##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-Q



---



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



FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005



COMMISSION FILE NUMBER: 000-32647



---



KNOLOGY, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|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



---



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, 2005, Knology,
Inc. had 23,714,299 shares of common stock outstanding.



---



---

##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED JUNE 30, 2005



INDEX



|        |  |                                                                                                           |  |     
|------- |  | --------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                                                                                                           |  | PAGE
|PART I  |  | FINANCIAL INFORMATION                                                                                     |  |     
|        |  |                                                                                                          
|ITEM 1  |  | FINANCIAL STATEMENTS                                                                                      |  | 3   
|        |  | Condensed Consolidated Balance Sheets as of December 31, 2004 and June 30, 2005                           |  | 3   
|        |  | Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2004 and 2005 |  | 4   
|        |  | Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2004 and 2005            |  | 5   
|        |  | Notes to Condensed Consolidated Financial Statements                                                      |  | 6   
|        |  |                                                                                                          
|ITEM 2  |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                     |  | 12  
|        |  |                                                                                                          
|ITEM 3  |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                |  | 25  
|ITEM 4  |  | CONTROLS AND PROCEDURES                                                                                   |  | 25  
|        |  |                                                                                                          
|PART II |  | OTHER INFORMATION                                                                                         |  |     
|        |  |                                                                                                          
|ITEM 1  |  | LEGAL PROCEEDINGS                                                                                         |  | 26  
|ITEM 2  |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                               |  | 26  
|ITEM 3  |  | DEFAULTS UPON SENIOR SECURITIES                                                                           |  | 26  
|ITEM 4  |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                       |  | 26  
|ITEM 5  |  | OTHER INFORMATION                                                                                         |  | 26  
|ITEM 6  |  | EXHIBITS                                                                                                  |  | 27  
|        |  |                                                                                                          
|        |  | SIGNATURES                                                                                                |  | 28  



---

##### Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS



KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE DATA)



