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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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



FOR
THE QUARTERLY PERIOD ENDED JUNE 30, 2004



COMMISSION FILE
NUMBER: 000-32647



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KNOLOGY, INC.

(Exact name of
registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 58-2424258                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                                          |  |           
|--------------------------------------------------------- |  | ----------
|KNOLOGY, INC. 1241 O.G. SKINNER DRIVE WEST POINT, GEORGIA |  | 31833     
|(Address of principal executive offices)                  |  | (Zip Code)



Registrants
telephone number, including area code: (706) 645-8553



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Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No ̈



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



As of July 31, 2004, we had
21,515,206 shares of common stock and 2,170,127 shares of non-voting common stock outstanding.



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KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED JUNE 30, 2004



INDEX



|        |  |                       |  |                                                                                       |  |     
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                       |  |                                                                                       |  | PAGE
|PART I  |  | FINANCIAL INFORMATION |  |                                                                                      
|        |  |                       | 
|        |  | ITEM 1                |  | FINANCIAL STATEMENTS                                                                  |  | 3   
|        |  |                       |  | Condensed Consolidated Balance Sheets                                                 |  | 3   
|        |  |                       |  | Condensed Consolidated Statements of Operations                                       |  | 4   
|        |  |                       |  | Condensed Consolidated Statement of Cash Flows                                        |  | 5   
|        |  |                       |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6   
|        |  | ITEM 2                |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 10  
|        |  | ITEM 3                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 20  
|        |  | ITEM 4                |  | CONTROLS AND PROCEDURES                                                               |  | 20  
|        |  |                      
|PART II |  | OTHER INFORMATION     |  |                                                                                      
|        |  |                       | 
|        |  | ITEM 1                |  | LEGAL PROCEEDINGS                                                                     |  | 21  
|        |  | ITEM 2                |  | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES      |  | 21  
|        |  | ITEM 3                |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 21  
|        |  | ITEM 4                |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 21  
|        |  | ITEM 5                |  | OTHER INFORMATION                                                                     |  | 22  
|        |  | ITEM 6                |  | EXHIBITS AND REPORTS ON FORM 8-K                                                      |  | 22  
|        |  |                       | 
|        |  |                       |  | SIGNATURES                                                                            |  | 23  
|        |  |                       |  | EXHIBIT INDEX                                                                         |  | 24  



2



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I
TEM 1. FINANCIAL STATEMENT



KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)



|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                                            |  | December 31,2003 |          |   | June 30,2004 |  
|ASSETS                                                                                                                                                                                      |  |                  |          |   |              |   |          |  
|CURRENT ASSETS:                                                                                                                                                                             |  |                  |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                                                                   |  | $                | 52,021   |   |              | $ | 51,417   |  
|Restricted cash                                                                                                                                                                             |  |                  | 11,314   |   |              |   | 12,987   |  
|Accounts receivable, net of an allowance for doubtful accounts of $1,449 and $664 at December 31, 2003 and June 30, 2004,
respectively                                                      |  |                  | 19,284   |   |              |   | 17,559   |  
|Prepaid expenses and other                                                                                                                                                                  |  |                  | 1,818    |   |              |   | 1,451    |  
|Assets of business held for sale (Note 10)                                                                                                                                                  |  |                  | 0        |   |              |   | 846      |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total current assets                                                                                                                                                                        |  |                  | 84,437   |   |              |   | 84,260   |  
|                                                                                                                                                                                            |  |                 
|PROPERTY, PLANT AND EQUIPMENT, net                                                                                                                                                          |  |                  | 336,060  |   |              |   | 325,332  |  
|                                                                                                                                                                                            |  |                 
|INVESTMENT                                                                                                                                                                                  |  |                  | 1,243    |   |              |   | 1,243    |  
|                                                                                                                                                                                            |  |                 
|GOODWILL                                                                                                                                                                                    |  |                  | 40,834   |   |              |   | 40,834   |  
|                                                                                                                                                                                            |  |                 
|INTANGIBLE AND OTHER ASSETS, net                                                                                                                                                            |  |                  | 1,138    |   |              |   | 1,185    |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total assets                                                                                                                                                                                |  | $                | 463,712  |   |              | $ | 452,854  |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                        |  |                  |          |   |              |   |          |  
|                                                                                                                                                                                            |  |                 
|CURRENT LIABILITIES:                                                                                                                                                                        |  |                  |          |   |              |   |          |  
|Current portion of notes payable                                                                                                                                                            |  | $                | 5,213    |   |              | $ | 8,830    |  
|Accounts payable                                                                                                                                                                            |  |                  | 15,520   |   |              |   | 17,252   |  
|Accrued liabilities                                                                                                                                                                         |  |                  | 9,136    |   |              |   | 13,692   |  
|Unearned revenue                                                                                                                                                                            |  |                  | 11,633   |   |              |   | 11,300   |  
|Liabilities of business held for sale (Note 10)                                                                                                                                             |  |                  | 0        |   |              |   | 825      |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total current liabilities                                                                                                                                                                   |  |                  | 41,502   |   |              |   | 51,899   |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|NONCURRENT LIABILITIES:                                                                                                                                                                     |  |                  |          |   |              |   |          |  
|Notes payable                                                                                                                                                                               |  |                  | 45,309   |   |              |   | 39,909   |  
|Senior unsecured notes, net of discount                                                                                                                                                     |  |                  | 225,037  |   |              |   | 237,096  |  
|Warrants                                                                                                                                                                                    |  |                  | 932      |   |              |   | 513      |  
|Unamortized investment tax credits                                                                                                                                                          |  |                  | 39       |   |              |   | 20       |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total noncurrent liabilities                                                                                                                                                                |  |                  | 271,317  |   |              |   | 277,538  |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total liabilities                                                                                                                                                                           |  |                  | 312,819  |   |              |   | 329,437  |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|COMMITMENTS AND CONTINGENCIES (Note 8)                                                                                                                                                      |  |                  |          |   |              |   |          |  
|                                                                                                                                                                                            |  |                 
|STOCKHOLDERS EQUITY:                                                                                                                                                                       |  |                  |          |   |              |   |          |  
|Common stock, $.01 par value per share; 175,000,000 shares authorized, 20,605,430 and 21,514,527 shares issued and outstanding at December 31,
2003 and June 30, 2004, respectively         |  |                  | 207      |   |              |   | 216      |  
|Non-voting common stock, $.01 par value per share; 25,000,000 shares authorized, 2,170,127 and 2,170,127 shares issued and outstanding at
December 31, 2003 and June 30, 2004, respectively |  |                  | 21       |   |              |   | 21       |  
|Additional paid-in capital                                                                                                                                                                  |  |                  | 548,518  |   |              |   | 558,064  |  
|Accumulated deficit                                                                                                                                                                         |  |                  | (397,853 | ) |              |   | (434,884 | )
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total stockholders equity                                                                                                                                                                  |  |                  | 150,893  |   |              |   | 123,417  |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                  |  | $                | 463,712  |   |              | $ | 452,854  |  
|                                                                                                                                                                                            |  |                  |          |   |              |   |          |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)



(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ---------- | ---- |  | - | ------- | - |  | - | ---------- | -
|                                                                                |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                                |  | 2003                        |         |   | 2004                      |   |            | 2003 |  |   | 2004    |  
|OPERATING REVENUES:                                                             |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|Video                                                                           |  | $                           | 17,987  |   |                           | $ | 24,304     |      |  | $ | 35,164  |   |  | $ | 49,719     |  
|Voice                                                                           |  |                             | 17,330  |   |                           |   | 18,368     |      |  |   | 33,895  |   |  |   | 36,416     |  
|Data and other                                                                  |  |                             | 7,552   |   |                           |   | 10,063     |      |  |   | 14,497  |   |  |   | 20,394     |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|TOTAL REVENUE                                                                   |  |                             | 42,869  |   |                           |   | 52,735     |      |  |   | 83,556  |   |  |   | 106,529    |  
|                                                                                |  |                             |         |  
|OPERATING EXPENSES:                                                             |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|Costs of services, excluding depreciation and amortization                      |  |                             | 11,257  |   |                           |   | 15,104     |      |  |   | 22,823  |   |  |   | 30,888     |  
|Selling, general and administrative expenses                                    |  |                             | 22,969  |   |                           |   | 28,578     |      |  |   | 45,732  |   |  |   | 57,553     |  
|Depreciation and amortization                                                   |  |                             | 19,933  |   |                           |   | 18,313     |      |  |   | 39,353  |   |  |   | 37,574     |  
|Expenses associated with capital market activities                              |  |                             | 43      |   |                           |   | 235        |      |  |   | 43      |   |  |   | 647        |  
|Non-cash stock option compensation                                              |  |                             | 478     |   |                           |   | 1,805      |      |  |   | 905     |   |  |   | 2,282      |  
|Litigation fees                                                                 |  |                             | 411     |   |                           |   | 23         |      |  |   | 611     |   |  |   | 23         |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|                                                                                |  |                             | 55,091  |   |                           |   | 64,058     |      |  |   | 109,467 |   |  |   | 128,967    |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|OPERATING LOSS                                                                  |  |                             | (12,222 | ) |                           |   | (11,323    | )    |  |   | (25,911 | ) |  |   | (22,438    | )
|                                                                                |  |                             |         |  
|OTHER INCOME (EXPENSE):                                                         |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|Interest income                                                                 |  |                             | 96      |   |                           |   | 180        |      |  |   | 210     |   |  |   | 339        |  
|Interest expense                                                                |  |                             | (7,324  | ) |                           |   | (7,741     | )    |  |   | (14,304 | ) |  |   | (15,524    | )
|Gain on adjustment of warrants to fair market value                             |  |                             | 0       |   |                           |   | 198        |      |  |   | 0       |   |  |   | 419        |  
|Other income, net                                                               |  |                             | 0       |   |                           |   | 12         |      |  |   | 86      |   |  |   | 140        |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|                                                                                |  |                             | (7,228  | ) |                           |   | (7,351     | )    |  |   | (14,008 | ) |  |   | (14,626    | )
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES AND DISCONTINUED OPERATIONS |  |                             | (19,450 | ) |                           |   | (18,674    | )    |  |   | (39,919 | ) |  |   | (37,064    | )
|INCOME TAX BENEFIT                                                              |  |                             | 0       |   |                           |   | 0          |      |  |   | 0       |   |  |   | 24         |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS                                                 |  |                             | (19,450 | ) |                           |   | (18,674    | )    |  |   | (39,919 | ) |  |   | (37,040    | )
|INCOME FROM DISCONTINUED OPERATIONS (Note 10)                                   |  |                             | 0       |   |                           |   | 10         |      |  |   | 0       |   |  |   | 10         |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|NET LOSS                                                                        |  | $                           | (19,450 | ) |                           | $ | (18,664    | )    |  | $ | (39,919 | ) |  | $ | (37,030    | )
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|BASIC AND DILUTED NET LOSS PER SHARE:                                           |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|Continuing operations                                                           |  | $                           | (383.65 | ) |                           | $ | (0.79      | )    |  | $ | (790.19 | ) |  | $ | (1.57      | )
|Discontinued operations                                                         |  |                             | 0       |   |                           |   | 0          |      |  |   | 0       |   |  |   | 0          |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|Net loss per share                                                              |  | $                           | (383.65 | ) |                           | $ | (0.79      | )    |  | $ | (790.19 | ) |  | $ | (1.57      | )
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING                                   |  |                             | 50,697  |   |                           |   | 23,685,080 |      |  |   | 50,518  |   |  |   | 23,618,645 |  
|                                                                                |  |                             |         |   |                           |   |            |      |  |   |         |   |  |   |            |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



