ITC DELTACOM INC
424B3, 1997-09-26
TELEPHONE COMMUNICATIONS (NO RADIOTELEPHONE)
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<PAGE>
 
                                               Filed Pursuant to Rule 424(b)(3)
                                                     Registration No. 333-31361
 
PROSPECTUS
DATED SEPTEMBER 24, 1997
 
 
                     [LOGO OF ITC/\DELTACOM APPEARS HERE]
                                 $200,000,000
 
            OFFER TO EXCHANGE ALL OUTSTANDING 11% SENIOR NOTES DUE
                                 JUNE 1, 2007
                                      FOR
                       11% SENIOR NOTES DUE JUNE 1, 2007
                                      OF
                              ITC/\DELTACOM, INC.
 
                               ----------------
 
                    INTEREST PAYABLE JUNE 1 AND DECEMBER 1,
                          COMMENCING DECEMBER 1, 1997
 
                               ----------------
 
      THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M.,
           NEW YORK CITY TIME, ON OCTOBER 28, 1997, UNLESS EXTENDED.
 
  ITC/\DeltaCom, Inc. (the "Company") hereby offers, upon the terms and subject
to the conditions set forth in this Prospectus (as the same may be amended or
supplemented from time to time) and in the accompanying Letter of Transmittal
(the "Letter of Transmittal") (which together constitute the "Exchange
Offer"), to exchange $1,000 principal amount of its 11% Senior Notes due June
1, 2007 (the "Exchange Notes") which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), for each $1,000 principal
amount of its outstanding unregistered 11% Senior Notes due June 1, 2007, of
which $200 million in aggregate principal amount is outstanding as of the date
hereof (the "Senior Notes" and, together with the Exchange Notes, the
"Notes").
 
  The form and terms of the Exchange Notes will be identical in all material
respects to the form and terms of the Senior Notes, except that (i) the
Exchange Notes will have been registered under the Securities Act and
therefore will not be subject to certain restrictions on transfer applicable
to the Senior Notes and (ii) holders of the Exchange Notes will not be
entitled to certain rights of holders of the Senior Notes under the
Registration Rights Agreement dated June 3, 1997 (the "Registration Rights
Agreement") among the Company and Morgan Stanley & Co. Incorporated, Merrill
Lynch, Pierce, Fenner & Smith Incorporated, First Union Capital Markets Corp.
and NationsBanc Capital Markets, Inc. (collectively, the "Placement Agents").
The Exchange Notes will evidence the same indebtedness as the Senior Notes
(which they will replace) and will be issued pursuant to, and entitled to the
benefits of, an indenture dated as of June 3, 1997 between the Company and the
United States Trust Company of New York, as trustee (the "Trustee"), governing
the Senior Notes and the Exchange Notes (the "Indenture").
                                                      (Continued on next page.)
 
                               ----------------
 
  SEE "RISK FACTORS" COMMENCING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
WHICH INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
 
                               ----------------
 
 THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
 EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
 AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
 ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
 A CRIMINAL OFFENSE.
 
                               ----------------
 
               THE DATE OF THIS PROSPECTUS IS SEPTEMBER 24, 1997
<PAGE>
 
  The Exchange Notes are redeemable at the option of the Company, in whole or
in part, at any time on or after June 1, 2002, initially at 105.5% of their
principal amount, plus accrued interest, declining ratably to 100% of their
principal amount, plus accrued interest, on or after June 1, 2004. In
addition, at any time prior to June 1, 2000, the Company may redeem up to 35%
of the aggregate principal amount of the Senior Notes and the Exchange Notes
from the proceeds of one or more Public Equity Offerings (as defined herein)
at 111% of their principal amount, plus accrued interest; provided that after
any such redemption at least $130.0 million aggregate principal amount of the
Senior Notes and the Exchange Notes remains outstanding. See "Description of
the Exchange Notes--Certain Definitions."
 
  Approximately $62.7 million of the net proceeds from the Offering (as
defined herein) have been used to purchase a portfolio of U.S. government
securities that have been pledged to secure and fund the first six scheduled
interest payments on the Senior Notes and the Exchange Notes.
 
  The Exchange Notes will be unsubordinated indebtedness of the Company,
ranking pari passu in right of payment with the Senior Notes and all other
existing and future unsubordinated indebtedness of the Company and senior in
right of payment to all subordinated indebtedness of the Company. After giving
pro forma effect to the Reorganization (as defined herein), as of June 30,
1997, the Company would have had (on an unconsolidated basis) no indebtedness
other than the Senior Notes and the Exchange Notes. However, the Company is a
holding company and the Senior Notes are, and the Exchange Notes will be,
effectively subordinated to all existing and future liabilities (including
trade payables) of the Company's subsidiaries. On June 30, 1997, on the same
pro forma basis, the Company's subsidiaries would have had approximately $37.7
million of liabilities (excluding intercompany payables), including
approximately $14.4 million of indebtedness (including capital leases).
 
  The Senior Notes were originally issued and sold on June 3, 1997 in a
transaction not registered under the Securities Act (the "Offering").
Accordingly, the Senior Notes may not be offered for resale, resold or
otherwise transferred unless so registered or unless an applicable exemption
from the registration requirements of the Securities Act is available. Based
on interpretations by the staff of the Securities and Exchange Commission (the
"Commission"), as set forth in no-action letters issued to third parties
unrelated to the Company, the Company believes that the Exchange Notes issued
pursuant to the Exchange Offer may be offered for resale, resold or otherwise
transferred by holders thereof (other than any holder that is (i) a broker-
dealer that acquired Senior Notes as a result of market-making activities or
other trading activities or (ii) an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act) without compliance with the
registration or prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement or understanding with any person
to participate in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. Any holder who tenders Senior Notes in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of the Exchange Notes or who is an affiliate of the Company may
not rely upon such interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Failure to comply with such requirements in such
instance may result in such holder incurring liabilities under the Securities
Act for which the holder is not indemnified by the Company. The staff of the
Commission has not considered the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer as in such
other circumstances.
 
  By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company, among other things, that: (i) any Exchange Notes to
be received by such holder will be acquired in the ordinary course of such
holder's business; (ii) such holder has no arrangement or understanding with
any person to participate in a distribution (within the meaning of the
Securities Act) of the Exchange Notes; and (iii) such holder is not an
"affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act), or if such holder is an affiliate, that such holder will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Senior Notes, where such
Senior Notes were acquired by such broker-dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver
a prospectus in
 
                                       2
<PAGE>
 
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a broker-
dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Senior Notes where
such Senior Notes were acquired by such broker-dealer as a result of market-
making activities or other trading activities. The Company has agreed that,
for a period not to exceed 180 days after the Expiration Date (as defined
herein), it will furnish additional copies of this Prospectus, as amended or
supplemented, to any broker-dealer that reasonably requests such documents for
use in connection with any such resale. See "Plan of Distribution."
 
  The Company does not intend to apply for listing of the Exchange Notes for
trading on any securities exchange or for inclusion of the Exchange Notes in
any automated quotation system. The Senior Notes, however, have been
designated for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") Market of the National Association of Securities
Dealers, Inc. Any Senior Notes not tendered and accepted in the Exchange Offer
will remain outstanding. To the extent that Senior Notes are not tendered and
accepted in the Exchange Offer, a holder's ability to sell such Senior Notes
could be adversely affected. Following consummation of the Exchange Offer, the
holders of Senior Notes will continue to be subject to the existing
restrictions on transfer thereof and the Company will have no further
obligation to such holders to provide for the registration under the
Securities Act of the Senior Notes. See "Description of the Exchange Notes--
Exchange Offer; Registration Rights." No assurance can be given as to the
liquidity of either the Senior Notes or the Exchange Notes.
 
  THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF SENIOR NOTES ARE URGED TO READ THIS PROSPECTUS AND THE
RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER.
 
  Senior Notes may be tendered for exchange prior to 5:00 p.m., New York City
time, on October 28, 1997 (such time on such date being hereinafter called the
"Expiration Date"), unless the Exchange Offer is extended by the Company (in
which case the term "Expiration Date" shall mean the latest date and time to
which the Exchange Offer is extended). Tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date. The Exchange Offer is not
conditioned upon any minimum aggregate principal amount of Senior Notes being
tendered for exchange. The Exchange Offer is, however, subject to certain
events and conditions and to the terms of the Registration Rights Agreement.
Senior Notes may be tendered only in integral multiples of aggregate principal
amount of $1,000. The Company has agreed to pay all expenses of the Exchange
Offer. This Prospectus, together with the Letter of Transmittal, is being sent
to all registered holders of Senior Notes as of September 26, 1997.
 
  The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. No underwriter is being used in connection with
the Exchange Offer. See "Use of Proceeds" and "Plan of Distribution."
                               TABLE OF CONTENTS
 
<TABLE>
<CAPTION>
                                   PAGE
                                   ----
<S>                                <C>
Prospectus Summary................   4
Risk Factors......................  15
The Exchange Offer................  26
History of the Company............  34
Use of Proceeds...................  35
Capitalization....................  36
Selected Financial and Operating
 Data.............................  37
Pro Forma Financial Data..........  39
Management's Discussion and
 Analysis of Financial Condition
 and Results of Operations........  43
Business..........................  60
</TABLE>
<TABLE>
<CAPTION>
                                     PAGE
                                     ----
<S>                                  <C>
Management.........................   75
Certain Transactions...............   80
Principal Stockholders.............   82
Description of Certain
 Indebtedness......................   83
Description of the Exchange Notes..   86
Plan of Distribution...............  114
Legal Matters......................  115
Experts............................  115
Available Information..............  116
Glossary...........................  G-1
Index to Financial Statements......  F-1
</TABLE>
 
 
                                       3
<PAGE>
 
                               PROSPECTUS SUMMARY
 
  The following summary is qualified in its entirety by the more detailed
information and financial statements, the notes thereto and the other financial
data contained elsewhere in this Prospectus. Potential participants in the
Exchange Offer should carefully consider the factors set forth herein under the
caption "Risk Factors" and are urged to read this Prospectus and the related
Letter of Transmittal in its entirety. Unless otherwise indicated, (i) the
information in this Prospectus, other than the historical financial
information, gives effect to the Reorganization (as defined herein) and the
Offering and (ii) references herein to the "Company" or "ITC/\DeltaCom" refer to
ITC/\DeltaCom, Inc. and its subsidiaries. Certain terms used in this Prospectus
are defined in the "Glossary" appearing elsewhere herein.
 
                                  THE COMPANY
 
  The Company provides retail long distance services to mid-sized and major
regional businesses in the southern United States and is a leading regional
provider of wholesale long-haul services to other telecommunications companies
using the Company's owned, operated and managed fiber optic network (the
"Carriers' Carrier Services"). The Company intends to become a leading regional
provider of integrated telecommunications services to mid-sized and major
regional businesses in the southern United States by offering such customers a
broad range of telecommunications services, including local exchange and long
distance data and voice, Internet and operator services, and the sale and
servicing of customer premise equipment (collectively, the "Retail Services"),
in a single package tailored to the business customer's specific needs. In
1996, the Company had pro forma revenues of approximately $85.4 million,
earnings before extraordinary item, preacquisition (earnings) losses, equity in
losses of unconsolidated subsidiaries, net interest, income taxes, depreciation
and amortization ("EBITDA") of approximately $18.9 million and net losses from
continuing operations of approximately $12.1 million. For the six months ended
June 30, 1997, the Company had pro forma revenues of approximately $54.3
million, EBITDA of approximately $11.7 million and net losses from continuing
operations of approximately $4.5 million.
 
  The Company provides Carriers' Carrier Services to other telecommunications
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI,
Frontier and IXC. The Company's fiber optic network reaches over 60 points of
presence ("POPs") in ten southern states (Alabama, Arkansas, Florida, Georgia,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and Texas)
and extends approximately 5,400 route miles, of which approximately 2,500 miles
are Company-owned and approximately 2,900 miles are owned and operated by three
public utilities (Duke Power Company, Florida Power & Light Company and Entergy
Technology Company) and managed and marketed by the Company. The Company
expects to add approximately 700 owned and operated route miles to its fiber
network by the end of 1997 and approximately 100 owned and operated route miles
in early 1998 through long-term dark fiber leases. In 1996, the Company's
Carriers' Carrier Services business generated pro forma revenues of
approximately $20.2 million, EBITDA of approximately $11.5 million and net
losses from continuing operations of approximately $1.8 million. For the six
months ended June 30, 1997, the Company's Carriers' Carrier Services business
generated pro forma revenues of approximately $14.3 million, EBITDA of
approximately $8.5 million and net income from continuing operations of less
than $.1 million. As of June 30, 1997, on a pro forma basis, the Company had
remaining future long-term contract commitments totaling approximately $75.8
million. These contracts expire on various dates through 2006 and are expected
to generate approximately $56.0 million in revenues to the Company through
2001, of which approximately $14.5 million are expected to be realized in 1998.
 
  The Company currently provides a variety of Retail Services, including retail
long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, Asynchronous
Transfer Mode ("ATM"), frame relay, high capacity broadband private line
services, as well as Internet, Intranet and Web page hosting and development
services, and customer premise equipment installation and repair. As of June
30, 1997, the Company provided services to over 6,600 business customers. The
Company currently offers Retail Services, other than local exchange services
(which are provided in two markets), in 12
 
                                       4
<PAGE>
 
metropolitan areas in Alabama, Florida, Georgia, Louisiana, North Carolina and
South Carolina and intends to provide a full range of Retail Services
(including local exchange services) in approximately 15 additional metropolitan
areas throughout the southern United States over the next five years. In 1996,
the Retail Services business generated pro forma revenues of approximately
$65.2 million, EBITDA of approximately $7.4 million and net losses from
continuing operations of approximately $3.7 million. For the six months ended
June 30, 1997, the Retail Services business generated pro forma revenues of
approximately $39.9 million, EBITDA of approximately $3.2 million and net
losses from continuing operations of approximately $2.2 million.
 
  In July 1997, the Company began offering local services on a limited, resale
basis in Birmingham and Montgomery, Alabama, and commenced general sales of
such services in those markets in August 1997. Also in August 1997, the Company
initiated a limited offering in Birmingham and Montgomery of facilities-based
local services, and expects that general marketing of such services will
commence in September 1997. Although the Company's local exchange services
offerings in such markets are in the very early stages, initial expressions of
customer interest in such services have been positive, consistent with
management's expectations. However, there can be no assurance that demand for
the Company's local services will match such preliminary indications of
customer interest. The Company expects to offer local exchange services as part
of its Retail Services in six to nine markets (including Birmingham and
Montgomery) by the end of 1997, initially by reselling the services of
incumbent local exchange carriers and, where market conditions warrant, by
using its own local switching facilities.
 
  In connection with offering local exchange services, the Company has entered
into an Interconnection Agreement (the "Interconnection Agreement") with
BellSouth Telecommunications, Inc. ("BellSouth") to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of immediately gaining access to all of
BellSouth's unbundled network elements. This agreement will allow the Company
to enter new markets with minimal capital expenditures and to offer local
exchange services to its current customer base. The Interconnection Agreement
currently allows the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on
a facilities bases, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
most states, although they remain subject to review and modification by such
authorities. In addition, the Interconnection Agreement does not resolve all
operational issues, particularly those relating to the collocation of the
Company's equipment with that of BellSouth. The Company and BellSouth are
continuing to negotiate to resolve such issues. The Company expects that the
Interconnection Agreement will provide a foundation for it to provide local
services on a reasonable commercial basis, but there can be no assurance of
this and important issues remain unsettled as a result of legal and regulatory
developments and related matters. The Interconnection Agreement expires in
1999, and there can be no assurance that the Company will be able to renew it
under favorable terms, or at all.
 
BUSINESS STRATEGY
 
  The Company's objectives are to maintain its leadership position in the
provision of Carriers' Carrier Services and to become a leading provider of
Retail Services in the southern United States. The Company intends to increase
its market share in existing markets and expand into new markets by (i)
aggressively expanding its customer base and increasing its telecommunications
services, including reselling services and facilities of the incumbent local
exchange carriers; (ii) leveraging the Company's extensive network in its
Retail Services and Carriers' Carrier Services businesses; (iii) concurrently
constructing or obtaining access to additional network infrastructure to serve
its customers more cost-effectively; and (iv) expanding its regional network of
sales offices. The principal elements of the Company's business strategy
include the following:
 
  PROVIDING INTEGRATED TELECOMMUNICATIONS SERVICES TO EXISTING BASE OF MID-
SIZED AND MAJOR REGIONAL BUSINESS CUSTOMERS. By providing additional
telecommunications services such as local telephone service to its existing,
well-established base of long distance customers, the Company expects to be
able to increase revenues at relatively low incremental cost. The Company
believes that bundling a variety of telecommunications services and presenting
customers with one fully integrated monthly billing statement for all of those
services
 
                                       5
<PAGE>
 
will allow it to penetrate its target markets rapidly and build customer
loyalty. The Company believes that there is substantial demand in its target
markets among mid-sized and major regional business customers for an integrated
package of telecommunications services that meets all of their
telecommunications needs.
 
  LEVERAGING ITS EXTENSIVE FIBER OPTIC NETWORK. The Company intends to leverage
its extensive fiber optic network, which currently reaches over 60 POPs, by (i)
continuing to provide switched and transport services to other communications
carriers throughout its region to enable such carriers to diversify their
routes and expand their networks; (ii) targeting customers that need to
transmit large amounts of data within the Company's service region, such as
banks and local and state governments; and (iii) offering local exchange
services to its business customers, which began on a limited basis in the
second half of 1997, as part of its integrated package of telecommunications
services. The Company intends initially to provide local exchange services by
reselling the services of incumbent local exchange carriers and, in some
established markets, using its own local switching facilities. Over time, the
Company expects to provide local services primarily using the Company's own
switching facilities and existing regional fiber optic network, supplemented by
unbundled facilities of incumbent local exchange carriers or other competitive
local exchange carriers. The configuration of the Company's network enables the
Company to expand its network by installing additional remote local switches,
which operate in conjunction with the Company's DMS-500 switches to provide
facilities-based local services. Because remote local switches are less
expensive to purchase and install than DMS-500 switches, and can be installed
more quickly than DMS-500 switches, the Company believes that it will be able
to enter new markets at less expense than many of its competitors. At present,
the Company does not plan to construct intra-city local loop facilities.
 
  FOCUSING ON THE SOUTHERN UNITED STATES. The Company intends to continue to
focus on the southern United States in order to leverage its extensive
telecommunications network in the region. The Company believes that its
regional focus will enable it to take advantage of economies of scale in
management, network operations and sales and marketing. The regional
concentration of the Company's network also provides an opportunity for
improved margins because a high portion of its customers' telecommunications
traffic originates and terminates within the region. The Company also believes
that its regional focus will enable it to build on its long-standing customer
and business relationships in the region.
 
  BUILDING MARKET SHARE THROUGH PERSONALIZED CUSTOMER SERVICE. The Company
believes that the key to revenue growth in its target markets is capturing and
retaining customers by emphasizing marketing, sales and customer service.
Management believes that customers prefer one company to be accountable for
their telecommunications services, and that a consultative, face-to-face sales
and service strategy is the most effective method of acquiring and maintaining
a high quality customer base. The Company seeks to obtain long-term commitments
from its business customers by responding rapidly and creatively to their
telecommunications needs. The Company currently operates 14 sales offices in
Alabama, Florida, Georgia, Louisiana, North Carolina and South Carolina. Each
sales office is staffed by personnel capable of marketing all of the Company's
products and providing comprehensive support to the Company's customers.
 
  EXPANDING ITS FIBER OPTIC NETWORK AND SWITCHING FACILITIES. The Company
expects to expand its fiber optic telecommunications network and switching
facilities to include additional markets within the southern United States. The
Company currently owns and operates approximately 2,500 route miles of fiber
optic network extending from Georgia to Texas, with an additional 700 owned and
operated route miles expected to be added by the end of 1997 and approximately
100 owned and operated route miles expected to be added in early 1998. The
Company also markets and manages capacity on 2,900 additional network route
miles through its strategic relationships with public utilities. In addition,
the Company has a buy-sell agreement with Carolinas Fibernet, LLC, which
manages fiber optic facilities in North Carolina and South Carolina. This
agreement enables the parties to buy and sell capacity on each other's networks
and allows the Company to provide customers with access to POPs throughout
those states. The Company believes that, by continuing to combine its owned
network with the networks of public utilities and by adding switching
facilities throughout its network, it will be able to achieve capital
efficiencies and rapidly expand its network in a cost-effective manner.
 
                                       6
<PAGE>
 
 
  LEVERAGING PROVEN MANAGEMENT TEAM. The Company's management team consists of
experienced telecommunications managers who in the past have successfully
implemented a customer-focused long distance telecommunications strategy in the
southern United States. Members of the team include Andrew Walker, Chief
Executive Officer of the Company, Foster McDonald, President of the Company,
and Douglas Shumate, Chief Financial Officer of the Company. ITC Holding
Company, Inc. ("ITC Holding"), a diversified company with substantial holdings
in telecommunications businesses operating in the southern United States, is
the Company's sole stockholder. The Company anticipates that ITC Holding's
experience and contacts in the telecommunications industry will enhance the
Company's development.
 
HISTORY OF THE COMPANY
 
  ITC/\DeltaCom was incorporated in March 1997 as a wholly owned subsidiary of
ITC Holding to acquire and operate ITC Holding's Retail Services and Carriers'
Carrier Services businesses. The Company acquired such businesses on July 25,
1997 in the Reorganization as described below.
 
  BACKGROUND. ITC Holding has provided operator and directory assistance
services since March 1993 through its subsidiary, Eastern Telecom, Inc., which
does business as InterQuest ("InterQuest"). Carriers' Carrier Services have
been offered since April 1992 through Interstate FiberNet, a partnership
originally formed by ITC Holding (with a 49% interest) and SCANA
Communications, Inc. ("SCANA") (with a 51% interest). In August 1994, ITC
Holding acquired SCANA's interest in Interstate FiberNet through ITC
Transmission Systems II, Inc., a wholly owned subsidiary of ITC Holding
("Transmission II"). Also in August 1994, ITC Holding and SCANA formed a second
partnership, Gulf States FiberNet, to construct and operate a fiber optic route
primarily between Atlanta, Georgia and Shreveport, Louisiana with several
supplemental spur routes. In a transaction consummated in March 1997 (the "Gulf
States Acquisition"), ITC Holding acquired SCANA's 64% partnership interest in
Gulf States FiberNet and certain fiber and fiber-related assets, including a
significant customer contract for network services in Georgia (the "Georgia
Fiber Assets"). Following the Gulf States Acquisition, ITC Holding contributed
the remaining 64% interest in Gulf States FiberNet to Gulf States Transmission
Systems, Inc., a wholly owned subsidiary of ITC Holding ("Gulf States
Transmission"), and the Georgia Fiber Assets to ITC Transmission Systems, Inc.,
a wholly owned subsidiary of ITC Holding ("Transmission"). Members of the
Company's management have been managing the businesses of both Interstate
FiberNet and Gulf States FiberNet since their inception.
 
  In January 1996, through its acquisition (the "DeltaCom Acquisition") of
DeltaCom, Inc. ("DeltaCom"), ITC Holding entered the retail long distance
business and acquired several fiber optic routes within the state of Alabama
that complemented the existing networks operated by Interstate FiberNet
(including a fiber optic route from Atlanta, Georgia to Columbus, Georgia) and
Gulf States FiberNet. DeltaCom, a provider of telecommunications services since
its inception in 1982, provides long distance services to mid-sized businesses
primarily in Alabama. In July 1996, DeltaCom purchased substantially all of the
assets of Viper Computer Systems, Inc. ("ViperNet"), which provides Internet
access, Web-hosting and Web page development services to business customers.
 
  To finance the DeltaCom Acquisition and to refinance existing DeltaCom debt,
ITC Holding incurred approximately $74.0 million of indebtedness, which was
pushed down to the Company (the "DeltaCom Indebtedness"). The aggregate
consideration paid by ITC Holding in the Gulf States Acquisition was
approximately $27.9 million, of which $10.0 million consisted of an unsecured
note (the "SCANA Note"), which has been assumed by a subsidiary of the Company,
and $17.9 million consisted of ITC Holding preferred stock. In connection with
the Gulf States Acquisition, Gulf States Transmission borrowed $41.6 million
under a credit facility (the "Bridge Facility") with NationsBank, N.A., to
refinance a project loan incurred by Gulf States FiberNet.
 
  SENIOR NOTE OFFERING. On June 3, 1997, the Company completed the sale of
$200.0 million principal amount of Senior Notes in a private offering. The net
proceeds from the sale of the Senior Notes, other than the
 
                                       7
<PAGE>
 
portion of such proceeds invested in U.S. government securities pledged to
secure and fund the first six scheduled interest payments on the Senior Notes
and the Exchange Notes (the "Pledged Securities"), were released to the Company
upon consummation of the Reorganization.
 
  REORGANIZATION. On July 25, 1997, ITC Holding contributed to the Company in a
series of transactions the businesses of Interstate FiberNet, Gulf States
FiberNet, DeltaCom and InterQuest (such transactions collectively referred to
herein as the "Reorganization"). In connection with the Reorganization,
approximately $31.0 million of the $74.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional
equity. Following the Reorganization, the Company repaid the remaining
$43.0 million of the DeltaCom Indebtedness, accrued interest on all $74.0
million of such indebtedness and the $41.6 million of indebtedness outstanding
under the Bridge Facility and accrued interest thereon with a portion of the
net proceeds from the Offering. See "Use of Proceeds."
 
                               THE EXCHANGE OFFER
 
The Exchange Offer........  Up to $200.0 million aggregate principal amount of
                            Exchange Notes are being offered in exchange for a
                            like aggregate principal amount of Senior Notes.
                            Senior Notes may be tendered for exchange in whole
                            or in part in integral multiples of $1,000
                            principal amount. The Company is making the
                            Exchange Offer in order to satisfy its obligations
                            under the Registration Rights Agreement relating to
                            the Senior Notes. For a description of the
                            procedures for tendering Senior Notes, see "The
                            Exchange Offer--Procedures for Tendering Senior
                            Notes."
 
Expiration Date...........  5:00 p.m., New York City time, on October 28, 1997
                            unless the Exchange Offer is extended by the
                            Company (in which case the term "Expiration Date"
                            shall mean the latest date and time to which the
                            Exchange Offer is extended). See "The Exchange
                            Offer--Expiration Date; Extensions, Amendments."
 
Conditions to the         
Exchange Offer............  The Exchange Offer is subject to certain conditions
                            which may be waived by the Company in its sole
                            discretion. The Exchange Offer is not conditioned
                            upon any minimum aggregate principal amount of
                            Senior Notes being tendered. See "The Exchange
                            Offer--Conditions to the Exchange Offer."
 
                            The Company reserves the right in its sole and
                            absolute discretion, subject to applicable law, at
                            any time and from time to time, (i) to delay the
                            acceptance of the Senior Notes, (ii) to terminate
                            the Exchange Offer if certain specified conditions
                            have not been satisfied, (iii) to extend the
                            Expiration Date of the Exchange Offer and retain
                            all Senior Notes tendered pursuant to the Exchange
                            Offer, subject, however, to the right of holders of
                            Senior Notes to withdraw their tendered Senior
                            Notes, and (iv) to waive any condition or otherwise
                            amend the terms of the Exchange Offer in any
                            respect. See "The Exchange Offer--Expiration Date;
                            Extensions; Amendments."
 
Withdrawal Rights.........  Tenders of Senior Notes may be withdrawn at any
                            time prior to the Expiration Date by delivering a
                            written notice of such withdrawal to
 
                                       8
<PAGE>
 
                            the Exchange Agent (as defined herein) in
                            conformity with certain procedures as set forth
                            below under "The Exchange Offer--Withdrawal
                            Rights."
 
Procedures for Tendering  
 Senior Notes.............  Tendering holders of Senior Notes must complete and
                            sign a Letter of Transmittal in accordance with the
                            instructions contained therein and forward the same
                            by mail, facsimile transmission or hand delivery,
                            together with any other required documents, to the
                            Exchange Agent, either with the Senior Notes to be
                            tendered or in compliance with the specified
                            procedures for guaranteed delivery of Senior Notes.
                            Certain brokers, dealers, commercial banks, trust
                            companies and other nominees may also effect
                            tenders by book-entry transfer. Holders of Senior
                            Notes registered in the name of a broker, dealer,
                            commercial bank, trust company or other nominee are
                            urged to contact such person promptly if they wish
                            to tender Senior Notes pursuant to the Exchange
                            Offer. See "The Exchange Offer--Procedures for
                            Tendering Senior Notes."
 
                            Letters of Transmittal and certificates
                            representing Senior Notes should not be sent to the
                            Company. Such documents should only be sent to the
                            Exchange Agent. Questions regarding how to tender
                            and requests for information should be directed to
                            the Exchange Agent. See "The Exchange Offer--
                            Exchange Agent."

Resales of Exchange       
Notes.....................  Based on interpretations by the staff of the
                            Commission, as set forth in no-action letters
                            issued to third parties, the Company believes that
                            holders of Senior Notes (other than any holder that
                            is (i) a broker-dealer that acquired Senior Notes
                            as a result of market-making activities or other
                            trading activities or (ii) an "affiliate" of the
                            Company within the meaning of Rule 405 under the
                            Securities Act) who exchange their Senior Notes for
                            Exchange Notes pursuant to the Exchange Offer may
                            offer for resale, resell and otherwise transfer
                            such Exchange Notes without compliance with the
                            registration and prospectus delivery provisions of
                            the Securities Act, provided that such Exchange
                            Notes are acquired in the ordinary course of such
                            holders' business and such holders have no
                            arrangement or understanding with any person to
                            participate in a distribution (within the meaning
                            of the Securities Act) of such Exchange Notes. Any
                            holder who tenders Senior Notes in the Exchange
                            Offer with the intention to participate, or for the
                            purpose of participating, in a distribution of the
                            Exchange Notes or who is an affiliate of the
                            Company may not rely upon such interpretations by
                            the staff of the Commission and, in the absence of
                            an exemption therefrom, must comply with the
                            registration and prospectus delivery requirements
                            of the Securities Act in connection with any
                            secondary resale transaction. Failure to comply
                            with such requirements in such instance may result
                            in such holder incurring liabilities under the
                            Securities Act for which the holder is not
                            indemnified by the Company. The staff of the
                            Commission has not considered the Exchange Offer in
                            the context of a no-action letter, and there can be
                            no assurance that the staff of the
 
                                       9
<PAGE>
 
                            Commission would make a similar determination with
                            respect to the Exchange Offer. Each broker-dealer
                            that receives Exchange Notes for its own account in
                            exchange for Senior Notes, where such Senior Notes
                            were acquired by such broker-dealer as a result of
                            market-making activities or other trading
                            activities, must acknowledge that it will deliver a
                            prospectus in connection with any resale of such
                            Exchange Notes. The Letter of Transmittal states
                            that by so acknowledging and by delivering a
                            prospectus, a broker-dealer will not be deemed to
                            admit that it is an "underwriter" within the
                            meaning of the Securities Act. The Company has
                            agreed that, for a period not to exceed 180 days
                            after the Expiration Date, it will furnish
                            additional copies of this Prospectus, as amended or
                            supplemented, to any broker-dealer that reasonably
                            requests such documents for use in connection with
                            any such resale. See "Plan of Distribution."
 
Exchange Agent............  The exchange agent with respect to the Exchange
                            Offer is United States Trust Company of New York
                            (the "Exchange Agent"). The address, telephone
                            number and facsimile number of the Exchange Agent
                            are set forth in "The Exchange Offer--Exchange
                            Agent" and in the Letter of Transmittal.
 
Use of Proceeds...........  The Company will not receive any cash proceeds from
                            the issuance of the Exchange Notes offered hereby.
                            The net proceeds from the Offering have been and
                            will be used to repay certain outstanding
                            indebtedness of the Company; to fund expansion of
                            the Company's telecommunications business,
                            including expansion of the Company's fiber optic
                            network and the opening of new sales offices; and
                            for additional working capital and general
                            corporate purposes, including funding cash flow
                            deficits and the payment of interest on the Senior
                            Notes and the Exchange Notes. See "Use of
                            Proceeds."
 
Certain United States     
 Federal Income Tax       
 Consequences.............  The exchange of the Senior Notes for the Exchange
                            Notes will not be a taxable exchange for federal
                            income tax purposes, and holders of Senior Notes
                            should not recognize any taxable gain or loss or
                            any interest income as a result of such exchange.
                            See "The Exchange Offer--Certain United States
                            Federal Income Tax Consequences."
 
                               THE EXCHANGE NOTES
 
Securities Offered........  $200.0 million aggregate principal amount of 11%
                            Senior Notes due June 1, 2007. The terms of the
                            Exchange Notes will be identical in all material
                            respects to the terms of the Senior Notes, except
                            that (i) the Exchange Notes will have been
                            registered under the Securities Act and therefore
                            will not be subject to certain restrictions on
                            transfer applicable to the Senior Notes and (ii)
                            holders of the Exchange Notes will not be entitled
                            to certain rights of holders of the Senior Notes
                            under the Registration Rights Agreement. The
                            Exchange Notes will evidence the same debt as the
                            Senior Notes and will be issued pursuant to and
                            entitled to the benefits of the Indenture.
 
                                       10
<PAGE>
 
 
Maturity..................  June 1, 2007.
 
Interest..................  Interest on the Exchange Notes is payable
                            semiannually in cash, on each June 1 and December 1,
                            commencing December 1, 1997.
 
Security..................  Pursuant to the Indenture, approximately $62.7
                            million of the net proceeds from the Offering were
                            used by the Trustee to purchase a portfolio of
                            Pledged Securities (consisting only of U.S.
                            government securities) that are being held as
                            security for the payment of the first six scheduled
                            interest payments due on the Senior Notes and the
                            Exchange Notes. The Pledged Securities are being
                            and will be held by the Trustee for the benefit of
                            the holders of the Senior Notes and the Exchange
                            Notes under a Pledge and Security Agreement dated
                            June 3, 1997 between the Company and the Trustee
                            (the "Pledge Agreement"), pending disbursement.
                            After the first six scheduled interest payments on
                            the Senior Notes and Exchange Notes are made, the
                            Senior Notes and the Exchange Notes will be
                            unsecured. See "Description of the Exchange Notes--
                            Security."
 
Optional Redemption.......  The Exchange Notes may be redeemed at any time on
                            or after June 1, 2002, at the option of the
                            Company, in whole or in part, at 105.5% of their
                            principal amount, plus accrued interest, declining
                            ratably to 100% of their principal amount, plus
                            accrued interest, on and after June 1, 2004. In
                            addition, at any time prior to June 1, 2000, up to
                            35% of the aggregate principal amount of the Senior
                            Notes and the Exchange Notes may be redeemed from
                            the proceeds of one or more Public Equity Offerings
                            at 111% of their principal amount plus accrued
                            interest; provided that after any such redemption
                            at least $130.0 million aggregate principal amount
                            of the Senior Notes and the Exchange Notes remains
                            outstanding.
 
Change of Control.........  Upon a Change of Control (as defined herein), the
                            Company will be required to make an offer to
                            purchase the Exchange Notes at a purchase price
                            equal to 101% of their principal amount, plus
                            accrued interest. There can be no assurance that
                            the Company will have sufficient funds available at
                            the time of any Change of Control to make any
                            required debt repayment (including repurchases of
                            the Exchange Notes). See "Description of the
                            Exchange Notes--Repurchases of Exchange Notes upon
                            a Change of Control," and "Description of the
                            Exchange Notes--Certain Definitions."
 
Ranking...................  The Exchange Notes will be unsubordinated
                            indebtedness of the Company, ranking pari passu in
                            right of payment with the Senior Notes and all
                            other existing and future unsubordinated
                            indebtedness of the Company and senior in right of
                            payment to all subordinated indebtedness of the
                            Company. After giving pro forma effect to the
                            Reorganization and the use of the net proceeds from
                            the Offering, at June 30, 1997, the Company (on an
                            unconsolidated basis) would have had no other
                            indebtedness other than the Senior Notes. In
                            addition, the Exchange Notes will be unsecured
                            (except as described under""--Security") and will
                            be effectively subordinated to all secured
 
                                       11
<PAGE>
 
                            indebtedness. The Company is a holding company and
                            the Senior Notes are, and the Exchange Notes will
                            be, effectively subordinated to all existing and
                            future liabilities (including trade payables) of
                            the Company's subsidiaries. On June 30, 1997, on
                            the same pro forma basis, the subsidiaries of the
                            Company would have had approximately $37.8 million
                            of liabilities (excluding intercompany payables),
                            including approximately $14.4 million of
                            indebtedness (including capital leases). In
                            September 1997, a subsidiary of the Company entered
                            into a credit agreement (the "Credit Agreement")
                            with NationsBank of Texas, N.A. ("NationsBank") for
                            a $100 million secured credit facility (the "Credit
                            Facility") to be used for working capital and other
                            purposes, including refinancing existing
                            indebtedness, capital expenditures and permitted
                            acquisitions. The Credit Facility is secured by
                            substantially all of the assets of the Company's
                            subsidiaries. In addition, all obligations under
                            the Credit Facility are guaranteed by the Company
                            and its other subsidiaries. Indebtedness under the
                            Credit Facility is effectively senior to the
                            Exchange Notes (except as described under "--
                            Security") to the extent of such security
                            interests. See "Risk Factors--Holding Company
                            Structure; Priority of Secured Debt."
 
Certain Covenants.........  The Indenture contains certain covenants that,
                            among other things, limit the ability of the
                            Company to incur indebtedness, pay dividends,
                            prepay subordinated indebtedness, repurchase
                            capital stock, make investments, engage in
                            transactions with stockholders and affiliates,
                            create liens, sell assets and engage in mergers and
                            consolidations. However, these limitations are
                            subject to a number of important qualifications and
                            exceptions. See "Description of the Exchange
                            Notes--Covenants."
 
                                  RISK FACTORS
 
  Potential participants in the Exchange Offer should consider carefully
certain factors relating to the Company, its business and an investment in the
Exchange Notes before tendering their Senior Notes for Exchange Notes. See
"Risk Factors."
 
                                       12
<PAGE>
 
                      SUMMARY FINANCIAL AND OPERATING DATA
 
  The summary historical and pro forma financial and operating data set forth
below should be read in conjunction with "History of the Company," "Use of
Proceeds," "Selected Financial and Operating Data," "Pro Forma Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the financial statements and notes thereto, and other financial
and operating data contained elsewhere in this Prospectus. The pro forma
statement of operations data for 1996 give effect to the following transactions
as if each had occurred on January 1, 1996: (i) the DeltaCom Acquisition; (ii)
the Gulf States Acquisition; (iii) the Reorganization; and (iv) the Offering
and the use of the net proceeds therefrom. The pro forma statement of
operations data for the six months ended June 30, 1997 give effect to the
following transactions as if each had occurred on January 1, 1996: (i) the Gulf
States Acquisition; (ii) the Reorganization; and (iii) the Offering and the use
of the net proceeds therefrom. The pro forma balance sheet data at June 30,
1997 give effect to (i) the Reorganization, including ITC Holding's forgiveness
and contribution of approximately $31.0 million of the DeltaCom Indebtedness to
the Company as additional equity and (ii) the use of the net proceeds from the
Offering as if such transactions had occurred on June 30, 1997. The pro forma
financial and operating information does not purport to represent what the
Company's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of the Company. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
 
<TABLE>
<CAPTION>
                                        YEAR ENDED DECEMBER 31,                        SIX MONTHS ENDED JUNE 30,
                           ----------------------------------------------------  ---------------------------------------
                                         COMBINED                   PRO FORMA            COMBINED            PRO FORMA
                           --------------------------------------  CONSOLIDATED  -------------------------  CONSOLIDATED
                           1994(A)(B)      1995        1996(C)         1996        1996(C)     1997(D)(E)    1997(D)(E)
                           -----------  -----------  ------------  ------------  -----------  ------------  ------------
                                                                   (UNAUDITED)   (UNAUDITED)  (UNAUDITED)   (UNAUDITED)
<S>                        <C>          <C>          <C>           <C>           <C>          <C>           <C>           
STATEMENT OF
 OPERATIONS DATA:
Operating revenues....     $ 4,945,902  $ 5,750,587  $ 66,518,585  $ 85,374,362  $28,574,799  $ 53,365,061  $ 54,250,511
Operating expenses:
 Cost of service......       2,484,744    3,149,231    38,756,287    42,587,228   16,129,463    25,302,747    25,302,747
 Selling, operations
  and
  administration expense..     948,230    1,626,678    18,876,572    23,866,169    8,206,621    16,961,324    17,209,549
 Depreciation and am-
  ortization..........         738,052    1,267,882     6,438,074    14,612,761    2,832,017     8,273,232     8,634,041
                           -----------  -----------  ------------  ------------  -----------  ------------  ------------
 Total operating ex-
  penses..............       4,171,026    6,043,791    64,070,933    81,066,158   27,168,101    50,537,303    51,146,337
Operating income
 (loss)...............         774,876     (293,204)    2,447,652     4,308,204    1,406,698     2,827,758     3,104,174
Equity in losses of
 unconsolidated
 subsidiaries.........         (96,920)    (258,242)   (1,589,812)          --    (1,088,404)          --            --
Interest expense......        (273,759)    (297,228)   (6,172,421)  (26,266,789)  (2,762,757)   (7,561,591)  (12,389,998)
Interest and other in-
 come.................          82,348       41,734       171,514     3,717,951      107,216       883,388     2,697,611
                           -----------  -----------  ------------  ------------  -----------  ------------  ------------
Income (loss) before
 taxes,
 preacquisition (earnings)
 losses and extraordi-
 nary item............         486,545     (806,940)   (5,143,067)  (18,240,634)  (2,337,247)  (3,850,445)    (6,588,213)
Income tax (provision)
 benefit..............        (113,248)     302,567     1,233,318     6,167,132      671,467     1,005,809     2,046,160
Preacquisition (earn-
 ings) losses.........        (236,300)         --            --            --           --         74,132           --
                           -----------  -----------  ------------  ------------  -----------  ------------  ------------
Income (loss) from
 continuing
 operations...........         136,997     (504,373)   (3,909,749)  (12,073,502)  (1,665,780)   (2,770,504)   (4,542,053)
Extraordinary item--
 loss on
 extinguishment of
 debt (net of tax
 benefit).............             --           --            --            --           --       (507,515)     (507,515)
                           -----------  -----------  ------------  ------------  -----------  ------------  ------------
Net income (loss).....     $   136,997  $  (504,373) $ (3,909,749) $(12,073,502) $(1,665,780) $ (3,278,019) $ (5,049,568)
                           ===========  ===========  ============  ============  ===========  ============  ============
BALANCE SHEET DATA (AT PERIOD
 END):
Working capital (defi-
 cit).................     $   254,988  $  (242,136) $  3,415,088                             $ 68,175,664  $ 53,895,964
Property and equip-
 ment, net............       8,486,996    9,386,444    31,880,556                              115,852,080   115,852,080
Total assets..........      20,062,286   20,922,337   113,207,979                              402,015,721   301,908,472
Long-term debt,
 advances from ITC
 Holding and capital
 lease obligations,
 including current
 portions.............       4,013,977    3,143,977    75,442,971                              335,915,346   335,915,346
Stockholder's equity..      13,761,409   14,307,036    19,256,526                               33,450,572    64,120,400
OTHER FINANCIAL DATA:
Capital expenditures..     $ 3,703,835  $ 1,805,742  $  6,172,660  $  7,427,263  $ 2,279,913  $ 12,357,471  $ 12,559,439
EBITDA(f).............       1,512,928      974,678     8,885,726    18,920,965    4,238,715    11,100,990    11,738,215
Cash flows from opera-
 tions................         978,775    1,437,317     8,188,618     8,252,717    2,448,698     9,409,779    10,212,231
Ratio of earnings to
 fixed charges(g).....            1.85x         --            --            --           --            --            --
</TABLE>
 
                                                   (footnotes on following page)
 
                                       13
<PAGE>
 
(a) Through August 17, 1994, the Company owned a 49% interest in Interstate
    FiberNet and accounted for this investment under the equity method. On
    August 17, 1994, the Company purchased the remaining 51% interest in
    Interstate FiberNet from SCANA. Therefore, Interstate FiberNet's revenues
    and expenses have been included in the combined statement of operations
    data effective January 1, 1994, with the preacquisition earnings
    attributable to SCANA deducted to determine the combined net income for
    1994. See note 5 to the combined financial statements.
(b) On August 17, 1994, the Company entered into the Gulf States FiberNet
    partnership with SCANA. The Company obtained a 36% general partnership
    interest and the investment was accounted for under the equity method. See
    note 5 to the combined financial statements.
(c) On January 29, 1996, ITC Holding purchased DeltaCom. DeltaCom's results of
    operations are included in the historical statement of operations data
    since the date of acquisition. See note 13 to the combined financial
    statements.
(d) On March 27, 1997, the Company purchased the remaining 64% partnership
    interest in Gulf States FiberNet from SCANA. Therefore, Gulf States
    FiberNet's revenues and expenses have been included in the combined
    statement of operations data effective January 1, 1997 with the
    preacquisition losses attributable to SCANA deducted to determine the
    combined net loss for the six months ended June 30, 1997. See note 16 to
    the combined financial statements.
(e) On March 27, 1997, the Company purchased the Georgia Fiber Assets from
    SCANA. The results of operations for the Georgia Fiber Assets were included
    in the combined statements of operations beginning April 1, 1997. See note
    16 to the combined financial statements.
(f) EBITDA represents earnings before extraordinary item, preacquisition
    (earnings) losses, equity in losses of unconsolidated subsidiaries, net
    interest, income taxes, depreciation and amortization. EBITDA is provided
    because it is a measure commonly used in the industry. EBITDA is not a
    measurement of financial performance under generally accepted accounting
    principles and should not be considered an alternative to net income as a
    measure of performance or to cash flow as a measure of liquidity. EBITDA is
    not necessarily comparable with similarly titled measures for other
    companies.
(g) Earnings consist of income before income taxes, plus fixed charges. Fixed
    charges consist of interest charges and amortization of debt issuance costs
    (including those reflected as an extraordinary item) and the portion of
    rent expense under operating leases representing interest (estimated to be
    one-third of such expense). Earnings were insufficient to cover fixed
    charges for the years ended December 31, 1995, 1996 and pro forma 1996 and
    the six months ended June 30, 1996, 1997 and pro forma 1997 by $.8 million,
    $5.1 million, $18.2 million, $2.3 million, $3.8 million and $6.6 million,
    respectively.
 
                                       14
<PAGE>
 
                                 RISK FACTORS
 
  In addition to the other information contained in this Prospectus, holders
of Senior Notes should consider carefully the following factors before
tendering their Senior Notes for Exchange Notes.
 
HISTORICAL AND ANTICIPATED FUTURE OPERATING LOSSES AND NEGATIVE CASH FLOW
AFTER CAPITAL EXPENDITURES
 
  The Company expects to incur significant and increasing operating losses and
negative cash flow (after capital expenditures) during the next several years
as it implements its business strategy to expand its telecommunications
service offerings, expand its fiber optic network and enter new markets.
Although the Company expects that a majority of its revenue growth will come
from Retail Services, it does not expect its Retail Services to obtain a
significant share of the market for telecommunications services in the
southern United States, and there can be no assurance that the Company will
achieve or sustain profitability or positive net cash flow in the future. If
the Company cannot achieve or sustain operating profitability and positive net
cash flow, it may not be able to meet its working capital or debt service
requirements, which could have a material adverse effect on the Company's
ability to meet its obligations on the Exchange Notes. See "--Significant
Capital Requirements; Uncertainty of Additional Financing," "Selected
Financial and Operating Data," "Pro Forma Financial Data" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
 
SIGNIFICANT CAPITAL REQUIREMENTS; UNCERTAINTY OF ADDITIONAL FINANCING
 
  Expansion of the Company's network, operations and services will require
significant capital. The Company currently estimates that its aggregate
capital requirements will total approximately $104 million in 1997 and 1998,
of which approximately $50 million is expected to be incurred in 1997
(including $12.4 million of capital expenditures made as of June 30, 1997) and
$54 million in 1998. The Company anticipates making substantial capital
expenditures thereafter. Capital expenditures will be primarily for: the
addition of facilities-based local telephone service to the Company's bundle
of integrated telecommunications services, including acquisition and
installation of switches; market expansion; continued development and
construction of its fiber optic network (including transmission equipment);
and infrastructure enhancements, principally for information systems. The
Company believes that the net proceeds from the Offering, together with cash
flow from operations and available borrowings under the Credit Facility, will
provide sufficient funds to enable the Company to expand its business as
currently planned through the maturity of the Credit Facility in 2002, after
which the Company will need to seek additional financing to fund capital
expenditures and working capital. Because the Credit Facility will mature in
2002, the Company may not have a ready source of liquidity after 2002. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Description of Certain Indebtedness."
 
  The actual amount and timing of the Company's future capital requirements
may differ materially from the Company's estimate depending on the demand for
the Company's services and as a result of regulatory, technological and
competitive developments (including new market developments and new
opportunities) in the Company's industry. The Company may also require
additional capital in the future (or sooner than currently anticipated) for
new business activities related to its current and planned businesses, or in
the event it decides to make additional acquisitions or enter into joint
ventures and strategic alliances. Sources of additional capital may include
cash flow from operations and public and private equity and debt financings.
There can be no assurance, however, that the Company will be successful in
producing sufficient cash flows or raising sufficient debt or equity capital
to meet its strategic objectives or that such funds, if available at all, will
be available on a timely basis or on terms that are acceptable to the Company.
Failure to generate or raise sufficient funds would require the Company to
delay or abandon some or all of its future expansion plans or expenditures,
which could have a material adverse effect on the Company. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview."
 
HIGH LEVERAGE; ABILITY TO SERVICE DEBT; RESTRICTIVE COVENANTS
 
  At June 30, 1997, on a pro forma basis, giving effect to the Reorganization,
including the forgiveness of, or repayment in full of certain indebtedness
with a portion of the net proceeds from the Offering, the Company
 
                                      15
<PAGE>
 
would have had $214.4 million of indebtedness and its stockholder's equity
would have been $64.1 million. On a pro forma basis, the Company's earnings
would have been insufficient to cover its fixed charges for the year ended
December 31, 1996 and the six months ended June 30, 1997 by $18.2 million and
$6.6 million, respectively, and its EBITDA less capital expenditures and
interest expense would have been negative $14.8 million and negative $13.0
million, respectively.
 
  The Indenture and the Credit Facility contain restrictions on the Company
and its subsidiaries that affect, and in certain cases significantly limit or
prohibit, among other things, the ability of the Company and its subsidiaries
to incur additional indebtedness, create liens, make investments, issue stock
of subsidiaries and sell assets. In addition, the Credit Facility requires the
Company to maintain certain financial ratios. See "Description of Certain
Indebtedness--Credit Facility." There can be no assurance that the Company
will be able to maintain such ratios or that such covenants will not adversely
affect the Company's ability to finance its future operations or capital needs
or to engage in other business activities that may be in the interest of the
Company. The limitations in the Indenture are subject to a number of important
qualifications and exceptions. In particular, while the Indenture restricts
the Company's ability to incur indebtedness by requiring compliance with
specified leverage ratios, it permits the Company to incur an unlimited amount
of additional indebtedness to finance the acquisition of equipment, inventory
or network assets.
 
  There can be no assurance that the Company will be able to improve its
earnings before fixed charges or that the Company will be able to meet its
debt service obligations, including its obligations on the Exchange Notes. If
the Company is unable to generate sufficient cash flow or otherwise obtain
funds necessary to make required payments, or if the Company otherwise fails
to comply with the various covenants in its debt obligations, it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company. Such defaults could result
in a default on the Exchange Notes and could delay or preclude payment of
interest or principal on the Exchange Notes. The ability of the Company to
meet its obligations will be dependent upon the future performance of the
Company, which will be subject to prevailing economic conditions and to
financial, business and other factors. See "Description of Certain
Indebtedness" and "Description of the Exchange Notes--Covenants."
 
  The level of the Company's indebtedness could adversely affect the Company
in a number of ways. For example, (i) the ability of the Company to obtain any
necessary financing in the future for working capital, capital expenditures,
debt service requirements or other purposes may be limited; (ii) the Company's
level of indebtedness could limit its flexibility in planning for, or reacting
to, changes in its business; (iii) the Company will be more highly leveraged
than some of its competitors, which may place it at a competitive
disadvantage; (iv) the Company's degree of indebtedness may make it more
vulnerable to a downturn in its business or the economy generally; (v) the
debt service requirements of any additional indebtedness could make it more
difficult for the Company to make payments on the Exchange Notes; and (vi) a
substantial portion of the Company's cash flow from operations must be
dedicated to the payment of principal and interest on its indebtedness and
will not be available for other purposes.
 
  The successful implementation of the Company's strategy, including expansion
of its network and obtaining and retaining a significant number of customers,
and significant and sustained growth in the Company's cash flow are necessary
for the Company to be able to meet its debt service requirements, including
its obligations under the Exchange Notes. There can be no assurance that the
Company will successfully implement its strategy or that the Company will be
able to generate sufficient cash flow from operating activities to meet its
debt service obligations and working capital requirements. In the event the
implementation of the Company's strategy is delayed or is unsuccessful or the
Company does not generate sufficient cash flow to meet its debt service and
working capital requirements, the Company may need to seek additional
financing. There can be no assurance that any such financing could be obtained
on terms that are acceptable to the Company, or at all. In the absence of such
financing, the Company could be forced to dispose of assets in order to make
up for any shortfall in the payments due on its indebtedness under
circumstances that might not be favorable to realizing the highest price for
such assets. A substantial portion of the Company's assets consist of
intangible assets, the value of which will depend upon a variety of factors
(including the success of the Company's business). As a result, there can
 
                                      16
<PAGE>
 
be no assurance that the Company's assets could be sold quickly enough or for
sufficient amounts to enable the Company to meet its obligations, including
its obligations with respect to the Exchange Notes.
 
ABILITY TO MANAGE GROWTH
 
  The expansion and development of the Company's business will depend on,
among other things, the Company's ability to successfully implement its sales
and marketing strategy, evaluate markets, design fiber routes, secure
financing, install facilities, acquire rights of way, obtain any required
government authorizations, implement interconnection to, and co-location with,
facilities owned by incumbent local exchange carriers and obtain appropriately
priced unbundled network elements and wholesale services from the incumbent
local exchange carriers, all in a timely manner, at reasonable costs and on
satisfactory terms and conditions. The Company's rapid growth, particularly in
the provision of Retail Services, has placed, and anticipated growth in other
services in the future may also place, a significant strain on its
administrative, operational and financial resources. The Company's ability to
continue to manage its growth successfully will require the Company to enhance
its operational, management, financial and information systems and controls
and to hire and retain qualified sales, marketing, administrative, operating
and technical personnel. There can be no assurance that the Company will be
able to do so. In addition, as the Company increases its service offerings and
expands its targeted markets, there will be additional demands on customer
support, sales and marketing, administrative resources and network
infrastructure. The Company's inability to manage its growth effectively could
have a material adverse effect on the Company's business, results of
operations and financial condition.
 
BUSINESS DEVELOPMENT AND EXPANSION RISKS
 
  The successful implementation of the Company's business strategy to provide
an integrated bundle of telecommunications services and expand its operations
will be subject to a variety of risks, including competition and pricing, the
availability of capital on favorable terms, regulatory uncertainties,
operating and technical problems, the need to establish interconnection and
co-location arrangements with incumbent local exchange carriers in its target
markets and the potential difficulties in adding a local service offering. See
"--Dependence on Incumbent Local Exchange Carriers." In addition, the
expansion of the Company's business may involve acquisitions of other
telecommunications businesses and assets that, if made, could divert the
resources and management time of the Company and could require integration
with the Company's operations. There can be no assurance that any such
acquisition could be successfully integrated into the Company's operations or
that any acquired business will perform as expected. Failure of the Company to
implement its expansion and growth strategy successfully would have a material
adverse effect on the Company's business, results of operations and financial
condition.
 
RISKS RELATED TO LOCAL SERVICES STRATEGY
 
  The Company plans to enter the newly created competitive local
telecommunications services industry. The local dial tone services market has
only recently been opened to competition through the passage of the
Telecommunications Act of 1996 (the "Telecommunications Act") and subsequent
state and Federal regulatory actions designed to implement the
Telecommunications Act. Regulatory bodies have not completed all actions
expected to be needed to implement local service competition, and there is
little experience under those decisions that have been made to date. The
Company will have to make significant operating and capital investments in
order to implement its local exchange services strategy. There are numerous
operating complexities associated with providing these services. The Company
will be required to develop new products, services and systems and will need
to develop new marketing initiatives and train its sales force in connection
with selling these services. The Company will also need to implement the
necessary billing and collecting systems for these services. The Company will
face significant competition from the Regional Bell Operating Companies, whose
core business is providing local dial tone service. The Regional Bell
Operating Companies, who currently are the dominant providers of services in
their markets, are expected to mount a significant competitive response to new
entrants in their markets such as the Company. The Company also will face
significant competitive product and pricing
 
                                      17
<PAGE>
 
pressures from other incumbent local exchange carriers and from other firms
seeking to compete in the local services market.
 
  The Company also expects that the addition of local service to its bundle of
telecommunications services will have an adverse impact on its gross margin
because the gross margin on the resale of local services through incumbent
local exchange carrier facilities is lower than the gross margin on the
Company's existing business. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Overview."
 
PRICING PRESSURES AND RISKS OF INDUSTRY OVER-CAPACITY
 
  The long distance transmission industry has generally been characterized by
over-capacity and declining prices since shortly after the AT&T divestiture in
1984. The Company believes that, in the last several years, increasing demand
has ameliorated the over-capacity and that pricing pressure has been reduced.
However, the Company anticipates that prices for its Carriers' Carrier
Services will continue to decline over the next several years. The Company is
aware that certain long distance carriers are expanding their capacity and
believes that other long distance carriers, as well as potential new entrants
to the industry, are constructing new fiber optic and other long distance
transmission networks in the southern United States. Since the cost of the
actual fiber (as opposed to construction costs) is a relatively small portion
of the cost of building new transmission lines, persons building such lines
are likely to install fiber that provides substantially more transmission
capacity than will be needed over the short or medium term. Further, recent
technological advances may greatly expand the capacity of existing and new
fiber optic cable. Although such technological advances may enable the Company
to increase its capacity, an increase in the capacity of the Company's
competitors could adversely affect the Company's business. If industry
capacity expansion results in capacity that exceeds overall demand along any
of the Company's routes, severe additional pricing pressure could develop. In
addition, strategic alliances or similar transactions, such as the long
distance capacity purchasing alliance among certain Regional Bell Operating
Companies announced in the spring of 1996, could result in additional pricing
pressure on long distance carriers. Furthermore, the marginal cost of carrying
an additional call over existing fiber optic cable is extremely low. As a
result, within a few years, there may be dramatic and substantial price
reductions. Such pricing pressure could have a material adverse effect on the
Company. In addition, the Federal Communications Commission (the "FCC") has
announced changes to its interstate access rules which may result in
additional pricing pressures. See "--Competition."
 
DEPENDENCE ON BILLING, CUSTOMER SERVICE AND INFORMATION SYSTEMS
 
  Sophisticated information and processing systems are vital to the Company's
growth and its ability to monitor costs, bill customers, provision customer
orders and achieve operating efficiencies. As the Company commences providing
dial tone and switched local access services, the need for enhanced billing
and information systems will increase significantly. The inability of the
Company to identify adequately all of its information and processing needs, or
to upgrade systems as necessary, could have a material adverse impact on the
ability of the Company to reach its objectives, on its financial condition and
results of operations and on its ability to pay interest and principal on the
Exchange Notes.
 
DEPENDENCE ON RIGHTS OF WAY AND OTHER THIRD PARTY AGREEMENTS
 
  The Company has obtained easements, rights of way, franchises and licenses
from various private parties, including actual and potential competitors, and
local governments in order to construct and maintain its fiber optic network.
There can be no assurance that the Company will continue to have access to
existing rights of way and franchises after the expiration of such agreements.
If a franchise, license or lease agreement were terminated and the Company
were forced to remove or abandon a significant portion of its network, such
termination could have a material adverse effect on the Company.
 
 
                                      18
<PAGE>
 
REGULATION
 
  The Company is required to obtain certain authorizations from the FCC and
state public utility commissions ("PUCs") to offer certain of its
telecommunications services, as well as file tariffs for many of its services.
To date the Company has not experienced significant difficulties in receiving
certification, maintaining tariffs, or otherwise complying with its regulatory
obligations. The Company will face new obligations arising out of the
Telecommunications Act as it begins to enter the local telephone market. It
also is likely that state PUCs will regulate the local telephone services
offered by the Company and other competitive local exchange carriers more
heavily than competitive long distance services have been regulated in the
past. Because the FCC and the states have yet to adopt many of the rules and
policies necessary to implement the Telecommunications Act, or to respond to
other related local telephone competition issues, it is uncertain how
burdensome these requirements will be for the Company.
 
  Although the Company entered into the Interconnection Agreement pursuant to
which it will obtain wholesale local services and access to unbundled network
elements from BellSouth, the terms of the Interconnection Agreement are
subject to the approval of the PUCs regulating the Company's markets. Such
approval has been received from the PUCs of Alabama, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina and South Carolina and is pending in
Florida and Tennessee.
 
  In addition, the Company's plans to provide local telephone service are
heavily dependent upon implementation of provisions of the Telecommunications
Act. The Telecommunications Act preempted state and local laws to the extent
that they prohibited local telephone competition, and imposed a variety of new
duties on incumbent local exchange carriers intended to advance such
competition, including the duty to negotiate in good faith with competitors
requesting interconnection to the incumbent local exchange carrier's network.
However, negotiations with incumbent local exchange carriers have sometimes
involved considerable delays and the resulting negotiated agreements may not
necessarily be obtained on terms and conditions that are acceptable to the
Company. In such instances, the Company may petition the proper state
regulatory agency to arbitrate disputed issues. There can be no assurance that
the Company will be able to negotiate acceptable new interconnection
agreements with incumbent local exchange carriers or that if state regulatory
authorities impose terms and conditions on the parties in arbitration, such
terms will be acceptable to the Company. On August 8, 1996, the FCC adopted
rules and policies implementing the local competition provisions of the
Telecommunications Act, which rules, in general, were considered favorable to
new competitive entrants, but those rules have not been fully implemented. The
FCC's rules were challenged in the federal courts by GTE, Regional Bell
Operating Companies, large independent incumbent local exchange carriers and
state regulatory commissions. On October 15, 1996, the U.S. Court of Appeals
for the Eighth Circuit issued a stay of the implementation of certain of the
FCC's rules and on July 18, 1997, the Court issued its decision finding that
the FCC lacked statutory authority under the Telecommunications Act for
certain of its rules. In particular, the Court found that the FCC was not
empowered to establish the pricing standards governing unbundled local network
elements or wholesale local services of the incumbent local exchange carriers.
The Court also struck down other FCC rules, including one that would have
enabled new entrants to "pick and choose" from provisions of established
interconnection agreements between the incumbent local exchange carriers and
other carriers. The Court rejected certain other objections to the FCC rules
brought by the incumbent local exchange carriers or the states, including
challenges to the FCC's definition of unbundled elements, and to the FCC's
rules allowing new competitors to create their own networks by combining
incumbent local exchange carrier network elements together without adding
additional facilities of their own. The overall impact of the Court's decision
is to materially reduce the role of the FCC in fostering local competition,
including its ability to take enforcement action if the Telecommunications Act
is violated, and increase the role of state utility commissions. The FCC has
indicated that it will ask the Supreme Court to review the Court's decision
and petitions for rehearing are pending concerning the decision's treatment of
unbundled elements. Meanwhile, certain state commissions have asserted that
they will be active in promoting local telephone competition using the
authority they have under the ruling, lessening the significance of the
reduced FCC role. At this time the impact of the Court's decision cannot be
evaluated, but there can be no assurance that the Court decision and related
developments will not have a materially adverse effect on the Company.
Furthermore, other FCC rules related to local telephone
 
                                      19
<PAGE>
 
competition remain the subject of legal challenges, and there can be no
assurance that decisions affecting those rules will not be adverse to
companies seeking to enter the local telephone market.
 
  The Telecommunications Act also creates the foundation for increased
competition in the long distance market from the incumbent local exchange
carriers, which could affect the successful implementation of the Company's
business plans. For example, certain provisions eliminate previous
prohibitions on the provision of interLATA long distance services (both retail
and carriers' carrier) by the Regional Bell Operating Companies subject to
compliance by such companies with requirements set forth in the
Telecommunications Act and implemented by the FCC. The Company could be
adversely affected if the Regional Bell Operating Companies (and particularly
BellSouth) are allowed to provide wireline interLATA long distance services
within their own regions before local competition is established. In a related
development, the FCC is considering proposed new policies and rules that would
grant the incumbent local exchange carriers additional flexibility in the
pricing of interstate access services, and states are considering or are
expected to consider incumbent local exchange carrier requests for similar
regulatory relief with respect to intrastate services. Such flexibility is
likely to come first for services offered in the business market. Any pricing
flexibility or other significant deregulation of the incumbent local exchange
carriers could have a material adverse effect on the Company. See "Business--
Regulation."
 
COMPETITION
 
  The Company operates in a highly competitive environment, and the level of
competition, particularly with respect to pricing, is increasing. Local
telephone and intraLATA long distance services substantially similar to those
expected to be offered by the Company are also offered by the incumbent local
exchange carriers serving the markets that the Company plans to serve.
BellSouth is the incumbent local exchange carrier and a particularly strong
competitor in most of the markets to be served by the Company. BellSouth and
other incumbent local exchange carriers already have relationships with every
customer and have the potential to subsidize services of the type offered by
the Company from service revenues not subject to effective competition, which
could result in even more intense price competition. The Company competes with
long distance carriers in the provision of interLATA long distance Retail and
Carriers' Carrier Services. The interLATA long distance market consists of
three major competitors (AT&T, MCI and Sprint) but other companies operate or
are building networks in the southern United States and other geographic
areas. Other competitors of the Company in the Retail and Carriers' Carrier
Services markets are likely to include Regional Bell Operating Companies
providing out-of-region (and, with the future removal of regulatory barriers,
in-region) long distance services, other competitive local exchange carriers,
microwave and satellite carriers, and private networks owned by large end-
users. In addition, the Company competes with direct marketers, equipment
vendors and installers, and telecommunications management companies with
respect to certain portions of its business. Many of the Company's existing
and potential competitors have financial, technical and other resources and
customer bases and name recognition far greater than those of the Company. The
long distance business is extremely competitive and prices have declined
substantially in recent years and are expected to continue to decline, which
will adversely affect the Company's gross margins as a percentage of revenues.
The FCC recently announced changes to its interstate access rules that will
reduce per-minute access charges and substitute new per-line flat-rate monthly
charges. These actions are expected to reduce access rates. AT&T has committed
to reduce its long distance rates to reflect access cost reductions, and other
competitors of the Company are likely to make similar reductions. In such
event, the Company may need to reduce its rates to respond to competitive
pressures. See "--Dependence on Incumbent Local Exchange Carriers" and
"Business--Regulation."
 
  The Telecommunications Act, other recent state legislative actions, and
current federal and state regulatory initiatives provide increased business
opportunities for the Company by removing or substantially reducing certain
barriers to local exchange competition. However, these new competitive
opportunities are expected to be accompanied by new competitive opportunities
for the incumbent local exchange carriers. It is also expected that increased
local competition will result in increased pricing flexibility for, and
relaxation of regulatory oversight of, the incumbent local exchange carriers.
If the incumbent local exchange carriers are permitted to engage in increased
volume and discount pricing practices or charge competitive local exchange
carriers increased fees for
 
                                      20
<PAGE>
 
interconnection to their networks, or if the incumbent local exchange carriers
seek to delay implementation of interconnection by competitors to their
networks, the Company's results of operations and financial condition could be
adversely affected. There can be no assurance that the Company will be able to
achieve or maintain adequate market share or revenues, or compete effectively
in any of its markets.
 
  In addition, a continuing trend toward business combinations and strategic
alliances in the telecommunications industry may further enhance competition.
For example, the national long distance carrier WorldCom acquired MFS
Communications Company, Inc., a competitive local exchange carrier, in
December 1996. In November 1996, British Telecommunications plc, an
international telecommunications company, announced its agreement to acquire
MCI. In March 1997, BellSouth and International Business Machines Corporation
("IBM") announced an alliance to provide Internet and Intranet services to
businesses in the southern United States. These types of strategic alliances
could put the Company at a significant competitive disadvantage.
 
  The Company will face competition in the markets in which it operates from
one or more competitive local exchange carriers operating fiber optic
networks, in some cases in conjunction with the local cable television
operator. One of the primary purposes of the Telecommunications Act is to
promote competition, particularly in the local telephone market. AT&T, MCI,
Sprint and others have begun to offer local telecommunications services,
either directly or in conjunction with other competitive local exchange
carriers in certain locations, and are expected to expand that activity as
opportunities created by the Telecommunications Act develop. BellSouth has
announced plans to provide competitive local service in areas of its region
where it is not the incumbent local exchange carrier.
 
  To complement its telecommunications services offerings, the Company offers
data transmission services. The data transmission business is extremely
competitive and prices have declined substantially in recent years and are
expected to continue to decline.
 
  The recent World Trade Organization ("WTO") agreement on basic
telecommunications services could increase the level of competition faced by
the Company. Under this agreement, the United States and other members of the
WTO committed themselves to opening their telecommunications markets to
competition and foreign ownership and to adopting regulatory measures to
protect against anticompetitive behavior by dominant telephone companies
effective as early as January 1, 1998.
 
  The Company also believes that providers of wireless services increasingly
will offer, in addition to products that supplement a customer's wireline
communications (similar to cellular telephone services in use today), wireline
replacement products that may result in wireless services becoming the
customer's primary mode of communication. For example, AT&T recently announced
plans to offer local services using a new wireless technology. AT&T's proposed
wireless system would link residential and business telephones via radio waves
to the AT&T network. If successful, this new service could further enhance
AT&T's ability to market, on a nationwide basis, "one-stop" telecommunications
services. Competition with providers of wireless telecommunications services
may be intense. Many of the Company's potential wireless competitors have
substantially greater financial, technical, marketing, sales, manufacturing
and distribution resources than those of the Company.
 
DEPENDENCE ON INCUMBENT LOCAL EXCHANGE CARRIERS
 
  The Company is dependent on incumbent local exchange carriers to provide
access service for the origination and termination of its toll long distance
traffic and interexchange private lines. Historically charges for such access
service have made up a significant percentage of the overall cost of providing
long distance service. On May 7, 1997, the FCC adopted changes to its
interstate access rules that, among other things, will reduce per-minute
access charges and substitute new per-line flat rate monthly charges. The FCC
also approved reductions in overall access rates, and established new rules to
recover subsidies to support universal service and other public policies. The
impact of these changes on the Company or its competitors is not yet clear.
The Company could be adversely affected if it does not experience access cost
reductions proportionally equivalent to those of its competitors. See
"Business--Regulation."
 
                                      21
<PAGE>
 
  The Company also generally will be dependent on incumbent local exchange
carriers for provision of local telephone service through access to local
loops, termination service and, in some markets, central office switches of
such carriers. In addition, the Company intends to obtain the local telephone
services of the incumbent local exchange carriers on a wholesale basis and
resell that service to end users, particularly in the early stages of its
local telephone service business.
 
  Any successful effort by the incumbent local exchange carriers to deny or
substantially limit the Company's access to the incumbent local exchange
carrier's network elements or wholesale services would have a material adverse
effect on the Company's ability to provide local telephone services. Although
the Telecommunications Act imposes interconnection obligations on incumbent
local exchange carriers, there can be no assurance that the Company will be
able to obtain access to such network elements or services at rates, and on
terms and conditions, that permit the Company to offer local services at rates
that are both profitable and competitive. As noted above, the Eighth Circuit
Court of Appeals recently struck down certain FCC rules intended to govern
such rates, terms and conditions. See "Risk Factors--Regulation." The result
of this decision is to give state utility commissions a significantly larger
role in implementing the Telecommunications Act. It is uncertain whether such
commissions will adopt and enforce rules or take other actions that will
permit new carriers to have economical use of incumbent local exchange carrier
networks and facilities. The Interconnection Agreement currently allows the
Company to provide local service on a resale basis or by purchasing all
unbundled network elements required to provide local service on a facilities
basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
most states, although they remain subject to review and modification by such
authorities. In addition, the Interconnection Agreement does not resolve all
operational issues, particularly those relating to the collocation of the
Company's equipment with that of BellSouth. The Company and BellSouth are
continuing to negotiate to resolve such issues. Many issues relevant to the
terms and conditions by which competitors may use the incumbent local exchange
carrier network and wholesale services remain to be resolved. For example,
BellSouth and certain other incumbent local exchange carriers have taken the
position that when a carrier seeking to provide local service obtains all
necessary elements (loops and switches) from the incumbent local exchange
carrier in a combined form, the incumbent local exchange carrier retains the
right to receive the access revenues associated with the service to the
customers served on that basis. Although the FCC has rejected this position,
further legal challenges are in progress and other important issues related to
this form of interconnection remain open. For example, many new carriers,
including the Company, have experienced problems with respect to the
operational support systems used by new carriers to order and receive network
elements and wholesale services from the incumbent local exchange carriers.
These systems are necessary for new carriers like the Company to provide local
service to customers on a timely and competitive basis. The FCC has recently
created a task force to examine problems that have slowed the development of
local telephone competition. See "Business--Regulation" and "Services and
Facilities."
 
DEPENDENCE ON CERTAIN CUSTOMERS
 
  For the year ended December 31, 1996 and the six months ended June 30, 1997,
giving effect to the Reorganization, the Company's two largest Carriers'
Carrier customers would together have accounted for approximately 15% and 12%,
respectively, of the Company's combined pro forma revenues. For the six months
ended June 30, 1997, the Company's five largest Retail Services customers
would have represented an aggregate of approximately 10% of the Company's
combined pro forma revenues. The Company's customers generally use more than
one service provider and may reduce their use of the Company's services and
switch to other providers without incurring significant expense. The Company's
agreements with its customers generally provide that the customer may
terminate service without penalty in the event of certain outages in service
and for certain other defined causes. Although, as of June 30, 1997, on a pro
forma basis, the Company's Carriers' Carrier business had remaining future
long-term contract commitments totaling approximately $75.8 million, some of
such contractual commitments provide that, if the customer is offered lower
pricing with respect to any circuit by another carrier, the customer's
commitment to the Company will be reduced to the extent the Company does not
match the price for such circuit and the customer purchases such circuit from
the other carrier. There can be no assurance that the Company will be able to
retain its customers. The loss of or a significant decrease of business from
any of its largest customers would have a material adverse effect on the
Company's business, results of operations and financial condition.
 
                                      22
<PAGE>
 
RISK OF RAPID TECHNOLOGICAL CHANGES
 
  The telecommunications industry is subject to rapid and significant changes
in technology. Although the Company believes that, for the foreseeable future,
these changes will neither materially affect the continued use of its fiber
optic network, digital switches and transmission equipment, nor materially
hinder its ability to acquire necessary technologies, the effect of
technological changes on the business of the Company, such as changes relating
to emerging wireline (including fiber optic) and wireless (including
broadband) transmission technologies, cannot be predicted. In addition, the
Company may be required to select in advance one technology over another, but
it will be impossible to predict with any certainty, at the time the Company
is required to make its investment, which technology will prove to be the most
economic, efficient or capable of attracting customer usage.
 