|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------ | - | -------- | -
|                                                                                                                                                                                               |  | December 31,2004 |          |   | June 30,2005 |  
|ASSETS                                                                                                                                                                                         |  |                  |          |   |              |   |          |  
|                                                                                                                                                                                               |  |                 
|CURRENT ASSETS:                                                                                                                                                                                |  |                  |          |   |              |   |          |  
|Cash and cash equivalents                                                                                                                                                                      |  | $                | 6,082    |   |              | $ | 6,610    |  
|Restricted cash                                                                                                                                                                                |  |                  | 7,365    |   |              |   | 244,235  |  
|Short term investments                                                                                                                                                                         |  |                  | 12,625   |   |              |   | 0        |  
|Accounts receivable, net of allowance for doubtful accounts of $724 and $682 as of December 31, 2004 and June 30, 2005,
respectively                                                           |  |                  | 18,924   |   |              |   | 18,215   |  
|Prepaid expenses                                                                                                                                                                               |  |                  | 2,735    |   |              |   | 2,125    |  
|Assets of business held for sale                                                                                                                                                               |  |                  | 887      |   |              |   | 905      |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total current assets                                                                                                                                                                           |  |                  | 48,618   |   |              |   | 272,090  |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                                                             |  |                  | 326,499  |   |              |   | 303,518  |  
|                                                                                                                                                                                               |  |                 
|GOODWILL                                                                                                                                                                                       |  |                  | 40,834   |   |              |   | 40,834   |  
|                                                                                                                                                                                               |  |                 
|INVESTMENTS                                                                                                                                                                                    |  |                  | 1,243    |   |              |   | 1,243    |  
|                                                                                                                                                                                               |  |                 
|INTANGIBLE, DEBT ISSUANCE COSTS AND OTHER ASSETS, NET                                                                                                                                          |  |                  | 1,393    |   |              |   | 10,139   |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total assets                                                                                                                                                                                   |  | $                | 418,587  |   |              | $ | 627,824  |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                           |  |                  |          |   |              |   |          |  
|                                                                                                                                                                                               |  |                 
|CURRENT LIABILITIES:                                                                                                                                                                           |  |                  |          |   |              |   |          |  
|Current portion of notes payable                                                                                                                                                               |  | $                | 179      |   |              | $ | 239,203  |  
|Accounts payable                                                                                                                                                                               |  |                  | 20,428   |   |              |   | 15,574   |  
|Accrued liabilities                                                                                                                                                                            |  |                  | 12,199   |   |              |   | 15,048   |  
|Unearned revenue                                                                                                                                                                               |  |                  | 11,841   |   |              |   | 12,846   |  
|Liabilities of business held for sale                                                                                                                                                          |  |                  | 770      |   |              |   | 696      |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total current liabilities                                                                                                                                                                      |  |                  | 45,417   |   |              |   | 283,367  |  
|                                                                                                                                                                                               |  |                 
|NONCURRENT LIABILITIES:                                                                                                                                                                        |  |                  |          |   |              |   |          |  
|Notes payable                                                                                                                                                                                  |  |                  | 49,438   |   |              |   | 280,248  |  
|Unamortized investment tax credits                                                                                                                                                             |  |                  | 13       |   |              |   | 6        |  
|Senior unsecured notes                                                                                                                                                                         |  |                  | 237,096  |   |              |   | 0        |  
|Warrants                                                                                                                                                                                       |  |                  | 354      |   |              |   | 173      |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total noncurrent liabilities                                                                                                                                                                   |  |                  | 286,901  |   |              |   | 280,427  |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total liabilities                                                                                                                                                                              |  |                  | 332,318  |   |              |   | 563,794  |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|CONVERTIBLE PREFERRED STOCK                                                                                                                                                                    |  |                  | 0        |   |              |   | 9,271    |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|COMMITMENTS AND CONTINGENCIES (Note 9)                                                                                                                                                         |  |                  |          |   |              |   |          |  
|                                                                                                                                                                                               |  |                 
|STOCKHOLDERS EQUITY:                                                                                                                                                                          |  |                  |          |   |              |   |          |  
|Undesignated Preferred stock, $.01 par value per share                                                                                                                                         |  |                  | 0        |   |              |   | 0        |  
|Series AA Convertible Preferred stock, $.01 par value per share; 3,000,000 shares authorized, 0 and 927,051 shares issued and outstanding at
December 31, 2004 and June 30, 2005, respectively |  |                  | 0        |   |              |   | 0        |  
|Common stock, $.01 par value per share; 200,000,000 shares authorized, 23,697,787 shares issued and outstanding at December 31, 2004 and June
30, 2005, respectively                           |  |                  | 237      |   |              |   | 237      |  
|Additional paid-in capital                                                                                                                                                                     |  |                  | 559,451  |   |              |   | 560,311  |  
|Accumulated other comprehensive income                                                                                                                                                         |  |                  | 1        |   |              |   | 0        |  
|Accumulated deficit                                                                                                                                                                            |  |                  | (473,420 | ) |              |   | (505,789 | )
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total stockholders equity                                                                                                                                                                     |  |                  | 86,269   |   |              |   | 54,759   |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                     |  | $                | 418,587  |   |              | $ | 627,824  |  
|                                                                                                                                                                                               |  |                  |          |   |              |   |          |  



See notes to condensed
consolidated financial statements.



3



---

##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)