(DOLLARS IN THOUSANDS)



|                                                                                |  |                           |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                |  | Six Months Ended June 30, |        
|                                                                                |  | 2003                      |         |   | 2004 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                           |         |   |      |   |         |  
|Net loss                                                                        |  | $                         | (39,919 | ) |      | $ | (37,030 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                                   |  |                           | 39,353  |   |      |   | 37,574  |  
|Non-cash stock option compensation                                              |  |                           | 905     |   |      |   | 2,282   |  
|Gain on adjustment of warrants to fair market value                             |  |                           |         |   |      |   | (419    | )
|Non-cash bond interest expense                                                  |  |                           | 12,995  |   |      |   | 12,059  |  
|Provision for bad debt                                                          |  |                           | 2,270   |   |      |   | 2,336   |  
|Loss (gain) on disposition of assets                                            |  |                           | 4       |   |      |   | (21     | )
|Changes in operating assets and liabilities:                                    |  |                           |         |   |      |   |         |  
|Accounts receivable                                                             |  |                           | (2,345  | ) |      |   | (612    | )
|Prepaid expenses and other                                                      |  |                           | (363    | ) |      |   | 392     |  
|Accounts payable                                                                |  |                           | (3,531  | ) |      |   | 1,732   |  
|Accrued liabilities                                                             |  |                           | (407    | ) |      |   | 4,557   |  
|Unearned revenue                                                                |  |                           | 1,359   |   |      |   | (333    | )
|Assets and liabilities of business held for sale                                |  |                           | 0       |   |      |   | (44     | )
|                                                                                |  |                           |         |   |      |   |         |  
|Total adjustments                                                               |  |                           | 50,240  |   |      |   | 59,503  |  
|                                                                                |  |                           |         |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                           | 10,321  |   |      |   | 22,473  |  
|                                                                                |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                           |         |   |      |   |         |  
|Capital expenditures                                                            |  |                           | (18,605 | ) |      |   | (26,793 | )
|Expenditures for intangible assets                                              |  |                           | (76     | ) |      |   | (253    | )
|Proceeds from sale of assets                                                    |  |                           | 60      |   |      |   | 152     |  
|                                                                                |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                           |  |                           | (18,621 | ) |      |   | (26,894 | )
|                                                                                |  |                           |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                           |         |   |      |   |         |  
|Principal payments on debt                                                      |  |                           | (1,654  | ) |      |   | (1,783  | )
|Proceeds from issuance of common stock, net of $827 offering costs              |  |                           | 0       |   |      |   | 7,273   |  
|Expenditures related to reorganization                                          |  |                           | (34     | ) |      |   | 0       |  
|Proceeds from exercised stock options                                           |  |                           | 9       |   |      |   | 0       |  
|                                                                                |  |                           |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                             |  |                           | (1,679  | ) |      |   | 5,490   |  
|                                                                                |  |                           |         |   |      |   |         |  
|NET (DECREASE) INCREASE IN CASH                                                 |  |                           | (9,979  | ) |      |   | 1,069   |  
|CASH AT BEGINNING OF PERIOD                                                     |  |                           | 43,913  |   |      |   | 63,335  |  
|                                                                                |  |                           |         |   |      |   |         |  
|CASH AT END OF PERIOD                                                           |  | $                         | 33,934  |   |      | $ | 64,404  |  
|                                                                                |  |                           |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:                               |  |                           |         |   |      |   |         |  
|Cash paid during the period for interest                                        |  | $                         | 1,272   |   |      | $ | 1,195   |  
|                                                                                |  |                           |         |   |      |   |         |  
|Cash received during the period for income taxes                                |  | $                         |        |   |      | $ | 24      |  
|                                                                                |  |                           |         |   |      |   |         |  



See notes to condensed
consolidated financial statements.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



JUNE 30, 2004

(UNAUDITED)



(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)



1. ORGANIZATION AND NATURE OF BUSINESS



Knology, Inc. (including its predecessors, Knology or the Company) is a publicly traded company incorporated under the laws of the
State of Delaware in September 1998.



Knology and its
subsidiaries own and operate an advanced interactive broadband network and provide residential and business customers broadband communications services, including analog and digital cable television, local and long-distance telephone, high-speed
Internet access, and broadband carrier services to various markets in the southeastern United States.



Our telephone operations group, consisting of Interstate Telephone Company, Globe Telecommunications, Inc., ITC Globe, Inc., and Valley Telephone Co., LLC
(our Telephone Operations Group) is wholly owned and provides a full line of local telephone and related services and broadband services. Certain of the Telephone Operations Group subsidiaries are subject to regulation by state public
service commissions of applicable states for intrastate telecommunications services. For applicable interstate matters related to telephone service, certain Telephone Operations Group subsidiaries are subject to regulation by the Federal
Communications Commission.



2. BASIS OF PRESENTATION



The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not
include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the financial
statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. These financial statements should be read in conjunction with the consolidated financial
statements and notes thereto, together with managements discussion and analysis of financial condition and results of operations contained in the Companys Annual Report on Form 10-K for the year ended December 31, 2003.



The preparation of financial statements in conformity with GAAP 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. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2004, or any
other interim period.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



RECENT ACCOUNTING PRONOUNCEMENTS



In December 2003, the FASB issued a revision to FASB Interpretation No. 46
(FIN 46-R), Consolidation of Variable Interest Entities. FIN 46 is an Interpretation of Accounting Research Bulletin 51, Consolidated Financial Statements and addresses consolidation by business enterprises of
variable interest entities (VIEs) that possess certain characteristics. The revision clarifies the definition in the original release that potentially could have classified any business as a VIE. The revision also delays the effective
date of the Interpretation from the first reporting period following December 15, 2003 to the first reporting period ending after March 15, 2004. The revision was effective for the Company in the first quarter of fiscal 2004. The Company has not
identified any VIEs and, accordingly, the application of this Interpretation did not have an effect on the Companys results of operations or financial position.



At the March 2004 Emerging Issues Task Force (EITF) meeting, the Task Force reached a consensus on the Issue No.
03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. Issue 03-1 defines the terms otherthan-temporary and other-than-temporary impairment and establishes a three-step impairment model applicable to
debt and equity securities that are within the scope of SFAS 115. At the November 2003 EITF meeting, the Task Force reached a consensus effective for fiscal years ending after December 15, 2003 on quantitative disclosures. Except for disclosure
requirements already in place, the Issue 03-1 consensus will be effective prospectively for all relevant current and future investments in reporting periods beginning after June 15, 2004. The Company adopted EITF Issue No. 03-1 disclosure
requirements for the fiscal year ended December 31, 2003 and does not expect the adoption of future requirements of EITF Issue No. 03-1 to have material impact on the Companys results of operations or financial position.



6



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4. CASH



As of June 30, 2004, the Company had $12,987 of cash that was restricted in use. Of this amount, $9,715 was held at the Telephone Operations Group and
restricted for use by these entities. Also, the Company has pledged $3,272 of cash as collateral for amounts potentially payable under certain franchise, insurance, lease agreements and surety bond agreements.



5. GOODWILL AND INTANGIBLE ASSETS



The Company performs a goodwill impairment test in accordance with SFAS No.
142, Goodwill and Other Intangible Assets, annually on January 1. There was no impairment identified as a result of the January 1, 2004 impairment test.