DEPENDENCE ON NETWORK INFRASTRUCTURE
 
  The Company has entered into marketing and management agreements with three
southern public utility companies to sell long-haul private line services on a
commission basis on the fiber optic networks owned by these companies.
Pursuant to these agreements, which have remaining terms ranging from five to
eight years, the Company generally earns a commission based upon a percentage
of the gross revenues generated by the sale of capacity on the utility's
networks. By interconnecting the Company's owned network to these other
networks owned by the public utilities, and by marketing and selling capacity
on such networks to the Company's customers, the Company has effectively
extended its network with minimal capital expenditure. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Overview." The Company also has a buy-sell agreement with Carolinas Fibernet,
LLC, which manages fiber optic facilities in North Carolina and South
Carolina. Although the Company does not believe that any of these agreements
will be terminated in the near future, cancellation or non-renewal of any of
such agreements could materially adversely affect the Company's business. In
addition, two of the Company's three agreements with public utility companies
are nonexclusive, and the Company may encounter competition for capacity on
the utilities' networks from other service providers that enter into
comparable arrangements with the utilities. Any reduction in the amount of
capacity that is made available to the Company could adversely affect the
Company. To the extent the Company is unable to establish similar arrangements
in new markets, it may be required to make additional capital expenditures to
extend its fiber network.
 
  The Company's business also could be materially adversely affected by a
cable cut or equipment failure in the Company's fiber optic network. Although
the Company has implemented electronic redundancy throughout its network,
which enables traffic to be rerouted to another fiber in the same fiber sheath
in the event of a partial fiber cut or electronics failure, a substantial
portion of the Company's owned and managed fiber optic network is not
protected in the event of a total cable cut.
 
HOLDING COMPANY STRUCTURE; PRIORITY OF SECURED DEBT
 
  The Company is a holding company with no direct operations and no
significant assets other than the stock of its subsidiaries. The Company is
dependent on the cash flows of its subsidiaries to meet its obligations,
including the payment of interest and principal on the Exchange Notes. The
Company's subsidiaries are separate legal entities that have no obligation to
pay any amounts due pursuant to the Exchange Notes or to make any funds
available therefor, whether by dividends, loans or other payments. Because the
Company's subsidiaries will not guarantee the payment of the principal or
interest on the Exchange Notes, any right of the Company to receive assets of
any of its subsidiaries upon its liquidation or reorganization (and the
consequent right of holders of the Exchange Notes to participate in the
distribution or realize proceeds from those assets) will be effectively
subordinated to the claims of the creditors of any such subsidiary (including
trade creditors and holders of indebtedness of such subsidiary), except if and
to the extent the Company is itself a creditor of such subsidiary, in which
case the claims of the Company would still be effectively subordinated to any
security interest in the assets of such subsidiary held by other creditors. As
of June 30, 1997, on a pro forma basis, giving effect to the Reorganization,
the subsidiaries of the Company had approximately $37.8 million of liabilities
(excluding
 
                                      23
<PAGE>
 
intercompany payables), including approximately $14.4 million of indebtedness
(including capital leases). In addition, a subsidiary of the Company has $100
million of availability under the Credit Facility, which is secured. The
Company and its other subsidiaries are guarantors under the Credit Facility.
See "Description of Certain Indebtedness--Credit Facility."
 
  The Exchange Notes are unsecured (except with respect to the Pledged
Securities) and therefore will be effectively subordinated to any secured
indebtedness of the Company. The Indenture permits the Company and its
subsidiaries to incur an unlimited amount of indebtedness to finance the
acquisition of equipment, inventory and network assets and to secure such
indebtedness, and up to $100 million of other secured indebtedness pursuant to
one or more credit facilities, including the Credit Facility. The Credit
Facility is secured by substantially all of the assets of the Company's
subsidiaries. Consequently, in the event of a bankruptcy, liquidation,
dissolution, reorganization or similar proceeding with respect to the Company,
such assets would be available to satisfy obligations of the secured debt
before any payment could be made on the Exchange Notes. In addition, to the
extent such assets did not satisfy in full the secured indebtedness, the
holders of such indebtedness would have a claim for any shortfall that would
be pari passu (or effectively senior if the indebtedness were issued by a
subsidiary) with the Exchange Notes. Accordingly, there may only be a limited
amount of assets available to satisfy any claims of the holders of the
Exchange Notes upon an acceleration of the Exchange Notes.
 
DEPENDENCE ON KEY PERSONNEL
 
  The Company's business is currently managed by a small number of key
management and operating personnel. The Company does not have any employment
agreements with, nor does the Company maintain "key man" insurance on, these
employees. The loss of the services of key personnel, or the inability to
attract, recruit and retain sufficient or additional qualified personnel,
could have a material adverse effect on the Company. See "Management."
 
CONTROL BY ITC HOLDING COMPANY; CONFLICTS OF INTEREST
 
  The Company is authorized under its certificate of incorporation to issue
60,000,000 shares of Class A common stock (the "Class A Common Stock"), which
have one vote per share, and 30,000,000 shares of Class B common stock (the
"Class B Common Stock"), which have ten votes per share. ITC Holding owns
15,000,000 shares of Class B Common Stock, which constitute all of the
Company's issued and outstanding capital stock. Certain decisions concerning
the operations or financial structure of the Company may present conflicts of
interest between ITC Holding and the holders of the Exchange Notes. For
example, if the Company encounters financial difficulties or is unable to pay
its debts as they mature, the interests of ITC Holding might conflict with
those of the holders of the Exchange Notes. In addition, ITC Holding may have
an interest in pursuing acquisitions, divestitures, financings or other
transactions that, in its judgment, could enhance its equity investment in the
Company, even though such transactions might involve risk to the holders of
the Exchange Notes.
 
ABSENCE OF PUBLIC MARKET
 
  The Senior Notes have been designated for trading by qualified buyers in the
PORTAL Market. The Senior Notes have not been registered under the Securities
Act, however, and will continue to be subject to restrictions on
transferability to the extent that they are not exchanged for Exchange Notes.
Furthermore, the Exchange Offer will not be conditioned upon any minimum or
maximum aggregate principal amount of Senior Notes being tendered for
exchange. No assurance can be given as to the liquidity of the trading market
of the Senior Notes following the Exchange Offer.
 
  Although the Exchange Notes will generally be permitted to be resold or
otherwise transferred by the holders thereof (other than any holder that is
(i) an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act or (ii) a broker-dealer that acquired Senior Notes as a result
of market-making activities or other trading activities) without compliance
with the registration requirements under the Securities Act, the
 
                                      24
<PAGE>
 
Exchange Notes will constitute a new issue of securities for which there is
currently no established trading market. If a trading market does not develop
or is not maintained, holders of the Exchange Notes may experience difficulty
in reselling the Exchange Notes or may be unable to sell them at all. If a
market for the Exchange Notes develops, any such market may cease at any time.
If a public trading market develops for the Exchange Notes, future trading
prices of the Exchange Notes will depend on many factors, including, among
other things, prevailing interest rates, the market for similar securities,
the financial conditions and results of operations of the Company and other
factors beyond the control of the Company, including general economic
conditions. The Company does not intend to list the Exchange Notes on any
national securities exchange or to seek approval for quotation through any
automated quotation system. The Company has been advised by the Placement
Agents that following completion of the Exchange Offer, the Placement Agents
intend to make a market in the Exchange Notes. However, the Placement Agents
are not obligated to do so and any market-making activities with respect to
the Exchange Notes may be discontinued at any time without notice.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes.
 
  Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" of the Company (within the meaning of Rule
405 under the Securities Act) may publicly offer for sale or resell the
Exchange Notes only in compliance with the provisions of Rule 144 under the
Securities Act or any other available exemptions under the Securities Act.
 
  Each broker-dealer that receives Exchange Notes for its own account in
exchange for Senior Notes, where such Senior Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
 
CONSEQUENCES OF A FAILURE TO EXCHANGE SENIOR NOTES
 
  The Senior Notes have not been registered under the Securities Act or any
state securities laws and therefore may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case
in compliance with certain other conditions and restrictions. Senior Notes
that remain outstanding after consummation of the Exchange Offer will continue
to bear a legend reflecting such restrictions on transfer. In addition, upon
consummation of the Exchange Offer, holders of Senior Notes that remain
outstanding will not be entitled to any rights to have such Senior Notes
registered under the Securities Act, except under certain limited
circumstances. The Company does not intend to register under the Securities
Act any Senior Notes that remain outstanding after consummation of the
Exchange Offer. See "The Exchange Offer." To the extent that Senior Notes are
not tendered and accepted in the Exchange Offer, a holder's ability to sell
such Senior Notes could be adversely affected.
 
EXCHANGE OFFER PROCEDURES
 
  Issuance of the Exchange Notes in exchange for Senior Notes pursuant to the
Exchange Offer will be made only after a timely receipt by the Exchange Agent
of (i) such Senior Notes or a book-entry confirmation of a book-entry transfer
of the Senior Notes into the Exchange Agent's account at The Depository Trust
Company ("DTC"); (ii) the Letter of Transmittal (or a facsimile thereof),
properly completed and duly executed, with any required signature guarantees;
and (iii) any other documents required by the Letter of Transmittal. Holders
of the Senior Notes desiring to tender such Senior Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company and the Exchange Agent are under no duty to give notification of
defects or irregularities with respect to the tenders of Senior Notes for
exchange. See "The Exchange Offer."
 
                                      25
<PAGE>
 
                              THE EXCHANGE OFFER
 
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
 
  In connection with the sale of the Senior Notes, the Company entered into
the Registration Rights Agreement with the Placement Agents, pursuant to which
the Company agreed to file and to use its best efforts to cause to become
effective with the Commission a registration statement with respect to the
exchange of the Senior Notes for Exchange Notes with terms identical in all
material respects to the terms of the Senior Notes. A copy of the Registration
Rights Agreement has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part (the "Registration Statement"). The Exchange
Offer is being made to satisfy the contractual obligations of the Company
under the Registration Rights Agreement.
 
  By tendering Senior Notes in exchange for Exchange Notes, each holder will
represent to the Company that: (i) any Exchange Notes to be received by such
holder will be acquired in the ordinary course of such holder's business; (ii)
such holder has no arrangement or understanding with any person to participate
in a distribution (within the meaning of the Securities Act) of the Exchange
Notes; (iii) such holder is not an "affiliate" of the Company (within the
meaning of Rule 405 under the Securities Act), or if such holder is an
affiliate, that such holder will comply with the registration and prospectus
delivery requirements of the Securities Act to the extent applicable; (iv)
such holder has full power and authority to tender, exchange, sell, assign and
transfer the tendered Senior Notes; (v) the Company will acquire good,
marketable and unencumbered title to the tendered Senior Notes, free and clear
of all liens, restrictions, charges and encumbrances; and (vi) the Senior
Notes tendered for exchange are not subject to any adverse claims or proxies.
Each tendering holder also will warrant and agree that such holder will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange,
sale, assignment, and transfer of the Senior Notes tendered pursuant to the
Exchange Offer. Each broker-dealer that receives Exchange Notes for its own
account in exchange for Senior Notes, where such Senior Notes were acquired by
such broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
 
  The Exchange Offer is not being made to, nor will the Company accept tenders
for exchange from, holders of Senior Notes in any jurisdiction in which the
Exchange Offer or the acceptance thereof would not be in compliance with the
securities or blue sky laws of such jurisdiction.
 
  Unless the context requires otherwise, the term "holder" with respect to the
Exchange Offer means any person in whose name the Senior Notes are registered
on the books of the Company or any other person who has obtained a properly
completed bond power from the registered holder, or any participant in DTC
whose name appears on a security position listing as a holder of Senior Notes
(which, for purposes of the Exchange Offer, include beneficial interests in
the Senior Notes held by direct or indirect participants in DTC and Senior
Notes held in definitive form).
 
TERMS OF THE EXCHANGE OFFER
 
  The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange $1,000 principal amount of Exchange Notes for each $1,000 principal
amount of Senior Notes properly tendered prior to the Expiration Date and not
properly withdrawn in accordance with the procedures described below. Holders
may tender their Senior Notes in whole or in part in integral multiples of
$1,000 principal amount.
 
  The form and terms of the Exchange Notes will be the same as the form and
terms of the Senior Notes except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
holders of the Exchange Notes will not be entitled to certain rights of
holders of the Senior Notes under the Registration Rights Agreement. The
 
                                      26
<PAGE>
 
Exchange Notes will evidence the same indebtedness as the Senior Notes (which
they will replace) and will be issued pursuant to, and entitled to the
benefits of, the Indenture.
 
  The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Notes being tendered for exchange. The Company reserves the
right in its sole discretion to purchase or make offers for any Senior Notes
that remain outstanding after the Expiration Date or, as set forth under "--
Conditions to the Exchange Offer," to terminate the Exchange Offer and, to the
extent permitted by applicable law, purchase Senior Notes in the open market,
in privately negotiated transactions or otherwise. The terms of any such
purchases or offers could differ from the terms of the Exchange Offer. As of
the date of this Prospectus,$200 million aggregate principal amount of Senior
Notes is outstanding.
 
  Holders of Senior Notes do not have any appraisal or dissenters' rights in
connection with the Exchange Offer. Senior Notes that are not tendered, or are
tendered but not accepted, in connection with the Exchange Offer will remain
outstanding and continue to accrue interest in accordance with their terms,
but will not retain any rights under the Registration Rights Agreement. See
"Risk Factors--Consequences of a Failure to Exchange Senior Notes."
 
  If any tendered Senior Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Senior Notes will be returned,
without expense, to the tendering holder thereof promptly after the Expiration
Date.
 
  Holders who tender Senior Notes in connection with the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Senior Notes in connection with the Exchange Offer. The Company
will pay all charges and expenses, other than certain applicable taxes
described below, in connection with the Exchange Offer. See "--Fees and
Expenses."
 
  THE BOARD OF DIRECTORS OF THE COMPANY MAKES NO RECOMMENDATION TO HOLDERS OF
SENIOR NOTES AS TO WHETHER TO TENDER OR REFRAIN FROM TENDERING ALL OR ANY
PORTION OF THEIR SENIOR NOTES PURSUANT TO THE EXCHANGE OFFER. IN ADDITION, NO
ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH RECOMMENDATION. HOLDERS OF SENIOR
NOTES MUST MAKE THEIR OWN DECISION WHETHER TO TENDER PURSUANT TO THE EXCHANGE
OFFER AND, IF SO, THE AGGREGATE AMOUNT OF SENIOR NOTES TO TENDER AFTER READING
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR
ADVISERS, IF ANY, BASED ON THEIR FINANCIAL POSITION AND REQUIREMENTS.
 
EXPIRATION DATE; EXTENSIONS, AMENDMENTS
 
  The term "Expiration Date" means 5:00 p.m., New York City time, on October
28, 1997 unless the Exchange Offer is extended by the Company (in which case
the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended).
 
  The Company expressly reserves the right in its sole and absolute
discretion, subject to applicable law, at any time and from time to time, (i)
to delay the acceptance of the Senior Notes for exchange; (ii) to terminate
the Exchange Offer (whether or not any Senior Notes have theretofore been
accepted for exchange) if the Company determines, in its sole and absolute
discretion, that any of the events or conditions referred to under "--
Conditions to the Exchange Offer" has occurred or exists or has not been
satisfied; (iii) to extend the Expiration Date of the Exchange Offer and
retain all Senior Notes tendered pursuant to the Exchange Offer, subject,
however, to the right of holders of Senior Notes to withdraw their tendered
Senior Notes as described under "--Withdrawal Rights;" and (iv) to waive any
condition or otherwise amend the terms of the Exchange Offer in any respect
(whether or not any Senior Notes have theretofore been accepted for exchange).
If the Exchange Offer is amended in a manner determined by the Company to
constitute a material change, or if the Company waives a material condition of
the Exchange Offer, the Company will promptly disclose such amendment by means
of a prospectus supplement that will be distributed to the registered holders
of the Senior
 
                                      27
<PAGE>
 
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Exchange Act.
 
  Any such delay in acceptance, termination, extension or amendment will be
followed promptly by oral or written notice thereof to the Exchange Agent (any
such oral notice to be promptly confirmed in writing) and by making a public
announcement thereof, and such announcement in the case of an extension will
be made no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date. Without limiting the manner in
which the Company may choose to make any public announcement, and subject to
applicable laws, the Company shall have no obligation to publish, advertise or
otherwise communicate any such public announcement other than by issuing a
release to an appropriate news agency.
 
ACCEPTANCE FOR EXCHANGE AND ISSUANCE OF EXCHANGE NOTES
 
  Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes
for Senior Notes validly tendered and not withdrawn (pursuant to the
withdrawal rights described under "--Withdrawal Rights") promptly after the
Expiration Date.
 
  In all cases, delivery of Exchange Notes in exchange for Senior Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Senior Notes or a book-
entry confirmation of a book-entry transfer of Senior Notes into the Exchange
Agent's account at DTC; (ii) the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees;
and (iii) any other documents required by the Letter of Transmittal.
Accordingly, the delivery of Exchange Notes might not be made to all tendering
holders at the same time, and will depend upon when Senior Notes, book-entry
confirmations with respect to Senior Notes and other required documents are
received by the Exchange Agent.
 
  The term "book-entry confirmation" means a timely confirmation of a book-
entry transfer of Senior Notes into the Exchange Agent's account at DTC.
 
  Subject to the terms and conditions of the Exchange Offer, the Company will
be deemed to have accepted for exchange, and thereby exchanged, Senior Notes
validly tendered and not withdrawn as, if and when the Company gives oral or
written notice to the Exchange Agent (any such oral notice to be promptly
confirmed in writing) of the Company's acceptance of such Senior Notes for
exchange pursuant to the Exchange Offer. The Company's acceptance for exchange
of Senior Notes tendered pursuant to any of the procedures described above
will constitute a binding agreement between the tendering holder and the
Company upon the terms and subject to the conditions of the Exchange Offer.
The Exchange Agent will act as agent for the Company for the purpose of
receiving tenders of Senior Notes, Letters of Transmittal and related
documents, and as agent for tendering holders for the purpose of receiving
Senior Notes, Letters of Transmittal and related documents and transmitting
Exchange Notes to holders who validly tendered Senior Notes. Such exchange
will be made promptly after the Expiration Date. If for any reason whatsoever
the acceptance for exchange or the exchange of any Senior Notes tendered
pursuant to the Exchange Offer is delayed (whether before or after the
Company's acceptance for exchange of Senior Notes), or the Company extends the
Exchange Offer or is unable to accept for exchange or exchange Senior Notes
tendered pursuant to the Exchange Offer, then, without prejudice to the
Company's rights set forth herein, the Exchange Agent may, nevertheless, on
behalf of the Company and subject to Rule 14e-1(c) under the Exchange Act,
retain tendered Senior Notes and such Senior Notes may not be withdrawn except
to the extent tendering holders are entitled to withdrawal rights as described
under "--Withdrawal Rights."
 
PROCEDURES FOR TENDERING SENIOR NOTES
 
  Valid Tender. Except as set forth below, in order for Senior Notes to be
validly tendered pursuant to the Exchange Offer, either (i) (a) a properly
completed and duly executed Letter of Transmittal (or facsimile thereof), with
any required signature guarantees and any other required documents, must be
received by the Exchange Agent at the address set forth under "--Exchange
Agent" prior to the Expiration Date and (b) tendered Senior
 
                                      28
<PAGE>
 
Notes must be received by the Exchange Agent, or such Senior Notes must be
tendered pursuant to the procedures for book-entry transfer set forth below
and a book-entry confirmation must be received by the Exchange Agent, in each
case prior to the Expiration Date, or (ii) the guaranteed delivery procedures
set forth below must be complied with.
 
  If less than all of the Senior Notes held by a holder are tendered by such
holder, such holder should fill in the amount of Senior Notes being tendered
in the appropriate box on the Letter of Transmittal. The entire amount of
Senior Notes delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
 
  If any Letter of Transmittal, endorsement, bond power, power of attorney, or
any other document required by the Letter of Transmittal is signed by a
trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company, in its sole discretion, of such person's
authority to so act must be submitted.
 
  Any beneficial owner of Senior Notes that are held by or registered in the
name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer.
 
  THE METHOD OF DELIVERY OF SENIOR NOTES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
 
  Book-Entry Transfer. The Exchange Agent will make a request to establish an
account with respect to the Senior Notes at DTC for purposes of the Exchange
Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in DTC's book-entry transfer
facility system may make a book-entry delivery of the Senior Notes by causing
DTC to transfer such Senior Notes into the Exchange Agent's account at DTC in
accordance with DTC's procedures for transfers. However, although delivery of
Senior Notes may be effected through book-entry transfer into the Exchange
Agent's account at DTC, the Letter of Transmittal (or facsimile thereof),
properly completed and duly executed, with any required signature guarantees
and any other required documents, must in any case be delivered to and
received by the Exchange Agent at its address set forth under "--Exchange
Agent" prior to the Expiration Date, or the guaranteed delivery procedure set
forth below must be complied with.
 
  DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
 
  Signature Guarantees. Certificates for Senior Notes need not be endorsed and
signature guarantees on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are unnecessary unless (a) a certificate for Senior Notes is
registered in a name other than that of the person surrendering the
certificate or (b) a registered holder completes the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" in the Letter of
Transmittal. In the case of (a) or (b) above, such certificates for Senior
Notes must be duly endorsed or accompanied by a properly executed bond power,
with the endorsement or signature on the bond power and on the Letter of
Transmittal or the notice of withdrawal, as the case may be, guaranteed by a
firm or other entity identified in Rule 17Ad-15 under the Exchange Act as an
"eligible guarantor institution," including (as such terms are defined
therein) (i) a bank; (ii) a broker, dealer, municipal securities broker or
dealer or government securities broker or dealer; (iii) a credit union; (iv) a
national securities exchange, registered securities association
 
                                      29
<PAGE>
 
or clearing agency; or (v) a savings association that is a participant in a
Securities Transfer Association (each an "Eligible Institution"), unless
surrendered on behalf of such Eligible Institution. See Instructions 2 and 5
to the Letter of Transmittal.
 
  Guaranteed Delivery. If a holder desires to tender Senior Notes pursuant to
the Exchange Offer and the certificates for such Senior Notes are not
immediately available or time will not permit all required documents to reach
the Exchange Agent before the Expiration Date, or the procedures for book-
entry transfer cannot be completed on a timely basis, such Senior Notes may
nevertheless be tendered, provided that all of the following guaranteed
delivery procedures are complied with:
 
    (i) such tenders are made by or through an Eligible Institution;
 
    (ii) prior to the Expiration Date, the Exchange Agent receives from such
  Eligible Institution a properly completed and duly executed Notice of
  Guaranteed Delivery, substantially in the form accompanying the Letter of
  Transmittal, setting forth the name and address of the holder of Senior
  Notes and the amount of Senior Notes tendered, stating that the tender is
  being made thereby and guaranteeing that within three New York Stock
  Exchange trading days after the date of execution of the Notice of
  Guaranteed Delivery, the certificates for all physically tendered Senior
  Notes, in proper form for transfer, or a book-entry confirmation, as the
  case may be, and any other documents required by the Letter of Transmittal
  will be deposited by the Eligible Institution with the Exchange Agent. The
  Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
  facsimile or mail to the Exchange Agent and must include a guarantee by an
  Eligible Institution in the form set forth in the Notice of Guaranteed
  Delivery; and
 
    (iii) the certificates (or book-entry confirmation) representing all
  tendered Senior Notes, in proper form for transfer, together with a
  properly completed and duly executed Letter of Transmittal, with any
  required signature guarantees and any other documents required by the
  Letter of Transmittal, are received by the Exchange Agent within three New
  York Stock Exchange trading days after the date of execution of the Notice
  of Guaranteed Delivery.
 
  Determination of Validity. All questions as to the form of documents,
validity, eligibility (including time of receipt) and acceptance for exchange
of any tendered Senior Notes will be determined by the Company, in its sole
discretion, which determination shall be final and binding on all parties. The
Company reserves the absolute right, in its sole and absolute discretion, to
reject any and all tenders determined by it not to be in proper form or the
acceptance for exchange of which may, in the view of counsel to the Company,
be unlawful. The Company also reserves the absolute right, subject to
applicable law, to waive any of the conditions of the Exchange Offer as set
forth under "--Conditions to the Exchange Offer" or any defect or irregularity
in any tender of Senior Notes of any particular holder whether or not similar
defects or irregularities are waived in the case of other holders.
 
  The Company's interpretation of the terms and conditions of the Exchange
Offer (including the Letter of Transmittal and the instructions thereto) will
be final and binding on all parties. No tender of Senior Notes will be deemed
to have been validly made until all defects or irregularities with respect to
such tender have been cured or waived. Neither the Company, any affiliates or
assigns of the Company, the Exchange Agent or any other person shall be under
any duty to give any notification of any defects or irregularities in tenders
or incur any liability for failure to give any such notification.
 
RESALES OF EXCHANGE NOTES
 
  Based on interpretations by the staff of the Commission, as set forth in no-
action letters issued to third parties unrelated to the Company, the Company
believes that holders of Senior Notes (other than any holder that is (i) a
broker-dealer that acquired Senior Notes as a result of market-making
activities or other trading activities or (ii) an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act) who exchange their
Senior Notes for Exchange Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such Exchange Notes without compliance
with the registration and prospectus delivery provisions of the Securities
Act, provided that such Exchange Notes are acquired in the ordinary course of
such holders' business
 
                                      30
<PAGE>
 
and such holders have no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. Any holder who tenders Senior Notes in the Exchange Offer
with the intention to participate, or for the purpose of participating, in a
distribution of the Exchange Notes or who is an affiliate of the Company may
not rely upon such interpretations by the staff of the Commission and, in the
absence of an exemption therefrom, must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
secondary resale transaction. Failure to comply with such requirements in such
instance may result in such holder incurring liabilities under the Securities
Act for which the holder is not indemnified by the Company. The staff of the
Commission has not considered the Exchange Offer in the context of a no-action
letter, and there can be no assurance that the staff of the Commission would
make a similar determination with respect to the Exchange Offer. Each broker-
dealer that receives Exchange Notes for its own account in exchange for Senior
Notes, where such Senior Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such Exchange
Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The Company has
agreed that, for a period not to exceed 180 days after the Expiration Date, it
will furnish additional copies of this Prospectus, as amended or supplemented,
to any broker-dealer that reasonably requests such documents for use in
connection with any such resale. See "Plan of Distribution."
 
WITHDRAWAL RIGHTS
 
  Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date.
 
  In order for a withdrawal to be effective, a written, telegraphic or
facsimile transmission of such notice of withdrawal must be timely received by
the Exchange Agent at its address set forth under "--Exchange Agent" prior to
the Expiration Date. Any such notice of withdrawal must specify the name of
the person who tendered the Senior Notes to be withdrawn, the aggregate
principal amount of Senior Notes to be withdrawn, and (if certificates for
such Senior Notes have been tendered) the name of the registered holder of the
Senior Notes as set forth on the Senior Notes, if different from that of the
person who tendered such Senior Notes. If certificates for Senior Notes have
been delivered or otherwise identified to the Exchange Agent, the notice of
withdrawal must specify the certificate number on the particular Senior Notes
to be withdrawn and the signature on the notice of withdrawal must be
guaranteed by an Eligible Institution, except in the case of Senior Notes
tendered for the account of an Eligible Institution. If Senior Notes have been
tendered pursuant to the procedures for book-entry transfer set forth in "--
Procedures for Tendering Senior Notes," the notice of withdrawal must specify
the name and number of the account at DTC to be credited with the withdrawal
of Senior Notes and must otherwise comply with the procedures of DTC.
Withdrawals of tenders of Senior Notes may not be rescinded. Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described above under "--
Procedures for Tendering Senior Notes."
 
  All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Senior Notes which
have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
 
INTEREST ON THE EXCHANGE NOTES
 
  Interest on the Exchange Notes will accrue at the rate of 11% per annum and
will be payable in cash semi-annually on June 1 and December 1, of each year,
commencing December 1, 1997.
 
                                      31
<PAGE>
 
CONDITIONS TO THE EXCHANGE OFFER
 
  Notwithstanding any other provisions of the Exchange Offer or any extension
of the Exchange Offer, the Company will not be required to accept for
exchange, or to exchange, any Senior Notes for any Exchange Notes, and may, at
any time and from time to time, terminate the Exchange Offer or waive any
conditions to or amend the Exchange Offer in any respect (whether or not any
Senior Notes have theretofore been accepted for exchange), if the Exchange
Offer is determined by the Company, in its sole and absolute discretion, to
violate applicable law or any applicable interpretation of the staff of the
Commission.
 
  If such waiver or amendment constitutes a material change to the Exchange
Offer, the Company will promptly disclose such waiver by means of a prospectus
supplement that will be distributed to the registered holders of the Senior
Notes, and the Company will extend the Exchange Offer to the extent required
by Rule 14e-1 under the Exchange Act.
 
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
 
  The exchange of the Senior Notes for the Exchange Notes will not be a
taxable exchange for federal income tax purposes, and holders of Senior Notes
should not recognize any taxable gain or loss or any interest income as a
result of such exchange.
 
EXCHANGE AGENT
 
  United States Trust Company of New York has been appointed as Exchange Agent
for the Exchange Offer. Delivery of the Letters of Transmittal and any other
required documents, questions, requests for assistance, and requests for
additional copies of this Prospectus or of the Letter of Transmittal should be
directed to the Exchange Agent as follows:
 
    BY FACSIMILE
    (212) 780-0592
    Attention: Customer Service
    Confirm by telephone: (800) 548-6565
 
    BY MAIL
    United States Trust Company of New York
    P.O. Box 843
    Cooper Station
    New York, New York 10276
    Attention: Corporate Trust Services
 
    BY HAND BEFORE 4:30 P.M.
    United States Trust Company of New York
    111 Broadway
    New York, New York 10006
    Attention: Lower Level Corporate Trust Window
 
    BY OVERNIGHT COURIER AND BY HAND AFTER 4:30 P.M.
    United States Trust Company of New York
    770 Broadway, 13th Floor
    New York, New York 10003
 
  DELIVERY TO OTHER THAN THE ABOVE ADDRESSES OR FACSIMILE NUMBER WILL NOT
CONSTITUTE A VALID DELIVERY.
 
FEES AND EXPENSES
 
  The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail. Additional solicitation may be
made personally or by telephone or other means by officers, directors or
employees of the Company.
 
                                      32
<PAGE>
 
  The Company has not retained any dealer-manager or similar agent in
connection with the Exchange Offer and will not make any payments to brokers,
dealers or others soliciting acceptances of the Exchange Offer. The Company
has agreed to pay the Exchange Agent reasonable and customary fees for its
services and will reimburse it for its reasonable out-of-pocket expenses in
connection therewith. The Company will also pay brokerage houses and other
custodians, nominees and fiduciaries the reasonable out-of-pocket expenses
incurred by them in forwarding copies of this Prospectus and related documents
to the beneficial owners of Senior Notes, and in handling or tendering for
their customers.
 
  Holders who tender their Senior Notes for exchange will not be obligated to
pay any transfer taxes in connection therewith, except that if Exchange Notes
are to be delivered to, or are to be issued in the name of, any person other
than the registered holder of the Senior Notes tendered, or if a transfer tax
is imposed for any reason other than the exchange of Senior Notes in
connection with the Exchange Offer, then the amount of any such transfer tax
(whether imposed on the registered holder or any other persons) will be
payable by the tendering holder. If satisfactory evidence of payment of such
taxes or exemption therefrom is not submitted with the Letter of Transmittal,
the amount of such transfer taxes will be billed directly to such tendering
holder.
 
                                      33
<PAGE>
 
                            HISTORY OF THE COMPANY
 
  ITC/\DeltaCom was incorporated in Delaware in March 1997 as a wholly owned
subsidiary of ITC Holding to acquire and operate ITC Holding's Retail Services
and Carriers' Carrier Services businesses. The Company acquired such
businesses on July 25, 1997 in the Reorganization.
 
BACKGROUND
 
  ITC Holding has provided operator and directory assistance services since
March 1992 through InterQuest. Carriers' Carrier Services have been offered
since late 1992 through Interstate FiberNet, a partnership originally formed
by ITC Holding (with a 49% interest) and SCANA (with a 51% interest). In
August 1994, ITC Holding acquired SCANA's interest in Interstate FiberNet
through Transmission II. Also in August 1994, ITC Holding and SCANA formed a
second partnership, Gulf States FiberNet, to construct and operate a fiber
optic route primarily between Atlanta, Georgia and Shreveport, Louisiana with
several supplemental spur routes. In the Gulf States Acquisition, ITC Holding
acquired SCANA's 64% partnership interest in Gulf States FiberNet and the
Georgia Fiber Assets, which included one customer contract representing $3.5
million in annual revenues through August 2001, the term of the contract.
Following the Gulf States Acquisition, ITC Holding contributed the remaining
64% interest in Gulf States FiberNet to Gulf States Transmission and the
Georgia Fiber Assets to Transmission. Members of the Company's management have
been managing the businesses of both Interstate FiberNet and Gulf States
FiberNet since their inception.
 
  In January 1996, as a result of the DeltaCom Acquisition, ITC Holding
entered the retail long distance business and acquired several fiber optic
routes within the state of Alabama that complemented the existing networks
operated by Interstate FiberNet and Gulf States FiberNet. DeltaCom, a provider
of telecommunications services since its inception in 1982, provides long
distance services to mid-sized businesses primarily in the state of Alabama.
In July 1996, DeltaCom purchased substantially all of the assets of ViperNet,
which provides Internet access, Web-hosting and Web page development services
to business customers.
 
  The aggregate consideration paid by ITC Holding in the DeltaCom Acquisition
was approximately $71.4 million (of which $6.0 million consisted of ITC
Holding common stock). To finance the DeltaCom Acquisition and to refinance
existing DeltaCom debt, ITC Holding incurred approximately $74.0 million of
indebtedness, which was pushed down to the Company (the DeltaCom
Indebtedness). See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Effects of Accounting Standards." The
aggregate consideration paid by ITC Holding in the Gulf States Acquisition was
approximately $27.9 million, of which $10.0 million consisted of the SCANA
Note, which has been assumed by a subsidiary of the Company, and $17.9 million
consisted of ITC Holding preferred stock. If the Gulf States FiberNet business
achieves a specified performance target for 1997, SCANA will be entitled to
receive additional ITC Holding preferred stock. In connection with the Gulf
States Acquisition, Gulf States Transmission borrowed $41.6 million under the
Bridge Facility to refinance a project loan incurred by Gulf States FiberNet.
 
SENIOR NOTE OFFERING
 
  On June 3, 1997, the Company completed the sale of $200.0 million principal
amount of Senior Notes in a private offering. The net proceeds to the Company
from the sale of the Senior Notes were approximately $192.7 million, after
deducting the estimated underwriting discounts and commissions and other
expenses payable by the Company. Approximately $62.7 million of such net
proceeds are held by the Trustee as security for and to fund the first six
interest payments on the Senior Notes and the Exchange Notes. The remaining
net proceeds from the sale of the Senior Notes were released to the Company
upon consummation of the Reorganization.
 
REORGANIZATION
 
  On July 25, 1997, upon receipt of certain regulatory approvals and certain
other consents, ITC Holding contributed to the Company in the Reorganization
the businesses of Interstate FiberNet, Gulf States FiberNet, DeltaCom and
InterQuest. As a result of the Reorganization, the Company became the sole
stockholder of Interstate FiberNet, Inc. (formerly Transmission, Transmission
II, InterQuest and Interstate FiberNet), and Interstate FiberNet, Inc. became
the sole stockholder of Gulf States FiberNet and DeltaCom.
 
                                      34
<PAGE>
 
  The following chart reflects the organizational structure of the Company
following the Reorganization:
 
         -----------------------------------------------------------

                             ITC/\DeltaCom, Inc.

         -----------------------------------------------------------


         -----------------------------------------------------------
                          Interstate FiberNet, Inc.
           (formerly Transmission, Transmission II, InterQuest and
                            Interstate FiberNet)
         -----------------------------------------------------------
                          ---------------------------
         ----------------------------         ----------------------
           Gulf States Transmission
                Systems, Inc.                     DeltaCom, Inc.

         ----------------------------         ----------------------
 
  In connection with the Reorganization, approximately $31.0 million of the
DeltaCom Indebtedness was forgiven by ITC Holding and contributed to the
Company as additional equity. Following the Reorganization, the Company repaid
the remaining $43.0 million of the DeltaCom Indebtedness, accrued interest on
all $74.0 million of such indebtedness and the $41.6 million of indebtedness
outstanding under the Bridge Facility and accrued interest thereon with a
portion of the net proceeds from the Offering. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Liquidity and
Capital Resources."
 
 
                                USE OF PROCEEDS
 
  The Exchange Offer is intended to satisfy certain obligations of the Company
under the Registration Rights Agreement. The Company will not receive any
proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this
Prospectus, the Company will receive, in exchange, an equal number of Senior
Notes in like principal amount. The form and terms of the Exchange Notes will
be identical in all material respects to the form and terms of the Senior
Notes, except as otherwise described herein under "The Exchange Offer--Terms
of the Exchange Offer."
 
  The net proceeds to the Company from the sale of the Senior Notes were
approximately $192.7 million, after deducting the estimated underwriting
discounts and commissions and other expenses payable by the Company.
Approximately $62.7 million of such net proceeds are held by the Trustee as
security for and to fund the first six scheduled interest payments on the
Senior Notes and the Exchange Notes. The remaining net proceeds from the
Offering were released to the Company upon consummation of the Reorganization.
The Company applied approximately $94.3 million of such net proceeds to repay
outstanding indebtedness (plus accrued interest) of the Company and
approximately $5.3 million of such net proceeds to repay advances from ITC
Holding used by the Company for capital expenditures. The Company has applied
or intends to apply the remaining net proceeds released to the Company to fund
market expansion activities of the Company's telecommunications business,
including development and construction costs of the Company's fiber optic
network and its regional sales offices; and for additional working capital and
other general corporate purposes, including the funding of cash flow deficits
(after capital expenditures). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
 
  The indebtedness that was repaid with the net proceeds from the Offering
consisted of (i) $43.0 million of the DeltaCom Indebtedness (plus accrued
interest on all $74.0 million of the DeltaCom Indebtedness, which was
approximately $9.5 million at July 25, 1997), (ii) $41.6 million of
indebtedness (plus accrued interest, which was approximately $.2 million at
July 25, 1997) under the Bridge Facility, and (iii) as of July 25, 1997, $5.3
million advanced by ITC Holding for general corporate purposes. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "--Liquidity and Capital Resources."
 
                                      35
<PAGE>
 
  As part of its business strategy, the Company intends to continue to
evaluate potential acquisitions, joint ventures and strategic alliances in
areas such as wireline and wireless services, network construction and
infrastructure and Internet access. The Company has no definitive agreement
with respect to any acquisition, although from time to time it has discussions
with other companies and assesses opportunities on an on-going basis. A
portion of the net proceeds from the Offering may be used to fund any such
acquisitions, joint ventures and strategic alliances. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
 
                                CAPITALIZATION
 
  The following table sets forth, as of June 30, 1997, (i) the capitalization
of the Company on a historical combined basis and (ii) the pro forma
consolidated as adjusted capitalization of the Company as adjusted for the
Reorganization and the use of the net proceeds from the Offering. This table
should be read in conjunction with "Use of Proceeds," "Selected Financial and
Operating Data," "Pro Forma Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," the financial
statements and notes thereto, and the other financial data included elsewhere
in this Offering Memorandum.
 
<TABLE>
<CAPTION>
                                                JUNE 30, 1997
                               ----------------------------------------
                                             ADJUSTMENTS    PRO FORMA
                                HISTORICAL     FOR THE     CONSOLIDATED
                                 COMBINED   REORGANIZATION AS ADJUSTED
                               ------------ -------------- ------------
<S>                            <C>          <C>            <C>         
Advances from ITC Holding..... $ 79,886,220  $(79,886,220) $        --
                               ------------  ------------  ------------
Long-term debt and capital
 lease obligations:
  Capital lease obligations,
   including current portion
   of $563,153................    3,542,360           --      3,542,360
  Senior Notes and Exchange
   Notes......................  200,000,000           --    200,000,000
  Gulf States Transmission,
   including current portion
   of $41,600,000.............   41,600,000   (41,600,000)          --
  Georgia Fiber Assets,
   including current portion
   of $1,992,818..............    9,964,091           --      9,964,091
  Other, including current
   portion of $282,563........      922,675           --        922,675
                               ------------  ------------  ------------
   Total long-term debt and
    capital lease obligations,
    including current portion
    (a)....................... $256,029,126  $(41,600,000) $214,429,126
                               ------------  ------------  ------------
Total stockholder's equity
 (b)..........................   33,450,572    30,669,828    64,120,400
                               ------------  ------------  ------------
Total capitalization.......... $369,365,918  $(90,816,392) $278,549,526
                               ============  ============  ============
</TABLE>
- --------
(a) The pro forma combined and the pro forma consolidated as adjusted
    capitalization of the Company exclude any potential borrowings under the
    Credit Facility. See "Description of Certain Indebtedness--Credit
    Facility."
(b) Pro forma consolidated as adjusted stockholder's equity includes (i) ITC
    Holding's forgiveness and contribution of $30,999,900 of the DeltaCom
    Indebtedness to the Company in connection with the Reorganization, and
    (ii) the write-off of $330,072 of debt issuance costs related to the
    Bridge Facility which was repaid with a portion of the proceeds from the
    Offering. See "Pro Forma Financial Data."
 
                                      36
<PAGE>
 
                     SELECTED FINANCIAL AND OPERATING DATA
 
  The following table sets forth selected financial and operating data for the
Company. The selected historical statements of operations data for each of the
years ended December 31, 1994, 1995 and 1996, and the selected historical
balance sheet data for the years then ended, have been derived from the
combined financial statements that have been audited by Arthur Andersen LLP,
independent public accountants. The selected historical statement of
operations data for the six months ended June 30, 1996 and 1997 have been
derived from the Company's unaudited combined financial statements and
include, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data for such
periods. Operating results for interim periods are not necessarily indicative
of results for the full fiscal year. The selected historical financial and
operating data should be read in conjunction with "Use of Proceeds," "Pro
Forma Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," the financial statements and notes
thereto, and other financial and operating data included elsewhere in this
Prospectus.
 
<TABLE>
<CAPTION>
                                                                                                SIX MONTHS ENDED
                                            YEAR ENDED DECEMBER 31,                                 JUNE 30,
                          ----------------------------------------------------------------  -------------------------
                                                   (COMBINED)                                      (COMBINED)
                          1992(A)(B)     1993(A)    1994(A)(C)      1995        1996(D)        1996       1997(E)(F)
                          -----------  -----------  -----------  -----------  ------------  -----------  ------------
                          (UNAUDITED)  (UNAUDITED)                                          (UNAUDITED)  (UNAUDITED)
<S>                       <C>          <C>          <C>          <C>          <C>           <C>          <C>
STATEMENT OF OPERATIONS
 DATA:
Operating revenues......  $      --    $  636,913   $ 4,945,902  $ 5,750,587  $ 66,518,585  $28,574,799  $ 53,365,061
Operating expenses:
 Cost of service........         --       578,206     2,484,744    3,149,231    38,756,287   16,129,463    25,302,747
 Selling, operations
  and administration
  expense...............         --       235,627       948,230    1,626,678    18,876,572    8,206,621    16,961,324
 Depreciation and
  amortization..........         --        47,068       738,052    1,267,882     6,438,074    2,832,017     8,273,232
                          ----------   ----------   -----------  -----------  ------------  -----------  ------------
   Total operating
    expenses............         --       860,901     4,171,026    6,043,791    64,070,933   27,168,101    50,537,303
Operating income
 (loss).................         --      (223,988)      774,876     (293,204)    2,447,652    1,406,698     2,827,758
Equity in losses of
 unconsolidated
 subsidiaries...........     (25,819)     360,257       (96,920)    (258,242)   (1,589,812)  (1,088,404)          --
Interest expense........         --           --       (273,759)    (297,228)   (6,172,421)  (2,762,757)   (7,561,591)
Interest and other
 income
 (other expense)........         --          (826)       82,348       41,734       171,514      107,216       883,388
                          ----------   ----------   -----------  -----------  ------------  -----------  ------------
Income (loss) before
 taxes, preacquisition
 earnings (losses) and
 extraordinary item.....     (25,819)     135,443       486,545     (806,940)   (5,143,067)  (2,337,247)   (3,850,445)
Income tax (provision)
 benefit................      15,672      (54,582)     (113,248)     302,567     1,233,318      671,467     1,005,809
Preacquisition
 (earnings) losses......         --           --       (236,300)         --            --           --         74,132
Extraordinary item (net
 of tax benefit)........         --           --            --           --            --           --       (507,515)
                          ----------   ----------   -----------  -----------  ------------  -----------  ------------
Net income (loss).......  $  (10,147)  $   80,861   $   136,997  $  (504,373) $ (3,909,749) $(1,665,780) $ (3,278,019)
                          ==========   ==========   ===========  ===========  ============  ===========  ============
BALANCE SHEET DATA (AT
 PERIOD END):
Working capital
 (deficit)..............  $      --    $  382,562   $   254,988  $  (242,136) $  3,415,088               $ 68,175,664
Property and equipment,
 net....................         --     5,204,153     8,486,996    9,386,444    31,880,556                115,852,080
Total assets............   2,118,761    6,294,266    20,062,286   20,922,337   113,207,979                402,015,721
Long-term debt, advances
 from ITC Holding, and
 capital lease
 obligations, including
 current portions.......         --       797,288     4,013,977    3,143,977    75,442,971                335,915,346
Stockholder's equity....   2,105,681    4,737,090    13,761,409   14,307,036    19,256,526                 33,450,572
OTHER FINANCIAL DATA:
Capital expenditures....  $      --    $  531,187   $ 3,703,835  $ 1,805,742  $  6,172,660  $ 2,279,913  $ 12,357,471
EBITDA(g)...............         --      (176,920)    1,512,928      974,678     8,885,726    4,238,715    11,100,990
Cash flows from
 operations.............     (25,819)      33,667       978,775    1,437,317     8,188,618    2,448,698     9,409,779
Ratio of earnings to
 fixed charges(h).......         N/A          N/A          1.85x         --            --           --            --
</TABLE>
 
                                                  (footnotes on following page)
 
                                      37
<PAGE>
 
(a) Through August 17, 1994, the Company owned a 49% interest in Interstate
    FiberNet and accounted for this investment under the equity method. On
    August 17, 1994, the Company purchased the remaining 51% interest in
    Interstate FiberNet from SCANA. Therefore, Interstate FiberNet's revenues
    and expenses have been included in the combined statement of operations
    data effective January 1, 1994, with the preacquisition earnings
    attributable to SCANA deducted to determine combined net income for 1994.
    See note 5 to the combined financial statements.
(b) Includes operations of InterQuest from March 1992 (date of inception).
(c) On August 17, 1994, the Company entered into the Gulf States FiberNet
    partnership with SCANA. The Company obtained a 36% general partnership
    interest, and the investment was accounted for under the equity method.
    See note 5 to the combined financial statements.
(d) On January 29, 1996, ITC Holding purchased DeltaCom. DeltaCom's results of
    operations are included in the historical statement of operations data
    since the date of acquisition. See note 13 to the combined financial
    statements.
(e) On March 27, 1997, the Company purchased the remaining 64% partnership
    interest in Gulf States FiberNet from SCANA. Therefore, Gulf States
    FiberNet's revenues and expenses have been included in the combined
    statement of operations data effective January 1, 1997 with the
    preacquisition losses attributable to SCANA deducted to determine the
    combined net loss for the six months ended June 30, 1997. See note 16 to
    the combined financial statements.
(f) On March 27, 1997, the Company purchased the Georgia Fiber Assets from
    SCANA. The results of operations for the Georgia Fiber Assets are included
    in the combined statements of operations beginning April 1, 1997. See note
    16 to the combined financial statements.
(g) EBITDA represents earnings before extraordinary item, preacquisition
    (earnings) losses, equity in losses of unconsolidated subsidiaries, net
    interest, income taxes, depreciation and amortization. EBITDA is provided
    because it is a measure commonly used in the industry. EBITDA is not a
    measurement of financial performance under generally accepted accounting
    principles and should not be considered an alternative to net income as a
    measure of performance or to cash flow as a measure of liquidity. EBITDA
    is not necessarily comparable with similarly titled measures for other
    companies.
(h) Earnings consist of income before income taxes, plus fixed charges. Fixed
    charges consist of interest charges and amortization of debt issuance
    costs (including those reflected as an extraordinary item) and the portion
    of rent expense under operating leases representing interest (estimated to
    be one-third of such expense). Earnings were insufficient to cover fixed
    charges for the years ended December 31, 1995 and 1996 and the six months
    ended June 30, 1996 and 1997 by $.8 million, $5.1 million, $2.3 million
    and $3.8 million, respectively.
 
                                      38
<PAGE>
 
                           PRO FORMA FINANCIAL DATA
 
  As discussed in note 1 to the combined financial statements, the historical
combined financial statements include the financial statements of the
following wholly owned subsidiaries of ITC Holding prior to the
Reorganization: Transmission, Transmission II, Gulf States Transmission,
InterQuest and DeltaCom. The historical combined financial statements include
the results of DeltaCom's operations effective as of the date of acquisition,
January 29, 1996. The Company's historical combined financial statements also
include the results of operations of Interstate FiberNet, a partnership
between Transmission and Transmission II, as well as Gulf States
Transmission's 36% equity interest in the results of operations of Gulf States
FiberNet.
 
  The pro forma adjustments to the statements of operations for the year ended
December 31, 1996 and for the six months ended June 30, 1997 reflect (i) the
DeltaCom Acquisition, with respect to the year ended December 31, 1996, (ii)
the Gulf States Acquisition, (iii) the Reorganization and (iv) the Offering
and the use of the net proceeds therefrom, as if each of such transactions had
occurred on January 1, 1996. The pro forma adjustments to the balance sheet
reflect (i) the Reorganization, including ITC Holding's forgiveness and
contribution of approximately $31.0 million of DeltaCom Indebtedness to the
Company as additional equity and (ii) the release and use of the net proceeds
from the Offering, as if each of such transactions had occurred on June 30,
1997.
 
  The pro forma financial and operating information does not purport to
represent what the Company's consolidated results of operations would have
been if these transactions had in fact occurred on these dates, nor does it
purport to indicate the future consolidated financial position or consolidated
results of future operations of the Company. The pro forma adjustments are
based on currently available information and certain assumptions that
management believes to be reasonable.
 
                                      39
<PAGE>
 
  UNAUDITED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31,
                                     1996
 
<TABLE>
<CAPTION>
                                                                  GEORGIA
                          HISTORICAL                GULF STATES    FIBER      PRO FORMA        PRO FORMA
                           COMBINED    DELTACOM(A)   FIBERNET      ASSETS    ADJUSTMENTS      CONSOLIDATED
                          -----------  -----------  -----------  ----------  ------------     ------------
<S>                       <C>          <C>          <C>          <C>         <C>              <C>
Operating revenues......  $66,518,585  $5,256,931   $10,056,544  $3,542,302  $        --      $ 85,374,362
Cost of services........   38,756,287   2,963,383       867,558         --            --        42,587,228
                          -----------  ----------   -----------  ----------  ------------     ------------
Gross margin............   27,762,298   2,293,548     9,188,986   3,542,302           --        42,787,134
Operating expenses:
 Selling, operations
  and administration....   18,876,572   1,343,761     2,785,596     860,240           --        23,866,169
 Depreciation
  and amortization......    6,438,074     290,226     6,620,382   1,063,408       200,671 (b)   14,612,761
                          -----------  ----------   -----------  ----------  ------------     ------------
 Total operating
  expenses .............   25,314,646   1,633,987     9,405,978   1,923,648       200,671       38,478,930
 Operating income
  (loss)................    2,447,652     659,561      (216,992)  1,618,654      (200,671)       4,308,204
Other income (expense):
 Equity in losses of
  unconsolidated
  subsidiary............   (1,589,812)        --            --          --      1,589,812 (c)          --
 Interest expense.......   (6,172,421)   (143,883)   (4,345,001)        --    (15,605,484)(d)  (26,266,789)
 Interest and
  other income..........      171,514      12,334       145,851         --      3,388,252 (e)    3,717,951
                          -----------  ----------   -----------  ----------  ------------     ------------
 Total other income
  (expense).............   (7,590,719)   (131,549)   (4,199,150)        --    (10,627,420)     (22,548,838)
Income (loss) before
 taxes..................   (5,143,067)    528,012    (4,416,142)  1,618,654   (10,828,091)     (18,240,634)
Income tax
 (provision) benefit....    1,233,318    (200,645)    1,678,134    (615,089)    4,071,414 (f)    6,167,132
                          -----------  ----------   -----------  ----------  ------------     ------------
Net income (loss).......  $(3,909,749) $  327,367   $(2,738,008) $1,003,565  $ (6,756,677)    $(12,073,502)
                          ===========  ==========   ===========  ==========  ============     ============
</TABLE>
- --------
(a) Represents the operations of DeltaCom from January 1, 1996 to January 29,
    1996, the date it was acquired by ITC Holding.
(b) Reflects one month of additional goodwill amortization resulting from the
    DeltaCom Acquisition ($113,844), as well as additional goodwill
    amortization resulting from the Gulf States Acquisition ($86,827). See
    notes 13 and 16, respectively, to the combined financial statements. The
    goodwill amounts will be amortized over 40 years.
(c) Reflects the elimination of Gulf States Transmission's 36% share of Gulf
    States FiberNet's results of operations for 1996.
(d) Reflects (i) additional interest expense of $1,096,050 related to the
    $10.0 million SCANA Note issued by ITC Holding in connection with the Gulf
    States Acquisition and assumed by Interstate FiberNet, Inc.; (ii) one
    month of additional interest expense of $530,065 related to the DeltaCom
    Indebtedness; (iii) interest expense of $22,000,000 related to the Notes;
    (iv) the amortization of $735,000 of debt issuance costs relating to the
    Offering; (v) the elimination of $9,789,687 of interest expense related to
    the DeltaCom Indebtedness and the Gulf States FiberNet debt, $84.6 million
    of which was repaid with a portion of the proceeds from the Offering and
    approximately $31.0 million of which was forgiven by ITC Holding and
    contributed to equity in connection with the Reorganization; and (vi) the
    write-off of $1,034,056 of debt issuance costs related to Gulf States
    FiberNet's existing debt and the Bridge Facility, which was repaid with a
    portion of the net proceeds from the Offering.
(e) Reflects the estimated interest income that would have been earned on the
    approximately $62.7 million of Offering proceeds placed in a pledged
    account (reflected as restricted cash on the pro forma balance sheet) to
    secure and fund the first six scheduled payments of interest (including
    .5% interest per annum in the event that the Exchange Offer is not
    consummated on or before December 3, 1997) on the Senior Notes and the
    Exchange Notes (at an average interest rate of 6.15% per annum). Under the
    terms of the Indenture, the amounts placed in the pledged account are
    required to be invested in Pledged Securities, which secure the Senior
    Notes and the Exchange Notes.
(f) Reflects the income tax effects of the pro forma adjustments above and
    includes the additional income tax benefits from additional interest
    expense and goodwill amortization as well as the net losses of Gulf States
    FiberNet.
 
                                      40
<PAGE>
 
                  UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
                    FOR THE SIX MONTHS ENDED JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                         GEORGIA
                           HISTORICAL     FIBER     PRO FORMA       PRO FORMA
                            COMBINED     ASSETS    ADJUSTMENTS     CONSOLIDATED
                           -----------  ---------  -----------     ------------
<S>                        <C>          <C>        <C>             <C>
Operating revenues.......  $53,365,061  $ 885,450  $       --      $54,250,511
Cost of services.........   25,302,747        --           --       25,302,747
                           -----------  ---------  -----------     -----------
Gross margin.............   28,062,314    885,450          --       28,947,764
Operating Expenses:
 Selling, operations, and
  administrative.........   16,961,324    248,225          --       17,209,549
 Depreciation &
  amortization...........    8,273,232    334,034       26,775 (a)   8,634,041
                           -----------  ---------  -----------     -----------
 Total operating
  expenses...............   25,234,556    582,259       26,775      25,843,590
Operating income.........    2,827,758    303,191      (26,775)      3,104,174
Other income (expense):
 Interest expense........   (7,561,591)       --    (4,828,407)(b) (12,389,998)
 Interest and other
  income (expense).......      883,388        --     1,814,223 (c)   2,697,611
                           -----------  ---------  -----------     -----------
 Total other income
  (expense)..............   (6,678,203)       --    (3,014,184)     (9,692,387)
Income before taxes,
 preacquisition losses
 and extraordinary item..   (3,850,445)   303,191   (3,040,959)     (6,588,213)
Income tax (provision)
 benefit ................    1,005,809   (115,213)   1,155,564 (d)   2,046,160
                           -----------  ---------  -----------     -----------
Income (loss) before
 preacquisition losses
 and extraordinary item..   (2,844,636)   187,978   (1,885,395)     (4,542,053)
Preacquisition losses....       74,132        --       (74,132)            --
                           -----------  ---------  -----------     -----------
Net income (loss) from
 continuing
 operations(e)...........  $(2,770,504) $ 187,978  $(1,959,527)    $(4,542,053)
                           ===========  =========  ===========     ===========
</TABLE>
- --------
(a) Reflects additional goodwill amortization resulting from the Gulf States
    Acquisition. See note 16 to the combined financial statements. The
    goodwill will be amortized over 40 years.
(b) Reflects (i) additional interest expense of $274,013 related to the $10.0
    million SCANA Note issued by ITC Holding in connection with the Gulf
    States Acquisition and assumed by Interstate FiberNet, Inc.; (ii) interest
    expense of $9,166,667 related to the Notes; (iii) the amortization of
    $304,167 of debt issuance costs relating to the Offering; (iv) the
    elimination of $5,246,512 of interest expense related to the DeltaCom
    Indebtedness and the Gulf States FiberNet debt, $84.6 million of which was
    repaid with a portion of the net proceeds from the Offering and
    approximately $31.0 million of which was forgiven by ITC Holding and
    contributed to equity in connection with the Reorganization; and (v) the
    write-off of $330,072 of debt issuance costs related to the Bridge
    Facility, which was repaid with a portion of the net proceeds from the
    Offering.
(c) Reflects the estimated interest income that would have been earned on the
    approximately $62.7 million of Offering proceeds placed in a pledged
    account (reflected as restricted cash on the pro forma balance sheet) to
    secure and fund the first six scheduled payments of interest (including
    .5% interest per annum in the event that the Exchange Offer is not
    consummated on or before December 3, 1997) on the Senior Notes and the
    Exchange Notes (at an average interest rate of 6.15% per annum). Under the
    terms of the Indenture, the amounts placed in the pledged account are
    required to be invested in Pledged Securities, which secure the Senior
    Notes and the Exchange Notes.
(d) Reflects the income tax effects of the pro forma adjustments above and
    includes the additional income tax benefits from additional interest
    expense and goodwill amortization.
(e) In March 1997, the Company incurred an extraordinary loss on the early
    retirement of debt totalling $507,515, net of tax. Including this
    extraordinary loss, the pro forma consolidated net loss for the six months
    ended June 30, 1997 would be $5,049,568.
 
                                      41
<PAGE>
 
                       UNAUDITED PRO FORMA BALANCE SHEET
                              AS OF JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                           PRO FORMA
                                          ADJUSTMENTS                            PRO FORMA
                           HISTORICAL       FOR THE            PRO FORMA       CONSOLIDATED
                            COMBINED     REORGANIZATION       ELIMINATIONS     BALANCE SHEET
                          ------------  ---------------       ------------     -------------
<S>                       <C>           <C>                   <C>              <C>
ASSETS
Cash and cash
equivalents.............  $  5,478,614    $31,029,025 (a)     $        --      $ 36,507,639
Current restricted
assets..................   194,775,128   (176,085,802)(a)              --        18,689,326
Accounts receivable, net
of allowance for
uncollectible accounts..    17,487,268            --                   --        17,487,268
Other current assets....     3,006,700            --                   --         3,006,700
Long-term restricted
assets..................           --      44,018,820 (a)              --        44,018,820
Investments.............         5,000     33,941,775 (b)      (33,941,775)(d)        5,000
Intangible assets, net..    65,397,003        930,708 (c)              --        66,327,711
Property, plant, and
equipment, net..........   115,852,080            --                   --       115,852,080
Other long-term assets..        13,928            --                   --            13,928
                          ------------   ------------         ------------     ------------
 Total assets...........  $402,015,721   $(66,165,474)        $(33,941,775)    $301,908,472
                          ============   ============         ============     ============
LIABILITIES AND
STOCKHOLDER'S EQUITY
Accounts payable........  $ 10,794,956   $        --          $        --      $ 10,794,956
Accrued interest expense
payable to ITC Holding..     9,011,106     (9,011,106)(a)              --               --
Other accrued
liabilities.............     8,441,230       (279,751)(a)              --         8,161,479
Current portion of long-
term debt and capital
lease obligations.......    44,438,534    (41,600,000)(a)              --         2,838,534
Advances from ITC
Holding.................    79,886,220    (79,886,220)(a)(b)           --               --
Long-term debt and
capital lease
obligations.............   211,590,592            --                   --       211,590,592
Deferred income taxes...     4,402,511            --                   --         4,402,511
Common stock............       150,826            --                  (826)(d)      150,000
Additional paid-in
capital.................    40,814,227     64,941,675 (b)      (40,814,227)(d)   64,941,675
Accumulated deficit.....    (7,514,481)      (330,072)(c)        6,873,278 (d)     (971,275)
                          ------------   ------------         ------------     ------------
 Total liabilities and
 stockholder's equity...  $402,015,721   $(66,165,474)        $(33,941,775)    $301,908,472
                          ============   ============         ============     ============
</TABLE>
- ----
(a) Reflects the release of $132,066,982 in net proceeds from the Offering
    (excluding $62,708,146 (including $18,689,326 current portion) which has
    been invested in certain U.S. government securities and is held by the
    trustee in a pledged account to secure and fund the first six scheduled
    interest payments on the Senior Notes and the Exchange Notes under the
    terms of the Indenture) less: (i) the repayment of $48,886,320 of advances
    from ITC Holding (the DeltaCom Indebtedness) and related interest of
    $9,011,106; (ii) the repayment of indebtedness under the Bridge Facility
    of $41,600,000 and related interest of $279,751; and (iii) estimated
    $1,260,780 payment of remaining debt issuance costs.
(b) Reflects ITC Holding's contribution to the Company of its investments in
    the historical combined subsidiaries and its forgiveness and contribution
    of $30,999,900 of DeltaCom Indebtedness in connection with the
    Reorganization.
(c) Reflects the estimated payment of $1,260,780 additional debt issuance
    costs from the Offering, partially offset by the writeoff of $330,072 of
    debt issuance costs related to the Bridge Facility.
(d) Reflects the Reorganization and corresponding consolidation entry to
    eliminate the Company's investment in its subsidiaries. See note 1 to the
    combined financial statements.
 
                                       42
<PAGE>
 
                    MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                 FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
  The following analysis should be read in conjunction with the financial
statements and the notes thereto and the other financial data appearing
elsewhere in this Prospectus. The Company has included EBITDA data in the
following analysis because it is a measure commonly used in the industry.
EBITDA represents earnings before extraordinary item, preacquisition
(earnings) losses, equity in losses of unconsolidated subsidiaries, net
interest, income taxes, depreciation and amortization. EBITDA is not a measure
of financial performance under generally accepted accounting principles and
should not be considered an alternative to net income as a measure of
performance or to cash flows as a measure of liquidity. EBITDA is not
necessarily comparable with similarly titled measures for other companies.
Unless otherwise indicated, dollar amounts have been rounded to the nearest
hundred thousand.
 
OVERVIEW
 
  Company Background. ITC/\DeltaCom was incorporated in March 1997 as a wholly
owned subsidiary of ITC Holding to acquire and operate ITC Holding's Retail
Services and Carriers' Carrier Services businesses.
 
  ITC Holding has provided operator and directory assistance services since
March 1992 through InterQuest. Carriers' Carrier Services have been offered
since late 1992 through Interstate FiberNet, a partnership originally formed
by ITC Holding (with a 49% interest) and SCANA (with a 51% interest). In
August 1994, ITC Holding acquired SCANA's interest in Interstate FiberNet.
Also in August 1994, ITC Holding formed a second partnership with SCANA, Gulf
States FiberNet, to construct and operate a fiber optic route primarily
between Atlanta, Georgia and Shreveport, Louisiana with several supplemental
spur routes. In the Gulf States Acquisition, ITC Holding acquired SCANA's 64%
partnership interest in Gulf States FiberNet and the Georgia Fiber Assets,
which included one customer contract representing $3.5 million in annual
revenues through August 2001, the term of the contract. Members of the
Company's management have been managing the businesses of both Interstate
FiberNet and Gulf States FiberNet since their inception. In 1995, the Company
began offering SS7 Services to its Carriers' Carrier customers.
 
  In January 1996, as a result of the DeltaCom Acquisition, ITC Holding
entered the retail long distance business and acquired several fiber optic
routes within the State of Alabama that complemented the existing networks
operated by Interstate FiberNet and Gulf States FiberNet. DeltaCom, a provider
of telecommunications services since its inception in 1982, provides long
distance services to mid-sized businesses primarily in the State of Alabama.
 
  The aggregate consideration paid by ITC Holding in the DeltaCom Acquisition
was approximately $71.4 million, consisting of approximately $65.4 million in
cash and $6.0 million of ITC Holding common stock. Concurrently with its
acquisition of DeltaCom, ITC Holding advanced $8.6 million to DeltaCom to
repay DeltaCom's outstanding debt. The DeltaCom Acquisition has been accounted
for under the purchase method. To finance the DeltaCom Acquisition and to
refinance DeltaCom's existing debt, ITC Holding incurred approximately $74.0
million of indebtedness, which was pushed down to DeltaCom (the DeltaCom
Indebtedness). See "--Effects of Accounting Standards."
 
  The aggregate consideration paid by ITC Holding in the Gulf States
Acquisition was approximately $27.9 million, consisting of the $10.0 million
SCANA Note, which was assumed by Interstate FiberNet, Inc., and $17.9 million
of ITC Holding preferred stock. Under an earn-out provision, SCANA will be
entitled to receive additional preferred stock of ITC Holding if the Gulf
States FiberNet business achieves a specified performance target for 1997. See
"Description of Certain Indebtedness--SCANA Note." The Company accounted for
the Gulf States Acquisition under the purchase method. Of the purchase price,
approximately $17.0 million was allocated to the Gulf States FiberNet
partnership interest and $10.9 million was allocated to the Georgia Fiber
Assets.
 
  In connection with the Reorganization, approximately $31.0 million of the
DeltaCom Indebtedness was forgiven by ITC Holding and contributed to the
Company as additional equity. Following the Reorganization,
 
                                      43
<PAGE>
 
the Company repaid the remaining $43.0 million of the DeltaCom Indebtedness,
accrued interest on all $74.0 million of such indebtedness and the $41.6
million of indebtedness outstanding under the Bridge Facility and accrued
interest thereon. See "History of the Company--Reorganization," "Use of
Proceeds" and "--Liquidity and Capital Resources."
 
  Revenues. The Company derives revenues primarily from two business segments:
(i) Retail Services, which encompass the retail sale of long distance, data,
Internet services and the sale and installation of customer premise equipment
to mid-sized and major regional business customers and certain switched
services telecommunications companies, and (ii) Carriers' Carrier Services,
which encompass the sale of long-haul private line services on a wholesale
basis to other telecommunications companies, using the Company's owned and
managed fiber optic network.
 
  The Company currently offers a wide range of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM and frame
relay, high capacity broadband private line, as well as Internet, Intranet and
Web page hosting and development services, and customer premise equipment
installation and repair. Since January 1996, the Company has expanded its
retail long distance operations into the following markets: Pensacola,
Florida; Atlanta, Georgia; Charlotte, North Carolina; Greenville, South
Carolina; and New Orleans and Baton Rouge, Louisiana. As ofJune 30, 1997, the
Company provided Retail Services to over 6,600 business customers and
approximately 7,100 residential customers. Such residential customers
represented less than 5% of the Company's revenues for the year ended 1996 and
the six months ended June 30, 1997.
 
  In July 1997, the Company began offering local exchange services on a
limited, resale basis in Birmingham and Montgomery, Alabama, and commenced
general sales of such services in those markets in August 1997. Also in August
1997, the Company initiated a limited offering in Birmingham and Montgomery of
facilities-based local exchange services, and expects that general marketing
of such services will commence in September 1997. Although the Company's local
exchange services offerings in such markets are in the very early stages,
initial expressions of customer interest in such services have been positive,
consistent with management's expectations. However, there can be no assurance
that demand for the Company's local services will match such preliminary
indications of customer interest. The Company expects to offer local exchange
services as part of its Retail Services in a total of six to nine markets
(including Birmingham and Montgomery) by the end of 1997, initially by
reselling the services of incumbent local exchange carriers and, where market
conditions warrant, by using its own local switching facilities.
 
  In connection with offering local exchange services, the Company has entered
into the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of gaining immediate access to all of
BellSouth's unbundled network elements. This agreement will allow the Company
to enter new markets with minimal capital expenditures and to offer local
exchange service to its current customer base. The Interconnection Agreement
currently allows the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on
a facilities basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
most states, although they remain subject to review and modification by such
authorities. In addition, the Interconnection Agreement does not resolve all
operational issues, particularly those relating to the collocation of the
Company's equipment with that of BellSouth. The Company and BellSouth are
continuing to negotiate to resolve such issues. The Company expects that the
Interconnection Agreement will provide a foundation for it to provide local
service on a reasonable commercial basis, but there can be no assurance of
this and important issues remain unsettled as a result of legal and regulatory
developments and related matters. The Interconnection Agreement expires in
1999, and there can be no assurance that the Company will be able to renew it
under favorable terms, or at all.
 
  The Company's strategy is ultimately to offer facilities-based local service
in certain established markets by collocating its equipment with that of
BellSouth which will enable the Company to purchase fewer unbundled network
elements. The Company expects that it will be able to begin providing local
service to such markets in the fourth quarter of 1997 by using its own
facilities and network, as supplemented by BellSouth's unbundled
 
                                      44
<PAGE>
 
network elements. In August 1997, the Company began the process of arranging
for collocation of its equipment with BellSouth in certain markets, primarily
in Alabama, in which the Company has an existing base of long distance
customers. The Company and BellSouth are negotiating the terms of an agreement
with respect to such equipment collocations. In addition, BellSouth has been
experiencing certain central office space limitations, resulting in delays in
completing arrangements for physical collocation of Company equipment. There
can be no assurance that the Company and BellSouth will enter into a
collocation agreement on terms acceptable to the Company or at all, nor can
there be any assurance that BellSouth's space limitations will be resolved to
the Company's satisfaction, in a timely manner, or at all. In the event that
collocation is not possible, the Company plans to provide facilities-based
local service primarily by purchasing unbundled network elements.
 
  The Company anticipates that an increasing portion of its revenue will be
derived from local services, primarily those provided pursuant to the
Interconnection Agreement with BellSouth and similar agreements with other
local exchange carriers. Management expects that gross margin associated with
local Retail Services will be slightly better than gross margin associated
with long distance Retail Services, but that, in general, gross margin
associated with Retail Services will be lower than that associated with
Carriers' Carrier Services. There can be no assurance that the Company will be
able to enter into additional interconnection agreements on terms acceptable
to the Company or at all, or that the incumbent local exchange carriers will
provide the operational support required for the Company to provide local
services to end users. See "Risk Factors--Dependence on Incumbent Local
Exchange Carriers," "--Regulation," "Business--Services and Facilities," and
"--Regulation."
 
  As the Company begins to offer local service on a facilities rather than
resale basis, it will begin to sell switched access and termination services
to carriers terminating calls to its local end user customers, and originating
switched access to long distance companies where the end users choose a
carrier other than the Company for that service. Certain incumbent local
exchange companies, including BellSouth, have taken the position that when a
carrier seeking to provide local service obtains all necessary elements (loops
and switches) from the incumbent local exchange carrier in a combined form,
the incumbent local exchange carrier retains the right to receive the access
revenues associated with service to the customers served on that basis.
Although a recent Eighth Circuit Court of Appeals decision appears to reject
this position, further legal challenges are likely and important issues
related to this form of interconnection remain open.
 
  The Company provides Carriers' Carrier Services using its owned and managed
fiber optic network, which reaches over 60 POPs in ten southern states
(Alabama, Arkansas, Florida, Georgia, Louisiana, Mississippi, North Carolina,
South Carolina, Tennessee and Texas). Of the network's approximately 5,400
route miles, approximately 2,500 are Company-owned and operated and
approximately 2,900 are owned and operated by three public utilities, Duke
Power Company, Florida Power & Light Company and Entergy Technology Company,
with which the Company has marketing and management arrangements. The
Company's arrangement with Entergy is exclusive. In addition, the Company has
a buy-sell agreement with Carolinas Fibernet, LLC, which manages fiber optic
facilities in North Carolina and South Carolina. This agreement enables the
parties to buy and sell capacity on each other's networks and allows the
Company to provide customers with access to POPs throughout those states. The
Company expects to add approximately 700 owned and operated route miles to its
fiber network by the end of 1997 and approximately 100 owned and operated
route miles in early 1998 through long-term dark fiber leases. In addition, as
part of its strategy, the Company intends to continue to evaluate the
potential expansion of its network through a combination of new construction,
long-term dark fiber leases and fiber swap transactions, depending on the
extent of capital required over the economic life of the fiber assets to be
deployed. To the extent that the Company elects to expand its network through
long-term leases in lieu of construction or fiber swap transactions, the
Company expects such leases to have a negative effect on EBITDA; however, the
Company expects that any such expansion of its network would provide
opportunities to generate additional revenues, which would partly offset such
negative effects.
 
  The Company derives commission revenues from the marketing, sale and
management of capacity on the utility-owned portions of the Company's network.
Negligible incremental costs are associated with these
 
                                      45
<PAGE>
 
commissions, because the Company uses the same marketing and sales force in
servicing the utility-owned portions of the network as it does for the
portions owned by the Company. In 1996, the Company's commission revenues from
these arrangements amounted to approximately $170,000 because, although the
utility-owned portions owned by Duke Power Company began generating revenues
in late 1995, the portions owned by Florida Power & Light Company and Entergy
Technology Company began generating revenues in late 1996. For the six months
ended June 30, 1997, the Company's commission revenues from these arrangements
amounted to approximately $451,000. The Company expects commissions associated
with the utility-owned portions of the network, which will become fully
operational in the current year, to continue to increase in 1997.
 
  The Company provides long-haul services to its carrier customers on a "take
or pay" long-term basis, on an individual circuit basis, or on a month-to-
month basis after the initial term of the "take or pay" or individual circuit
contract. As of June 30, 1997, the Company had remaining future long-term
contract commitments totaling approximately $75.8 million. These contracts
expire on various dates through 2006 and are expected to generate
approximately $56.0 million in revenues to the Company through 2001, of which
approximately $14.5 million are expected to be realized in 1998. No single
Carriers' Carrier Services customer or Retail Services customer represented
over 10% of the Company's total revenues for the six months ended June 30,
1997.
 
  Although the Company expects that a majority of its revenue growth will come
from its Retail Services business, the Company does not expect its Retail
Services to obtain a significant share of the market for telecommunications
services in the southern United States. The customer contracts for Retail
Services generally provide for payment in arrears based on minutes of use for
switched services and payment in advance for private line services. The
contracts generally also provide that the customer may terminate the affected
services without penalty in the event of certain outages in service, and for
certain other defined causes. To date, no customers have terminated any
services under these provisions. The contracts also typically provide that the
customer must use at least a minimum dollar amount of switched long distance
services per month for the term of the contract. During the past several
years, market prices for many telecommunications services segments have been
declining, which the Company believes will likely continue. In response to
these and other competitive pressures, the Company recently modified certain
of its retail contracts to extend to certain customers lower rates over longer
terms as a means of maintaining and developing the Company's customer base. In
the future, in response to competitive considerations, the Company may decide
to modify certain other retail customer contracts in a similar manner,
emphasizing lower pricing and longer commitment periods. A substantial portion
of the Company's total revenues are from retail long distance services.
Revenue per minute from such services has been declining and is expected to
continue to decline. This decline will have a negative effect on the Company's
gross margin which may not be offset completely by savings from decreases in
the Company's cost of services.
 