|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|-------------------------------------------------------------------------------------- |  | --------------------------- | ---------- | - | ------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                                                       |  | Three Months Ended June 30, |            |   | Six Months Ended June 30, |  
|                                                                                       |  | 2004                        |            |   | 2005                      |   |            | 2004 |  |   | 2005       |  
|OPERATING REVENUES:                                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Video                                                                                  |  | $                           | 24,304     |   |                           | $ | 25,601     |      |  | $ | 49,719     |   |  | $ | 50,336     |  
|Voice                                                                                  |  |                             | 18,368     |   |                           |   | 19,395     |      |  |   | 36,416     |   |  |   | 38,300     |  
|Data services and other                                                                |  |                             | 10,063     |   |                           |   | 12,276     |      |  |   | 20,394     |   |  |   | 23,666     |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating revenues                                                               |  |                             | 52,735     |   |                           |   | 57,272     |      |  |   | 106,529    |   |  |   | 112,302    |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|OPERATING EXPENSES:                                                                    |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Costs of services (excluding depreciation and amortization)                            |  |                             | 15,104     |   |                           |   | 16,567     |      |  |   | 30,888     |   |  |   | 32,679     |  
|Selling, general and administrative expenses (excluding depreciation and amortization) |  |                             | 30,641     |   |                           |   | 29,349     |      |  |   | 60,505     |   |  |   | 59,053     |  
|Depreciation and amortization                                                          |  |                             | 18,313     |   |                           |   | 18,657     |      |  |   | 37,574     |   |  |   | 37,296     |  
|Loss on early extinguishment of debt                                                   |  |                             | 0          |   |                           |   | 544        |      |  |   | 0          |   |  |   | 544        |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                               |  |                             | 64,058     |   |                           |   | 65,117     |      |  |   | 128,967    |   |  |   | 129,572    |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|OPERATING INCOME (LOSS)                                                                |  |                             | (11,323    | ) |                           |   | (7,845     | )    |  |   | (22,438    | ) |  |   | (17,270    | )
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|OTHER INCOME (EXPENSE):                                                                |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                                        |  |                             | 180        |   |                           |   | 88         |      |  |   | 339        |   |  |   | 292        |  
|Interest expense                                                                       |  |                             | (7,741     | ) |                           |   | (7,962     | )    |  |   | (15,524    | ) |  |   | (15,805    | )
|Gain on adjustment of warrants to market                                               |  |                             | 198        |   |                           |   | 42         |      |  |   | 419        |   |  |   | 181        |  
|Other income, net                                                                      |  |                             | 12         |   |                           |   | 139        |      |  |   | 164        |   |  |   | 141        |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|Total other expense                                                                    |  |                             | (7,351     | ) |                           |   | (7,693     | )    |  |   | (14,602    | ) |  |   | (15,191    | )
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS                         |  |                             | (18,674    | ) |                           |   | (15,538    | )    |  |   | (37,040    | ) |  |   | (32,461    | )
|INCOME FROM DISCONTINUED OPERATIONS                                                    |  |                             | 10         |   |                           |   | 47         |      |  |   | 10         |   |  |   | 92         |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|NET LOSS                                                                               |  |                             | (18,664    | ) |                           |   | (15,491    | )    |  |   | (37,030    | ) |  |   | (32,369    | )
|PREFERRED STOCK DIVIDENDS                                                              |  |                             | 0          |   |                           |   | (71        | )    |  |   | 0          |   |  |   | (71        | )
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                           |  | $                           | (18,664    | ) |                           | $ | (15,562    | )    |  | $ | (37,030    | ) |  | $ | (32,440    | )
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS PER SHARE                                              |  | $                           | (0.79      | ) |                           | $ | (0.66      | )    |  | $ | (1.57      | ) |  | $ | (1.37      | )
|INCOME FROM DISCONTINUED OPERATIONS PER SHARE                                          |  |                             | 0          |   |                           |   | 0          |      |  |   | 0          |   |  |   | 0          |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS               |  | $                           | (0.79      | ) |                           | $ | (0.66      | )    |  | $ | (1.57      | ) |  | $ | (1.37      | )
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  
|BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING                 |  |                             | 23,685,080 |   |                           |   | 23,697,787 |      |  |   | 23,618,645 |   |  |   | 23,697,787 |  
|                                                                                       |  |                             |            |   |                           |   |            |      |  |   |            |   |  |   |            |  



See notes to condensed
consolidated financial statements.