Intangible assets as of December 31, 2003 and June 30, 2004, respectively, were as follows:



|                                                                  |  |                   |        |              |   |                            |  |     
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ | - | -------------------------- |  | ----
|                                                                  |  | December 31, 2003 |        | June 30,2004 |   | AmortizationPeriod (Years)
|Customer base                                                     |  | $                 | 326    |              | $ | 410                        |  | 3   
|Other                                                             |  |                   | 225    |              |   | 352                        |  | 1-15
|                                                                  |  |                   |        |              |   |                            |  |     
|Gross carrying value of intangible assets subject to amortization |  |                   | 551    |              |   | 762                        |  |     
|Less accumulated amortization                                     |  |                   | 235    |              |   | 366                        |  |     
|                                                                  |  |                   |        |              |   |                            |  |     
|Net carrying value of intangible assets subject to amortization   |  |                   | 316    |              |   | 396                        |  |     
|Goodwill                                                          |  |                   | 40,834 |              |   | 40,834                     |  |     
|                                                                  |  |                   |        |              |   |                            |  |     
|Total intangibles, net                                            |  | $                 | 41,150 |              | $ | 41,230                     |  |     
|                                                                  |  |                   |        |              |   |                            |  |     



Amortization expense
related to intangible assets was $213 and $155 for the six months ended June 30, 2003 and 2004, respectively.



6. LONG-TERM DEBT



Long-term debt at
December 31, 2003 and June 30, 2004 consists of the following:



|                                                                                                                                                                                                                                                                        |  |                  |         |               |   |        
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------- | - | -------
|                                                                                                                                                                                                                                                                        |  | December 31,2003 |         | June 30, 2004
|Senior unsecured notes including accrued interest, with a face value of $194,659 bearing interest in-kind at 13% beginning November 6, 2002,
interest payable semiannually at 12% beginning November 30, 2004, with principal and unpaid interest due November 30, 2009 |  | $                | 225,037 |               | $ | 237,096
|Senior secured Wachovia credit facility, at a rate of LIBOR plus 4%, interest payable quarterly, principal payments due quarterly beginning
September 2004 with remaining principal and any unpaid interest due June 15, 2006                                           |  |                  | 15,465  |               |   | 15,465 
|Senior secured CoBank term credit facility, at a rate of LIBOR plus 2.5%, interest payable quarterly, principal payments due quarterly
beginning July 2002 with final principal and any unpaid interest due April 20, 2011                                              |  |                  | 34,588  |               |   | 32,809 
|Capitalized lease obligation, at a rate of 7%, with monthly principal and interest payments through October 2011                                                                                                                                                        |  |                  | 470     |               |   | 465    
|                                                                                                                                                                                                                                                                        |  |                  |         |               |   |        
|                                                                                                                                                                                                                                                                        |  |                  | 275,560 |               |   | 285,835
|Less current maturities                                                                                                                                                                                                                                                 |  |                  | 5,213   |               |   | 8,830  
|                                                                                                                                                                                                                                                                        |  |                  |         |               |   |        
|                                                                                                                                                                                                                                                                        |  | $                | 270,347 |               | $ | 277,005
|                                                                                                                                                                                                                                                                        |  |                  |         |               |   |        



As of June 30, 2004,
the Company was in compliance with all of its debt covenants.



7. EQUITY
INTERESTS



On January 13, 2004, pursuant to the exercise
of the underwriters over-allotment option, the Company issued approximately 900,000 shares at a per share price to the public of $9.00, with net proceeds of approximately $7,300.



These consolidated financial statements have been revised to give effect to the reverse stock split on November 28, 2003,
which was a one-for-ten stock split of our common and non-voting common stock. As a result of the stock split, each of the outstanding shares of common stock was reclassified as one-tenth (1/10) of a share of common stock and each of the outstanding
shares of non-voting common stock was reclassified as one-tenth (1/10) of a share of non-voting common stock.



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On May 7, 2004, pursuant to a proposal ratified by a shareholder vote, all outstanding options to
purchase common stock granted prior to December 18, 2003 under the 2002 Long-Term Incentive Plan with an exercise price of $18.70 per share were cancelled and replaced with new options with an exercise price of $6.87 per share.



8. LOSS PER SHARE



The Company computes loss per share in accordance with SFAS No. 128, Earnings per Share. Basic loss per share is
computed by dividing income from continuing operations by the weighed-average number of common shares outstanding for the period. Diluted loss per share is computed in the same manner, but also includes the dilutive effect of common stock
equivalents and other financial instruments that are convertible or exercisable for the Companys common stock. For the three months ended June 30, 2003 and 2004, the Company had 18,004,242 and 3,200,023 shares related to preferred stock, stock
options and warrants outstanding that were not included in the computation of diluted loss per share because such effects would have been antidilutive for the respective periods.



9. COMMITMENTS AND CONTINGENCIES



LEGAL PROCEEDINGS



In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., a subsidiary of Knology, Inc., a cable television franchise. On
November 2, 2000, Insight filed a complaint against the City of Louisville in Kentucky Circuit Court in Jefferson County, Kentucky claiming that the Companys franchise was more favorable than Insights franchise. Insights complaint
suspended the Companys franchise until there is a final, nonappealable order in Insights Kentucky Circuit Court case. In April 2001 the City of Louisville moved for summary judgment in Kentucky Circuit Court against Insight. In March
2002, the Kentucky Circuit Court ruled that Insights complaint had no merit and the Kentucky Circuit Court granted the City of Louisvilles motion to dismiss Insights complaint. Insight appealed the Kentucky Circuit Court order
dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky Circuit Court ruling. Insight sought discretionary review of the Kentucky Court of Appeals ruling from the Kentucky Supreme Court which request was denied



On November 8, 2000, the Company filed an action in the U.S.
District Court for the Western District of Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from Insight and the City arising out of Insights complaint and the suspension of the Companys franchise. In
March 2001, the U.S. District Court issued an order granting the Companys motion for preliminary injunctive relief and denying Insights motion to dismiss. In June 2003, the U.S. District Court ruled on the parties cross motions for
summary judgment, resolving certain claims and setting others down for trial. The U.S. District Court granted the Companys motion for summary judgment based on causation on certain claims. In August 2003, the U.S. District Court granted
Insights motion for an immediate interlocutory appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for the Sixth Circuit. The matter has been fully briefed and it is anticipated that oral argument will be
held although it has yet to be scheduled. At this time it is impossible to determine with certainty the ultimate outcome of the litigation.



On November 21, 2001, the Company filed a complaint against Georgia Power Company requesting FCC adjudication of a dispute regarding amounts Georgia Power
charged the Company in connection with the construction of its network in Augusta, Georgia. The Company requested the FCC to review these charges to determine whether they were reasonable in accordance with FCC pole attachment
regulations. The company requested reimbursement from Georgia Power of approximately $2,500. Georgia Power responded to the FCC complaint by asserting the Company owed Georgia Power approximately $900 for additional construction-related charges. In
May 2003, Georgia Power filed a complaint against Knology Broadband, the Companys subsidiary, in the Superior Court of Troup County, State of Georgia, re-asserting claims for construction related charges. Georgia Powers claim duplicates
its claim pending before the FCC. The Company responded to Georgia Powers complaint in state court by re-asserting its claims that are currently pending before the FCC. The Company also sought to remove the state court action to federal court
and moved to dismiss the lawsuit or to stay the action to allow the FCC time to issue its decision. Georgia Power has moved to remand the case to state court. On November 20, 2003, the FCC issued an order determining that certain pole attachment
fees charged by Georgia Power were improper. The Commission ordered Georgia Power to refund $52 and to recalculate certain charges that it had billed the Company. Georgia Power refunded the $52. On August 11, 2004 the Company filed a motion seeking
enforcement of the other provisions of the Commissions Order. At this time, it is impossible to determine with certainty the ultimate outcome of the motion or the litigation.



The Company is subject to other litigation in the normal course of its business. However, in the Companys opinion,
there is no legal proceeding pending against it which would have a material adverse effect on its financial position, results of operations or liquidity. The Company is also a party to regulatory proceedings affecting the segments of the
communications industry generally in which it engages in business.



10.
BUSINESS HELD FOR SALE



On May 24, 2004 the Company
announced that it had entered into a definitive asset purchase agreement to sell its cable system located in Cerritos, California for $14,800 in cash, subject to customary closing adjustments. The Company acquired the Cerritos



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##### Table of Contents

cable system in December 2003 from Verizon Media Ventures Inc. in conjunction with its acquisition of Verizon
Medias Pinellas County, Florida operations. The sale of the Cerritos system is expected to close during the fourth quarter of 2004, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to
the municipal franchise in Cerritos, California.



Following the
guidance of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, effective April 30, 2004, the Cerritos cable system was deemed to be a long-lived asset to be disposed of based on managements commitment,
plan, and actions taken to sell the property. Therefore, no depreciation expense related to the Cerritos assets will be recorded subsequent to April 30, 2004. The assets and liabilities related to the Cerritos system are separately stated on the
Companys balance sheet. The table below summarizes the major classes of assets and liabilities classified as held for sale.



|                                   |  |               |    
|---------------------------------- |  | ------------- | ---
|                                   |  | June 30, 2004
|Assets:                            |  |               |    
|Cash                               |  | $             | 50 
|Accounts Receivable                |  |               | 213
|Net Property, Plant, and Equipment |  |               | 575
|Prepayments and Other              |  |               | 8  
|                                   |  |               |    
|Total Assets                       |  | $             | 846
|                                   |  |               |    
|Liabilities:                       |  |               |    
|Accounts Payable                   |  | $             | 236
|Accrued Liabilities                |  |               | 90 
|Unearned Revenue                   |  |               | 197
|Advance from Affiliate             |  |               | 302
|                                   |  |               |    
|Total Liabilities                  |  | $             | 825
|                                   |  |               |    



The net income
associated with the Cerritos cable system since April 30, 2004 is presented separately in the statement of operations as income from discontinued operations. The Cerritos cable system generated approximately $583 of revenue for the period that the
assets have been classified as held for sale.



11. SEGMENT INFORMATION



The Company follows SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information, which established revised standards for the reporting of financial and descriptive information about operating segments in financial statements.