  Operating Expenses. The Company's principal operating expenses consist of
cost of services, selling, operations and administration expenses, and
depreciation and amortization. Cost of services related to Retail Services
consists primarily of access charges and local facility charges paid to local
exchange carriers, as well as wholesale carrier origination, termination and
interexchange facility charges paid to other interexchange carriers. Cost of
services related to Carriers' Carrier Services are substantially all fixed
costs attributable to (i) the leasing of dark fiber under long-term operating
leases, (ii) the leasing of capacity outside the Company's owned or managed
network (off-net capacity) to meet customer requirements, (iii) labor
associated with operator services and (iv) network costs associated with the
provision of SS7 Services. The Company purchases off-net capacity to provide
Carriers' Carrier Services in cases where the Company plans to construct its
own network to replace the off-net portion of certain fiber routes. The
Company also purchases off-net capacity in connection with an existing
customer contract, pursuant to which the Company is the exclusive provider of
network capacity to such customer. Although the Company is able to
substantially meet the requirements of such customer on the Company's network,
the Company purchases off-net capacity to fill such customer's requirements
that cannot be met on the Company's network. Selling, operations and
administration expenses consist of expenses of selling and marketing, field
personnel engaged in direct network maintenance and monitoring, customer
service and corporate administration. Depreciation and amortization include
depreciation of the Company's telecommunications network and equipment and
amortization of goodwill and other intangible assets related to acquisitions,
primarily the DeltaCom Acquisition.
 
                                      46
<PAGE>
 
  As the Company continues to expand into new geographic markets, add new
sales offices and facilities and enlarge its current product offerings to
include local telephone and other services, cost of services and selling,
operations and administration expenses are expected to increase substantially.
Therefore, the Company expects to incur increasing operating losses over the
next few years. Although the Company anticipates that it will continue to
generate positive cash flow from operations, it expects that such cash flows
will be more than offset by capital expenditures during the next several years
as it implements its business plan. The Company also expects that the addition
of local service to its bundle of telecommunications services will have an
adverse impact on its gross margin, because the gross margin on the resale of
local services through incumbent local exchange carrier facilities will be
lower than the gross margin on the Company's existing businesses. As the
Company increasingly uses incumbent local exchange carrier unbundled network
elements instead of resold services, the Company expects gross margin on local
service to improve. Such improvement is expected to result from reduced access
charges and efficiencies realized through increased reliance on the Company's
owned network. Such improved margins, however, could be offset by competitive
market pressures to reduce prices for Retail Services, as discussed above.
There can be no assurance that growth in the Company's revenues or customer
base will continue or that the Company will be able to achieve or sustain
profitability or positive net cash flows.
 
  High Leverage. At June 30, 1997, on a pro forma basis, giving effect to the
Reorganization, as well as the forgiveness of, or repayment in full of certain
indebtedness with a portion of the net proceeds from the Offering, the Company
would have had $214.4 million of indebtedness and its stockholder's equity
would have been $64.1 million. On a pro forma basis, the Company's earnings
would have been insufficient to cover its fixed charges for the year ended
December 31, 1996 and the six months ended June 30, 1997 by $18.2 million and
$6.6 million, respectively, and its EBITDA less capital expenditures and
interest expense would have been negative $14.8 million and negative $13.0
million, respectively.
 
  Although the Company's liquidity has improved, the Company's level of
indebtedness and debt service obligations has significantly increased as a
result of the Offering. The successful implementation of the Company's
strategy, including expansion of its network and obtaining and retaining a
significant number of customers, and significant and sustained growth in the
Company's cash flow are necessary for the Company to be able to meet its debt
service requirements. There can be no assurance that the Company will
successfully implement its strategy or that the Company will be able to
generate sufficient cash flow from operating activities to improve its
earnings before fixed charges, or to meet its debt service obligations and
working capital requirements. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company,
which will be subject to prevailing economic conditions and to financial,
business and other factors. See "Risk Factors--Significant Capital
Requirements; Uncertainty of Additional Financing" and "--High Leverage;
Ability to Service Debt; Restrictive Covenants," "--Liquidity and Capital
Resources," "Description of Certain Indebtedness" and "Description of the
Exchange Notes."
 
 
                                      47
<PAGE>
 
CERTAIN PRO FORMA RESULTS OF OPERATIONS
 
  The following table sets forth certain summary unaudited pro forma financial
data for the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1996 and 1997. The pro forma data reflect the results of
operations for such periods related to (i) Retail Services, consisting of
certain historical data for DeltaCom as if the DeltaCom Acquisition had
occurred as of the beginning of each period presented, and (ii) Carriers'
Carrier Services, consisting of certain pro forma combined data for Interstate
FiberNet, InterQuest, Gulf States FiberNet and the Georgia Fiber Assets as if
the Gulf States Acquisition had occurred as of the beginning of each period
presented. The information set forth below does not purport to represent what
the Company's financial position or results of operations would have been if
these acquisitions had actually occurred as of such dates, or to project the
Company's financial position or results of operations for any future date or
period. The information presented below should be read in conjunction with the
financial statements and the notes thereto included elsewhere in this
Prospectus.
 
                  PRO FORMA RESULTS OF OPERATIONS (UNAUDITED)
 
<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,                                SIX MONTHS ENDED JUNE 30,
                    ----------------------------------------------------------------- -------------------------------------------
                            1994                  1995                  1996                  1996                  1997
                    --------------------- --------------------- --------------------- --------------------- ---------------------
                                   % OF                  % OF                  % OF                  % OF                  % OF
                                 REVENUES              REVENUES              REVENUES              REVENUES              REVENUES
                                 --------              --------              --------              --------              --------
<S>                 <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>      <C>          <C>
Revenues
 Retail Services... $53,777,565     86%   $56,271,011     77%   $65,176,807     76%   $31,106,856     79%   $39,920,414     74%
 Carriers' Carrier
  Services.........   8,582,444     14%    16,837,906     23%    20,197,555     24%     8,495,298     21%    14,330,097     26%
                    -----------           -----------           -----------           -----------           -----------
   Total........... $62,360,009           $73,108,917           $85,374,362           $39,602,154           $54,250,511
                    ===========           ===========           ===========           ===========           ===========
Gross Margin
 Retail Services... $20,608,785     38%   $23,915,653     43%   $25,820,210     40%   $13,140,448     42%   $16,392,403     41%
 Carriers' Carrier
  Services.........   5,728,170     67%    12,521,873     74%    16,966,924     84%     7,152,759     84%    12,555,361     88%
                    -----------           -----------           -----------           -----------           -----------
   Total........... $26,336,955     42%   $36,437,526     50%   $42,787,134     50%   $20,293,207     51%   $28,947,764     53%
                    ===========           ===========           ===========           ===========           ===========
EBITDA
 Retail Services... $ 9,999,787     19%   $10,069,786     18%   $ 7,426,297     11%   $ 4,441,728     14%   $ 3,221,943      8%
 Carriers' Carrier
  Services.........   3,958,559     46%     8,735,909     52%    11,494,668     57%     4,311,693     51%     8,516,272     59%
                    -----------           -----------           -----------           -----------           -----------
   Total(a)........ $13,958,346     22%   $18,805,695     26%   $18,920,965     22%   $ 8,753,421     22%   $11,738,215     22%
                    ===========           ===========           ===========           ===========           ===========
Net Income (Loss)
 from Continuing
 Operations
 Retail Services... $(1,441,323)    (3)%  $(1,405,651)    (3)%   (3,701,538)    (6)%  $(1,049,660)    (3)%  $(2,235,487)    (6)%
 Carrier's Carrier
  Services.........     793,759      9%      (462,146)    (3)%   (1,805,472)    (9)%   (1,246,039)   (15)%       33,544     --%
                    -----------           -----------           -----------           -----------           -----------
   Total(b)........ $  (647,564)     1%   $(1,867,797)    (3)%  $(5,507,010)    (6)%  $(2,295,699)    (6)%  $(2,201,943)    (4)%
                    ===========           ===========           ===========           ===========           ===========
</TABLE>
- --------
(a) Excludes interest income that would have been earned during the periods
    presented on the $62.7 million of Offering proceeds invested in Pledged
    Securities and held by the Trustee to fund and secure the first six
    interest payments on the Notes.
(b) Excludes net interest related to the Offering and use of the net proceeds
    therefrom totaling $6,566,492 and $2,340,110 for the year ended December
    31, 1996 and the six months ended June 30, 1997, respectively.
 
PRO FORMA SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO PRO FORMA SIX MONTHS
ENDED JUNE 30, 1997
 
  Revenues
 
  Pro forma revenues increased 37% from $39.6 million for the six months ended
June 30, 1996 to $54.3 million for the six months ended June 30, 1997. Retail
Services operations' pro forma revenues increased $8.8 million
 
                                      48
<PAGE>
 
from $31.1 million for the six months ended June 30, 1996 to $39.9 million for
the six months ended June 30, 1997. Of this increase, $7.0 million was
attributable to long distance services, $.9 million to sales of customer
premise equipment and $.9 million to Internet sales and services. The growth
in long distance services was primarily the result of an increase in minutes
from new and existing customers, partially offset by a decrease in revenues
per minute due to lower prices. Pro forma revenues from Carriers' Carrier
operations contributed $5.8 million of this increase, increasing from $8.5
million for the six months ended June 30, 1996 to $14.3 million for the six
months ended June 30, 1997. Revenues from Carriers' Carrier Services increased
due to increased demand for Carriers' Carrier Services from new and existing
customers.
 
  Gross Margin
 
  Pro forma gross margin increased from $20.3 million for the six months ended
June 30, 1996 to $28.9 million for the six months ended June 30, 1997. Pro
forma gross margin for Carriers' Carrier Services as a percentage of Carrier's
Carrier Services revenues increased from 84% for the six months ended June 30,
1996 to 88% for the six months ended June 30, 1997, primarily due to
additional revenues. Retail Services pro forma gross margin as a percentage of
Retail Services revenues was 42% and 41%, respectively, for the six month
periods ended June 30, 1996 and 1997. The Company anticipates that increased
competition, particularly with respect to pricing, in the long distance market
will likely adversely affect the Company's gross margin on long distance
services as a percentage of revenues. Management expects that the Company will
increasingly utilize its fiber optic network in the deployment of the
Company's switched network design, favorably affecting the Company's gross
margin on the Retail Services segment. As the Company increases the volume of
traffic it either originates or terminates on its own network, it expects to
be able to use more effectively its switched network to reduce per-minute
costs. The Company expects that the provision of local telecommunications
service through the resale of incumbent local exchange carrier facilities will
adversely affect its gross margin. As the Company begins to utilize incumbent
local exchange carrier unbundled network elements instead of reselling local
services, the Company expects gross margin on local services to improve.
 
  EBITDA
 
  Pro forma EBITDA increased $2.9 million from $8.8 million for the six months
ended June 30, 1996 to $11.7 million for the six months ended June 30, 1997,
an increase of 33%. For Carriers' Carrier Services, pro forma EBITDA increased
as a percentage of Carrier's Carrier Services revenues from 51% for the six
months ended June 30, 1996 to 59% for the six months ended June 30, 1997,
primarily due to increased revenues. Pro forma EBITDA related to Retail
Services decreased $1.2 million, from $4.4 million for the six months ended
June 30, 1996 to $3.2 million for the six months ended June 30, 1997. This
decrease was attributable to the costs associated with new sales offices
opened since March 31, 1996 and employment of additional support personnel to
better position this segment for growth and expansion. The Company expects
that EBITDA for Retail Services will continue to decline at least through
1998, as the Company expands its offering of local services and opens
additional sales offices.
 
  Net Income (Loss) From Continuing Operations
 
  Pro forma net loss decreased $.1 million from $2.3 million for the six
months ended June 30, 1996 to a loss of $2.2 million for the six months ended
June 30, 1997. The pro forma net loss from Retail Services increased from $1.0
million for the six months ended June 30, 1996 to a loss of $2.2 million for
the six months ended June 30, 1997. This additional loss resulted from
increased costs associated with new sales offices opened since March 31, 1996,
and the employment of additional support personnel to better position this
segment for growth and expansion. Carriers' Carrier Services had a net loss of
$1.2 million for the six months ended June 30, 1996 and net income of less
than $.1 million for the six months ended June 30, 1997. This increase in net
income is primarily attributable to increased revenues and gross margins.
 
 
                                      49
<PAGE>
 
PRO FORMA YEAR ENDED DECEMBER 31, 1995 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1996
 
  Revenues
 
  Pro forma revenues increased 17% from $73.1 million in 1995 to $85.4 million
in 1996. Of this increase, $8.9 million was attributable to Retail Services,
which increased $7.6 million from long distance services and $1.3 million from
Internet services and sales of customer premise equipment. The growth in long
distance services was primarily the result of an increase in minutes from new
and existing customers, which was partially offset by a decrease in revenues
per minute (because of lower prices). The Company also opened six additional
sales offices during the first half of 1996 in the following new markets: New
Orleans, Baton Rouge, Atlanta, Greenville, Charlotte and Pensacola. Carriers'
Carrier Services accounted for $3.4 million of the total revenues increase.
Pro forma revenues for this segment in 1995 included a $3.3 million
nonrecurring payment from a major customer related to the initial construction
of the Gulf States FiberNet fiber optic route. Excluding the effect of this
nonrecurring payment, pro forma revenues attributable to Carriers' Carrier
Services increased 49%, or $6.6 million, to $20.2 million in 1996. Of this
increase, $5.7 million was due to services provided on new network capacity,
primarily the Gulf States FiberNet portions of the network, which were fully
operational for all of 1996, after being operational for only approximately
six months in 1995. The balance of the increase was attributable to increased
demand over existing portions of the Company's network. Gulf States FiberNet
represented $10.1 million and the Georgia Fiber Assets customer contract
represented $3.5 million of the total $20.2 million of Carriers' Carrier
Services pro forma revenues in 1996. For 1995, excluding the effect of the
$3.3 million nonrecurring payment, Gulf States FiberNet represented $4.3
million and the Georgia Fiber Assets customer contract represented $3.5
million of Carriers' Carrier Services pro forma revenues of $13.6 million.
 
  Gross Margin
 
  Pro forma gross margin increased from $36.4 million in 1995 to $42.8 million
in 1996. For Carriers' Carrier Services, pro forma gross margin as a
percentage of revenues increased from 74% in 1995 to 84% in 1996, primarily
because most Carriers' Carrier Services are long-haul private line services
which have low associated variable cost of services. For Retail Services, pro
forma gross margin as a percentage of revenues decreased from 43% in 1995 to
40% in 1996, primarily because of an increase in the number of wholesale
switched minutes sold to other telecommunications companies as a percentage of
total switched minutes in 1996 compared to 1995. The gross margin on these
wholesale services is lower than the gross margin on retail switched services.
In addition, in 1996, the Company modified certain of its retail contracts to
extend to certain customers lower rates over longer terms as a means of
maintaining and developing the Company's customer base.
 
  EBITDA
 
  Pro forma EBITDA increased $.1 million from $18.8 million in 1995 to $18.9
million in 1996. Pro forma EBITDA related to Retail Services decreased $2.7
million from $10.1 million in 1995 to $7.4 million in 1996, principally
because of costs incurred to open six new sales offices during 1996 and the
addition of management and infrastructure after the DeltaCom Acquisition to
position this segment for growth and expansion. EBITDA related to Carriers'
Carrier Services increased from $8.7 million in 1995 to $11.5 million in 1996
on a $3.4 million increase in revenues because the long-haul portion of the
Carriers' Carrier business has low associated variable costs. EBITDA and
revenues for 1995 include a $3.3 million nonrecurring payment related to the
initial construction of the Gulf States FiberNet fiber optic route.
 
  Net Income (Loss) From Continuing Operations
 
  Pro forma net loss increased $3.6 million from $1.9 million in 1995 to $5.5
million in 1996. Of this increase, $2.3 million was attributable to Retail
Services primarily due to costs incurred to open six new sales offices during
1996 and addition of management and infrastructure to position this segment
for growth and expansion. Pro forma net loss from Carriers' Carrier Services
increased $1.3 million from $.5 million in 1995 to $1.8 million in 1996. This
increased net loss was primarily attributable to increased depreciation and
amortization expense and increased interest expense.
 
                                      50
<PAGE>
 
PRO FORMA YEAR ENDED DECEMBER 31, 1994 COMPARED TO PRO FORMA YEAR ENDED
DECEMBER 31, 1995
 
  Revenues
 
  Pro forma revenues increased 17% from $62.4 million in 1994 to $73.1 million
in 1995. Revenues from Retail Services accounted for $2.5 million of the $10.7
million total increase, due to an increase of $1.8 million attributable to
long distance services and $.7 million attributable to sales of customer
premise equipment. Revenues from Carriers' Carrier Services contributed $8.3
million to the total increase, including a $3.3 million nonrecurring payment
from a major customer related to the initial construction of the Gulf States
FiberNet fiber optic route. Excluding the effect of this nonrecurring payment,
$4.2 million of the $5.0 million increase in revenues attributable to
Carriers' Carrier Services consisted of revenues generated from the newly
constructed Gulf States FiberNet route, which began operations in June 1995.
The remaining $.8 million was attributable to increased sales on existing
network routes and the sale of newly introduced SS7 Services.
 
  Gross Margin
 
  Pro forma gross margin as a percentage of revenues increased from 42% in
1994 to 50% in 1995. Pro forma gross margin as a percentage of revenues
generated by Retail Services increased from 38% in 1994 to 43% in 1995. This
improvement was primarily a result of (i) reductions in the cost of intrastate
switched access and (ii) newly renegotiated favorable contract terms resulting
in higher revenues to the Company for off-net originating and terminating
interstate services. As a result of the increased revenues derived from
Carriers' Carrier Services, pro forma gross margin as percentage of revenues
generated by this business segment increased from 67% in 1994 to 75% in 1995.
 
  EBITDA
 
  Pro forma EBITDA increased 34% from $14.0 million in 1994 to $18.8 million
in 1995. Pro forma EBITDA related to Retail Services increased slightly from
$10.0 million in 1994 to $10.1 million in 1995. Increases in pro forma 1995
gross margin for Retail Services were partially offset by approximately $1.0
million of costs related to personnel additions to the Company's human
resources, marketing, customer service and information services departments
and approximately $.6 million of costs related to management services.
Although pro forma revenues related to Carriers' Carrier Services increased
$8.3 million in 1995 compared to 1994, pro forma EBITDA for Carriers' Carrier
Services only increased $4.7 million from $4.0 million in 1994 to $8.7 million
in 1995. The Carriers' Carrier Services revenues increase was offset in part
by (i) a $1.5 million increase in cost of services related primarily to
network costs associated with the initiation of SS7 Services, a network
management contract for a large enhanced specialized mobile radio customer and
off-net lease expense incurred in the sale of certain long-haul private lines
and (ii) a $2.0 million increase in selling, operations and administration
expense related to the hiring of additional senior management and key
operations personnel to position the Company for future growth. Also included
in this $2.0 million increase is the opening of a fully staffed network
operation center to monitor the entire fiber optic network 24 hours a day,
seven days a week.
 
  Net Income (Loss) From Continuing Operations
 
  Pro forma net loss increased $1.3 million from $.6 million in 1994 to $1.9
million in 1995. This increased loss was attributable to the loss from
Carriers' Carrier Services which increased $1.3 million to a net loss of $.5
million in 1995 as compared to net income of $.8 million in 1994. This loss
was attributable to (i) an increase in selling, operations and administration
expense related to the hiring of additional management and key operations
personnel to position the Company for future growth and (ii) an increase in
depreciation and amortization expense and interest expense which resulted
primarily from the operations of the Gulf States FiberNet routes which
commenced in August 1994.
 
                                      51
<PAGE>
 
HISTORICAL RESULTS OF OPERATIONS
 
  The following tables set forth certain historical financial data for the
years ended December 31, 1994, 1995 and 1996 and the six months ended June 30,
1996 and 1997 for the Carriers' Carrier Services business and for the year
ended December 31, 1996 and the six months ended June 30, 1996 and 1997 for
the Retail Services business.
 
  The comparability of the historical financial data for the six months ended
June 30, 1996 and 1997 has been affected by the DeltaCom Acquisition and the
Gulf States Acquisition. The historical financial statements for the six
months ended June 30, 1996 include the results of operations for DeltaCom
since its acquisition on January 29, 1996. For the six months ended June 30,
1996, the Company's 36% interest in Gulf States FiberNet's results of
operations is reflected using the equity method. Due to the Gulf States
Acquisition on March 27, 1997, the results of operations for the six months
ended June 30, 1997 reflect the total revenues and expenses from January 1,
1997 attributable to Gulf States FiberNet with the preacquisition losses
attributable to SCANA from January 1, 1997 deducted to determine combined net
loss. The results of operations for the six months ended June 30, 1997 also
reflect the revenues and expenses of Georgia Fiber since April 1, 1997.
 
                       HISTORICAL RESULTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                                                     CARRIERS' CARRIER SERVICES
                          -----------------------------------------------------------------------------------
                                      YEAR ENDED DECEMBER 31,                  SIX MONTHS ENDED JUNE 30,
                          ------------------------------------------------ ----------------------------------
                             1994     %      1995      %      1996     %      1996       %      1997      %
                          ---------- ---- ----------  ---- ---------- ---- -----------  ---- ----------- ----
                                                                           (UNAUDITED)       (UNAUDITED)
<S>                       <C>        <C>  <C>         <C>  <C>        <C>  <C>          <C>  <C>         <C>
Revenues................  $4,945,902 100% $5,750,587  100% $6,598,709 100% $2,724,874   100% $13,444,647 100%
Cost of services........   2,484,744  50%  3,149,231   55%  2,363,073  36%  1,126,438    41%   1,774,736  13%
                          ----------      ----------       ----------      ----------        -----------
 Gross margin...........   2,461,158  50%  2,601,356   45%  4,235,636  64%  1,598,436    59%  11,669,911  87%
Selling, operations and
 administration
 expense................     948,230  19%  1,626,678   28%  1,826,420  28%    851,662    31%   3,790,864  28%
Depreciation and
 amortization...........     738,052  15%  1,267,882   22%  1,656,685  25%    759,366    28%   5,315,500  40%
                          ----------      ----------       ----------      ----------        -----------
Total operating ex-
 penses.................   1,686,282  34%  2,894,560   50%  3,483,105  53%  1,611,028    59%   9,106,364  68%
                          ----------      ----------       ----------      ----------        -----------
Operating income
 (loss).................  $  774,876  16% $ (293,204) (5)% $  752,531  11% $  (12,592)    0% $ 2,563,547  19%
                          ==========      ==========       ==========      ==========        ===========
</TABLE>
 
<TABLE>
<CAPTION>
                                               RETAIL SERVICES
                              --------------------------------------------------
                                 YEAR ENDED
                                DECEMBER 31,       SIX MONTHS ENDED JUNE 30,
                              ---------------- ---------------------------------
                                 1996      %      1996      %      1997      %
                              ----------- ---- ----------- ---- ----------- ----
                                               (UNAUDITED)      (UNAUDITED)
<S>                           <C>         <C>  <C>         <C>  <C>         <C>
Revenues....................  $59,919,876 100% $25,849,925 100% $39,920,414 100%
Cost of services............   36,393,214  61%  15,003,025  58%  23,528,011  59%
                              -----------      -----------      -----------
 Gross margin...............   23,526,662  39%  10,846,900  42%  16,392,403  41%
Selling, operations and ad-
 ministration expense.......   17,050,152  28%   7,354,959  28%  13,170,460  33%
Depreciation and amortiza-
 tion.......................    4,781,389   8%   2,072,651   8%   2,957,732   7%
                              -----------      -----------      -----------
 Total operating expenses...   21,831,541  36%   9,427,610  36%  16,128,192  40%
                              -----------      -----------      -----------
Operating income............  $ 1,695,121   3% $ 1,419,290   5% $   264,211   1%
                              ===========      ===========      ===========
</TABLE>
 
HISTORICAL SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH HISTORICAL SIX MONTHS
ENDED JUNE 30, 1996
 
  Revenues
 
  Revenue for the six months ended June 30, 1997 increased from $28.6 million
for the six months ended June 30, 1996 to $53.4 million for the six months
ended June 30, 1997. Revenues from Retail Services increased $14.1 million
from $25.8 million for the six months ended June 30, 1996 to $39.9 million for
the six months
 
                                      52
<PAGE>
 
ended June 30, 1997. Results for the six months ended June 30, 1996 reflect
only five months of Retail Services revenues because the DeltaCom Acquisition
occurred on January 29, 1996. Revenues from Carriers' Carrier Services
increased from $2.7 million for the six months ended June 30, 1996 to $13.4
million for the six months ended June 30, 1997. Of the $10.7 million increase,
$8.8 million was attributable to revenues generated during the six months
ended June 30, 1997 by Gulf States FiberNet. Excluding revenues attributable
to Gulf States FiberNet during the six months ended June 30, 1997, Carriers'
Carrier Services increased $1.9 million, of which $.9 million was attributable
to revenue from the Georgia Fiber Assets acquired March 27, 1997.
 
  Cost of Services
 
  Cost of services increased $9.2 million from $16.1 million for the six
months ended June 30, 1996 to $25.3 million for the six months ended June 30,
1997. Cost of services for Retail Services' operations increased $8.5 million
to $23.5 million for the six months ended June 30, 1997 from $15.0 million for
the six months ended June 30, 1996, which reflect only five months of cost of
services attributable to Retail Services operations. Cost of services for
Retail Services' operations as a percentage of revenue increased to 59% for
the six months ended June 30, 1997 compared to 58% for the six months ended
June 30, 1996. This increase was attributable to the cost of new facilities in
order to service expanded retail markets, and the impact of increased minutes
of usage at lower prices per minute. Cost of services attributable to
Carriers' Carrier Services increased $.7 million from $1.1 million for the six
months ended June 30, 1996 to $1.8 million for the six months ended June 30,
1997. Cost of services for Carriers' Carrier Services as a percentage of
revenue decreased to 13% for the six months ended June 30, 1997 compared to
41% for the six months ended June 30, 1996, due to increases in revenue from
long-haul private line services, which have low associated variable costs.
 
  Selling, Operations and Administration Expense
 
  Selling, operations and administration expense increased $8.8 million from
$8.2 million (29% as a percentage of revenue) for the six months ended June
30, 1996 to $17.0 million (32% as a percentage of revenue) for the six months
ended June 30, 1997. Selling, operations and administration expense
attributable to Retail Services increased $5.8 million from $7.4 million (or
28% of Retail Services revenues) for the six months ended June 30, 1996 to
$13.2 million (or 33% of Retail Services revenues) for the six months ended
June 30, 1997. This increase resulted from employment of additional sales,
information services and provisioning personnel to support the Company's
geographical market and product expansion as the Company prepared to offer
local service and expand into new markets. Results for the six months ended
June 30, 1996 reflect only five months of selling, operations and
administration expense attributable to Retail Services. Selling, operations
and administration expense attributable to Carriers' Carrier Services
increased $2.9 million from $.9 million (or 31% of Carriers' Carrier Services
revenues) for the six months ended June 30, 1996 to $3.8 million (or 28% of
Carriers' Carrier Services revenues) for the six months ended June 30, 1997.
Of the $2.9 million increase, $1.8 million was attributable to the acquisition
of Gulf States FiberNet. The remaining $1.1 million of this increase was
attributable to increased costs of administrative personnel employed to
support expansion of the business.
 
  Depreciation and Amortization
 
  Depreciation and amortization expense increased $5.5 million from $2.8
million for the six months ended June 30, 1996 to $8.3 million for the six
months ended June 30, 1997. Retail Services accounted for $.9 million of the
increase, which was primarily related to installation of new central office
equipment. Depreciation and amortization for Carriers' Carrier Services
operations accounted for $4.6 million of the increase and was primarily
related to the acquisition of Gulf States FiberNet.
 
  Interest Expense
 
  Interest expense increased from $2.8 million for the six months ended June
30, 1996 to $7.6 million for the six months ended June 30, 1997. Of this $4.8
million increase, $2.2 million was attributable to the acquisition of Gulf
States FiberNet, $1.8 million was attributable to the Senior Notes, $.5
million was attributable to the DeltaCom Indebtedness, and the balance was
attributable to the SCANA Note.
 
                                      53
<PAGE>
 
  Income Taxes
 
  The Company is included in the consolidated federal income tax returns of
its parent, ITC Holding, which results in the Company receiving benefits for
certain of its net operating losses. The benefit received as a percentage of
taxable income was 26% and 29% for the six month periods ended June 30, 1997
and 1996, respectively.
 
  EBITDA
 
  EBITDA increased from $4.2 million for the six months ended June 30, 1996 to
$11.1 million for the six months ended June 30, 1997. Carriers' Carrier
Services accounted for $7.1 million of the increase. EBITDA attributable to
Retail Services for the six months ended June 30, 1996 was $3.5 million,
compared to $3.2 million for the six months ended June 30, 1997. EBITDA
attributable to Retail Services decreased from 14% of revenues for the six
months ended June 30, 1996 to 8% for the six months ended June 30, 1997,
primarily due to increased costs associated with the expansion of new sales
offices and the employment of additional support personnel to position this
segment for growth and expansion. The Company expects that EBITDA for Retail
Services will continue to decline through at least 1998 as the Company opens
additional sales offices and prepares to offer local service.
 
HISTORICAL YEAR ENDED DECEMBER 31, 1995 COMPARED WITH HISTORICAL YEAR ENDED
DECEMBER 31, 1996
 
  Revenues
 
  Revenues increased from $5.8 million in 1995 to $66.5 million in 1996. The
$60.7 million increase was primarily attributable to revenues of $59.9 million
generated by DeltaCom since it was acquired on January 29, 1996. Revenues from
Carriers' Carrier Services increased approximately $800,000 in 1996 (15%),
primarily due to the growth in new SS7 Services and directory assistance
products and growth in demand for Carriers' Carrier Services.
 
  Cost of Services
 
  Cost of services increased from $3.1 million in 1995 to $38.8 million in
1996. DeltaCom's operations accounted for $36.4 million of this increase.
Carriers' Carrier Services accounted for a decrease of $700,000 primarily due
to intersegment eliminations related to its utilization of DeltaCom's network
infrastructure.
 
  Selling, Operations and Administration Expense
 
  Selling, operations and administration expense increased from $1.6 million
in 1995 to $18.9 million in 1996. DeltaCom's operations accounted for $17.1
million of the increase. Carriers' Carrier Services accounted for $200,000 of
the increase.
 
  Depreciation and Amortization
 
  Depreciation and amortization expense increased from $1.3 million in 1995 to
$6.4 million in 1996. Of this $5.1 million increase, $4.8 million was
attributable to DeltaCom, including $1.3 million of intangible amortization on
$54.6 million of intangibles pushed down to the Company. See "--Effects of
Accounting Standards." Carriers' Carrier Services accounted for $300,000 of
the increase as a result of additional capital expenditures made for the
provision of SS7 Services, capital expenditures associated with the Company's
network management systems required to support the various management and
marketing agreements with various utilities, and small electronic overbuilds
on existing network segments.
 
  Other Income (Expense)
 
  Other expense increased from $200,000 in 1995 to $1.4 million in 1996. The
Company's share of Gulf States FiberNet's partnership losses accounted for
$1.3 million of this increase, which was partially offset by a
 
                                      54
<PAGE>
 
$100,000 increase in other interest and miscellaneous income. Gulf States
FiberNet began full operations in late 1995 and, accordingly, the effect of a
full year of operations was not reflected until 1996. Gulf States FiberNet
recorded a pretax loss of $4.4 million in 1996, compared to a pretax loss of
$700,000 in 1995. As of December 31, 1995 and 1996, the Company owned 36% of
Gulf States FiberNet and recorded losses of $300,000 and $1.6 million,
respectively, from such interest.
 
  Interest Expense
 
  Interest expense increased from $300,000 in 1995 to $6.2 million in 1996.
The increase was primarily attributable to the increase in the Company's
aggregate indebtedness resulting from the $74.0 million of DeltaCom
Indebtedness. See "--Effects of Accounting Standards." The Company incurred
interest expense of $5.8 million related to such indebtedness in 1996.
 
  EBITDA
 
  EBITDA increased from $1.0 million in 1995 to $8.9 million in 1996. DeltaCom
accounted for $6.5 million and Carriers' Carrier Services accounted for $1.4
million of the increase. The increased EBITDA attributable to Carriers'
Carrier Services is a result of an increase in revenues with minimal increases
in associated variable costs.
 
HISTORICAL YEAR ENDED DECEMBER 31, 1994 COMPARED WITH HISTORICAL YEAR ENDED
DECEMBER 31, 1995
 
  Revenues
 
  Revenues increased from $4.9 million in 1994 to $5.8 million in 1995. The
increase was primarily attributable to additional capacity sales on the
Atlanta-to-Columbus fiber route and the introduction of SS7 Services in early
1995. Revenues from operator services remained stable between years at
approximately $2.5 million.
 
  Cost of Services
 
  Cost of services increased from $2.5 million in 1994 to $3.1 million in
1995, primarily as a result of network costs associated with SS7 Services in
1995 and the network management contract for a large enhanced specialized
mobile radio customer.
 
  Selling, Operations and Administration Expense
 
  Selling, operations and administration expense increased from $900,000 in
1994 to $1.6 million in 1995. The increase principally reflected higher
management and personnel costs resulting from the hiring of additional senior
management and a team of key operations personnel in order to position the
Company for future growth.
 
  Depreciation and Amortization
 
  Depreciation and amortization expense increased from $700,000 in 1994 to
$1.3 million in 1995. The $600,000 increase in depreciation and amortization
resulted from additional depreciation on capital assets related to the
establishment of the network operations center that operates 24 hours a day,
seven days a week, several minor spur routes, the initiation of SS7 Services,
and ongoing capital expenditures for Carriers' Carrier Services.
 
  Other Income (Expense)
 
  Other expense increased from less than $100,000 in 1994 to $200,000 in 1995.
The Company's share of the partnership losses related to Gulf States FiberNet
accounted for this increase. Gulf States FiberNet was in the construction
phase during 1994 and incurred a pretax loss of $300,000 in 1994, compared to
a pretax loss of $700,000 in 1995. As of December 31, 1994 and 1995, the
Company owned 36% of Gulf States FiberNet and recorded equity in partnership
losses of $100,000 and $300,000, respectively. The equity in partnership
losses was partially offset by other miscellaneous income in both years.
 
                                      55
<PAGE>
 
  EBITDA
 
  EBITDA decreased from $1.5 million in 1994 to $1.0 million in 1995. The
decrease in EBITDA primarily reflected increased selling, operations and
administration expense incurred in connection with the hiring of additional
senior management, as discussed above, and additional expense related to the
Company's initiation of SS7 Services.
 
LIQUIDITY AND CAPITAL RESOURCES
 
  The Company has historically generated positive cash flow from operations
from its existing lines of business, but has required equity infusions and
advances from ITC Holding to finance a significant portion of its investing
and financing activities. Cash flow from operations totaled $979,000, $1.4
million and $8.2 million for 1994, 1995 and 1996, respectively, and $9.4
million for the six months ended June 30, 1997. The components of cash flow
from operations consisting of net loss adjusted for depreciation,
amortization, deferred income taxes, equity in losses of investee,
preacquisition losses, extraordinary item--loss on extinguishment of debt and
other totaled $1.4 million, $1.5 million and $4.7 million for 1994, 1995 and
1996, respectively, and $5.7 million for the six months ended June 30, 1997.
Changes in working capital used $443,000 and $42,000 in 1994 and 1995,
respectively, and provided $3.5 million and $3.7 million for 1996 and the six
months ended June 30, 1997, respectively. Such changes were primarily due to
an increase in accounts receivable in 1994, which resulted from increased
earned and unearned revenue, increases in income tax receivables and prepaid
expenses in 1995, and, during 1996, an increase in accrued interest, accounts
payable and unearned revenue, partially offset by an increase in accounts
receivable. The increase in 1996 in accrued interest, accounts payable and
accounts receivable resulted primarily from the DeltaCom Acquisition. Such
changes were primarily due to increases in unearned revenue, accrued
liabilities and income tax refunds receivable, offset by increases in accounts
receivable for the six months ended June 30, 1997. Of this increase in
accounts receivable and unearned revenue, $2.3 million and $1.3 million,
respectively, resulted from the Gulf States Acquisition, with the remaining
increase in accounts receivable attributable to increased earned and unearned
revenue in the Carriers' Carrier Services and Retail Services.
 
  Cash used for investing activities was $10.7 million, $1.5 million and $72.7
million for the years ended December 31, 1994, 1995 and 1996, respectively,
and $11.8 million for the six months ended June 30, 1997. The cash used in
1996 was primarily attributable to the investment of $63.5 million, net of
cash received, in connection with the DeltaCom Acquisition in January 1996.
The Company made capital expenditures of $3.7 million, $1.8 million and $6.2
million for the years ended December 31, 1994, 1995 and 1996, respectively,
and $12.4 million for the six months ended June 30, 1997. Of the $6.2 million
of capital expenditures in 1996, $4.1 million related to Retail Services and
$2.1 million related to Carriers' Carrier Services. In addition, the Company
contributed an additional $2.4 million to Gulf States FiberNet in 1996 to meet
debt service requirements and to fund additional capital requirements of that
business. Of the $12.4 million of capital expenditures for the six months
ended June 30, 1997, $5.7 million related to Carriers' Carrier Services and
$6.7 million related to Retail Services.
 
  Cash provided by financing activities was $10.1 million, $200,000, and $65.1
million for the years ended December 31, 1994, 1995 and 1996, respectively,
and $201.3 million for the six months ended June 30, 1997. Net cash provided
by financing activities for the six months ended June 30, 1997 consisted
primarily of net proceeds of $194.3 million from the sale of the Senior Notes
and $8.2 million of advances received from ITC Holding. For 1996, most of the
cash provided by financing activities was attributable to the DeltaCom
Indebtedness, which was advanced to the Company by ITC Holding from funds
borrowed under a bank facility. See "--Effects of Accounting Standards."
 
  ITC Holding partially financed the DeltaCom Acquisition and the Gulf States
Acquisition with debt, which consists of the following: (i) a $74.0 million
term loan under a bank facility incurred in connection with the DeltaCom
Acquisition and pushed down to the Company (the DeltaCom Indebtedness); (ii) a
$41.6 million Bridge Facility incurred in connection with the Gulf States
Acquisition, which required the refinancing of Gulf
 
                                      56
<PAGE>
 
States FiberNet's existing project facility; and (iii) the $10.0 million SCANA
Note issued in connection with the Gulf States Acquisition and assumed by the
Company.
 
  Upon consummation of the Reorganization on July 25, 1997, approximately
$62.7 million of the $192.7 million of net proceeds from the sale of the
Senior Notes in the Offering were used to purchase U.S. government securities
that are being held by the Trustee in a pledged account as security for and to
fund the first six scheduled interest payments on the Senior Notes and
Exchange Notes. The balance of the net proceeds from the Offering,
approximately $131.6 million, was released to the Company. A portion of the
released proceeds was applied on July 25, 1997 as follows: (i) to repay
approximately $48.3 million of indebtedness to ITC Holding (together with
approximately $9.5 million of accrued interest) associated with the DeltaCom
Acquisition and advances used by the Company for capital expenditures; and
(ii) to repay approximately $41.6 million of indebtedness incurred under the
Bridge Facility (together with approximately $.2 million of accrued interest).
The Company intends to use the remaining approximately $32.2 million of such
net proceeds (i) to fund market expansion activities of the Company's
telecommunications business, including development and construction costs of
the Company's fiber optic network and its regional sales offices; and (ii) for
additional working capital and other general corporate purposes, including the
funding of cash flow deficits (after capital expenditures). Pending such uses,
the Company has invested such amounts in U.S. government securities. In
connection with the Reorganization, $31.0 million of the DeltaCom Indebtedness
was forgiven by ITC Holding and contributed to the Company as additional
equity.
 
  In January 1995, Gulf States FiberNet entered into an interest rate swap
agreement with a $47.5 million principal amount. The agreement swapped the
applicable three-month LIBOR rate selected under Gulf States FiberNet's
project facility with a fixed rate of 8.25%. As of June 30, 1997, Gulf States
FiberNet would have been required to pay $2,142,916 to terminate the interest
rate swap. Gulf States FiberNet made payments totaling $553,320, $1,261,000
and $540,997 for the years ended December 1995 and 1996 and the six months
ended June 30, 1997, respectively, in connection with this interest rate swap
agreement. Although the related debt (the Bridge Facility) has been repaid,
the Company does not currently intend to terminate this interest rate swap
agreement since the Company plans to draw upon its variable rate Credit
Facility to fund capital expenditures and operating losses in accordance with
its expansion plans. The interest rate swap agreement expires in December
2002.
 
  To achieve its business plan, the Company will need significant financing
for capital expenditure and working capital requirements, including repayment
of indebtedness and operating losses. Expansion of the Company's network,
operations and services will require significant capital expenditures. The
Company currently estimates that its aggregate capital requirements will total
approximately $104 million in 1997 and 1998, of which a total of approximately
$50 million is expected to be incurred in 1997 (including $12.4 million of
capital expenditures made as of June 30, 1997) and approximately $54 million
is expected to be incurred in 1998. The Company expects to make substantial
capital expenditures thereafter. Capital expenditures will be primarily for:
(i) addition of facilities-based local telephone service to its bundle of
integrated telecommunications services, including acquisition and installation
of switches and related equipment, (ii) market expansion, (iii) continued
development and construction of its fiber optic network (including
transmission equipment) and (iv) infrastructure enhancements, principally for
information systems. At June 30, 1997, the Company had entered into agreements
with vendors to purchase approximately $11.5 million of equipment and
services, and, for the six months ended June 30, 1997, had made capital
expenditures of $12.4 million. The actual amount and timing of the Company's
capital requirements may differ materially from the foregoing estimate as a
result of regulatory, technological and competitive developments (including
market developments and new opportunities) in the Company's industry. See
"Risk Factors--Significant Capital Requirements; Uncertainty of Additional
Financing."
 
  In September 1997, Interstate FiberNet, Inc., a wholly owned subsidiary of
the Company, entered into the Credit Agreement with NationsBank for a five-
year $100 million term and revolving credit facility to be used for working
capital and other corporate purposes, including refinancing existing
indebtedness, capital expenditures and permitted acquisitions. The Credit
Facility consists of a $50 million multi-draw term facility
 
                                      57
<PAGE>
 
and a $50 million revolving credit facility, and contains restrictions on the
Company and its subsidiaries and requires Interstate FiberNet, Inc. to comply
with certain financial tests and to maintain certain financial ratios. The
Credit Facility is guaranteed by the Company, DeltaCom and Gulf States
Transmission and is secured by a first priority lien on all current and future
assets of Interstate FiberNet, Inc. and its subsidiaries and a first priority
pledge of the stock of the Company's subsidiaries. See "Risk Factors--High
Leverage; Ability to Service Debt; Restructure Covenants" and "Description of
Certain Indebtedness--Credit Facility."
 
  The Company will be dependent on additional capital to fund its growth, as
well as to fund continued operating losses and working capital. The Company
believes that the net proceeds from the Offering, together with cash flow from
operations and available borrowings under the Credit Facility, will provide
sufficient funds to enable the Company to expand its business as currently
planned through the maturity of the Credit Facility in 2002, after which the
Company will need to seek additional financing to fund capital expenditures
and working capital. Because the Credit Facility will mature in 2002, the
Company may not have a ready source of liquidity after 2002. In the event that
the Company's plans or assumptions change or prove to be inaccurate, the
foregoing sources of funds may prove to be insufficient to fund the Company's
currently planned growth and operations. In addition, if the Company
successfully completes any acquisitions, the Company may be required to seek
additional capital sooner than currently anticipated. Additional sources may
include equity and debt financings and other financing arrangements, such as
vendor financing. There can be no assurance that the Company will be able to
generate sufficient cash flow from operations or that additional financing
arrangements will be available, or if available, that they can be concluded on
terms acceptable to the Company. Failure to generate or obtain sufficient
funds would result in delay or abandonment of some or all of the Company's
development and expansion plans, which could have a material adverse effect on
the Company's ability to service its debt, including the Senior Notes and the
Exchange Notes.
 
  At June 30, 1997, on a pro forma basis, giving effect to the Reorganization,
including the forgiveness of, or repayment in full of certain indebtedness
with a portion of the net proceeds from the Offering, the Company would have
had $214.4 million of indebtedness and its stockholder's equity would have
been $64.1 million. On a pro forma basis, the Company's earnings would have
been insufficient to cover its fixed charges for the year ended December 31,
1996, and the six months ended June 30, 1997 by $18.2 million and $6.6
million, respectively, and its EBITDA less capital expenditures and interest
expense would have been negative $14.8 million and negative $13.0 million,
respectively.
 
  Although the Company's liquidity has improved, the Company's level of
indebtedness and debt service obligations has significantly increased as a
result of the Offering. The successful implementation of the Company's
strategy, including expansion of its network and obtaining and retaining a
significant number of customers, and significant and sustained growth in the
Company's cash flow are necessary for the Company to be able to meet its debt
service requirements. There can be no assurance that the Company will
successfully implement its strategy or that the Company will be able to
generate sufficient cash flow from operating activities to improve its
earnings before fixed charges, or to meet its debt service obligations and
working capital requirements. The ability of the Company to meet its
obligations will be dependent upon the future performance of the Company,
which will be subject to prevailing economic conditions and to financial,
business and other factors. See "Risk Factors--Significant Capital
Requirements; Uncertainty of Additional Financing" and
"--High Leverage; Ability to Service Debt; Restrictive Covenants,"
"Description of Certain Indebtedness" and "Description of the Exchange Notes."
 
EFFECTS OF ACCOUNTING STANDARDS
 
  SFAS No. 121 and SFAS No. 123. Statement of Financial Accounting Standards
("SFAS") No. 121, Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to Be Disposed Of, issued by the Financial Accounting
Standards Board, requires the Company to review for impairment, and
potentially write down, the carrying values of long-lived assets and certain
identifiable intangibles (including goodwill) to be held and used by the
Company whenever events or changes in circumstances indicate that the carrying
amount of any
 
                                      58
<PAGE>
 
such asset may not be recoverable. The Company adopted SFAS No. 121, effective
January 1, 1996, with no material impact on the combined financial statements.
 
  SFAS No. 123, Accounting for Stock-Based Compensation, establishes a fair
market value based method for financial accounting and reporting stock-based
employee compensation plans. Companies may elect to adopt the measurement
criteria of SFAS No. 123 for accounting purposes, thereby recognizing
compensation expense in results of operations on a prospective basis, or to
disclose the pro forma effects of the new measurement criteria. The Company
has elected to disclose the pro forma effects of the new measurement criteria.
See note 9 to the combined financial statements.
 
  "Push Down" of Assets and Liabilities Related to the Acquisitions. ITC
Holding financed the cash purchase price for the DeltaCom Acquisition of
approximately $65.4 million and related debt refinancing of approximately $8.6
million principally with debt. The DeltaCom Acquisition was accounted for
under the purchase method of accounting. In accordance with applicable
accounting requirements of the Securities and Exchange Commission, purchase
transactions that result in one entity becoming substantially wholly owned by
the acquiror establish a new basis of accounting for the purchased assets and
liabilities. Thus, the purchase price for the DeltaCom Acquisition has been
allocated to the underlying assets purchased and liabilities assumed based on
their estimated fair market values at January 29, 1996, the acquisition date.
Because the DeltaCom Acquisition was recorded as a purchase, generally
accepted accounting principles require that the purchase price paid and the
debt incurred by ITC Holding for the DeltaCom Acquisition (and the related
assets) be "pushed down" to establish a new accounting basis in DeltaCom's
financial statements so that the basis of accounting for the purchased assets
and liabilities is the same between ITC Holding and DeltaCom. This accounting
treatment is also required because the Company used a portion of the proceeds
of the Offering to repay a significant portion of the debt incurred by ITC
Holding to finance the DeltaCom Acquisition. Similarly, the purchase price and
debt associated with the Gulf States Acquisition was also "pushed down" to the
financial statements of Interstate FiberNet and Gulf States Transmission.
 
INFLATION
 
  The Company does not believe that inflation has had a significant impact on
the Company's combined operations.
 
                                      59
<PAGE>
 
                                   BUSINESS
 
  The Company provides retail long distance services to mid-sized and major
regional businesses in the southern United States and is a leading regional
provider of Carriers' Carrier Services. The Company intends to become a
leading regional provider of integrated telecommunications services to mid-
sized and major regional businesses in the southern United States by offering
such customers a broad range of telecommunications services, including local
exchange and long distance data and voice, Internet and operator services, and
the sale and servicing of customer premise equipment, in a single package
tailored to the business customer's specific needs. In 1996, the Company had
pro forma revenues of approximately $85.4 million, EBITDA of approximately
$18.9 million and net losses from continuing operations of approximately $12.1
million. For the six months ended June 30, 1997, the Company had pro forma
revenues of approximately $54.3 million, EBITDA of approximately $11.7 million
and net losses from continuing operations of approximately $4.5 million.
 
  The Company provides Carriers' Carrier Services to other telecommunications
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI,
Frontier and IXC. The Company's fiber optic network reaches over 60 POPs in
ten southern states (Alabama, Arkansas, Florida, Georgia, Louisiana,
Mississippi, North Carolina, South Carolina, Tennessee and Texas) and extends
approximately 5,400 route miles, of which approximately 2,500 miles are
Company-owned and approximately 2,900 miles are owned and operated by three
public utilities (Duke Power Company, Florida Power & Light Company and
Entergy Technology Company) and managed and marketed by the Company. The
Company expects to add approximately 700 route miles to its fiber network by
the end of 1997 and approximately 100 owned and operated route miles in early
1998 through long-term dark fiber leases. In 1996, the Company's Carriers'
Carrier Services business generated pro forma revenues of approximately $20.2
million, EBITDA of approximately $11.5 million and net losses from continuing
operations of approximately $1.8 million. For the six months ended June 30,
1997, the Company's Carriers' Carrier Services business generated pro forma
revenues of approximately $14.3 million, EBITDA of approximately $8.5 million
and net income from continuing operations of less than $.1 million. As of
June 30, 1997, on a pro forma basis, the Company had remaining future long-
term contract commitments totaling approximately $75.8 million. These
contracts expire on various dates through 2006 and are expected to generate
approximately $56.0 million in revenues to the Company through 2001, of which
approximately $14.5 million are expected to be realized in 1998.
 
  The Company currently provides a variety of Retail Services, including
retail long distance services such as traditional switched and dedicated long
distance, 800/888 calling, calling card and operator services, ATM and frame
relay, high capacity broadband private line services, as well as Internet,
Intranet and Web page hosting and development services, and customer premise
equipment installation and repair. As of June 30, 1997, the Company provided
services to over 6,600 business customers. The Company currently offers Retail
Services, other than local exchange services (which are provided in two
markets), in 12 metropolitan areas in Alabama, Florida, Georgia, Louisiana,
North Carolina and South Carolina and intends to provide a full range of
Retail Services (including local exchange services) in approximately 15
additional metropolitan areas throughout the southern United States over the
next five years. In 1996, the Retail Services business generated pro forma
revenues of approximately $65.2 million, EBITDA of approximately $7.4 million
and net losses from continuing operations of approximately $3.7 million. For
the six months ended June 30, 1997, the Retail Services business generated pro
forma revenues of approximately $39.9 million, EBITDA of approximately $3.2
million and net losses from continuing operations of approximately $2.2
million.
 
  In July 1997, the Company began offering local services on a limited, resale
basis in Birmingham and Montgomery, Alabama, and commenced general sales of
such services in those markets in August 1997. Also in August 1997, the
Company initiated a limited offering in Birmingham and Montgomery of
facilities-based local services, and expects that general marketing of such
services will commence in September 1997. Although the Company's local
exchange services offerings in such markets are in the very early stages,
initial expressions of customer interest in such services have been positive,
consistent with management's expectations. However, there can be no assurance
that demand for the Company's local services will match such preliminary
 
                                      60
<PAGE>
 
indications of customer interest. The Company expects to offer local exchange
services as part of its Retail Services in six to nine markets (including
Birmingham and Montgomery) by the end of 1997, initially by reselling the
services of incumbent local exchange carriers and, where market conditions
warrant, by using its own local switching facilities.
 
  In connection with offering local exchange services, the Company has entered
into the Interconnection Agreement with BellSouth to (i) resell BellSouth's
local exchange services and (ii) interconnect the Company's network with
BellSouth's network for the purpose of gaining immediate access to all of
BellSouth's unbundled network elements. This agreement will allow the Company
to enter new markets with minimal capital expenditures and to offer local
exchange service to its current customer base. The Interconnection Agreement
currently allows the Company to provide local service on a resale basis or by
purchasing all unbundled network elements required to provide local service on
a facilities basis, without using Company-owned facilities. The terms of the
Interconnection Agreement, including interim pricing terms agreed to by the
Company and BellSouth, have been approved by state regulatory authorities in
most states, although they remain subject to review and modification by such
authorities. In addition, the Interconnection Agreement does not resolve all
operational issues, particularly those relating to the collocation of the
Company's equipment with that of BellSouth. The Company and BellSouth are
continuing to negotiate to resolve such issues. The Company expects that the
Interconnection Agreement will provide a foundation for it to provide local
service on a reasonable commercial basis, but there can be no assurance of
this and important issues remain unsettled as a result of legal and regulatory
developments and related matters. The Interconnection Agreement expires in
1999, and there can be no assurance that the Company will be able to renew it
under favorable terms, or at all.
 
  ITC/\DeltaCom was incorporated in Delaware. The Company's principal executive
offices are located at 206 West Ninth Street, West Point, Georgia 31833, and
its telephone number is (706) 645-8990.
 
INDUSTRY OVERVIEW
 
  The long distance and local telecommunications markets are currently
undergoing substantial changes, including fundamental changes resulting from
the February 8, 1996 enactment of the Telecommunications Act, and the Company
believes that it is well positioned to take advantage of these developments.
 
  Long Distance Services. Until 1984, AT&T largely monopolized local and long
distance telephone services in the United States. Technological developments
gradually enabled others to compete with AT&T in the long distance market. In
1984, largely as the result of a court decree, AT&T was required to divest its
local telephone systems but was permitted to retain its long distance
operations. Since 1984, competition in the long distance market has increased,
service levels have improved, product offerings have increased and prices for
long distance services have generally declined, all of which has resulted in
increased consumer demand and significant market growth for long distance
services. The increase in competition among long distance providers has also
resulted in a growing trend toward industry consolidation.
 
  Local Services. The market for local exchange services consists of a number
of distinct service components. These service components are defined by
specific regulatory tariff classifications including: (i) local network
services, which generally include basic dial tone, enhanced calling features
and data services (dedicated point-to-point and frame relay service); (ii)
network access services, which consist of access provided by local exchange
carriers to long distance network carriers; (iii) short-haul long distance
network services, which include intraLATA long distance calls; and (iv) other
varied services, including the publication of "white page" and "yellow page"
telephone directories. Industry sources have estimated that the 1995 aggregate
revenues of all local exchange carriers approximated $95 billion. Until
recently, there was virtually no competition in the local exchange markets.
 
  Since 1984, several factors have served to promote competition in the local
exchange market, including: (i) rapidly growing customer demand for an
alternative to the local exchange carrier monopoly, spurred partly by the
development of competitive activities in the long distance market; (ii)
advances in the technology for
 
                                      61
<PAGE>
 
transmission of data and video, which require significant capacity and
reliability levels; (iii) the development of fiber optics and digital
electronic technology, which reduced network construction costs while
increasing transmission speeds, capacity and reliability as compared to
copper-based networks; (iv) the significant access charges interexchange
carriers are required to pay to local exchange carriers to access the local
exchange carriers' networks; and (v) a willingness on the part of legislators
to enact and regulators to enforce legislation and regulations permitting and
promoting competition in the local exchange market. In particular, the
Telecommunications Act requires all local exchange carriers to "unbundle"
their local network offerings and allow other providers of telecommunications
services to interconnect with their facilities and equipment. Most
significantly, the incumbent local exchange carriers will be required to
complete local calls originated by the Company's customers and switched by the
Company and to deliver inbound local calls to the Company for termination to
its customers, assuring customers of unimpaired local calling ability. The
Company expects to obtain access to incumbent carrier local "loop" facilities
(the transmission lines connecting customers' premises to the public telephone
network) on an unbundled basis at reasonable rates. In addition, local
exchange carriers are obligated to provide local number portability and
dialing parity upon request and make their local services available for resale
by competitors. Local exchange carriers also are required to allow competitors
non-discriminatory access to local exchange carrier pole attachments, conduit
space and other rights-of-way. Moreover, states may not erect "barriers to
entry" of local competition, although they may regulate such competition. The
Company believes that, as a result of continued regulatory and technological
changes and competitive trends, competitive local telecommunications companies
have substantial opportunities for growth.
 
BUSINESS STRATEGY
 
  The Company's objectives are to maintain its leadership position in the
provision of Carriers' Carrier Services and to become a leading provider of
Retail Services in the southern United States. The Company intends to increase
its market share in existing markets and expand into new markets by: (i)
aggressively expanding its customer base and increasing its telecommunications
services, including reselling services and facilities of the incumbent local
exchange carriers; (ii) leveraging the Company's extensive network in its
Retail Services and Carriers' Carrier Services businesses; (iii) concurrently
constructing or obtaining access to additional network infrastructure to serve
its customers more cost-effectively; and (iv) expanding its regional network
of sales offices. The principal elements of the Company's business strategy
include the following:
 
  Providing Integrated Telecommunications Services to Existing Base of Mid-
sized and Major Regional Business Customers. By providing additional
telecommunications services such as local telephone service to its existing,
well-established base of long distance customers, the Company expects to be
able to increase revenues at relatively low incremental cost. The Company
believes that bundling a variety of telecommunications services and presenting
customers with one fully integrated monthly billing statement for all of those
services will allow it to penetrate its target markets rapidly and build
customer loyalty. The Company believes that there is substantial demand in its
target markets among mid-sized and major regional business customers for an
integrated package of telecommunications services that meets all of their
telecommunications needs.
 
  Leveraging Its Extensive Fiber Optic Network. The Company intends to
leverage its extensive fiber optic network, which currently reaches over 60
POPs, by (i) continuing to provide switched and transport services to other
communications carriers throughout its region to enable such carriers to
diversify their routes and expand their networks; (ii) targeting customers
that need to transmit large amounts of data within the Company's service
region, such as banks and local and state governments; and (iii) offering
local exchange services to its business customers, which began on a limited
basis in the second half of 1997, as part of its integrated package of
telecommunications services. The Company intends initially to provide local
exchange services by reselling the services of incumbent local exchange
carriers and, in some established markets, using its own local switching
facilities. Over time, the Company expects to provide local services primarily
using the Company's own switching facilities and existing regional fiber optic
network, supplemented by unbundled facilities of incumbent local exchange
carriers or other competitive local exchange carriers. The configuration of
the Company's network enables the Company to expand its network by installing
additional remote local switches, which operate
 
                                      62
<PAGE>
 
in conjunction with the Company's DMS-500 switches, to provide facilities-
based local services. Because remote local switches are less expensive to
purchase and install than DMS-500 switches, and can be installed more quickly
than DMS-500 switches, the Company believes that it will be able to enter new
markets at less expense than many of its competitors. At present, the Company
does not plan to construct intra-city local loop facilities.
 
  Focusing on the Southern United States. The Company intends to continue to
focus on the southern United States in order to leverage its extensive
telecommunications network in the region. The Company believes that its
regional focus will enable it to take advantage of economies of scale in
management, network operations and sales and marketing. The regional
concentration of the Company's network also provides an opportunity for
improved margins because a high portion of its customers' telecommunications
traffic originates and terminates within the region. The Company also believes
that its regional focus will enable it to build on its long-standing customer
and business relationships in the region.
 
  Building Market Share through Personalized Customer Service. The Company
believes that the key to revenue growth in its target markets is capturing and
retaining customers by emphasizing marketing, sales and customer service.
Management believes that customers prefer one company to be accountable for
their telecommunications services, and that a consultative, face-to-face sales
and service strategy is the most effective method of acquiring and maintaining
a high quality customer base. The Company seeks to obtain long-term
commitments from its business customers by responding rapidly and creatively
to their telecommunications needs. The Company currently operates 14 sales
offices in Alabama, Florida, Georgia, Louisiana, North Carolina and South
Carolina. Each sales office is staffed by personnel capable of marketing all
of the Company's products and providing comprehensive support to the Company's
customers.
 
  Expanding Its Fiber Optic Network and Switching Facilities. The Company
expects to expand its fiber optic telecommunications network and switching
facilities to include additional markets within the southern United States.
The Company currently owns and operates approximately 2,500 route miles of
fiber optic network extending from Georgia to Texas, with an additional 700
owned and operated route miles expected to be added by the end of 1997 and
approximately 100 owned and operated route mile expected to be added in early
1998. The Company also markets and manages capacity on 2,900 additional
network route miles through its strategic relationships with public utilities.
In addition, the Company has a buy-sell agreement with Carolinas Fibernet,
LLC, which manages fiber optic facilities in North Carolina and South
Carolina. This agreement enables the parties to buy and sell capacity on each
other's networks and allows the Company to provide customers with access to
POPs throughout those states. The Company believes that, by continuing to
combine its owned network with the networks of public utilities and by adding
switching facilities throughout its network, it will be able to achieve
capital efficiencies and rapidly expand its network in a cost-effective
manner.
 
  Leveraging Proven Management Team. The Company's management team consists of
experienced telecommunications managers who in the past have successfully
implemented a customer-focused long distance telecommunications strategy in
the southern United States. Members of the team include Andrew Walker, Chief
Executive Officer of the Company, Foster McDonald, President of the Company,
and Douglas Shumate, Chief Financial Officer of the Company. ITC Holding is
the Company's sole stockholder. The Company anticipates that ITC Holding's
experience and contacts in the telecommunications industry will enhance the
Company's development. See "Risk Factors--Control by ITC Holding Company;
Conflicts of Interest" and "Management."
 
SERVICES AND FACILITIES
 
 Services
 
  The Company currently provides two basic services: (i) Retail Services and
(ii) Carriers' Carrier Services.
 
  Retail Services. Retail Services involve the provision of voice, data or
video telecommunications services to end users or resellers. The Company
currently provides several types of Retail Services, including basic long
 
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distance services (switched, dedicated, and calling card), dedicated Internet
access, data network solutions (frame relay, ATM, point-to-point), and the
sale and installation of customer premise equipment and, in two markets, local
exchange services. The Company intends to provide additional types of Retail
Services in the future and expand the markets in which it offers local
services as part of a bundled "one-stop" integrated telecommunications service
which will offer customers a wide range of switch-based value-added services.
The Company's customer-focused software and network architecture will permit
the Company to present its customers with one fully integrated monthly billing
statement for the entire package of Retail Services.
 
  Set forth below are brief descriptions of the Company's Retail Services:
 
    LOCAL SERVICES. The Company intends initially to provide local exchange
  services by reselling the services of incumbent local exchange carriers
  and, in some established markets, using its own local switching facilities.
  Over time, the Company expects to provide local services primarily using
  the Company's own switching facilities and existing regional fiber optic
  network, supplemented by unbundled facilities of incumbent local exchange
  carriers or other competitive local exchange carriers. In July 1997, the
  Company began offering local services in Birmingham and Montgomery,
  Alabama. The Company expects to offer local services as part of its Retail
  Services in six to nine markets (including Birmingham and Montgomery) by
  the end of 1997.
 
    In connection with offering local services, the Company has entered into
  the Interconnection Agreement with BellSouth to (i) resell BellSouth's
  local exchange services and (ii) interconnect the Company's network with
  BellSouth's network for the purpose of immediately gaining access to the
  unbundled network elements necessary to provide local exchange services.
  The Interconnection Agreement contains "most favored nation" provisions
  which grant the Company the right to obtain the benefit of any arrangements
  entered into during the term of the Interconnection Agreement between
  BellSouth and any other carrier that materially differ from the rates,
  terms or conditions of the Interconnection Agreement. Under the
  Interconnection Agreement, each party may resell one or more unbundled
  network elements of the other party at agreed upon prices set forth in the
  Interconnection Agreement. In addition, each party is required to pay for
  the interconnection trunks needed to terminate traffic into the other
  party's local network, with the costs of certain two-way interconnection
  trunks and ports to be shared by the Company and BellSouth.
 
    The Interconnection Agreement has a term of two years beginning July 1,
  1997, and requires the parties to negotiate renewal terms by July 1, 1998
  for interconnection commencing July 1, 1999. In the event the parties fail
  to agree on such terms, they have agreed to operate under the existing
  terms, pending a determination of new terms by a state commission.
 
    LONG DISTANCE. The Company offers a full range of retail long distance
  services, including traditional switched and dedicated long distance,
  800/888 calling, international, calling card and operator services.
 
    DATA SERVICES. The Company provides high quality data services to its
  customers primarily using frame relay switches distributed strategically
  throughout the Company's network, enabling customers to use a single
  network connection to communicate with multiple sites throughout the
  Company's fiber optic network. The Company currently provides ATM services
  on a resale basis. Beginning in late 1997 or early 1998, the Company
  intends to offer ATM services on its own network, providing data services
  to customers that need to transmit large amounts of data within the
  Company's service region, such as banks and local and state governments.
  The Company will continue to seek, through strategic business relationships
  with other providers, to interconnect its fiber optic network with the
  fiber optic networks of other companies. The Company anticipates increased
  demand for data services in the future, and expects that in the future a
  larger percentage of its revenues will be derived from the sale of
  dedicated data services.
 
    INTERNET ACCESS, INTRANET SERVICES AND WEB DEVELOPMENT. Since its
  acquisition in 1996 of substantially all of the assets of ViperNet, an
  Internet access provider and Web page developer for business customers, the
  Company has provided dedicated (frame relay) Internet access and Intranet
  services, electronic mail, Web page design and Web hosting services. The
  Company expects that mid-sized and larger businesses will require faster
  Internet access and larger bandwidth in the future, and intends to offer
 
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  products that will meet that demand. The Company refers customers
  requesting non-dedicated Internet access to MindSpring Enterprises, Inc.
  ("MindSpring"), an Internet service provider in which ITC Holding has a
  substantial equity interest, and receives a fee per referred customer.
 
    CUSTOMER PREMISE EQUIPMENT. The Company sells and installs customer
  premise equipment such as telephones, office switchboard systems and, to a
  lesser extent, private branch exchanges (PBX) for customers in the
  Huntsville, Birmingham, Dothan and Montgomery, Alabama markets. The Company
  intends to offer customer premise equipment sales and installation in
  additional markets in the future, with the goals of (i) enhancing and
  supporting the Company's sale of local and long distance services and
  (ii) enhancing customer retention. The Company plans to form relationships
  with local customer premise equipment installation companies in all of its
  markets for the purpose of selling and installing customer premise
  equipment not otherwise provided by the Company.
 
  Carriers' Carrier Services. The Company's Carriers' Carrier Services are
used by customers, such as major telecommunications carriers and non-
facilities based carriers that have switches but do not own transmission
facilities, to transport their already-switched traffic between LATAs. Calls
being transmitted over a long-haul circuit for a customer are generally routed
by the customer through a switch to a receiving terminal in the Company's
network. The Company transmits the signals over a long-haul circuit to the
terminal where the signals are to exit the Company's network. The signals are
then routed by the customer through another switch and to the call recipient
through a local exchange carrier. The Company provides DS-1, DS-3 and OC-N
services. OC-N services are used by the Company's customers for very high
capacity inter-city connectivity and specialized high speed data networking.
The interface between the Company's network and the customer's facilities is
by either local exchange carrier or a direct connection between the Company's
network and the facilities of the customer. The Company typically bills the
customers a fixed monthly rate depending on the capacity and length of the
circuit, regardless of the amount the circuit is actually used.
 
 Facilities
 
  The Company owns or manages approximately 5,400 miles of a high quality
fiber optic network which covers portions of ten states in the southern United
States and extends to over 60 POPs. These POPs are located in almost all major
population centers in the areas covered by the fiber optic network and a
significant number of smaller cities where the Company's only competitor is
the incumbent local exchange carrier.
 
  The Company owns approximately 2,500 miles of its fiber optic network, which
the Company has built or acquired since 1992. In addition, the Company has
strategic relationships with three public utilities, Duke Power Company,
Florida Power & Light Company and Entergy Technology Company, pursuant to
which the Company markets, sells and manages capacity on approximately 2,900
route miles of network owned and operated by the utilities.
 
  In addition, the Company is able to purchase network capacity to certain
cities not covered by the Company's owned and managed network in North
Carolina and South Carolina pursuant to a buy-sell agreement with Carolinas
Fibernet, LLC, which manages fiber optic facilities in North Carolina and
South Carolina. This agreement enables the parties to buy and sell capacity on
each other's networks at pre-established prices which are generally favorable
to the prices for such capacity available in the open market. Under this
agreement, neither party is responsible for network maintenance charges
relating to the other party's network.
 
  The Company expects to add approximately 700 owned and operated route miles
to its fiber network by the end of 1997 and approximately 100 owned and
operated route miles in early 1998 through long-term dark fiber leases. In
addition, as part of its strategy, the Company intends to continue to evaluate
the potential expansion of its network through a combination of new
construction, long-term dark fiber leases and fiber swap transactions,
depending on the extent of capital required over the economic life of the
fiber assets to be deployed.
 
  The Company's decision to further expand its fiber optic network will be
based on various factors, including: (i) the number of its customers in a
market; (ii) the anticipated operating cost savings associated with
 
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<PAGE>
 
such construction; and (iii) any strategic relationships with owners of
existing infrastructure (e.g., utilities and cable operators). Through its
strategic relationships with public utility companies, the Company believes
that it will be able to achieve capital efficiencies in constructing and
expanding its fiber optic network in a rapid and cost-effective manner. The
Company also believes that its fiber optic network, in combination with its
personalized approach to customer service, will create an attractive customer-
focused platform for the provision of local, long distance and enhanced
services.
 
  The Company has implemented electronic redundancy throughout its network,
which enables traffic to be rerouted to another fiber in the same fiber sheath
in the event of a partial fiber cut or electronic failure. Approximately 40%
of the Company's owned and operated fiber optic network is also protected by
geographically diverse routing, a network design (also called a "self healing
ring") which enables traffic to be rerouted to an entirely different fiber
optic cable (assuming capacity is available) in the event of a total cable
cut. The Company is continuing to increase the geographic diversity of its
fiber optic network, and expects to have a substantial portion of its network
protected in this manner by the end of 1997.
 
  The Company's switching facilities currently consist of Nortel DMS 500
switches in Birmingham, Alabama and Columbia, South Carolina and a Nortel DMS
250 switch in Arab, Alabama. The Arab switch is capable of handling long
distance switching and the Birmingham and Columbia DMS 500 switches are
capable of handling both local and long distance switching. These
installations enable the Company to market its Retail Services, including
local services, on a switch-based facilities basis in, among other markets,
Huntsville, Birmingham and Montgomery, Alabama; Greenville, Columbia and
Charleston, South Carolina and Atlanta, Georgia. The Company intends to
strategically place additional switches along its fiber network over the next
five years. The Company also intends to deploy a significant number of Nortel
Access Nodes in the majority of the markets which the Company intends to
serve. The additional switches and nodes will allow the Company to perform
local and long distance switching in its markets on a host/remote type
relationship to the applicable DMS 500 switch. The Nortel Access Nodes will be
connected to the Company's DMS 500 switching platform, utilizing the Company's
fiber network wherever possible. This networking design, together with the
Interconnection Agreement, will enable the Company to be a facilities-based
provider of local and long distance services in all of the markets that it
intends to enter. For those markets in which the Company intends to resell the
services of incumbent local exchange carriers, the Company's platform will be
BellSouth's Centrex product, known as MultiServ, which provides full feature
functionality, such as caller identification, call waiting, remote call
forwarding, call blocking, anonymous call rejection and conference calling.
 
  The Company is a member of the Associated Communications Companies of
America (the "ACCA"), an 11-member trade association that negotiates with
carriers for bulk transmission capacity for its members. The collective buying
power of its members enables the ACCA to negotiate as if it were one of the
larger long distance providers in the United States.
 
  The Company's data network currently consists of six Cascade 9000 frame
relay switches located in Atlanta and West Point, Georgia; Birmingham,
Montgomery and Arab, Alabama; and Columbia, South Carolina. The Company's data
network connects with BellSouth's and Intermedia Communications' frame relay
networks to provide nationwide connectivity for the Company's customers. The
data network currently serves over 105 customers connected to approximately
560 customer locations. The Company's Cascade frame relay switches have the
capability to provide ATM connectivity, and the Company has one ATM connection
to American Communication Services, Inc. for the Internet. The Company intends
to strategically locate additional frame relay and ATM switch sites over the
next five years, with approximately eight to ten frame relay switches being
added in 1997. These frame relay and ATM switches will be co-located with the
Company's DMS-500 switches at strategic network facility locations, and will
create a data backbone which will support the Company's data services.
 
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<PAGE>
 
SALES AND MARKETING
 
  Retail Services
 
  The Company focuses its sales efforts on mid-sized and major regional
businesses in the southern United States. The Company believes that it can
effectively compete for business customers based upon service, product
diversity, price and reliability. The Company's sales force, composed of
direct sales personnel, technical consultants and technicians, markets the
Company's long distance and local communications services. The Company's
management believes that high quality employee training is a prerequisite for
superior customer service, and as a result each member of the Company's sales
force is required to complete the Company's intensive training program. The
Company's marketing strategy is built upon the belief that customers prefer to
hold one company accountable for all of their telecommunications services.
Each sales office provides technical assistance for its voice, data, Internet
and customer premise equipment as required. Customers are assured a single
point of contact, 24 hours a day, seven days a week.
 
  Marketing to mid-sized and major regional businesses is currently conducted
by over 70 direct sales personnel (and over 120 other field personnel) located
in 14 sales offices in the southern United States. In the future, the Company
expects to significantly expand its direct sales force and open sales offices
in additional major and secondary population centers in the southern United
States. The Company's sales personnel make direct calls to prospective and
existing business customers, conduct analyses of business customers' usage
histories and service needs, and demonstrate how the Company's service package
will improve a customer's communications capabilities and costs. Sales
personnel locate potential business customers by several methods, including
customer referral, market research, telemarketing and other networking
alliances such as endorsement agreements with trade associations and local
chambers of commerce. The Company's sales personnel work closely with the
Company's network engineers and information systems consultants to design new
service products and applications. The Company's sales offices are also
primarily responsible for coordinating service and customer premise equipment
installation activities. Technicians survey customers' premises to assess
power and space requirements, and coordinate delivery, installation and
testing of equipment.
 
  A primary element of the Company's Retail Services marketing strategy is to
enter into contracts with its customers. Those agreements generally provide
for payment in arrears based on minutes of use for switched services and in
advance for private line services. The agreements generally also provide that
the customer may terminate the affected service without penalty in the event
of substantial and prolonged outages arising from causes within the Company's
control, and for certain other defined causes. To date, no customers have been
terminated under these provisions. Generally, the agreements provide that the
customer must utilize at least a minimum dollar amount (measured by dollars or
minutes of use) of switched long distance services per month for the term of
the agreement.
 
  In addition, the Company markets its business communication services through
advertisements, event sponsorships, trade journals, direct mail and trade
forums. Because the Company intends to distinguish its retail products largely
on the convenience of its single communications bundle and the benefits of the
Company's comprehensive, individualized and innovative customer support, the
Company believes that advertising will play a larger role in its marketing
strategy than it has in the past.
 
