The following discussion and analysis should be read in conjunction with the "Selected Financial Data" and the accompanying consolidated financial statements and related notes thereto, included elsewhere in this report. This section and other parts of this report contain forward-looking statements that involve risks and uncertainties. See "Caution Regarding Forward-Looking Statements" at the beginning of this report. Forward-looking statements are not guarantees of future performance, and our actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Risk Factors" above. We assume no obligation to revise or update any forward-looking statements for any reason, except as required by law. Overview
We are a leading national provider of managed network services, specializing in business Ethernet, data networking, converged, IP VPN, Internet access, voice, including VoIP, and network security services to enterprise organizations, including public sector entities, and carriers throughout the U.S., including their global locations. Our revenue is derived from business communication services, including data, high-speed Internet access, network and voice services. Our customers include, among others, enterprise organizations in the financial services, technology and scientific, health care, distribution, manufacturing and professional services industries, public sector entities, system integrators and communications service providers, including ILECs, competitive local exchange carriers ("CLECs"), wireless communications companies and cable companies.
Through our subsidiaries, we serve 75 metropolitan markets with local fiber networks that are connected by our regional fiber facilities and national IP backbone. As of December 31, 2012, our fiber network spanned approximately 29,000 route miles (including approximately 22,000 metropolitan route miles) connecting to 17,948 buildings served directly by our local fiber facilities. In 2012 we added approximately 2,500 new buildings directly connected to our network, including 532 previously connected buildings that were identified during an alignment of key operating systems. Our fiber networks also connect to over 400 key third party data centers across the country where customers deploy their own equipment or connect to cloud service providers. We continue to extend our fiber footprint within our existing markets by connecting our network into additional locations and to expand our data, voice and IP networking capabilities between our markets, supporting secure end-to-end business Ethernet, IP VPN and converged solutions for customers.
Our objective is to be the leading national provider of high quality, business networking solutions leveraging our integrated network, operational capabilities, dedicated people, local presence, personalized customer experience and advanced support systems to meet the complex and evolving needs of our customers and increase stockholder value. The key elements of our business strategy include:
• Focusing our service offerings on meeting our customers' complex evolving needs, emphasizing business Ethernet and IP VPN services (which we refer to as strategic services), Internet-based services and converged service offerings and developing our advanced service capabilities, which we refer to as the "Intelligent Network". We launched the initial phase of the Intelligent Network, Enhanced Management, in June 2012 for IP VPN, converged and Ethernet services, and the second phase, Dynamic Capacity, which allows customers to manage or schedule bandwidth, in August 2012;

•         Enabling enterprise cloud computing and other developing customer IT
          and business strategies by leveraging our fiber network, data services
          portfolio, Intelligent Network capabilities and the numerous third
          party and customer data centers connected to our network;


•         Delivering a differentiated customer care strategy by engaging all of
          our employees and continually incorporating customer feedback to
          provide the best possible customer service;


•         Leveraging our local fiber assets and national IP backbone and
          integrating and managing other carriers' facilities to enable our
          customers to connect to any of their locations with our network
          solutions, and using our local presence and local sales, sales
          engineering, customer support and operational resources, backed by a
          national organization, to provide personalized service and customized
          solutions for our customers;

• Enhancing our multi-channel sales strategy;

•         Employing a disciplined capital allocation strategy to invest for
          growth in the near and long term to broaden our reach and capabilities
          and increase operational efficiencies; and

• Investing in our people to drive the execution of our strategies.