The Company owns and operates advanced interactive broadband networks and
provides residential and business customers broadband communications services, including analog and digital cable television, local and long distance telephone, and high-speed Internet access, which the Company refers to as video, voice, and data
services. We also provide other services including broadband carrier services, which includes local transport services such as local Internet transport, special access, local private line, and local loop services.



While management of the Company monitors the revenue generated from each of
the various broadband services, operations are managed and financial performance is evaluated based upon the delivery of multiple services to customers over a single network. As a result of multiple services being provided over a single network,
many expenses and assets are shared related to providing the various broadband services to customers. Management believes that any allocation of the shared expenses or assets to the broadband services would be subjective and impractical.



Revenues by broadband communications service are as follows:



|                      |  |                            |        |                          |   |        |  |      |        |  |   |        
|--------------------- |  | -------------------------- | ------ | ------------------------ | - | ------ |  | ---- | ------ |  | - | -------
|                      |  | THREE MONTHS ENDEDJUNE 30, |        | SIX MONTHS ENDEDJUNE 30,
|                      |  | 2003                       |        | 2004                     |   | 2003   |  | 2004
|Video                 |  | $                          | 17,987 |                          | $ | 24,304 |  |      | 35,164 |  | $ | 49,719 
|Voice                 |  |                            | 17,330 |                          |   | 18,368 |  |      | 33,895 |  |   | 36,416 
|Data and other        |  |                            | 7,552  |                          |   | 10,063 |  |      | 14,497 |  |   | 20,394 
|                      |  |                            |        |                          |   |        |  |      |        |  |   |        
|Consolidated revenues |  | $                          | 42,869 |                          | $ | 52,735 |  | $    | 83,556 |  | $ | 106,529
|                      |  |                            |        |                          |   |        |  |      |        |  |   |        



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



THE MANAGEMENTS DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS QUARTERLY REPORT INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL
SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS THAT
EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT OUR SUPPLIERS AND CUSTOMERS MAY REFUSE TO
CONTINUE DOING BUSINESS WITH US, (3) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (4) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS IMPACTING OUR INDUSTRY AND MARKETS, (5) THAT NEEDED FINANCING WILL NOT
BE AVAILABLE, (6) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT CONSUMER AND CORPORATE SPENDING ARE MATERIALLY IMPACTED, (7) THAT WE WILL NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS, THAT WE MAY HAVE
DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES, OR THAT THE COST OF SUCH INTEGRATION WILL BE GREATER THAN WE EXPECT, (8) THAT WE MAY NOT COMPLETE THE SALE OF THE CERRITOS CABLE SYSTEM OR WE MAY NOT COMPLETE THE SALE IN A TIMELY MANNER, OR IN THE EVENT
WE DO NOT RECEIVE NECESSARY REGULATORY OR OTHER APPROVALS OR FAIL TO SATISFY THE CONDITIONS TO CLOSING, THE TRANSACTION WILL TERMINATE, AND (9) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR, AS WELL AS THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ON
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2003, WHICH ARE INCORPORATED HEREIN BY REFERENCE. THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE
FORWARD-LOOKING STATEMENTS INCLUDED HEREIN.



The following is a
discussion of our consolidated financial condition and results of operations for the three and six months ended June 30, 2004, and certain factors that are expected to affect our prospective financial condition. The following discussion and analysis
should be read in conjunction with the financial statements and related notes included elsewhere in this Form 10-Q.



Introduction



We are a fully integrated provider of video, voice, data and advanced communications services to residential and business customers in nine markets in the
southeastern United States. We provide a full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama City, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. We
provide video and data services in Pinellas County, Florida and have begun to enhance our network assets in that market to provide voice services beginning in the third quarter of 2004. We also provide video services in Cerritos, California, but, as
discussed below, we have entered into an agreement to sell those assets to Orange Broadband, Inc. Our primary business is the delivery of bundled communication services over our own network. In addition to our bundled package offerings, we sell
these services on an unbundled basis.



We have built our
business through:



| |  | acquisitions of other cable companies, networks and franchises;
| | - | ---------------------------------------------------------------



| |  | upgrades of acquired networks to introduce expanded broadband services including bundled video, voice and data services;
| | - | ------------------------------------------------------------------------------------------------------------------------



| |  | construction and expansion of our broadband network to offer integrated video, voice and data services; and
| | - | -----------------------------------------------------------------------------------------------------------



| |  | organic growth of connections through increased penetration of services to new marketable homes and our existing customer base.
| | - | -------------------------------------------------------------------------------------------------------------------------------



To date, we have experienced operating losses as a result of the expansion of
our service territories and the construction of our network. We expect to continue to focus on increasing our customer base and expanding our broadband operations. Our ability to generate profits and positive cash flow from operations will depend in
large part on our ability to increase revenues to offset the costs of construction, expansion and operation of our network.



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Recent Transactions



On December 23, 2003, we completed a public offering of our common stock. Including the shares issued on January 13, 2004, pursuant to the exercise of the
underwriters over-allotment option, we issued 6.9 million shares at a per share price to the public of $9.00, and our net proceeds were approximately $56.3 million.



In December 2003, we also completed the acquisition of certain assets from Verizon Media, including the cable television
systems and franchise rights in Pinellas County, Florida and Cerritos, California. We paid Verizon Media an aggregate of approximately $17.0 million in cash, which was funded with the net proceeds of our common stock offering. In connection with the
completion of the Verizon Media acquisition, we also issued to a prior prospective purchaser and certain of its employees warrants to purchase one million shares of our common stock with an exercise price of $9.00 per share in exchange for the
release of the prospective purchasers exclusivity rights with Verizon Media.



On May 24, 2004, we announced that we entered into a definitive asset purchase agreement to sell our cable system located in Cerritos, California to Orange Broadband, Inc. for $14.8 million in cash, subject to
customary closing adjustments. We expect the sale of the Cerritos system to close during the fourth quarter of 2004, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise
in Cerritos, California.



Homes Passed and Connections



We report homes passed as the number of residential and business units, such
as single residence homes, apartments and condominium units, passed by our broadband network and listed in our database. Marketable homes passed are homes passed other than those we believe are covered by exclusive arrangements with other providers
of competing services. Because we deliver multiple services to our customers, we report the total number of connections for video, voice and data rather than the total number of customers. We count each video, voice or data service as a separate
connection. For example, a single customer who purchases cable television, local telephone and Internet access services would count as three connections. We do not record the purchase of digital video services by an analog video customer as an
additional connection. As we continue to sell bundled services, we expect more of our video customers to purchase voice, data and other enhanced services in addition to video services. Accordingly, we expect that our number of voice and data
connections will grow faster than our video connections and will represent a higher percentage of our total connections in the future.



As of June 30, 2004, 100% of our video and data connections and over 95% of our voice connections were provided over our own network. The following table
sets forth the number of marketable homes passed and connections as of June 30, 2003 and 2004.



|                           |  |                |  |        
|-------------------------- |  | -------------- |  | -------
|                           |  | AS OF JUNE 30,
|                           |  | 2003           |  | 2004   
|Connections:(1)            |  |                |  |        
|Video(2)                   |  | 132,163        |  | 174,957
|Voice:                     |  |                |  |        
|On-net                     |  | 115,268        |  | 121,819
|Off-net                    |  | 5,332          |  | 6,040  
|Data                       |  | 58,031         |  | 77,174 
|                           |  |                |  |        
|Total connections          |  | 310,794        |  | 379,990
|                           |  |                |  |        
|Residential connections    |  | 279,323        |  | 343,626
|Business connections       |  | 31,471         |  | 36,364 
|                           |  |               
|Homes passed(2)            |  | 534,084        |  | 950,337
|Marketable homes passed(2) |  | 443,159        |  | 746,782

---

|(1) | All of our video and data connections are provided over our networks. Our voice connections consist of both On-net and Off-net connections.
On-net refers to lines provided over our networks. It includes 25,557 and 23,894 lines as of June 30, 2003 and 2004, respectively, using traditional copper telephone lines. Off-net refers to telephone connections provided over telephone lines leased
from third parties.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The total number of video connections, homes passed and marketable homes passed as of June
30, 2004 include 6,926 video connections, 15,900 homes passed and 15,595 marketable homes passed by our network in Cerritos, California which we plan to sell during the fourth quarter of 2004.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

Revenues



We group our revenues into the following categories:



| | Video revenues. Our video revenues consist of fixed monthly fees for expanded basic, premium and digital cable television services, as well as fees from pay-per-view movies,
fees for video on demand and events such as boxing matches and concerts that involve a charge for each viewing. Video revenues accounted for approximately 46.1% and 46.7% of our consolidated revenues for the three and six months ended June 30, 2004
compared to 42.0% and 42.1% for the three and six months ended June 30, 2003. In providing video services we currently compete with Comcast Corporation, Time Warner Cable, Inc., Mediacom Communications Corporation, Charter Communications, Inc. and
Bright House Networks. We also compete with satellite television providers Echostar Communications Corporation and DirecTV and the strategic marketing alliance of BellSouth and DirecTV, Inc. to provide video and voice services in our markets. Other
competitors include broadcast television stations and other satellite television companies.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local service and enhanced services, such as call waiting and voice mail, and usage fees for
long-distance service. Voice revenues accounted for approximately 34.8% and 34.2% of our consolidated revenues for the three and six months ended June 30, 2004 compared to 40.4% and 40.6% for the three and six months ended June 30, 2003. In
providing local and long-distance telephone services, we compete with the incumbent local phone company, competitive local phone companies, various long distance providers and voice over Internet Protocol providers in each of our markets. BellSouth
Corporation is the incumbent local and long distance phone company except for Pinellas County, Florida, where Verizon Communications, Inc. is our competitor, and both are particularly strong competitors in our current markets and throughout the
southeastern United States. We also compete with long-distance phone companies such as AT&T Corporation, MCI, Inc., BellSouth and Sprint Corporation.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Data revenues and other revenues.Our data revenues consist primarily of fixed monthly fees for data service and rental of cable modems. Other revenues result principally
from broadband carrier services and video production services. These combined revenues accounted for approximately 19.1% and 19.1% of our consolidated revenues for the three and six months ended June 30, 2004 compared to 17.6% and 17.3% for the
three and six months ended June 30, 2003. Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors have competitive advantages such as greater experience, resources,
marketing capabilities and stronger name recognition. In providing data services, we compete with traditional dial-up Internet service providers; incumbent local exchange providers that provide dial-up and DSL services subscriber lines; providers of
satellite-based Internet access services; long-distance telephone companies; and cable television companies. We also compete with providers of wireless high-speed data services.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We experienced a net loss of connections during the first and second quarters
of 2004. The lost connections is primarily a result of clean-up activities in the newly acquired Pinellas County market, including the elimination of non-paying customers from prior periods, customer database reconciliations and customers with
expired promotions. We will add voice services to our current video and data offerings in the Pinellas County market during the third quarter of 2004, and we expect to achieve net connection additions, on a consolidated basis, during the third and
fourth quarters of 2004.