  Carriers' Carrier Services
 
  The Company has long-haul circuit contracts with major long distance
carriers, including AT&T, MCI, Sprint, WorldCom, Cable & Wireless, LCI,
Frontier and IXC. As of June 30, 1997, on a pro forma basis, the Company had
remaining future long term contract commitments totaling approximately $75.8
million. These contracts expire on various dates through 2006 and are expected
to generate approximately $56.0 million in revenues to the Company through
2001, of which $14.5 million are expected to be realized in 1998. The Company
also provides long-haul transmission to customers after contract expiration on
a month-to-month basis. The Company's long-haul contracts provide for fixed
monthly payments, generally in advance. Although sales
 
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<PAGE>
 
volumes from particular customers vary from year to year, the Company has
historically enjoyed high customer retention and circuit renewal rates.
 
  The Company believes that it can continue to compete effectively in the
wholesale, carrier-to-carrier market on the basis of price, reliability,
state-of-the-art technology, route diversity, ease of ordering and customer
service. The Company believes that demand for its Carriers' Carrier Services
will increase as the incumbent local exchange carriers begin competing in the
long distance market.
 
COMPETITION
 
  The telecommunications industry is highly competitive. The Company competes
primarily on the basis of price, availability, transmission quality,
reliability, customer service and variety of product offerings. The ability of
the Company to compete effectively will depend on its ability to maintain high
quality services at prices generally equal to or below those charged by its
competitors. In particular, price competition in the retail and carrier's
carrier long distance markets has generally been intense and is expected to
increase. Many of the Company's competitors (such as AT&T, MCI, Sprint and
WorldCom on an interexchange basis and BellSouth on an intraLATA basis) have
substantially greater financial, personnel, technical, marketing and other
resources, larger numbers of established customers and more prominent name
recognition than the Company and utilize more extensive transmission networks
than the Company. In addition, IXC and Qwest Communications International Inc.
are constructing nationwide fiber optic systems, including routes through
portions of the southern United States. The Company will also increasingly
face competition in the long distance market from local exchange carriers,
switchless resellers and satellite carriers and may eventually compete with
public utilities and cable companies. In particular, Regional Bell Operating
Companies such as BellSouth are now allowed to provide interLATA long distance
services outside their home regions, as well as interLATA mobile services
within their regions. They will be allowed to provide interLATA long distance
services within their regions after meeting certain requirements of the
Telecommunications Act intended to foster opportunities for local telephone
competition. The Regional Bell Operating Companies already have extensive
fiber optic cable, switching, and other network facilities in their respective
regions that can be used for their long distance services. BellSouth and other
Regional Bell Operating Companies are already beginning to take steps toward
obtaining approval to provide in-region long distance services. Although the
FCC has not approved the first two of such applications to come before it,
there can be no assurance that such approvals will be delayed until local
competition is established. In addition, other new competitors may build
additional fiber capacity in the geographic areas served by the Company.
 
  The Company's principal competitor for local exchange services will be the
incumbent local exchange carrier in the particular market, including BellSouth
in virtually all of the Company's initial market areas. The incumbent local
exchange carriers will enjoy substantial competitive advantages arising from
their historical monopoly position in the local telephone market, including
their preexisting customer relationship with all or virtually all end users.
Furthermore, the Company will be highly dependent on the competing incumbent
local exchange carrier for local network facilities and wholesale services
required in order for the Company to assemble its own local retail products.
The Company will also face competition from competitive local exchange
carriers, some of whom have already established local operations in the
Company's target markets. See "Risk Factors--Dependence on Incumbent Local
Exchange Carriers."
 
  Large long distance carriers, such as AT&T, MCI and Sprint, have begun to
offer local services together with their long distance telecommunications
services in certain markets, and are expected to expand that activity as
opportunities created by the Telecommunications Act develop. In addition,
incumbent local exchange carriers are expected to compete in each other's
markets in some cases. For example, BellSouth has recently announced plans to
provide local services within its geographic region in competition with
independent telephone companies. Wireless telecommunications providers may
develop into effective substitutes for wireline local telephone service. For
example, AT&T recently announced plans to offer local services using a new
wireless technology. AT&T's proposed wireless system would link residential
and business telephones via radio waves to the AT&T network. If successful,
this new service could further enhance AT&T's ability to market, on a
 
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<PAGE>
 
nationwide basis, "one-stop" telecommunications services. The Company also
competes with numerous direct marketers and telemarketers and equipment
vendors and installers with respect to certain portions of its business.
 
  A continuing trend toward consolidation, mergers, acquisitions and strategic
alliances in the telecommunications industry could also increase the level of
competition faced by the Company or the Company's carrier customers. For
example, in December 1996, WorldCom, a national long distance carrier,
acquired MFS Communications Company, Inc., one of the largest competitive
local exchange carriers, and, in November 1996, British Telecommunications plc
announced its agreement to acquire MCI. In March 1997, BellSouth and IBM
announced an alliance to provide Internet and Intranet services to businesses
in the South. The telecommunications market is very dynamic, and additional
competitive changes are likely in the future.
 
REGULATION
 
  Overview. The Company's services are subject to federal, state and local
regulation. The Company, through its wholly owned subsidiaries, holds various
federal and state regulatory authorizations. The FCC exercises jurisdiction
over telecommunications common carriers to the extent they provide, originate
or terminate interstate or international communications. The FCC also
establishes rules and has other authority over certain issues related to local
telephone competition. State regulatory commissions retain jurisdiction over
telecommunications carriers to the extent they provide, originate or terminate
intrastate communications. Local governments may require the Company to obtain
licenses, permits or franchises in order to use the public rights-of-way
necessary to install and operate its networks.
 
  Federal Regulation. The Company is categorized as a non-dominant carrier by
the FCC, and as a result is subject to relatively limited regulation of its
interstate and international services. Certain general policies and rules
apply, as well as certain reporting requirements, but the Company's rates are
not reviewed. The Company has all the authority required by the FCC to conduct
its long distance business. As a non-dominant carrier, the Company may install
and operate additional wireline facilities for the transmission of domestic
interstate communications without prior FCC authorization.
 
  The FCC also imposes prior approval requirements on transfers of control and
assignments of operating authorizations. The FCC has the authority generally
to condition, modify, cancel, terminate or revoke operating authority for
failure to comply with federal laws and/or the rules, regulations and policies
of the FCC. Fines or other penalties also may be imposed for such violations.
There can be no assurance that the FCC or third parties will not raise issues
with regard to the Company's compliance with applicable laws and regulations.
 
  The FCC also regulates the interstate access rates charged by incumbent
local exchange carriers for the origination and termination of interstate long
distance traffic. Those access rates make up a significant portion of the cost
of providing long distance service. The FCC has recently announced changes to
its interstate access rules that will result in restructuring of the access
charge system and changes in access charge rate levels. These changes will
reduce per-minute access charges and substitute new per-line flat-rate monthly
charges. These actions are expected to reduce access rates, and hence the cost
of providing long distance service, especially to business customers. However,
the full impact of the FCC's new decisions will not be known until those
decisions are implemented over the next several years, during which time those
decisions may be revised. Long distance companies may be disadvantaged if they
have a disproportionate number of customers with multiple local telephone
lines but relatively limited long distance requirements. In addition, AT&T has
committed to reduce its long distance rates to reflect access cost reductions,
and other competitors of the Company are likely to make similar reductions. In
such event, the Company may need to reduce its rates in response to
competitive pressures. In a related proceeding, the FCC has adopted changes to
the methodology by which access has been used in part to subsidize universal
telephone service and other public policy goals.
 
  The Telecommunications Act also gives the FCC a role in establishing rules
for the implementation of local telephone competition, working with the state
PUCs. The Telecommunications Act imposes a variety of new duties on incumbent
local exchange carriers in order to promote competition in local exchange and
access
 
                                      69
<PAGE>
 
services, and the FCC has authority to develop rules to implement these
duties. Some smaller independent incumbent local exchange carriers may seek
suspension or modification of these obligations, and some companies serving
rural areas are exempt from them.
 
  In that regard, on August 8, 1996, the FCC adopted the Interconnection
Decision (the "Decision") to implement the interconnection, resale and number
portability provisions of the Telecommunications Act. This Decision
establishes rules pursuant to which incumbent local exchange carriers
interconnect their networks with the networks of competitive local exchange
carriers at rates that are reasonable and non-discriminatory. The Decision
also establishes rules governing the rights of competitive local exchange
carriers to obtain and use elements of the incumbent local exchange carriers'
networks at cost-based rates either to supplement or substitute for
alternative local network facilities that the competitive local exchange
carrier would otherwise be required to install. The Decision sets rules
governing competitive local exchange carrier access to wholesale versions of
the incumbent local exchange carriers' retail local services for resale. The
incumbent local exchange carriers are required to establish administrative
support systems so that these services and functionalities can be made
available to other carriers on a nondiscriminatory basis. The Decision also
created rules to deal with reciprocal compensation for the transport and
termination of local telecommunications, non-discriminatory access to rights
of way, and related matters. A related FCC order adopted the same day
established rules implementing the Telecommunications Act with respect to
local and toll dialing parity among competitors; nondiscriminatory access to
telephone numbers, operator services, directory assistance and listings,
network information; and reform of numbering administration.
 
  The FCC's rules were challenged in the federal courts by GTE, the Regional
Bell Operating Companies, large independent incumbent local exchange carriers
and state regulatory commissions. On October 15, 1996, the U.S. Court of
Appeals for the Eighth Circuit issued a stay of the implementation of certain
of the FCC's rules and on July 18, 1997, the Court issued its decision finding
that the FCC lacked statutory authority under the Telecommunications Act for
certain of its rules. In particular, the Court found that the FCC was not
empowered to establish the pricing standards governing unbundled local network
elements or wholesale local services of the incumbent local exchange carriers.
The Court also struck down other FCC rules, including one that would have
enabled new entrants to "pick and choose" from provisions of established
interconnection agreements between the incumbent local exchange carriers and
other carriers. The Court, however, rejected certain other objections to the
FCC rules brought by the incumbent local exchange carriers or the states,
including challenges to the FCC's definition of unbundled elements, and to the
FCC's rules allowing new competitors to create their own networks by combining
incumbent local exchange carrier network elements together without adding
additional facilities of their own. The overall impact of the Court's decision
is to materially reduce the role of the FCC in fostering local competition,
including its ability to take enforcement action if the Telecommunications Act
is violated, and increase the role of state utility commissions. The FCC has
indicated that it will ask the Supreme Court to review the Court's decision
and petitions for rehearing are pending concerning the decision's treatment of
unbundled elements. Meanwhile, certain state commissions have asserted that
they will be active in promoting local telephone competition using the
authority they have under the ruling, which may lessen the significance of the
reduced FCC role. At this time the impact of the Court's decision cannot be
evaluated and there can be no assurance that the Court decision and related
developments will not have a material adverse effect on the Company.
Furthermore, other FCC rules related to local telephone competition remain the
subject of legal challenges. For example, on August 22, 1997, the Eighth
Circuit Court issued a second order striking down certain FCC rules regarding
dialing parity for new competitors. There can be no assurance that these and
other pending decisions affecting local competition will not be adverse to
companies seeking to enter the local telephone market.
 
  There can be no assurance that the FCC's remaining rules (including such
rules that may be reinstated by the Supreme Court, if any), together with
rules adopted by state public utility commissions, will be implemented in a
manner that will permit local telephone competition to develop to a
substantial extent and without significant delays. For example, many new
carriers, including the Company, have experienced problems with respect to the
operational support systems used by new carriers to order and receive network
elements and wholesale services
 
                                      70
<PAGE>
 
from the incumbent local exchange carriers. These systems are necessary for
new carriers like the Company to provide local service to customers on a
timely and competitive basis. The FCC has recently created a task force to
examine problems that have slowed the development of local telephone
competition.
 
  The Company has entered into the Interconnection Agreement with BellSouth.
The Interconnection Agreement currently allows the Company to provide local
service on a resale basis or by purchasing all unbundled network elements
required to provide local service on a facilities bases, without using
Company-owned facilities. The Company and BellSouth have agreed on interim
pricing terms for such resale and purchase of unbundled network elements. The
terms of the Interconnection Agreement, including the interim pricing terms,
are subject to the approval of the PUCs regulating the Company's markets. Such
approval has been received from the PUCs of Alabama, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina, Tennessee and is
pending in Florida. In addition, the Interconnection Agreement does not
resolve all operational issues, particularly those relating to the collocation
of the Company's equipment with that of BellSouth. The Company and BellSouth
are continuing to negotiate to resolve such issues. The Company expects that
the Interconnection Agreement will provide a foundation for it to provide
local service on a reasonable commercial basis, but there can be no assurance
of this and important issues remain unsettled as a result of the Court
decision and related matters. See "Risk Factors--Dependence on Local Incumbent
Exchange Carriers."
 
  The Company expects to negotiate similar interconnection agreements with
other incumbent local exchange carriers. However, other carriers who have
preceded the Company in the negotiation process with certain of these
incumbent local exchange carriers have expressed dissatisfaction with some of
the terms of their agreements, or with the operational support systems by
which they obtain the interconnection they require to provide local services
to end users.
 
  As a general matter, no assurance is possible regarding how quickly or how
adequately the Company will be able to take advantage of the opportunities
created by the Telecommunications Act. The Company could be adversely affected
if the court decision reversing some of the new FCC rules, or problems in the
related arbitration and negotiation process, result in increasing the cost of
using incumbent local exchange carrier network elements or services, or if
such actions otherwise result in delays in the implementation of the
Telecommunications Act or impediments to the development of local telephone
competition.
 
  The Telecommunications Act also imposes certain duties on non-incumbent
local exchange carriers, such as the Company. These duties include the
obligation to complete calls originated by competing carriers under reciprocal
arrangements or through mutual exchange of traffic without explicit payment;
the obligation to permit resale of their telecommunications services without
unreasonable restrictions or conditions; and the duty to provide dialing
parity, number portability, and access to rights of way. The Company does not
anticipate that these obligations will impose a material burden on its
operations. However, given that local telephone competition is still in its
infancy and implementation of the Telecommunications Act has just begun, there
can be no assurance in this regard.
 
  The Telecommunications Act also establishes the foundation for substantial
additional competition to the Company's long distance operations through
elimination or modification of previous prohibitions on the provision of
interLATA long distance services by the Regional Bell Operating Companies and
GTE. The Regional Bell Operating Companies are now permitted to provide
interLATA long distance service outside those states in which they provide
local exchange service ("out-of-region long distance service") upon receipt of
any necessary state and/or federal regulatory approvals that are otherwise
applicable to the provision of intrastate and/or interstate long distance
service. They also are allowed to provide long distance services for their
cellular and other mobile services within the regions in which they also
provide local exchange service ("in-region service"). The Regional Bell
Operating Companies will be allowed to provide wireline in-region services
upon specific approval of the FCC and satisfaction of other conditions,
including a checklist of interconnection requirements. GTE is permitted to
enter the long distance market without regard to limitations by region. GTE is
also subject to the provisions of the Telecommunications Act that impose
interconnection and other requirements on local exchange carriers. BellSouth
and other Regional Bell Operating Companies have begun to take actions
directed towards obtaining authority from the FCC to offer in-region long
distance services in certain of the states
 
                                      71
<PAGE>
 
in their respective regions. Although the FCC forced the withdrawal of the
first such request, and rejected the next two, others are anticipated soon,
including one or more applications from BellSouth to provide service in states
in its region. Furthermore, court actions are now pending challenging both the
terms under which the FCC has denied an in-region application, and the
underlying provisions of the Telecommunications Act that restrict in-region
service. There can be no assurance that the Regional Bell Operating Companies
will be prevented from offering in-region long distance service until local
competition is established.
 
  The FCC has granted incumbent local exchange carriers certain flexibility in
pricing their interstate special and switched access services. Under this
pricing scheme, local exchange carriers may establish pricing zones based on
access traffic density and charge different prices for access provided in each
zone. The Company anticipates that the FCC will grant incumbent local exchange
carriers increasing pricing flexibility as the number of interconnection
agreements and competitors increases. In a pending rulemaking proceeding
scheduled for completion soon, the FCC is expected to announce new and more
specific policies regarding the conditions and timing under which incumbent
local exchange carriers will be eligible for such increased pricing
flexibility. There can be no assurance that such pricing flexibility will not
place the Company at a competitive disadvantage, either as a purchaser of
access for its long distance operations, or as a vendor of access to other
carriers or end user customers.
 
  State Regulation. The Company is also subject to various state laws and
regulations. Most public utility commissions require providers such as the
Company to obtain authority from the commission prior to the initiation of
service. In most states, including Alabama, Georgia and Florida, the Company
also is required to file tariffs setting forth the terms, conditions and
prices for services that are classified as intrastate. The Company also is
required to update or amend its tariffs when it adjusts its rates or adds new
products, and is subject to various reporting and record-keeping requirements.
 
  Many states also require prior approval for transfers of control of
certified carriers, corporate reorganizations, acquisitions of
telecommunications operations, assignment of carrier assets, carrier stock
offerings and incurrence by carriers of significant debt obligations.
Certificates of authority can generally be conditioned, modified, canceled,
terminated or revoked by state regulatory authorities for failure to comply
with state law and/or the rules, regulations and policies of state regulatory
authorities. Fines or other penalties also may be imposed for such violations.
There can be no assurance that state utilities commissions or third parties
will not raise issues with regard to the Company's compliance with applicable
laws or regulations.
 
  The Company has all necessary authority to offer intrastate long distance
services in Alabama, Arkansas, California, Colorado, Connecticut, Delaware,
District of Columbia, Florida, Georgia, Idaho, Illinois, Indiana, Iowa,
Kansas, Kentucky, Louisiana, Maryland, Massachusetts, Michigan, Mississippi,
Missouri, Montana, Nebraska, Nevada, New Hampshire, New Jersey, New York,
North Carolina, North Dakota, Ohio, Oklahoma, Oregon, Rhode Island, South
Carolina, South Dakota, Tennessee, Texas, Utah, Vermont, Virginia, Washington,
West Virginia, Wisconsin and Wyoming. The Company is authorized to provide
intrastate long distance service in the states of Arizona and Pennsylvania
while certificates in those states are pending. Applications for authority to
provide intrastate long distance service are also pending in several other
states, including Maine, Minnesota and New Mexico. Applications will be filed,
in the near future, in the states of Alaska and Hawaii. The Company seeks
authority to provide long distance service in states outside of its target
markets to enhance its ability to attract business customers with offices, or
whose employees travel, outside of the Company's target markets.
 
  The Company intends initially to provide local exchange services in its
region by reselling the retail local services of the respective incumbent
local exchange carrier in a given territory and, in some established markets,
using its own local switching facilities. The Company has obtained competitive
local exchange carrier certification in Alabama, Florida, Georgia, Kentucky,
Louisiana, Mississippi, North Carolina, South Carolina and Tennessee.
 
  Many issues remain open regarding how new local telephone carriers will be
regulated at the state level. For example, although the Telecommunications Act
preempts the ability of states to forbid local service
 
                                      72
<PAGE>
 
competition, the Telecommunications Act preserves the ability of states to
impose reasonable terms and conditions of service and other regulatory
requirements. However, these statutes and related questions arising from the
Telecommunications Act will be elaborated further through rules and policy
decisions made by PUCs in the process of addressing local service competition
issues.
 
  The Company also will be heavily affected by state PUC decisions related to
the incumbent local exchange carriers, particularly in view of the July 18,
1997 decision of the Eighth Circuit Court of Appeals noted above which
recognizes a larger role for state utility commissions and a reduced role for
the FCC. For example, PUCs have significant responsibility under the
Telecommunications Act to oversee relationships between incumbent local
exchange carriers and their new competitors with respect to such competitors'
use of the incumbent local exchange carriers' network elements and wholesale
local services. PUCs arbitrate interconnection agreements between the
incumbent local exchange carriers and new competitors such as the Company when
necessary. PUCs are considering incumbent local exchange carrier pricing
issues in major proceedings now underway. PUCs will also determine how
competitors can take advantage of the terms and conditions of interconnection
agreements that incumbent local exchange carriers reach with other carriers.
It is too early to evaluate how these matters will be resolved, or their
impact on the ability of the Company to pursue its business plan.
 
  States also regulate the intrastate carrier access services of the incumbent
local exchange carriers. The Company is required to pay such access charges to
originate and terminate its intrastate long distance traffic. The Company
could be adversely affected by high access charges, particularly to the extent
that the incumbent local exchange carriers do not incur the same level of
costs with respect to their own intrastate long distance services. A related
issue is use by certain incumbent local exchange carriers, with the approval
of PUCs, of extended local area calling that converts otherwise competitive
intrastate toll service to local service. States also are or will be
addressing various intraLATA dialing parity issues that may affect
competition. It is unclear whether state utility commissions will adopt
changes in their rules governing intrastate access charges similar to those
recently approved by the FCC for interstate access. The Company's business
could be adversely affected by such changes.
 
  The Company also will be affected by how states regulate the retail prices
of the incumbent local exchange carriers with which it competes. The Company
believes that, as the degree of intrastate competition increases, the states
will offer the incumbent local exchange carriers increasing pricing
flexibility. This flexibility may present the incumbent local exchange
carriers with an opportunity to subsidize services that compete with the
Company's services with revenues generated from non-competitive services,
thereby allowing incumbent local exchange carriers to offer competitive
services at lower prices than they otherwise could. The Company cannot predict
the extent to which this may occur or its impact on the Company's business.
 
  Local Government Authorizations. The Company is required to obtain street
use and construction permits and licenses and/or franchises to install and
expand its fiber optic networks using municipal rights-of-way. In some
municipalities where the Company has installed or anticipates constructing
networks, it will be required to pay license or franchise fees based on a
percentage of gross revenues or on a per linear foot basis. There can be no
assurance that, following the expiration of existing franchises, fees will
remain at their current levels. In many markets, the incumbent local exchange
carriers do not pay such franchise fees or pay fees that are substantially
less than those required to be paid by the Company, although the
Telecommunications Act requires that in the future such fees be applied in a
competitively neutral manner. To the extent that, notwithstanding the Act,
competitors do not pay the same level of fees as the Company, the Company
could be at a competitive disadvantage. Termination of the existing franchise
or license agreements prior to their expiration dates or a failure to renew
the franchise or license agreements and a requirement that the Company remove
its facilities or abandon its network in place could have a material adverse
effect on the Company.
 
  General. The telecommunications market is in a period of substantial change
and uncertainty. As the Telecommunications Act and related FCC and state
actions are implemented, new issues are likely to arise that can affect the
Company and its business plan. No assurance can be given that future
regulatory developments will not have a materially adverse impact on the
Company.
 
                                      73
<PAGE>
 
FACILITIES, REAL PROPERTY AND LEASES
 
  The Company leases its corporate headquarters space in West Point, Georgia
from ITC Holding. The lease expires in 2005 and may be terminated by either
party on 90 days' notice. See "Certain Transactions--ITC Holding." The Company
also owns a switch site in Birmingham, Alabama and leases space for a network
operations center and a switch site in Arab, Alabama. In addition, the Company
intends to construct a multi-service facility in Anniston, Alabama to function
as a centralized switching control center for the Company's network and an
operator services center. Construction of the Anniston facility is expected to
commence by the end of 1997 and to be completed in the second quarter of 1998.
 
  The Company operates sales offices in Atlanta (two offices), Georgia;
Pensacola, Florida; Columbia and Greenville, South Carolina; Charlotte, North
Carolina; New Orleans and Baton Rouge, Louisiana; and Huntsville, Mobile,
Auburn, Dothan, Florence, Montgomery and Birmingham, Alabama. The leases for
these offices expire between 1997 and 2001.
 
  As part of its fiber optic network and switched service system, the Company
owns or leases rights-of-way, land, office space and towers throughout the
southern United States.
 
  The Company owns land and microwave transmission towers at various locations
in Alabama.
 
  The Company expects to lease or purchase additional office space and
switching and other network facilities in connection with the planned
expansion of its telecommunications network system.
 
  The Company believes that all of its properties are well maintained.
 
EMPLOYEES
 
  As of June 30, 1997, the Company had over 500 full-time employees, none of
whom was represented by a union or covered by a collective bargaining
agreement. The Company believes that its relationship with its employees is
good. In connection with the construction and maintenance of its fiber optic
network and the conduct of its other business operations, the Company uses
third party contractors, some of whose employees may be represented by unions
or covered by collective bargaining agreements.
 
LEGAL PROCEEDINGS
 
  In May 1997, the U.S. District Court for the Middle District of Alabama,
Southern Division returned a verdict against DeltaCom in Digitel Corporation
v. DeltaCom, Inc., Richard A. Wilkins, John A.R. Smith, and Edward L.
Blackwell, awarding plaintiff $265,000 in damages. Plaintiff in this action
alleged that certain of its former employees violated the non-solicitation
agreements they had entered into with plaintiff as part of their employment.
Plaintiff further alleged that DeltaCom, as the current employer of these
former employees, shares liability for their alleged violations. DeltaCom is
indemnified by the former stockholders of DeltaCom against both the attorney's
fees incurred in defending the action and the judgment resulting from the
action.
 
                                      74
<PAGE>
 
                                  MANAGEMENT
 
DIRECTORS AND EXECUTIVE OFFICERS
 
  The table below sets forth, as of June 30, 1997, certain information
concerning the directors and executive officers of the Company. The Board of
Directors (the "Board") currently consists of nine directors, divided into
three classes of directors serving staggered three-year terms. Directors and
executive officers of the Company are elected to serve until they resign or
are removed, or are otherwise disqualified to serve, or until their successors
are elected and qualified. Directors of the Company are elected at the annual
meeting of stockholders. Executive officers of the Company generally are
appointed at the Board's first meeting after each annual meeting of
stockholders.
 
<TABLE>
<CAPTION>
          NAME            AGE      POSITION(S) WITH COMPANY      TERM AS DIRECTOR EXPIRES
          ----            ---      ------------------------      ------------------------
<S>                       <C> <C>                                <C>
Campbell B. Lanier,                                                            
 III....................   46 Chairman, Director                           2000
Andrew M. Walker........   55 Chief Executive Officer, Director            2000
Foster O. McDonald......   35 President
Douglas A. Shumate......   32 Senior Vice President-Chief
                              Financial Officer
Steven D. Moses.........   47 Senior Vice President-Network
                              Services
J. Thomas Mullis........   53 Senior Vice President-General
                              Counsel, Secretary
Roger F. Woodward.......   44 Senior Vice President-Sales,
                              Marketing and Customer Support
Sara L. Plunkett........   47 Vice President-Finance, Treasurer
Donald W. Burton........   53 Director                                     1998
Malcolm C. Davenport,                                                          
 V......................   44 Director                                     1998
Robert A. Dolson (1)....   51 Director                                     1999
O. Gene Gabbard (1)(2)..   57 Director                                     1999
William T. Parr (2).....   60 Director                                     1998
William H. Scott, III                                                          
 (2)....................   49 Director                                     1999
William B. Timmerman....   50 Director                                     2000
</TABLE>
- --------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee
 
  Campbell B. Lanier, III has been Chairman of the Company since March 1997.
Mr. Lanier serves as Chairman of the Board and Chief Executive Officer of ITC
Holding and has served as a director of ITC Holding since its inception in
1985 through a predecessor company. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. He also is a director of KNOLOGY
Holdings, Inc. ("KNOLOGY"), (a broadband telecommunications services company)
(formerly known as CyberNet Holding, Inc.), MindSpring (a company that
provides Internet services), National Vision Associates, Ltd. (a full service
optical retailer) and K&G Men's Centers (a discount retailer of men's
clothing), Vice Chairman of the Board of AvData Systems, Inc. ("AvData") (a
company providing data communications networks) and Chairman of the Board of
Powertel, Inc. (formerly InterCel, Inc.) ("Powertel") (a wireless
telecommunications services company in which ITC Holding has a substantial
equity interest) and is a Managing Director of South Atlantic Private Equity
Fund IV, Limited Partnership. Since 1989, he has served as a director of the
United States Telephone Association. He served as Chairman of the Board of
AvData from 1988 to 1990.
 
 
                                      75
<PAGE>
 
  Andrew M. Walker has been Chief Executive Officer of the Company since March
1997. He served as President and Chief Executive Officer of the managing
partner of each of Interstate FiberNet and Gulf States FiberNet from November
1994 until March 1997. Mr. Walker has served as a director of KNOLOGY since
July 1996, and he served as Chief Executive Officer and President of KNOLOGY
from July 1996 to February 1997. Mr. Walker worked for MCI from 1990 to 1994
as Vice President Carrier Services. From 1986 to 1990, Mr. Walker served as a
Division President for Telecom*USA, Inc. ("Telecom*USA"). Prior to 1986, Mr.
Walker held different positions with the Christian Broadcasting Network, M/A-
Com and Comsat Laboratories ("Comsat").
 
  Foster O. McDonald has been President of the Company since March 1997. He
served as President of DeltaCom from January 1991 until March 1997. From
February 1996 until March 1997, Mr. McDonald also served as Chief Executive
Officer of DeltaCom. From May 1984 through December 1990, Mr. McDonald served
as Vice President and General Manager of DeltaCom. He also serves as a
director of Brindlee Mountain Telephone Company.
 
  Douglas A. Shumate has been Senior Vice President and Chief Financial
Officer of the Company since March 1997. He served as Chief Financial Officer
of the Managing Partners of each of Interstate FiberNet and Gulf States
FiberNet from January 1995 until March 1997. From May 1991 to January 1995, he
served as Vice President-Finance and Chief Financial Officer of Interstate
Telephone Company ("Interstate Telephone"), a local telephone service provider
and wholly owned subsidiary of ITC Holding. From December 1986 through April
1991, Mr. Shumate was employed as a C.P.A. at Arthur Andersen LLP.
 
  Steven D. Moses has been Senior Vice President-Network Services of the
Company since March 1997. He served as Vice President of Interstate FiberNet
from January 1992 until April 1995 and Chief Operating Officer of Interstate
FiberNet from April 1995 until March 1997. From May 1991 to January 1992, Mr.
Moses served as Director--Special Projects of Interstate Telephone and Valley
Telephone Company ("Valley Telephone") (a local telephone service provider and
a wholly owned subsidiary of ITC Holding).
 
  J. Thomas Mullis has been Senior Vice President, General Counsel and
Secretary of the Company since March 1997. Mr. Mullis served as General
Counsel and Secretary of DeltaCom from May 1985 to March 1997 and as Executive
Vice President of DeltaCom from January 1994 to November 1996. From November
1996 to March 1997, he also served as Senior Vice President of DeltaCom. From
January 1990 to December 1993, Mr. Mullis served as President, General Counsel
and Secretary of both Southern Interexchange Services, Inc. (a switched
services carrier) and Southern Interexchange Facilities, Inc. (a private line
carriers' carrier).
 
  Roger F. Woodward has been Senior Vice President--Sales, Marketing and
Customer Support of the Company since March 1997. Mr. Woodward served as
Senior Vice President-Sales of DeltaCom from October 1996 until March 1997.
From March 1990 until July 1996, Mr. Woodward served in a variety of
positions, including Regional Sales Director and Vice President-Sales, with
Allnet Communications, Inc., which was acquired by Frontier in August 1995.
 
  Sara L. Plunkett has been Vice President--Finance and Treasurer for the
Company since March 1997. She served as Vice President--Finance of DeltaCom
from October 1996 until March 1997. From May 1989 through October 1996, she
served as Chief Financial Officer of DeltaCom.
 
  Donald W. Burton has been a director of the Company since March 1997. He has
served as the Managing General Partner of South Atlantic Venture Funds since
1983 and as the General Partner of The Burton Partnership, Limited Partnership
since 1979. Since 1981, he has served as President of South Atlantic Capital
Corporation. Mr. Burton serves as director of Powertel, MTL, Inc. (a bulk
transportation service company), the Heritage Group of Mutual Funds and
several private companies.
 
  Malcolm C. Davenport, V has been a director of the Company since March 1997.
He has operated his own C.P.A. and law practices since 1979 and 1983,
respectively. Mr. Davenport also serves as a director of ITC
 
                                      76
<PAGE>
 
Holding and several of its subsidiaries, Spintek Gaming Technologies, Inc. (a
gaming technology provider) and American Artists Film Corporation (a motion
picture production company).
 
  Robert A. Dolson has been a director of the Company since March 1997. He has
served as President and Chairman of Continental Water Company (a holding
company for regulated water utilities) since 1982 and 1989, respectively. He
has served as President and Chairman of National Enterprises, Inc. (the parent
company of Continental Water Company) since 1984 and 1989, respectively. He
has served as a director of ITC Holding since December 1993. He also serves as
a director of several private companies.
 
  O. Gene Gabbard has been a director of the Company since March 1997. He has
worked independently as an entrepreneur and consultant since February 1993.
Mr. Gabbard currently serves as Chairman of the Board of KNOLOGY and as a
director of ITC Holding, Powertel, MindSpring, KNOLOGY and InterServ Services
Corporation (a marketing company). He also currently serves as a director of
two telecommunications technology companies, Dynatech Corporation and Adtran,
Inc. and is a Managing Director of South Atlantic Private Equity Fund IV,
Limited Partnership. From August 1990 through January 1993, he served as
Executive Vice President and Chief Financial Officer of MCI. He served in
various senior executive capacities, including Chairman of the Board,
President and Chief Executive Officer of Telecom*USA, Inc. from December 1988
until Telecom's merger with MCI in August 1990. From July 1984 to December
1988, he was Chairman and/or President of SouthernNet, Inc. ("SouthernNet"), a
long distance telecommunications company which was the predecessor to
Telecom*USA.
 
  William T. Parr has been a director of the Company since March 1997. Mr.
Parr has served as Vice Chairman of J. Smith Lanier & Co. (an insurance
placement company) since 1980. He currently serves as a director of ITC
Holding and several of its subsidiaries, including ITC Services Co., Inc. (a
management services company), Valley Telephone, InterCall, Inc. (a conference
calling service provider) and Globe Telecommunications, Inc. ("Globe") (a non-
regulated telecommunications provider). He also serves as a director of AvData
and J. Smith Lanier & Co.
 
  William H. Scott, III has been a director of the Company since March 1997.
Mr. Scott has served as President of ITC Holding since December 1991 and has
been a director of ITC Holding since May 1989. Mr. Scott is a director of
Powertel, AvData, KNOLOGY and MindSpring. From 1989 to 1991, he served as
Executive Vice President of ITC Holding. From 1985 to 1989, Mr. Scott was an
officer and director of Async. Between 1984 and 1988, Mr. Scott held several
offices with SouthernNet, including Chief Operating Officer, Chief Financial
Officer, and Vice President-Administration. He was a director of SouthernNet
from 1984 to 1987.
 
  William B. Timmerman has been a director of the Company since March 1997.
Since 1978 he has served in a variety of management positions at SCANA
Corporation (a diversified utility company), including Chief Executive
Officer, President, Senior Vice President, Executive Vice President and Chief
Financial Officer. Mr. Timmerman is also director of SCANA Corporation, ITC
Holding, Powertel and Liberty Corporation (a life insurance company).
 
COMMITTEES OF THE BOARD OF DIRECTORS
 
  The Board currently has two committees, the Audit Committee and the
Compensation Committee. The Audit Committee, among other things, recommends
the firm to be appointed as independent accountants to audit the Company's
financial statements, discusses the scope and results of the audit with the
independent accountants, reviews with management and the independent
accountants the Company's interim and year-end operating results, considers
the adequacy of the internal accounting controls and audit procedures of the
Company and reviews the non-audit services to be performed by the independent
accountants. The current members of the Audit Committee are Messrs. Dolson and
Gabbard.
 
  The Compensation Committee reviews and recommends the compensation
arrangements for management of the Company and administers the Company's stock
option plans. The current members of the Compensation Committee are Messrs.
Gabbard, Parr and Scott.
 
 
                                      77
<PAGE>
 
DIRECTOR COMPENSATION
 
  Directors of the Company who are also employees of the Company receive no
directors' fees. Non-employee directors receive directors' fees of $750 for
each Board meeting attended in person, $200 for each Board meeting attended by
telephone and $200 for each Board committee meeting attended (whether in
person or by telephone conference). In addition, directors are reimbursed for
their reasonable out-of-pocket travel expenditures incurred. Directors of the
Company are also eligible to receive grants of stock options under the
Company's Director Stock Option Plan.
 
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
 
  The current members of the Compensation Committee are Messrs. Gabbard, Parr
and Scott.
 
INCENTIVE COMPENSATION PLANS
 
  1997 Stock Option Plan. The Company's 1997 Stock Option Plan (the "Stock
Option Plan") provides for the grant of options that are intended to qualify
as "incentive stock options" under Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), to employees of the Company, its subsidiaries
and its parent corporation, ITC Holding, as well as the grant of non-
qualifying options to any other individual whose participation in the Stock
Option Plan is determined to be in the best interests of the Company. The
Stock Option Plan authorizes the issuance of up to 1,500,000 shares of Class A
Common Stock pursuant to options granted under the Stock Option Plan (subject
to anti-dilution adjustments in the event of a stock split, recapitalization
or similar transaction). The maximum number of shares subject to options that
may be awarded under the Stock Option Plan to any person is 500,000 shares.
The Compensation Committee of the Board of Directors will administer the Stock
Option Plan and will grant options to purchase Class A Common Stock.
 
  The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Class A Common Stock on the date of grant of the option (or 110% in the case
of an incentive stock option granted to an optionee beneficially owning more
than 10% of the outstanding Class A Common Stock). The option exercise price
for non-incentive stock options granted under the Stock Option Plan may not be
less than the par value of the Class A Common Stock on the date of grant of
the option. The maximum option term is ten years (or five years in the case of
an incentive stock option granted to an optionee beneficially owning more than
10% of the outstanding Class A Common Stock). Options may be exercised at any
time after grant, except as otherwise provided in the particular option
agreement. There is also a $100,000 limit on the value of Class A Common Stock
(determined at the time of grant) covered by incentive stock options that
become exercisable by an optionee in any year. Options granted will become
exercisable with respect to 50% of the shares subject to the options on the
second anniversary of the date of grant and with respect to 25% of the shares
subject to the options on each of the third and fourth anniversaries of the
date of grant.
 
  The Board of Directors may amend or terminate the Stock Option Plan with
respect to shares of Class A Common Stock as to which options have not been
granted.
 
  At July 31, 1997, options to purchase 894,254 shares of Class A Common Stock
were outstanding pursuant to the Stock Option Plan.
 
  Directors Stock Option Plan. The Company's 1997 Directors Stock Option Plan
(the "Directors Plan") provides for the "formula" grant of options that are
not intended to qualify as "incentive stock options" under Section 422 of the
Code to directors of the Company who are not officers or employees of the
Company, ITC Holding or any subsidiary of the Company (each an "Eligible
Director"). The Directors Plan authorizes the issuance of up to 150,000 shares
of Class A Common Stock pursuant to options granted under the Directors Plan
(subject to anti-dilution adjustments in the event of a stock split,
recapitalization or similar transaction). The option exercise price for
options granted under the Directors Plan will be 100% of the fair market value
of the shares of Class A Common Stock on the date of grant of the option.
Under the Directors Plan, each Eligible Director will be granted an option to
purchase 10,000 shares of Class A Common Stock upon such person's
 
                                      78
<PAGE>
 
initial election or appointment to serve as a director. Options granted will
become exercisable with respect to 50% of the shares subject to the options on
the second anniversary of the date of grant and with respect to 25% of the
shares subject to the options on each of the third and fourth anniversaries of
the date of grant. The options will expire ten years and 30 days after the
date of grant. The Board of Directors may amend or terminate the Directors
Plan with respect to shares of Class A Common Stock as to which options have
not been granted.
 
  At July 31, 1997, stock options to purchase 60,000 shares of Class A Common
Stock were outstanding pursuant to the Directors Plan.
 
EXECUTIVE COMPENSATION
 
  During 1997 Messrs. Walker, McDonald, Mullis, Woodward and Moses (the "Named
Executive Officers") expect to earn salaries at annual rates of $150,000,
$135,000, $131,472, $125,000 and $110,000, respectively. If certain
performance goals are met, Messrs. Walker, McDonald, Mullis, Woodward and
Moses expect to earn bonuses of $90,000, $75,000, $35,855, $50,000 and
$61,111, respectively.
 
  On March 24, 1997, the Company granted Messrs. Walker, McDonald, Mullis,
Woodward and Moses options to purchase 125,000, 75,000, 40,000, 50,000 and
50,000 shares of Class A Common Stock, respectively. Each of the Named
Executive Officers has been granted certain options to purchase shares of
common stock of ITC Holding under ITC Holding's incentive stock option plan.
These options will continue to vest according to the schedule set forth in
each Named Executive Officer's respective stock option agreement unless such
Named Executive Officer's employment with the Company is terminated (and such
employee is not employed by ITC Holding or another subsidiary thereof), in
which case options that have not vested at that time will terminate.
 
                                      79
<PAGE>
 
                             CERTAIN TRANSACTIONS
 
  The Company has adopted a policy requiring that any material transactions
between the Company and persons or entities affiliated with officers,
directors or principal stockholders of the Company be on terms no less
favorable to the Company than reasonably could have been obtained in arm's-
length transactions with independent third parties.
 
ITC HOLDING
 
  The following is a summary of certain transactions and relationships between
the Company and ITC Holding, its other wholly owned subsidiaries, or entities
in which ITC Holding holds more than 10% of the equity interests, and among
the Company and its directors, executive officers and stockholders and its
associated entities.
 
  The Company, through Interstate FiberNet, Inc. (and formerly through
Interstate FiberNet, a Georgia general partnership), sells capacity on its
fiber optic network to several ITC Holding subsidiaries and affiliates,
including Powertel and Powertel PCS, Inc., Globe, InterCall, KNOLOGY and
MindSpring. Together, these entities paid Interstate FiberNet approximately
$422,000, $316,000 and $243,000 for such capacity for the years ended December
31, 1996, 1995 and 1994 and $456,000 for the six months ended June 30, 1997,
respectively.
 
  Since 1996, the Company, through DeltaCom, has provided long distance and
carrier switched long distance service to several ITC Holding subsidiaries and
affiliates, including KNOLOGY , InterCall, Interstate Telephone, Valley
Telephone, Powertel and MindSpring. Together, these entities paid DeltaCom
approximately $1.4 million for the year ended December 31, 1996 and $1,755,000
for the six months ended June 30, 1997. Since 1996, DeltaCom has also earned
commissions by serving as agent for certain interexchange carriers doing
business with Powertel, InterCall and MindSpring. Under these agreements,
DeltaCom contracts with the interexchange carrier and rebills the appropriate
access charges plus a margin to Powertel, InterCall and MindSpring. Together,
Powertel, InterCall and MindSpring paid DeltaCom commissions totaling
approximately $514,000 for the year ended December 31, 1996, and $462,000 for
the six months ended June 30, 1997.
 
  In 1995, the Company, through Interstate FiberNet and Gulfstates FiberNet,
constructed a fiber route on behalf of KNOLOGY. KNOLOGY reimbursed the Company
for approximately $62,000 worth of construction expenses. The Company also
provided certain engineering and construction-related management services,
estimated to have a value of $50,000, to KNOLOGY in 1995. The Company did not
charge KNOLOGY for these services.
 
  In addition to his responsibilities with the Company, Mr. Walker also served
as President and Chief Executive Officer of KNOLOGY for the period from July
15, 1996 through February 20, 1997. He served in this capacity at the request
of KNOLOGY and ITC Holding and received no compensation from KNOLOGY. The
Company estimates the value of services provided to be approximately $20,000.
 
  In 1996, Interstate FiberNet provided certain engineering and construction-
related management services to PowerTel. Interstate FiberNet charged
approximately $57,000 for these services.
 
  In 1995, the Company provided certain network optimization services for
InterCall. InterCall paid $24,000 for such services.
 
  The Company, through Interstate FiberNet, Inc. (and formerly through
InterQuest), provides directory assistance and operator service to Powertel,
Interstate Telephone and Valley Telephone. Revenues recorded by the Company
for these services were approximately $433,000, $245,000 and $202,000 for the
years ended December 31, 1996, 1995 and 1994, respectively, and $451,000 for
the six months ended June 30, 1997.
 
                                      80
<PAGE>
 
  Since 1996, DeltaCom has purchased feature group access from Interstate
Telephone and Valley Telephone. Access fees paid by DeltaCom to these
entities, in the aggregate, totaled approximately $401,000 in 1996 and $87,000
for the six months ended June 30, 1997.
 
  Since 1995, InterCall has provided conference calling services to Interstate
FiberNet (and now to Interstate FiberNet, Inc.) and (beginning in 1996) to
DeltaCom. The Company paid approximately $80,000 and $1,000 for such services
for the years ended December 31, 1996 and 1995, respectively, and $35,000 for
the six months ended June 30, 1997.
 
  ITC Holding, through certain of its subsidiaries, from time to time provides
the Company (and its subsidiaries) with administrative and staff services. The
amounts paid by the Company to ITC Holding and its affiliates for these
services for the years ended December 31, 1996, 1995 and 1994, were $19,000,
$5,000 and $148,000, respectively, and $65,000 for the six months ended June
30, 1997.
 
  Since 1995, ITC Holding advanced funds to InterQuest at a variable rate
equal to the rate paid by ITC Holding through its credit facility with First
Union and CoBank, plus .5%. For the years ended December 31, 1995 and 1996 and
the six months ended June 30, 1997, InterQuest recorded interest expenses to
ITC Holding of approximately $123,000, $97,000 and $40,000, respectively. For
the year ended December 31, 1996 and for the six months ended June 30, 1997,
DeltaCom advanced excess funds from its operations to ITC Holding at an annual
interest rate of 8.25% and DeltaCom recorded interest income of approximately
$78,000 and $7,000, respectively. The advance is repayable on demand.
 
  The Company has leased office space in West Point, Georgia from ITC Holding
since January 1995. Under its lease, the Company pays ITC Holding rent in the
amount of approximately $2,500 per month. The lease may be terminated by
either party on 90 days' notice. In 1996, the Company paid ITC Holding an
additional $7,000 in tax reimbursement payments for 1995 and 1996.
 
  In 1996, InterQuest purchased certain switching equipment located in West
Point, Georgia from Globe for approximately $120,000. During the six months
ended June 30, 1997, DeltaCom sold equipment to KNOLOGY for $204,000.
 
  Certain officers and directors of the Company hold or have held positions in
ITC Holding and various subsidiaries of ITC Holding. See "Management--
Directors and Executive Officers." In addition, certain Company officers and
directors have ownership interests in ITC Holding. See "Principal
Stockholders--Stock of ITC Holding Held By Directors and Management."
 
SCANA
 
  In March 1997, in the Gulf States Acquisition, ITC Holding acquired SCANA's
64% partnership interest in Gulf States FiberNet and the Georgia Fiber Assets.
The purchase price of approximately $27.9 million was paid in the form of the
SCANA Note in the aggregate principal amount of approximately $10.0 million
and 588,411 shares of Series A Convertible Preferred Stock of ITC Holding. See
"Description of Certain Indebtedness--SCANA Note." In addition, pursuant to an
earn-out provision, no later than April 30, 1998, ITC Holding must issue to
SCANA that number of shares of Series A Convertible Preferred Stock that in
aggregate value equal 35.7% of the product of (a) 64%, multiplied by (b)(i)
six, multiplied by (ii) the amount (if any) by which the earnings before
interest, taxes, depreciation and amortization of the Gulf States FiberNet
business for the fiscal year ended December 31, 1997 exceeds $11,265,696.
 
                                      81
<PAGE>
 
                            PRINCIPAL STOCKHOLDERS
 
  All of the Company's issued and outstanding capital stock is owned by ITC
Holding.
 
STOCK OF ITC HOLDING HELD BY DIRECTORS AND MANAGEMENT
 
  The following table sets forth information as of July 31, 1997 concerning
beneficial ownership of the common stock of ITC Holding by (i) each director
of the Company, (ii) each executive officer and (iii) all directors and
executive officers of the Company as a group. The information in the table is
based on information from the named persons regarding ownership of ITC Holding
common stock. Unless otherwise indicated, each of the stockholders listed
below has sole voting and investment power with respect to the shares shown as
beneficially owned by them.
<TABLE>
<CAPTION>
                                                         AMOUNT OF
                                                        BENEFICIAL    PERCENT
NAME OF BENEFICIAL OWNER                              OWNERSHIP(A)(B) OF CLASS
- ------------------------                              --------------- --------
<S>                                                   <C>             <C>
Donald W. Burton(c)..................................      520,952       6.1%
Malcolm C. Davenport, V(d)...........................      168,478       2.0
Robert A. Dolson(e)..................................      875,135      10.2
O. Gene Gabbard......................................       44,215        *
Campbell B. Lanier, III(f)...........................    2,374,621      27.7
Foster O. McDonald(g)................................       76,598        *
Steven O. Moses......................................       19,022        *
J. Thomas Mullis.....................................          --         *
William T. Parr......................................       55,335        *
Sara L. Plunkett.....................................          --         *
William H. Scott, III(h).............................      338,673       3.9
Douglas A. Shumate...................................       27,798        *
William B. Timmerman(i)..............................      774,616       9.1
Andrew M. Walker.....................................       16,800        *
Roger F. Woodward....................................          --         *
All executive officers and directors as a group (15
 persons)............................................    5,293,243      60.5
</TABLE>
- --------
 * Less than one percent.
(a) In accordance with Rule 13d-3 under the Exchange Act, a person is deemed
    to be the beneficial owner, for purposes of this table, of any shares of
    common stock if such person has or shares voting power or investment power
    with respect to such security, or has the right to acquire beneficial
    ownership at any time within 60 days from July 31, 1997. As used herein,
    "voting power" is the power to vote or direct the voting of shares and
    "investment power" is the power to dispose or direct the disposition of
    shares.
(b) Includes the following shares that the individuals named below have the
    right to purchase within 60 days from July 31, 1997 pursuant to options:
 
<TABLE>
   <S>                                                                   <C>
   Donald W. Burton.....................................................   1,480
   O. Gene Gabbard......................................................   1,480
   Campbell B. Lanier, III..............................................  91,372
   Steven D. Moses......................................................  17,102
   William H. Scott, III................................................ 120,836
   Douglas A. Shumate...................................................  22,452
   Andrew M. Walker.....................................................   8,400
                                                                         -------
     Total.............................................................. 263,122
                                                                         =======
</TABLE>
(c) Includes 26,978 shares held of record by The Burton Partnership, Limited
    Partnership, of which Mr. Burton is the sole general partner; 47,337
    shares held of record by South Atlantic Venture Fund II, Limited
    Partnership, of which South Atlantic Venture Partners II, Limited
    Partnership is the sole general partner, of which Mr. Burton is the
    managing general partner; 245,157 shares held of record by South Atlantic
    Venture Fund III, Limited Partnership, of which South Atlantic Venture
    Partners III, Limited Partnership is the sole general partner, of which
    Mr. Burton is the managing partner, 78,754 shares held of record by South
    Atlantic Venture Fund IV, L.P., of which Mr. Burton is a general partner,
    and 121,246 shares held of record by South Atlantic Venture Fund IV (QP),
    L.P., of which Mr. Burton is a general partner. Also includes 1,480
    unexercised but vested options held of record by South Atlantic Venture
    Fund II, Limited Partnership.
(d) Includes 149,970 shares held of record by the Malcolm C. Davenport, V
    Family Trust, of which Mr. Davenport is co-trustee.
(e) Represents 875,135 shares held of record by National Enterprises, Inc., of
    which Mr. Dolson is President.
(f) Includes 40 shares in the aggregate held of record by Mr. Lanier's wife;
    13,000 shares held of record by the Lanier Family Foundation, of which Mr.
    Lanier is co-trustee; and 25,000 shares held of record by the Campbell
    Lanier, Jr. Irrevocable Life Insurance Trust, of which Mr. Lanier is co-
    trustee.
(g) Represents 76,598 shares held of record by three McDonald family trusts,
    of which Mr. McDonald is trustee.
(h) Includes 800 shares in the aggregate held of record by members of Mr.
    Scott's immediate family; 13,000 shares held of record by the Lanier
    Family Foundation, of which Mr. Scott is co-trustee; 25,000 shares held by
    the Campbell Lanier, Jr. Irrevocable Life Insurance Trust, of which Mr.
    Scott is co-trustee; 65,000 shares held of record by Campbell B. Lanier,
    III Charitable Remainder Trust, of which Mr. Scott is trustee; 3,608
    shares held in trust for Mr. Scott's minor daughter, of which Mr. Scott's
    wife is co-trustee; and 625 shares held of record by the Campbell B.
    Lanier, IV 2503(c) Trust, of which Mr. Scott is trustee.
(i) Represents 774,616 shares held of record by SCANA, of which Mr. Timmerman
    is Chief Executive Officer.
 
                                      82
<PAGE>
 
                      DESCRIPTION OF CERTAIN INDEBTEDNESS
 
SCANA NOTE
 
  The SCANA Note has been assumed by Interstate FiberNet, Inc., which became a
wholly owned subsidiary of the Company as part of the Reorganization. See
"History of the Company--Reorganization." The SCANA Note, which has a
principal balance of approximately $10.0 million, has a maturity date of March
31, 2002. Interest accrues on the SCANA Note at an annual rate of 11% and is
payable semiannually in arrears. Principal is payable semiannually, commencing
on September 30, 1997, in equal semiannual installments of $996,409. The SCANA
Note is unsecured.
 
CREDIT FACILITY
 
  The Company's wholly owned subsidiary, Interstate FiberNet, Inc. (the
"Borrower") has entered into a credit agreement with NationsBank, as
administrative lender, and the lenders set forth therein (the "Credit
Agreement"). The Credit Agreement provides for a $100 million credit facility
to be used for working capital and other purposes, including refinancing
indebtedness of the Borrower existing at the closing of the Credit Facility,
capital expenditures and permitted acquisitions. The Borrower's obligations
under the Credit Facility are guaranteed by the Company and the Borrower's
subsidiaries and are secured by a first priority lien on all current and
future assets and properties of the Borrower and its subsidiaries, except for
certain contract rights and interests in real estate, and a first priority
pledge of the stock of the Borrower and its subsidiaries. The following
summary of the material provisions of the Credit Agreement is subject to, and
is qualified in its entirety by reference to, the Credit Agreement, a copy of
which has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. Certain capitalized terms used in this description of
the Credit Facility are defined at the end of this section.
 
  The Credit Facility will mature on September 15, 2002. The Credit Facility
includes a $50 million multi-draw term loan facility and a $50 million
revolving credit facility. The Borrower may draw down amounts under the term
loan facility until the second anniversary of the Credit Facility. The
aggregate amount of all advances under the term loan facility must equal $50
million before drawing down any amount over $10 million under the revolving
credit facility.
 
  Amounts drawn under the Credit Facility will bear interest, at the
Borrower's option, at either the Base Rate or the LIBOR Rate, plus an
Applicable Margin. The Applicable Margin will be an annual rate which will
fluctuate based on the Borrower's Total Leverage Ratio and which will be
between 1.75% and .75% for Base Rate borrowings and between 2.75% and 1.75%
for LIBOR Rate borrowings. The Credit Agreement requires the Borrower to repay
indebtedness outstanding under the Credit Facility with the net cash proceeds
from sales of assets by the Company, the Borrower or the Borrower's
subsidiaries other than in the ordinary course of business and from certain
public or private issuances of equity or debt securities by the Company, the
Borrower or the Borrower's subsidiaries.
 
  The Credit Agreement contains negative covenants limiting the ability of the
Borrower, the Borrower's current and future subsidiaries and the Company to
incur debt, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, change their business,
issue capital stock, engage in transactions with affiliates, sell assets,
engage in mergers and acquisitions and assume or make guaranties. In addition,
the Credit Agreement contains affirmative covenants, including covenants
requiring compliance with laws, maintenance of corporate existence, licenses,
properties and insurance, payment of taxes and performance of other material
obligations and the delivery of financial and other information.
 
  The Credit Agreement restricts the Borrower from declaring and paying
dividends or distributions. However, the Borrower is permitted to pay
dividends to the Company to pay scheduled interest on the Senior Notes and the
Exchange Notes, commencing after the sixth scheduled interest payment, unless
at the time of such dividend or distribution an event of default (other than
an event of default resulting solely from the breach
 
                                      83
<PAGE>
 
of a representation or warranty) under the Credit Agreement exists or would be
caused by such dividend or distribution; provided that, with respect to any
event of default (other than a payment default, a bankruptcy event with
respect to the Company, the Borrower, the Borrower's subsidiaries, any person
or entity liable for the performance of any of the obligations pursuant to the
Credit Agreement or any person or entity the property of which secures the
performance of any of the obligations pursuant to the Credit Agreement, or the
loss of a material license or fiber network), the Borrower will not be
prohibited from paying dividends to the Company to pay scheduled cash interest
due and payable on the Senior Notes and the Exchange Notes for more than 180
days.
 
  The Credit Agreement also requires the Borrower to comply with certain
financial tests and to maintain certain financial ratios on a consolidated
basis. The Borrower must maintain (i) a Total Leverage Ratio no greater than
9.5:1.0 initially, with subsequent reductions; (ii) a Senior Leverage Ratio no
greater than 2.75:1.0 through June 30, 1999 and 2.25:1.0 thereafter; (iii) an
Interest Coverage Ratio no less than 3.75:1.0 through June 30, 2000 and
1.75:1.0 thereafter; (iv) capital expenditures no greater than $57,650,600
initially, with subsequent reductions; provided, that (A) to the extent that
less than such amount is used for any fiscal year, the limitation on capital
expenditures for the immediately succeeding fiscal year may be increased by
the amount of such unused amount, (B) during 1997 the Borrower may elect to
reduce its 1998 limitation by $8 million and increase its 1997 limitation by
$8 million, and (C) the amount of net cash proceeds from certain issuances of
equity securities may be used for capital expenditures in excess of the
foregoing limitations; and (v) a minimum Operating Cash Flow of no less than
$16,700,000 initially, with subsequent increases.
 
  Failure to satisfy any of the financial covenants constitutes an event of
default under the Credit Facility, notwithstanding the ability of the Borrower
to meet its debt service obligations. The Credit Agreement also includes other
customary events of default, including, without limitation, a cross-default to
other indebtedness, material undischarged judgments, bankruptcy and a change
of control.
 
  As used in this section:
 
  "Annualized Operating Cash Flow" means Operating Cash Flow for the six-month
period most recently ended multiplied by two.
 
  "Base Rate" means an annual interest rate equal to the lesser of (a) the
Highest Lawful Rate, and (b) the sum of the Applicable Margin plus the higher
of (i) a fluctuating annual rate as shall be in effect from time to time and
announced or published by NationsBank as its prime rate, and which may not
necessarily be the lowest interest rate charged by NationsBank and (ii) the
Federal Funds Rate in effect at such time plus 0.50%.
 
  "Highest Lawful Rate" means at the particular time in question the maximum
rate of interest which, under applicable law, any of the lenders under the
Credit Agreement is then permitted to charge on the obligations pursuant to
the Credit Agreement.
 
  "Interest Coverage Ratio" means, for the Borrower on a consolidated basis
for any period, the ratio of Annualized Operating Cash Flow to the aggregate
amount of interest due and payable by the Company, the Borrower and the
Borrower's subsidiaries with respect to Total Debt during such period net of
interest on the Senior Notes and the Exchange Notes funded by Pledged
Securities, interest income for such period, interest actually paid-in-kind,
any one-time facility fees paid in connection with the Credit Facility and in
connection with any pre-existing debt of the Company, the Borrower or the
Borrower's subsidiaries, and up to $9.5 million of accrued interest paid by
the Borrower to ITC Holding prior to the closing of the Credit Facility.
 
  "LIBOR Rate" means an annual interest rate equal to the lesser of (a) the
Highest Lawful Rate and (b) the sum of (i) the Applicable Margin, plus (ii)
the annual rate (rounded upwards, if necessary, to the nearest 1/100th of one
percent) appearing on Telerate Page 3750 (or any successor page) as the London
interbank offered rate for deposits in U.S. dollars at approximately 11:00
a.m. (London time) two business days prior to the first day of the applicable
interest period. If for any reason such rate is not available, the term "LIBOR
Rate" means the
 
                                      84
<PAGE>
 
annual interest rate (rounded upwards, if necessary, to the nearest 1/100th of
one percent) appearing on Reuters Screen LIBO page as the London interbank
offered rate for deposits in U.S. dollars at approximately 11:00 a.m. (London
time) two business days prior to the first day of the applicable interest
period for a term comparable to such interest period; provided, however, if
more than one rate is specified on Reuters Screen LIBO Page, the applicable
rate shall be the arithmetic mean of all such rates.
 
  "Operating Cash Flow" for any period means the consolidated net income
(loss) of the Company, the Borrower and the Borrower's subsidiaries for such
period plus the following amounts for such period, to the extent included in
the determination of such income (loss): depreciation expense, amortization
expense and other non-cash charges reducing income, net interest expense, and
income tax expense.
 
  "Senior Leverage Ratio" means, for the Borrower on a consolidated basis at
any date, the ratio of Senior Debt (Total Debt minus the Senior Notes and the
Exchange Notes) to Annualized Operating Cash Flow.
 
  "Total Debt" means the aggregate indebtedness of the Borrower for borrowed
money on a consolidated basis, net of cash balances in excess of $5 million
plus, except for purposes of calculating the Senior Leverage Ratio, the
balance of Pledged Securities securing the Senior Notes and the Exchange
Notes.
 
  "Total Leverage Ratio" means at any date, for the Borrower on a consolidated
basis, the ratio of Total Debt on such date to Annualized Operating Cash Flow.
 
                                      85
<PAGE>
 
                       DESCRIPTION OF THE EXCHANGE NOTES
 
  The Senior Notes were, and the Exchange Notes will be, issued under the
Indenture, dated as of June 3, 1997, between the Company and United States
Trust Company of New York, trustee under the Indenture (the "Trustee"). A copy
of the Indenture is filed as an exhibit to the Registration Statement (of
which this Prospectus is a part). The following summary contains a description
of certain provisions of the Indenture, but is subject to, and is qualified in
its entirety by reference to, all of the provisions of the Indenture,
including the definitions of certain terms therein and those terms made a part
thereof by the Trust Indenture Act of 1939, as amended. For definitions of
certain capitalized terms used in the following summary, see "--Certain
Definitions."
 
GENERAL
 
  The terms of the Exchange Notes will be identical in all material respects
to the Senior Notes, except that (i) the Exchange Notes will have been
registered under the Securities Act and therefore will not be subject to
certain restrictions on transfer applicable to the Senior Notes and (ii)
Holders of the Exchange Notes will not be entitled to certain rights of
Holders of Senior Notes under the Registration Rights Agreement.
 
  The Exchange Notes will be unsecured (except to the extent described under
"--Security" below) unsubordinated obligations of the Company, initially
limited to $200,000,000 aggregate principal amount, and will mature on June 1,
2007. Each Exchange Note will bear interest at the rate of 11% per annum from
the Closing Date or from the most recent Interest Payment Date to which
interest has been paid or provided for, payable semiannually (to Holders of
record at the close of business on the May 15 or November 15 immediately
preceding the Interest Payment Date) on June 1 and December 1, of each year,
commencing December 1, 1997.
 
  Principal of, premium, if any, and interest on the Exchange Notes will be
payable, and the Exchange Notes may be exchanged or transferred, at the office
or agency of the Company in the Borough of Manhattan, The City of New York
(which initially will be the corporate trust office of the Trustee at 114 West
47th Street, New York, New York 10036-1532); provided that, at the option of
the Company, payment of interest may be made by check mailed to the Holders at
their addresses as they appear in the Security Register.
 
  The Exchange Notes will be issued only in fully registered form, without
coupons, in denominations of $1,000 of principal amount and any integral
multiple thereof. See "--Book-Entry; Delivery and Form." No service charge
will be made for any registration of transfer or exchange of Exchange Notes,
but the Company may require payment of a sum sufficient to cover any transfer
tax or other similar governmental charge payable in connection therewith.
 
  Subject to the covenants described below under "Covenants" and applicable
law, the Company may issue additional Notes under the Indenture. The Exchange
Notes offered hereby and any additional Notes subsequently issued would be
treated as a single class for all purposes under the Indenture.
 
OPTIONAL REDEMPTION
 
  The Exchange Notes will be redeemable, at the Company's option, in whole or
in part, at any time or from time to time, on or after June 1, 2002 and prior
to maturity, upon not less than 30 nor more than 60 days' prior notice mailed
by first class mail to each Holder's last address, as it appears in the
Security Register, at the following Redemption Prices (expressed in
percentages of principal amount), plus accrued and unpaid interest to the
Redemption Date (subject to the right of Holders of record on the relevant
Regular Record Date that is prior to the Redemption Date to receive interest
due on an Interest Payment Date), if redeemed during the 12-month period
commencing June 1, of the years set forth below:
 
<TABLE>
<CAPTION>
      YEAR                                                      REDEMPTION PRICE
      ----                                                      ----------------
      <S>                                                       <C>
      2002.....................................................     105.500%
      2003.....................................................     102.750
      2004 and thereafter......................................     100.000
</TABLE>
 
                                      86
<PAGE>
 
  In addition, at any time prior to June 1, 2000, the Company may redeem up to
35% of the principal amount of the Senior Notes and the Exchange Notes with
the proceeds of one or more Public Equity Offerings following which a Public
Market occurs, at any time or from time to time in part, at a Redemption Price
(expressed as a percentage of principal amount) of 111%, plus accrued and
unpaid interest to the Redemption Date (subject to the rights of Holders of
record on the relevant Regular Record Date that is prior to the Redemption
Date to receive interest due on an Interest Payment Date); provided that at
least $130.0 million aggregate principal amount of Senior Notes and the
Exchange Notes remains outstanding after each such redemption.
 
  If less than all of the Notes are to be redeemed at any time, the Trustee
will select the Notes, or portions thereof, for redemption in compliance with
the requirements of the principal national securities exchange, if any, on
which the Notes are listed or, if the Notes are not listed on a national
securities exchange, on a pro rata basis, by lot or by such other method as
the Trustee in its sole discretion shall deem to be fair and appropriate;
provided that no Note of $1,000 in principal amount or less shall be redeemed
in part. If any Note is to be redeemed in part only, the notice of redemption
relating to such Note shall state the portion of the principal amount thereof
to be redeemed. A new Note in principal amount equal to the unredeemed portion
thereof will be issued in the name of the Holder thereof upon cancellation of
the original Note.
 
SECURITY
 
  The Indenture requires that a portion of the proceeds from the Offering
remain subject to the Pledge Agreement and be invested in Pledged Securities
in such amounts and maturities as will be sufficient upon receipt of scheduled
interest and principal payments of such securities, in the opinion of a
nationally recognized firm of independent public accountants selected by the
Company, to provide for payment in full of the first six scheduled interest
payments due on the Senior Notes and the Exchange Notes. Approximately $62.7
million of such proceeds are held by the Trustee as security for and to fund
the first six interest payments on the Senior Notes and the Exchange Notes.
 
  The Pledged Securities are pledged to the Trustee for the benefit of the
Holders of the Senior Notes and the Exchange Notes pursuant to the Pledge
Agreement and are being held by the Trustee in the Pledge Account. Pursuant to
the Pledge Agreement, immediately prior to an Interest Payment Date, the
Company may either deposit with the Trustee from funds otherwise available to
the Company cash sufficient to pay the interest scheduled to be paid on such
date or the Company may direct the Trustee to release from the Pledge Account
proceeds sufficient to pay interest then due on the Senior Notes and the
Exchange Notes. A failure to pay interest on the Senior Notes or the Exchange
Notes in a timely manner through the first six scheduled interest payment
dates will constitute an immediate Event of Default under the Indenture, with
no grace or cure period. The Pledged Securities and Pledge Account will also
secure the repayment of the principal amount and premium on the Senior Notes
and the Exchange Notes.
 
  Under the Pledge Agreement, once the Company makes the first six scheduled
interest payments on the Exchange Notes, all of the remaining Pledged
Securities, if any, will be released from the Pledge Account and thereafter
the Exchange Notes will be unsecured.
 
EXCHANGE OFFER; REGISTRATION RIGHTS
 
  The Company entered into the Registration Rights Agreement with the
Placement Agents, for the benefit of the holders of Senior Notes, pursuant to
which the Company agreed to file the Registration Statement (of which this
Prospectus is a part) with the Commission. The Registration Rights Agreement
provides that the Company will, at its cost, use its best efforts to cause the
Registration Statement to be filed with the SEC not later than 60 days after
the Closing Date (as defined in the Purchase Agreement attached as an exhibit
to the Registration Statement of which this Prospectus is a part) and declared
effective under the Securities Act. Upon the effectiveness of the Registration
Statement, the Company will offer the Exchange Notes in exchange for surrender
of the Senior Notes. The Company has agreed to keep the Exchange Offer open
for not less than 20 days after the date notice of the Exchange Offer is
mailed to the holders of Senior Notes. For each Senior Note
 
                                      87
<PAGE>
 
surrendered to the Company pursuant to the Exchange Offer, the holder of such
Senior Note will receive an Exchange Note having a principal amount equal to
that of the surrendered Senior Note. Under existing Commission
interpretations, the Exchange Notes would be freely transferable by holders
other than affiliates of the Company after the Exchange Offer without further
registration under the Securities Act if the holder of the Exchange Notes
represents that it is acquiring the Exchange Notes in the ordinary course of
its business, that it has no arrangement or understanding with any person to
participate in the distribution of the Exchange Notes and that it is not an
affiliate of the Company, as such terms are interpreted by the Commission;
provided that broker-dealers ("Participating Broker-Dealers") receiving
Exchange Notes in the Exchange Offer will have a prospectus delivery
requirement with respect to resales of such Exchange Notes. The Commission has
taken the position that Participating Broker-Dealers may fulfill their
prospectus delivery requirements with respect to Exchange Notes with the
prospectus contained in the Registration Statement under certain
circumstances. Under the Registration Rights Agreement, the Company is
required to allow Participating Broker-Dealers and other persons, if any, with
similar prospectus delivery requirements to use this Prospectus in connection
with the resale of such Exchange Notes.
 
  A holder of Senior Notes who wishes to exchange such Senior Notes for
Exchange Notes in the Exchange Offer will be required to represent that, among
other things, any Exchange Notes to be received by it will be acquired in the
ordinary course of its business and that at the time of the commencement of
the Exchange Offer it has no arrangement or understanding with any person to
participate in a distribution (within the meaning of the Securities Act) of
the Exchange Notes and that it is not an "affiliate" of the Company, as
defined in Rule 405 of the Securities Act, or if it is an affiliate, that it
will comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable.
 
  The Company has filed the Registration Statement (of which this Prospectus
is a part) and will commence the Exchange Offer pursuant to the Registration
Rights Agreement. In the event that applicable interpretations of the staff of
the Commission do not permit the Company to effect the Exchange Offer, or
under certain other circumstances, the Company has agreed, at its cost, to use
its best efforts to file and cause to become effective a shelf registration
statement (the "Shelf Registration Statement") with respect to resales of the
Senior Notes and to keep the Shelf Registration Statement effective until the
expiration of the time period referred to in Rule 144(k) under the Securities
Act or such shorter period that will terminate when all Senior Notes covered
by the Shelf Registration Statement have been sold pursuant to the Shelf
Registration Statement. The Company has agreed, in the event a Shelf
Registration Statement is filed, among other things, to provide to each holder
for whom such Shelf Registration Statement was filed copies of the prospectus
which is a part of the Shelf Registration Statement, to notify each such
holder when the Shelf Registration Statement has become effective and to take
certain other actions as are required to permit unrestricted resales of the
Senior Notes. A holder selling such Senior Notes pursuant to the Shelf
Registration Statement generally would be required to be named as a selling
security holder in the related prospectus and to deliver a prospectus to
purchasers, will be subject to certain of the civil liability provisions under
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such
holder (including certain indemnification obligations).
 
  In the event the Exchange Offer is not consummated and a Shelf Registration
Statement is not declared effective on or prior to the date that is six months
after the Closing Date, the interest rate on the Senior Notes will be
increased by .5% per annum until the Exchange Offer is consummated or the
Shelf Registration is declared effective.
 
  Senior Notes not tendered in the Exchange Offer shall accrue interest at the
rate of 11% per annum and be subject to all of the terms and conditions
specified in the Indenture and to the transfer restrictions described in
"Transfer Restrictions."
 
  This summary of certain provisions of the Registration Rights Agreement does
not purport to be complete and is subject to, and is qualified in its entirety
by reference to, all the provisions of the Registration Rights
 
                                      88
<PAGE>
 
Agreement, a copy of which has been filed as an exhibit to the Registration
Statement of which this Prospectus is a part.
 
RANKING
 
  The Indebtedness evidenced by the Exchange Notes will rank pari passu in
right of payment with the Senior Notes and all other existing and future
unsubordinated indebtedness of the Company and senior in right of payment to
all existing and future subordinated indebtedness of the Company. After giving
pro forma effect to the Reorganization, as of June 30, 1997, the Company would
have had no indebtedness outstanding other than the Senior Notes and the
Exchange Notes. The Company is permitted to incur additional indebtedness to
finance the acquisition of equipment, inventory and network assets and up to
$100 million of other indebtedness and is permitted to secure any such
indebtedness. The Exchange Notes will be effectively subordinated to such
security interests to the extent of such security interests.
 
  The Company is a holding company which conducts substantially all of its
business through subsidiaries. The Company's subsidiaries will have no direct
obligation to pay amounts due on the Senior Notes and the Exchange Notes and
will not guarantee the Senior Notes and the Exchange Notes. As a result, the
Senior Notes and, the Exchange Notes will be, effectively subordinated to all
existing and future indebtedness and other liabilities (including trade
payables) of the Company's subsidiaries. After giving pro forma effect to the
Reorganization, as of June 30, 1997, the Company's subsidiaries would have had
approximately $37.7 million of liabilities (excluding intercompany payables),
including approximately $14.4 million of indebtedness (including capital
leases). The Company will be dependent upon access to the cash flow or assets
of its subsidiaries to make payments on the Exchange Notes and the Company's
ability to obtain such access may be limited by law. See "Risk Factors--
Holding Company Structure; Priority of Secured Debt."
 
CERTAIN DEFINITIONS
 
  Set forth below is a summary of certain of the defined terms used in the
covenants and other provisions of the Indenture. Reference is made to the
Indenture for the definition of any other capitalized term used herein for
which no definition is provided.
 
  "Acquired Assets" means (i) the Capital Stock of any Person that becomes a
Restricted Subsidiary after the Closing Date and (ii) the real or personal
property of any Person that becomes a Restricted Subsidiary after the Closing
Date.
 
  "Acquired Indebtedness" means Indebtedness of a Person existing at the time
such Person becomes a Restricted Subsidiary or assumed in connection with an
Asset Acquisition by a Restricted Subsidiary; provided that Indebtedness of
such Person which is redeemed, defeased, retired or otherwise repaid at the
time of or immediately upon consummation of the transactions by which such
Person becomes a Restricted Subsidiary or such Asset Acquisition (including
any Indebtedness of any Reorganization Subsidiary to be repaid with the
proceeds from the sale of the Notes upon consummation of the Reorganization)
shall not be Acquired Indebtedness.
 