4



---

##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)



|                                                                                |  |                           |          |   |      |   |          |  
|------------------------------------------------------------------------------- |  | ------------------------- | -------- | - | ---- | - | -------- | -
|                                                                                |  | Six Months Ended June 30, |         
|                                                                                |  | 2004                      |          |   | 2005 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                           |          |   |      |   |          |  
|Net loss                                                                        |  | $                         | (37,030  | ) |      | $ | (32,369  | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                           |          |   |      |   |          |  
|Depreciation and amortization                                                   |  |                           | 37,574   |   |      |   | 37,296   |  
|Non-cash stock option compensation                                              |  |                           | 2,282    |   |      |   | 931      |  
|Non-cash bond interest expense                                                  |  |                           | 12,059   |   |      |   | 0        |  
|Provision for bad debt                                                          |  |                           | 2,336    |   |      |   | 1,641    |  
|Gain on disposition of assets                                                   |  |                           | (21      | ) |      |   | (5       | )
|Accretion of bank loan                                                          |  |                           | 0        |   |      |   | 2        |  
|Loss on early extinguishment of debt                                            |  |                           | 0        |   |      |   | 544      |  
|Gain on adjustment of warrants to market                                        |  |                           | (419     | ) |      |   | (181     | )
|Changes in operating assets and liabilities:                                    |  |                           |          |   |      |   |          |  
|Accounts receivable                                                             |  |                           | (612     | ) |      |   | (932     | )
|Prepaid expenses and other                                                      |  |                           | 392      |   |      |   | 620      |  
|Accounts payable                                                                |  |                           | 1,732    |   |      |   | (4,855   | )
|Accrued liabilities                                                             |  |                           | 4,557    |   |      |   | 2,849    |  
|Unearned revenue                                                                |  |                           | (333     | ) |      |   | 1,006    |  
|                                                                                |  |                           |          |   |      |   |          |  
|Total adjustments                                                               |  |                           | 59,547   |   |      |   | 38,916   |  
|                                                                                |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities from continuing operations            |  |                           | 22,517   |   |      |   | 6,547    |  
|                                                                                |  |                           |          |   |      |   |          |  
|Net cash used in operating activities from discontinued operations              |  |                           | (44      | ) |      |   | (92      | )
|                                                                                |  |                           |          |   |      |   |          |  
|Net cash provided by operating activities                                       |  |                           | 22,473   |   |      |   | 6,455    |  
|                                                                                |  |                           |          |   |      |   |          |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                           |          |   |      |   |          |  
|Capital expenditures                                                            |  |                           | (26,793  | ) |      |   | (13,979  | )
|Purchase of short term investments                                              |  |                           | (161,575 | ) |      |   | (4,000   | )
|Proceeds from sale of short term investments                                    |  |                           | 161,500  |   |      |   | 16,625   |  
|Franchise and other intangible expenditures                                     |  |                           | (253     | ) |      |   | (101     | )
|Proceeds from sale of property                                                  |  |                           | 152      |   |      |   | 104      |  
|Cash pledged as security                                                        |  |                           | (500     | ) |      |   | (236,870 | )
|                                                                                |  |                           |          |   |      |   |          |  
|Net cash (used in) provided by investing activities                             |  |                           | (27,469  | ) |      |   | (238,221 | )
|                                                                                |  |                           |          |   |      |   |          |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                           |          |   |      |   |          |  
|Principal payments on debt and short-term borrowings                            |  |                           | (1,783   | ) |      |   | (47,434  | )
|Proceeds from public equity offering, net of transaction costs                  |  |                           | 7,273    |   |      |   | 0        |  
|Proceeds from issuance of convertible preferred stock                           |  |                           | 0        |   |      |   | 9,200    |  
|Expenditures related to issuance of long term debt                              |  |                           | 0        |   |      |   | (9,472   | )
|Proceeds from long term debt                                                    |  |                           | 0        |   |      |   | 280,000  |  
|                                                                                |  |                           |          |   |      |   |          |  
|Net cash provided by financing activities                                       |  |                           | 5,490    |   |      |   | 232,294  |  
|                                                                                |  |                           |          |   |      |   |          |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                       |  |                           | 494      |   |      |   | 528      |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  |  |                           | 20,575   |   |      |   | 6,082    |  
|                                                                                |  |                           |          |   |      |   |          |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      |  | $                         | 21,069   |   |      | $ | 6,610    |  
|                                                                                |  |                           |          |   |      |   |          |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |  |                           |          |   |      |   |          |  
|Cash paid during the year for interest                                          |  | $                         | 1,195    |   |      | $ | 16,208   |  
|                                                                                |  |                           |          |   |      |   |          |  
|Non-cash financing activities: Debt acquired in capital lease transactions      |  | $                         | 0        |   |      | $ | 172      |  
|                                                                                |  |                           |          |   |      |   |          |  
|Preferred stock dividend declared but not paid                                  |  | $                         | 0        |   |      | $ | 71       |  
|                                                                                |  |                           |          |   |      |   |          |  