We expect the growth of new video
connections to decrease as the video segment matures in our current markets. While the number of new video connections may decrease, management feels that opportunity to increase revenue and margins is available with the introduction of new products
and new technology. New voice and data connections are expected to increase with sales and marketing efforts directed at selling new customers a bundle of services, penetrating untapped market segments and offering new services to existing and new
customers.



Our operating expenses include cost of services,
selling, operations and administrative expenses and depreciation and amortization.



Cost of services include:



| | Video cost of services.Video cost of services consists primarily of monthly fees to the National Cable Television Cooperative and other programming providers and are
generally based on the average number of subscribers to each program. Programming costs are one of our largest costs and we expect this trend to continue. Programming costs as a percentage of video revenue were approximately 49.7% and 49.2% for the
three and six months ended June 30, 2004 compared to the 44.5% and 46.2% for the three and six months ended June 30, 2003. We have entered into contracts with various entities to provide programming to be aired on our network. We pay a monthly fee
for these programming services, generally based on the average number of subscribers to the program, although some fees are adjusted based on the total number of subscribers to the system and/or the system penetration percentage. Since programming
cost is partially based on numbers of subscribers, it will increase as we add more subscribers. It will also increase as costs per channel increase over time and as programmers increase their rates.
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Voice cost of services.Voice cost of services consists primarily of transport cost and network access fees. The voice cost of services as a percentage of voice revenues were
approximately 14.3% and 15.1% for the three and six moths ended June 30, 2004 compared to 16.3% and 17.0 for the three and six months ended June 30, 2003.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Data and other cost of services.Data and other cost of services consist primarily of transport cost and network access fees. The data and other cost of services as a
percentage of data and other revenue were approximately 4.1% and 4.4% for the three and six
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

months ended June 30, 2004 compared to the 5.8% and 5.8% for the three and six months ended June 30, 2003. The decrease
in data cost of services as a percentage of revenue for the three and six months ended June 30, 2004 resulted from price increases for our data products in 2004 and the grooming of our network for increased capacity at reduced costs.



Relative to our current product mix, we expect voice and data revenue will
become larger percentages of our overall revenue, and potentially will provide higher margins. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of service as a percentage of our consolidated revenue will
decrease.



Selling, operations and administrative expenses
include:



| | Sales and marketing expenses. Sales and marketing expenses include the cost of sales and marketing personnel and advertising and promotional expenses.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | Network operations and maintenance expenses. Network operations and maintenance expenses include payroll and departmental costs incurred for network monitoring and
maintenance.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Service and installation expenses. Service and installation expenses include payroll and departmental cost incurred for customer installation and service personnel.
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | Customer service expenses. Customer service expenses include payroll and departmental costs incurred for customer service representatives and management.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



| | General and administrative expenses. General and administrative expenses consist of corporate and subsidiary management and administrative costs.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------



Depreciation and amortization expenses include depreciation of our
interactive broadband networks and equipment and amortization of intangible assets related to customer acquisitions.



As our sales and marketing efforts continue and our networks expand, we expect to add customer connections resulting in increased revenue. We also expect
our operating expenses, including depreciation and amortization, to increase as we expand our networks and business.



We have experienced operating losses as a result of the expansion of our advanced broadband communications networks and services into new and existing
markets. We expect to continue to focus on increasing our customer base and expanding our broadband operations. Accordingly, we expect that our operating expenses and capital expenditures will continue to increase as we extend our interactive
broadband networks in existing and new markets in accordance with our business plan.



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RESULTS OF OPERATIONS



THREE MONTHS ENDED JUNE 30, 2003 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004



The following table sets forth financial data as a percentage of operating revenues for the three months ended June 30, 2003
and 2004.



|                                                     |  |                            |    |  |      |   
|---------------------------------------------------- |  | -------------------------- | -- |  | ---- | --
|                                                     |  | THREE MONTHSENDED JUNE 30, |   
|                                                     |  | 2003                       |    |  | 2004 |   
|Operating revenues:                                  |  |                            |    |  |      |   
|Video                                                |  | 42                         | %  |  | 46   | % 
|Voice                                                |  | 40                         |    |  | 35   |   
|Data                                                 |  | 18                         |    |  | 19   |   
|                                                     |  |                            |    |  |      |   
|Total                                                |  | 100                        |    |  | 100  |   
|Cost of services:                                    |  |                            |    |  |      |   
|Video                                                |  | 19                         |    |  | 23   |   
|Voice                                                |  | 6                          |    |  | 5    |   
|Data                                                 |  | 1                          |    |  | 1    |   
|                                                     |  |                            |    |  |      |   
|Total                                                |  | 26                         |    |  | 29   |   
|Gross profit                                         |  |                            |    |  |      |   
|Video                                                |  | 23                         |    |  | 23   |   
|Voice                                                |  | 34                         |    |  | 30   |   
|Data                                                 |  | 17                         |    |  | 18   |   
|                                                     |  |                            |    |  |      |   
|Total                                                |  | 74                         |    |  | 71   |   
|Operating expenses:                                  |  |                            |    |  |      |   
|Selling, operating and administrative                |  | 53                         |    |  | 54   |   
|Depreciation and amortization                        |  | 47                         |    |  | 35   |   
|Expenses associated with capital market activities   |  | 0                          |    |  | 0    |   
|Non-cash stock option compensation                   |  | 1                          |    |  | 3    |   
|Litigation fees                                      |  | 1                          |    |  | 0    |   
|                                                     |  |                            |    |  |      |   
|Total                                                |  | 102                        |    |  | 92   |   
|                                                     |  |                            |    |  |      |   
|Operating loss                                       |  | (28                        | )  |  | (21  | ) 
|Other income and (expense)                           |  | (17                        | )  |  | (14  | ) 
|                                                     |  |                            |    |  |      |   
|Loss before income taxes and discontinued operations |  | (45                        | )  |  | (35  | ) 
|Income tax benefit (provision)                       |  | 0                          |    |  | 0    |   
|Income from discontinued operations                  |  | 0                          |    |  | 0    |   
|                                                     |  |                            |    |  |      |   
|Net loss                                             |  | (45                        | )% |  | (35  | )%
|                                                     |  |                            |    |  |      |   



Revenues.
Operating revenues increased 23.0% from $42.9 million for the three months ended June 30, 2003, to $52.7 million for the three months ended June 30, 2004. Operating revenues from video services increased 35.1% from $18.0 million for the three months
ended June 30, 2003, to $24.3 million for the same period in 2004. Operating revenues from voice services increased 6.0% from $17.3 million for the three months ended June 30, 2003, to $18.4 million for the same period in 2004. Operating revenues
from data and other services increased 33.3% from $7.6 million for the three months ended June 30, 2003, to $10.1 million for the same period in 2004.



The increased revenues from video, voice and data and other services are due primarily to an increase in the number of connections, from 310,794 as of
June 30, 2003, to 379,990 as of June 30, 2004. Rate increases accounted for approximately 8% of the increased revenues for the three months ended June 30, 2004, and the increase in the number of connections accounted for approximately 92% of the
increased revenue for the same period. The additional connections resulted primarily from:



| | The December 31, 2003 acquisition of certain cable system assets in Pinellas County, Florida from Verizon Media which at June 30, 2004 had provided an additional 44,922 connections.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | New service offerings specifically marketed to increase sales and penetration.
|- | ------------------------------------------------------------------------------



| | The continued construction of the broadband network in the Knoxville market.
|- | ----------------------------------------------------------------------------



14



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##### Table of Contents

Cost of services. Cost of services increased 34.2% from $11.2 million for the three months ended
June 30, 2003, to $15.1 million for the three months ended June 30, 2004. Cost of services for video services increased 50.7% from $8.0 million for the three months ended June 30, 2003, to $12.1 million for the same period in 2004. Cost of services
for voice services decreased 6.8% from $2.8 million for the three months ended June 30, 2003, to $2.6 million for the same period in 2004. Cost of services for data and other services decreased 5.3% from $436,000 for the three months ended June 30,
2003, to $412,000 for the same period in 2004. We expect our cost of services to continue to increase as we add more connections. Programming costs, which are one of our largest single expense items, have been increasing over the last several years
on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. We expect this trend to continue. We may not be able to pass these higher costs on to customers because of
competitive forces, which would adversely affect our cash flow and gross profit.