  "Adjusted Consolidated Net Income" means, for any period, the aggregate net
income (or loss) of the Company and its Restricted Subsidiaries for such
period determined in conformity with GAAP; provided that the following items
shall be excluded in computing Adjusted Consolidated Net Income (without
duplication): (i) the net income (or loss) of any Person (other than a
Restricted Subsidiary) in which any Person (other than the Company or any of
its Restricted Subsidiaries) has a joint interest and the net income (or loss)
of any Unrestricted Subsidiary, except (x) with respect to net income, to the
extent of the amount of dividends or other distributions actually paid to the
Company or any of its Restricted Subsidiaries by such other Person or such
Unrestricted Subsidiary during such period and (y) with respect to net losses,
to the extent of the amount of cash contributed by the Company or any
Restricted Subsidiary to such Person during such period; (ii) solely for the
purposes of calculating the amount of Restricted Payments that may be made
pursuant to clause (C) of the first
 
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<PAGE>
 
paragraph of the "Limitation on Restricted Payments" covenant described below
(and in such case, except to the extent includable pursuant to clause (i)
above), the net income (or loss) of any Person accrued prior to the date it
becomes a Restricted Subsidiary or is merged into or consolidated with the
Company or any of its Restricted Subsidiaries or all or substantially all of
the property and assets of such Person are acquired by the Company or any of
its Restricted Subsidiaries; (iii) the net income of any Restricted Subsidiary
to the extent that the declaration or payment of dividends or similar
distributions by such Restricted Subsidiary of such net income is not at the
time permitted by the operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to such Restricted Subsidiary; (iv) any gains or losses (on an
after-tax basis) attributable to Asset Sales; (v) except for purposes of
calculating the amount of Restricted Payments that may be made pursuant to
clause (C) of the first paragraph of the "Limitation on Restricted Payments"
covenant described below, any amount paid or accrued as dividends on Preferred
Stock (other than accrued dividends which, pursuant to the terms of the
Preferred Stock, will not be payable prior to the first anniversary after the
Stated Maturity of the Notes) of the Company or any Restricted Subsidiary
owned by Persons other than the Company and any of its Restricted
Subsidiaries; and (vi) all extraordinary gains and extraordinary losses.
 
  "Adjusted Consolidated Net Tangible Assets" means the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), except to the extent resulting
from write-ups of capital assets (excluding write-ups in connection with
accounting for acquisitions in conformity with GAAP), after deducting
therefrom (i) all current liabilities of the Company and its Restricted
Subsidiaries (excluding intercompany items) and (ii) all goodwill, trade
names, trademarks, patents, unamortized debt discount and expense and other
like intangibles, all as set forth on the most recent quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries,
prepared in conformity with GAAP and filed with the Commission or provided to
the Trustee pursuant to the "Commission Reports and Reports to Holders"
covenant described below.
 
  "Affiliate" means, as applied to any Person, any other Person directly or
indirectly controlling, controlled by, or under direct or indirect common
control with, such Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with"), as applied to any Person, means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities, by contract or otherwise.
 
  "Asset Acquisition" means (i) an investment by the Company or any of its
Restricted Subsidiaries in any other Person pursuant to which such Person
shall become a Restricted Subsidiary or shall be merged into or consolidated
with the Company or any of its Restricted Subsidiaries; provided that such
Person's primary business is related, ancillary or complementary to the
businesses of the Company and its Restricted Subsidiaries on the date of such
investment or (ii) an acquisition by the Company or any of its Restricted
Subsidiaries of the property and assets of any Person other than the Company
or any of its Restricted Subsidiaries that constitute substantially all of a
division or line of business of such Person; provided that the property and
assets acquired are related, ancillary or complementary to the businesses of
the Company and its Restricted Subsidiaries on the date of such acquisition.
 
  "Asset Disposition" means the sale or other disposition by the Company or
any of its Restricted Subsidiaries (other than to the Company or another
Restricted Subsidiary) of (i) all or substantially all of the Capital Stock of
any Restricted Subsidiary or (ii) all or substantially all of the assets that
constitute a division or line of business of the Company or any of its
Restricted Subsidiaries.
 
  "Asset Sale" means any sale, transfer or other disposition (including by way
of merger, consolidation or sale-leaseback transaction) in one transaction or
a series of related transactions by the Company or any of its Restricted
Subsidiaries to any Person other than the Company or any of its Restricted
Subsidiaries of (i) all or any of the Capital Stock of any Restricted
Subsidiary, (ii) all or substantially all of the property and assets of an
operating unit or business of the Company or any of its Restricted
Subsidiaries or (iii) any other property and
 
                                      90
<PAGE>
 
assets (other than the Capital Stock or other Investment in an Unrestricted
Subsidiary) of the Company or any of its Restricted Subsidiaries outside the
ordinary course of business of the Company or such Restricted Subsidiary and,
in each case, that is not governed by the provisions of the Indenture
applicable to mergers, consolidations and sales of all or substantially all of
the assets of the Company; provided that "Asset Sale" shall not include (a)
sales, transfers or other dispositions of inventory, receivables and other
current assets, (b) sales, transfers or other dispositions of assets with a
fair market value (as certified in an Officers' Certificate) not in excess of
$500,000 in any transaction or series of related transactions or (c) sales,
transfers or other dispositions of assets for consideration at least equal to
the fair market value of the assets sold, transferred or otherwise disposed of
to the extent the consideration received would satisfy clause (B) of the
"Limitation on Assets Sales" covenant described below, provided that after
giving pro forma effect to such exchange, the Consolidated Leverage Ratio
shall be no greater than the Consolidated Leverage Ratio immediately prior to
such exchange.
 
  "Average Life" means, at any date of determination with respect to any debt
security, the quotient obtained by dividing (i) the sum of the products of (a)
the number of years from such date of determination to the dates of each
successive scheduled principal payment of such debt security and (b) the
amount of such principal payment by (ii) the sum of all such principal
payments.
 
  "Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) in equity of such Person, whether outstanding on the
Closing Date or issued thereafter, including, without limitation, all Common
Stock and Preferred Stock.
 
  "Capitalized Lease" means, as applied to any Person, any lease of any
property (whether real, personal or mixed) of which the discounted present
value of the rental obligations of such Person as lessee, in conformity with
GAAP, is required to be capitalized on the balance sheet of such Person.
 
  "Capitalized Lease Obligations" means the discounted present value of the
rental obligations under a Capitalized Lease.
 
  "Change of Control" means such time as (i) (a) prior to the occurrence of a
Public Market, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) becomes the ultimate "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act) of Voting Stock representing a
greater percentage of the total voting power of the Voting Stock of the
Company, on a fully diluted basis, than is held by the Existing Stockholders
on such date and (b) after the occurrence of a Public Market, a "person" or
"group" (within the meaning of Sections 13(d) and 14(d)(2) of the Exchange
Act) becomes the ultimate "beneficial owner" (as defined in Rule 13d-3 under
the Exchange Act) of more than 35% of the total voting power of the Voting
Stock of the Company on a fully diluted basis and such ownership represents a
greater percentage of the total voting power of the Voting Stock of the
Company, on a fully diluted basis, than is held by the Existing Stockholders
on such date; or (ii) individuals who on the Closing Date constitute the Board
of Directors (together with any new directors whose election by the Board of
Directors or whose nomination by the Board of Directors for election by the
Company's stockholders was approved by a vote of at least two-thirds of the
members of the Board of Directors then in office who either were members of
the Board of Directors on the Closing Date or whose election or nomination for
election was previously so approved) cease for any reason to constitute a
majority of the members of the Board of Directors then in office.
 
  "Closing Date" means the date on which the Notes are originally issued under
the Indenture.
 
  "Common Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's equity, other than Preferred Stock of
such Person, whether outstanding on the Closing Date or issued thereafter,
including, without limitation, all series and classes of such common stock.
 
  "Consolidated EBITDA" means, for any period, the sum of the amounts for such
period of (i) Adjusted Consolidated Net Income, (ii) Consolidated Interest
Expense to the extent such amount was deducted in
 
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<PAGE>
 
calculating Adjusted Consolidated Net Income, (iii) income taxes, to the
extent such amount was deducted in calculating Adjusted Consolidated Net
Income (other than income taxes (either positive or negative) attributable to
extraordinary and non-recurring gains or losses or sales of assets), (iv)
depreciation expense, to the extent such amount was deducted in calculating
Adjusted Consolidated Net Income, (v) amortization expense, to the extent such
amount was deducted in calculating Adjusted Consolidated Net Income, and (vi)
all other non-cash items reducing Adjusted Consolidated Net Income (other than
items that will require cash payments and for which an accrual or reserve is,
or is required by GAAP to be, made), less all non-cash items increasing
Adjusted Consolidated Net Income, all as determined on a consolidated basis
for the Company and its Restricted Subsidiaries in conformity with GAAP;
provided that, if any Restricted Subsidiary is not a Wholly Owned Restricted
Subsidiary, Consolidated EBITDA shall be reduced (to the extent not otherwise
reduced in accordance with GAAP) by an amount equal to (A) the amount of the
Adjusted Consolidated Net Income attributable to such Restricted Subsidiary
multiplied by (B) the quotient of (1) the number of shares of outstanding
Common Stock of such Restricted Subsidiary not owned on the last day of such
period by the Company or any of its Restricted Subsidiaries divided by (2) the
total number of shares of outstanding Common Stock of such Restricted
Subsidiary on the last day of such period.
 
  "Consolidated Interest Expense" means, for any period, the aggregate amount
of interest in respect of Indebtedness (including, without limitation,
amortization of original issue discount on any Indebtedness and the interest
portion of any deferred payment obligation, calculated in accordance with the
effective interest method of accounting; all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers'
acceptance financing; the net costs associated with Interest Rate Agreements;
and Indebtedness that is Guaranteed or secured by the Company or any of its
Restricted Subsidiaries) and all but the principal component of rentals in
respect of Capitalized Lease Obligations paid, accrued or scheduled to be paid
or to be accrued by the Company and its Restricted Subsidiaries during such
period; excluding, however, (i) any amount of such interest of any Restricted
Subsidiary if the net income of such Restricted Subsidiary is excluded in the
calculation of Adjusted Consolidated Net Income pursuant to clause (iii) of
the definition thereof (but only in the same proportion as the net income of
such Restricted Subsidiary is excluded from the calculation of Adjusted
Consolidated Net Income pursuant to clause (iii) of the definition thereof)
and (ii) any premiums, fees and expenses (and any amortization thereof)
payable in connection with the offering of the Notes and the Reorganization,
all as determined on a consolidated basis (without taking into account
Unrestricted Subsidiaries) in conformity with GAAP.
 
  "Consolidated Leverage Ratio" means, on any Transaction Date, the ratio of
(i) the aggregate amount of Indebtedness of the Company and its Restricted
Subsidiaries on a consolidated basis outstanding on such Transaction Date to
(ii) the aggregate amount of Consolidated EBITDA for the then most recent four
fiscal quarters for which financial statements of the Company have been filed
with the Commission or provided to the Trustee pursuant to the "Commission
Reports and Reports to Holders" covenant described below (such four fiscal
quarter period being the "Four Quarter Period"); provided that, in making the
foregoing calculation, (A) pro forma effect shall be given to any Indebtedness
to be Incurred or repaid on the Transaction Date; (B) pro forma effect shall
be given to Asset Dispositions and Asset Acquisitions (including giving pro
forma effect to the application of proceeds of any Asset Disposition) that
occur from the beginning of the Four Quarter Period through the Transaction
Date (the "Reference Period"), as if they had occurred and such proceeds had
been applied on the first day of such Reference Period; (C) pro forma effect
shall be given to asset dispositions and asset acquisitions (including giving
pro forma effect to the application of proceeds of any asset disposition) that
have been made by any Person that has become a Restricted Subsidiary or has
been merged with or into the Company or any Restricted Subsidiary during such
Reference Period and that would have constituted Asset Dispositions or Asset
Acquisitions had such transactions occurred when such Person was a Restricted
Subsidiary as if such asset dispositions or asset acquisitions were Asset
Dispositions or Asset Acquisitions that occurred on the first day of such
Reference Period; provided that to the extent that clause (B) or (C) of this
sentence requires that pro forma effect be given to an Asset Acquisition or
Asset Disposition, such pro forma calculation shall be based upon the four
full fiscal quarters immediately preceding the Transaction Date of the Person,
or division or line of business of the Person, that is acquired or disposed of
for which
 
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<PAGE>
 
financial information is available; and (D) the aggregate amount of
Indebtedness outstanding as of the end of the Reference Period will be deemed
to include the total amount of funds outstanding and/or available on the
Transaction Date under any revolving credit or similar facilities of the
Company or its Restricted Subsidiaries.
 
  "Consolidated Net Worth" means, at any date of determination, stockholders'
equity as set forth on the most recently available quarterly or annual
consolidated balance sheet of the Company and its Restricted Subsidiaries
(which shall be as of a date not more than 90 days prior to the date of such
computation and which shall not take into account Unrestricted Subsidiaries),
less any amounts attributable to Redeemable Stock or any equity security
convertible into or exchangeable for Indebtedness, the cost of treasury stock
and the principal amount of any promissory notes receivable from the sale of
the Capital Stock of the Company or any of its Restricted Subsidiaries, each
item to be determined in conformity with GAAP (excluding the effects of
foreign currency exchange adjustments under Financial Accounting Standards
Board Statement of Financial Accounting Standards No. 52).
 
  "Credit Agreement" means the $100 million credit facility to be entered into
by the Company and its Restricted Subsidiaries and NationsBank of Texas, N.A.
pursuant to a commitment letter dated May 9, 1997.
 
  "Credit Facilities" means revolving credit or working capital facilities or
similar facilities made available from time to time to the Company and its
Restricted Subsidiaries.
 
  "Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement.
 
  "Default" means any event that is, or after notice or passage of time or
both would be, an Event of Default.
 
  "Existing Stockholders" means ITC Holding, Campbell B. Lanier, III and SCANA
Corporation and their Affiliates, and Campbell B. Lanier, III's spouse and any
one or more of his lineal descendants and their spouses; provided however,
that any such person other than Campbell B. Lanier, III shall only be deemed
to be an "Existing Stockholder" to the extent such person's Capital Stock of
the Company was received, directly or indirectly, from Campbell B. Lanier,
III.
 
  "fair market value" means the price that would be paid in an arm's-length
transaction between an informed and willing seller under no compulsion to sell
and an informed and willing buyer under no compulsion to buy, as determined in
good faith by the Board of Directors, whose determination shall be conclusive
if evidenced by a Board Resolution; provided that for purposes of clause
(viii) of the second paragraph of the "Limitation on Indebtedness" covenant,
(x) the fair market value of any security registered under the Exchange Act
shall be the average of the closing prices, regular way, of such security for
the 20 consecutive trading days immediately preceding the capital contribution
or sale of Capital Stock and (y) in the event the aggregate fair market value
of any other property (other than cash or cash equivalents) received by the
Company exceeds $10 million, the fair market value of such property shall be
determined by a nationally recognized investment banking firm and set forth in
their written opinion which shall be delivered to the Trustee.
 
  "GAAP" means generally accepted accounting principles in the United States
of America as in effect from time to time, including, without limitation,
those set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or
in such other statements by such other entity as approved by a significant
segment of the accounting profession. All ratios and computations contained or
referred to in the Indenture shall be computed in conformity with GAAP applied
on a consistent basis, except that computations made for purposes of
determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to (i) the
amortization of any expenses incurred in connection with the offering of the
Notes or the Reorganization and (ii) except as otherwise provided, the
amortization of any amounts required or permitted by Accounting Principles
Board Opinion Nos. 16 and 17.
 
 
                                      93
<PAGE>
 
  "Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any other Person and,
without limiting the generality of the foregoing, any obligation, direct or
indirect, contingent or otherwise, of such Person (i) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness of
such other Person (whether arising by virtue of partnership arrangements, or
by agreements to keep-well, to purchase assets, goods, securities or services
(unless such purchase arrangements are on arm's-length and are entered into in
the ordinary course of business), to take-or-pay, or to maintain financial
statement conditions or otherwise) or (ii) entered into for purposes of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole
or in part); provided that the term "Guarantee" shall not include endorsements
for collection or deposit in the ordinary course of business. The term
"Guarantee" used as a verb has a corresponding meaning.
 
  "Holder" means the registered holder of any Note.
 
  "Incur" means, with respect to any Indebtedness, to incur, create, issue,
assume, Guarantee or otherwise become liable for or with respect to, or become
responsible for, the payment of, contingently or otherwise, such Indebtedness,
including an Incurrence of Acquired Indebtedness; provided that neither the
accrual of interest nor the accretion of original issue discount shall be
considered an Incurrence of Indebtedness.
 
  "Indebtedness" means, with respect to any Person at any date of
determination (without duplication), (i) all indebtedness of such Person for
borrowed money, (ii) all obligations of such Person evidenced by bonds,
debentures, notes or other similar instruments, (iii) all obligations of such
Person in respect of letters of credit or other similar instruments (including
reimbursement obligations with respect thereto), (iv) all obligations of such
Person to pay the deferred and unpaid purchase price of property or services,
which purchase price is due more than six months after the date of placing
such property in service or taking delivery and title thereto or the
completion of such services, except Trade Payables, (v) all Capitalized Lease
Obligations of such Person, (vi) all Indebtedness of other Persons secured by
a Lien on any asset of such Person, whether or not such Indebtedness is
assumed by such Person; provided that the amount of such Indebtedness shall be
the lesser of (A) the fair market value of such asset at such date of
determination and (B) the amount of such Indebtedness, (vii) all Indebtedness
of other Persons Guaranteed by such Person to the extent such Indebtedness is
Guaranteed by such Person and (viii) to the extent not otherwise included in
this definition, obligations under Currency Agreements and Interest Rate
Agreements. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date (or, in the case of a revolving credit or
other similar facility, the total amount of funds outstanding and/or available
on the date of determination) of all unconditional obligations as described
above and, with respect to contingent obligations, the maximum liability upon
the occurrence of the contingency giving rise to the obligation, provided (A)
that the amount outstanding at any time of any Indebtedness issued with
original issue discount is the face amount of such Indebtedness less the
remaining unamortized portion of the original issue discount of such
Indebtedness at the time of its issuance as determined in conformity with
GAAP, (B) that money borrowed and set aside at the time of the Incurrence of
any Indebtedness in order to prefund the payment of the interest on such
Indebtedness shall not be deemed to be "Indebtedness" and (C) that
Indebtedness shall not include any liability for federal, state, local or
other taxes.
 
  "Interest Rate Agreement" means any interest rate protection agreement,
interest rate future agreement, interest rate option agreement, interest rate
swap agreement, interest rate cap agreement, interest rate collar agreement,
interest rate hedge agreement, option or future contract or other similar
agreement or arrangement.
 
  "Investment" in any Person means any direct or indirect advance, loan or
other extension of credit (including, without limitation, by way of Guarantee
or similar arrangement; but excluding advances to customers in the ordinary
course of business that are, in conformity with GAAP, recorded as accounts
receivable on the balance sheet of the Company or its Restricted Subsidiaries)
or capital contribution to (by means of any transfer of cash or other property
to others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, bonds, notes,
debentures or other similar instruments issued by, such Person and shall
include (i) the designation of a Restricted Subsidiary as an Unrestricted
Subsidiary and
 
                                      94
<PAGE>
 
(ii) the fair market value of the Capital Stock (or any other Investment),
held by the Company or any of its Restricted Subsidiaries, of (or in) any
Person that has ceased to be a Restricted Subsidiary, including, without
limitation, by reason of any transaction permitted by clause (iii) of the
"Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries" covenant described below. For purposes of the definition of
"Unrestricted Subsidiary" and the "Limitation on Restricted Payments" covenant
described below, (i) "Investment" shall include the fair market value of the
assets (net of liabilities (other than liabilities to the Company or any of
its Subsidiaries)) of any Restricted Subsidiary at the time that such
Restricted Subsidiary is designated an Unrestricted Subsidiary, (ii) the fair
market value of the assets (net of liabilities (other than liabilities to the
Company or any of its Subsidiaries)) of any Unrestricted Subsidiary at the
time that such Unrestricted Subsidiary is designated a Restricted Subsidiary
shall be considered a reduction in outstanding Investments and (iii) any
property transferred to or from any Person shall be valued at its fair market
value at the time of such transfer.
 
  "ITC Holding" means ITC Holding Company, Inc., a Delaware corporation.
 
  "Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof or any
agreement to give any security interest).
 
  "Net Cash Proceeds" means, (a) with respect to any Asset Sale, the proceeds
of such Asset Sale in the form of cash or cash equivalents, including payments
in respect of deferred payment obligations (to the extent corresponding to the
principal, but not interest, component thereof) when received in the form of
cash or cash equivalents (except to the extent such obligations are financed
or sold with recourse to the Company or any Restricted Subsidiary) and
proceeds from the conversion of other property received when converted to cash
or cash equivalents, net of (i) brokerage commissions and other fees and
expenses (including fees and expenses of counsel and investment bankers)
related to such Asset Sale, (ii) provisions for all taxes (whether or not such
taxes will actually be paid or are payable) as a result of such Asset Sale
without regard to the consolidated results of operations of the Company and
its Restricted Subsidiaries, taken as a whole, (iii) payments made to repay
Indebtedness or any other obligation outstanding at the time of such Asset
Sale that either (A) is secured by a Lien on the property or assets sold or
(B) is required to be paid as a result of such sale and (iv) appropriate
amounts to be provided by the Company or any Restricted Subsidiary as a
reserve against any liabilities associated with such Asset Sale, including,
without limitation, pension and other post-employment benefit liabilities,
liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as determined
in conformity with GAAP, and (b) with respect to any capital contribution or
issuance or sale of Capital Stock, options, warrants or other rights to
acquire Capital Stock or Indebtedness, the proceeds of such capital
contribution or issuance or sale in the form of cash or cash equivalents,
including payments in respect of deferred payment obligations (to the extent
corresponding to the principal, but not interest, component thereof) when
received in the form of cash or cash equivalents (except to the extent such
obligations are financed or sold with recourse to the Company or any
Restricted Subsidiary) and proceeds from the conversion of other property
received when converted to cash or cash equivalents, net of attorney's fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees incurred in connection
with such issuance or sale and net of taxes or payable as a result thereof.
 
  "Offer to Purchase" means an offer by the Company to purchase Notes from the
Holders commenced by mailing a notice to the Trustee and each Holder stating:
(i) the covenant pursuant to which the offer is being made and that all Notes
validly tendered will be accepted for payment on a pro rata basis; (ii) the
purchase price and the date of purchase (which shall be a Business Day no
earlier than 30 days nor later than 60 days from the date such notice is
mailed) (the "Payment Date"); (iii) that any Note not tendered will continue
to accrue interest pursuant to its terms; (iv) that, unless the Company
defaults in the payment of the purchase price, any Note accepted for payment
pursuant to the Offer to Purchase shall cease to accrue interest on and after
the Payment Date; (v) that Holders electing to have a Note purchased pursuant
to the Offer to Purchase will be required to surrender the Note, together with
the form entitled "Option of the Holder to Elect Purchase" on the reverse side
of the Note completed, to the Paying Agent at the address specified in the
notice prior to the close of business on
 
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<PAGE>
 
the Business Day immediately preceding the Payment Date; (vi) that Holders
will be entitled to withdraw their election if the Paying Agent receives, not
later than the close of business on the third Business Day immediately
preceding the Payment Date, a facsimile transmission or letter setting forth
the name of such Holder, the principal amount of Notes delivered for purchase
and a statement that such Holder is withdrawing his election to have such
Notes purchased; and (vii) that Holders whose Notes are being purchased only
in part will be issued new Notes equal in principal amount to the unpurchased
portion of the Notes surrendered; provided that each Note purchased and each
new Note issued shall be in a principal amount of $1,000 or integral multiples
thereof. On the Payment Date, the Company shall (i) accept for payment on a
pro rata basis Notes or portions thereof tendered pursuant to an Offer to
Purchase; (ii) deposit with the Paying Agent money sufficient to pay the
purchase price of all Notes or portions thereof so accepted; and (iii)
deliver, or cause to be delivered, to the Trustee all Notes or portions
thereof so accepted together with an Officers' Certificate specifying the
Notes or portions thereof accepted for payment by the Company. The Paying
Agent shall promptly mail to the Holders of Notes so accepted payment in an
amount equal to the purchase price, and the Trustee shall promptly
authenticate and mail to such Holders a new Note equal in principal amount to
any unpurchased portion of the Note surrendered; provided that each Note
purchased and each new Note issued shall be in a principal amount of $1,000 or
integral multiples thereof. The Company will publicly announce the results of
an Offer to Purchase as soon as practicable after the Payment Date. The
Trustee shall act as the Paying Agent for an Offer to Purchase. The Company
will comply with Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable, in the event that the Company is required to repurchase Notes
pursuant to an Offer to Purchase.
 
  "Permitted Investment" means (i) an Investment in the Company or a
Restricted Subsidiary or a Person which will, upon the making of such
Investment, become a Restricted Subsidiary or be merged or consolidated with
or into or transfer or convey all or substantially all its assets to, the
Company or a Restricted Subsidiary; provided that such Person's primary
business is related, ancillary or complementary to the businesses of the
Company and its Restricted Subsidiaries on the date of such Investment; (ii) a
Temporary Cash Investment; (iii) commission, payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses in accordance with GAAP; (iv) stock,
obligations or securities received in satisfaction of judgments; (v)
Investments in prepaid expenses, negotiable instruments held for collection,
and lease, utility and workers' compensation, performance and other similar
deposits; and (vi) Interest Rate Agreements and Currency Agreements to the
extent permitted under clause (iv) of the "Limitation on Indebtedness"
covenant described below.
 
  "Permitted Liens" means (i) Liens for taxes, assessments, governmental
charges or claims that are being contested in good faith by appropriate legal
proceedings promptly instituted and diligently conducted and for which a
reserve or other appropriate provisions, if any, as shall be required in
conformity with GAAP shall have been made; (ii) statutory and common law Liens
of landlords and carriers, warehousemen, mechanics, suppliers, materialmen,
repairmen or other similar Liens arising in the ordinary course of business
and with respect to amounts not yet delinquent or being contested in good
faith by appropriate legal proceedings promptly instituted and diligently
conducted and for which a reserve or other appropriate provision, if any, as
shall be required in conformity with GAAP shall have been made; (iii) Liens
incurred or deposits made in the ordinary course of business in connection
with workers' compensation, unemployment insurance and other types of social
security; (iv) Liens incurred or deposits made to secure the performance of
tenders, bids, leases, statutory or regulatory obligations, bankers'
acceptances, surety and appeal bonds, government contracts, performance and
return-of-money bonds and other obligations of a similar nature incurred in
the ordinary course of business (exclusive of obligations for the payment of
borrowed money); (v) easements, rights-of-way, municipal and zoning ordinances
and similar charges, encumbrances, title defects or other irregularities that
do not materially interfere with the ordinary course of business of the
Company or any of its Restricted Subsidiaries; (vi) Liens (including
extensions and renewals thereof) upon real or personal property (including,
without limitation, Acquired Assets) acquired after the Closing Date; provided
that (a) such Lien is created solely for the purpose of securing Indebtedness
Incurred, in accordance with the "Limitation on Indebtedness" covenant
described below, to finance the cost (including, without limitation, the cost
of design, development, construction, acquisition, installation,
 
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improvement, transportation or integration) of the real or personal property
subject thereto and such Lien is created prior to, at the time of or within
six months after the latest of the acquisition, the completion of construction
or the commencement of full operation of such real or personal property;
provided that in the case of Acquired Assets, the Lien secures the
Indebtedness Incurred to purchase the Capital Stock of the Person to make such
Person a Restricted Subsidiary, (b) the principal amount of the Indebtedness
secured by such Lien does not exceed 100% of such cost and (c) any such Lien
shall not extend to or cover any real or personal property other than such
real or personal property and any improvements on such real or personal
property and any proceeds thereof; (vii) leases or subleases granted to others
that do not materially interfere with the ordinary course of business of the
Company and its Restricted Subsidiaries, taken as a whole; (viii) Liens
encumbering property or assets under construction arising from progress or
partial payments by a customer of the Company or its Restricted Subsidiaries
relating to such property or assets; (ix) any interest or title of a lessor in
the property subject to any Capitalized Lease or operating lease; (x) Liens
arising from filing Uniform Commercial Code financing statements regarding
leases; (xi) Liens on property of, or on shares of Capital Stock or
Indebtedness of, any Person existing at the time such Person becomes, or
becomes a part of, any Restricted Subsidiary; provided that such Liens do not
extend to or cover any property or assets of the Company or any Restricted
Subsidiary other than the property or assets acquired and any proceeds
thereof; (xii) Liens in favor of the Company or any Restricted Subsidiary;
(xiii) Liens arising from the rendering of a final judgment or order against
the Company or any Restricted Subsidiary that does not give rise to an Event
of Default; (xiv) Liens securing reimbursement obligations with respect to
letters of credit that encumber documents and other property relating to such
letters of credit and the products and proceeds thereof; (xv) Liens in favor
of customs and revenue authorities arising as a matter of law to secure
payment of customs duties in connection with the importation of goods; (xvi)
Liens encumbering customary initial deposits and margin deposits, and other
Liens that are either within the general parameters customary in the industry
and incurred in the ordinary course of business, in each case securing
Indebtedness under Interest Rate Agreements and Currency Agreements and
forward contracts, options, future contracts, futures options or similar
agreements or arrangements designed solely to protect the Company or any of
its Restricted Subsidiaries from fluctuations in interest rates, currencies or
the price of commodities; (xvii) Liens arising out of conditional sale, title
retention, consignment or similar arrangements for the sale of goods entered
into by the Company or any of its Restricted Subsidiaries in the ordinary
course of business in accordance with the past practices of the Company and
its Restricted Subsidiaries prior to the Closing Date; (xviii) Liens on or
sales of receivables, including related intangible assets and proceeds
thereof; and (xix) Liens that secure Indebtedness with an aggregate principal
amount not to exceed $5 million at any time outstanding.
 
  "Pledge Account" means the accounts established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the net proceeds from the
sale of the Notes and the purchase of the Pledged Securities.
 
  "Pledge Agreement" means the Pledge and Security Agreement, dated as of the
Closing Date, made by the Company in favor of the Trustee, governing the
disbursement of funds from the Pledge Account, as such agreement may be
amended, restated, supplemented or otherwise modified from time to time.
 
  "Pledged Securities" means the U.S. Government Obligations (and, prior to
the Reorganization, commercial paper rated at least "Prime-1" (or the then
equivalent grade) by Moody's Investors Service, Inc. or "A-1" (or the then
equivalent grade) by Standards & Poor's Ratings Service) to be purchased and
held in the Pledge Account in accordance with the Pledge Agreement.
 
  "Preferred Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated, whether
voting or non-voting) of such Person's preferred or preference equity, whether
outstanding on the Closing Date or issued thereafter, including, without
limitation, all series and classes of such preferred or preference stock.
 
  "Public Equity Offering" means an underwritten primary public offering of
Common Stock of the Company pursuant to an effective registration statement
under the Securities Act.
 
 
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<PAGE>
 
  A "Public Market" shall be deemed to exist if (i) a Public Equity Offering
has been consummated and (ii) at least 15% of the total issued and outstanding
Common Stock of the Company has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
 
  "Redeemable Stock" means any class or series of Capital Stock of any Person
that by its terms or otherwise is (i) required to be redeemed prior to the
Stated Maturity of the Notes, (ii) redeemable at the option of the holder of
such class or series of Capital Stock at any time prior to the Stated Maturity
of the Notes or (iii) convertible into or exchangeable for Capital Stock
referred to in clause (i) or (ii) above or Indebtedness having a scheduled
maturity prior to the Stated Maturity of the Notes; provided that any Capital
Stock that would not constitute Redeemable Stock but for provisions thereof
giving holders thereof the right to require such Person to repurchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the Stated Maturity of the Notes shall not
constitute Redeemable Stock if the "asset sale" or "change of control"
provisions applicable to such Capital Stock are no more favorable in any
material respect to the holders of such Capital Stock than the provisions
contained in "Limitation on Asset Sales" and "Repurchase of Notes upon a
Change of Control" covenants described below are to the holders of the Notes
and such Capital Stock specifically provides that such Person will not
repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required to be repurchased pursuant
to the "Limitation on Asset Sales" and "Repurchase of Notes upon a Change of
Control" covenants described below.
 
  "Reorganization" means the transactions in which ITC Holding will contribute
to the Company its investments in the Reorganization Subsidiaries (or their
successors-in-interest), which will become Restricted Subsidiaries.
 
  "Reorganization Subsidiaries" means, collectively, (i) DeltaCom, Inc., an
Alabama corporation; (ii) Eastern Telecom, Inc., a Georgia corporation; (iii)
Gulf States Transmission Systems, Inc., a Delaware corporation; (iv) ITC
Transmission Systems, Inc., a Delaware corporation; (v) ITC Transmission
Systems II, Inc., a Delaware corporation; and (vi) Interstate FiberNet, a
Georgia general partnership.
 
  "Restricted Subsidiary" means any Subsidiary of the Company other than an
Unrestricted Subsidiary.
 
  "Significant Subsidiary" means, at any date of determination, any Restricted
Subsidiary that, together with its Subsidiaries, (i) for the most recent
fiscal year of the Company, accounted for more than 10% of the consolidated
revenues of the Company and its Restricted Subsidiaries or (ii) as of the end
of such fiscal year, was the owner of more than 10% of the consolidated assets
of the Company and its Restricted Subsidiaries, all as set forth on the most
recently available consolidated financial statements of the Company for such
fiscal year.
 
  "Stated Maturity" means (i) with respect to any debt security, the date
specified in such debt security as the fixed date on which the final
installment of principal of such debt security is due and payable and (ii)
with respect to any scheduled installment of principal of or interest on any
debt security, the date specified in such debt security as the fixed date on
which such installment is due and payable.
 
  "Strategic Subordinated Indebtedness" means Indebtedness of the Company
Incurred to finance the acquisition of a Person engaged in the
Telecommunications Business that by its terms, or by the terms of any
agreement or instrument pursuant to which such Indebtedness is Incurred, (i)
is expressly made subordinate in right of payment to the Notes and (ii)
provides that no payment of principal, premium or interest on, or any other
payment with respect to, such Indebtedness may be made prior to the payment in
full of all of the Company's obligations under the Notes; provided that such
Indebtedness may provide for and be repaid at any time from the proceeds of
the sale of Capital Stock (other than Redeemable Stock) of the Company after
the Incurrence of such Indebtedness.
 
  "Subsidiary" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the voting power of the
outstanding Voting Stock is owned, directly or indirectly, by such Person and
one or more other Subsidiaries of such Person.
 
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<PAGE>
 
  "Telecommunications Business" means the development, ownership or operation
of one or more telephone, telecommunications or information systems or the
provision of telephony, telecommunications or information services (including,
without limitation, any voice, video transmission, data or Internet services)
and any related, ancillary or complementary business.
 
  "Temporary Cash Investment" means any of the following: (i) direct
obligations of the United States of America or any agency thereof or
obligations fully and unconditionally guaranteed by the United States of
America or any agency thereof, (ii) time deposit accounts, certificates of
deposit and money market deposits maturing within one year of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50 million (or the foreign currency equivalent thereof) and has outstanding
debt which is rated "A" (or such similar equivalent rating) or higher by at
least one nationally recognized statistical rating organization (as defined in
Rule 436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor, (iii) repurchase
obligations with a term of not more than 30 days for underlying securities of
the types described in clause (i) above entered into with a bank meeting the
qualifications described in clause (ii) above, (iv) commercial paper, maturing
not more than one year after the date of acquisition, issued by a corporation
(other than an Affiliate of the Company) organized and in existence under the
laws of the United States of America, any state thereof or any foreign country
recognized by the United States of America with a rating at the time as of
which any investment therein is made of "P-1" (or higher) according to Moody's
Investors Service, Inc. or "A-1" (or higher) according to Standard & Poor's
Ratings Service, and (v) securities with maturities of six months or less from
the date of acquisition issued or fully and unconditionally guaranteed by any
state, commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A" by
Standard & Poor's Ratings Service or Moody's Investors Service, Inc.
 
  "Trade Payables" means, with respect to any Person, any accounts payable or
any other indebtedness or monetary obligation to trade creditors created,
assumed or Guaranteed by such Person or any of its Subsidiaries arising in the
ordinary course of business in connection with the acquisition of goods or
services.
 
  "Transaction Date" means, with respect to the Incurrence of any Indebtedness
by the Company or any of its Restricted Subsidiaries, the date such
Indebtedness is to be Incurred and, with respect to any Restricted Payment,
the date such Restricted Payment is to be made.
 
  "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any
Restricted Subsidiary (including any newly acquired or newly formed Subsidiary
of the Company) to be an Unrestricted Subsidiary unless such Subsidiary owns
any Capital Stock of, or owns or holds any Lien on any property of, the
Company or any Restricted Subsidiary; provided that either (A) the Subsidiary
to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the "Limitation on Restricted Payments" covenant described below. The
Board of Directors may designate any Unrestricted Subsidiary to be a
Restricted Subsidiary; provided that (i) no Default or Event of Default shall
have occurred and be continuing at the time of or after giving effect to such
designation and (ii) all Liens and Indebtedness of such Unrestricted
Subsidiary outstanding immediately after such designation would, if Incurred
at such time, have been permitted to be Incurred for all purposes of the
Indenture. Any such designation by the Board of Directors shall be evidenced
to the Trustee by promptly filing with the Trustee a copy of the Board
Resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
 
  "Voting Stock" means with respect to any Person, Capital Stock of any class
or kind ordinarily having the power to vote for the election of directors,
managers or other voting members of the governing body of such Person.
 
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<PAGE>
 
  "Wholly Owned" means, with respect to any Subsidiary of any Person, the
ownership of all of the outstanding Capital Stock of such Subsidiary (other
than any director's qualifying shares or Investments by foreign nationals
mandated by applicable law) by such Person or one or more Wholly Owned
Subsidiaries of such Person.
 
COVENANTS
 
  The Indenture contains, among others, the following covenants:
 
  Limitation on Indebtedness
 
  (a) The Company will not, and will not permit any of its Restricted
Subsidiaries to, Incur any Indebtedness (other than the Notes and Indebtedness
existing on the Closing Date); provided that the Company may Incur
Indebtedness if, after giving effect to the Incurrence of such Indebtedness
and the receipt and application of the proceeds thereof, the Consolidated
Leverage Ratio would be less than or equal to 7 to 1, for Indebtedness
Incurred on or prior to June 30, 1998, or less than or equal to 5 to 1, for
Indebtedness Incurred thereafter.
 
  Notwithstanding the foregoing, the Company, and (except as specified below)
any Restricted Subsidiary, may Incur each and all of the following: (i)
Indebtedness in an aggregate principal amount outstanding or available at any
time not to exceed $100 million, less any amount of such Indebtedness
permanently repaid as provided under the "Limitation on Asset Sales" covenant
described below; (ii) Indebtedness owed (A) to the Company and evidenced by an
unsubordinated promissory note or (B) to any Restricted Subsidiaries; provided
that any event which results in any such Restricted Subsidiary ceasing to be a
Restricted Subsidiary or any subsequent transfer of such Indebtedness (other
than to the Company or another Restricted Subsidiary) shall be deemed, in each
case, to constitute an Incurrence of such Indebtedness not permitted by this
clause (ii); (iii) Indebtedness issued in exchange for, or the net proceeds of
which are used to refinance or refund, then outstanding Indebtedness (other
than Indebtedness Incurred under clause (i), (ii), (iv), (vi) or (ix) of this
paragraph) and any refinancings of such new Indebtedness in an amount not to
exceed the amount so refinanced or refunded (plus premiums, accrued interest,
fees and expenses); provided that Indebtedness the proceeds of which are used
to refinance or refund the Notes or Indebtedness that is pari passu in right
of payment with, or subordinated in right of payment to, the Notes shall only
be permitted under this clause (iii) if (A) in case the Notes are refinanced
in part or the Indebtedness to be refinanced is pari passu in right of payment
with the Notes, such new Indebtedness, by its terms or by the terms of any
agreement or instrument pursuant to which such new Indebtedness is
outstanding, is expressly made pari passu in right of payment with, or
subordinate in right of payment to, the remaining Notes, (B) in case the
Indebtedness to be refinanced is subordinated in right of payment to the
Notes, such new Indebtedness, by its terms or by the terms of any agreement or
instrument pursuant to which such new Indebtedness is issued or remains
outstanding, is expressly made subordinate in right of payment to the Notes at
least to the extent that the Indebtedness to be refinanced is subordinated to
the Notes and (C) such new Indebtedness, determined as of the date of
Incurrence of such new Indebtedness, does not mature prior to the Stated
Maturity of the Indebtedness to be refinanced or refunded, and the Average
Life of such new Indebtedness is at least equal to the remaining Average Life
of the Indebtedness to be refinanced or refunded; and provided further that in
no event may Indebtedness of the Company be refinanced by means of any
Indebtedness of any Restricted Subsidiary pursuant to this clause (iii); (iv)
Indebtedness (A) in respect of performance, surety or appeal bonds provided in
the ordinary course of business, (B) under Currency Agreements and Interest
Rate Agreements; provided that such agreements (a) are designed solely to
protect the Company or its Subsidiaries against fluctuations in foreign
currency exchange rates or interest rates and (b) do not increase the
Indebtedness of the obligor outstanding at any time other than as a result of
fluctuations in foreign currency exchange rates or interest rates or by reason
of fees, indemnities and compensation payable thereunder or (C) arising from
agreements providing for indemnification, adjustment of purchase price or
similar obligations, or from Guarantees or letters of credit, surety bonds or
performance bonds securing any obligations of the Company or any of its
Restricted Subsidiaries pursuant to such agreements, in each case Incurred in
connection with the disposition of any business, assets or Restricted
Subsidiary (other than Guarantees of Indebtedness Incurred by any Person
acquiring all or any portion of such business, assets or Restricted Subsidiary
for the purpose of
 
                                      100
<PAGE>
 
financing such acquisition), in a principal amount not to exceed the gross
proceeds actually received by the Company or any Restricted Subsidiary in
connection with such disposition; (v) Indebtedness of the Company, to the
extent the net proceeds thereof are promptly (A) used to purchase Notes
tendered in an Offer to Purchase made as a result of a Change of Control or
(B) deposited to defease all of the Notes as described below under
"Defeasance"; (vi) Guarantees of the Notes and Guarantees of Indebtedness of
the Company by any Restricted Subsidiary, provided the Guarantee of such
Indebtedness is permitted by and made in accordance with the "Limitation on
Issuance of Guarantees by Restricted Subsidiaries" covenant described below;
(vii) Indebtedness Incurred to finance the cost (including the cost of design,
development, acquisition, construction, installation, improvement,
transportation or integration) of equipment, inventory or network assets
acquired by the Company or a Restricted Subsidiary after the Closing Date;
(viii) Indebtedness of the Company not to exceed, at any one time outstanding,
two times (A) the Net Cash Proceeds received by the Company after the Closing
Date as a capital contribution or from the issuance and sale of its Capital
Stock (other than Redeemable Stock) to a Person that is not a Subsidiary of
the Company, to the extent such Net Cash Proceeds have not been used pursuant
to clause (C)(2) of the first paragraph or clause (iii), (iv) or (vi) of the
second paragraph of the "Limitation on Restricted Payments" covenant described
below to make a Restricted Payment and (B) 80% of the fair market value of
property (other than cash and cash equivalents) received by the Company after
the Closing Date from a contribution of capital or the sale of its Capital
Stock (other than Redeemable Stock) to a Person that is not a Subsidiary of
the Company, to the extent such capital contribution or sale of Capital Stock
has not been used pursuant to clause (iii), (iv) or (ix) of the second
paragraph of the "Limitation on Restricted Payments" covenant described below
to make a Restricted Payment; provided that such Indebtedness does not mature
prior to the Stated Maturity of the Notes and has an Average Life longer than
the Notes; (ix) Strategic Subordinated Indebtedness; and (x) Indebtedness in
an aggregate principal amount not to exceed $20 million to be Incurred in
connection with the Reorganization.
 
  (b) Notwithstanding any other provision of this "Limitation on Indebtedness"
covenant, the maximum amount of Indebtedness that the Company or a Restricted
Subsidiary may Incur pursuant to this "Limitation on Indebtedness" covenant
shall not be deemed to be exceeded due solely to the result of fluctuations in
the exchange rates of currencies.
 
  (c) For purposes of determining any particular amount of Indebtedness under
this "Limitation on Indebtedness" covenant, (1) Guarantees, Liens or
obligations with respect to letters of credit supporting Indebtedness
otherwise included in the determination of such particular amount shall not be
included and (2) any Liens granted pursuant to the equal and ratable
provisions referred to in the "Limitation on Liens" covenant described below
shall not be treated as Indebtedness. For purposes of determining compliance
with this "Limitation on Indebtedness" covenant, in the event that an item of
Indebtedness meets the criteria of more than one of the types of Indebtedness
described in the above clauses, the Company, in its sole discretion, shall
classify such item of Indebtedness and only be required to include the amount
and type of such Indebtedness in one of such clauses.
 
  Limitation on Restricted Payments
 
  The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, (i) declare or pay any dividend or make any
distribution on or with respect to its Capital Stock (other than (x) dividends
or distributions payable solely in shares of its Capital Stock (other than
Redeemable Stock) or in options, warrants or other rights to acquire shares of
such Capital Stock and (y) pro rata dividends or distributions on Common Stock
of Restricted Subsidiaries held by minority stockholders, provided that such
dividends do not in the aggregate exceed the minority stockholders' pro rata
share of such Restricted Subsidiaries' net income from the first day of the
fiscal quarter beginning immediately following the Closing Date) held by
Persons other than the Company or any of its Restricted Subsidiaries, (ii)
purchase, redeem, retire or otherwise acquire for value any shares of Capital
Stock of (A) the Company or an Unrestricted Subsidiary (including options,
warrants or other rights to acquire such shares of Capital Stock) held by any
Person or (B) a Restricted Subsidiary (including options, warrants or other
rights to acquire such shares of Capital Stock) held by any Affiliate of the
Company (other than a Wholly Owned Restricted Subsidiary) or any holder (or
any Affiliate of such holder) of 5% or
 
                                      101
<PAGE>
 
more of the Capital Stock of the Company, (iii) make any voluntary or optional
principal payment, or voluntary or optional redemption, repurchase,
defeasance, or other acquisition or retirement for value, of Indebtedness of
the Company that is subordinated in right of payment to the Notes (other than,
in each case, the purchase, repurchase or acquisition of Indebtedness in
anticipation of satisfying a sinking fund obligation, principal installment or
final maturity, in any case due within one year after the date of such
purchase, repurchase or acquisition) or (iv) make any Investment, other than a
Permitted Investment, in any Person (such payments or any other actions
described in clauses (i) through (iv) above being collectively "Restricted
Payments") if, at the time of, and after giving effect to, the proposed
Restricted Payment: (A) a Default or Event of Default shall have occurred and
be continuing, (B) the Company could not Incur at least $1.00 of Indebtedness
under the first paragraph of the "Limitation on Indebtedness" covenant or (C)
the aggregate amount of all Restricted Payments (the amount, if other than in
cash, to be determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) made
after the Closing Date shall exceed the sum of (1) 50% of the aggregate amount
of the Adjusted Consolidated Net Income (or, if the Adjusted Consolidated Net
Income is a loss, minus 100% of the amount of such loss) (excluding, for
purposes of such computation, income resulting from transfers of assets by the
Company or a Restricted Subsidiary to an Unrestricted Subsidiary) accrued on a
cumulative basis during the period (taken as one accounting period) beginning
on the first day of the fiscal quarter immediately following the Closing Date
and ending on the last day of the last fiscal quarter preceding the
Transaction Date for which reports have been filed with the Commission or
provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant plus (2) the aggregate Net Cash Proceeds received by the
Company after the Closing Date from a capital contribution or the issuance and
sale permitted by the Indenture to a Person who is not a Subsidiary of the
Company of (a) its Capital Stock (other than Redeemable Stock), (b) any
options, warrants or other rights to acquire Capital Stock of the Company (in
each case, exclusive of any Redeemable Stock or any options, warrants or other
rights that are redeemable at the option of the holder, or are required to be
redeemed, prior to the Stated Maturity of the Notes) and (c) Indebtedness of
the Company that has been exchanged for or converted into Capital Stock of the
Company (other than Redeemable Stock), in each case except to the extent such
Net Cash Proceeds are used to Incur Indebtedness pursuant to clause (viii) of
the second paragraph under the "Limitation on Indebtedness" covenant, plus (3)
an amount equal to the net reduction in Investments (other than reductions in
Permitted Investments and reductions in Investments made pursuant to clause
(vi) of the second paragraph of this "Limitation on Restricted Payments"
covenant) in any Person resulting from payments of interest on Indebtedness,
dividends, repayments of loans or advances, or other transfers of assets, in
each case to the Company or any Restricted Subsidiary or from the Net Cash
Proceeds from the sale of any such Investment (except, in each case, to the
extent any such payment or proceeds is included in the calculation of Adjusted
Consolidated Net Income), or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (valued in each case as provided in the definition
of "Investments"), not to exceed, in each case, the amount of Investments
previously made by the Company or any Restricted Subsidiary in such Person or
Unrestricted Subsidiary.
 
  The foregoing provision shall not be violated by reason of: (i) the payment
of any dividend within 60 days after the date of declaration thereof if, at
such date of declaration, such payment would comply with the foregoing
paragraph; (ii) the redemption, repurchase, defeasance or other acquisition or
retirement for value of Indebtedness that is subordinated in right of payment
to the Notes, including premium, if any, and accrued and unpaid interest, with
the proceeds of, or in exchange for, Indebtedness Incurred under clause (iii)
of the second paragraph of part (a) of the "Limitation on Indebtedness"
covenant; (iii) the repurchase, redemption or other acquisition of Capital
Stock of the Company (or options, warrants or other rights to acquire such
Capital Stock) in exchange for, or out of the proceeds of a substantially
concurrent offering of, shares of Capital Stock (other than Redeemable Stock)
of the Company (or options, warrants or other rights to acquire such Capital
Stock); (iv) the making of any principal payment or the repurchase,
redemption, retirement, defeasance or other acquisition for value of
Indebtedness of the Company which is subordinated in right of payment to the
Notes in exchange for, or out of the proceeds of, a substantially concurrent
offering of shares of the Capital Stock (other than Redeemable Stock) of the
Company (or options, warrants or other rights to acquire such Capital Stock);
(v) payments or distributions to dissenting stockholders pursuant to
applicable law in connection with a consolidation, merger or transfer of
assets that complies with the provisions of the Indenture applicable to
 
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<PAGE>
 
mergers, consolidations and transfers of all or substantially all of the
property and assets of the Company; (vi) Investments in any Person the primary
business of which is related, ancillary or complementary to the business of
the Company and its Restricted Subsidiaries on the date of such Investments;
provided that the aggregate amount of Investments made pursuant to this clause
(vi) does not exceed the sum of (x) $25 million plus (y) the amount of Net
Cash Proceeds received by the Company after the Closing Date as a capital
contribution or from the sale of its Capital Stock (other than Redeemable
Stock) to a Person who is not a Subsidiary of the Company, except to the
extent such Net Cash Proceeds are used to Incur Indebtedness pursuant to
clause (viii) under the "Limitation on Indebtedness" covenant or to make
Restricted Payments pursuant to clause (C)(2) of the first paragraph, or
clauses (iii) or (iv) of this paragraph, of this "Limitation on Restricted
Payments" covenant, plus (z) the net reduction in Investments made pursuant to
this clause (vi) resulting from distributions on or repayments of such
Investments or from the Net Cash Proceeds from the sale of any such Investment
(except in each case to the extent any such payment or proceeds is included in
the calculation of Adjusted Consolidated Net Income) or from such Person
becoming a Restricted Subsidiary (valued in each case as provided in the
definition of "Investments"), provided that the net reduction in any
Investment shall not exceed the amount of such Investment; (vii) the purchase,
redemption, acquisition, cancellation or other retirement for value of shares
of Capital Stock of the Company to the extent necessary, in the judgment of
the Board of Directors, to prevent the loss or secure the renewal or
reinstatement of any license or franchise held by the Company or any
Restricted Subsidiary from any governmental agency; (viii) the purchase,
redemption, retirement or other acquisition for value of shares of Capital
Stock of the Company, or options to purchase such shares, held by directors,
employees, or former directors or employees of the Company or any Restricted
Subsidiary (or their estates or beneficiaries under their estates) upon their
death, disability, retirement, termination of employment or pursuant to the
terms of any agreement under which such shares of Capital Stock or options
were issued; provided that the aggregate consideration paid for such purchase,
redemption, retirement or other acquisition for value of such shares of
Capital Stock or options after the Closing Date does not exceed $2 million in
any calendar year, or $5 million in the aggregate; or (ix) Investments
acquired as a capital contribution to the Company or in exchange for Capital
Stock (other than Redeemable Stock) of the Company; provided that, except in
the case of clauses (i), (iii) and (iv), no Default or Event of Default shall
have occurred and be continuing, or occur as a consequence of the actions or
payments set forth therein.
 
  Each Restricted Payment permitted pursuant to the preceding paragraph (other
than the Restricted Payment referred to in clause (ii) thereof, an exchange of
Capital Stock for Capital Stock or Indebtedness referred to in clause (iii) or
(iv) thereof and an Investment referred to in clause (ix) thereof), and the
Net Cash Proceeds from any issuance of Capital Stock referred to in clauses
(iii), (iv) and (vi) thereof, shall be included in calculating whether the
conditions of clause (C) of the first paragraph of this "Limitation on
Restricted Payments" covenant have been met with respect to any subsequent
Restricted Payments. In the event the proceeds of an issuance of Capital Stock
of the Company are used for the redemption, repurchase or other acquisition of
the Notes, or Indebtedness that is pari passu in right of payment with the
Notes, then the Net Cash Proceeds of such issuance shall be included in clause
(C) of the first paragraph of this "Limitation on Restricted Payments"
covenant only to the extent such proceeds are not used for such redemption,
repurchase or other acquisition of Indebtedness.
 
  Limitation on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries
 
  The Company will not, and will not permit any Restricted Subsidiary to,
create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction of any kind on the ability of any
Restricted Subsidiary to (i) pay dividends or make any other distributions
permitted by applicable law on any Capital Stock of such Restricted Subsidiary
owned by the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii)
make loans or advances to the Company or any other Restricted Subsidiary or
(iv) transfer any of its property or assets to the Company or any other
Restricted Subsidiary.
 
  The foregoing provisions shall not restrict any encumbrances or
restrictions: (i) existing on the Closing Date in the Indenture or any other
agreements in effect on the Closing Date, and any extensions, refinancings,
renewals or replacements of such agreements; provided that the encumbrances
and restrictions in any such extensions,
 
                                      103
<PAGE>
 
refinancings, renewals or replacements are no less favorable in any material
respect to the Holders than those encumbrances or restrictions that are then
in effect and that are being extended, refinanced, renewed or replaced; (ii)
existing under or by reason of applicable law; (iii) existing with respect to
any Person or the property or assets of such Person acquired by the Company or
any Restricted Subsidiary and existing at the time of such acquisition and not
incurred in contemplation thereof, which encumbrances or restrictions are not
applicable to any Person or the property or assets of any Person other than
such Person or the property or assets of such Person so acquired; (iv) in the
case of clause (iv) of the first paragraph of this "Limitation on Dividend and
Other Payment Restrictions Affecting Restricted Subsidiaries" covenant, (A)
that restrict in a customary manner the subletting, assignment or transfer of
any property or asset that is a lease, license, conveyance or contract or
similar property or asset, (B) existing by virtue of any transfer of,
agreement to transfer, option or right with respect to, or Lien on, any
property or assets of the Company or any Restricted Subsidiary not otherwise
prohibited by the Indenture or (C) arising or agreed to in the ordinary course
of business, not relating to any Indebtedness, and that do not, individually
or in the aggregate, detract from the value of property or assets of the
Company or any Restricted Subsidiary in any manner material to the Company or
any Restricted Subsidiary; (v) with respect to a Restricted Subsidiary and
imposed pursuant to an agreement that has been entered into for the sale or
disposition of all or substantially all of the Capital Stock of, or property
and assets of, such Restricted Subsidiary; or (vi) contained in the terms of
any Indebtedness or any agreement pursuant to which such Indebtedness was
issued if (A) the encumbrance or restriction applies only in the event of a
payment default or a default with respect to a financial covenant contained in
such Indebtedness or agreement; provided that in the case of the Credit
Agreement the encumbrance or restriction may apply if an event of default
(other than an event of default resulting solely from the breach of a
representation or warranty) occurs and is continuing under the Credit
Agreement; provided that, with respect to any event of default (other than a
payment default, a bankruptcy event with respect to the Company or
Transmission or the loss of a material license or fiber network) under the
Credit Agreement, such encumbrance or restriction may not prohibit dividends
to the Company to pay scheduled interest on the Notes for more than 180 days
in any consecutive 360-day period, (B) the encumbrance or restriction is not
materially more disadvantageous to the Holders of the Notes than is customary
in comparable financings (as determined by the Company) and (C) the Company
determines that any such encumbrance or restriction will not materially affect
the Company's ability to make principal or interest payments on the Notes.
 
  Nothing contained in this "Limitation on Dividend and Other Payment
Restrictions Affecting Restricted Subsidiaries" covenant shall prevent the
Company or any Restricted Subsidiary from (1) creating, incurring, assuming or
suffering to exist any Liens otherwise permitted in the "Limitation on Liens"
covenant described below or (2) restricting the sale or other disposition of
property or assets of the Company or any of its Restricted Subsidiaries that
secure Indebtedness of the Company or any of its Restricted Subsidiaries.
 
  Limitation on the Issuance and Sale of Capital Stock of Restricted
Subsidiaries
 
  The Company will not sell, and will not permit any Restricted Subsidiary,
directly or indirectly, to issue or sell, any shares of Capital Stock of a
Restricted Subsidiary (including options, warrants or other rights to purchase
shares of such Capital Stock) except (i) to the Company or a Wholly Owned
Restricted Subsidiary, (ii) issuances of director's qualifying shares, or
sales to foreign nationals of shares of Capital Stock of foreign Restricted
Subsidiaries, to the extent required by applicable law, (iii) if, immediately
after giving effect to such issuance or sale, such Restricted Subsidiary would
no longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect to such issuance or sale would have been
permitted to be made under the "Limitation on Restricted Payments" covenant if
made on the date of such issuance or sale or (iv) issuances or sales of Common
Stock of a Restricted Subsidiary, provided that the Company or such Restricted
Subsidiary applies the Net Cash Proceeds, if any, of any such sale in
accordance with clause (A) or (B) of the "Limitation on Asset Sales" covenant
described below.
 
  Limitation on Issuances of Guarantees by Restricted Subsidiaries
 
  The Company will not permit any Restricted Subsidiary, directly or
indirectly, to Guarantee any Indebtedness of the Company which is pari passu
in right of payment with, or subordinate in right of payment
 
                                      104
<PAGE>
 
to, the Notes ("Guaranteed Indebtedness"), unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture to
the Indenture providing for a Guarantee (a "Subsidiary Guarantee") of payment
of the Notes by such Restricted Subsidiary and (ii) such Restricted Subsidiary
waives, and will not in any manner whatsoever claim or take the benefit or
advantage of, any rights of reimbursement, indemnity or subrogation or any
other rights against the Company or any other Restricted Subsidiary as a
result of any payment by such Restricted Subsidiary under its Subsidiary
Guarantee; provided that this paragraph shall not be applicable to (x) any
Guarantee of any Restricted Subsidiary that existed at the time such Person
became a Restricted Subsidiary and was not Incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary or (y) any
Guarantee of any Restricted Subsidiary of Indebtedness Incurred (I) under
Credit Facilities pursuant to clause (i) of the second paragraph of the
"Limitation on Indebtedness" covenant or (II) pursuant to clause (vii) of the
second paragraph of the "Limitation on Indebtedness" covenant. If the
Guaranteed Indebtedness is (A) pari passu in right of payment with the Notes,
then the Guarantee of such Guaranteed Indebtedness shall be pari passu in
right of payment with, or subordinated in right of payment to, the Subsidiary
Guarantee or (B) subordinated in right of payment to the Notes, then the
Guarantee of such Guaranteed Indebtedness shall be subordinated in right of
payment to the Subsidiary Guarantee at least to the extent that the Guaranteed
Indebtedness is subordinated in right of payment to the Notes.
 
  Notwithstanding the foregoing, any Subsidiary Guarantee by a Restricted
Subsidiary may provide by its terms that it shall be automatically and
unconditionally released and discharged upon (i) any sale, exchange or
transfer, to any Person not an Affiliate of the Company, of all of the
Company's and each Restricted Subsidiary's Capital Stock in, or all or
substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) the release
or discharge of the Guarantee which resulted in the creation of such
Subsidiary Guarantee, except a discharge or release by or as a result of
payment under such Guarantee.
 
  Limitation on Transactions with Stockholders and Affiliates
 
  The Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into, renew or extend any transaction
(including, without limitation, the purchase, sale, lease or exchange of
property or assets, or the rendering of any service) with any holder (or any
Affiliate of such holder) of 5% or more of any class of Capital Stock of the
Company or with any Affiliate of the Company or any Restricted Subsidiary,
except upon fair and reasonable terms no less favorable in any material
respect to the Company or such Restricted Subsidiary than could be obtained,
at the time of such transaction or, if such transaction is pursuant to a
written agreement, at the time of the execution of the agreement providing
therefor, in a comparable arm's-length transaction with a Person that is not
such a holder or an Affiliate.
 
  The foregoing limitation does not limit, and shall not apply to: (i)
transactions (A) approved by a majority of the disinterested members of the
Board of Directors or (B) for which the Company or a Restricted Subsidiary
delivers to the Trustee a written opinion of a nationally recognized
investment banking firm stating that the transaction is fair to the Company or
such Restricted Subsidiary from a financial point of view; (ii) any
transaction solely between the Company and any of its Wholly Owned Restricted
Subsidiaries or solely between Wholly Owned Restricted Subsidiaries; (iii) the
payment of reasonable and customary regular fees to directors of the Company
who are not employees of the Company; (iv) any payments or other transactions
pursuant to any tax-sharing agreement between the Company and any other Person
with which the Company files a consolidated tax return or with which the
Company is part of a consolidated group for tax purposes; (v) any Restricted
Payments not prohibited by the "Limitation on Restricted Payments" covenant;
or (vi) the Reorganization. Notwithstanding the foregoing, any transaction
covered by the first paragraph of this "Limitation on Transactions with
Stockholders and Affiliates" covenant and not covered by clauses (ii) through
(vi) of this paragraph, the aggregate amount of which exceeds $5 million in
value, must be approved or determined to be fair in the manner provided for in
clause (i)(A) or (B) above.
 
 
                                      105
<PAGE>
 
  Limitation on Liens
 
  The Company will not, and will not permit any Restricted Subsidiary to,
create, incur, assume or suffer to exist any Lien on any of its assets or
properties of any character, or any shares of Capital Stock or Indebtedness of
any Restricted Subsidiary, without making effective provision for all of the
Notes and all other amounts due under the Indenture to be directly secured
equally and ratably with (or, if the obligation or liability to be secured by
such Lien is subordinated in right of payment to the Notes, prior to) the
obligation or liability secured by such Lien.
 
  The foregoing limitation does not apply to: (i) Liens existing on the
Closing Date; (ii) Liens granted after the Closing Date on any assets or
Capital Stock of the Company or its Restricted Subsidiaries created in favor
of the Holders; (iii) Liens with respect to the assets of a Restricted
Subsidiary granted by such Restricted Subsidiary to the Company or a Wholly
Owned Restricted Subsidiary to secure Indebtedness owing to the Company or
such other Restricted Subsidiary; (iv) Liens securing Indebtedness which is
Incurred to refinance secured Indebtedness which is permitted to be Incurred
under clause (iii) of the second paragraph of the "Limitation on Indebtedness"
covenant; provided that such Liens do not extend to or cover any property or
assets of the Company or any Restricted Subsidiary other than the property or
assets securing the Indebtedness being refinanced; (v) Liens securing
obligations under Credit Facilities Incurred under clause (i) of the second
paragraph of the "Limitation on Indebtedness" covenant; or (vi) Permitted
Liens.
 
  Limitation on Sale-Leaseback Transactions
 
  The Company will not, and will not permit any Restricted Subsidiary to,
enter into any sale-leaseback transaction involving any of its assets or
properties whether now owned or hereafter acquired, whereby the Company or a
Restricted Subsidiary sells or transfers such assets or properties and then or
thereafter leases such assets or properties or any part thereof or any other
assets or properties which the Company or such Restricted Subsidiary, as the
case may be, intends to use for substantially the same purpose or purposes as
the assets or properties sold or transferred.
 
  The foregoing restriction does not apply to any sale-leaseback transaction
if (i) the lease is for a period, including renewal rights, of not in excess
of three years; (ii) the lease secures or relates to industrial revenue or
pollution control bonds; (iii) the transaction is solely between the Company
and any Wholly Owned Restricted Subsidiary or solely between Wholly Owned
Restricted Subsidiaries; or (iv) the Company or such Restricted Subsidiary,
within 12 months after the sale or transfer of any assets or properties is
completed, applies an amount not less than the net proceeds received from such
sale in accordance with clause (A) or (B) of the first paragraph of the
"Limitation on Asset Sales" covenant described below.
 
  Limitation on Asset Sales
 
  The Company will not, and will not permit any Restricted Subsidiary to,
consummate any Asset Sale, unless (i) the consideration received by the
Company or such Restricted Subsidiary is at least equal to the fair market
value of the assets sold or disposed of and (ii) at least 75% of the
consideration received consists of cash or Temporary Cash Investments. In the
event and to the extent that the Net Cash Proceeds received by the Company or
any of its Restricted Subsidiaries from one or more Asset Sales occurring on
or after the Closing Date in any period of 12 consecutive months exceed 10% of
Adjusted Consolidated Net Tangible Assets (determined as of the date closest
to the commencement of such 12-month period for which a consolidated balance
sheet of the Company and its Subsidiaries has been filed with the Commission
or provided to the Trustee pursuant to the "Commission Reports and Reports to
Holders" covenant), then the Company shall or shall cause the relevant
Restricted Subsidiary to (i) within 12 months after the date Net Cash Proceeds
so received exceed 10% of Adjusted Consolidated Net Tangible Assets (A) apply
an amount equal to such excess Net Cash Proceeds to permanently repay
unsubordinated Indebtedness of the Company or any Restricted Subsidiary
providing a Subsidiary Guarantee pursuant to the "Limitation on Issuances of
Guarantees by Restricted Subsidiaries" covenant described above or
Indebtedness of any other Restricted Subsidiary, in each case owing to a
Person other than the Company or any of its Subsidiaries, or (B) invest an
amount equal to such excess Net Cash
 
                                      106
<PAGE>
 
Proceeds, or the amount of such Net Cash Proceeds not so applied pursuant to
clause (A) (or enter into a definitive agreement committing to so invest
within 12 months after the date of such agreement), in capital assets of a
nature or type or that are used in a business (or in a Person having capital
assets of a nature or type, or engaged in a business) similar or related to
the nature or type of the property and assets of, or the business of, the
Company and its Restricted Subsidiaries existing on the date of such
investment (as determined in good faith by the Board of Directors, whose
determination shall be conclusive and evidenced by a Board Resolution) and
(ii) apply (no later than the end of the 12-month period referred to in clause
(i)) such excess Net Cash Proceeds (to the extent not applied pursuant to
clause (i)) as provided in the following paragraph of this "Limitation on
Asset Sales" covenant. The amount of such excess Net Cash Proceeds required to
be applied (or to be committed to be applied) during such 12-month period as
set forth in clause (i) of the preceding sentence and not applied as so
required by the end of such period shall constitute "Excess Proceeds."
 
  If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Offer to Purchase pursuant to
this "Limitation on Asset Sales" covenant totals at least $5 million, the
Company must commence, not later than the fifteenth Business Day of such
month, and consummate an Offer to Purchase from the Holders on a pro rata
basis an aggregate principal amount of Notes equal to the Excess Proceeds on
such date, at a purchase price equal to 100% of the principal amount of the
Notes plus, in each case, accrued interest to the Payment Date.
 
  Commission Reports and Reports to Holders
 
  The Company shall file with the Commission the annual, quarterly and other
reports and other information required by Section 13(a) or 15(d) of the
Exchange Act, regardless of whether such sections of the Exchange Act are
applicable to the Company (unless the Commission will not accept such a
filing). The Company shall mail or cause to be mailed copies of such reports
and information to Holders and the Trustee within 15 days after the date it
files such reports and information with the Commission or after the date it
would have been required to file such reports and information with the
Commission had it been subject to such sections of the Exchange Act; provided,
however, that the copies of such reports and information mailed to Holders may
omit exhibits, which the Company will supply to any Holder at such Holder's
request.
 
REPURCHASE OF EXCHANGE NOTES UPON A CHANGE OF CONTROL
 
  The Company shall commence, within 30 days of the occurrence of a Change of
Control, and consummate an Offer to Purchase for all Exchange Notes then
outstanding, at a purchase price equal to 101% of the principal amount
thereof, plus accrued interest to the Payment Date.
 
  There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Exchange Notes) required by the foregoing covenant
(as well as may be contained in other securities of the Company which might be
outstanding at the time). The foregoing covenant requiring the Company to
repurchase the Exchange Notes will, unless consents are obtained, require the
Company to repay all indebtedness then outstanding which by its terms would
prohibit such Exchange Note repurchase, either prior to or concurrently with
such Exchange Note repurchase.
 
EVENTS OF DEFAULT
 
  The following events are defined as "Events of Default" in the Indenture:
(a) defaults in the payment of principal of (or premium, if any, on) any Note
when the same becomes due and payable at maturity, upon acceleration,
redemption or otherwise; (b) defaults in the payment of interest on any Note
when the same becomes due and payable, which defaults continue for a period of
30 days; provided that a failure to make any of the first six scheduled
interest payments on the Notes on the applicable Interest Payment Date will
constitute an Event of Default with no grace or cure period; (c) defaults in
the performance or breach of the provisions of the Indenture applicable to
mergers, consolidations and transfers of all or substantially all of the
assets of the Company or mandatory redemption, or the failure to make or
consummate an Offer to Purchase in accordance
 
                                      107
<PAGE>
 
with the "Limitation on Asset Sales" or the "Repurchase of Notes upon a Change
of Control" covenant described above; (d) defaults in the performance or
breach of any covenant or agreement of the Company in the Indenture or under
the Notes (other than a default specified in clause (a), (b) or (c) above),
which default or breach continues for a period of 30 consecutive days after
written notice by the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then outstanding; (e) there occurs with respect
to any issue or issues of Indebtedness of the Company or any Significant
Subsidiary having an outstanding principal amount of $5 million or more in the
aggregate for all such issues of all such Persons, whether such Indebtedness
now exists or shall hereafter be created, (I) an event of default that has
caused the holder thereof to declare such Indebtedness to be due and payable
prior to its Stated Maturity and such Indebtedness has not been discharged in
full or such acceleration has not been rescinded or annulled within 30 days of
such acceleration and/or (II) the failure to make a principal payment at the
final (but not any interim) fixed maturity and such defaulted payment shall
not have been made, waived or extended within 30 days of such payment default;
(f) any final judgment or order (not covered by insurance) for the payment of
money in excess of $5 million in the aggregate for all such final judgments or
orders against all such Persons (treating any deductibles, self-insurance or
retention as not so covered) shall be rendered against the Company or any
Significant Subsidiary and shall not be paid or discharged, and there shall be
any period of 30 consecutive days following entry of the final judgment or
order that causes the aggregate amount for all such final judgments or orders
outstanding and not paid or discharged against all such Persons to exceed $5
million during which a stay of enforcement of such final judgment or order, by
reason of a pending appeal or otherwise, shall not be in effect; (g) a court
having jurisdiction in the premises enters a decree or order for (A) relief in
respect of the Company or any Significant Subsidiary in an involuntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, (B) appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) the winding up or
liquidation of the affairs of the Company or any Significant Subsidiary and,
in each case, such decree or order shall remain unstayed and in effect for a
period of 60 consecutive days; (h) the Company or any Significant Subsidiary
(A) commences a voluntary case under any applicable bankruptcy, insolvency or
other similar law now or hereafter in effect, or consents to the entry of an
order for relief in an involuntary case under any such law, (B) consents to
the appointment of or taking possession by a receiver, liquidator, assignee,
custodian, trustee, sequestrator or similar official of the Company or any
Significant Subsidiary or for all or substantially all of the property and
assets of the Company or any Significant Subsidiary or (C) effects any general
assignment for the benefit of creditors; or (i) the Pledge Agreement shall
cease to be in full force and effect or enforceable in accordance with its
terms, other than in accordance with its terms.
 
  If an Event of Default (other than an Event of Default specified in clause
(g) or (h) above that occurs with respect to the Company) occurs and is
continuing under the Indenture, the Trustee or the Holders of at least 25% in
aggregate principal amount of the Notes then outstanding, by written notice to
the Company (and to the Trustee if such notice is given by the Holders), may,
and the Trustee at the request of such Holders shall, declare the principal
of, premium, if any, and accrued interest on the Notes to be immediately due
and payable. Upon a declaration of acceleration, such principal, premium, if
any, and accrued interest shall be immediately due and payable. In the event
of a declaration of acceleration because an Event of Default set forth in
clause (e) above has occurred and is continuing, such declaration of
acceleration shall be automatically rescinded and annulled if the event of
default triggering such Event of Default pursuant to clause (e) shall be
remedied or cured by the Company or the relevant Significant Subsidiary or
waived by the holders of the relevant Indebtedness within 60 days after the
declaration of acceleration with respect thereto. If an Event of Default
specified in clause (g) or (h) above occurs with respect to the Company, the
principal of, premium, if any, and accrued interest on the Notes then
outstanding shall ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any Holder. The
Holders of at least a majority in principal amount of the outstanding Notes,
by written notice to the Company and to the Trustee, may waive all past
defaults and rescind and annul a declaration of acceleration and its
consequences if (i) all existing Events of Default, other than the nonpayment
of the principal of, premium, if any, and interest on the Notes that have
become due solely by such declaration of acceleration, have been cured or
waived and (ii) the rescission would not conflict with any
 
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<PAGE>
 
judgment or decree of a court of competent jurisdiction. For information as to
the waiver of defaults, see "--Modification and Waiver."
 
  The Holders of at least a majority in aggregate principal amount of the
outstanding Notes may direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee. However, the Trustee may refuse to follow any
direction that conflicts with law or the Indenture, that may involve the
Trustee in personal liability, or that the Trustee determines in good faith
may be unduly prejudicial to the rights of Holders of Notes not joining in the
giving of such direction and may take any other action it deems proper that is
not inconsistent with any such direction received from Holders of Notes. A
Holder may not pursue any remedy with respect to the Indenture or the Notes
unless: (i) the Holder gives the Trustee written notice of a continuing Event
of Default; (ii) the Holders of at least 25% in aggregate principal amount of
outstanding Notes make a written request to the Trustee to pursue the remedy;
(iii) such Holder or Holders offer the Trustee indemnity satisfactory to the
Trustee against any costs, liability or expense; (iv) the Trustee does not
comply with the request within 60 days after receipt of the request and the
offer of indemnity; and (v) during such 60-day period, the Holders of a
majority in aggregate principal amount of the outstanding Notes do not give
the Trustee a direction that is inconsistent with the request. However, such
limitations do not apply to the right of any Holder of a Note to receive
payment of the principal of, premium, if any, or interest on, such Note or to
bring suit for the enforcement of any such payment, on or after the due date
expressed in the Notes, which right shall not be impaired or affected without
the consent of the Holder.
 
  The Indenture requires certain officers of the Company to certify, on or
before a date not more than 90 days after the end of each fiscal year, that a
review has been conducted of the activities of the Company and its Restricted
Subsidiaries and the performance of the Company and its Restricted
Subsidiaries under the Indenture and that the Company has fulfilled all
obligations thereunder, or, if there has been a default in the fulfillment of
any such obligation, specifying each such default and the nature and status
thereof. The Company is also obligated to notify the Trustee of any default or
defaults in the performance of any covenants or agreements under the
Indenture.
 