Our revenue is derived from business communications services, including data, high-speed Internet access, voice and network services. Although we analyze revenue by customer type, we present our financial results as one segment across the

U.S. because our business is centrally managed. The percentage of revenue by customer type for each of the past three years is as follows:

                                 Revenue
                          2012    2011    2010
Enterprise / End Users     79 %    77 %    75 %
Carrier                    19 %    21 %    22 %
Intercarrier Compensation   2 %     2 %     3 %
                          100 %   100 %   100 %

Revenue Trends

Total Revenue
Our revenue has grown for the past consecutive 33 quarters through December 31, 2012, including throughout the various economic cycles. We expect our future revenue growth to be driven in part by the increasingly web-based economy and developing IT strategies such as cloud computing, collaboration, data center connectivity and disaster recovery, all of which require the reliable connectivity and network capacity that we provide. We also expect that our enhanced service capabilities will drive more demand for our existing Ethernet and VPN product suite and enhance our future data services revenue growth. Our national footprint and new and enhanced service capabilities enable us to serve customers with multi-point, multi-city locations. Our year-over-year growth rate increased over each of the prior years ended December 31, 2010, 2011 and 2012 and was 5.1%, 7.4% and 7.6%, respectively. These higher year-over-year growth rates were primarily due to higher demand, low revenue churn and an increase in certain taxes and fees that are reported on a gross versus net basis in revenue and expense. We also believe that our newer and enhanced services, our customer experience initiatives to increase customer loyalty and retention and improved economic conditions contributed to our growing revenue. In 2012, our service installations increased year-over-year, although at a growth rate lower than our total overall revenue growth rate. As a result, beginning in the three months ended March 31, 2012, we experienced a trend of lower quarterly year-over-year revenue growth rates, including for the three months ended December 31, 2012 (excluding the impact of a large customer settlement) and expect this trend to continue into 2013. Increasing our rate of revenue growth will be dependent on higher service installations to keep pace with the growing total base of revenue as well as retaining revenue from existing customers. To capture growing market demand and share, we are implementing several initiatives in 2013 focused on increasing sales to contribute to an accelerating growth rate over time (see "Modified EBITDA Trends and Growth Initiatives" below).
Revenue for data and Internet, network and the majority of our voice services is generally billed in advance on a monthly fixed-rate basis and recognized over the period the services are provided. Revenue for the majority of intercarrier compensation and certain components of voice services, such as certain components of long distance, is generally billed on a transactional basis in arrears based on a customer's actual usage; therefore, we use estimates to recognize revenue in the period earned. Due to the time required to obtain or build necessary facilities, obtain rights to install equipment in multi-tenant buildings and other factors related to service installation, some of which are not within our control, there is often a time lag between the time a sale, or "booking" (i.e., signed contract) is made, and the time revenue commences. Our installation intervals are generally longer for the more complex solutions delivered to our customers. In some situations, the timing of service installations may be subject to factors that our customers control, such as their readiness for us to install equipment on their premises or the readiness of their equipment. Due to all of these factors, installation intervals may range between two weeks for single-site, less complex services to 6 to 12 months or longer for the more complex solutions. Enterprise Customer Revenue
Revenue from enterprise customers has increased for the past 42 consecutive quarters through December 31, 2012 and increased 6.3%, 9.4% and 10.5% for the years ended December 31, 2010, 2011 and 2012 over the respective prior years primarily due to increased installations of our data and Internet services such as business Ethernet and VPN and other services and an increase in certain taxes and fees. Revenue from our enterprise customers represented 79% of our total revenue for the year ended December 31, 2012. We expect our future revenue growth to come primarily from our enterprise customer base.