Gross profit. Gross profit increased 19.0% from $31.6 million for the three months ended June 30, 2003, to $37.6 million for the three months ended June 30, 2004. Gross profit for video services increased 22.6%
from $10.0 million for the three months ended June 30, 2003, to $12.2 million for the same period in 2004. Gross profit for voice services increased 8.5% from $14.5 million for the three months ended June 30, 2003, to $15.7 million for the same
period in 2004. Gross profit for data and other services increased 35.6% from $7.1 million for the three months ended June 30, 2003, to $9.7 million for the same period in 2004. The increase in gross profit is primarily a result of the fluctuations
as described above in revenues and cost of services.



Operating expenses. Our operating expenses, excluding depreciation and amortization, increased 27.6% from 34.2 million for the three months ended June 30, 2003, to $43.7 for the three months ended June 30, 2004. The increase in our
operating expenses is consistent with the growth in revenues and is a result of the expansion of our operations and an increase in the number of employees associated with such expansion and growth in our markets. Selling, operations and
administrative expenses will continue to increase as we expand into new markets and our existing markets mature.



Our depreciation and amortization decreased from $19.9 million for the three months ended June 30, 2003, to $18.3 million for the three months ended June
30, 2004. The decrease in depreciation and amortization resulted from a combination of lower spending for additions in property, plant, equipment and intangible assets in 2004 and a portion of our long-lived assets becoming fully depreciated. We
expect depreciation and amortization expense to increase as we make capital expenditures to extend our existing networks and build additional networks.



We have adopted SFAS No. 123 and SFAS No. 148 and recorded a non-cash stock option compensation expense of $478,000 for the three months ended June 30,
2003 and $1.8 million for the three months ended June 30, 2004. The increase in the non-cash stock option compensation expense was due to a re-pricing of certain stock options during the second quarter of 2004.



Other income and expense, including interest income and interest
expense. Our total other expenses increased from $7.2 million for the three months ended June 30, 2003, to $7.4 million for the three months ended June 30, 2004. Interest income was $96,000 for the three months ended June 30, 2003, compared to
$180,000 for the same period in 2004. The increase in interest income primarily reflects a higher average cash balance for the three months ended June 30, 2004. Interest expense increased from $7.3 million for the three months ended June 30, 2003,
to $7.7 million for the three months ended June 30, 2004. The interest expense represents the interest incurred on our 12% senior notes due 2009 and our two existing credit facilities.



In the second quarter of 2004, we adjusted the carrying value of the outstanding warrants to purchase our common stock to
market value based on the published market per share value of our common stock. The published market per share value of our common stock on June 30, 2004 was $4.97 resulting in a $198,000 gain on the adjustment of warrants to market value. Other
income, net increased to $12,000 for the three months ended June 30, 2004.



Income tax benefit. We recorded no income tax benefit or provision for the three months ended June 30, 2003 and 2004, respectively.



Net income from discontinued operations.Effective April 30, 2004, following the guidance of SFAS No. 144
Accounting for the Impairment or Disposal of Long-Lived Assets, we deemed the Cerritos cable system to be a long-lived asset to be disposed of based on our plan, and actions taken to sell the property.



Net loss. We incurred a net loss of $19.5 million and $18.7 million
for the three months ended June 30, 2003 and 2004, respectively. We expect net losses to continue as our business matures.



15



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##### Table of Contents

SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004



The following table sets forth financial data as a percentage of operating
revenues for the six months ended June 30, 2003 and 2004.



|                                                     |  |                          |    |  |      |   
|---------------------------------------------------- |  | ------------------------ | -- |  | ---- | --
|                                                     |  | SIX MONTHSENDED JUNE 30, |   
|                                                     |  | 2003                     |    |  | 2004 |   
|Operating revenues:                                  |  |                          |    |  |      |   
|Video                                                |  | 42                       | %  |  | 47   | % 
|Voice                                                |  | 41                       |    |  | 34   |   
|Data                                                 |  | 17                       |    |  | 19   |   
|                                                     |  |                          |    |  |      |   
|Total                                                |  | 100                      |    |  | 100  |   
|Cost of services:                                    |  |                          |    |  |      |   
|Video                                                |  | 19                       |    |  | 23   |   
|Voice                                                |  | 7                        |    |  | 5    |   
|Data                                                 |  | 1                        |    |  | 1    |   
|                                                     |  |                          |    |  |      |   
|Total                                                |  | 27                       |    |  | 29   |   
|Gross profit                                         |  |                          |    |  |      |   
|Video                                                |  | 23                       |    |  | 24   |   
|Voice                                                |  | 34                       |    |  | 29   |   
|Data                                                 |  | 16                       |    |  | 18   |   
|                                                     |  |                          |    |  |      |   
|Total                                                |  | 73                       |    |  | 71   |   
|Operating expenses:                                  |  |                          |    |  |      |   
|Selling, operating and administrative                |  | 55                       |    |  | 54   |   
|Depreciation and amortization                        |  | 47                       |    |  | 35   |   
|Expenses associated with capital market activities   |  | 0                        |    |  | 1    |   
|Non-cash stock option compensation                   |  | 1                        |    |  | 2    |   
|Litigation fees                                      |  | 1                        |    |  | 0    |   
|                                                     |  |                          |    |  |      |   
|Total                                                |  | 104                      |    |  | 92   |   
|                                                     |  |                          |    |  |      |   
|Operating loss                                       |  | (31                      | )  |  | (21  | ) 
|Other income and (expense)                           |  | (17                      | )  |  | (14  | ) 
|                                                     |  |                          |    |  |      |   
|Loss before income taxes and discontinued operations |  | (48                      | )  |  | (35  | ) 
|Income tax benefit (provision)                       |  | 0                        |    |  | 0    |   
|Income from discontinued operations                  |  | 0                        |    |  | 0    |   
|                                                     |  |                          |    |  |      |   
|Net loss                                             |  | (48                      | )% |  | (35  | )%
|                                                     |  |                          |    |  |      |   



Revenues.
Operating revenues increased 27.5% from $83.6 million for the six months ended June 30, 2003, to $106.5 million for the six months ended June 30, 2004. Operating revenues from video services increased 41.4% from $35.2 million for the six months
ended June 30, 2003, to $49.7 million for the same period in 2004. Operating revenues from voice services increased 7.4% from $33.9 million for the six months ended June 30, 2003, to $36.4 million for the same period in 2004. Operating revenues from
data and other services increased 40.7% from $14.5 million for the six months ended June 30, 2003, to $20.4 million for the same period in 2004.



Cost of services. Cost of services increased 35.3% from $22.8 million for the six months ended June 30, 2003, to $30.9 million for the six months
ended June 30, 2004. Cost of services for video services increased 50.8% from $16.2 million for the six months ended June 30, 2003, to $24.5 million for the same period in 2004. Cost of services for voice services decreased 4.1% from $5.7 million
for the six months ended June 30, 2003, to $5.5 million for the same period in 2004. Cost of services for data and other services increased 7.6% from $841,000 for the six months ended June 30, 2003, to $905,000 for the same period in 2004.



Gross profit. Gross profit increased 24.5% from $60.7
million for the six months ended June 30, 2003, to $75.6 million for the six months ended June 30, 2004. Gross profit for video services increased 33.4% from $18.9 million for the six months ended June 30, 2003, to $25.2 million for the same period
in 2004. Gross profit for voice services increased 9.8% from $28.1 million for the six months ended June 30, 2003, to $30.9 million for the same period in 2004. Gross profit for data and other services increased 42.7% from $13.7 million for the six
months ended June 30, 2003, to $19.5 million for the same period in 2004.



16



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##### Table of Contents

Operating expenses. Our operating expenses, excluding depreciation and amortization, increased
29.0% from $68.6 million for the six months ended June 30, 2003, to $88.4 for the six months ended June 30, 2004.



Our depreciation and amortization decreased from $39.4 million for the six months ended June 30, 2003, to $37.6 million for the six months ended June 30,
2004.



We have adopted SFAS No. 123 and SFAS No. 148 and
recorded a non-cash stock option compensation expense of $905,000 for the six months ended June 30, 2003 and $2.3 million for the six months ended June 30, 2004.



Other income and expense, including interest income and interest expense. Our total other expenses increased from
$14.0 million for the six months ended June 30, 2003, to $14.6 million for the six months ended June 30, 2004. Interest income was $210,000 for the six months ended June 30, 2003, compared to $339,000 for the same period in 2004. Interest expense
increased from $14.3 million for the six months ended June 30, 2003, to $15.5 million for the six months ended June 30, 2004.



In the first and second quarters of 2004, we adjusted the carrying value of the outstanding warrants to purchase our common stock to market value based on
the published market per share value of our common stock. The published market per share value of our common stock on March 31, 2004 was $6.89 and on June 30, 2004 was $4.97 resulting in a $419,000 gain on the adjustment of warrants to market value
for the six months ended June 30, 2004. Other income, net increased from $86,000 for the six months ended June 30, 2003 to $140,000 for the six months ended June 30, 2004.



Income tax benefit. We recorded no income tax benefit or provision for the six months ended June 30, 2003 and a tax
benefit of $24,000 for the six months ended June 30, 2004.



Net income from discontinued operations. Effective April 30, 2004, following the guidance of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived Assets, we deemed the Cerritos cable system to be a
long-lived asset to be disposed of based on our plan, and actions taken to sell the property.



Net loss. We incurred a net loss of $39.9 million and $37.0 million for the six months ended June 30, 2003 and 2004, respectively. We expect net losses to continue as our business matures.