CONSOLIDATION, MERGER AND SALE OF ASSETS
 
  The Company shall not consolidate with, merge with or into, or sell, convey,
transfer, lease or otherwise dispose of all or substantially all of its
property and assets (as an entirety or substantially an entirety in one
transaction or a series of related transactions) to, any Person or permit any
Person to merge with or into the Company unless: (i) the Company shall be the
continuing Person, or the Person (if other than the Company) formed by such
consolidation or into which the Company is merged or that acquired or leased
such property and assets of the Company shall be a corporation organized and
validly existing under the laws of the United States of America or any
jurisdiction thereof, and shall expressly assume, by a supplemental indenture,
executed and delivered to the Trustee, all of the obligations of the Company
on all of the Notes and under the Indenture; (ii) immediately after giving
effect to such transaction, no Default or Event of Default shall have occurred
and be continuing; (iii) immediately after giving effect to such transaction
on a pro forma basis, the Company or any Person becoming the successor obligor
of the Notes shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction;
(iv) immediately after giving effect to such transaction on a pro forma basis,
the Company, or any Person becoming the successor obligor of the Notes, as the
case may be, could Incur at least $1.00 of Indebtedness under the first
paragraph of the "Limitation on Indebtedness" covenant described above;
provided, however, that this clause (iv) shall not apply to a consolidation or
merger with or into (x) a Wholly Owned Restricted Subsidiary with a positive
net worth or (y) ITC Holding, provided that (A) in connection with any such
merger or consolidation, no consideration (except Capital Stock (other than
Redeemable Stock) in the surviving Person or the Company (or a Person that
owns directly or indirectly all of the Capital Stock of the surviving Person
or the Company immediately following such transaction)) shall be issued or
distributed to the stockholders of the Company and (B) in connection with a
consolidation or merger with or into ITC Holding, all Liens and Indebtedness
of ITC Holding and its Subsidiaries (other than the Company and its Restricted
Subsidiaries) outstanding immediately prior to such transaction would, if
Incurred at such time, have been permitted to be Incurred by the Company
 
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<PAGE>
 
and its Restricted Subsidiaries for all purposes of the Indenture; and (v) the
Company delivers to the Trustee an Officers' Certificate (attaching the
arithmetic computations to demonstrate compliance with clauses (iii) and
(iv) above) and an Opinion of Counsel, in each case stating that such
consolidation, merger or transfer and such supplemental indenture comply with
this provision and that all conditions precedent provided for herein relating
to such transaction have been complied with; provided, however, that clauses
(iii) and (iv) above do not apply if, in the good faith determination of the
Board of Directors of the Company, whose determination shall be evidenced by a
Board Resolution, the principal purpose of such transaction is to change the
state of incorporation of the Company; and provided further that any such
transaction shall not have as one of its purposes the evasion of the foregoing
limitations.
 
DEFEASANCE
 
  Defeasance and Discharge. The Indenture provides that the Company will be
deemed to have paid and will be discharged from any and all obligations in
respect of the Notes on the 123rd day after the deposit referred to below, and
the provisions of the Indenture will no longer be in effect with respect to
the Notes (except for, among other matters, certain obligations to register
the transfer or exchange of the Notes, to replace stolen, lost or mutilated
Notes, to maintain paying agencies and to hold monies for payment in trust)
if, among other things, (A) the Company has deposited with the Trustee, in
trust, money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes, (B) the Company
has delivered to the Trustee (i) either (x) an Opinion of Counsel to the
effect that Holders will not recognize income, gain or loss for federal income
tax purposes as a result of the Company's exercise of its option under this
"Defeasance" provision and will be subject to federal income tax on the same
amount and in the same manner and at the same times as would have been the
case if such deposit, defeasance and discharge had not occurred, which Opinion
of Counsel must be based upon (and accompanied by a copy of) a ruling of the
Internal Revenue Service to the same effect unless there has been a change in
applicable federal income tax law after the Closing Date such that a ruling is
no longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that the creation of the
defeasance trust does not violate the Investment Company Act of 1940 and after
the passage of 123 days following the deposit, the trust fund will not be
subject to the effect of Section 547 of the United States Bankruptcy Code or
Section 15 of the New York Debtor and Creditor Law, (C) immediately after
giving effect to such deposit on a pro forma basis, no Event of Default, or
event that after the giving of notice or lapse of time or both would become an
Event of Default, shall have occurred and be continuing on the date of such
deposit or during the period ending on the 123rd day after the date of such
deposit, and such deposit shall not result in a breach or violation of, or
constitute a default under, any other agreement or instrument to which the
Company or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries is bound, and (D) if at such time the Notes are listed on
a national securities exchange, the Company has delivered to the Trustee an
Opinion of Counsel to the effect that the Notes will not be delisted as a
result of such deposit, defeasance and discharge.
 
  Defeasance of Certain Covenants and Certain Events of Default. The Indenture
further provides that the provisions of the Indenture will no longer be in
effect with respect to clauses (iii) and (iv) under "Consolidation, Merger and
Sale of Assets" and all the covenants described herein under "Covenants,"
clause (d) under "Events of Default" with respect to such covenants and
clauses (iii) and (iv) under "Consolidation, Merger and Sale of Assets," and
that clauses (e) and (f) under "Events of Default" shall be deemed not to be
Events of Default, upon, among other things, the deposit with the Trustee, in
trust, of money and/or U.S. Government Obligations that through the payment of
interest and principal in respect thereof in accordance with their terms will
provide money in an amount sufficient to pay the principal of, premium, if
any, and accrued interest on the Notes on the Stated Maturity of such payments
in accordance with the terms of the Indenture and the Notes, the satisfaction
of the provisions described in clauses (B)(ii), (C) and (D) of the preceding
paragraph and the delivery by the Company to the Trustee of an Opinion of
Counsel to the effect that, among other things, the Holders will
 
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<PAGE>
 
not recognize income, gain or loss for federal income tax purposes as a result
of such deposit and defeasance of certain covenants and Events of Default and
will be subject to federal income tax on the same amount and in the same
manner and at the same times as would have been the case if such deposit and
defeasance had not occurred.
 
  Defeasance and Certain Other Events of Default. In the event the Company
exercises its option to omit compliance with certain covenants and provisions
of the Indenture with respect to the Notes as described in the immediately
preceding paragraph and the Notes are declared due and payable because of the
occurrence of an Event of Default that remains applicable, the amount of money
and/or U.S. Government Obligations on deposit with the Trustee will be
sufficient to pay amounts due on the Notes at the time of their Stated
Maturity but may not be sufficient to pay amounts due on the Notes at the time
of the acceleration resulting from such Event of Default. However, the Company
will remain liable for such payments.
 
MODIFICATION AND WAIVER
 
  Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of not less than a majority in
aggregate principal amount of the outstanding Notes; provided, however, that
no such modification or amendment may, without the consent of each Holder
affected thereby, (i) change the Stated Maturity of the principal of, or any
installment of interest on, any Note, (ii) reduce the principal of, or
premium, if any, or interest on, any Note, (iii) change the place or currency
of payment of principal of, or premium, if any, or interest on, any Note, (iv)
impair the right to institute suit for the enforcement of any payment on or
after the Stated Maturity (or, in the case of a redemption, on or after the
Redemption Date) of any Note, (v) reduce the above-stated percentage of
outstanding Notes the consent of whose Holders is necessary to modify or amend
the Indenture, (vi) waive a default in the payment of principal of, premium,
if any, or interest on the Notes or (vii) reduce the percentage or aggregate
principal amount of outstanding Notes the consent of whose Holders is
necessary for waiver of compliance with certain provisions of the Indenture or
for waiver of certain defaults.
 
BOOK-ENTRY; DELIVERY AND FORM
 
  The certificates representing the Exchange Notes will initially be
represented by one or more permanent global Notes in definitive, fully
registered form without interest coupons (each a "Global Note") and will be
deposited with the Trustee as custodian for, and registered in the name of, a
nominee of DTC. Except in the limited circumstances described below under
"Certificated Notes," owners of beneficial interests in a Global Note will not
be entitled to receive physical delivery of Certificated Notes (as defined
below).
 
  Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in a Global
Note will be shown on, and the transfer of that ownership will be effected
only through, records maintained by DTC or its nominee (with respect to
interests of participants) and the records of participants (with respect to
interests of persons other than participants).
 
  So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Exchange Notes represented by such Global Note for
all purposes under the Indenture and the Exchange Notes. No beneficial owner
of an interest in a Global Note will be able to transfer that interest except
in accordance with DTC's applicable procedures, in addition to those provided
for under the Indenture.
 
  Payments of the principal of, and interest on, a Global Note will be made to
DTC or its nominee, as the case may be, as the registered owner thereof.
Neither the Company, the Trustee nor any Paying Agent will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in a Global Note or
for maintaining, supervising or reviewing any records relating to such
beneficial ownership interests.
 
  The Company expects that DTC or its nominee, upon receipt of any payment of
principal or interest in respect of a Global Note, will credit participants'
accounts with payments in amounts proportionate to their
 
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<PAGE>
 
respective beneficial interests in the principal amount of such Global Note as
shown on the records of DTC or its nominee. The Company also expects that
payments by participants to owners of beneficial interests in such Global Note
held through such participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts
of customers registered in the names of nominees for such customers. Such
payments will be the responsibility of such participants.
 
  Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules and will be settled in same-day funds.
 
  The Company expects that DTC will take any action permitted to be taken by a
holder of Exchange Notes (including the presentation of Exchange Notes for
exchange as described below) only at the direction of one or more participants
to whose account the DTC interests in a Global Note is credited and only in
respect of such portion of the aggregate principal amount of Exchange Notes as
to which such participant or participants has or have given such direction.
However, if there is an Event of Default under the Exchange Notes, DTC will
exchange the applicable Global Note for Certificated Exchange Notes, which it
will distribute to its participants.
 
  The Company understands that DTC is a limited purpose trust company
organized under the laws of the State of New York, a "banking organization"
within the meaning of New York Banking Law, a member of the Federal Reserve
System, a clearing corporation within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC was created to hold securities for its
participants and facilitate the clearance and settlement of securities
transactions between participants through electronic book-entry changes in
accounts of its participants, thereby eliminating the need for physical
movement of certificates and certain other organizations. Indirect access to
the DTC system is available to others such as banks, brokers, dealers and
trust companies that clear through or maintain a custodial relationship with a
participant, either directly or indirectly ("indirect participants").
 
  Although DTC is expected to follow the foregoing procedures in order to
facilitate transfers of interests in a Global Note among participants of DTC,
it is under no obligation to perform or continue to perform such procedures,
and such procedures may be discontinued at any time. Neither the Company nor
the Trustee will have any responsibility for the performance by DTC or its
respective participants or indirect participants of their respective
obligation under the rules and procedures governing their operations.
 
CERTIFICATED NOTES
 
  If DTC is at any time unwilling or unable to continue as a depositary for
the Global Notes, and a successor depositary is not appointed by the Company
within 90 days, the Company will issue Certificated Notes in exchange for the
Global Note. Holders of an interest in a Global Note may receive a
Certificated Note in accordance with DTC's rules and procedures in addition to
those provided for under the Indenture.
 
NO PERSONAL LIABILITY OF INCORPORATORS, STOCKHOLDERS, OFFICERS, DIRECTORS OR
EMPLOYEES
 
  The Indenture provides that no recourse for the payment of the principal of,
premium, if any, or interest on any of the Exchange Notes or for any claim
based thereon or otherwise in respect thereof, and no recourse under or upon
any obligation, covenant or agreement of the Company in the Indenture, or in
any of the Exchange Notes or because of the creation of any Indebtedness
represented thereby, shall be had against any incorporator, stockholder,
officer, director, employee or controlling person of the Company or of any
successor Person thereof. Each Holder, by accepting the Exchange Notes, waives
and releases all such liability.
 
CONCERNING THE TRUSTEE
 
  The Indenture provides that, except during the continuance of a Default, the
Trustee will not be liable, except for the performance of such duties as are
specifically set forth in such Indenture. If an Event of Default has occurred
and is continuing, the Trustee will use the same degree of care and skill in
its exercise as a prudent person would exercise under the circumstances in the
conduct of such person's own affairs.
 
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<PAGE>
 
  The Indenture and provisions of the Trust Indenture Act of 1939, as amended,
incorporated by reference therein contain limitations on the rights of the
Trustee, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Trustee is permitted
to engage in other transactions; provided, however, that if it acquires any
conflicting interest, it must eliminate such conflict or resign.
 
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<PAGE>
 
                             PLAN OF DISTRIBUTION
 
  Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Senior
Notes where such Senior Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, for a
period not to exceed 180 days after the Expiration Date, it will furnish
additional copies of this Prospectus, as amended or supplemented, to any
broker-dealer that reasonably requests such documents for use in connection
with any such resale.
 
  The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit of any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
 
  The Exchange Notes will constitute a new issue of securities with no
established trading market. The Company does not intend to list the Exchange
Notes on any national securities exchange or to seek approval for quotation
through any automated quotation system. The Company has been advised by the
Placement Agents that following completion of the Exchange Offer, the
Placement Agents intend to make a market in the Exchange Notes. However, the
Placement Agents are not obligated to do so and any market-making activities
with respect to the Exchange Notes may be discontinued at any time without
notice. Accordingly, no assurance can be given that an active public or other
market will develop for the Exchange Notes or as to the liquidity of or the
trading market for the Exchange Notes. If a trading market does not develop or
is not maintained, holders of the Exchange Notes may experience difficulty in
reselling the Exchange Notes or may be unable to sell them at all. If a market
for the Exchange Notes develops, any such market may cease at any time. If a
public trading market develops for the Exchange Notes, future trading prices
of the Exchange Notes will depend on many factors, including, among other
things, prevailing interest rates, the market for similar securities, the
financial conditions and results of operations of the Company and other
factors beyond the control of the Company, including general economic
conditions. Notwithstanding the registration of the Exchange Notes in the
Exchange Offer, holders who are "affiliates" of the Company (within the
meaning of Rule 405 under the Securities Act) may publicly offer for sale or
resell the Exchange Notes only in compliance with the provisions of Rule 144
under the Securities Act or any other available exemptions under the
Securities Act.
 
  The Company has agreed to pay all expenses incident to the Exchange Offer
other than commissions or concessions of any brokers or dealers, and will
indemnify the holders of the Senior Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
 
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<PAGE>
 
                                 LEGAL MATTERS
 
  Certain legal matters in connection with the Exchange Notes offered hereby
are being passed upon for the Company by Hogan & Hartson L.L.P., Washington,
D.C., counsel for the Company. Hogan & Hartson L.L.P. also provides legal
services to ITC Holding, its affiliated companies and Campbell B. Lanier, III,
Chairman and Chief Executive Officer of ITC Holding. Anthony S. Harrington, a
partner of Hogan & Hartson, L.L.P., beneficially owns 34,800 shares of common
stock of ITC Holding.
 
                                    EXPERTS
 
  The balance sheet of ITC/\DeltaCom, Inc. as of June 30, 1997 and the related
statements of operations, stockholder's deficit, and cash flows for the period
from inception (March 24, 1997) through June 30, 1997 included in this
Registration Statement have been audited by Arthur Andersen LLP, independent
public accountants, as stated in their report with respect thereto and is
included herein in reliance upon the authority of said firm as experts in
giving said report.
 
  The combined balance sheets of ITC Transmission Systems, Inc., ITC
Transmission Systems II, Inc., Gulf States Transmission Systems, Inc., Eastern
Telecom, Inc. (d.b.a. InterQuest), and DeltaCom, Inc. as of December 31, 1995
and 1996, and the related combined statements of operations, stockholder's
equity and cash flows for each of the three years in the period ended December
31, 1996, included in this Registration Statement have been audited by Arthur
Andersen LLP, independent public accountants, to the extent and for the
periods indicated in their report, and are included herein in reliance upon
the authority of said firm as experts in giving said report.
 
  The statements of operations, stockholders' equity and cash flows of
DeltaCom, Inc. for the year ended December 31, 1994 included in this
Registration Statement have been audited by Martin Stuedeman & Associates,
P.C., independent auditors, as stated in their report appearing herein. The
statements of operations, stockholders' equity and cash flows of DeltaCom,
Inc. for the year ended December 31, 1995 included in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, as stated in their report with respect thereto, and are included
herein in reliance upon the authority of said firm as experts in giving said
report.
 
  The balance sheets of Gulf States FiberNet as of December 31, 1995 and 1996,
and the related statements of operations, partners' capital, and cash flows
for the period from inception (August 17, 1994) through December 31, 1994 and
for the years ended December 31, 1995 and 1996 included in this Registration
Statement have been audited by Arthur Andersen LLP, independent public
accountants, to the extent and for the periods indicated in their report, and
are included herein in reliance upon the authority of said firm as experts in
giving said report.
 
  The financial statements of Georgia Fiber for the years ended December 31,
1996 and 1995 included in this Registration Statement have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report
appearing herein, and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
 
                                      115
<PAGE>
 
                             AVAILABLE INFORMATION
 
  The Company is not currently subject to the informational reporting
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement (of which this
Prospectus is a part), the Company will become subject to the informational
requirements of the Exchange Act. In addition, the Indenture provides that,
regardless of whether the Company is required to file reports with the
Commission, the Company shall file with the Commission all such reports and
other information as would be required to be filed with the Commission if the
Company were subject to the reporting requirements of the Exchange Act. The
Company will supply, or cause the Trustee to supply, to each holder of
Exchange Notes, without cost, copies of such reports or other information.
 
  The Company has filed the Registration Statement (of which this Prospectus
is a part) under the Securities Act with respect to the Exchange Offer. As
permitted by the rules and regulations of the Commission, this Prospectus does
not contain all the information set forth in the Registration Statement. For
further information about the Company and the Exchange Offer, reference is
made to the Registration Statement and to the financial statements, exhibits
and schedules filed therewith. The statements contained in this Prospectus
about the contents of any contract or other document referred to are not
necessarily complete, and in each instance, reference is made to a copy of
such contract or other document filed as an exhibit to the Registration
Statement, each such statement being qualified in all respects by such
reference. Copies of each such document may be obtained from the Commission at
its principal office in Washington, D.C. upon payment or the charges
prescribed by the Commission or, in the case of certain such documents, by
accessing the Commission's World Wide Web site at http://www.sec.gov.
 
  The Company is required by the terms of the Indenture to furnish the Trustee
with annual reports containing consolidated financial statements audited by
their independent public accountants and with quarterly reports containing
unaudited condensed consolidated financial statements for each of the first
three quarters of each fiscal year.
 
                                      116
<PAGE>
 
                                   GLOSSARY
 
  Access--Telecommunications services that permit long distance carriers to
use local exchange facilities to originate and/or terminate long distance
service.
 
  Access charges--The fees paid by long distance carriers to local exchange
carriers for originating and terminating long distance calls on their local
network.
 
  AT&T -- AT&T Corp.
 
  Cable & Wireless--Cable & Wireless Communications Inc.
 
  Central offices--The switching centers or central switching facilities of
the local exchange companies.
 
  Co-location--The ability of a competitor carrier to connect its network to
the local exchange carriers' central offices. Physical co-location occurs when
a competitor carrier places its network connection equipment inside the local
exchange company's central offices. Virtual co-location is an alternative to
physical co-location pursuant to which the local exchange company permits a
competitor carrier to connect its network to the local exchange company's
central offices on comparable terms, even through the competitor carrier's
network connection equipment is not physically located inside the central
offices.
 
  Dedicated--Local telecommunications lines reserved for use by particular
customers, generally for connection between the customer's location and an
interexchange carrier POP.
 
  DeltaCom--DeltaCom, Inc., an Alabama corporation which provides long
distance telephone services in the southeastern United States. DeltaCom became
a wholly owned subsidiary of the Company as part of the Reorganization.
 
  Dialing Parity--The ability of a competing local or toll service provider to
provide telecommunications services in such a manner that customers have the
ability to route automatically, without the use of any access code, their
telecommunications to the service provider of the customer's designation.
 
  Digital--A method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the
binary digits 0 and 1. Digital transmission and switching technologies employ
a sequence of these pulses to represent information as opposed to the
continuously variable analog signal. The precise digital numbers minimize
distortion (such as graininess or snow in the case of video transmission, or
static or other background distortion in the case of audio transmission).
 
  DS-1, DS-3--Standard telecommunications industry digital signal formats,
which are distinguishable by bit rate (the number of binary digits (0 and 1)
transmitted per second). DS-1 service has a bit rate of 1.544 megabits per
second and DS-3 service has a bit rate of 45 megabits per second.
 
  Frontier--Allnet Communications Services, Inc. d/b/a Frontier Communications
Services.
 
  GTE--GTE Corporation.
 
  Gulf States FiberNet--A Georgia general partnership, prior to the
Reorganization, that operates a fiber-optic telecommunications network between
Atlanta, Georgia and Longview, Texas. Gulf States FiberNet's assets and
operations now are 100% owned by Gulf States Transmission Systems, Inc.
 
  Gulf States Transmission--Gulf States Transmission Systems, Inc., a Delaware
corporation, formed in 1994 by ITC Holding to be the 36% managing general
partner in Gulf States FiberNet and which now owns 100% of Gulf States
FiberNet's assets and its operations. Gulf States Transmission Systems, Inc.
became a wholly owned subsidiary of the Company as part of the Reorganization.
 
                                      G-1
<PAGE>
 
  Interconnection--Interconnection of facilities between or among local
exchange carriers, including potential physical collocation of one carrier's
equipment in the other carrier's premise to facilitate such interconnection.
 
  Interconnection Decision--The August 1996 order issued by the FCC
implementing the interconnection provisions of the Telecommunications Act.
Portions of this order have been stayed by the U.S. Eighth Circuit Court of
Appeals.
 
  InterLATA--Telecommunications services originating in a LATA and terminating
outside of that LATA.
 
  InterQuest--Eastern Telecom, Inc., a Georgia corporation, d/b/a InterQuest,
engaged solely in the provision of operator and other directory assistance
services. Eastern Telecom merged into Interstate FiberNet, Inc. as part of the
Reorganization.
 
  Interstate FiberNet--A Georgia general partnership which operates a fiber-
optic telecommunications network between Georgia and Alabama. Interstate
FiberNet became part of Interstate FiberNet, Inc. following the
Reorganization.
 
  Interstate FiberNet, Inc.--The wholly owned subsidiary of the Company that
currently holds the businesses that were held by ITC Transmission Systems,
Inc., ITC Transmission Systems II, Inc., InterQuest and Interstate FiberNet
prior to the Reorganization.
 
  IntraLATA--Telecommunications services originating and terminating in the
same LATA.
 
  ITC Holding--ITC Holding Company, Inc. is a diversified telecommunications
company based in West Point, Georgia, with substantial holdings in
telecommunications companies operating in the southern United States.
 
  ITC Transmission Systems II, Inc.--A Delaware corporation formed by ITC
Holding to hold a 51 percent interest in InterState FiberNet. ITC Transmission
Systems II merged into Interstate FiberNet, Inc. as part of the
Reorganization.
 
  IXC--IXC Communications Inc.
 
  LATA (local access and transport area)--A geographic area composed of
contiguous local exchanges, usually but not always within a single state.
There are approximately 200 LATAs in the United States.
 
  LCI--LCI International Telecom Corp.
 
  Local exchange--A geographic area determined by the local exchange carrier
in which calls generally are transmitted without toll charges to the calling
or called party.
 
  Local exchange carrier--A company providing local telephone services.
 
  Long distance carriers (interexchange carriers)--Long distance carriers
provide services between local exchanges on an interstate or intrastate basis.
A long distance carrier may offer services over its own or another carrier's
facilities.
 
  MCI--MCI Communications Corporation.
 
  Nortel Access Node--A remote multi-purpose vehicle for local switched access
transport services. Used to extend Nortel DMS-500 local access lines to remote
cities along the long-haul network.
 
  Number portability--The ability of an end user to change local exchange
carriers while retaining the same telephone number.
 
  OC-N--Standard telecommunications industry measurements for optical
transmission capacity distinguishable by bit rate transmitted per second and
the number of voice or data transmissions that can be simultaneously
transmitted through fiber optic cable. "N" represents the number of DS-3s
involved. For
 
                                      G-2
<PAGE>
 
example, an OC-3 is generally equivalent to three DS-3s and has a bit rate of
155.52 megabits per second and can transmit 2,016 simultaneous voice or data
transmissions. An OC-12 has a bit rate of 622.08 megabits per second and can
transmit 8,064 simultaneous voice or data transmissions. An OC-48 has a bit
rate of 2488.32 megabits per second and can transmit 32,256 simultaneous voice
or data transmissions.
 
  POPs (points of presence)--Locations where a long distance carrier has
installed transmission equipment in a service area that serves as, or relays
calls to, a network switching center of that long distance carrier.
 
  Private line--A dedicated telecommunications connection between end user
locations.
 
  "PUC" or "Public utilities commission"--A state regulatory body, established
in most states, which regulates utilities, including telephone companies
providing intrastate services.
 
  Reciprocal compensation--The same compensation of a new competitive local
exchange carrier for termination of a local call by the local exchange carrier
on its network as the new competitor pays the local exchange carrier for
termination of local calls on the local exchange carrier network.
 
  Reorganization--The contribution to the Company by ITC Holding of the
businesses of Interstate FiberNet, Gulf States FiberNet, DeltaCom and
InterQuest.
 
  Resale--Resale by a provider of telecommunications services (such as a local
exchange carrier) of such services to other providers or carriers on a
wholesale or a retail basis.
 
  Route miles--The number of miles of the telecommunications path in which
fiber optic cables are installed.
 
  SCANA--SCANA Communications, Inc.
 
  Self-healing ring--A self-healing ring is a network design in which the
network backbone consists of a continuous ring connecting a central hub
facility with one or more network nodes. Traffic is routed between the hub and
each of the nodes simultaneously in both a clockwise and a counterclockwise
direction. In the event of a cable cut or component failure along one of these
paths, traffic will continue to flow along the alternate path so no traffic is
lost. In the event of a catastrophic node failure, other nodes will be
unaffected because traffic will continue to flow along whichever path (primary
or alternate) does not pass through the affected node. The switch from the
primary to the alternate path will be imperceptible to most users.
 
  Sprint--Sprint Corporation.
 
  "SS7" or "Signaling System 7" services--Signaling System 7 network services
utilize common channel signaling, which reduces connect time delays and
directs calls.
 
  Switch--A device that opens or closes circuits or selects the paths or
circuits to be used for transmission of information. Switching is a process of
interconnecting circuits to form a transmission path between users.
 
  Switched access transport services--Transportation of switched traffic along
dedicated lines between the local exchange company central offices and long
distance carrier POPs.
 
  Switched traffic--Telecommunications traffic along the public switched
network. This traffic is generally switched at the local exchange company's
central offices.
 
  Transmission--ITC Transmission Systems, Inc., a Delaware corporation formed
by ITC Holding to hold a 49% managing interest in InterState FiberNet. ITC
Transmission Systems became a wholly owned subsidiary of the Company as part
of the Reorganization and changed its name to Interstate FiberNet, Inc.
 
  Unbundled Access--Access to unbundled elements of a telecommunications
services provider's network, including network facilities, equipment,
features, functions and capabilities, at any technically feasible point within
such network.
 
  WorldCom--WorldCom, Inc.
 
 
                                      G-3
<PAGE>
 
                       INDEX TO THE FINANCIAL STATEMENTS
 
ITC/\DELTACOM, INC.
<TABLE>
<S>                                                                        <C>
  Report of Independent Public Accountants................................  F-2
  Balance Sheet--June 30, 1997 ...........................................  F-3
  Statement of Operations for the Period from Inception (March 24, 1997)
   through June 30, 1997..................................................  F-4
  Statement of Stockholder's Deficit for the Period from Inception (March
   24, 1997) through June 30, 1997........................................  F-5
  Statement of Cash Flows for the Period from Inception (March 24, 1997)
   thrugh June 30, 1997...................................................  F-6
  Notes to Financial Statements...........................................  F-7
INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.), ITC
 TRANSMISSION SYSTEMS II, INC., GULF STATES TRANSMISSION SYSTEMS, INC.,
 EASTERN TELECOM, INC., D.B.A INTERQUEST, DELTACOM, INC. AND ITC/\DELTACOM,
 INC. (REORGANIZED AS ITC/\DELTACOM, INC.)
  Report of Independent Public Accountants................................ F-10
  Combined Balance Sheets--December 31, 1995 and 1996 and June 30, 1997
   (unaudited) ........................................................... F-11
  Combined Statements of Operations for the Years Ended December 31, 1994,
   1995, and 1996 and for the Six Months Ended June 30, 1996 and 1997
   (unaudited)............................................................ F-12
  Combined Statements of Stockholder's Equity for the Years Ended December
   31, 1994, 1995, and 1996 and for the Six Months Ended June 30, 1997
   (unaudited)............................................................ F-13
  Combined Statements of Cash Flows for the Years Ended December 31, 1994,
   1995, and 1996 and for the Six Months Ended June 30, 1996 and 1997
   (unaudited)............................................................ F-14
  Notes to Combined Financial Statements.................................. F-16
DELTACOM, INC.
  Independent Auditors' Report............................................ F-35
  Report of Independent Public Accountants................................ F-36
  Statements of Operations for the Years Ended December 31, 1994 and 1995
   and for the One Month Ended January 29, 1996........................... F-37
  Statements of Stockholder's Equity for the Years Ended December 31, 1994
   and 1995 and for the One Month Ended January 29, 1996.................. F-38
  Statements of Cash Flows for the Years Ended December 31, 1994 and 1995
   and for the One Month Ended January 29, 1996........................... F-39
  Notes to Financial Statements........................................... F-40
GULF STATES FIBERNET
  Report of Independent Public Accountants................................ F-43
  Balance Sheets--December 31, 1995 and 1996 and March 27, 1997
   (unaudited) ........................................................... F-44
  Statements of Operations for the Period From Inception (August 17, 1994)
   Through December 31, 1994 and for the Years Ended December 31, 1995 and
   1996 and for the periods ended March 31, 1996 and March 27, 1997
   (unaudited)............................................................ F-45
  Statements of Partners' Capital for the Period From Inception (August
   17, 1994) Through December 31, 1994 and for the Years Ended December
   31, 1995 and 1996 and for the period ended March 27, 1997 (unaudited).. F-46
  Statements of Cash Flows for the Period From Inception (August 17, 1994)
   Through December 31, 1994 and for the Years Ended December 31, 1995 and
   1996 and for the periods ended March 31, 1996 and March 27, 1997
   (unaudited)............................................................ F-47
  Notes to Financial Statements........................................... F-48
GEORGIA FIBER
  Independent Auditors' Report............................................ F-54
  Balance Sheets--December 31, 1995 and 1996, and March 31, 1996 and March
   27, 1997 (unaudited)................................................... F-55
  Statements of Income and Net Equity for the Years Ended December 31,
   1995 and 1996 and for the periods ended March 31, 1996 and March 27,
   1997 (unaudited)....................................................... F-56
  Statements of Cash Flows for the Years Ended December 31, 1995 and 1996
   and for the periods ended March 31, 1996 and March 27, 1997
   (unaudited)............................................................ F-57
  Notes to Financial Statements........................................... F-58
</TABLE>
 
                                      F-1
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To ITC/\DeltaCom, Inc.:
 
  We have audited the accompanying balance sheet of ITC/\DELTACOM, INC. (a
Delaware corporation) as of June 30, 1997 and the related statements of
operations, stockholder's deficit and cash flows for the period from inception
(March 24, 1997) to June 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these statements based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of ITC/\DeltaCom, Inc. as of
June 30, 1997 and the results of its operations and its cash flows for the
period from inception (March 24, 1997) through June 30, 1997 in conformity
with generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
July 31, 1997 (except with respect 
 to the Credit Agreement discussion 
 in Note 4, as to which the date 
 is September 17, 1997)
 
                                      F-2
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
                                 BALANCE SHEET
 
                                 JUNE 30, 1997
 
<TABLE>
<S>                                                              <C>
                             ASSETS
CASH............................................................ $    401,857
RESTRICTED ASSET................................................  194,775,128
                                                                 ------------
    Total current assets........................................  195,176,985
OTHER NON-CURRENT ASSETS........................................    5,978,387
                                                                 ------------
TOTAL ASSETS.................................................... $201,155,372
                                                                 ============
             LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES--Accounts payable and accrued liabilities... $  1,646,575
LONG-TERM DEBT..................................................  200,000,000
                                                                 ------------
    Total liabilities........................................... $201,646,575
                                                                 ------------
PREFERRED STOCK, $.01 par value; 5,000,000 shares authorized, 0
 shares issued and outstanding..................................            0
CLASS A COMMON STOCK, $.01 par value; 60,000,000 shares
 authorized, 0 shares issued and outstanding....................            0
CLASS B COMMON STOCK, $.01 par value; 30,000,000 shares
 authorized, 15,000,000 shares issued and outstanding...........      150,000
Accumulated deficit.............................................     (641,203)
                                                                 ------------
    Total stockholder's deficit.................................     (491,203)
                                                                 ------------
TOTAL LIABILITIES AND STOCKHOLDER'S DEFICIT..................... $201,155,372
                                                                 ============
</TABLE>
 
 
 
 
       The accompanying notes are an integral part of this balance sheet.
 
                                      F-3
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
                            STATEMENT OF OPERATIONS
 
                 FOR THE PERIOD FROM INCEPTION (MARCH 24, 1997)
                             THROUGH JUNE 30, 1997
 
<TABLE>
<S>                                                                <C>
OPERATING EXPENSES:
  Depreciation and amortization................................... $    60,833
                                                                   -----------
OPERATING LOSS....................................................     (60,833)
                                                                   -----------
OTHER INCOME (EXPENSE):
  Interest expense................................................  (1,687,671)
  Interest income.................................................     776,985
                                                                   -----------
    Total other income (expense)..................................    (910,686)
                                                                   -----------
LOSS BEFORE INCOME TAXES..........................................    (971,519)
INCOME TAX BENEFIT................................................     330,316
                                                                   -----------
NET LOSS.......................................................... $  (641,203)
                                                                   ===========
</TABLE>
 
 
 
         The accompanying notes are an integral part of this statement.
 
                                      F-4
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
                       STATEMENT OF STOCKHOLDER'S DEFICIT
 
                 FOR THE PERIOD FROM INCEPTION (MARCH 24, 1997)
                             THROUGH JUNE 30, 1997
 
<TABLE>
<CAPTION>
                                    CLASS A CLASS B  ADDITIONAL
                          PREFERRED COMMON   COMMON   PAID-IN   RETAINED
                            STOCK    STOCK   STOCK    CAPITAL    DEFICIT     TOTAL
                          --------- ------- -------- ---------- ---------  ---------
<S>                       <C>       <C>     <C>      <C>        <C>        <C>
Balance at inception
 (March 24, 1997).......     $ 0      $ 0   $150,000    $ 0     $       0  $ 150,000
  Net loss..............       0        0          0      0      (641,203)  (641,203)
                             ---      ---   --------    ---     ---------  ---------
Balance, June 30, 1997..     $ 0      $ 0   $150,000    $ 0     $(641,203) $(491,203)
                             ===      ===   ========    ===     =========  =========
</TABLE>
 
 
 
         The accompanying notes are an integral part of this statement.
 
                                      F-5
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
                            STATEMENT OF CASH FLOWS
 
                   FOR PERIOD FROM INCEPTION (MARCH 24, 1997)
                             THROUGH JUNE 30, 1997
 
<TABLE>
     <S>                                                         <C>
     CASH FLOWS FROM OPERATING ACTIVITIES:
      Net loss.................................................  $    (641,203)
      Adjustments to reconcile net loss to net
       cash provided by operating activities:
        Depreciation and amortization..........................         60,833
        Changes in operating assets and liabilities:
         Accounts payable and accrued liabilities..............      1,646,575
                                                                 -------------
           Total adjustments...................................      1,707,408
                                                                 -------------
           Net cash provided by operating activities...........      1,066,205
                                                                 -------------
     CASH FLOWS FROM INVESTING ACTIVITIES:
      Investment in restricted assets (Note 1).................   (194,775,128)
                                                                 -------------
     CASH FLOWS FROM FINANCING ACTIVITIES:
      Proceeds from issuance of common stock...................        150,000
      Proceeds from issuance of long-term debt, net of offering
       expenses................................................    193,960,780
                                                                 -------------
       Net cash provided by financing activities...............    194,110,780
                                                                 -------------
     NET INCREASE IN CASH......................................        401,857
     CASH, BEGINNING OF THE PERIOD.............................              0
                                                                 -------------
     CASH, END OF THE PERIOD...................................  $     401,857
                                                                 =============
</TABLE>
 
 
 
         The accompanying notes are an integral part of this statement.
 
                                      F-6
<PAGE>
 
                              ITC/\DELTACOM, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                                 JUNE 30, 1997
 
1. ORGANIZATION AND NATURE OF BUSINESS
 
  ITC/\DeltaCom, Inc. (the "Company") was incorporated under the laws of the
state of Delaware on March 24, 1997. The purpose of incorporating the Company
was to enable ITC Holding Company, Inc. ("ITC Holding"), the Company's parent
company and only stockholder to complete a reorganization of certain of its
wholly owned subsidiaries on July 25, 1997 as follows:
 
  .  Eastern Telecom, Inc. (d.b.a. InterQuest) and ITC Transmission Systems
     II, Inc. were merged with and into Interstate FiberNet, Inc. (formerly
     ITC Transmission Systems, Inc.) ("FiberNet").
 
  .  ITC Holding contributed all of the outstanding capital stock of
     FiberNet, DeltaCom, Inc. ("DeltaCom") and Gulf States Transmission
     Systems, Inc. to the Company.
 
  .  The Company contributed all of the outstanding capital stock of
     DeltaCom, Inc. and Gulf States Transmission Systems, Inc. to FiberNet.
 
  In connection with the Reorganization, FiberNet undertook to repay (and
DeltaCom agreed to reimburse FiberNet) approximately $31 million of DeltaCom's
advances from ITC Holding. ITC Holding then forgave such indebtedness and
contributed it to FiberNet as additional equity.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Cash and cash equivalents
 
  For purposes of the statement of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be cash
equivalents.
 
 Debt issuance costs
 
  The Company has incurred debt issuance costs in connection with its long-
term debt. These costs have been capitalized and are being amortized over the
term of the related debt.
 
3. EQUITY INTERESTS
 
CAPITAL STOCK
 
  The Company has authorized two classes of common stock. Holders of the
Company's Class A Common Stock have one vote per share, while holders of the
Company's Class B Common Stock have ten votes per share. At June 30, 1997, 0
shares of the Company's Class A Common Stock and 15,000,000 shares of the
Company's Class B Common Stock were outstanding.
 
EMPLOYEE STOCK OPTION PLAN
 
  On March 24, 1997, the Company adopted and its stockholder approved the 1997
Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan provides
for the grant of options that are intended to qualify as "incentive stock
options" under Section 422 of the Internal Revenue Code of 1986, as amended
(the "Code") to employees of the Company, its subsidiaries to be obtained in
the reorganization described in Note 1, and ITC Holding, as well as the grant
of non-qualifying options to any other individual whose participation in the
Stock Option Plan is determined to be in the best interests of the Company.
The Stock Option Plan authorizes the issuance of up to 1.5 million shares of
Class A Common Stock pursuant to options granted under the Stock Option Plan
(subject to anti-dilution adjustments in the event of a stock split,
recapitalization or similar transaction). The maximum number of shares subject
to options that can be awarded under the Stock Option
 
                                      F-7
<PAGE>
 
                              ITC/\DELTACOM, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
Plan to any person is 500,000 shares. The Compensation Committee of the Board
of Directors will administer the Stock Option Plan and will grant options to
purchase Class A Common Stock.
 
  The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Class A Common Stock on the date of grant of the option (or 110% in the case
of an incentive stock option granted to an optionee beneficially owning more
than 10% of the outstanding Class A Common Stock). The option exercise price
for non-incentive stock options granted under the Stock Option Plan may not be
less than the par value of the Class A Common Stock on the date of grant of
the option. The maximum option term is 10 years (or five years in the case of
an incentive stock option granted to an optionee beneficially owning more than
10% of the outstanding Class A Common Stock). There is also a $100,000 limit
on the value of Class A Common Stock (determined at the time of grant) covered
by incentive stock options that become exercisable by an optionee in any year.
Options granted will become exercisable with respect to 50% of the shares
subject to the options on the second anniversary of the date of grant and with
respect to 25% of the shares subject to the options on each of the third and
fourth anniversaries of the date of grant.
 
  The Board of Directors may amend or terminate the Stock Option Plan with
respect to shares of Class A Common Stock as to which options have not been
granted.
 
  On March 24, 1997, the Company granted options to purchase 789,000 shares of
Class A Common Stock under the Stock Option Plan. All options were granted at
a price at least equal to the estimated fair value of the common stock on the
date of grant ($7.20) as determined by the Company's stockholder's board of
directors based on equity transactions and other analyses. On July 29, 1997,
the Company granted options to purchase 105,254 shares of Class A Common Stock
under The Stock Option Plan. All options were granted at a price at least
equal to the estimated fair value of the common stock on the date of grant
($7.20) as determined by the Company's stockholder's board of directors based
on equity transactions and other analyses.
 
DIRECTORS STOCK OPTION PLAN
 
  On March 24, 1997, the Company adopted and its stockholder approved the
Directors Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the "formula" grant of options that are not intended to qualify
as "incentive stock options" under Section 422 of the Code to directors of the
Company who are not officers or employees of the Company, ITC Holding, or any
subsidiary of the Company (each an "Eligible Director"). The Directors Plan
authorizes the issuance of up to 150,000 shares of Class A Common Stock
pursuant to options granted under the Directors Plan (subject to anti-dilution
adjustments in the event of a stock split, recapitalization or similar
transaction). The option exercise price for options granted under the
Directors Plan will be 100% of the fair market value of the shares of Class A
Common Stock on the date of grant of the option. Under the Directors Plan,
each Eligible Director will be granted an option to purchase 10,000 shares of
Class A Common Stock upon such person's initial election or appointment to
serve as director. Options granted will become exercisable with respect to 50%
of the shares subject to the options on the second anniversary of the date of
grant and with respect to 25% of the shares subject to the options on each of
the third and fourth anniversaries of the date of grant. The options will
expire ten years and 30 days after the date of grant.
 
  On March 24, 1997, the Company granted options to purchase 10,000 shares of
the Company's Class A common stock to each of its six nonemployee directors.
All options were granted at a price equal to the estimated fair value of the
common stock on the date of grant ($7.20) as determined by the Company's
stockholder's board of directors based on equity transactions and other
analyses.
 
 
                                      F-8
<PAGE>
 
                              ITC/\DELTACOM, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
 
  During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has elected to account
for options granted to employees under APB Opinion No. 25, under which no
compensation cost has been recognized. Options granted to non-employees, if
any, will be accounted for under SFAS No. 123 and compensation expense equal
to the fair value of the options granted will be recognized.
 
4. FINANCING ARRANGEMENTS
 
 Senior Notes Offering
 
  On June 3, 1997, the Company completed the issuance of $200 million
principal amount of 11% Senior Notes due 2007 (the "Offering"). Proceeds from
the Offering were held by the trustee until all regulatory approvals related
to the reorganization described in Note 1 were received. On July 25, 1997, the
reorganization was completed and the proceeds from the Offering were released
to the Company. In accordance with the Indenture related to the Notes,
approximately $62.7 million of the approximately $192.7 million net proceeds
was invested in U.S. government securities, which are in a pledged account
held by the Trustee to secure and fund the first six interest payments on the
Notes. Additionally, approximately $99.6 million of the net proceeds was used
to repay outstanding debt and related accrued interest owed by the Company's
subsidiaries. The Company intends to use the remaining approximately $30.4
million of net proceeds (i) to fund market expansion activities of the
Company's telecommunications business, including development and construction
costs of the Company's fiber optic network and its regional sales offices, and
(ii) for additional working capital and other general corporate purposes,
including the funding of cash flow deficits (after capital expenditures).
Pending such uses, the Company has invested such amounts in U.S. government
securities.
 
 Credit Agreement
 
  On September 17, 1997, FiberNet entered into a credit agreement with
NationsBank of Texas, N.A., as administrative lender (the "Credit Agreement").
The Credit Agreement provides for a term and revolving credit facility of up
to $100 million to be used for working capital and other purposes, including
refinancing existing indebtedness, capital expenditures, and permitted
acquisitions. The Credit Agreement matures on September 15, 2002 and includes
a $50 million multi-draw term loan facility and a $50 million revolving credit
facility. Amounts may be drawn under the term loan facility until September
15, 1999. All $50 million of the term loan facility must be utilized before
drawing down any amount over $10 million under the revolving credit facility.
Amounts drawn under the Credit Agreement will bear interest, at FiberNet's
option, at either the Base Rate of the LIBOR Rate, plus an applicable margin.
 
  Borrowings under the Credit Agreement are guaranteed by the Companies and
are secured by a first priority lien on substantially all current and future
assets and properties of FiberNet and its subsidiaries and a first priority
pledge of the stock of FiberNet and its subsidiaries. The Credit Agreement
contains covenants limiting the Companies ability to incur debt or make
guaranties, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, issue capital stock,
engage in transactions with affiliates, sell assets, and engage in mergers and
acquisitions. The Credit Agreement also requires FiberNet to comply with
certain financial tests and to maintain certain financial ratios on a
consolidated basis.
 
                                      F-9
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Interstate FiberNet, Inc. (formerly ITC Transmission Systems, Inc.),
ITC Transmission Systems II, Inc.,
Gulf States Transmission Systems, Inc.,
Eastern Telecom, Inc., d.b.a. InterQuest, and
DeltaCom, Inc.:
 
  We have audited the accompanying combined balance sheets of INTERSTATE
FIBERNET, INC., (FORMERLY ITC TRANSMISSION SYSTEMS, INC.) (a Delaware
corporation), ITC TRANSMISSION SYSTEMS II, INC. (a Delaware corporation), GULF
STATES TRANSMISSION SYSTEMS, INC. (a Delaware corporation), EASTERN TELECOM,
INC., D.B.A. INTERQUEST (a Georgia corporation), AND DELTACOM, INC. (an
Alabama corporation) (collectively referred to as the "Companies" and
contributed to ITC/\DeltaCom, Inc. in connection with the reorganization as
discussed in Notes 1 and 16) as of December 31, 1995 and 1996 and the related
combined statements of operations, stockholder's equity, and cash flows for
each of the three years in the period ended December 31, 1996. These combined
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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.
 
  In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of the
Companies as of December 31, 1995 and 1996 and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996 in conformity with generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
March 27, 1997 (except with respect 
 to Note 16, as to which the date 
 is September 17, 1997)
 
                                     F-10
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.)
 
                       ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                 DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                            COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
                                             DECEMBER 31,
                                       -------------------------    JUNE 30,
                                          1995          1996          1997
                                       -----------  ------------  ------------
                                                                  (UNAUDITED)
<S>                                    <C>          <C>           <C>
                ASSETS
CURRENT ASSETS:
 Cash and cash equivalents............ $   656,096  $  1,301,415  $  5,478,614
 Restricted assets....................           0             0   194,775,128
 Accounts receivable:
 Customer, net of allowance for
  uncollectible accounts of $35,787,
  $856,858 and $1,019,606 in 1995,
  1996 and 1997, respectively.........   1,577,037    11,029,037    17,308,908
 Affiliate............................      84,796     1,227,661       178,360
 Inventory............................           0       543,447       630,431
 Prepaid expenses.....................     220,022     1,191,287     1,348,767
 Federal income tax refunds receivable
  from Parent (Note 8)................     523,782     2,546,534       663,200
 Deferred income taxes (Note 8).......      85,357       525,660       364,302
                                       -----------  ------------  ------------
   Total current assets...............   3,147,090    18,365,041   220,747,710
                                       -----------  ------------  ------------
PROPERTY, PLANT, AND EQUIPMENT, NET
 (NOTE 3).............................   9,386,444    31,880,556   115,852,080
OTHER LONG-TERM ASSETS:
 Intangible assets, net of accumulated
  amortization of $58,695, $1,431,753
  and $1,973,562 in 1995, 1996 and
  1997, respectively (Note 4).........   1,721,871    55,517,575    65,397,003
 Investments (Note 5).................   6,653,079     7,424,797         5,000
 Other long-term assets...............      13,853        20,010        13,928
                                       -----------  ------------  ------------
   Total assets....................... $20,922,337  $113,207,979  $402,015,721
                                       ===========  ============  ============
 LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
 Accounts payable:
 Trade................................ $   376,799  $  4,192,927  $  7,130,290
 Construction.........................   1,020,904       972,215     3,664,666
 Affiliate (Note 12)..................     577,439       658,990             0
 Accrued interest expense payable to
  Parent..............................           0     5,830,716     9,011,106
 Accrued compensation.................     275,856     1,189,395     1,391,633
 Unearned revenue.....................     248,459       762,829     3,178,367
 Other accrued liabilities............     214,769       983,270     3,871,230
 Advances from Parent.................           0             0    79,886,220
 Current portion of long-term debt
  (Note 6)............................     675,000       290,140    43,875,381
 Current portion of capital lease
  obligations (Note 6)................           0        69,471       563,153
                                       -----------  ------------  ------------
   Total current liabilities..........   3,389,226    14,949,953   152,572,046
                                       -----------  ------------  ------------
LONG-TERM LIABILITIES:
 Advance from Parent (Note 7).........   1,456,477    74,227,827             0
 Deferred income taxes (Note 8).......     757,098     3,918,140     4,402,511
 Long-term debt (Note 6)..............   1,012,500       640,112   208,611,385
 Capital lease obligations (Note 6)...           0       215,421     2,979,207
                                       -----------  ------------  ------------
   Total long-term liabilities........   3,226,075    79,001,500   215,993,103
                                       -----------  ------------  ------------
COMMITMENTS AND CONTINGENCIES (NOTES
 6, 7, 10, AND 16)
STOCKHOLDER'S EQUITY:
 Common stock (Note 9)................          26           826       150,826
 Additional paid-in capital...........  14,633,723    23,492,162    40,814,227
 Accumulated deficit..................    (326,713)   (4,236,462)   (7,514,481)
                                       -----------  ------------  ------------
   Total stockholder's equity.........  14,307,036    19,256,526    33,450,572
                                       -----------  ------------  ------------
   Total liabilities and stockholder's
    equity............................ $20,922,337  $113,207,979  $402,015,721
                                       ===========  ============  ============
</TABLE>
 The accompanying notes are an integral part of these combined balance sheets.
 
                                      F-11
<PAGE>
 
                              ITC/\DELTACOM, INC.,
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
 
                       ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                 DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                       COMBINED STATEMENTS OF OPERATIONS
 
<TABLE>
<CAPTION>
                              YEARS ENDED DECEMBER 31,          SIX MONTHS ENDED JUNE 30,
                          -----------------------------------  -----------------------------
                             1994        1995        1996         1996         1997
                          ----------  ----------  -----------  -----------  -----------
                                                               (UNAUDITED)  (UNAUDITED)
<S>                       <C>         <C>         <C>          <C>          <C>          
OPERATING REVENUES......  $4,945,902  $5,750,587  $66,518,585  $28,574,799  $53,365,061
COST OF SERVICES........   2,484,744   3,149,231   38,756,287   16,129,463   25,302,747
                          ----------  ----------  -----------  -----------  -----------
GROSS MARGIN............   2,461,158   2,601,356   27,762,298   12,445,336   28,062,314
                          ----------  ----------  -----------  -----------  -----------
OPERATING EXPENSES:
  Selling, operations,
   and administration...     948,230   1,626,678   18,876,572    8,206,621   16,961,324
  Depreciation and
   amortization.........     738,052   1,267,882    6,438,074    2,832,017    8,273,232
                          ----------  ----------  -----------  -----------  -----------
    Total operating
     expenses...........   1,686,282   2,894,560   25,314,646   11,038,638   25,234,556
                          ----------  ----------  -----------  -----------  -----------
OPERATING INCOME
 (LOSS).................     774,876    (293,204)   2,447,652    1,406,698    2,827,758
                          ----------  ----------  -----------  -----------  -----------
OTHER INCOME (EXPENSE):
  Equity in losses of
   unconsolidated
   subsidiary (Note 5)..     (96,920)   (258,242)  (1,589,812)  (1,088,404)           0
  Interest expense......    (273,759)   (297,228)  (6,172,421)  (2,762,757)  (7,561,591)
  Interest and other
   income (other
   expense).............      82,348      41,734      171,514      107,216      883,388
                          ----------  ----------  -----------  -----------  -----------
    Total other
     expense............    (288,331)   (513,736)  (7,590,719)  (3,743,945)  (6,678,203)
                          ----------  ----------  -----------  -----------  -----------
INCOME (LOSS) BEFORE
 INCOME TAXES,
 PREACQUISITION EARNINGS
 (LOSSES) AND
 EXTRAORDINARY ITEM.....     486,545    (806,940)  (5,143,067)  (2,337,247)  (3,850,445)
INCOME TAX PROVISION
 (BENEFIT)..............     113,248    (302,567)  (1,233,318)     671,467    1,005,809
                          ----------  ----------  -----------  -----------  -----------
INCOME (LOSS) BEFORE
 PREACQUISITION EARNINGS
 (LOSSES) AND
 EXTRAORDINARY ITEM.....     373,297    (504,373)  (3,909,749)  (1,665,780)  (2,844,636)
PREACQUISITION EARNINGS
 (LOSSES) (NOTE 1)......     236,300           0            0            0       74,132
                          ----------  ----------  -----------  -----------  -----------
INCOME (LOSS) BEFORE
 EXTRAORDINARY ITEM.....     136,997    (504,373)  (3,909,749)  (1,665,780)  (2,770,504)
EXTRAORDINARY ITEM--
 LOSS ON EXTINGUISHMENT
 OF DEBT (LESS RELATED
 INCOME TAX BENEFITS OF
 $311,057)..............           0           0            0            0     (507,515)
                          ----------  ----------  -----------  -----------  -----------
NET INCOME (LOSS).......  $  136,997  $ (504,373) $(3,909,749) $(1,665,780) $(3,278,019)
                          ==========  ==========  ===========  ===========  ===========
</TABLE>
 
   The accompanying notes are an integral part of these combined statements.
 
                                      F-12
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.)
 
                       ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                 DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                  COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
 
<TABLE>
<CAPTION>
                                                        RETAINED
                          COMMON STOCK                  EARNINGS        TOTAL
                         ---------------   PAID-IN    (ACCUMULATED  STOCKHOLDER'S
                         SHARES  AMOUNT    CAPITAL      DEFICIT)       EQUITY
                         ------ -------- -----------  ------------  -------------
<S>                      <C>    <C>      <C>          <C>           <C>
BALANCE, DECEMBER 31,
 1993...................    630 $      6 $ 2,131,494  $    40,663    $ 2,172,163
  Capital contribution
   from Parent for for-
   mation of ITC Trans-
   mission Systems II,
   Inc. and acquisition
   of 51% interest in
   Interstate FiberNet
   (Note 5).............  1,000       10   4,567,407            0      4,567,417
  Capital contribution
   from Parent for for-
   mation of Gulf States
   Transmission Systems,
   Inc..................  1,000       10   6,999,990            0      7,000,000
  Return of capital con-
   tribution to Parent..      0        0    (115,168)           0       (115,168)
  Net income............      0        0           0      136,997        136,997
                         ------ -------- -----------  -----------    -----------
BALANCE, DECEMBER 31,
 1994...................  2,630       26  13,583,723      177,660     13,761,409
  Capital contributions
   from Parent, net.....      0        0   1,050,000            0      1,050,000
  Net loss..............      0        0           0     (504,373)      (504,373)
                         ------ -------- -----------  -----------    -----------
BALANCE, DECEMBER 31,
 1995...................  2,630       26  14,633,723     (326,713)    14,307,036
  Acquisition of
   DeltaCom, Inc. (Note
   13).................. 80,000      800   5,999,200            0      6,000,000
  Capital contributions
   from Parent, net.....      0        0   2,859,239            0      2,859,239
  Net loss..............      0        0           0   (3,909,749)    (3,909,749)
                         ------ -------- -----------  -----------    -----------
BALANCE, DECEMBER 31,
 1996................... 82,630      826  23,492,162   (4,236,462)    19,256,526
  Capital contributions
   from Parent, net.....      0        0  17,322,065            0     17,322,065
  Initial capitalization
   of ITC/\DeltaCom.....      0  150,000           0            0        150,000
  Net loss..............      0        0           0   (3,278,019)    (3,278,019)
                         ------ -------- -----------  -----------    -----------
BALANCE, JUNE 30, 1997
 (UNAUDITED)............ 82,630 $150,826 $40,814,227  $(7,514,481)   $33,450,572
                         ====== ======== ===========  ===========    ===========
</TABLE>
 
 
   The accompanying notes are an integral part of these combined statements.
 
                                      F-13
<PAGE>
 
                              ITC/\DELTACOM, INC.,
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.),
 
                       ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                 DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                       COMBINED STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                               YEARS ENDED DECEMBER 31,           SIX MONTHS ENDED JUNE 30,
                         ---------------------------------------  ---------------------------
                             1994         1995          1996          1996          1997
                         ------------  -----------  ------------  ------------  -------------
                                                                  (UNAUDITED)    (UNAUDITED)
<S>                      <C>           <C>          <C>           <C>           <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES:
 Net income (loss)...... $    136,997  $  (504,373) $ (3,909,749) $ (1,665,780) $  (3,278,019)
                         ------------  -----------  ------------  ------------  -------------
 Adjustments to
  reconcile net income
  (loss) to net cash
  provided by operating
  activities (excluding
  the effects of
  acquisitions):
  Depreciation and
   amortization.........      738,052    1,267,882     6,438,074     2,832,017      8,334,065
  Deferred income
   taxes................      165,195      368,998       611,530             0        104,330
  Equity in losses of
   investee.............       96,920      258,242     1,589,812     1,088,404              0
  Loss on sale of
   assets...............            0       73,967             0             0              0
  Preacquisition
   earnings.............      236,300            0             0             0        (74,132)
  Extraordinary item--
   Loss on
   extinguishment of
   debt, net of income
   tax benefit..........            0            0             0             0        507,515
  Other.................       48,794       14,326        13,853        13,265         73,369
  Changes in current
   operating assets and
   liabilities:
   Accounts receivable..   (1,321,852)     471,988    (2,646,760)   (2,110,448)    (3,055,995)
   Inventory............            0            0      (182,853)     (228,299)       (86,984)
   Prepaid expenses.....      (14,390)     (93,563)     (246,159)     (536,620)      (101,682)
   Income tax refunds
    receivable from
    Parent..............      (52,609)    (471,619)   (2,022,752)            0       (663,200)
   Accounts payable.....      491,656       15,083     1,506,728     1,616,103       (505,512)
   Accrued interest.....            0            0     5,830,716     2,650,325      3,180,390
   Unearned revenue.....      240,234        4,225       514,370       388,927      2,415,538
   Accrued compensation
    and other accrued
    liabilities.........      227,855       31,718       698,290    (1,505,644)     2,563,342
   Other, net...........      (14,377)         443        (6,482)      (93,552)        (3,246)
                         ------------  -----------  ------------  ------------  -------------
    Total adjustments...      841,778    1,941,690    12,098,367     4,114,478     12,687,798
                         ------------  -----------  ------------  ------------  -------------
    Net cash provided by
     operating
     activities.........      978,775    1,437,317     8,188,618     2,448,698      9,409,779
                         ------------  -----------  ------------  ------------  -------------
CASH FLOWS FROM
 INVESTING ACTIVITIES:
 Capital expenditures...   (4,003,835)  (2,526,646)   (6,003,971)   (1,855,798)   (14,069,380)
 Change in accrued
  construction costs....      300,000      720,904      (168,689)     (424,115)     1,711,909
 Purchase of
  Investments...........            0            0             0      (394,923)             0
 Proceeds from sales of
  property to
  affiliate.............            0      326,984             0             0              0
 Investment in Gulf
  States FiberNet.......   (7,000,000)           0    (2,361,530)     (501,595)             0
 Purchase of DeltaCom,
  net of cash received
  (Note 13).............            0            0   (63,534,092)  (63,534,092)             0
 Purchase of assets of
  Viper Computer
  Systems, Inc. (Note
  14)...................            0            0      (625,000)            0              0
 Purchase of Gulf States
  FiberNet, net of cash
  received..............            0            0             0             0        574,600
 Purchase of restricted
  assets................            0            0             0             0    194,775,128
                         ------------  -----------  ------------  ------------  -------------
    Net cash used in
     investing
     activities.........  (10,703,835)  (1,478,758)  (72,693,282)  (66,710,523)  (206,557,999)
                         ------------  -----------  ------------  ------------  -------------
</TABLE>
 
   The accompanying notes are an integral part of these combined statements.
 
                                      F-14
<PAGE>
 
                               ITC/\DELTACOM, INC.
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.)
 
                       ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                 DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                 COMBINED STATEMENTS OF CASH FLOWS--(CONTINUED)
<TABLE>
<CAPTION>
                                                                      SIX MONTHS ENDED
                               YEARS ENDED DECEMBER 31,                   JUNE 30,
                         ---------------------------------------  -------------------------
                            1994         1995          1996          1996          1997
                         -----------  -----------  -------------  -----------  ------------
                                                                  (UNAUDITED)  (UNAUDITED)
<S>                      <C>          <C>          <C>            <C>          <C>
CASH FLOWS FROM
 FINANCING ACTIVITIES:
 Proceeds from Senior
  Notes................. $         0  $         0  $           0  $         0  $194,250,000
 Proceeds from other
  long-term debt........   2,700,000            0              0            0    41,095,061
 Repayment of other
  long-term debt and
  capital lease obliga-
  tions.................    (337,500)    (675,000)   (10,619,682) (10,327,884)  (41,562,500)
 Proceeds from advance
  from Parent...........     854,190            0     74,005,598   74,741,047     8,243,990
 Repayment of advance
  from Parent...........           0     (195,000)    (1,234,248)  (1,194,806)      (48,329)
 Proceeds from common
  stock.................           0            0              0            0       150,000
 Capital contributions
  from Parent, net......   6,884,832    1,050,000      2,859,239    1,810,412      (624,465)
 Repayment of capital
  lease obligations.....           0            0              0       (6,000)     (184,420)
 Proceeds from note re-
  ceivable..............           0            0        139,076            0         6,082
                         -----------  -----------  -------------  -----------  ------------
 Net cash provided by
  financing activities..  10,101,522      180,000     65,149,983   65,022,769   201,325,419
                         -----------  -----------  -------------  -----------  ------------
INCREASE IN CASH AND
 CASH EQUIVALENTS.......     376,462      138,559        645,319      760,944     4,177,199
                         -----------  -----------  -------------  -----------  ------------
CASH AND CASH EQUIVA-
 LENTS AT BEGINNING OF
 YEAR...................     141,075      517,537        656,096      656,096     1,301,415
                         -----------  -----------  -------------  -----------  ------------
CASH AND CASH EQUIVA-
 LENTS AT END OF YEAR... $   517,537  $   656,096  $   1,301,415  $ 1,417,040  $  5,478,614
                         ===========  ===========  =============  ===========  ============
SUPPLEMENTAL CASH FLOW
 DISCLOSURES:
 Cash paid for inter-
  est................... $   143,762  $   174,513  $     280,791  $ 1,217,972  $  1,034,980
                         ===========  ===========  =============  ===========  ============
 Cash paid for income
  taxes, net of refunds
  received.............. $     7,000  $    11,558  $     546,501  $   362,764  $   (621,319)
                         ===========  ===========  =============  ===========  ============
NONCASH TRANSACTIONS:
 Equity portion of ac-
  quisition of DeltaCom
  (Note 13)............. $         0  $         0  $   6,000,000  $ 6,000,000  $          0
                         ===========  ===========  =============  ===========  ============
 Assumption of capital
  leases related to
  acquisition of assets
  of Viper Computer
  Systems, Inc.
  (Note 14)............. $         0  $         0  $     171,683  $         0  $          0
                         ===========  ===========  =============  ===========  ============
 Equity portion of
  acquisition of 64%
  interest in Gulf State
  FiberNet and Georgia
  Fiber Assets.......... $         0  $         0  $           0  $         0  $ 17,896,665
                         ===========  ===========  =============  ===========  ============
 Assumption of long-term
  debt related to
  acquisition of Georgia
  Fiber Assets.......... $         0  $         0  $           0  $         0  $  9,964,091
                         ===========  ===========  =============  ===========  ============
 Offset of Advances to
  Parent as a reduction
  to related advances
  from Parent........... $         0  $         0  $           0  $         0  $  2,546,534
                         ===========  ===========  =============  ===========  ============
 Accrued debt issuance
  costs related to
  Notes................. $         0  $         0  $           0  $         0  $    289,220
                         ===========  ===========  =============  ===========  ============
</TABLE>
 
   The accompanying notes are an integral part of these combined statements.
 
                                      F-15
<PAGE>
 
                              ITC/\DELTACOM, INC.
 
      INTERSTATE FIBERNET, INC. (FORMERLY ITC TRANSMISSION SYSTEMS, INC.)
 
                      ITC TRANSMISSION SYSTEMS II, INC.,
 
                    GULF STATES TRANSMISSION SYSTEMS, INC.,
 
                 EASTERN TELECOM, INC., D.B.A. INTERQUEST, AND
 
                                DELTACOM, INC.
 
                      (REORGANIZED AS ITC/\DELTACOM, INC.)
 
                    NOTES TO COMBINED FINANCIAL STATEMENTS
 
1. ORGANIZATION, BASIS OF PRESENTATION, AND NATURE OF BUSINESS
 
 Organization
 
  InterState FiberNet, Inc. (formerly ITC Transmission Systems, Inc.)
("FiberNet"), ITC Transmission Systems II, Inc. ("Transmission II"), Gulf
States Transmission Systems, Inc. ("GSTS"), and Eastern Telecom, Inc. d.b.a.
InterQuest ("InterQuest") (collectively, the "Fiber Companies"), as well as
DeltaCom, Inc. ("DeltaCom"), are all wholly owned subsidiaries of ITC Holding
Company, Inc. (the "Parent"). ITC/\DeltaCom, Inc. ("ITC/\DeltaCom") was
incorporated on March 24, 1997 under the laws of the State of Delaware, as a
wholly owned subsidiary of the Parent, to acquire and operate the Fiber
Companies and DeltaCom. Upon receipt of certain regulatory approvals and
certain other consents, on July 25, 1997 the Parent completed the
reorganization of such subsidiaries (the "Reorganization"), as follows:
 
    a. InterQuest and Transmission II were merged with and into FiberNet.
 
    b. The Parent contributed all of the issued and outstanding capital
       stock of FiberNet, DeltaCom and GSTS to ITC/\DeltaCom Inc.
 
    c. ITC/\DeltaCom contributed all of the outstanding capital stock of
       DeltaCom and GSTS to FiberNet.
 
  As a result of the Reorganization, ITC/\DeltaCom became the sole stockholder
of FiberNet and FiberNet became the sole stockholder of both GSTS and
DeltaCom. ITC/\DeltaCom, FiberNet, Transmission II, GSTS, InterQuest, and
DeltaCom are collectively referred to herein as the "Companies."
 
  At December 31, 1996, FiberNet and Transmission II together held 100% of the
ownership interests in Interstate FiberNet ("Interstate"), a Georgia general
partnership (Note 5). Effective with the Reorganization, Interstate was
absorbed by law into FiberNet. GSTS held a 36% ownership in and is the
managing partner of Gulf States FiberNet ("Gulf States"), a Georgia general
partnership (Note 5). Subsequent to year-end, the Parent agreed to purchase
the remaining 64% interest in Gulf States (Note 16).
 
 Basis of Accounting and Financial Statement Presentation
 
  The accompanying combined financial statements of the Companies are prepared
on the accrual basis of accounting and present their combined assets,
liabilities, revenues, expenses, and cash flows as if they existed as a
separate corporation during the periods presented. ITC/\DeltaCom's results of
operations, changes in stockholder's equity, and cash flow have been included
in the combined statements for the period from inception (March 24, 1997)
through June 30, 1997.
 
  The financial information included herein may not necessarily reflect the
financial position, results of operations, or cash flows of the Companies in
the future or what the financial position, results of operations or cash flows
of the Companies would have been if they were combined as a separate stand
alone company during the periods presented.
 
 
                                     F-16
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
  The combined balance sheet as of June 30, 1997 and the combined statements
of operations and cash flows for the six months ended June 30, 1996 and 1997
are unaudited and have been prepared by management of the Companies in
accordance with the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements contain all
adjustments (consisting of only normal recurring items) necessary for the fair
presentation of the financial position and results of operations for the
interim period. The results of operations for the six months ended June 30,
1997 are not necessarily indicative of the results to be expected for the
entire year.
 
  Investments in affiliated entities in which the Companies have at least 20%
ownership and do not have management control are accounted for using the
equity method. All material intercompany accounts and transactions have been
eliminated in the accompanying combined financial statements.
 
  Interstate was initially formed in 1992 as a partnership between FiberNet,
which held a 49% ownership interest, and SCANA Communications, Inc. ("SCANA"),
which held the remaining 51% interest. FiberNet accounted for this investment
using the equity method. On August 17, 1994, the Parent formed Transmission II
and purchased SCANA's 51% interest in Interstate (Note 5). To reflect this
step acquisition, the revenues and expenses of Interstate have been included
in the accompanying statements of operations for the full year ended December
31, 1994, with the preacquisition earnings attributable to SCANA prior to
August 17, 1994 deducted to determine combined net income of the Companies.
 
  On January 29, 1996, the Parent acquired 100% of the common stock of
DeltaCom (Note 13). The acquisition was accounted for using the purchase
method of accounting. The results of operations of DeltaCom have been included
in the accompanying statements of operations since the date of acquisition.
 
  Gulf States was initially formed in 1994 as a partnership between GSTS,
which held a 36% ownership interest, and SCANA, which held the remaining 64%
interest. GSTS accounted for this investment using the equity method. On March
27, 1997, GSTS purchased SCANA's 64% interest in Gulf States (Note 16). To
reflect this step acquisition, the revenues and expenses of Gulf States have
been included in the statement of operations for the six months ended June 30,
1997, with the preacquisition losses attributable to SCANA prior to March 27,
1997 deducted to determine the combined net loss of the Companies.
 
 Nature of Business
 
  The Companies operate primarily in two business segments. DeltaCom is a
regional long-distance company operating primarily in the State of Alabama.
DeltaCom is engaged in the retail sale of long-distance services such as
traditional switched and dedicated long distance; 800/888 calling; calling
card and operator services; ATM and frame relay; high-capacity broadband
private line services, as well as Intranet, Internet, and Web page hosting and
development services; and customer premises equipment installation and repair.
DeltaCom primarily serves midsized and major regional businesses in the
southern United States (the "Retail Services").
 
  The Fiber Companies are engaged in the sale of long-haul private-line
services on a wholesale basis to other telecommunications companies using
their owned and managed fiber optic network which extends throughout ten
southern states (Arkansas, Texas, Tennessee, Mississippi, Louisiana, Alabama,
Georgia, North Carolina, South Carolina, and Florida) (the "Carriers' Carrier
Services"). The Fiber Companies have been providing Carriers' Carrier Services
since 1992 through their ownership interests in Interstate and, later, Gulf
States (Note 5).
 
  Certain of the Companies have experienced operating losses as a result of
efforts to build their network infrastructure and internal staffing, develop
their systems, and expand into new markets. Assuming financing is available,
all of the Companies expect to continue to focus on increasing their customer
base and expanding their network operations. Accordingly, the Companies expect
that their cost of services, selling, operations, and administration expenses
and capital expenditures will continue to increase significantly, all of which
will have a
 
                                     F-17
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
negative impact on short-term operating results. In addition, the Companies
may change their pricing policies to respond to a changing competitive
environment. The Companies have entered into a commitment letter with a third-
party lender for a five-year, $100 million secured credit facility and
ITC/\DeltaCom has issued senior notes (Note 16) to refinance certain existing
indebtedness of the Companies and to provide additional funds for the
Companies' expansion plans. In the opinion of management, the Companies' cash
flows from operations and existing credit position, combined with management's
ability to scale back expansion plans if necessary, will be sufficient to meet
the capital and operating needs of the Companies through at least 1997.
However, there can be no assurance that growth in the Companies' revenue or
customer base will continue or that the Companies will be able to achieve or
sustain profitability and/or positive cash flow.
 
 Sources of Supplies
 
  The Companies voluntarily use a single vendor for transmission equipment
used in the Companies' network. However, if this vendor were unable to meet
the Companies' needs, management believes that other sources for this
equipment exist on commensurate terms and that operating results would not be
adversely affected.
 
 Credit Risk and Significant Customers
 
  The Companies' accounts receivable potentially subject the Companies to
credit risk, as collateral is generally not required. The Companies' risk of
loss is limited due to advance billings to certain customers for services and
the ability to terminate access on delinquent accounts. The concentration of
credit risk is mitigated by the large number of customers comprising the
customer base. In 1996 and 1994, no customer represented more than 10% of the
Companies' combined operating revenues. However, in 1995, one customer
represented approximately 30% of the Companies' combined operating revenues.
 
 Regulation
 
  The Companies are subject to certain regulations and requirements of the
Federal Communications Commission and various state public service
commissions.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Accounting Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Cash and Cash Equivalents
 
  The Companies consider all short term highly liquid investments with an
original maturity date of three months or less to be cash equivalents.
 
 Inventory
 
  Inventory is held only by DeltaCom and consists primarily of customer
premise equipment held for resale.
 
  Inventory is valued at the lower of cost or market, with cost determined
using the first in, first out method.
 
 
                                     F-18
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 Property and Equipment
 
  Property and equipment are recorded at cost or fair market value at the
acquisition date (Note 3). Depreciation of property and equipment is provided
using the composite or straight line method over the following estimated
useful lives:
 
<TABLE>
<CAPTION>
                                                                          YEARS
                                                                         -------
   <S>                                                                   <C>
   Buildings and towers.................................................      30
   Office furniture, fixtures, and equipment............................ 3 to 15
   Vehicles.............................................................       5
   Telecommunications equipment......................................... 5 to 20
</TABLE>
 
 Intangible Assets
 
  Intangible assets include the excess of the purchase price of acquisitions
over the fair value of net assets acquired, as well as various other acquired
intangibles. Intangible assets are amortized over the following estimated
useful lives:
 
<TABLE>
<CAPTION>
                                                                          YEARS
                                                                         -------
   <S>                                                                   <C>
   Goodwill.............................................................      40
   Trademark............................................................      40
   Customer base........................................................ 5 to 12
   Noncompete agreements................................................       5
</TABLE>
 
  At June 30, 1997, intangible assets also include debt issuance costs
associated with ITC/\DeltaCom's offering of Senior Notes (Note 16) as well as
the Bridge Facility (Note 16), which will be amortized over the life of the
related debt.
 
 Long-Lived Assets
 
  The Companies adopted Statement of Financial Accounting Standards ("SFAS")
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to Be Disposed Of," on January 1, 1996. SFAS No. 121 establishes
accounting standards for the impairment of long lived assets and goodwill
related to those assets to be held and used and for long-lived assets and
certain identifiable intangible assets to be disposed of. The effect of
adopting SFAS No. 121 was not material to the Companies' combined financial
statements.
 
  The Companies review their intangible assets for impairment at each balance
sheet date or whenever events or changes in circumstances indicate that the
carrying amount of an asset should be assessed. Management evaluates the
intangible assets related to each acquisition individually to determine
whether an impairment has occurred. An impairment is recognized when the
discounted future cash flows estimated to be generated by the acquired
business are sufficient to recover the current unamortized balance of the
intangible asset with the amount of any such deficiency charged to income in
the current year. Estimates of future cash flows are based on many factors,
including current operating results, expected market trends, and competitive
influences.
 
 Unearned Revenue
 
  Unearned revenue represents the liability for advanced billings to customers
for use of the Companies' fiber- optic network. Customers are billed in
advance for fixed monthly charges.
 
 Unbilled Revenue
 
  DeltaCom records unbilled revenue for long-distance services provided to
customers but not yet billed. Approximately $3.4 million in unbilled revenue
is included in accounts receivable in the accompanying balance sheet at
December 31, 1996.
 
 
                                     F-19
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 Income Taxes
 
  The Companies 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.
 