Carrier Customer Revenue
Our carrier revenue represented 19% of total revenue for the year ended December 31, 2012. Carrier revenue has been gradually declining as a percentage of revenue due to the higher contribution from enterprise customer revenue coupled with continued disconnections and repricing of carrier contracts upon renewals somewhat offset by installed sales of Ethernet services to carriers to serve their end users' needs. Carrier revenue from wireless providers represented 30% of total carrier revenue for both the years ended December 31, 2012 and 2011. While we expect some contribution to carrier revenue as we expand our data and Internet service offerings to our wholesale customer base, our carrier revenue historically has been impacted by pricing declines in connection with carrier customer contract renewals, disconnections resulting from price competition from other carriers, customer cost cutting measures and carrier consolidation. We expect these impacts on our carrier revenue to continue. Intercarrier Compensation Revenue
Intercarrier compensation revenue, which consists of switched access services and reciprocal compensation, represented 2% of our total revenue for the year ended December 31, 2012, and is expected to continue to decline in the future as a percentage of total revenue due to federal and state mandated rate reductions and changes in the regulatory regime for intercarrier compensation. We lowered our rates in July 2012 to comply with a 2011 FCC Order. Another mandated rate decrease will occur in July of 2013. As a result of the order, we lost approximately $2.0 million in intercarrier compensation revenue in the year ended December 31, 2012 and expect to lose approximately $4.0 million in the year ended December 31, 2013 compared to the full year 2012. The order mandates further rate declines through 2018 when carriers will be required to exchange local traffic on a "bill and keep" basis, meaning that the exchange of traffic will not be compensatory. Intercarrier compensation revenue also may fluctuate based on variations in minutes of use originating and terminating on our network and changes in customer settlements.
Revenue and Customer Churn
Revenue churn, defined as the average lost recurring monthly billing for the period from a customer's partial or complete disconnection of services
(excluding pricing declines upon contract renewals and lost usage revenue)
compared to reported revenue, is a measure used by management to evaluate revenue retention. Customer and service disconnections occur as part of the normal course of business and are primarily associated with price competition from other providers, customers moving facilities to other locations and customers' cost cutting, business contractions, financial difficulties and consolidation, among other reasons. After higher churn beginning in late 2007 and continuing through 2009, revenue churn improved in the year ended December 31, 2010 to pre-recession levels of 1.0% of monthly revenue and further improved to 0.9% in each of the years ended December 31, 2011 and 2012. We believe that the improvement in revenue churn is a result of improved economic conditions as well as our service portfolio, measures we put in place to increase revenue retention and our customer experience initiatives. As a component of revenue churn, revenue lost from customers fully disconnecting services was 0.2% for each of the years ended December 31, 2010, 2011 and 2012, respectively. We continue our initiatives to maintain revenue churn that is low relative to our industry, but do not expect contribution to our revenue growth rate from a lower revenue churn rate. If our revenue churn were to increase, our revenue growth would likely be negatively impacted. We cannot predict the total impact on revenue from future customer disconnections or the timing of such disconnections or whether these favorable churn trends will continue.

Customer churn, defined as the average monthly customer turnover for the period compared to the average monthly customer count for the period, was 1.1%, 1.0% and 1.0% for the years ended December 31, 2010, 2011 and 2012, respectively. The majority of this churn came from our smaller customers, which we expect will continue.
Pricing
We experience significant price competition across our service categories that impacts our revenue. We also believe that technology advancements over the years in the telecommunications industry have resulted in lower unit costs for some electronics and equipment that drives customer demand for higher bandwidth at the same or lower prices.
In our industry, service agreements typically range from two to five years, with fixed pricing for the contract term. When contracts are renewed with no changes to the services, pricing is frequently reduced to current market levels as a renewal incentive. In addition, during the terms of agreements, customers often purchase additional services or increase or decrease the capacity of existing services, subject to applicable early termination charges, depending on their business needs. During periods of economic downturn, our customers' needs may contract, resulting in fewer service additions.