Liquidity and Capital Resources



As of June 30, 2004, we had net working capital of $32.3 million, compared
to net working capital of $42.9 million as of December 31, 2003. The decrease in working capital resulted primarily from the following:



| |  | a decrease of $1.7 million in accounts receivable;
| | - | --------------------------------------------------



| |  | a decrease if $367,000 in prepaid expenses and other;
| | - | -----------------------------------------------------



| |  | an increase of $3.6 million in current portion of notes payable;
| | - | ----------------------------------------------------------------



| |  | an increase of $1.7 million in accounts payable; and
| | - | ----------------------------------------------------



| |  | an increase of $4.6 million in accrued liabilities.
| | - | ---------------------------------------------------



The decreases in working capital were partially offset by an increase in cash, cash equivalents and restricted cash of $1.1 million.



On May 24, 2004 we entered into a definitive asset purchase agreement to sell
our cable system located in Cerritos, California to Orange Broadband, Inc. for $14.8 million in cash, subject to customary closing adjustments. We expect the sale of the Cerritos system to close during the fourth quarter of 2004, subject to the
satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise in Cerritos, California.



We have recently been in negotiations with our existing bank lenders to amend and restate our senior secured credit facility in order to refinance the
existing $15.5 million facility and to provide additional liquidity for the business through 2007. We expect to complete the amendment and restatement of the senior secured credit facility during the third quarter of 2004, however, there can be no
assurance that we will be able to negotiate an amended and restated facility on terms acceptable to us.



In November 2004, we will begin paying our required interest obligations, semiannually at 12%, on our senior notes due 2009. Approximately $14.2 million
will be due to be paid on November 30, 2004.



17



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##### Table of Contents

We believe we can satisfy all of our anticipated funding requirements, including capital expenditures,
through 2004 using a combination of internally generated cash flow from operations and cash currently on hand.



Net cash provided by operations totaled $10.3 million and $22.5 million for the six months ended June 30, 2003 and 2004, respectively. The net cash flow
activity related to operations consists primarily of changes in operating assets and liabilities and adjustments to net income for non-cash transactions including:



| |  | depreciation and amortization;
| | - | ------------------------------



| |  | non-cash stock option compensation;
| | - | -----------------------------------



| |  | gain on adjustment of warrants to market;
| | - | -----------------------------------------



| |  | non-cash bond interest expense;
| | - | -------------------------------



| |  | provision for bad debt; and
| | - | ---------------------------



| |  | loss (gain) on disposition of assets.
| | - | -------------------------------------



Net cash used for investing activities was $18.6 million and $26.9 million for the six months ended June 30, 2003 and 2004, respectively. Our investing
activities for the six months ended June 30, 2003 primarily consisted of $18.6 million of capital expenditures. Our investing activities for the six months ended June 30, 2004 primarily consisted of $26.8 million of capital expenditures. Of the
$26.8 million in capital expenditures for the six months ended June 30, 2004, $10.9 million related to the newly acquired Pinellas County market.



Financing activities used cash of $1.7 million for the six months ended June 30, 2003, and provided cash of $5.5 million for the six months ended June 30,
2004. Financing activities for the six months ended June 30, 2003 primarily consisted of $1.7 million of principal payments on debt. Financing activities for the six months ended June 30, 2004 consisted of $7.3 million of net proceeds from the
exercise of the underwriters over-allotment option of 900,000 shares, partially offset by $1.8 million of principal payments on debt.



As of June 30, 2004, we were in compliance with all of our debt covenants.



Capital Expenditures



We have spent approximately $26.8 million in capital expenditures during 2004 through June 30, and we expect to spend an additional $40.9 million for the
remainder of 2004. Of the capital expenditures through June 30, 2004, $14.9 million relates to network construction and the remainder relates to the purchase of customer premise equipment, such as cable set-top boxes and cable modems, network
equipment, including switching and transport equipment, and billing and information systems. We believe we have sufficient cash on hand and cash from internally generated cash flow to cover our planned operating expenses and capital expenditures
during the remainder of 2004. If we decide to expand our broadband network into new markets, we would require additional funding to operate and for the capital expenditures necessary to finance the construction and purchase of customer premise
equipment.



We have received franchises to build a network in
Louisville, Kentucky and Nashville, Tennessee, although our franchise in Louisville is currently being contested by the incumbent cable provider in that city. The indenture governing our 12% senior notes due 2009 includes a covenant limiting our
ability to fund expansion into new markets, including Louisville and Nashville, from operating cash flows or new borrowings.



We do not intend to expand into Nashville, Louisville or other markets until the required funding is available. We estimate the cost of constructing our
network and funding initial customer premise equipment in new markets to be approximately $750 to $1,000 per home passed. The actual costs of each new market may vary significantly from this range and will depend on the number of miles of network to
be constructed, the geographic and demographic characteristics of the city, population density, costs associated with the cable franchise in each city, the number of customers in each city, the mix of services purchased, the cost of customer premise
equipment we pay for or finance, utility requirements and other factors.



Critical Accounting Policies



Our consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that the following may involve a higher degree of judgment and
complexity.



18



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##### Table of Contents

Revenue recognition. We generate recurring or multi-period operating revenues, as well as
nonrecurring revenues. We recognize revenue in accordance with SEC Staff Accounting Bulletin, or SAB, No. 104, Revenue Recognition, which requires that the following four basic criteria must be satisfied before revenues can be
recognized:



| | There is persuasive evidence that an arrangement exists;
|- | --------------------------------------------------------



| | Delivery has occurred or services rendered;
|- | -------------------------------------------



| | The fee is fixed and determinable; and,
|- | ---------------------------------------



| | Collectibility is reasonably assured.
|- | -------------------------------------



We base our determination of the third and fourth criteria above on our judgment regarding the fixed nature of the fee we have charged for the services
rendered and products delivered, and the prospect that those fees will be collected. If changes in conditions should cause us to determine that these criteria likely will not be met for certain future transactions, revenue recognized for any
reporting period could be materially affected.



We generate
recurring revenues for our broadband offerings of video, voice and data and other services. Revenue generated from these services primarily consists of a fixed monthly fee for access to cable programming, local phone services and enhanced services
and access to the internet. Additional fees are charged for services including pay-per-view movies, events such as boxing matches and concerts, long distance service and cable modem rental. Revenues are recognized as services are provided and
advance billings or cash payments received in advance of services performed are recorded as deferred revenue.



Allowance for doubtful accounts. We use estimates to determine our allowance for bad debts. These estimates are based on historical collection
experience, current trends, credit policy and a percentage of our customer accounts receivable. In determining these percentages, we look at historical write-offs of our receivables, but our history is limited.



Plant and equipment. The costs associated with the construction of our
broadband transmission and distribution facilities and new service installations are capitalized. Capitalized costs include all direct labor and materials, as well as some indirect costs. We perform periodic evaluations of any estimates associated
with indirect costs and changes to the estimates, which are significant, are included prospectively in the period in which the evaluations are completed.



Valuation of long-lived and intangible assets and goodwill. We assess the impairment of identifiable long-lived assets and related goodwill
whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with Statement of Financial Accounting Standards, or SFAS No. 121, and beginning January 1, 2002 SFAS No. 144. Factors we consider
important and that could trigger an impairment review include the following:



| | Significant underperformance of our assets relative to expected historical or projected future operating results;
|- | -----------------------------------------------------------------------------------------------------------------



| | Significant changes in the manner in which we use our assets or in our overall business strategy; and,
|- | ------------------------------------------------------------------------------------------------------



| | Significant negative industry or economic trends.
|- | -------------------------------------------------



In July 2001, the FASB issued SFAS No. 144, Impairment or Disposal of Long-Lived Assets, which is effective for fiscal years beginning after
December 15, 2001. The provisions of this statement provide a single accounting model for impairment of long-lived assets. We recorded no asset impairment during the six months ended June 30, 2003 and 2004, respectively, in accordance with SFAS No.
144.



We adopted SFAS No. 142 on January 1, 2002 and have
performed a goodwill impairment test in accordance with SFAS No. 142. As a result of the impairment test in January 2003 and 2004, no impairments were identified.



The foregoing list in not intended to be a comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any
available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K, which contains accounting policies and other disclosures required
by accounting principles generally accepted in the United States.



Recent
Accounting Pronouncements



In December 2003, the FASB
issued a revision to FASB Interpretation No. 46 (FIN 46-R), Consolidation of Variable Interest Entities. FIN 46 is an Interpretation of Accounting Research Bulletin 51, Consolidated Financial Statements and
addresses consolidation by business enterprises of variable interest entities (VIEs) that possess certain characteristics. The revision clarifies the definition in the original release that potentially could have classified any business
as a VIE. The revision also delays the effective date of the FIN 46 from the first reporting period following December 15, 2003 to the first reporting period ending after March 15, 2004. The revision was effective for us in the first quarter of
fiscal 2004. We have not identified any VIEs and, accordingly, the application of this FIN 46-R did not have an effect on our results of operations or financial position.



19



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##### Table of Contents

At the March 2004 Emerging Issues Task Force (EITF) meeting, the EITF reached a consensus on
Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. Issue 03-1 defines the terms otherthan-temporary and other-than-temporary impairment and establishes a three-step impairment model
applicable to debt and equity securities that are within the scope of SFAS 115. At the November 2003 EITF meeting, the Task Force reached a consensus effective for fiscal years ending after December 15, 2003 on quantitative disclosures. Except for
disclosure requirements already in place, the Issue 03-1 consensus will be effective prospectively for all relevant current and future investments in reporting periods beginning after June 15, 2004. We adopted EITF Issue No. 03-1 disclosure
requirements for the fiscal year ended December 31, 2003 and do not expect the adoption of future requirements of EITF Issue No. 03-1 to have material impact on our results of operations or financial position.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



We are exposed to market risk from changes in interest rates. We manage our exposure to this market risk through our regular operating and financing
activities. Derivative instruments are not currently used and, if used, are employed as risk management tools and not for trading purposes.