  The Internal Revenue Code and applicable state statutes provide that the
income and expenses of a partnership are not separately taxable to the
partnership but rather accrue directly to the partners. Accordingly, the
accompanying financial statements include provisions for federal and state
income taxes related to partnership interests in Interstate and Gulf States
held by FiberNet, Transmission II, and GSTS.
 
  The Companies are included in the consolidated federal income tax return of
the Parent. Under a tax-sharing arrangement, the Companies are paid for the
utilization of net operating losses included in the consolidated tax return,
even if such losses could not have been used if the Companies were to have
filed on a separate return basis.
 
 Revenue Recognition
 
  Revenues are recognized as services are provided and consist primarily of
charges for use of long-distance services and for use of the Companies' fiber-
optic network.
 
 Fair Value of Financial Instruments
 
  The carrying values of the Companies' financial instruments, other than the
portion of their advance from the Parent related to the DeltaCom acquisition,
approximate their fair values. See Note 7 for the terms of the advance from
the Parent and the related interest swap agreements under which DeltaCom would
receive $285,308 if the agreements were terminated at December 31, 1996.
 
 Advertising Costs
 
  The Companies expense all advertising costs as incurred.
 
3. PROPERTY AND EQUIPMENT
 
  Balances of major classes of assets and the related accumulated depreciation
as of December 31, 1995 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                            1995       1996
                                                         ---------- -----------
   <S>                                                   <C>        <C>
   Land................................................. $        0 $   140,695
   Buildings and towers.................................    788,107   1,293,495
   Furniture and fixtures...............................  1,219,792   4,140,188
   Vehicles.............................................     31,610     287,219
   Telecommunications equipment.........................  7,598,308  32,321,553
                                                         ---------- -----------
                                                          9,637,817  38,183,150
   Less accumulated depreciation........................  1,511,374   6,569,908
                                                         ---------- -----------
   Net property, plant, and equipment in service........  8,126,443  31,613,242
   Assets under construction............................  1,260,001     267,314
                                                         ---------- -----------
   Property, plant, and equipment, net.................. $9,386,444 $31,880,556
                                                         ========== ===========
</TABLE>
 
                                     F-20
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
4. INTANGIBLE ASSETS
 
  Goodwill and other intangible assets and the related amortization as of
December 31, 1995 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                           1995        1996
                                                        ----------  -----------
   <S>                                                  <C>         <C>
   Goodwill............................................ $1,780,566  $50,961,123
   Customer base.......................................          0    5,846,371
   Noncompete agreements...............................          0      102,000
   Trademark...........................................          0       39,834
                                                        ----------  -----------
                                                         1,780,566   56,949,328
   Less accumulated amortization.......................    (58,695)  (1,431,753)
                                                        ----------  -----------
   Intangibles, net.................................... $1,721,871  $55,517,575
                                                        ==========  ===========
</TABLE>
 
  At December 31, 1995, all goodwill related to the acquisition of Interstate
in 1994 (Note 5). See Notes 14 and 15 for a discussion of additional
intangible assets recorded in 1996 related to the acquisitions of DeltaCom and
the assets of Viper Computer Systems, Inc. ("ViperNet").
 
5. INVESTMENTS
 
 Gulf States
 
  At December 31, 1995 and 1996, investments represent GSTS's 36% ownership
interest in Gulf States, which was formed as a partnership between GSTS and
SCANA in 1994. Gulf States provides digital communications transport services
to communications common carriers in the states of Georgia, Texas, Alabama,
Mississippi, and Louisiana. GSTS is the managing partner and is responsible
for managing and operating Gulf States. Subsequent to year-end, the Parent
agreed to purchase the remaining 64% interest in Gulf States previously owned
by SCANA (Note 16). The following table summarizes various financial data of
Gulf States for the period from inception (August 17, 1994) to December 31,
1994 and for the years ended December 31, 1995 and 1996:
 
<TABLE>
<CAPTION>
                                             1994         1995         1996
                                          -----------  -----------  -----------
   <S>                                    <C>          <C>          <C>
   Operating revenues.................... $   127,569  $ 7,587,713  $10,056,544
   Operating (loss) income...............    (280,718)   1,214,409     (216,992)
   Net loss..............................    (269,222)    (717,340)  (4,416,142)
   Current assets........................     590,040    6,557,741    2,751,101
   Noncurrent assets.....................  42,950,641   64,206,522   63,820,143
   Current liabilities...................  10,753,346    9,831,768    9,432,588
   Noncurrent liabilities................  12,700,000   41,562,500   35,625,000
</TABLE>
 
 Interstate
 
  FiberNet owned a 49% interest in Interstate. On August 17, 1994, the Parent
exchanged 250,000 shares of its common stock, valued at $4,435,000, for
SCANA's 51% interest in Interstate and paid $132,417 in related expenses.
Simultaneously, the Parent formed Transmission II, transferred the 51%
ownership interest in Interstate to Transmission II, and made an equity
contribution to Transmission II equal to the value of the net assets acquired.
Goodwill of $1,780,566 related to this transaction has been "pushed down" to
the accounts of Transmission II. The goodwill represents the excess of the
purchase price paid for the 51% ownership interest in Interstate over the fair
market value of the net assets acquired.
 
 
                                     F-21
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
  To reflect this step acquisition, the revenues and expenses of Interstate
for the year ended December 31, 1994 have been included in the accompanying
statements of operations, with the preacquisition earnings attributable to
SCANA deducted to determine combined net income of the Companies. In addition,
the statement of cash flows for the year ended December 31, 1994 reflects all
cash flows of Interstate during the year. The statement of stockholder's
equity reflects the step acquisition as a capital contribution to FiberNet
during 1994.
 
  As discussed in Note 1, effective with the Reorganization, the partners of
Interstate merged and the partnership was absorbed by law into FiberNet.
 
6. FINANCING OBLIGATIONS
 
 Long-Term Debt
 
  Long-term debt at December 31, 1995 and 1996 consists of the following:
 
<TABLE>
<CAPTION>
                                                            1995       1996
                                                         ----------  ---------
<S>                                                      <C>         <C>
Borrowings under NationsBank of Georgia, N.A. credit
 agreement (up to $2,700,000), 8% interest; due in
 quarterly installments of $168,750 through September
 1998; secured by the assets of Interstate; all
 outstanding amounts were repaid during 1996............ $1,687,500  $       0
Installment payments on equipment due to Northern
 Telecom, payable in annual installments of $351,370;
 due June 1, 1999; interest rate imputed at 8.6%........          0    930,252
                                                         ----------  ---------
                                                          1,687,500    930,252
Less current maturities.................................   (675,000)  (290,140)
                                                         ----------  ---------
Long-term debt, net of current portion.................. $1,012,500  $ 640,112
                                                         ==========  =========
</TABLE>
 
  Maturities of long term debt at December 31, 1996 are as follows:
 
<TABLE>
   <S>                                                                  <C>
   1997................................................................ $290,140
   1998................................................................  306,862
   1999................................................................  333,250
   2000................................................................        0
   2001................................................................        0
   Thereafter..........................................................        0
                                                                        --------
                                                                        $930,252
                                                                        ========
</TABLE>
 
  Long term debt at June 30, 1997 consisted of the following (unaudited):
 
<TABLE>
   <S>                                                             <C>
   11% Senior Notes Due 2007 (Note 16)............................ $200,000,000
   $41.6 million bridge facility, interest payable at LIBOR plus
    2.25% (8.25% at June 30, 1997), paid in full on July 25, 1997
    (Note 16).....................................................   41,600,000
   $10.0 million term facility, interest payable at 11%, maturing
    on March 31, 2002.............................................    9,964,091
   Other..........................................................      922,675
                                                                   ------------
   Total long-term debt ..........................................  252,486,766
   Less: current maturities.......................................   43,875,381
                                                                   ------------
   Total.......................................................... $208,611,385
                                                                   ============
</TABLE>
 
                                     F-22
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
LEASE OBLIGATIONS
 
  The Companies have entered into various operating and capital leases for
facilities and equipment used in their operations. Aggregate future minimum
rental commitments under noncancelable operating leases with original or
remaining periods in excess of one year and maturities of capital lease
obligations as of December 31, 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                          OPERATING  CAPITAL
                                                           LEASES     LEASES
                                                         ----------- --------
   <S>                                                   <C>         <C>
   1997................................................. $ 2,156,464 $ 90,139
   1998.................................................   2,694,668   89,678
   1999.................................................   2,583,231   45,643
   2000.................................................   1,937,701   21,981
   2001.................................................   1,769,097   19,004
   Thereafter...........................................   7,987,843   99,797
                                                         ----------- --------
                                                         $19,129,004  366,242
                                                         ===========
   Less amounts representing interest...................              (81,350)
                                                                     --------
   Present value of net minimum lease payments..........              284,892
   Less current portion.................................              (69,471)
                                                                     --------
   Obligations under capital lease, net of current por-
    tion................................................             $215,421
                                                                     ========
</TABLE>
 
  Rental expense charged to operations for the years ended December 31, 1994,
1995, and 1996 was $63,251, $74,534, and $1,272,389, respectively.
 
7. ADVANCE FROM PARENT
 
  The advance from Parent reflected on the Companies' balance sheets includes
the following at December 31, 1995 and 1996.
 
<TABLE>
<CAPTION>
                                                         1995       1996
                                                      ---------- -----------
   <S>                                                <C>        <C>
   DeltaCom advance from Parent related to acquisi-
    tion............................................. $        0 $74,005,598
   Cash advance from Parent to InterQuest............  1,456,477   1,267,143
   Cash advance to Parent from DeltaCom..............          0  (1,044,914)
                                                      ---------- -----------
   Total advance from Parent......................... $1,456,477 $74,227,827
                                                      ========== ===========
</TABLE>
 
 DeltaCom Advance From Parent Related to Acquisition
 
  As discussed in Note 12, the Parent funded the acquisition of DeltaCom and
the related refinancing of DeltaCom's outstanding debt through borrowings of
$74,005,598 on its own credit facility (the "Parent Credit Facility") with
First Union National Bank of North Carolina ("First Union") and CoBank, ACB
("CoBank"). These borrowings have been pushed down to the accounts of the
Company through the advance from Parent account under terms substantially
identical to those of the Parent Credit Facility.
 
  The Parent Credit Facility is a two year line of credit providing for
borrowings of up to $127.5 million on a two year revolving basis. The
available credit was initially split equally between CoBank ("Tranche A") and
First Union ("Tranche B"); however, First Union subsequently syndicated
Tranche B to several other lenders. On January 19, 1998, the Parent may elect
to convert all outstanding balances to a five year term loan with quarterly
principal payments through December 31, 2002. Loans made under the Parent
Credit Facility may, at any time or from time to time, be repaid in whole or
in part, upon certain notices to the administrative agent. As of December 31,
1996, the Parent had $86 million outstanding under this agreement.
 
                                     F-23
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  Interest on the Parent Credit Facility is calculated on a 360 day year, at
the option of the Parent, as follows:
 
  . Tranche A--"Margin" plus either (a) prime, (b) 1-, 2-, 3-, or 6-month
    LIBOR, or (c) one year Treasury
 
  . Tranche B--"Margin" plus either (a) prime or (b) 1-, 2-, 3-, or 6-month
    LIBOR
 
  The applicable "Margin" varies based on the Parent's leverage ratio and is
adjusted quarterly. At December 31, 1996, the interest rate for both tranches
was calculated based on the applicable margin (2.25%) plus the 3 month LIBOR
rate (5.53125%).
 
  The Parent has also entered into a forward starting interest rate swap
agreement with First Union to hedge its interest rate exposure under the
Parent Credit Facility. The agreement swaps notional amounts of $50 million
and $41 million under the Parent Credit Facility with fixed rates of 8.66% and
8.53%, respectively. As of December 31, 1996, DeltaCom's proportionate share
of the fee the Parent would receive upon termination of the swap agreement was
$285,308. Upon the Reorganization (Note 16), DeltaCom will repay its portion
of these borrowings at an interest rate of 8.595%, which approximates the
Parent's average interest rate under these interest rate swap agreements. At
December 31, 1996, the balance sheet reflects approximately $5.8 million of
accrued interest related to DeltaCom's advance from Parent.
 
  The Parent Credit Facility includes certain financial covenants and ratios.
At December 31, 1996, the Parent was in compliance with these requirements.
The Parent Credit Facility is jointly and severally guaranteed by the Parent,
the Companies, and other wholly owned or majority owned subsidiaries of the
Parent. The Parent Credit Facility is also secured by substantially all of the
assets of the Parent and the Companies, as well as the assets of other wholly
owned or majority owned subsidiaries of the Parent.
 
 Cash Advance to Parent From DeltaCom
 
  Amounts reflected as cash advance to Parent from DeltaCom represent excess
funds from operations which are loaned to the Parent at an annual interest
rate of 8.25%. DeltaCom recorded interest income of $77,868 during 1996. The
advance is repayable on demand.
 
 Cash Advance From Parent to InterQuest
 
  Amounts reflected as cash advance from Parent to InterQuest represent
borrowings for operating purposes. Interest is payable at a rate equal to the
interest rate on the Parent Credit Facility plus .5%. InterQuest recorded
interest expense of $122,696 and $96,665 in 1995 and 1996, respectively.
 
8. INCOME TAXES
 
  Details of the income tax provision (benefit) for the years ended December
31, 1994, 1995, and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                1994      1995        1996
                                              --------  ---------  -----------
   <S>                                        <C>       <C>        <C>
   Current:
     Federal................................. $  3,040  $(628,795) $(1,804,786)
     State...................................   (1,453)   (42,770)     (48,829)
                                              --------  ---------  -----------
       Total current.........................    1,587   (671,565)  (1,853,615)
                                              --------  ---------  -----------
   Deferred:
     Federal.................................   95,812    385,742      660,033
     State...................................   15,849    (16,744)     (39,736)
                                              --------  ---------  -----------
       Total deferred........................  111,661    368,998      620,297
                                              --------  ---------  -----------
       Total provision (benefit)............. $113,248  $(302,567) $(1,233,318)
                                              ========  =========  ===========
</TABLE>
 
 
                                     F-24
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
  The tax effects of temporary differences between the carrying amounts of
assets and liabilities in the financial statements and their respective tax
bases, which give rise to deferred tax assets and liabilities, as of December
31, 1995 and 1996 are as follows:
 
<TABLE>
<CAPTION>
                                                         1995        1996
                                                       ---------  -----------
   <S>                                                 <C>        <C>
   Noncurrent deferred tax (liabilities) assets:
     Property, plant, and equipment basis differ-
      ences........................................... $(784,435) $(3,903,605)
     Intangible assets................................   (48,109)     (57,849)
     Other............................................    75,446       43,314
                                                       ---------  -----------
                                                        (757,098)  (3,918,140)
                                                       ---------  -----------
   Current deferred tax assets:
     Accrued expenses.................................         0       80,245
     Net operating loss carryforwards.................    77,526      130,912
     Reserves for uncollectible accounts..............     7,831      314,503
                                                       ---------  -----------
                                                          85,357      525,660
                                                       ---------  -----------
   Net deferred income tax liabilities................ $(671,741) $(3,392,480)
                                                       =========  ===========
</TABLE>
 
  The Companies are included in the Parent's consolidated federal income tax
return. Prior to January 29, 1996, DeltaCom filed a separate federal income
tax return. The Companies each file separate state income tax returns.
 
  Under a tax-sharing arrangement, the Companies receive payment for net
operating losses generated for federal income tax purposes and used by the
Parent in the Parent's consolidated income tax return. Amounts receivable from
the Parent under this tax-sharing agreement are $523,782 and $2,546,534 at
December 31, 1995 and 1996, respectively. Additionally, certain of the
Companies have generated net operating losses for state income tax purposes.
At December 31, 1995 and 1996, $77,526 and $130,912 respectively, have been
included in current assets in the Companies' balance sheets. Loss
carryforwards of approximately $11,000, $67,000, and $53,000 will expire in
2009, 2010, and 2011, respectively. In management's opinion, the Companies
will generate operating income sufficient to utilize all of the remaining
state net operating loss carryforwards in 1997.
 
  A reconciliation of the federal statutory income tax rate to the effective
income tax rate for the periods presented is as follows:
 
<TABLE>
<CAPTION>
                                                         1994    1995    1996
                                                         -----  ------   -----
   <S>                                                   <C>    <C>      <C>
   Federal statutory rate...............................  34.0% (34.0)%  (34.0)%
   Increase (reduction) in taxes resulting from:
     State income taxes, net of federal benefit.........   5.5    (5.2)   (2.0)
     Nondeductible amortization of goodwill.............   0.0     0.0     9.0
     Preacquisition earnings............................ (16.5)    0.0     0.0
   Other................................................   0.3     1.7     3.0
                                                         -----  ------   -----
   Effective income tax rate............................  23.3%  (37.5)% (24.0)%
                                                         =====  ======   =====
</TABLE>
 
                                     F-25
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
9. EQUITY INTERESTS
 
 Capital Stock
 
  The common stock authorized, issued, and outstanding at December 31, 1995
and 1996 for each of the Companies is as follows:
 
<TABLE>
<CAPTION>
                                                             SHARES
                                                  SHARES   ISSUED AND  PAR VALUE
                                                AUTHORIZED OUTSTANDING PER SHARE
                                                ---------- ----------- ---------
   <S>                                          <C>        <C>         <C>
   FiberNet....................................
   Transmission II.............................   10,000      1,000      0.01
   GSTS........................................   10,000      1,000      0.01
   InterQuest..................................  100,000        530      0.01
   DeltaCom....................................   80,000     80,000      0.01
</TABLE>
 
  ITC/\DeltaCom has two classes of common stock authorized. Holders of
ITC/\DeltaCom's Class A Common Stock have one vote per share, while holders of
Class B Common Stock have ten votes per share. Upon the formation of
ITC/\DeltaCom (Note 1), 15,000,000 shares of Class B Common Stock were
outstanding.
 
 Parent Stock Option Plan
 
  The Parent sponsors a stock option plan which provides for the granting of
stock options to substantially all employees of the Parent and its wholly
owned and majority owned subsidiaries, including the Companies. Options are
generally granted at a price (established by the Parent's board of directors
based on equity transactions and other analyses) equal to at least 100% of the
fair market value of the Parent's common stock on the option grant date.
Options granted generally become exercisable 40% after two years and 20% per
annum for the next three years and remain exercisable for ten years after the
option grant date. At December 31, 1996, employees of the Companies held
outstanding options for a total of 314,768 of the Parent's shares at option
prices ranging from $7.60 to $30.50 per share.
 
 Statement of Financial Accounting Standards No. 123
 
  During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock- Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." Entities electing to remain with
the accounting methodology required by APB Opinion No. 25 must make pro forma
disclosures of net income and, if presented, earnings per share as if the fair
value-based method of accounting defined in SFAS No. 123 had been applied.
 
  The Parent has elected to account for its stock based compensation plans
under APB Opinion No. 25, under which no compensation cost has been recognized
by either the Parent or the Companies. However, the Companies have computed,
for pro forma disclosure purposes, the value of all options for shares of the
Parent's common stock granted since December 15, 1994 to employees of the
Companies using the Black-Scholes option pricing model prescribed by SFAS No.
123 and the following weighted average assumptions:
 
<TABLE>
<CAPTION>
                                                             1995       1996
                                                           ---------  ---------
   <S>                                                     <C>        <C>
   Risk-free interest rate................................      5.53%      6.29%
   Expected dividend yield................................         0%         0%
   Expected lives......................................... Ten years  TEN YEARS
   Expected volatility....................................        50%        50%
</TABLE>
 
 
                                     F-26
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
  The weighted average fair value of options for the Parent's stock granted to
employees of the Companies in 1995 and 1996 was $16.14 and $19.65 per share,
respectively. The total value of options for the Parent's stock granted to
employees of the Companies during 1995 and 1996 was computed as approximately
$257,000 and $4,116,000, respectively, which would be amortized on a pro forma
basis over the five-year vesting period of the options. If the Companies had
accounted for these plans in accordance with SFAS No. 123, the Companies' net
loss for the years ended December 31, 1995 and 1996 would have increased as
follows:
 
<TABLE>
<CAPTION>
                                                     AS REPORTED   PRO FORMA
                                                     -----------  -----------
   <S>                                               <C>          <C>
   Net loss for the year ended December 31, 1995.... $  (504,373) $  (595,987)
   Net loss for the year ended December 31, 1996....  (3,909,749)  (5,469,440)
</TABLE>
 
  Because SFAS No. 123 has not been applied to options granted prior to
December 15, 1994, the resulting pro forma compensation cost may not be
representative of that expected in future years.
 
  A summary of the status of the Companies' portion of the Parent's stock
option plan at December 31, 1995 and 1996 and changes during the years then
ended is presented in the following table:
 
<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                                                        AVERAGE
                                                                         PRICE
                                                              SHARES   PER SHARE
                                                              -------  ---------
   <S>                                                        <C>      <C>
   Outstanding at December 31, 1994..........................  94,925   $13.92
     Granted.................................................  14,252    21.17
     Forfeited...............................................    (750)   14.35
                                                              -------
   Outstanding at December 31, 1995.......................... 108,427    14.87
     Granted................................................. 223,081    25.87
     Exercised...............................................    (840)   16.86
     Forfeited............................................... (15,900)   24.55
                                                              -------
   Outstanding at December 31, 1996.......................... 314,768    22.17
                                                              =======
</TABLE>
 
  The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
 
<TABLE>
<CAPTION>
                                                                                 WEIGHTED
                                                       WEIGHTED                   AVERAGE
        EXERCISE              NUMBER                   AVERAGE                  CONTRACTUAL
       PRICE RANGE           OF SHARES                  PRICE                      LIFE
       -----------           ---------                 --------                 -----------
                                                                                (IN YEARS)
      <S>                    <C>                       <C>                      <C>
      $ 7.60-$ 7.99            25,000                   $ 7.68                     4.95
             $14.35            31,300                    14.35                     7.27
             $17.74            38,962                    17.74                     7.89
             $20.00             5,300                    20.00                     8.43
      $24.75-$24.78           170,406                    24.78                     9.87
      $30.02-$30.50            43,800                    30.08                     9.31
</TABLE>
 
  At December 31, 1996, 51,750 options for the Parent's stock with a weighted
average exercise price of $12.06 per share were exercisable by employees of
the Companies. At December 31, 1995, 26,260 options for the Parent's stock
with a weighted average exercise price of $9.27 per share were exercisable by
employees of the Companies.
 
                                     F-27
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
10. COMMITMENTS AND CONTINGENCIES
 
 Purchase Commitments
 
  At December 31, 1996, the Companies had entered into agreements with vendors
to purchase approximately $5.6 million of equipment related to the
installation of a switch in Columbia, South Carolina, improvements to a switch
in Birmingham, Alabama, and other network expansion efforts.
 
  At June 30, 1997, the Companies had entered into agreements with vendors to
purchase approximately $11.5 million of equipment related to the improvement
and installation of switches, other network expansion efforts and certain
services (unaudited).
 
 Legal Proceedings
 
  In the normal course of business, the Companies are subject to various
litigation; however, in management's opinion and the opinion of counsel, there
are no legal proceedings pending against the Companies which would have a
material adverse effect on the financial position, results of operations, or
liquidity of the Companies.
 
11. EMPLOYEE BENEFIT PLANS
 
  The Fiber Companies' employees are participants in the Parent's defined
benefit plan. Effective January 31, 1995, the Parent elected to freeze all
future benefit accruals under the plan. The plan provided retirement,
disability, and survivor benefits to eligible employees. The Fiber Companies
funded pension cost in accordance with applicable regulations. Total pension
cost charged to expense in 1994, 1995, and 1996 was $17,805, $8,721, and
$9,600, respectively.
 
  The net assets available for benefits under the plan are maintained by the
Parent on behalf of its subsidiaries. As of December 31, 1995 and 1996, the
plan's net assets available for benefits were $1,878,498 and $1,646,892,
respectively, and the projected benefit obligations were $2,370,391 and
$2,442,917, respectively, as computed under SFAS No. 87.
 
  Employees of the Fiber Companies participate in the Parent's 401(k) defined
contribution plan. This plan, which became effective February 1, 1995, covers
all employees of the participating entities who have one year of service and
are 18 years of age. The Parent contributes a discretionary amount of the
employees' earnings based on the plan's earnings. The discretionary
contribution percentages per employee for the years ended December 31, 1995
and 1996 were 2.53% (limited to a total for all participants of $100,000) and
2.66% (limited to a total for all participants of $150,000), respectively, and
were fully funded by the Parent. In addition, the Fiber Companies offer a
partial matching of employee contributions at a rate of 1/2% for each 1% of
the employee earnings contributed to a maximum match of 4% of employee
earnings. Total matching contributions made to the plan and charged to expense
by the Fiber Companies for the years ended December 31, 1995 and 1996 were
$26,520 and $54,098, respectively.
 
  Employees of DeltaCom may participate in a separately administered 401(k)
defined contribution plan. The plan covers substantially all DeltaCom
employees with at least one year of service. Participants may elect to defer
15% of compensation up to a maximum amount determined annually pursuant to IRS
regulations. DeltaCom has elected to provide matching employer contributions
equal to the lesser of 3% of compensation or the maximum amount annually for
each participant. DeltaCom's policy is to fund contributions as earned.
Company contributions made to the plan and charged to expense by DeltaCom for
the 11 months ended December 31, 1996 were $123,854.
 
                                     F-28
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
12. RELATED PARTY TRANSACTIONS
 
  The Parent occasionally provides certain administrative services, such as
legal and tax planning services for its subsidiaries, including the Companies.
In addition, for the period from January through July 1994, the Parent
provided FiberNet and InterQuest with additional administrative services,
including marketing, management, and financial services. The costs of these
services are charged to the Companies based primarily on the salaries and
related expenses for certain of the Parent's executives and an estimate of
their time spent on projects specific to the Companies. For the years ended
December 31, 1994, 1995, and 1996, the Companies recorded $148,140, $5,270,
and $19,150 in selling, operations, and administration expenses related to
these services. In the opinion of management, the methodology used to
calculate the amounts charged to the Companies is reasonable.
 
  The Parent also leases office space and transportation to the Companies.
Amounts charged to the Companies related to these leases for the years ended
December 31, 1995 and 1996 were $21,669, and $62,762, respectively, and are
reflected as selling, operations, and administration expenses in the
Companies' statements of operations. No such leases were in place in 1994. See
Notes 7 and 11 for discussion of certain other financial arrangements between
the Parent and the Companies.
 
  Certain of the Parent's other wholly owned or majority-owned subsidiaries
provide the Companies with various services and/or receive services provided
by the Companies. These entities include Interstate Telephone Company and
Valley Telephone Company, which provide local and long-distance telephone
services; InterCall, Inc. ("InterCall"), which provides conference calling
services; and InterServ Services Corporation, which provides operator services
for "800" customer service numbers and full-service marketing research in the
telecommunications industry and other industries. The Parent also holds equity
investments in the following entities which do business with the Companies:
InterCel, Inc., which provides cellular services; KNOLOGY Holdings, Inc.,
formerly CyberNet Holding, Inc. ("KNOLOGY"), which provides cable television
services; and MindSpring Enterprises, Inc. ("MindSpring"), which is a regional
provider of Internet access. In management's opinion, the Companies'
transactions with these affiliated entities are generally representative of
arm's-length transactions.
 
  For the years ended December 31, 1994, 1995, and 1996, the Companies
received services from these affiliated entities in the amounts of $89,149,
$465,167, and $180,400, respectively, which are reflected in selling,
operations, and administration expenses in the Companies' statements of
operations. In addition, in 1996, the Companies received services from these
affiliated entities in the amount of $762,173, which is reflected in cost of
services in the Companies' statements of operations. At December 31, 1995 and
1996, amounts payable for these services of $577,439 and $658,990,
respectively, are recorded in the Companies' balance sheets as affiliate
accounts payable.
 
  The Fiber Companies provide operator and directory assistance services and
lease capacity on certain of their fiber routes to affiliated entities.
Beginning in 1996, DeltaCom also provides long-distance and related services
to the Parent and all of its wholly owned and majority-owned subsidiaries.
Also beginning in 1996, DeltaCom acts as an agent for InterCall and MindSpring
in contracting with major interexchange carriers to provide origination and
termination services. Under these agreements, DeltaCom contracts with the
interexchange carrier and rebills the appropriate access charges plus a margin
to InterCall and MindSpring, such that only the margin impacts the Companies'
combined revenues. Total affiliated revenues included in the Companies'
statements of operations for the years ended December 31, 1994, 1995, and 1996
were $458,302, $486,246, and $2,863,389, respectively. At December 31, 1995
and 1996, amounts receivable for these services were $84,796 and $1,227,661,
respectively, and are recorded in the Companies' balance sheets as affiliate
accounts receivable.
 
  In 1995, the Fiber Companies constructed a fiber route on behalf of
CyberNet. Construction expenses reimbursed by KNOLOGY totaled $62,830. The
Companies also provided certain engineering and construction- related
management services to KNOLOGY in 1995. The Fiber Companies did not bill
KNOLOGY for these services, which are estimated by the Fiber Companies to have
a value of approximately $50,000.
 
                                     F-29
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
  DeltaCom has a contract with a former stockholder to provide management
services to DeltaCom through 1997 for $300,000 annually. In addition, DeltaCom
leases real properties from former stockholders and other related parties.
Total rental expense related to these leases was approximately $235,000 in
1996. DeltaCom is obligated to pay rentals to a former stockholder totaling
approximately $181,000 annually from 1997 through 2005 under leases which are
cancelable by either of the parties with 24 months' notice. DeltaCom is also
obligated through 1999 to pay annual rentals ranging from approximately
$74,000 to $81,000 to an officer of a former stockholder.
 
  Relatives of stockholders of the Parent are stockholders and employees of
the Companies' insurance provider. The costs charged to the Companies for
insurance services from this provider were $40,351, $63,836, and $156,523 for
the years ended December 31, 1994, 1995, and 1996.
 
  The chief executive officer of the Fiber Companies, who has been named as
chief executive officer of ITC/\DeltaCom, has also served since July 15, 1996
as president and chief executive officer and as a director of KNOLOGY. He has
served in his capacity as chief executive officer and president of KNOLOGY at
the request of KNOLOGY and the Parent and received no compensation from
KNOLOGY for the year ended December 31, 1996. He resigned as chief executive
officer and president of KNOLOGY effective February 20, 1997. The value of
services provided through February 20, 1997 is estimated to total
approximately $20,000.
 
13. ACQUISITION OF DELTACOM
 
  On January 29, 1996 (the "Acquisition Date"), DeltaCom was purchased by the
Parent for total consideration of $71,362,213, including cash acquired of
$1,828,121 (the "Acquisition"). The consideration included $65,362,213 in cash
and $6,000,000 in common stock of the Parent. Simultaneously, the Parent
refinanced $8,643,384 of DeltaCom's outstanding debt by borrowing against its
own line of credit and contributing the proceeds to DeltaCom, which then
repaid all of its outstanding debt. The Acquisition was accounted for under
the purchase method of accounting, and the purchase accounting entries were
"pushed down" to DeltaCom's financial statements. The purchase price has been
allocated to the underlying assets purchased and liabilities assumed based on
their estimated fair values at the Acquisition Date. The acquisition costs
exceeded the fair market value of net tangible assets acquired by $54,645,063,
of which $5,464,506 has been allocated to identifiable intangible assets and
the remainder has been recorded as goodwill in the accompanying balance
sheets. Amounts recorded in connection with the "pushdown" include the
$49,180,557 in goodwill, $5,464,506 in customer base, $74,005,598 in debt
related to the Acquisition and debt refinancing, and $6,000,000 in paid-in
capital. The operating results of DeltaCom have been included in the
Companies' financial statements since the Acquisition Date.
 
  The following table summarizes the net assets purchased in connection with
the Acquisition and the amount attributable to cost in excess of net assets
acquired:
 
<TABLE>
   <S>                                                             <C>
   Working capital, net of $1,828,121 cash acquired............... $  5,155,221
   Property, plant, and equipment.................................   21,357,357
   Other assets...................................................      198,920
   Noncurrent liabilities.........................................  (11,822,469)
   Customer base..................................................    5,464,506
   Goodwill.......................................................   49,180,557
                                                                   ------------
   Purchase price, net of cash acquired........................... $ 69,534,092
                                                                   ============
</TABLE>
 
  The common stock portion of the Acquisition has been accounted for as a
noncash transaction for purposes of the statements of cash flows.
 
 
                                     F-30
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
  The following pro forma information has been prepared assuming that the
Acquisition occurred at the beginning of the respective periods. This
information includes pro forma adjustments related to the amortization of
goodwill resulting from the excess of the purchase price over the fair value
of the net assets acquired and interest expense related to the debt financing
used to acquire DeltaCom. The pro forma information is presented for
informational purposes only and may not be indicative of the results of
operations as they would have been had the Acquisition occurred at the
beginning of the respective periods, nor is the information necessarily
indicative of the results of operations which may occur in the future.
 
<TABLE>
<CAPTION>
                                                             DECEMBER 31
                                                       ------------------------
                                                          1995         1996
                                                       -----------  -----------
                                                             (UNAUDITED)
   <S>                                                 <C>          <C>
   Combined operating revenues........................ $62,021,598  $71,775,516
   Combined net loss..................................  (1,826,756)  (4,024,866)
</TABLE>
 
14. ACQUISITION OF VIPERNET
 
  In July 1996, DeltaCom purchased certain assets of ViperNet, which provides
business Internet services, for cash of $625,000 and assumption of capital
lease obligations in the amount of $171,683 (Note 6).
 
  The following table summarizes the net assets purchased by DeltaCom in
connection with its acquisition of ViperNet:
 
<TABLE>
   <S>                                                                <C>
   Working capital................................................... $ 121,500
   Property and equipment............................................   191,318
   Noncompete agreement..............................................   102,000
   Customer base.....................................................   381,865
   Liabilities assumed...............................................  (171,683)
                                                                      ---------
   Cash paid for ViperNet, net assets................................ $ 625,000
                                                                      =========
</TABLE>
 
  The assumption of the capital lease obligations has been treated as a
noncash transaction for purposes of the statements of cash flows.
 
                                     F-31
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
15. SEGMENT REPORTING
 
  Upon the acquisition of DeltaCom in January 1996 (Note 13), the Companies
began operating in two business segments: Carriers' Carrier Services and
Retail Services. Retail Services are provided by DeltaCom and include the
retail sale of long-distance, data, and Internet services, including the sale
and installation of customer premises equipment primarily to midsized and
major regional business customers. Carriers' Carrier Services are provided by
the Fiber Companies. Carriers' Carrier Services include the sale of long-haul
private line services on a wholesale basis using the Fiber Companies' owned
and managed fiber-optic network. Summarized financial data by business segment
for the year ended December 31, 1996 and as of December 31, 1996 are as
follows:
 
<TABLE>
<CAPTION>
                            CARRIERS'
                             CARRIER      RETAIL
                             SEGMENT      SEGMENT   ELIMINATIONS    COMBINED
                           -----------  ----------- ------------  ------------
<S>                        <C>          <C>         <C>           <C>
Sales to external custom-
 ers.....................  $ 6,598,709  $59,919,876 $         0   $ 66,518,585
Intersegment sales.......      558,312    1,553,445  (2,111,757)             0
                           -----------  ----------- -----------   ------------
  Total operating reve-
   nues..................  $ 7,157,021  $61,473,321 $(2,111,757)  $ 66,518,585
                           -----------  ----------- -----------   ------------
Gross margin.............  $ 3,256,596  $24,325,559 $   180,143   $ 27,762,298
Selling, operations, and
 administration expense..    1,646,277   17,050,152     180,143     18,876,572
Depreciation and amorti-
 zation..................    1,656,685    4,781,389           0      6,438,074
Equity in losses of Gulf
 States..................   (1,589,812)           0           0     (1,589,812)
Other income (expense),
 net.....................                                              171,514
Interest expense, net....                                           (6,172,421)
                                                                  ------------
Loss before income tax-
 es......................                                         $ (5,143,067)
                                                                  ============
Identifiable assets......   14,597,073   91,592,697    (406,588)  $105,783,182
Investment in net assets
 of Gulf States..........    7,424,797            0           0      7,424,797
                           -----------  ----------- -----------   ------------
Total assets.............  $22,021,870  $91,592,697 $  (406,588)  $113,207,979
                           ===========  =========== ===========   ============
Capital expenditures.....  $ 1,101,181  $ 5,071,479 $         0   $  6,172,660
                           ===========  =========== ===========   ============
</TABLE>
 
16. SUBSEQUENT EVENTS
 
 Acquisition
 
  On March 27, 1997, the Parent purchased the 64% interest in Gulf States
owned by SCANA, along with certain of SCANA's other fiber and fiber-related
assets, including a significant long-term customer contract (the "Georgia
Fiber Assets"), for approximately $28 million payable at closing, plus certain
contingent consideration. The purchase price included 588,411 shares of the
Parent's convertible, nonvoting preferred stock valued at approximately $17.9
million and an unsecured purchase money note for approximately $10 million
(the "SCANA Note"). The purchase price was allocated as follows: $17 million
to the 64% interest in Gulf States and $10.9 million to the Georgia Fiber
Assets. The note, which bears interest at 11%, is payable in ten semiannual
principal payments of approximately $1 million plus accrued interest,
beginning September 30, 1997. The contingent consideration is due no later
than April 30, 1998, at which time the Parent must deliver additional
preferred stock to SCANA equal to 35.7% of (a) 64%, multiplied by (b)(i) 6,
multiplied by (ii) the amount, if any, by which the earnings before interest,
taxes, depreciation, and amortization of Gulf States for the year ended
December 31, 1997 exceed $11,265,696.
 
  Upon the closing of these acquisitions, the Parent contributed the 64%
ownership interest in Gulf States to GSTS and the Georgia Fiber Assets to
FiberNet. The Gulf States partnership has been dissolved. The SCANA Note was
assumed by FiberNet and the Parent was released from its obligations
thereunder.
 
                                     F-32
<PAGE>
 
              NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
 
 
 GSTS Bridge Facility
 
  In connection with the acquisition of the remaining 64% interest in Gulf
States, GSTS refinanced Gulf States' outstanding indebtedness of approximately
$41.6 million. In connection with the refinancing, GSTS wrote off $818,572
($507,515 net of tax benefits) in unamortized debt issuance costs, which is
reflected on the accompanying statement of operations as an extraordinary loss
on extinguishment of debt. The GSTS Bridge Facility matured on the date the
proceeds from ITC/\DeltaCom's debt offering described below were released (July
25, 1997). The GSTS Bridge Facility bore interest at LIBOR plus 2.25%.
 
 ITC/\DeltaCom Employee Stock Option Plan
 
  Upon the Reorganization, all employees of the Companies became eligible to
receive stock options under ITC/\DeltaCom's 1997 Employee Stock Option Plan
(the "Stock Option Plan") which was adopted and approved by its sole
stockholder on March 24, 1997.
 
  The Stock Option Plan provides for the grant of options that are intended to
qualify as "incentive stock options" under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code") to employees of ITC/\DeltaCom, its
subsidiaries obtained in the reorganization described in Note 1, and the
Parent, as well as the grant of non-qualifying options to any other individual
whose participation in the Stock Option Plan is determined to be in the best
interests of ITC/\DeltaCom. The Stock Option Plan authorizes the issuance of up
to 1.5 million shares of Class A Common Stock pursuant to options granted
under the Stock Option Plan (subject to anti-dilution adjustments in the event
of a stock split, recapitalization or similar transaction). The maximum number
of shares subject to options that can be awarded under the Stock Option Plan
to any person is 500,000 shares. The Compensation Committee of ITC/\DeltaCom's
Board of Directors will administer the Stock Option Plan and will grant
options to purchase Class A Common Stock.
 
  The option exercise price for incentive stock options granted under the
Stock Option Plan may not be less than 100% of the fair market value of the
Class A Common Stock on the date of grant of the option (or 110% in the case
of an incentive stock option granted to an optionee beneficially owning more
than 10% of the outstanding Class A Common Stock). The option exercise price
for non-incentive stock options granted under the Stock Option Plan may not be
less than the par value of the Class A Common Stock on the date of grant of
the option. The maximum option term is 10 years (or five years in the case of
an incentive stock option granted to an optionee beneficially owning more than
10% of the outstanding Class A Common Stock). There is also a $100,000 limit
on the value of Class A Common Stock (determined at the time of grant) covered
by incentive stock options that become exercisable by an optionee in any year.
Options granted will become exercisable with respect to 50% of the shares
subject to the options on the second anniversary of the date of grant and with
respect to 25% of the shares subject to the options on each of the third and
fourth anniversaries of the date of grant.
 
  ITC/\DeltaCom's Board of Directors may amend or terminate the Stock Option
Plan with respect to shares of Class A Common Stock as to which options have
not been granted.
 
  On March 24, 1997, ITC/\Deltacom granted options to purchase 789,000 shares
of Class A Common Stock under the Stock Option Plan. All options were granted
at a price at least equal to the estimated fair value of the common stock on
the date of grant ($7.20) as determined by ITC/\DeltaCom's sole stockholder's
board of directors based on equity transactions and other analyses.
 
  On July 29, 1997, ITC/\DeltaCom granted options to purchase 105,254 shares of
Class A Common Stock under The Stock Option Plan. All options were granted at
a price at least equal to the estimated fair value of the common stock on the
date of grant ($7.20) as determined by ITC/\DeltaCom's sole stockholder's board
of directors based on equity transactions and other analyses.
 
 
                                     F-33
<PAGE>
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Directors Stock Option Plan
 
  On March 24, 1997, ITC/\DeltaCom adopted and its stockholders approved the
Directors Stock Option Plan (the "Directors Plan"). The Directors Plan
provides for the "formula" grant of options that are not intended to qualify
as "incentive stock options" under Section 422 of the Code to directors of
ITC/\Deltacom who are not officers or employees of the Company, the Parent, or
any subsidiary of ITC/\DeltaCom (each an "Eligible Director"). The Directors
Plan authorizes the issuance of up to 150,000 shares of Class A Common Stock
pursuant to options granted under the Directors Plan (subject to anti-dilution
adjustments). The option exercise price for options granted under the
Directors Plan will be at least 100% of the fair market value of the shares of
Class A Common Stock on the date of grant of the option. Under the Directors
Plan, each Eligible Director will be granted an option to purchase 10,000
shares of Class A Common Stock upon such person's initial election or
appointment to serve as director. Options granted will become exercisable with
respect to 50% of the shares subject to the options on the second anniversary
of the date of grant and with respect to 25% of the shares subject to the
options on each of the third and fourth anniversaries of the date of grant.
The options will expire ten years and 30 days after the date of grant.
 
  On March 24, 1997, ITC/\DeltaCom granted options to purchase 10,000 shares of
ITC/\DeltaCom's Class A Common Stock to each of its six nonemployee directors.
All options were granted at a price equal to the estimated fair value of the
common stock on the date of grant ($7.20) as determined by the ITC/\DeltaCom's
stockholder's board of directors based on equity transactions and other
analyses.
 
 Credit Agreement
 
  On September 17, 1997, FiberNet entered into a credit agreement with
NationsBank of Texas, N.A., as administrative lender (the "Credit Agreement").
The Credit Agreement provides for a term and revolving credit facility of up
to $100 million to be used for working capital and other purposes, including
refinancing existing indebtedness, capital expenditures, and permitted
acquisitions. The Credit Agreement matures on September 15, 2002 and includes
a $50 million multi-draw term loan facility and a $50 million revolving credit
facility. Amounts may be drawn under the term loan facility until September
15, 1999. All $50 million of the term loan facility must be utilized before
drawing down any amount over $10 million under the revolving credit facility.
Amounts drawn under the Credit Agreement will bear interest, at FiberNet's
option, at either the Base Rate of the LIBOR Rate, plus an applicable margin.
 
  Borrowings under the Credit Agreement are guaranteed by the Companies and
are secured by a first priority lien on substantially all current and future
assets and properties of FiberNet and its subsidiaries and a first priority
pledge of the stock of FiberNet and its subsidiaries. The Credit Agreement
contains covenants limiting the Companies ability to incur debt or make
guaranties, create liens, pay dividends, make distributions or stock
repurchases, make investments or capital expenditures, issue capital stock,
engage in transactions with affiliates, sell assets, and engage in mergers and
acquisitions. The Credit Agreement also requires FiberNet to comply with
certain financial tests and to maintain certain financial ratios on a
consolidated basis.
 
 Debt Offering
 
  On June 3, 1997, ITC/\DeltaCom completed the issuance of 11% Senior Notes due
2007 (the "Offering").
 
  Proceeds from the Offering were held by the trustee until all regulatory
approvals related to the Reorganization described in Note 1 were received.
Upon their release, a portion of the proceeds was used to repay approximately
$48.0 million of the Companies' advances from Parent and approximately $41.6
million under the GSTS Bridge Facility as well as accrued interest.
Approximately $62.7 million of such proceeds are held by the Trustee as
security for and to fund the first six interest payments on the Senior Notes.
Also in connection with the Reorganization, FiberNet undertook to repay (and
DeltaCom agreed to reimburse to FiberNet) the remaining $31.0 million of
DeltaCom's advance from Parent; the Parent then forgave this indebtedness and
contributed it to FiberNet as additional equity. Upon the settlement of
DeltaCom's advance from Parent related to the acquisition (and accrued
interest), the Parent Credit Facility was amended to release the Companies as
guarantors and to terminate the related security interests in the assets of
the Companies (Note 7). The Parent effected the Reorganization on July 25,
1997.
 
                                     F-34
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
To DeltaCom, Inc.:
 
  We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of DELTACOM, INC. for the year ended December 31, 1994.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
DeltaCom, Inc. for the year ended December 31, 1994 in conformity with
generally accepted accounting principles.
 
MARTIN STUEDEMAN & ASSOCIATES P.C.
 
Birmingham, Alabama
March 19, 1997
 
                                     F-35
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To DeltaCom, Inc.:
 
  We have audited the accompanying statements of operations, stockholders'
equity, and cash flows of DELTACOM, INC. (an Alabama corporation) for the year
ended December 31, 1995. 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. The December 31, 1994 financial
statements were audited by other auditors, whose report dated March 19, 1997
expressed an unqualified opinion on those statements.
 
  We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of
DeltaCom, Inc. for the year ended December 31, 1995 in conformity with
generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
March 27, 1997
 
                                     F-36
<PAGE>
 
                                 DELTACOM, INC.
 
                            STATEMENTS OF OPERATIONS
 
                 FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
                  AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
 
<TABLE>
<CAPTION>
                                             1994         1995         1996
                                          -----------  -----------  -----------
                                                                    (UNAUDITED)
<S>                                       <C>          <C>          <C>
OPERATING REVENUES....................... $53,777,565  $56,271,011  $5,256,931
COST OF SERVICES.........................  33,168,780   32,355,358   2,963,383
                                          -----------  -----------  ----------
    Gross margin.........................  20,608,785   23,915,653   2,293,548
                                          -----------  -----------  ----------
OPERATING EXPENSES:
  Selling, general, and administrative...  10,608,998   13,845,867   1,343,761
  Depreciation and amortization..........   2,982,325    3,241,869     290,226
                                          -----------  -----------  ----------
    Total operating expenses.............  13,591,323   17,087,736   1,633,987
                                          -----------  -----------  ----------
OPERATING INCOME.........................   7,017,462    6,827,917     659,561
OTHER INCOME (EXPENSE):
  Interest income........................      56,474      105,477      12,334
  Interest expense.......................  (1,068,140)  (1,025,571)   (143,883)
                                          -----------  -----------  ----------
INCOME BEFORE INCOME TAXES...............   6,005,796    5,907,823     528,012
PROVISION FOR INCOME TAXES...............   2,239,613    2,211,115     200,645
                                          -----------  -----------  ----------
NET INCOME............................... $ 3,766,183  $ 3,696,708  $  327,367
                                          ===========  ===========  ==========
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-37
<PAGE>
 
                                 DELTACOM, INC.
 
                       STATEMENTS OF STOCKHOLDERS' EQUITY
 
                 FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
                  AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
 
<TABLE>
<CAPTION>
                              COMMON STOCK
                              -------------  PAID-IN    RETAINED
                              SHARES AMOUNT  CAPITAL    EARNINGS      TOTAL
                              ------ ------ ---------- ----------- -----------
<S>                           <C>    <C>    <C>        <C>         <C>
BALANCE, December 31, 1993... 80,000  $800  $5,145,715 $ 3,780,377 $ 8,926,892
  Net income.................      0     0           0   3,766,183   3,766,183
                              ------  ----  ---------- ----------- -----------
BALANCE, December 31, 1994... 80,000   800   5,145,715   7,546,560  12,693,075
  Net income.................      0     0           0   3,696,708   3,696,708
                              ------  ----  ---------- ----------- -----------
BALANCE, December 31, 1995... 80,000   800   5,145,715  11,243,268  16,389,783
  Net income (unaudited).....      0     0           0     327,367     327,367
                              ------  ----  ---------- ----------- -----------
BALANCE, January 29, 1996
 (Unaudited)................. 80,000  $800  $5,145,715 $11,570,635 $16,717,150
                              ======  ====  ========== =========== ===========
</TABLE>
 
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-38
<PAGE>
 
                                 DELTACOM, INC.
 
                            STATEMENTS OF CASH FLOWS
 
                 FOR THE YEARS ENDED DECEMBER 31, 1994 AND 1995
                  AND FOR THE ONE MONTH ENDED JANUARY 29, 1996
 
<TABLE>
<CAPTION>
                                            1994         1995         1996
                                         -----------  -----------  -----------
                                                                   (UNAUDITED)
<S>                                      <C>          <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
 Net income............................. $ 3,766,183  $ 3,696,708  $   327,367
                                         -----------  -----------  -----------
 Adjustments to reconcile net income to
  net cash provided by operating activi-
  ties:
  Depreciation and amortization.........   2,982,325    3,241,869      290,226
  Deferred income taxes.................     605,427       37,185       (8,767)
  Changes in current operating assets
   and liabilities:
   Accounts receivable..................    (347,863)    (832,551)    (360,594)
   Due from related parties.............           0      (26,397)      26,397
   Prepayments..........................    (401,052)    (137,876)     748,471
   Inventories..........................      28,081      (55,333)     (82,217)
   Notes receivable.....................           0     (167,481)       8,395
   Accounts payable.....................  (1,819,564)    (863,902)     174,476
   Accrued liabilities..................      89,740      (20,027)     298,047
   Income taxes payable.................     326,238      249,670      189,956
   Other, net...........................           0        1,075       89,278
                                         -----------  -----------  -----------
    Total adjustments...................   1,463,332    1,426,232    1,373,668
                                         -----------  -----------  -----------
    Net cash provided by operating ac-
     tivities...........................   5,229,515    5,122,940    1,701,035
                                         -----------  -----------  -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
 Purchases of property and equipment....  (2,596,331)  (4,431,552)    (171,036)
 Proceeds from sale of equipment........           0      175,389            0
 Increase in accrued construction
  payables..............................           0      144,720     (144,720)
                                         -----------  -----------  -----------
    Net cash used in investing activi-
     ties...............................  (2,596,331)  (4,111,443)    (315,756)
                                         -----------  -----------  -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
 Principal payments on long-term debt... $(1,410,155) $(2,127,651) $(1,244,759)
 Proceeds from financing agreement......           0    1,388,859            0
                                         -----------  -----------  -----------
    Net cash used in financing activi-
     ties...............................  (1,410,155)    (738,792)  (1,244,759)
                                         -----------  -----------  -----------
NET INCREASE IN CASH AND CASH
 EQUIVALENTS............................   1,223,029      272,705      140,520
CASH AND CASH EQUIVALENTS AT BEGINNING
 OF PERIOD..............................     191,867    1,414,896    1,687,601
                                         -----------  -----------  -----------
CASH AND CASH EQUIVALENTS AT END OF
 PERIOD................................. $ 1,414,896  $ 1,687,601  $ 1,828,121
                                         ===========  ===========  ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
 INFORMATION:
 Cash paid during the year for:
  Interest.............................. $ 1,068,140  $ 1,005,827  $    17,210
                                         ===========  ===========  ===========
  Income taxes.......................... $ 1,302,388  $ 2,016,860  $         0
                                         ===========  ===========  ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-39
<PAGE>
 
                                DELTACOM, INC.
 
                         NOTES TO FINANCIAL STATEMENTS
 
                DECEMBER 31, 1994 AND 1995 AND JANUARY 29, 1996
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  DeltaCom, Inc. (the "Company") was incorporated in the state of Alabama on
April 7, 1982. The Company is a provider of telecommunications services and
products in Alabama and surrounding states. Prior to January 29, 1996, the
Company's common stock was owned 50% by SCI Systems (Alabama), Inc., 14% by
Brindlee Mountain Telephone Company ("BMTC"), and 36% by the majority
stockholder of BMTC. ITC Holding Company, Inc. acquired all of the stock of
the Company on January 29, 1996 (Note 7).
 
 Basis of Accounting
 
  The accompanying financial statements are prepared on the accrual basis of
accounting. Revenues are recognized as services are performed. Costs and
expenses are recognized when incurred. The financial statements are prepared
in conformity with generally accepted accounting principles, which require the
use of estimates. Actual results may differ from those estimates.
 
 Accounting Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from these estimates.
 
 Depreciation
 
  Depreciation of property and equipment is generally provided on a composite
or straight-line basis over the assets' estimated useful lives, which are 40
years for buildings, 5 to 20 years for telecommunications equipment, 3 to 15
years for office furniture and equipment, and 5 years for vehicles.
 
  Expenditures for maintenance and repairs are expensed currently, while
renewals and betterments that materially extend the life of an asset are
capitalized. The cost of assets sold, retired, or otherwise disposed of and
the related accumulated depreciation are eliminated from the accounts, and any
resulting gain or loss is included in the results of operations.
 
 Income Taxes
 
  Deferred income taxes are determined in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." This
approach results in the recognition of deferred tax assets and liabilities for
the expected future tax consequences of temporary differences between the book
carrying amounts and the tax basis of assets and liabilities.
 
 Advertising Costs
 
  The Company expenses all advertising costs as incurred.
 
                                     F-40
<PAGE>
 
                                DELTACOM, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 
2. INCOME TAXES
 
  The components of the provision for income taxes for the years ended
December 31, 1994 and 1995 and the one month ended January 29, 1996 are as
follows:
 
<TABLE>
<CAPTION>
                                                  1994       1995       1996
                                               ---------- ---------- -----------
                                                                     (UNAUDITED)
   <S>                                         <C>        <C>        <C>
   Current:
     Federal.................................. $1,780,968 $1,970,891  $190,360
     State....................................    164,427    203,039    19,052

   Deferred...................................    294,218     37,185    (8,767)
                                               ---------- ----------  --------
                                               $2,239,613 $2,211,115  $200,645
                                               ========== ==========  ========
</TABLE>
 
  A reconciliation of the federal statutory rate to the effective income tax
rate for the periods presented for the years ended December 31, 1994 and 1995
and the one month ended January 29, 1996 is as follows:
 
<TABLE>
<CAPTION>
                                                         1994  1995     1996
                                                         ----  ----  -----------
                                                                     (UNAUDITED)
   <S>                                                   <C>   <C>   <C>
   Federal statutory rate............................... 34.0% 34.0%    34.0%
   State income taxes...................................  3.6   3.6      4.0
   Other................................................ (0.3) (0.2)     0.0
                                                         ----  ----     ----
   Effective income tax rate............................ 37.3% 37.4%    38.0%
                                                         ====  ====     ====
</TABLE>
 
3. RELATED-PARTY TRANSACTIONS
 
  During 1994, the Company recorded revenues from two affiliates, BMTC and
Valley Telephone Services, for approximately $401,000 and $141,000,
respectively. The Company recorded expenses to BMTC in the amount of
approximately $1,650,000 in 1994.
 
  During 1995, the Company recorded revenues of approximately $88,000 in the
accompanying statements of operations for long distance services provided to
BMTC. These services were discontinued in March 1995. The Company also
recorded revenues of approximately $168,000 during the year ended December 31,
1995 for long-distance services provided to Marshall Cellular, an affiliate of
BMTC.
 
  During January 1996, the Company recorded revenues from BMTC, Marshall
Cellular, and another affiliate, SCI, of approximately $27,500, $13,200, and
$33,400, respectively. The Company also recorded expenses of $30,200 and
$2,000 for telephone services provided by BMTC and Marshall Cellular,
respectively.
 
  The Company paid approximately $770,000 to BMTC for electronic data
information services, including billing and rating services, through July
1995. In August 1995, the Company terminated its contract for such services,
hired the information services personnel from BMTC, and assumed BMTC's
operating lease obligations, totaling approximately $419,000 annually, for
electronic data processing equipment. The Company contracted to furnish
electronic data processing services to BMTC annually for $300,000. The Company
recorded revenues of $125,000 in the accompanying statements of operations
related to these services for the year ended December 31, 1995 and $27,500 for
the one month ended January 29, 1996.
 
  The Company paid $405,000 to BMTC for management services in 1995. These
services were terminated in January 1996. During 1995, the Company also paid
$600,000 in management fees to its stockholders. The
 
                                     F-41
<PAGE>
 
                                DELTACOM, INC.
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
Company has a contract with a former stockholder to provide management
services to the Company through 1997 for $300,000 annually. The Company
recorded expenses of $25,000 in the accompanying statements of operations
related to those services for the one month ended January 29, 1996.
 
  The Company leases real properties from stockholders and other related
parties. Total rental expense related to these leases was approximately
$133,000, $145,000, and $30,000 for the years ended December 31, 1994 and 1995
and the month ended January 29, 1996, respectively. The Company is obligated
to pay rentals totaling approximately $150,000 to BMTC in 1996 and future
years under leases which are cancelable by either of the parties with 24
months' notice. The Company is also obligated through 1999 to pay annual
rentals ranging from approximately $74,000 to $81,000 to an officer of a
former stockholder.
 
4. DEFERRED COMPENSATION PLAN
 
  The Company has a 401(k) deferred compensation plan covering substantially
all employees with at least one year of service. Participants may elect to
defer 15% of compensation up to a maximum amount determined annually pursuant
to IRS regulations. The Company has elected to provide matching employer
contributions equal to the lesser of 3% of compensation or the maximum amount
annually for each participant. The Company's policy is to fund contributions
as earned. Company contributions made to the plan and charged to expense for
the years ended December 31, 1994 and 1995 and the one month ended January 29,
1996 were $111,561, $138,697, and $12,588, respectively.
 
5. COMMITMENTS
 
  Minimum future rental commitments under noncancelable operating leases
having an initial or remaining term in excess of one year as of December 31,
1995 are as follows:
 
<TABLE>
   <S>                                                                <C>
   December 31:
     1996............................................................ $  988,523
     1997............................................................    831,657
     1998............................................................    754,481
     1999............................................................    407,300
     2000............................................................    279,755
     Thereafter......................................................    726,330
                                                                      ----------
                                                                      $3,988,046
                                                                      ==========
</TABLE>
 
  Total rental expense charged to operations for the years ended December 31,
1994 and 1995 and the one month ended January 29, 1996 was $287,425, $615,734,
and $105,578, respectively.
 
  At January 29, 1996, the Company had agreed to purchase telecommunications
equipment at a price totaling approximately $365,000.
 
6. CONTINGENT MATTERS
 
  The Company is subject to various legal proceedings and claims which arise
in the ordinary course of its business. In the opinion of management, the
amount or ultimate liability with respect to these actions will not materially
affect the Company's financial position or results of operations.
 
7. ACQUISITION OF THE COMPANY
 
  On January 29, 1996, the Company was purchased by ITC Holding Company, Inc.
for total consideration of $71,362,213.
 
                                     F-42
<PAGE>
 
                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
 
To Gulf States FiberNet:
 
  We have audited the accompanying balance sheets of GULF STATES FIBERNET (a
Georgia general partnership) as of December 31, 1995 and 1996 and the related
statements of operations, partners' capital, and cash flows for period from
inception (August 17, 1994) through December 31, 1994 and for the years ended
December 31, 1995 and 1996. These financial statements are the responsibility
of the Partnership's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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.
 
  In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gulf States FiberNet as of
December 31, 1995 and 1996 and the results of its operations and its cash
flows for the period from inception (August 17, 1994) through December 31,
1994 and for the years ended December 31, 1995 and 1996 in conformity with
generally accepted accounting principles.
 
ARTHUR ANDERSEN LLP
 
Atlanta, Georgia
March 27, 1997 (except with 
 respect to the Debt Refinancing, 
 Parent's Reorganization of 
 Subsidiaries, and ITC/\DeltaCom 
 Debt Offering discussions in
 Note 8, as to which the date 
 is July 25, 1997)
 
                                     F-43
<PAGE>
 
                              GULF STATES FIBERNET
 
                                 BALANCE SHEETS
 
                           DECEMBER 31, 1995 AND 1996
                               AND MARCH 27, 1997
 
<TABLE>
<CAPTION>
                                               1995        1996        1997
                                            ----------- ----------- -----------
                                                                    (UNAUDITED)
<S>                                         <C>         <C>         <C>
                  ASSETS
CURRENT ASSETS:
  Cash and cash equivalents................ $ 5,561,737 $ 1,130,668 $   574,600
  Accounts receivable:
    Affiliates.............................     496,286     476,102     280,866
    Customer accounts receivable, net of
     allowance for uncollectible accounts
     of $15,000, $24,000 and $39,006 in
     1995, 1996 and 1997, respectively.....     428,775   1,127,788   1,923,592
  Other....................................      70,943      16,543      55,799
                                            ----------- ----------- -----------
                                              6,557,741   2,751,101   2,834,857
                                            ----------- ----------- -----------
PROPERTY AND EQUIPMENT, NET (NOTE 2).......  62,756,563  62,444,185  66,112,272
                                            ----------- ----------- -----------
OTHER NONCURRENT ASSETS:
  Goodwill, net of accumulated amortization
   of $14,226, $27,358 and $30,640 in 1995,
   1996, and 1997 respectively.............     511,034     497,902     494,620
  Debt issuance costs, net of accumulated
   amortization of $47,251, $188,505 and
   $231,321 in 1995, 1996 and 1997, respec-
   tively..................................     938,925     878,056     974,572
                                            ----------- ----------- -----------
                                              1,449,959   1,375,958   1,469,192
                                            ----------- ----------- -----------
                                            $70,764,263 $66,571,244 $70,416,321
                                            =========== =========== ===========
     LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
  Current maturities of long-term debt..... $ 5,937,500 $ 5,937,500 $42,068,969
  Accounts payable:
    Affiliates.............................      25,263           0       2,431
    Other..................................     136,604     104,208   1,290,172
  Accrued construction costs...............   2,664,051   1,712,272     980,542
  Other accrued liabilities................     860,477     680,941     540,270
  Unearned revenue.........................     207,873     997,667   1,185,206
                                            ----------- ----------- -----------
      Total current liabilities............   9,831,768   9,432,588  46,067,590
LONG-TERM DEBT (NOTE 4)....................  41,562,500  35,625,000   2,950,906
COMMITMENTS AND CONTINGENCIES (NOTES 4, 5,
 AND 7)
PARTNERS' CAPITAL..........................  19,369,995  21,513,656  21,397,825
                                            ----------- ----------- -----------
                                            $70,764,263 $66,571,244 $70,416,321
                                            =========== =========== ===========
</TABLE>
 
      The accompanying notes are an integral part of these balance sheets.
 
                                      F-44
<PAGE>
 
                              GULF STATES FIBERNET
 
                            STATEMENTS OF OPERATIONS
 
                FOR THE PERIOD FROM INCEPTION (AUGUST 17, 1994)
                           THROUGH DECEMBER 31, 1994,
 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND FOR THE PERIODS ENDED MARCH
                          31, 1996 AND MARCH 27, 1997
 
<TABLE>
<CAPTION>
                                   DECEMBER 31,
                         -----------------------------------   MARCH 31,    MARCH 27,
                           1994        1995         1996         1996         1997
                         ---------  -----------  -----------  -----------  -----------
                                                              (UNAUDITED)  (UNAUDITED)
<S>                      <C>        <C>          <C>          <C>          <C>
REVENUES................ $ 127,569  $ 7,587,713  $10,056,544  $ 1,832,487  $4,085,039
COST OF SERVICES........    41,838       82,680      867,558       47,368     418,472
                         ---------  -----------  -----------  -----------  ----------
    Gross margin........    85,731    7,505,033    9,188,986    1,785,119   3,666,567
                         ---------  -----------  -----------  -----------  ----------
OPERATING EXPENSES:
  Selling, general, and
   administrative.......   318,685    2,455,159    2,785,596      733,135     871,566
  Depreciation and
   amortization.........    47,764    3,835,465    6,620,382    1,574,627   1,897,826
                         ---------  -----------  -----------  -----------  ----------
    Total operating
     expenses...........   366,449    6,290,624    9,405,978    2,307,762   2,769,392
                         ---------  -----------  -----------  -----------  ----------
OPERATING (LOSS)
 INCOME.................  (280,718)   1,214,409     (216,992)    (522,643)    897,175
                         ---------  -----------  -----------  -----------  ----------
OTHER INCOME (EXPENSE):
  Interest expense......         0   (2,172,373)  (4,345,001)  (1,085,287) (1,031,546)
  Other.................    11,496      240,624      145,851       62,834      18,540
                         ---------  -----------  -----------  -----------  ----------
    Total other income
     (expense)..........    11,496   (1,931,749)  (4,199,150)  (1,022,453) (1,013,006)
                         ---------  -----------  -----------  -----------  ----------
NET LOSS................ $(269,222) $  (717,340) $(4,416,142) $(1,545,096) $ (115,831)
                         =========  ===========  ===========  ===========  ==========
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-45
<PAGE>
 
                              GULF STATES FIBERNET
 
                        STATEMENTS OF PARTNERS' CAPITAL
 
                FOR THE PERIOD FROM INCEPTION (AUGUST 17, 1994)
                           THROUGH DECEMBER 31, 1994,
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
                    AND FOR THE PERIOD ENDED MARCH 27, 1997
 
<TABLE>
<CAPTION>
                                            PARTNERS' CAPITAL         TOTAL
                                          -----------------------   PARTNERS'
                                             SCANA        GSTS       CAPITAL
                                          -----------  ----------  -----------
<S>                                       <C>          <C>         <C>
BALANCE AT INCEPTION (AUGUST 17, 1994)... $ 5,449,670  $        0  $ 5,449,670
  Partnership contributions..............   7,906,887   7,000,000   14,906,887
  Net loss...............................    (172,302)    (96,920)    (269,222)
                                          -----------  ----------  -----------
BALANCE, DECEMBER 31, 1994...............  13,184,255   6,903,080   20,087,335
  Net loss...............................    (459,098)   (258,242)    (717,340)
                                          -----------  ----------  -----------
BALANCE, DECEMBER 31, 1995...............  12,725,157   6,644,838   19,369,995
  Partnership contributions..............   4,198,274   2,361,529    6,559,803
  Net loss...............................  (2,826,331) (1,589,811)  (4,416,142)
                                          -----------  ----------  -----------
BALANCE, DECEMBER 31, 1996...............  14,097,100   7,416,556   21,513,656
  Net loss...............................     (74,132)    (41,699)    (115,831)
                                          -----------  ----------  -----------
BALANCE, MARCH 27, 1997 (UNAUDITED)...... $14,022,968  $7,374,857  $21,397,825
                                          ===========  ==========  ===========
</TABLE>
 
 
        The accompanying notes are an integral part of these statements.
 
                                      F-46
<PAGE>
 
                              GULF STATES FIBERNET
 
                            STATEMENTS OF CASH FLOWS
 
                FOR THE PERIOD FROM INCEPTION (AUGUST 17, 1994)
                         THROUGH DECEMBER 31, 1994 AND
                 FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
          AND FOR THE PERIODS ENDED MARCH 31, 1996 AND MARCH 27, 1997
 
<TABLE>
<CAPTION>
                                     DECEMBER 31,
                         ---------------------------------------   MARCH 31,     MARCH 27,
                             1994          1995         1996          1996         1997
                         ------------  ------------  -----------  ------------  -----------
                                                                  (UNAUDITED)   (UNAUDITED)
<S>                      <C>           <C>           <C>          <C>           <C>
CASH FLOWS FROM
 OPERATING ACTIVITIES:
  Net loss.............. $   (269,222) $   (717,340) $(4,416,142) $ (1,545,096) $  (115,831)
                         ------------  ------------  -----------  ------------  -----------
  Adjustments to recon-
   cile net loss to net
   cash provided by op-
   erating activities:
    Depreciation and
     amortization.......       47,764     3,835,465    6,620,382     1,574,627    1,897,826
    Changes in operating
     assets and liabili-
     ties:
      Accounts
       receivable.......      (64,004)     (861,057)    (678,829)     (157,231)    (600,569)
      Other current as-
       sets.............      (12,600)      (58,343)      54,400       (33,821)     49,215
      Accounts payable..      430,873      (269,004)     (57,659)     (131,172)   1,188,426
      Accrued liabili-
       ties.............      106,985       753,492     (179,536)     (117,742)    (140,671)
      Unearned revenue..       36,868       171,005      789,794        38,419       99,068
                         ------------  ------------  -----------  ------------  -----------
        Total adjust-
         ments..........      545,886     3,571,558    6,548,552     1,173,080    2,493,295
                         ------------  ------------  -----------  ------------  -----------
        Net cash
         provided by
         (used in)
         operating
         activities.....      276,664     2,854,218    2,132,410      (372,016)   2,377,464
                         ------------  ------------  -----------  ------------  -----------
CASH FLOWS FROM
 INVESTING ACTIVITIES:
  Capital expenditures..  (37,548,729)  (24,105,172)  (6,153,618)   (1,216,962)  (2,062,470)
  Accrued construction
   costs................   10,178,620    (7,514,569)    (951,779)   (1,921,170)    (731,730)
                         ------------  ------------  -----------  ------------  -----------
        Net cash used in
         investing
         activities.....  (27,370,109)  (31,619,741)  (7,105,397)   (3,138,132)  (2,794,200)
                         ------------  ------------  -----------  ------------  -----------
CASH FLOWS FROM
 FINANCING ACTIVITIES:
  Proceeds from interim
   construction loan....   12,700,000    24,000,000            0             0            0
  Payments on interim
   construction loan....            0   (36,700,000)           0             0            0
  Proceeds from long-
   term note............            0    47,500,000            0             0            0
  Payments on long-term
   note.................            0             0   (5,937,500)            0            0
  Payment of debt issu-
   ance costs...........            0      (986,176)     (80,385)      (22,072)    (139,332)
  Capital contribu-
   tions................   14,906,881             0    6,559,803     1,393,320            0
                         ------------  ------------  -----------  ------------  -----------
        Net cash
         provided by
         (used in)
         financing
         activities.....   27,606,881    33,813,824      541,918     1,371,248    (139,332)
                         ------------  ------------  -----------  ------------  -----------
INCREASE (DECREASE) IN
 CASH AND CASH
 EQUIVALENTS............      513,436     5,048,301   (4,431,069)   (2,138,900)    (556,068)
CASH AND CASH
 EQUIVALENTS AT
 BEGINNING OF PERIOD....            0       513,436    5,561,737     5,561,737    1,130,668
                         ------------  ------------  -----------  ------------  -----------
CASH AND CASH
 EQUIVALENTS AT END OF
 PERIOD................. $    513,436  $  5,561,737  $ 1,130,668  $  3,422,837  $   574,600
                         ============  ============  ===========  ============  ===========
SUPPLEMENTAL CASH FLOW
 DISCLOSURES:
  Cash paid for inter-
   est.................. $     45,907  $  2,909,056  $ 4,689,477  $    991,318  $ 1,410,816
                         ============  ============  ===========  ============  ===========
  Noncash financing
   activities:
   Assets contributed by
   SCANA................ $  5,449,670  $          0  $         0  $          0  $         0
                         ============  ============  ===========  ============  ===========
  Capital lease
   obligation for fiber
   route................ $          0  $          0  $         0  $          0  $ 3,457,345
                         ============  ============  ===========  ============  ===========
</TABLE>
 
        The accompanying notes are an integral part of these statements.
 
                                      F-47
<PAGE>
 
                             GULF STATES FIBERNET
 
                         NOTES TO FINANCIAL STATEMENTS
 
                       DECEMBER 31, 1994, 1995, AND 1996
 
1. ORGANIZATION AND BUSINESS OPERATIONS
 
 General
 
  Gulf States FiberNet (the "Partnership") was formed on August 17, 1994
pursuant to the provisions of the Georgia Uniform Partnership Act. The
Partnership provides digital communications transport to communications common
carriers in the states of Georgia, Texas, Alabama, Mississippi, and Louisiana.
The Partnership is a facilities-based entity with an existing fiber optic
transmission facility between Atlanta, Georgia, and Birmingham, Alabama. The
Partnership has also constructed a redundant route from Atlanta to Birmingham
which continues on to Longview, Texas, through such cities as Tuscaloosa,
Alabama; Meridian, Jackson, and Vicksburg, Mississippi; and Monroe and
Shreveport, Louisiana. The Partnership has also constructed a spur from
Meridian to Gulfport, Mississippi. These additional routes became operational
during May 1995. In September 1996, an extension to Longview, Texas, was
completed. The Partnership has also constructed a route from Atlanta to
Gainesville, Georgia, where it connects to the network of another
nonaffiliated entity that provides transit into the networks of several other
nonaffiliated entities in the states of North Carolina and South Carolina. The
Atlanta to Gainesville route was completed in January 1996.
 
  The general partners and their respective ownership percentages as of
December 31, 1996 were as follows:
 
<TABLE>
           <S>                                            <C>
           SCANA Communications, Inc. ("SCANA")..........  64%
           Gulf States Transmission Systems, Inc.
            ("GSTS").....................................  36
</TABLE>
 
  GSTS is the managing partner and is responsible for managing and operating
the Partnership. The partners make capital contributions to share in the
operating results of, and receive distributions from, the Partnership in
accordance with their respective ownership percentages.
 
  The Partnership's revenues are derived from sales to a relatively small
number of customers. The loss of a major customer would have a significant
impact on the partnership's results of operations and financial position. This
risk is mitigated by take-or-pay contracts whereby the customers are
contractually obligated to pay periodic specified amounts, even if they do not
take delivery of the contracted services.
 
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
 Basis of Accounting and Presentation
 
  The Partnership's financial statements are prepared on the accrual basis of
accounting. The balance sheet as of March 27, 1997 and the statements of
operations and cash flows for the periods ending March 31, 1996 and March 27,
1996 are unaudited and, in the opinion of management, contain all adjustments
(consisting of only normal recurring items) necessary for the fair
presentation of the financial position and results of operations for the
interim periods. The results of operations for the period ended March 27, 1997
are not necessarily indicative of the results to be expected for the entire
year.
 
 Use of Estimates
 
  The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
 Cash and Cash Equivalents
 
  For purposes of the statements of cash flows, temporary investments
represent securities with maturities of 90 days or less and are considered
cash equivalents.
 
 
                                     F-48
<PAGE>
 
                             GULF STATES FIBERNET
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Revenue Recognition
 
  Revenues are recognized as the Partnership performs services in accordance
with contract or tariff terms.
 
 Property and Equipment
 
  Property and equipment are carried at cost or fair market value of
contributed property at the time of the contribution. Depreciation and
amortization of property and equipment are provided using the straight-line
method over estimated useful lives (3 to 20 years). Balances of major classes
of assets and the related accumulated depreciation as of December 31, 1995 and
1996 are as follows:
 
<TABLE>
<CAPTION>
                                                       1995          1996
                                                    -----------  ------------
<S>                                                 <C>          <C>
Land............................................... $     2,500  $      2,500
Vehicles and work equipment........................     357,994       459,906
Office furniture, fixtures, equipment, and lease-
 hold improvements.................................      79,939        80,628
Electronic equipment...............................   8,935,670    13,730,134
Buildings and POP extensions.......................   3,608,294     4,297,142
Cable and installation costs.......................  42,412,149    45,612,729
Other depreciable assets...........................   8,370,033     8,572,664
Less accumulated depreciation......................  (4,006,455)  (10,472,469)
                                                    -----------  ------------
  Net property and equipment in service............  59,760,124    62,283,234
Property and equipment under construction..........   2,996,439       160,951
                                                    -----------  ------------
Net property and equipment......................... $62,756,563  $ 62,444,185
                                                    ===========  ============
</TABLE>
 
 Long-Lived Assets
 
  In 1995, the Partnership adopted Statement of Financial Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." SFAS No. 121 establishes accounting
standards for the impairment of long-lived assets and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. The effect of adopting SFAS No.
121 was not material.
 