Expenses and Modified EBITDA Trends
Pricing of Special Access Services
We purchase a substantial amount of special access services primarily from ILECs to expand the reach of our network and also provide special access services to our customers over our fiber facilities in competition with the ILECs. The ILECs have argued before the FCC that the high capacity telecommunications services that they sell, including special access services we buy from them, should no longer be subject to regulations governing price and quality of service. We have advocated that the FCC modify certain of its special access pricing flexibility rules to return these services to price-cap regulation to protect against unreasonable price increases for carriers such as us. The FCC is reviewing its regulation of special access pricing in a pending proceeding commenced in 2005 that has not yet resulted in proposed rules. In 2012, the FCC suspended the operation of the pricing flexibility triggers, which means that ILECs cannot expand the geographic scope of their capability to raise prices, pending further FCC review. We cannot predict when the FCC will act on interstate special access pricing regulation or the impact of any such action. If the special access services we buy from the ILECs were to be further deregulated, ILECs would have a greater ability to increase the price and reduce the service quality of special access services they sell to us. As the prices we must pay for special access services increase, our margins are pressured. In addition, the FCC has granted ILEC requests for forbearance from regulation of certain Ethernet and OC-n high capacity services offered by the ILECs as special access, with the result that prices we would pay for those services are no longer regulated and can increase. We are advocating reversal of these forbearance requests. We also continue to pursue and implement commercial arrangements with the ILECs and cable companies for these services on acceptable terms and conditions. In an attempt to stabilize the prices we pay for these services, we entered into a wholesale service agreement with a large ILEC for tariffed special access and other services for end-user access. However, since mid-2010, costs for some special access services subject to this agreement and those we buy from other significant ILEC suppliers of special access service have trended up. Expiration of the current wholesale agreement, without a new agreement with similar terms to replace it, could result in additional increases to our special access costs, which could be material. Bad Debt Expense Trends
Due to the quality of our customer base, successful collection efforts, internal controls, bad debt recoveries, and our revenue recognition policies, including recognition of contract termination charges upon cash receipt, our bad debt expense was less than 1% of our total revenue for the year ended December 31, 2012, comparable to the years ended December 31, 2011 and 2010. We cannot assure that we will be able to maintain bad debt expense at this low level. Modified EBITDA Trends and Growth Initiatives We have had initiatives to expand our revenue growth, margins and cash flow that required both capital and operating investments. During the past three years ended December 31, 2012, these operating investments included expansion of our sales and sales support staff as well as IT and technical personnel and contract labor to support our growing customer base and new product and technology investments to provide future capabilities which differentiate our products and services from the competition. Our capital spending investments during these periods consisted of incremental success-based expenditures to support growing sales, new service portfolio enhancements, including our expanded Ethernet service portfolio and our Intelligent Network capabilities, including sales to wireless providers, strategic market expansion through fiber purchases to extend our network reach and corporate and IT initiatives that support the evolution of our services, enable our customer experience and drive increased scale and efficiency. We believe that these initiatives resulted in expansion of our revenue growth, margins and cash flows.
Our Modified EBITDA (see Note 4 to the table under Item 6. Selected Financial Data for a definition of Modified EBITDA) has increased sequentially for 23 consecutive quarters due to the contribution from revenue growth and the initiatives described above, among other factors. Modified EBITDA grew 6.2%, 7.4%, and 8.6% in the years ended December 31, 2010, 2011 and 2012, respectively, each compared to the respective period in the prior year. Modified EBITDA margin was 36.4%, 36.4% and 36.8% for the years ended December 31, 2010, 2011 and 2012, respectively. These margins included the absorption of increased costs for special access due to higher prices and costs associated with additions to our sales and support staff and IT and technical personnel and were impacted by the dilutive effect of volume and rate increases in certain taxes and fees that are reported on a gross versus net basis in revenue and expense (see "Revenue" in Note 1 to the consolidated financial statements).