We have no derivative financial instruments outstanding to hedge interest rate risk. Our only borrowings subject to market conditions are our borrowings
under our credit facilities, which are based on either a prime or federal funds rate plus applicable margin or LIBOR plus applicable margin. Any changes in these rates would affect the rate at which we could borrow funds under our bank credit
facilities. A hypothetical 10% increase in interest rates on our variable rate bank debt for the duration of one year would increase interest expense by an immaterial amount.



ITEM 4. CONTROL AND PROCEDURES



Based on an evaluation carried out, as of the end of the period covered by this report, under the supervision and with the participation of the our management, including its Chief Executive Officer and Chief Financial Officer, the Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) are effective. As of the end of the period covered by
this report, there have been no significant changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



20



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##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. Legal Proceedings



In
September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our subsidiary, a cable television franchise. On November 2, 2000, Insight filed a complaint against the City of Louisville in Kentucky Circuit Court in Jefferson
County, Kentucky claiming that our franchise was more favorable than Insights franchise. Insights complaint suspended our franchise until there is a final, nonappealable order in Insights Kentucky Circuit Court case. In April 2001
the City of Louisville moved for summary judgment in Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled that Insights complaint had no merit and the Kentucky Circuit Court granted the City of
Louisvilles motion to dismiss Insights complaint. Insight appealed the Kentucky Circuit Court order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky Circuit Court ruling. Insight sought
discretionary review of the Kentucky Court of Appeals ruling from the Kentucky Supreme Court which request was denied



On November 8, 2000, we filed an action in the U.S. District Court for the Western District of Kentucky against Insight seeking monetary damages,
declaratory and injunctive relief from Insight and the City arising out of Insights complaint and the suspension of our franchise. In March 2001, the U.S. District Court issued an order granting our motion for preliminary injunctive relief and
denying Insights motion to dismiss. In June 2003, the U.S. District Court ruled on the parties cross motions for summary judgment, resolving certain claims and setting others down for trial. The U.S. District Court granted our motion for
summary judgment based on causation on certain claims. In August 2003, the U.S. District Court granted Insights motion for an immediate interlocutory appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for
the Sixth Circuit. The matter has been fully briefed and it is anticipated that oral argument will be held although it has yet to be scheduled. At this time it is impossible to determine with certainty the ultimate outcome of the litigation.



On November 21, 2001, we filed a complaint against Georgia
Power Company requesting FCC adjudication of a dispute regarding amounts Georgia Power charged us in connection with the construction of our network in Augusta, Georgia. We requested the FCC to review these charges to determine whether they were
reasonable in accordance with FCC pole attachment regulations. We requested reimbursement from Georgia Power of approximately $2.5 million. Georgia Power responded to the FCC complaint by asserting we owed Georgia Power approximately
$900,000 for additional construction-related charges. In May 2003, Georgia Power filed a complaint against Broadband, our subsidiary, in the Superior Court of Troup County, State of Georgia, re-asserting claims for construction related charges.
Georgia Powers claim duplicates its claim pending before the FCC. We responded to Georgia Powers complaint in state court by re-asserting our claims that are currently pending before the FCC. We also sought to remove the state court
action to federal court and moved to dismiss the lawsuit or to stay the action to allow the FCC time to issue its decision. Georgia Power has moved to remand the case to state court. On November 20, 2003, the FCC issued an order determining that
certain pole attachment fees charged by Georgia Power were improper. The Commission ordered Georgia Power to refund approximately $52,000 and to recalculate certain charges that it had billed Knology. Georgia Power refunded approximately $52,000. On
August 11, 2004 Knology filed a motion seeking enforcement of the other provisions of the Commissions Order. At this time, it is impossible to determine with certainty the ultimate outcome of the motion or the litigation.



We are also subject to other litigation in the normal course of our business.
However, in our opinion, there is no legal proceeding pending against us which would have a material adverse effect on our financial position, results of operations or liquidity. We are also a party to regulatory proceedings affecting the segments
of the communications industry generally in which we engage in business.



ITEM 2. Changes in Securities and Use of Proceeds



At Knologys 2004 annual meeting of stockholders, our stockholders voted to amend and restate our certificate of incorporation to (1) eliminate the existing preferred stock designations, (2) make certain changes
to the manner in which our non-voting common stock converts into common stock, and (3) prohibit stockholder action by written consent on any matter unless the matter is approved in advance by our board of directors.



ITEM 3. Default upon Senior Securities



None



ITEM 4. Submission of Matters to a Vote of Security Holders



On May 4, 2004, Knology held its annual meeting of stockholders. At the meeting, the holders of our common stock voted to re-elect Mr. William Laverack, Jr. (with 16,935,566 shares voting for and 4,759 shares
withheld) and Mr. Bret Pearlman (with 16,910,166 shares voting for and 30,159 shares withheld) as Class I board members to serve for two-year terms or until their successors are duly elected and qualified. The holders of our common stock also voted
at the annual meeting to re-elect Mr. Alan A. Burgess (with 16,729,165 shares voting for and 211,160 shares withheld), Mr. Donald W. Burton (with 16,657,389 shares voting for and 282,936 shares withheld) and Mr. William H. Scott (with 16,729,141
shares voting for and 211,184 shares withheld) as Class II board members to serve for three-year terms or until their successors are duly elected and qualified.



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At the 2004 annual meeting, our stockholders also voted to amend and restate our certificate of
incorporation to (1) eliminate the existing preferred stock designations (with 13,647,684 shares voting for, 633,459 against 1,734 abstaining and 1,453,781 broker non-votes), (2) make certain changes to the manner in which our non-voting common
stock converts into common stock (with 16,912,480 shares voting for, 25,740 against 2,105 abstaining and 1,453,781 broker non-votes), and (3) prohibit stockholder action by written consent on any matter unless the matter is approved in advance by
our board of directors (with 13,603,421 shares voting for, 675,679 against 3,777 abstaining and 1,453,781 broker non-votes).



Additionally, the stockholders approved a stock option re-pricing through the cancellation of existing options and grant of new stock options (with
12,430,551 shares voting for, 1,847,250 against 5,076 abstaining and 1,453,781 broker non-votes).



The stockholders also approved our amended and restated 2002 long-term incentive plan (with 13,629,222 shares voting for, 649,736 against 3,919 abstaining
and 1,453,781 broker non-votes).



ITEM 5. Other Information



None



ITEM 6. Exhibits and Reports on Form 8-K



(A)
EXHIBITS



|              |  |                                                                                                                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                              
|2.1*          |  | Asset Purchase Agreement, dated as of May 19, 2004, by and between Knology Broadband of California, Inc. and Orange Broadband, Inc. (Incorporated herein by reference to Exhibit 2.5 to
Knology, Inc.s Registration Statement on Form S-3 (File No. 333-117675).
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Knology, Inc.                                                                                                                                                                                               
|              | 
|3.2           |  | Bylaws of Knology, Inc. (Incorporated herein by reference to Exhibit 3.2 to Knology Inc.s Registration Statement on Form S-1 (File No. 333-89179)).                                                                                                             
|              | 
|31.1          |  | Certification of Chief Executive Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                      
|              | 
|31.2          |  | Certification of Chief Financial Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                      
|              | 
|32.1          |  | Statement of the Chief Executive Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                          
|              | 
|32.2          |  | Statement of the Chief Financial Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                          

---

|* | Confidential treatment has been requested pursuant to Rule 406 of the Securities Act of 1933, as amended. The copy on file as an exhibit omits the information subject to the
confidentiality request. Such information has been filed separately with the Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



(B) REPORTS ON FORM 8-K



On May 12,
2004, Knology furnished a current report on Form 8-K, under item 12, announcing its 2004 first quarter results.



On May 24, 2004, Knology furnished a current report on Form 8-K, under item 9, announcing that it has entered into a definitive agreement to sell its Cerritos, California
cable system to Orange Broadband, Inc.



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SIGNATURES



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



|                |  |               |  |                                                                      
|--------------- |  | ------------- |  | ---------------------------------------------------------------------
|                |  | KNOLOGY, INC.
|                |  |              
|August 13, 2004 |  | By:           |  | /s/ Rodger L. Johnson                                                
|                |  |               |  | Rodger L. Johnson President and Chief Executive Officer              
|                |  |              
|August 13, 2004 |  | By:           |  | /s/ Robert K. Mills                                                  
|                |  |               |  | Robert K. Mills Chief Financial Officer (Principal Financial Officer)



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EXHIBIT INDEX



|              |  |                                                                                                                                                                                                                                                                  
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                              
|2.1*          |  | Asset Purchase Agreement, dated as of May 19, 2004, by and between Knology Broadband of California, Inc. and Orange Broadband, Inc. (Incorporated herein by reference to Exhibit 2.5 to
Knology, Inc.s Registration Statement on Form S-3 (File No. 333-117675).
|              | 
|3.1           |  | Amended and Restated Certificate of Incorporation of Knology, Inc.                                                                                                                                                                                               
|              | 
|3.2           |  | Bylaws of Knology, Inc. (Incorporated herein by reference to Exhibit 3.2 to Knology Inc.s Registration Statement on Form S-1 (File No. 333-89179)).                                                                                                             
|              | 
|31.1          |  | Certification of Chief Executive Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                      
|              | 
|31.2          |  | Certification of Chief Financial Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                      
|              | 
|32.1          |  | Statement of the Chief Executive Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                          
|              | 
|32.2          |  | Statement of the Chief Financial Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                          

---

|* | Confidential treatment has been requested pursuant to Rule 406 of the Securities Act of 1933, as amended. The copy on file as an exhibit omits the information subject to the
confidentiality request. Such information has been filed separately with the Commission.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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