  The Partnership periodically reviews the values assigned to long-lived
assets, such as property and equipment, and cost in excess of net assets
acquired to determine whether any impairments are other than temporary.
Management believes that the long-lived assets in the accompanying balance
sheets are appropriately valued.
 
 Income Taxes
 
  The Internal Revenue Code and applicable state statutes provide that the
income and expenses of a partnership are not separately taxable to the
partnership but rather accrue directly to the partners. Accordingly, no
provision for federal or state income taxes has been made in the accompanying
financial statements.
 
 Interest Expense
 
  All interest incurred during 1994, 1995, and 1996 is attributable to the
construction of the routes detailed in Note 1. Interest was capitalized until
the completion of the construction of a specific route segment. The amount of
interest capitalized in 1994, 1995, and 1996 totaled $45,907, $1,020,204, and
$40,365, respectively.
 
 
                                     F-49
<PAGE>
 
                             GULF STATES FIBERNET
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
 Other Noncurrent Assets
 
  The excess of cost over the fair market value of assets acquired
("goodwill") is being amortized to income on a straight-line basis over a
period of 40 years.
 
  In connection with the issuance of its long-term debt, the Partnership
incurred debt issuance costs of approximately $986,000 and $80,000 in 1995 and
1996, respectively. These costs were recorded as other assets and are being
amortized on a straight-line basis over 7 to 8.5 years, the term of the
related debt facilities.
 
 Presentation
 
  Certain prior year amounts have been reclassified to conform with the
current year presentation.
 
3. SCANA ASSET CONTRIBUTION
 
  Effective November 1, 1994, SCANA contributed an existing Atlanta to
Birmingham fiber optic route to the Partnership as part of its capital
contribution. The tangible assets associated with this route were recorded at
their estimated appraised value of $4,924,410. This route was valued at
$5,449,670 for purposes of determining a portion of SCANA's capital
contribution. The $525,260 difference between the estimated appraised value of
the tangible assets and the fair market value of the route is reflected as
goodwill in the accompanying balance sheets.
 
4. INTERIM CONSTRUCTION LOAN AND LONG-TERM DEBT
 
 Interim Construction Loan
 
  On December 8, 1994, the Partnership completed a $40,000,000 construction
loan commitment ("Loan") with NationsBank of North Carolina. The Loan provided
the Partnership the ability to draw amounts as needed to finance the
construction of a new route. The interest rates paid on amounts outstanding
under the Loan ranged from 6.75% to 7.25% in 1995. Any unused portion of this
Loan was subject to a commitment fee equal to .25% per annum. The Partnership
borrowed $36,700,000 under this Loan prior to its repayment in full in August
1995. The Partnership utilized funds realized from the $47,500,000 nonrecourse
project financing discussed below to repay the Loan.
 
 Long-Term Debt
 
  Long-term debt consisted of the following at December 31, 1996 and March 27,
1997:
 
<TABLE>
<CAPTION>
                                                    DECEMBER 31,  MARCH 27,
                                                        1996         1997
                                                    ------------ ------------
                                                                 (UNAUDITED)
   <S>                                              <C>          <C>
   $41.6 million bridge facility, interest payable
    at LIBOR plus 2.25% (8.25% at June 30, 1997)..  $41,562,500  $ 41,600,000
   Other..........................................            0     3,419,875
                                                    -----------  ------------
                                                     41,562,500    45,019,875
   Less: Current maturities.......................    5,937,500   (42,068,969)
                                                    -----------  ------------
   Total long-term debt...........................  $35,625,000  $  2,950,906
                                                    ===========  ============
</TABLE>
 
  On July 25, 1995, the Partnership completed a $47,500,000 nonrecourse
project financing (the "Financing") with NationsBank of North Carolina. The
Financing is to be repaid in 16 equal semiannual installments of $2,968,750
beginning on June 30, 1996 and ending on December 31, 2003. The Financing
bears
 
                                     F-50
<PAGE>
 
                             GULF STATES FIBERNET
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
interest on outstanding amounts at various floating rate options plus an
applicable credit spread, which varies throughout the term of the Financing.
The Partnership is contractually obligated to select the three-month LIBOR
option as a direct result of the interest rate swap agreement discussed below.
The Financing is secured by substantially all of the Partnership's assets.
 
  Concurrent with the closing of the Financing, the parent companies of GSTS
and SCANA, ITC Holding Company, Inc. ("ITC") and SCANA, Inc., respectively,
have entered into the Telecommunications System Capacity Agreement ("TSCA")
with NationsBank of North Carolina ("NationsBank"). The TSCA requires ITC and
SCANA to make additional equity contributions to the Partnership. These
required equity contributions are calculated on a quarterly basis throughout
the term of the Financing based on a contractually determined amount, less the
Partnership's quarterly revenue, excluding the nonrecurring revenue discussed
in Note 7. The contractually determined amounts discussed above are fixed
amounts and are not contingent upon the results of operations of the
Partnership.
 
  On January 24, 1995, the Partnership entered into a forward starting
interest rate swap agreement with a $47,500,000 principal amount with
NationsBank. This agreement is accounted for as a hedge of an anticipated
transaction. The agreement swaps the applicable three-month LIBOR selected
under the Financing with a fixed rate of 8.25%. As of December 31, 1996, the
Partnership would be required to pay $2,962,000 to terminate the interest rate
swap with NationsBank. The Partnership made payments totaling $1,261,000 and
$553,320 to NationsBank in 1995 and 1996, respectively, in connection with
this interest rate swap. These payments are included in interest expense in
the accompanying statements of operations.
 
  As a result of this interest rate swap, the Financing will bear an effective
interest rate as follows:
 
<TABLE>
       <S>                                                                <C>
       Years 1-3......................................................... 9.375%
       Years 4-6......................................................... 9.500
       Years 7-8.5....................................................... 9.625
</TABLE>
 
  Maturities of long-term debt as of December 31, 1996 are as follows:
 
<TABLE>
       <S>                                                           <C>
       1997......................................................... $ 5,937,500
       1998.........................................................   5,937,500
       1999.........................................................   5,937,500
       2000.........................................................   5,937,500
       2001.........................................................   5,937,500
       Thereafter...................................................  11,875,000
                                                                     -----------
                                                                     $41,562,500
                                                                     ===========
</TABLE>
 
5. LEASE OBLIGATIONS
 
  The Partnership has entered into various operating leases for facilities and
equipment used in its operations. Aggregate future minimum rental commitments
under noncancelable operating leases as of December 31, 1996 are as follows:
 
<TABLE>
       <S>                                                            <C>
       1997.......................................................... $  682,902
       1998..........................................................    636,037
       1999..........................................................    620,405
       2000..........................................................    601,135
       2001..........................................................    580,585
       Thereafter....................................................  2,310,260
                                                                      ----------
                                                                      $5,431,324
                                                                      ==========
</TABLE>
 
 
                                     F-51
<PAGE>
 
                             GULF STATES FIBERNET
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
  Rent expense charged to operations for the years ended December 31, 1994,
1995, and 1996 was $6,437, $153,003, and $953,713, respectively.
 
6. RELATED-PARTY TRANSACTIONS
 
  ITC provides certain administrative services and leases office space to the
Partnership. In addition, certain of ITC's other wholly owned or majority-
owned subsidiaries provide the Partnership with various services and/or
receive services provided by the Partnership. These entities include
Interstate Telephone Company and Valley Telephone Company, which provide local
and long distance telephone services; Interstate FiberNet, which provides
digital communications transport; and InterQuest, which provides operator
assistance services. ITC also holds equity investments in the following
entities which do business with the Partnership: InterCel, Inc., which
provides cellular services, and MindSpring Enterprises, Inc., which is a
regional provider of Internet access.
 
  The Company received services from ITC and other affiliated entities of
approximately $279,000, $1,162,000, and $1,477,000, for the period from
inception through December 31, 1994 and the years ended December 31, 1995 and
1996, respectively, which are reflected in selling, general, and
administrative expenses in the Partnership's statements of operations. In
addition, the Partnership received services from ITC and other affiliated
entities of approximately $70,000 for the year ended December 31, 1996, which
is reflected in cost of services in the Partnership's statement of operations.
At December 31, 1995 and 1996, amounts payable for these services of $0 and
$25,263, respectively, are recorded in the Partnership's balance sheets as
affiliate accounts payable. In management's opinion, the Partnership's
transactions with these affiliated entities are representative of arm's-length
transactions.
 
  Relatives of stockholders of ITC are stockholders and employees of the
Partnership's insurance provider. The costs charged to the Partnership for
insurance services were approximately $1,300, $33,000, and $54,000 for the
years ended December 31, 1994, 1995, and 1996, respectively.
 
7. SIGNIFICANT CUSTOMERS
 
  No customer was responsible for greater than 10% of the Partnership's
revenues for the period from inception through December 31, 1994. However, two
customers made up greater than 10% of the Partnership's revenues for the years
ended December 31, 1995 and 1996, as follows:
 
<TABLE>
<CAPTION>
                                                                     1995  1996
                                                                     ----  ----
       <S>                                                           <C>   <C>
       Customer A................................................... 82.5% 43.2%
       Customer B...................................................  8.6  21.0
</TABLE>
 
  During 1995, the Partnership received nonrecurring revenue of $3,250,000, or
approximately 43% of net sales to Customer A, related to the cancellation of
an existing lease agreement.
 
  The Partnership entered into an agreement with Customer A to lease certain
fiber optic lines whereby Customer A is contractually obligated to pay
$4,338,996 per annum for 11 years beginning June 1995.
 
8. SUBSEQUENT EVENTS
 
 Capital Lease
 
  In January 1997, the Partnership entered into a capital lease agreement with
Southern Telecom 1, Inc. ("STI") to construct and lease a fiber optic facility
and related equipment from Birmingham to Montgomery, Alabama. In total, STI
constructed a 24 fiber optic strand facility, 12 strands of which it leased to
the Partnership and 12 strands of which it granted the Partnership a revocable
right to use. STI has the option to lease to the
 
                                     F-52
<PAGE>
 
                             GULF STATES FIBERNET
 
                  NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
Partnership any of the additional 12 licensed fibers for a monthly payment of
$2,000 per fiber after the ninth anniversary of the lease. To the extent STI
does not lease the Partnership at least six of the licensed fibers under its
option, the Partnership will have the right to lease from STI up to a total of
six of the licensed fibers. Construction was completed and lease payments
began in February 1997. Payments under the lease are as follows:
 
<TABLE>
<CAPTION>
          MONTHS                                                        MONTHLY
          OF TERM                                                       PAYMENT
          -------                                                       -------
       <S>                                                              <C>
       1 through 48.................................................... $75,000
       49 through 108..................................................  25,000
       109 through 240.................................................   1,000
</TABLE>
 
 Dissolution of the Partnership
 
  On March 27, 1997, GSTS's parent, ITC, purchased the 64% interest in the
Partnership owned by SCANA for approximately $17 million, payable at closing
in shares of ITC's nonvoting convertible preferred stock, plus certain
contingent consideration. The contingent consideration is due no later than
April 30, 1998, at which time ITC must deliver additional nonvoting
convertible preferred stock to SCANA equal to 35.7% of (a) 64%, multiplied by
(b) (i) 6, multiplied by (ii) the amount, if any, by which the earnings before
interest, taxes, depreciation, and amortization of the Partnership for the
year ended December 31, 1997 exceed $11,265,696.
 
  Upon the closing of the acquisition, ITC contributed the 64% ownership
interest in the Partnership to GSTS and the Partnership was dissolved.
 
 Debt Refinancing
 
  In connection with the acquisition of the remaining 64% interest in the
Partnership, GSTS signed an agreement with NationsBank of Texas, N.A. for a
$41.6 million bridge financing facility (the "Bridge Facility"). The Bridge
Facility finances the Partnership's existing Financing described in Note 4 and
is secured by the assets of the Partnership. The Bridge Facility bore interest
on outstanding amounts at various floating rate options plus an applicable
credit margin. The Bridge Facility matured and was repaid on the date the
proceeds from ITC/\DeltaCom's debt offering discussed later were released.
 
 Parent's Reorganization of Subsidiaries
 
  In March 1997, ITC formed a new wholly owned subsidiary, ITC/\DeltaCom, Inc.
("ITC/\DeltaCom"). Upon completion of the debt offering and the related
transactions described below, ITC reorganized several of its wholly owned
subsidiaries as follows:
 
  .  Eastern Telecom, Inc. (d.b.a. InterQuest) and ITC Transmission Systems
     II, Inc. merged with and into Interstate FiberNet, Inc., formerly ITC
     Transmission Systems, Inc. ("FiberNet").
 
  .  ITC contributed all of the outstanding capital stock of FiberNet,
     DeltaCom, Inc. and GSTS to ITC/\DeltaCom.
 
  .  ITC/\DeltaCom contributed all of the outstanding capital stock of
     DeltaCom and GSTS to FiberNet.
 
  These changes are collectively referred to as the "Reorganization."
 
 ITC/\DeltaCom Debt Offering
 
  On June 3, 1997, ITC/\DeltaCom issued senior notes with a principal value of
$200 million (the "Offering"). Proceeds from the Offering were held by the
trustee until all required regulatory approvals related to the Reorganization
were received. Upon consummation of the Reorganization on July 25, 1997, a
portion of the proceeds was used to repay the Bridge Facility described above
as well as certain advances from the Parent outstanding at DeltaCom, Inc.
 
                                     F-53
<PAGE>
 
                         INDEPENDENT AUDITORS' REPORT
 
SCANA Communications, Inc.
 
  We have audited the accompanying balance sheets of Georgia Fiber (a business
unit of SCANA Communications, Inc. (SCI)) as of December 31, 1996 and 1995,
and the related statements of income and net equity and of cash flows for the
years then ended. These financial statements are the responsibility of SCI's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
 
  We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes 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.
 
  In our opinion, such financial statements present fairly, in all material
respects, the financial position of Georgia Fiber at December 31, 1996 and
1995 and the results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
 
  The accompanying financial statements have been prepared from the separate
records of Georgia Fiber (a business unit of SCANA Communications, Inc.) and
may not necessarily be indicative of the conditions that would have existed or
the results of operations that would have occurred had Georgia Fiber been
operated as an unaffiliated company.
 
  As discussed in Note 1 to the financial statements, on March 27, 1997, the
assets of Georgia Fiber were sold.
 
DELOITTE & TOUCHE LLP
 
Columbia, South Carolina
May 23, 1997
 
                                     F-54
<PAGE>
 
                                 GEORGIA FIBER
                (A BUSINESS UNIT OF SCANA COMMUNICATIONS, INC.)
 
                                 BALANCE SHEETS
 
<TABLE>
<CAPTION>
                                      DECEMBER 31,
                                 ----------------------  MARCH 27,   MARCH 31,
                                    1996        1995       1997        1996
                                 ----------- ---------- ----------- -----------
                                                        (UNAUDITED) (UNAUDITED)
<S>                              <C>         <C>        <C>         <C>
            ASSETS
CURRENT ASSETS:
  Accounts receivable..........  $        89 $  332,426 $   300,311 $  302,854
  Prepaid expenses.............       18,790     17,761         --      15,039
                                 ----------- ---------- ----------- ----------
    Total current assets.......       18,879    350,187     300,311    317,893
FIBER OPTIC TRANSMISSION CAPAC-
 ITY, NET (Notes 1 and 2)......   10,484,324  7,980,616  10,352,258  8,007,715
                                 ----------- ---------- ----------- ----------
TOTAL ASSETS...................  $10,503,203 $8,330,803 $10,652,569 $8,325,608
                                 =========== ========== =========== ==========
  LIABILITIES AND NET EQUITY
CURRENT LIABILITIES--Accounts
 payable and accrued
 liabilities...................  $   339,644 $  139,740 $   596,958 $  131,135
NET EQUITY.....................   10,163,559  8,191,063  10,055,611  8,194,473
                                 ----------- ---------- ----------- ----------
    TOTAL LIABILITIES AND NET
     EQUITY....................  $10,503,203 $8,330,803 $10,652,569 $8,325,608
                                 =========== ========== =========== ==========
</TABLE>
 
 
                       See notes to financial statements.
 
                                      F-55
<PAGE>
 
                                 GEORGIA FIBER
                (A BUSINESS UNIT OF SCANA COMMUNICATIONS, INC.)
 
                      STATEMENTS OF INCOME AND NET EQUITY
 
<TABLE>
<CAPTION>
                                YEAR ENDED DECEMBER
                                        31,
                               ----------------------   MARCH 27,    MARCH 31,
                                  1996        1995        1997         1996
                               ----------- ----------  -----------  -----------
                                                       (UNAUDITED)  (UNAUDITED)
<S>                            <C>         <C>         <C>          <C>
NET REVENUES (Note 1)........  $ 3,542,302 $3,499,606  $   885,450  $  885,950
                               ----------- ----------  -----------  ----------
OPERATING COSTS AND EXPENSES:
  Depreciation and
   amortization..............    1,063,408    778,817      334,034     219,662
  Selling, general and
   administrative expenses...      431,394    432,517       69,921     156,659
  Maintenance................      288,085    122,770      135,286      16,298
  Other operating costs and
   expenses..................      140,761    231,446       43,018      29,484
                               ----------- ----------  -----------  ----------
    Total costs and
     expenses................    1,923,648  1,565,550      582,259     422,103
                               ----------- ----------  -----------  ----------
OPERATING INCOME.............    1,618,654  1,934,056      303,191     463,847
NET EQUITY, BEGINNING OF
 YEAR........................    8,191,063  6,300,078   10,163,559   8,191,063
NET CASH PROVIDED FROM (TO)
 SCANA COMMUNICATIONS, INC...      353,842    (43,071)    (411,139)   (460,436)
                               ----------- ----------  -----------  ----------
NET EQUITY, END OF YEAR......  $10,163,559 $8,191,063  $10,055,611  $8,194,474
                               =========== ==========  ===========  ==========
</TABLE>
 
 
                       See notes to financial statements.
 
                                      F-56
<PAGE>
 
                                 GEORGIA FIBER
                (A BUSINESS UNIT OF SCANA COMMUNICATIONS, INC.)
 
                            STATEMENTS OF CASH FLOWS
 
<TABLE>
<CAPTION>
                               YEAR ENDED DECEMBER 31,
                               ------------------------   MARCH 27,   MARCH 31,
                                  1996         1995         1997        1996
                               -----------  -----------  ----------- -----------
                                                         (UNAUDITED) (UNAUDITED)
<S>                            <C>          <C>          <C>         <C>
CASH FLOWS FROM OPERATING
 ACTIVITIES:
 Operating income............  $ 1,618,654  $ 1,934,056   $ 303,191   $ 463,847
 Adjustments to reconcile
  operating income to net
  cash provided by operating
  activities:
  Depreciation and
   amortization..............    1,063,408      778,817     334,034     219,662
  Changes in operating assets
   and liabilities:
   Decrease in receivables...      332,337      181,416    (300,222)     29,572
   (Increase) decrease in
    prepaid expenses.........       (1,029)       1,995      18,790       2,722
   Increase (decrease) in
    accounts payable and
    accrued expenses.........      199,904     (169,780)    257,314      (8,605)
                               -----------  -----------   ---------   ---------
    Net cash provided by
     operating activities....    3,213,274    2,726,504     613,107     707,198
                               -----------  -----------   ---------   ---------
CASH FLOWS FROM INVESTING
 ACTIVITIES--Additions to
 fiber optic transmission
 capacity....................   (3,567,116)  (2,683,433)   (201,968)   (246,762)
                               -----------  -----------   ---------   ---------
CASH FLOWS FROM FINANCING
 ACTIVITIES--Net cash
 provided from (to) SCANA
 Communications, Inc.........      353,842      (43,071)   (411,139)   (460,436)
                               -----------  -----------   ---------   ---------
NET CHANGE IN CASH...........          --           --          --          --
CASH, BEGINNING OF THE YEAR..          --           --          --          --
                               -----------  -----------   ---------   ---------
CASH, END OF THE YEAR........  $       --   $       --    $     --    $     --
                               ===========  ===========   =========   =========
</TABLE>
 
 
                       See notes to financial statements.
 
                                      F-57
<PAGE>
 
                                 GEORGIA FIBER
                (A BUSINESS UNIT OF SCANA COMMUNICATIONS, INC.)
 
                         NOTES TO FINANCIAL STATEMENTS
                    YEARS ENDED DECEMBER 31, 1996 AND 1995
 
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
  General--Georgia Fiber is a business unit of SCANA Communications, Inc.
("SCI"). This business unit consists of certain fiber optic capacity in the
State of Georgia. Such assets were sold to a third party on March 27, 1997.
The accompanying financial statements include the historical cost basis assets
and related operations of the business unit. No effects of the asset sale are
included in the financial statements.
 
  All revenues were derived from fiber optic service provided to one customer.
Revenues are recognized as earned on a monthly basis in accordance with an
agreement with such customer.
 
  Use of Estimates--The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
 
  Fiber Optic Transmission Capacity--Pursuant to certain agreements, SCI
(formerly MPX Systems, Inc.) obtained fiber optic transmission capacity along
specified routes in Georgia. Such agreements obligated SCI to reimburse the
counterparty for costs incurred in construction of the capacity and to pay for
operation and maintenance costs applicable to the capacity. In addition, SCI
pays an amount equal to 2.8% of operating income from operations to the
counterparty. Since inception, additional costs have been incurred to upgrade
and extend the life of the capacity. Costs of obtaining, constructing,
upgrading and extending the life of the capacity are capitalized. Of the
capitalized cost at December 31, 1996, approximately $6,231,000 is being
amortized over a useful life of 25 years and approximately $9,308,000 is
amortized over a life of 8 years. Costs of operating and maintaining the
capacity are expensed as incurred. These agreements expire in 2015 with two
ten-year renewal options.
 
  Cost and Expenses--The accompanying financial statements reflect costs and
expenses that are applicable to the business unit and selling, general and
administrative expenses of SCI which were allocated to the business unit based
on revenues. Management believes that the method used to allocate such
expenses is reasonable (see Note 3).
 
  Fair Value of Financial Instruments--The carrying values of the Company's
financial instruments (receivables and payables) approximate fair value.
 
  Income Taxes--SCI is a wholly owned subsidiary of SCANA Corporation. As a
business unit of SCI, Georgia Fiber does not incur income tax expense. On a
pro forma separate return basis, for the year ended December 31, 1996,
management estimates that Georgia Fiber would have incurred an income tax
provision of approximately $615,000.
 
 
                                     F-58
<PAGE>
 
                                 GEORGIA FIBER
 
                   NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
 
2. FIBER OPTIC TRANSMISSION CAPACITY
 
  Fiber optic transmission capacity consisted of the following:
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,
                                                       ------------------------
                                                          1996         1995
                                                       -----------  -----------
   <S>                                                 <C>          <C>
   Fiber optic transmission capacity.................. $15,538,718  $11,971,958
   Accumulated amortization...........................  (5,054,394)  (3,991,342)
                                                       -----------  -----------
   Net fiber optic transmission capacity.............. $10,484,324  $ 7,980,616
                                                       ===========  ===========
</TABLE>
 
3. RELATED PARTY TRANSACTIONS
 
  Expenses allocated by SCI to the business unit during the years ended
December 31, 1996 and 1995 are as follows:
 
<TABLE>
<CAPTION>
                                                                1996     1995
                                                              -------- --------
   <S>                                                        <C>      <C>
   Selling, general and administrative expenses.............. $383,824 $383,929
                                                              ======== ========
</TABLE>
 
                                * * * * * * * *
 
                                      F-59
<PAGE>
 
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OF-
FER MADE HEREBY, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY. NEITHER THE DELIV-
ERY OF THIS PROSPECTUS OR THE LETTER OF TRANSMITTAL NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE INFORMATION SET FORTH HEREIN OR IN THE AFFAIRS OF THE COMPANY
SINCE THE DATE AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS OR THE LET-
TER OF TRANSMITTAL. NEITHER THIS PROSPECTUS NOR THE LETTER OF TRANSMITTAL CON-
STITUTES AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OF-
FER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
 
UNTIL DECEMBER 23, 1997 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEAL-
ERS EFFECTING TRANSACTIONS IN THE NOTES, WHETHER OR NOT PARTICIPATING IN THIS
DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY REQUIRE-
MENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
 
                                ---------------
 
$200,000,000
 
                     [LOGO OF ITC/\DELTACOM APPEARS HERE]
 
11% SENIOR NOTES DUE 2007
 
 
 
 
PROSPECTUS
 
DATED SEPTEMBER 24, 1997

<PAGE>
 
             THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE
            AT 5:00 P.M., NEW YORK CITY TIME, ON OCTOBER 28, 1997,
                   UNLESS EXTENDED (THE "EXPIRATION DATE").
 
                     [LOGO OF ITC/\DELTACOM APPEARS HERE]
 
                             LETTER OF TRANSMITTAL
 
            OFFER TO EXCHANGE ITS 11% SENIOR NOTES DUE JUNE 1, 2007
          WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
                      FOR ANY AND ALL OF ITS OUTSTANDING
                       11% SENIOR NOTES DUE JUNE 1, 2007
              PURSUANT TO THE PROSPECTUS DATED SEPTEMBER 24, 1997
 
                              THE EXCHANGE AGENT
                          FOR THE EXCHANGE OFFER IS:
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
 
          BY FACSIMILE:                                   BY MAIL:
 
 
         (212) 780-0592                        United States Trust Company of
   Attention: Customer Service                            New York
 Confirm by Telephone to: (800)                 P.O. Box 843, Cooper Station
            548-6565                              New York, New York 10276
                                                 Attention: Corporate Trust
                                                          Services
 
    BY HAND BEFORE 4:30 P.M.:
                                              BY OVERNIGHT COURIER AND BY HAND
                                                      AFTER 4:30 P.M.:
 
 
 
 United States Trust Company of
            New York                           United States Trust Company of
          111 Broadway                                    New York
    New York, New York 10006                      770 Broadway, 13th Floor
Attention: Lower Level Corporate                  New York, New York 10003
          Trust Window
 
 DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
 ABOVE OR TRANSMISSION OF THIS LETTER OF TRANSMITTAL VIA FACSIMILE TO A NUMBER
 OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY. THE
 INSTRUCTIONS CONTAINED HEREIN SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF
 TRANSMITTAL IS COMPLETED.
<PAGE>
 
  Capitalized terms used but not defined herein shall have the same meaning
given them in the Prospectus (as defined below).
 
  This Letter of Transmittal is to be completed by holders of Senior Notes (as
defined below) either if Senior Notes are to be forwarded herewith or if
tenders of Senior Notes are to be made by book-entry transfer to an account
maintained by United States Trust Company of New York (the "Exchange Agent")
at The Depository Trust Company ("DTC") pursuant to the procedures set forth
in "The Exchange Offer--Procedures for Tendering Senior Notes" in the
Prospectus.
 
  Holders of Senior Notes whose certificates (the "Certificates") for such
Senior Notes are not immediately available or who cannot deliver their
Certificates, this Letter of Transmittal and all other required documents to
the Exchange Agent on or prior to the Expiration Date or who cannot complete
the procedures for book-entry transfer on a timely basis, may tender their
Senior Notes according to the guaranteed delivery procedures set forth in "The
Exchange Offer--Procedures for Tendering Senior Notes" in the Prospectus.
 
  DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT.
 
                   NOTE: SIGNATURES MUST BE PROVIDED BELOW.
             PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.
 
  List below the Senior Notes of which you are a holder. If the space provided
below is inadequate, list the certificate numbers and principal amount on a
separate signed schedule and attach that schedule to this Letter of
Transmittal. See Instruction 3.
 
                   ALL TENDERING HOLDERS COMPLETE THIS BOX:
 
                     DESCRIPTION OF SENIOR NOTES TENDERED
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
     NAME(S) AND
    ADDRESS(ES) OF
  REGISTERED HOLDER
 (FILL IN, IF BLANK)                    SENIOR NOTES TENDERED
- ------------------------------------------------------------------------------
                           CERTIFICATE
                           NUMBER(S)*
                             (ATTACH
                           ADDITIONAL      PRINCIPAL AMOUNT  PRINCIPAL AMOUNT
                             LIST IF      (ATTACH ADDITIONAL TENDERED (IF LESS
                           NECESSARY)     LIST IF NECESSARY)    THAN ALL)**
<S>                        <C>            <C>                <C> 
                         -------------------------------------------------------
                         -------------------------------------------------------
                         -------------------------------------------------------
                         -------------------------------------------------------
                         -------------------------------------------------------
                         -------------------------------------------------------
TOTAL SHARES TENDERED:
</TABLE>
- -------------------------------------------------------------------------------
  * Need not be completed by book-entry holders. Such holders should check
    the appropriate box below and provide the requested information.
 ** Need not be completed if tendering for exchange all Senior Notes held.
    Senior Notes may be tendered in whole or in part in integral multiples
    of $1,000 principal amount at maturity. All Senior Notes held shall be
    deemed tendered unless a lesser number is specified in this column. See
    Instruction 4.
<PAGE>
 
 (BOXES BELOW TO BE CHECKED BY ELIGIBLE INSTITUTIONS ONLY. SEE INSTRUCTION 1)
 
[_]CHECK HERE IF TENDERED SENIOR NOTES ARE BEING DELIVERED BY BOOK-ENTRY
   TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT AT DTC AND
   COMPLETE THE FOLLOWING:
 
  Name of Tendering Institution: _____________________________________________
 
  DTC Account Number: ________________________________________________________
 
  Transaction Code Number: ___________________________________________________
 
[_]CHECK HERE AND ENCLOSE A PHOTOCOPY OF THE NOTICE OF GUARANTEED DELIVERY IF
   TENDERED SENIOR NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
   GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND COMPLETE THE
   FOLLOWING:
 
  Name(s) of Registered Holder(s): ___________________________________________
 
  Window Ticket Number (if any): _____________________________________________
 
  Date of Notice of Guaranteed Delivery: _____________________________________
 
  Institution Which Guaranteed Delivery: _____________________________________
 
  If Guaranteed Delivery is to be made by book-entry transfer:
 
  Name of Tendering Institution: _____________________________________________
 
  DTC Account Number: ________________________________________________________
 
  Transaction Code Number: ___________________________________________________
 
[_]CHECK HERE IF YOU ARE A BROKER-DEALER WHO ACQUIRED SENIOR NOTES FOR YOUR
   OWN ACCOUNT AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING
   ACTIVITIES (A "PARTICIPATING BROKER-DEALER") AND WISH TO RECEIVE 10
   ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR
   SUPPLEMENTS THERETO.
 
  Name: ______________________________________________________________________
 
  Address: ___________________________________________________________________
 
      _____________________________________________________________________
 
  Telephone Number and Contact Person: _______________________________________
<PAGE>
 
LADIES AND GENTLEMEN:
 
  The undersigned hereby tenders to ITC/\DeltaCom, Inc., a Delaware corporation
(the "Company"), the above described principal amount of the Company's 11%
Senior Notes due June 1, 2007 (the "Senior Notes") in exchange for a like
principal amount of the Company's 11% Senior Notes due June 1, 2007 (the
"Exchange Notes") which have been registered under the Securities Act of 1933
(the "Securities Act"), upon the terms and subject to the conditions set forth
in the Prospectus dated September 24, 1997 (as the same may be amended or
supplemented from time to time, the "Prospectus"), receipt of which is hereby
acknowledged, and in this Letter of Transmittal (which, together with the
Prospectus, constitute the "Exchange Offer").
 
  Subject to and effective upon the acceptance for exchange of the Senior
Notes tendered herewith, the undersigned hereby sells, assigns and transfers
to or upon the order of the Company all right, title and interest in and to
such Senior Notes as are being tendered herewith. The undersigned hereby
irrevocably constitutes and appoints the Exchange Agent as its agent and
attorney-in-fact (with full knowledge that the Exchange Agent is also acting
as agent of the Company in connection with the Exchange Offer and as Trustee
under the Indenture for the Senior Notes and the Exchange Notes) with respect
to the tendered Senior Notes, with full power of substitution (such power of
attorney being an irrevocable power coupled with an interest), subject only to
the right of withdrawal described in the Prospectus, to: (i) deliver such
Senior Notes to the Company together with all accompanying evidences of
transfer and authenticity to, or upon the order of, the Company upon receipt
by the Exchange Agent, as the undersigned's agent, of the Exchange Notes to be
issued in exchange for such Senior Notes; (ii) present Certificates for such
Senior Notes for transfer, and to transfer such Senior Notes on the account
books maintained by DTC; and (iii) receive for the account of the Company all
benefits and otherwise exercise all rights of beneficial ownership of such
Senior Notes, all in accordance with the terms and conditions of the Exchange
Offer.
 
  THE UNDERSIGNED HEREBY REPRESENTS AND WARRANTS THAT THE UNDERSIGNED HAS FULL
POWER AND AUTHORITY TO TENDER, EXCHANGE, SELL, ASSIGN AND TRANSFER THE SENIOR
NOTES TENDERED HEREBY AND THAT, WHEN THE SAME ARE ACCEPTED FOR EXCHANGE, THE
COMPANY WILL ACQUIRE GOOD, MARKETABLE AND UNENCUMBERED TITLE THERETO, FREE AND
CLEAR OF ALL LIENS, RESTRICTIONS, CHARGES AND ENCUMBRANCES, AND THAT THE
SENIOR NOTES TENDERED HEREBY ARE NOT SUBJECT TO ANY ADVERSE CLAIMS OR PROXIES.
THE UNDERSIGNED WILL, UPON REQUEST, EXECUTE AND DELIVER ANY ADDITIONAL
DOCUMENTS DEEMED BY THE COMPANY OR THE EXCHANGE AGENT TO BE NECESSARY OR
DESIRABLE TO COMPLETE THE EXCHANGE, SALE, ASSIGNMENT AND TRANSFER OF THE
SENIOR NOTES TENDERED HEREBY. THE UNDERSIGNED HAS READ AND AGREES TO ALL OF
THE TERMS OF THE EXCHANGE OFFER.
 
  The name(s) and address(es) of the registered holder(s) of the Senior Notes
tendered hereby should be printed above, if they are not already set forth
above, as they appear on the Certificates representing such Senior Notes. The
Certificate number(s) and the Senior Notes that the undersigned wishes to
tender should be indicated in the appropriate boxes above.
 
  If any tendered Senior Notes are not exchanged pursuant to the Exchange
Offer for any reason, or if Certificates are submitted for more Senior Notes
than are tendered or accepted for exchange, Certificates for such nonexchanged
or nontendered Senior Notes will be returned (or, in the case of Senior Notes
tendered by book-entry transfer, such Senior Notes will be credited to an
account maintained at DTC), without expense to the tendering holder promptly
following the expiration or termination of the Exchange Offer.
 
  The undersigned understands that tenders of Senior Notes pursuant to any one
of the procedures described in "The Exchange Offer--Procedures for Tendering
Senior Notes" in the Prospectus and in the instructions herein will, upon the
Company's acceptance for exchange of such tendered Senior Notes, constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Exchange Offer. The undersigned recognizes
that, under certain circumstances set forth in the Prospectus, the Company may
not be required to accept for exchange any of the Senior Notes tendered
hereby.
<PAGE>
 
  Unless otherwise indicated herein in the box entitled "Special Issuance
Instructions" below, the undersigned hereby directs that the Exchange Notes be
issued in the name(s) of the undersigned or, in the case of a book-entry
transfer of Senior Notes, that such Exchange Notes be credited to the account
indicated above maintained at DTC. If applicable, substitute Certificates
representing Senior Notes not exchanged or not accepted for exchange will be
issued to the undersigned or, in the case of a book-entry transfer of Senior
Notes, will be credited to the account indicated above maintained at DTC.
Similarly, unless otherwise indicated under "Special Delivery Instructions,"
please deliver Exchange Notes to the undersigned at the address shown below
the undersigned's signature.
 
  BY TENDERING SENIOR NOTES AND EXECUTING THIS LETTER OF TRANSMITTAL, THE
UNDERSIGNED HEREBY REPRESENTS AND AGREES THAT: (i) THE UNDERSIGNED IS NOT AN
"AFFILIATE" OF THE COMPANY (WITHIN THE MEANING OF RULE 405 UNDER THE
SECURITIES ACT), OR IF THE UNDERSIGNED IS AN AFFILIATE, THE UNDERSIGNED WILL
COMPLY WITH THE REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE
SECURITIES ACT TO THE EXTENT APPLICABLE; (ii) ANY EXCHANGE NOTES TO BE
RECEIVED BY THE UNDERSIGNED ARE BEING ACQUIRED IN THE ORDINARY COURSE OF ITS
BUSINESS; AND (iii) THE UNDERSIGNED HAS NO ARRANGEMENT OR UNDERSTANDING WITH
ANY PERSON TO PARTICIPATE IN A DISTRIBUTION (WITHIN THE MEANING OF THE
SECURITIES ACT) OF EXCHANGE NOTES TO BE RECEIVED IN THE EXCHANGE OFFER. IF THE
UNDERSIGNED IS NOT A BROKER-DEALER, BY TENDERING SENIOR NOTES AND EXECUTING
THIS LETTER OF TRANSMITTAL, THE UNDERSIGNED REPRESENTS AND AGREES THAT IT IS
NOT ENGAGED IN, AND DOES NOT INTEND TO ENGAGE IN, A DISTRIBUTION OF EXCHANGE
NOTES. IF THE UNDERSIGNED IS A BROKER-DEALER, BY TENDERING SENIOR NOTES AND
EXECUTING THIS LETTER OF TRANSMITTAL, THE UNDERSIGNED REPRESENTS AND AGREES
THAT SUCH SENIOR NOTES WERE ACQUIRED BY SUCH BROKER-DEALER FOR ITS OWN ACCOUNT
AS A RESULT OF MARKET-MAKING ACTIVITIES OR OTHER TRADING ACTIVITIES AND IT
WILL DELIVER A PROSPECTUS MEETING THE REQUIREMENTS OF THE SECURITIES ACT IN
CONNECTION WITH ANY RESALE OF EXCHANGE NOTES (PROVIDED THAT, BY SO
ACKNOWLEDGING AND BY DELIVERING A PROSPECTUS, SUCH BROKER-DEALER WILL NOT BE
DEEMED TO ADMIT THAT IT IS AN "UNDERWRITER" WITHIN THE MEANING OF THE
SECURITIES ACT). THE COMPANY HAS AGREED THAT, FOR A PERIOD NOT TO EXCEED 180
DAYS AFTER THE EXPIRATION DATE, IT WILL FURNISH ADDITIONAL COPIES OF THE
PROSPECTUS, AS AMENDED OR SUPPLEMENTED, TO ANY PARTICIPATING BROKER-DEALER
THAT REASONABLY REQUESTS SUCH DOCUMENTS IN CONNECTION WITH ANY SUCH RESALE.
 
  All authority herein conferred or agreed to be conferred in this Letter of
Transmittal shall survive the death or incapacity of the undersigned and any
obligation of the undersigned hereunder shall be binding upon the heirs,
executors, administrators, personal representatives, trustees in bankruptcy,
legal representatives, successors and assigns of the undersigned. Except as
stated in the Prospectus and in the Instructions contained in this Letter of
Transmittal, this tender is irrevocable.
<PAGE>
 

 
PLEASE SIGN HERE                          PLEASE SIGN HERE
 
_____________________________________     _____________________________________
        Authorized Signature                      Authorized Signature
 
Name: _______________________________     Name: _______________________________
                                                                              
                                                                              
                                                                              
Title: ______________________________     Title: ______________________________
                                          
                                          
 
Address: ____________________________     Address: ____________________________
                                                                              
                                                                              
                                                                              
_____________________________________     _____________________________________
                                          
                                          
 
Telephone Number: ___________________     Telephone Number: ___________________
                                                                              
                                                                              
                                                                              
Dated: ______________________________     Dated: ______________________________
                                          
                                          
 
- -------------------------------------     -------------------------------------
  Taxpayer Identification or Social         Taxpayer Identification or Social
           Security Number                           Security Number
 
  (NOTE: Signature(s) must be guaranteed if required by Instructions 2 and 5.
This Letter of Transmittal must be signed by the registered holder(s) exactly
as the name(s) appear(s) on Certificate(s) for the Senior Notes hereby
tendered or on a security position listing, or by any person(s) authorized to
become the registered holder(s) by endorsements and documents transmitted
herewith, including such opinions of counsel, certifications and other
information as may be required by the Company or the Trustee for the Senior
Notes to comply with the restrictions on transfer applicable to the Senior
Notes. If signature is by an attorney-in-fact, executor, administrator,
trustee, guardian, officer of a corporation or another acting in a fiduciary
capacity or representative capacity, please set forth the signer's full title.
See Instructions 2 and 5. Please complete substitute Form W-9 below.)
<PAGE>
 
                           GUARANTEE OF SIGNATURE(S)
                    (IF REQUIRED--SEE INSTRUCTIONS 2 AND 5)
 
 Signature(s) Guaranteed by an
 Eligible Institution: ______________
                                          Date: ______________________________
                AUTHORIZED SIGNATURE
 
 
 Name of Eligible Institution             Address: ___________________________
 Guaranteeing Signature: ____________
 
 
 Capacity (full title): _____________     ____________________________________
 
 Telephone Number: __________________     ____________________________________
 
 
 
  SPECIAL ISSUANCE INSTRUCTIONS (SEE         SPECIAL DELIVERY INSTRUCTIONS (SEE
       INSTRUCTIONS 2, 5 AND 6)                   INSTRUCTIONS 2, 5 AND 6)
 
 
  To be completed ONLY if the Ex-              To be completed ONLY if the Ex-
 change Notes or any Senior Notes             change Notes or any Senior Notes
 that are not tendered are to be is-          that are not tendered are to be
 sued in the name of someone other            sent to someone other than the
 than the registered holder(s) of             registered holder(s) of the Se-
 the Senior Notes whose name(s) ap-           nior Notes whose name(s) ap-
 pear(s) above.                               pear(s) above, or to such regis-
                                              tered holder at an address other
                                              than that shown above.
 
 Issue:                                       Mail:                            
                                                                               
                                                                               
 [_] Senior Notes not tendered, to:           [_] Senior Notes not tendered,    
                                              to:                               
                                                                                
 [_] Exchange Notes, to:                      [_] Exchange Notes, to: 
                                                                                
                                                                      
                                                                                
 Name(s) ____________________________         Name(s) _________________________
                                                                                
                                                                               
                                                                                
 Address ____________________________         Address _________________________ 

 ____________________________________         _________________________________
                                                                               
 Telephone Number: __________________         Telephone Number: _______________ 

 ____________________________________         _________________________________ 
    (TAX IDENTIFICATION OR SOCIAL               (TAX IDENTIFICATION OR SOCIAL   
           SECURITY NUMBER)                           SECURITY NUMBER)          
                                                                                
                                                                                
<PAGE>
 
                                 INSTRUCTIONS
       (FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER)
 
  1. DELIVERY OF LETTER OF TRANSMITTAL AND CERTIFICATES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed either if (a)
Certificates are to be forwarded herewith or (b) tenders are to be made
pursuant to the procedures for tender by book-entry transfer set forth in "The
Exchange Offer--Procedures for Tendering Senior Notes" in the Prospectus.
Certificates, or timely confirmation of a book-entry transfer of such Senior
Notes into the Exchange Agent's account at DTC, as well as this Letter of
Transmittal (or facsimile thereof), properly completed and duly executed, with
any required signature guarantees and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at its address
set forth herein on or prior to the Expiration Date. The term "book-entry
confirmation" means a timely confirmation of book-entry transfer of Senior
Notes into the Exchange Agent's account at DTC. Senior Notes may be tendered
in whole or in part in integral multiples of $1,000 principal amount at
maturity.
 
  Holders who wish to tender their Senior Notes and: (i) whose Certificates
for such Senior Notes are not immediately available; (ii) who cannot deliver
their Certificates, this Letter of Transmittal and all other required
documents to the Exchange Agent prior to the Expiration Date; or (iii) who
cannot complete the procedures for delivery by book-entry transfer on a timely
basis, may tender their Senior Notes by properly completing and duly executing
a Notice of Guaranteed Delivery pursuant to the guaranteed delivery procedures
set forth in "The Exchange Offer--Procedures for Tendering Senior Notes" in
the Prospectus. Pursuant to such procedures: (i) such tender must be made by
or through an Eligible Institution (as defined below); (ii) a properly
completed and duly executed Notice of Guaranteed Delivery, substantially in
the form accompanying this Letter of Transmittal, must be received by the
Exchange Agent prior to the Expiration Date; and (iii) the Certificates (or a
book-entry confirmation) representing all tendered Senior Notes, in proper
form for transfer, together with a Letter of Transmittal (or facsimile
thereof), properly completed and duly executed, with any required signature
guarantees and any other documents required by this Letter of Transmittal,
must be received by the Exchange Agent within three New York Stock Exchange
trading days after the date of execution of such Notice of Guaranteed
Delivery, all as provided in "The Exchange Offer--Procedures for Tendering
Senior Notes" in the Prospectus.
 
  The Notice of Guaranteed Delivery may be delivered by hand or transmitted by
facsimile or mail to the Exchange Agent and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed
Delivery. For Senior Notes to be properly tendered pursuant to the guaranteed
delivery procedure, the Exchange Agent must receive a Notice of Guaranteed
Delivery prior to the Expiration Date. As used herein and in the Prospectus,
"Eligible Institution" means a firm or other entity identified in Rule 17Ad-15
under the Exchange Act as "an eligible guarantor institution," including (as
such terms are defined therein): (i) a bank; (ii) a broker, dealer, municipal
securities broker or dealer or government securities broker or dealer; (iii) a
credit union; (iv) a national securities exchange, registered securities
association or clearing agency; or (v) a savings association that is a
participant in a Securities Transfer Association.
 
  THE METHOD OF DELIVERY OF SENIOR NOTES, THIS LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS IS AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS
USE AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY AND PROPER INSURANCE SHOULD BE
OBTAINED. NO LETTER OF TRANSMITTAL OR SENIOR NOTES SHOULD BE SENT TO THE
COMPANY. HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL
BANKS, TRUST COMPANIES OR NOMINEES TO EFFECT THESE TRANSACTIONS FOR SUCH
HOLDERS.
 
  The Company will not accept any alternative, conditional or contingent
tenders. Each tendering holder, by execution of a Letter of Transmittal (or
facsimile thereof), waives any right to receive any notice of the acceptance
of such tender.
 
<PAGE>
 
  2. GUARANTEE OF SIGNATURES.  No signature guarantee on this Letter of
Transmittal is required if: (i) this Letter of Transmittal is signed by the
registered holder (which shall include any participant in DTC whose name
appears on a security position listing as the owner of the Senior Notes) of
Senior Notes tendered herewith, unless such holder has completed either the
box entitled "Special Issuance Instructions" or the box entitled "Special
Delivery Instructions" above; or (ii) such Senior Notes are tendered for the
account of a firm that is an Eligible Institution. In all other cases, an
Eligible Institution must guarantee the signature(s) on this Letter of
Transmittal. See Instruction 5.
 
  3. INADEQUATE SPACE. If the space provided in the box captioned "Description
of Senior Notes Tendered" is inadequate, the Certificate number(s) and/or the
principal amount of Senior Notes and any other required information should be
listed on a separate signed schedule and attached to this Letter of
Transmittal.
 
  4. PARTIAL TENDERS AND WITHDRAWAL RIGHTS. Tenders of Senior Notes will be
accepted only in integral multiples of $1,000 principal amount at maturity. If
less than all the Senior Notes evidenced by any Certificate submitted are to
be tendered, fill in the principal amount of Senior Notes which are to be
tendered in the box entitled "Principal Amount Tendered (if less than all)."
In such case, new Certificate(s) for the remainder of the Senior Notes that
were evidenced by the old Certificate(s) will be sent to the tendering holder,
unless the appropriate boxes on this Letter of Transmittal are completed,
promptly after the Expiration Date. All Senior Notes represented by
Certificates delivered to the Exchange Agent will be deemed to have been
tendered unless otherwise indicated.
 
  Except as otherwise provided herein, tenders of Senior Notes may be
withdrawn at any time prior to the Expiration Date. In order for a withdrawal
to be effective, a written, telegraphic or facsimile transmission of such
notice of withdrawal must be timely received by the Exchange Agent at its
address set forth above prior to the Expiration Date. Any such notice of
withdrawal must specify the name of the person who tendered the Senior Notes
to be withdrawn, the aggregate principal amount of Senior Notes to be
withdrawn, and (if Certificates for such Senior Notes have been tendered) the
name of the registered holder of the Senior Notes as set forth on the
Certificate(s), if different from that of the person who tendered such Senior
Notes. If Certificates for Senior Notes have been delivered or otherwise
identified to the Exchange Agent, the notice of withdrawal must specify the
serial numbers on the particular Certificates for the Senior Notes to be
withdrawn and the signature on the notice of withdrawal must be guaranteed by
an Eligible Institution, except in the case of Senior Notes tendered for the
account of an Eligible Institution. If Senior Notes have been tendered
pursuant to the procedures for book-entry transfer set forth in "The Exchange
Offer--Procedures for Tendering Senior Notes," the notice of withdrawal must
specify the name and number of the account at DTC to be credited with the
withdrawal of Senior Notes and must otherwise comply with the procedures of
DTC. Withdrawals of tenders of Senior Notes may not be rescinded. Senior Notes
properly withdrawn will not be deemed validly tendered for purposes of the
Exchange Offer, but may be retendered at any subsequent time prior to the
Expiration Date by following any of the procedures described in the Prospectus
under "The Exchange Offer--Procedures for Tendering Senior Notes."
 
  All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, which determination shall be final and binding on all
parties. Neither the Company, any affiliates of the Company, the Exchange
Agent or any other person shall be under any duty to give any notification of
any defects or irregularities in any notice of withdrawal or incur any
liability for failure to give any such notification. Any Senior Notes which
have been tendered but which are withdrawn will be returned to the holder
thereof promptly after withdrawal.
 
  5. SIGNATURES ON LETTER OF TRANSMITTAL, ASSIGNMENTS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered holder(s) of the Senior
Notes tendered hereby, the signature(s) must correspond exactly with the
name(s) as written on the face of the Certificate(s) or on a security position
listing, without alteration, enlargement or any change whatsoever.
 
  If any of the Senior Notes tendered hereby are owned of record by two or
more joint owners, all such owners must sign this Letter of Transmittal.
<PAGE>
 
  If any tendered Senior Notes are registered in different names on several
Certificates, it will be necessary to complete, sign and submit as many
separate Letters of Transmittal (or facsimiles thereof) as there are names in
which Certificates are registered.
 
  If this Letter of Transmittal or any Certificates or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity,
such persons should so indicate when signing and must submit proper evidence
satisfactory to the Company, in its sole discretion, of such persons'
authority to so act.
 
  If this Letter of Transmittal is signed by a person other than the
registered holder(s) of the Senior Notes listed and transmitted hereby, the
Certificate(s) must be endorsed or accompanied by appropriate bond power(s),
signed exactly as the name(s) of the registered owner appear(s) on the
Certificate(s), and also must be accompanied by such opinions of counsel,
certifications and other information as the Company or the Trustee for the
Senior Notes may require in accordance with the restrictions on transfer
applicable to the Senior Notes. Signature(s) on such Certificate(s) or bond
power(s) must be guaranteed by an Eligible Institution.
 
  6. SPECIAL ISSUANCE AND DELIVERY INSTRUCTIONS. If Exchange Notes or
Certificates for Senior Notes not exchanged are to be issued in the name of a
person other than the signer of this Letter of Transmittal, or are to be sent
to someone other than the signer of this Letter of Transmittal or to an
address other than that shown above, the appropriate boxes on this Letter of
Transmittal should be completed. In the case of issuance in a different name,
the taxpayer identification number of the person named must also be indicated.
Holders tendering Senior Notes by book-entry transfer may request that Senior
Notes not exchanged be credited to such account maintained at DTC as such
holder may designate. If no such instructions are given, Senior Notes not
exchanged will be returned by mail or, if tendered by book-entry transfer, by
crediting the account indicated above maintained at DTC.
 
  7. IRREGULARITIES. The Company will determine, in its sole discretion, all
questions as to the form of documents, validity, eligibility (including time
of receipt) and acceptance for exchange of any tender of Senior Notes, which
determination shall be final and binding on all parties. The Company reserves
the absolute right, in its sole and absolute discretion, to reject any and all
tenders determined by it not to be in proper form or the acceptance for
exchange of which may, in the view of counsel to the Company, be unlawful. The
Company also reserves the absolute right, subject to applicable law, to waive
any of the conditions of the Exchange Offer set forth in the Prospectus under
"The Exchange Offer--Conditions to the Exchange Offer" or any defect or
irregularity in any tender of Senior Notes of any particular holder whether or
not similar defects or irregularities are waived in the case of other holders.
The Company's interpretation of the terms and conditions of the Exchange Offer
(including this Letter of Transmittal and the instructions hereto) will be
final and binding. No tender of Senior Notes will be deemed to have been
validly made until all defects or irregularities with respect to such tender
have been cured or waived. Neither the Company, any affiliates of the Company,
the Exchange Agent, or any other person shall be under any duty to give any
notification of any defects or irregularities in tenders or incur any
liability for failure to give any such notification.
 
  8. QUESTIONS, REQUESTS FOR ASSISTANCE AND ADDITIONAL COPIES. Questions and
requests for assistance may be directed to the Exchange Agent at its address
and telephone number set forth above. Additional copies of the Prospectus, the
Notice of Guaranteed Delivery and the Letter of Transmittal may be obtained
from the Exchange Agent or from your broker, dealer, commercial bank, trust
company or other nominee.
 
  9. BACKUP WITHHOLDING; SUBSTITUTE FORM W-9. Under U.S. Federal income tax
law, a holder whose tendered Senior Notes are accepted for exchange is
required to provide the Exchange Agent with such holder's correct taxpayer
identification number ("TIN") on Substitute Form W-9 below. If the Exchange
Agent is not provided with the correct TIN, the Internal Revenue Service (the
"IRS") may subject the holder or other payee to a $50 penalty. In addition,
payments to such holders or other payees with respect to Senior Notes
exchanged pursuant to the Exchange Offer may be subject to 31% backup
withholding.
<PAGE>
 
  The box in Part 3 of the Substitute Form W-9 may be checked if the tendering
holder has not been issued a TIN and has applied for a TIN or intends to apply
for a TIN in the near future. If the box in Part 3 is checked, the holder or
other payee must also complete the Certificate of Awaiting Taxpayer
Identification Number below in order to avoid backup withholding.
Notwithstanding that the box in Part 3 is checked and the Certificate of
Awaiting Taxpayer Identification Number is completed, the Exchange Agent will
withhold 31% of all payments made prior to the time a properly certified TIN
is provided to the Exchange Agent. The Exchange Agent will retain such amounts
withheld during the 60 day period following the date of the Substitute Form W-
9. If the holder furnishes the Exchange Agent with its TIN within 60 days
after the date of the Substitute Form W-9, the amounts retained during the 60
day period will be remitted to the holder and no further amounts shall be
retained or withheld from payments made to the holder thereafter. If, however,
the holder has not provided the Exchange Agent with its TIN within such 60 day
period, amounts withheld will be remitted to the IRS as backup withholding. In
addition, 31% of all payments made thereafter will be withheld and remitted to
the IRS until a correct TIN is provided.
 
  The holder is required to give the Exchange Agent the TIN (e.g., social
security number or employer identification number) of the registered owner of
the Senior Notes or of the last transferee appearing on the transfers attached
to, or endorsed on, the Senior Notes. If the Senior Notes are registered in
more than one name or are not in the name of the actual owner, consult the
Instructions to Form W-9 (Request for Identification Number and Certification)
for additional guidance on which number to report.
 
  Certain holders (including, among others, corporations, financial
institutions and certain foreign persons) may not be subject to these backup
withholding and reporting requirements. Such holders should nevertheless
complete the attached Substitute Form W-9 below, and write "exempt" on the
face thereof, to avoid possible erroneous backup withholding. A foreign person
may qualify as an exempt recipient by submitting a properly completed IRS Form
W-8, signed under penalties of perjury, attesting to that holder's exempt
status. Please consult the Instructions to Form W-9 (Request for
Identification Number and Certification) for additional guidance on which
holders are exempt from backup withholding.
 
  Backup withholding is not an additional U.S. federal income tax. Rather, the
U.S. federal income tax liability of a person subject to backup withholding
will be reduced by the amount of tax withheld. If withholding results in an
overpayment of taxes, a refund may be obtained.
 
  10. MUTILATED, LOST, DESTROYED OR STOLEN CERTIFICATES. If any Certificate
representing Senior Notes has been mutilated, lost, destroyed or stolen, the
holder should promptly notify the Exchange Agent. The holder will then be
instructed as to the steps that must be taken in order to replace the
Certificate. This Letter of Transmittal and related documents cannot be
processed until the procedures for replacing mutilated, lost, destroyed or
stolen Certificates have been followed.
 
  11. SECURITY TRANSFER TAXES. Holders who tender their Senior Notes for
exchange will not be obligated to pay any transfer taxes in connection
therewith, except that if Exchange Notes are to be delivered to, or are to be
issued in the name of, any person other than the registered holder of the
Senior Notes tendered, or if a transfer tax is imposed for any reason other
than the exchange of Senior Notes in connection with the Exchange Offer, then
the amount of any such transfer tax (whether imposed on the registered holder
or any other persons) will be payable by the tendering holder. If satisfactory
evidence of payment of such transfer tax or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer tax will
be billed directly to such tendering holder.
 
  IMPORTANT: THIS LETTER OF TRANSMITTAL (OR A FACSIMILE THEREOF), TOGETHER
WITH CERTIFICATES REPRESENTING TENDERED SENIOR NOTES OR A BOOK ENTRY
CONFIRMATION AND ALL OTHER REQUIRED DOCUMENTS, MUST BE RECEIVED BY THE
EXCHANGE AGENT PRIOR TO THE EXPIRATION DATE.
<PAGE>
 
               TO BE COMPLETED BY ALL TENDERING SECURITY HOLDERS:
                              (SEE INSTRUCTION 9)
 
             PAYER'S NAME: UNITED STATES TRUST COMPANY OF NEW YORK
 
 
                      PART 1--PLEASE PROVIDE YOUR    SOCIAL SECURITY NUMBER OR
 SUBSTITUTE           TIN ON THE LINE AT RIGHT AND    EMPLOYER IDENTIFICATION
                      CERTIFY BY SIGNING AND                  NUMBER
 FORM W-9             DATING BELOW                     -----------------------
                     ----------------------------------------------------------
 DEPARTMENT OF        PART 2--CERTIFICATION--Under penalties of perjury, I
 THE TREASURY         certify that:
 INTERNAL REVENUE     (1) The number shown on this form is my correct
 SERVICE                  taxpayer identification number (or I am waiting for
                          a number to be issued to me);
 
 PAYER'S              (2) I am not subject to backup withholding either
 REQUEST FOR              because: (a) I am exempt from backup withholding;
 TAXPAYER'S               (b) I have not been notified by the Internal
 IDENTIFICATION           Revenue Service ("IRS") that I am subject to backup
 NUMBER (TIN)             withholding as a result of a failure to report all
                          interest or dividends; or (c) the IRS has notified
                          me that I am no longer subject to backup
                          withholding; and
                      (3) Any other information provided on this form is true
                          and correct.
 
                      CERTIFICATION INSTRUCTIONS--You must cross out item (2)
                      above if you have been notified by the IRS that you are
                      subject to backup withholding because of underreporting
                      interest or dividends on your tax return and you have
                      not been notified by the IRS that you are no longer
                      subject to backup withholding.
                     ----------------------------------------------------------
 
                      SIGNATURE ____________________________     PART 3--
                                                                 Awaiting
                                                                 TIN [_]
 
                      DATE _________________________________
                     ----------------------------------------------------------
                      NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY IN
                      CERTAIN CIRCUMSTANCES RESULT IN BACKUP WITHHOLDING OF
                      31% OF ANY AMOUNTS PAID TO YOU PURSUANT TO THE EXCHANGE
                      OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR
                      CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON
                      SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS.
                     ----------------------------------------------------------
                         YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU
                       CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9.
 
                       CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
 
                      I certify under penalties of perjury that a taxpayer
                      identification number has not been issued to me, and
                      either (1) I have mailed or delivered an application to
                      receive a taxpayer identification number to the
                      appropriate Internal Revenue Service Center or Social
                      Security Administration Office or (2) I intend to mail
                      or deliver an application in the near future. I
                      understand that if I do not provide a taxpayer
                      identification number by the time of payment, 31% of
                      all payments made to me on account of the Exchange
                      Notes shall be retained until I provide a taxpayer
                      identification number to the Exchange Agent and that,
                      if I do not provide my taxpayer identification number
                      within 60 days, such retained amounts shall be remitted
                      to the Internal Revenue Service as backup withholding
                      and 31% of all reportable payments made to me
                      thereafter will be withheld and remitted to the
                      Internal Revenue Service until I provide a taxpayer
                      identification number.
 
                      SIGNATURE: _________________    DATE: __________________
 

<PAGE>
 
                         NOTICE OF GUARANTEED DELIVERY
 
                                 FOR TENDER OF
                       11% SENIOR NOTES DUE JUNE 1, 2007
                             (THE "SENIOR NOTES")
 
                                      OF
 
 
                      [LOGO OF ITC/\DELTACOM APPEARS HERE]
 
  This Notice of Guaranteed Delivery, or one substantially equivalent to this
form, must be used to tender Senior Notes pursuant to the Exchange Offer
described in the Prospectus dated September 24, 1997 (as the same may be
amended or supplemented from time to time, the "Prospectus") of ITC/\DeltaCom,
Inc., a Delaware corporation (the "Company"), if certificates for the Senior
Notes are not immediately available, or time will not permit the Senior Notes,
the Letter of Transmittal and all other required documents to be delivered to
United States Trust Company of New York (the "Exchange Agent") prior to 5:00
p.m., New York City time, on October 28, 1997 or such later date and time to
which the Exchange Offer may be extended (the "Expiration Date"), or the
procedures for delivery by book-entry transfer cannot be completed on a timely
basis. This Notice of Guaranteed Delivery, or one substantially equivalent to
this form, must be delivered by hand or sent by facsimile transmission or mail
to the Exchange Agent, and must be received by the Exchange Agent prior to the
Expiration Date. See "The Exchange Offer--Procedures for Tendering Senior
Notes" in the Prospectus. Capitalized terms used but not defined herein shall
have the same meaning given them in the Prospectus.
 
                 The Exchange Agent for the Exchange Offer is:
 
                    UNITED STATES TRUST COMPANY OF NEW YORK
 
       By Facsimile:                By Mail:             By Hand before 4:30
                                                                p.m.:
                               United States Trust  
      (212) 780-0592           Company of New York       United States Trust
                              P.O. Box 843, Cooper       Company of New York
    Attention: Customer              Station                111 Broadway     
    Service Confirm by      New York, New York 10276  New York, New York 10006
 Telephone to: (800) 548-     Attention: Corporate     Attention: Lower Level 
           6565                  Trust Services        Corporate Trust Window 
 
               By Overnight Courier and By Hand after 4:30 p.m.:
 
                    United States Trust Company of New York
                           770 Broadway, 13th Floor
                           New York, New York 10003
 
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE OR TRANSMISSION OF THIS NOTICE OF GUARANTEED DELIVERY VIA FACSIMILE
OTHER THAN AS SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY.
 
  This Notice of Guaranteed Delivery is not to be used to guarantee
signatures. If a signature on a Letter of Transmittal is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided in the
signature box on the Letter of Transmittal.
<PAGE>
 
Ladies and Gentlemen:
 
  The undersigned hereby tenders to the Company, upon the terms and subject to
the conditions set forth in the Prospectus and the related Letter of
Transmittal, the Senior Notes indicated below pursuant to the guaranteed
delivery procedures set forth in the Prospectus under the caption "The
Exchange Offer--Procedures for Tendering Senior Notes."
 
Name(s) of Registered Holder(s): ______________________________________________
                                          (Please Print or Type)
Signature(s): _________________________________________________________________
Address(es): __________________________________________________________________
_______________________________________________________________________________
Area Code(s) and Telephone Number(s): _________________________________________
Account Number: _______________________________________________________________
Date: _________________________________________________________________________
 
       Certificate No(s).                          Principal Amount of
         (if available)                          Senior Notes Tendered*
_________________________________         _____________________________________
_________________________________         _____________________________________
_________________________________         _____________________________________
_________________________________         _____________________________________
_________________________________         _____________________________________
_________________________________         _____________________________________
 
* Must be in integral multiples of $1,000 principal amount at maturity.
 
                             GUARANTEE OF DELIVERY
                   (NOT TO BE USED FOR SIGNATURE GUARANTEE)
 
  The undersigned, a member firm of a registered national securities exchange
or of the National Association of Securities Dealers, Inc., a commercial bank
or trust company having an office or a correspondent in the United States or
an "eligible guarantor institution" within the meaning of Rule 17Ad-15 under
the Securities Exchange Act of 1934, as amended, hereby guarantees that the
undersigned will deliver to the Exchange Agent the certificates representing
the Senior Notes being tendered hereby in proper form for transfer (or a
confirmation of book-entry transfer of such Senior Notes, into the Exchange
Agent's account at the book-entry transfer facility of The Depository Trust
Company ("DTC")) with delivery of a properly completed and duly executed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, all within three New York Stock
Exchange trading days after the date of execution of the Notice of Guaranteed
Delivery.
 
Name of Firm ____________________         _____________________________________
Address _________________________                 Authorized Signature
_________________________________         Name ________________________________
                         Zip Code                 Please Print or Type
Telephone No. ___________________         Title _______________________________
                                          Dated: ______________________________
 
  The institution that completes this form must communicate the guarantee to
the Exchange Agent and must deliver the certificates representing any Senior
Notes (or a confirmation of book-entry transfer of such Senior Notes into the
Exchange Agent's account at DTC) and the Letter of Transmittal to the Exchange
Agent within the time period shown herein. Failure to do so could result in a
financial loss to such institution.
 
                                       2

<PAGE>
 
                  [LOGO OF ITC/\DELTACOM, INC. APPEARS HERE]
 
                             OFFER TO EXCHANGE ITS
                       11% SENIOR NOTES DUE JUNE 1, 2007
          WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
                      FOR ANY AND ALL OF ITS OUTSTANDING
                       11% SENIOR NOTES DUE JUNE 1, 2007
              PURSUANT TO THE PROSPECTUS DATED SEPTEMBER 24, 1997
 
TO:BROKERS, DEALERS, COMMERCIAL BANKS,
  TRUST COMPANIES AND OTHER NOMINEES
 
  ITC/\DeltaCom, Inc. (the "Company") is offering to exchange (the "Exchange
Offer"), upon and subject to the terms and conditions set forth in the
enclosed Prospectus, dated September 24, 1997 (the "Prospectus"), and the
enclosed Letter of Transmittal (the "Letter of Transmittal"), its 11% Senior
Notes Due June 1, 2007 which have been registered under the Securities Act of
1933 (the "Exchange Notes") for any and all of its outstanding 11% Senior
Notes Due June 1, 2007 (the "Senior Notes"). The Exchange Offer is being made
in order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement dated as of June 3, 1997, among the Company and
Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, First Union Capital Markets Corp. and NationsBanc Capital
Markets, Inc.
 
  In connection with the Exchange Offer, we are requesting that you contact
your clients for whom you hold Senior Notes registered in your name or in the
name of your nominee, or who hold Senior Notes registered in their own names.
The Company will not pay any fees or commissions to any broker, dealer or
other person in connection with the solicitation of tenders pursuant to the
Exchange Offer. However, you will, upon request, be reimbursed for reasonable
out-of-pocket expenses incurred in connection with soliciting acceptances of
the Exchange Offer. The Company will pay or cause to be paid all transfer
taxes applicable to the exchange of Senior Notes pursuant to the Exchange
Offer, except as set forth in the Prospectus and the Letter of Transmittal.
 
  For your information and for forwarding to your clients, we are enclosing
the following documents:
 
  1. Prospectus dated September 24, 1997;
 
  2. A Letter of Transmittal for your use and for the information of your
     clients;
 
  3. A form of Notice of Guaranteed Delivery; and
 
  4. A form of letter which may be sent to your clients for whose account you
     hold Senior Notes registered in your name or the name of your nominee,
     with space provided for obtaining such clients' instructions with regard
     to the Exchange Offer.
 
  YOUR PROMPT ACTION IS REQUESTED. THE EXCHANGE OFFER WILL EXPIRE AT 5:00
P.M., NEW YORK CITY TIME, ON OCTOBER 28, 1997 (THE "EXPIRATION DATE"), UNLESS
EXTENDED BY THE COMPANY (IN WHICH CASE THE TERM "EXPIRATION DATE" SHALL MEAN
THE LATEST DATE AND TIME TO WHICH THE EXCHANGE OFFER IS EXTENDED). THE SENIOR
NOTES TENDERED PURSUANT TO THE EXCHANGE OFFER MAY BE WITHDRAWN, SUBJECT TO THE
PROCEDURES DESCRIBED IN THE PROSPECTUS AND THE LETTER OF TRANSMITTAL, AT ANY
TIME PRIOR TO THE EXPIRATION DATE.
 
  To participate in the Exchange Offer, a duly executed and properly completed
Letter of Transmittal (or facsimile thereof), with any required signature
guarantees and any other required documents, should be sent to the Exchange
Agent and certificates representing the Senior Notes should be delivered to
the Exchange Agent, all in accordance with the instructions set forth in the
Prospectus and the Letter of Transmittal.
<PAGE>
 
  If holders of Senior Notes wish to tender, but it is impracticable for them
to forward their certificates for Senior Notes prior to the expiration of the
Exchange Offer or to comply with the book-entry transfer procedures on a
timely basis, a tender may be effected by following the guaranteed delivery
procedures described in the Prospectus and the Letter of Transmittal.
 
  Any inquiries you may have with respect to the Exchange Offer, or requests
for additional copies of the enclosed materials, should be directed to the
Exchange Agent for the Senior Notes, at its address and telephone number set
forth on the front of the Letter of Transmittal.
 
                                          Very truly yours,
 
                                          ITC/\DeltaCom, Inc.
 
  NOTHING HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY
OTHER PERSON AS AN AGENT OF THE COMPANY OR THE EXCHANGE AGENT, OR AUTHORIZE
YOU OR ANY OTHER PERSON TO USE ANY DOCUMENT OR MAKE ANY STATEMENTS ON BEHALF
OF EITHER OF THEM WITH RESPECT TO THE EXCHANGE OFFER, EXCEPT FOR STATEMENTS
EXPRESSLY MADE IN THE PROSPECTUS OR THE LETTER OF TRANSMITTAL.

<PAGE>
 
 
                  [LOGO OF ITC/\DELTACOM, INC. APPEARS HERE]
 
                             OFFER TO EXCHANGE ITS
                       11% SENIOR NOTES DUE JUNE 1, 2007
          WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933
                      FOR ANY AND ALL OF ITS OUTSTANDING
                       11% SENIOR NOTES DUE JUNE 1, 2007
 
TO OUR CLIENTS:
 
  Enclosed for your consideration is a Prospectus, dated September 24, 1997
(the "Prospectus"), and a form of Letter of Transmittal (the "Letter of
Transmittal"), relating to the offer (the "Exchange Offer") of ITC/\DeltaCom,
Inc. (the "Company") to exchange its 11% Senior Notes due June 1, 2007 which
have been registered under the Securities Act of 1933 (the "Exchange Notes")
for any and all of its outstanding 11% Senior Notes due June 1, 2007 (the
"Senior Notes"), upon the terms and subject to the conditions described in the
Prospectus and the Letter of Transmittal. The Exchange Offer is being made in
order to satisfy certain obligations of the Company contained in the
Registration Rights Agreement dated as of June 3, 1997, among the Company and
Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, First Union Capital Markets Corp. and NationsBanc Capital
Markets, Inc.
 
  This material is being forwarded to you as the beneficial owner of the
Senior Notes carried by us in your account but not registered in your name. A
TENDER OF SUCH SENIOR NOTES MAY ONLY BE MADE BY US AS THE HOLDER OF RECORD AND
PURSUANT TO YOUR INSTRUCTIONS.
 
  Accordingly, we request instructions as to whether you wish us to tender on
your behalf the Senior Notes held by us for your account, pursuant to the
terms and conditions set forth in the enclosed Prospectus and Letter of
Transmittal.
 
  Your instructions should be forwarded to us as promptly as possible in order
to permit us to tender the Senior Notes on your behalf in accordance with the
provisions of the Exchange Offer. The Exchange Offer will expire at 5:00 p.m.,
New York City time, on October 28, 1997, unless extended by the Company (the
"Expiration Date"). Any Senior Notes tendered pursuant to the Exchange Offer
may be withdrawn, subject to the procedures described in the Prospectus and
the Letter of Transmittal, at any time prior to the Expiration Date.
 
  If you wish to have us tender your Senior Notes, please so instruct us by
completing, executing and returning to us the instruction form included with
this letter. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR INFORMATION
ONLY AND MAY NOT BE USED DIRECTLY BY YOU TO TENDER SENIOR NOTES.
<PAGE>
 
                         INSTRUCTIONS WITH RESPECT TO
                              THE EXCHANGE OFFER
 
  The undersigned acknowledge(s) receipt of your letter and the enclosed
material referred to therein, including the Prospectus and the accompanying
form of Letter of Transmittal, relating to the Exchange Offer made by
ITC/\DeltaCom, Inc. with respect to its Senior Notes.
 
  This will instruct you as to the action to be taken by you relating to the
Exchange Offer with respect to the Senior Notes held by you for the account of
the undersigned, upon and subject to the terms and conditions set forth in the
Prospectus and the Letter of Transmittal.
 
  The aggregate principal amount at maturity of the Senior Notes held by you
for the account of the undersigned is (fill in amount):
 
    $ _____________________________
       of the 11% Senior Notes due
              June 1, 2007
 
  With respect to the Exchange Offer, the undersigned hereby instructs you
(check appropriate box):
 
  [_] To TENDER the following Senior Notes held by you for the account of the
      undersigned (insert aggregate principal amount at maturity of Senior
      Notes to be tendered, in integral multiples of $1,000):
 
    $ _____________________________
         of the 11% Senior Notes
            due June 1, 2007
 
  [_] NOT to tender any Senior Notes held by you for the account of the
      undersigned.
 
  If the undersigned instructs you to tender the Senior Notes held by you for
the account of the undersigned, it is understood that you are authorized to
make, on behalf of the undersigned (and the undersigned, by its signature
below, hereby makes to you), the representations, warranties and agreements
contained in the Letter of Transmittal that are to be made with respect to the
undersigned as beneficial owner.
 
                                   SIGN HERE
 
Name of beneficial owner(s): __________________________________________________
 
Signature(s): _________________________________________________________________
 
Name(s) (please print): _______________________________________________________
 
Address: ______________________________________________________________________
 
Telephone Number: _____________________________________________________________
 
Taxpayer Identification or Social Security Number(s): _________________________
 
Date: _________________________________________________________________________
 
  None of the Senior Notes held by us for your account will be tendered unless
we receive written instructions from you to do so. Unless a specific contrary
instruction is given in the space provided, your signature(s) hereon shall
constitute an instruction to us to tender all the Senior Notes held by us for
your account.


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