The initiatives that we are implementing in 2013 are designed to reverse the 2012 trend of lower quarterly year-over-year growth rates and consist of further increasing investments in our sales and support staff to expand our market penetration, in new technologies to deliver new innovative capabilities to further drive our strategic data and Internet services, in further automation of network functionality to enable more dynamic customer network capacity and connections and in continuing the expansion of our network in existing and adjacent markets to reach more customers. While these initiatives are designed to increase sales in the near term to enable us to accelerate our revenue growth rate over the long term, we cannot assure that these and other initiatives will be sufficient to achieve our objectives of increased revenue growth, margins and cash flows or the timing of such anticipated benefits.
We believe that increasing our sales and support staff to leverage our service offerings and support our increasingly complex solutions will enable us to attract new customers, sell more services to existing customers and retain customers. However, we expect that the higher investments in this and the other growth initiatives discussed above will dampen our Modified EBITDA margin and cash flow in the near term until we can achieve higher service installations and an expansion in our rate of revenue growth that we expect will absorb the cost of the expanded sales reach and allow margins to expand again. We believe that future margin expansion will come from higher service installations, further leveraging our on-network facilities and increasing the network density of our less mature markets, since over the long term we have generally experienced margin improvement and increased cash flow from our less dense markets as those markets are expanded through on-net building additions and other network expansions. Our continued cost efficiency efforts are also intended to contribute to our overall margins. Our revenue and margins may also be impacted by, among other risks, competitive pressures, higher special access, fuel and energy costs, fluctuations in certain taxes and fees and any future inflationary pressures.
Seasonality and Fluctuations
We continue to expect business fluctuations to impact sequential quarterly trends in revenue, margins and cash flow. This includes the timing, as well as any seasonality of sales and service installations, usage, rate changes, disputes, settlements, repricing for contract renewals and fluctuations in revenue churn, expenses, capital expenditures and certain taxes and fees. Historically our revenue and expense in the first quarter has been impacted by the slowing of our customers' purchasing activities during the holidays and the resetting of payroll taxes in the new year. Our historical experience with quarterly fluctuations may not necessarily be indicative of future results. Because we generally do not recognize revenue subject to billing disputes until the dispute is resolved, the timing of dispute resolutions and settlements may positively or negatively affect our revenue in a particular quarter. The timing of disconnections may also impact our results in a particular quarter, with disconnections early in the quarter generally having a greater impact. The timing of capital and other expenditures may affect our margins or cash flow. The convergence of any of these or other factors such as fluctuations in usage, increases or decreases in certain taxes and fees or pricing declines upon contract renewals in a particular quarter may result in our revenue growing more or less than previous trends, may impact our margins and other financial results and may not be indicative of future financial performance. Critical Accounting Policies and Estimates We prepare our financial statements in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

•         it requires assumptions to be made that were uncertain at the time the
          estimate was made; and


•         changes in the estimate or different estimates that could have been
          selected could have a material impact on our consolidated results of
          operations or financial condition.

Goodwill
We perform impairment tests at least annually on all goodwill and indefinite-lived intangible assets as required by relevant accounting standards, which require goodwill to be assigned to a reporting unit and tested using a consistent measurement date. For purposes of testing goodwill for impairment, our goodwill has been assigned to our one consolidated reporting unit and our test is performed in the fourth quarter of each year or more frequently if impairment indicators arise.

In reviewing goodwill for impairment we have the option to (i) assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount or (ii) bypass the qualitative assessment and proceed directly to a quantitative assessment. For our assessment in the year ended December 31, 2012, we opted to bypass the qualitative assessment and proceed directly to the quantitative assessment, which utilizes a two-step process. The first step is to identify if a potential impairment exists by comparing the fair value of the reporting unit to its carrying amount. If the fair value of the reporting unit exceeds its carrying amount, goodwill is not considered to have a potential impairment and the second step of the impairment test is not necessary. However, if a potential impairment exists, the fair value of the reporting unit is compared to the fair value of its assets and liabilities, excluding goodwill, to estimate the implied value of the reporting unit's goodwill. If an impairment charge is deemed necessary, a charge is recognized for any excess of the carrying amount of the reporting unit's goodwill over the implied fair value.
Considerable management judgment is necessary to estimate the fair value of our reporting unit and goodwill. We determine the fair value of our reporting unit based on the income approach, using a discounted projection of future cash flows which includes a five-year annual discounted cash flow ("DCF") analysis with a terminal value to value the long-term future cash flows. This DCF analysis was used solely for the purpose of evaluating our goodwill for impairment and should not be interpreted as our prediction of future performance. The assumptions used in our DCF analysis are consistent with the assumptions we believe hypothetical marketplace participants would use. With respect to our DCF analysis, the timing and amount of future cash flows requires critical management assumptions, including estimates of expected future revenue growth rates, Modified EBITDA contributions, expected capital expenditures and an appropriate discount rate and terminal value. Our growth rate assumptions for this purpose are based on product and technology investments, fiber network expansions, changes in our underlying cost structure, market trends and historical results, among other items. In determining the fair value of our reporting unit for purposes of our assessment for the year ended December 31, 2012, we considered our five-year . . .