See notes to condensed
consolidated financial statements



5



---

##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS



JUNE 30, 2005

(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 (GAAP) 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, 2004.



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, 2005, or any other interim period.



In our
Consolidated Statement of Cash Flows for the six months ended June 30, 2005, we changed the classification of changes in cash pledged as security to present such changes as an investing activity. We previously presented such changes as financing
activity. In the accompanying Consolidated Statements of Cash Flows for the six months ended June 30, 2004, we reclassified changes in cash pledged as security to be consistent with our 2005 presentation, which resulted in a $500 decrease in
investing cash flows and a corresponding increase in financing cash flows from the amounts previously reported.



3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES



RECENT ACCOUNTING PRONOUNCEMENTS



In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard, (SFAS) No.
123 (revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and supercedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or
annual period after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over
the remaining vesting period. In December 2002 the Company elected to adopt the recognition provisions of SFAS No. 123 which is considered the preferable accounting method for stock-based



6



---

##### Table of Contents

employee compensation. The Company also elected to report the change in accounting principle using the prospective method
in accordance with SFAS No. 148. Under the prospective method, the recognition of compensation costs is applied to all employee awards granted, modified or settled after the beginning of the fiscal year in which the recognition provisions are first
applied. Because the fair value recognition provisions of SFAS No. 123 were adopted effective January 1, 2002, the Company does not expect this revised standard to have a material impact on its financial statements.



In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for
Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations, refers to a legal obligation of an
entity to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not he within the control of the entity. Such an obligation to perform the asset retirement activity is
unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability
can be reasonably estimated. FIN 47 is effective for the Company no later than December 31, 2005. The Company is currently evaluating the impact, if any, on its results of operations and financial position.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). This Statement replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and
changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the
unusual instance that the pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154
is not expected to have a material effect on the Companys results of operations or financial position.



4. CASH AND CASH EQUIVALENTS



Cash and cash equivalents are highly liquid investments with a maturity of three months or less at the date of purchase and consist of time deposits, investment in money market funds with commercial banks and financial institutions,
commercial paper and high-quality corporate and municipal bonds.



As of June 30, 2005, the Company has $244,235 of cash that is restricted in use. Of this amount, $237,096 of principle and $4,584 of interest was paid on July 29, 2005 in repayment of our Senior Notes due 2009. Also, the Company has pledged
$2,555 of cash as collateral for amounts potentially payable under certain insurance, lease and surety bond agreements.



5. SHORT TERM INVESTMENTS



The Company follows FASB SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. SFAS No. 115 mandates that a
determination be made of the appropriate classification for equity securities with a readily determinable fair value and all debt securities at the time of purchase and a re-evaluation of such designation as of each balance sheet date.



Short term investments consist of adjustable rate securities and are
classified as available-for-sale. These investments are carried at fair value and any unrealized gains and losses are reported as a separate component of stockholders equity. Realized gains and losses are included in interest income. The cost
of securities sold is based on the specific identification method. All adjustable rate securities held as of December 31, 2004 were sold with proceeds transferred to cash and cash equivalents prior to March 28, 2005.



The available-for-sale securities at December 31, 2004 and June 30, 2005
included the following:



|                       |  |                  |        |              |   |  
|---------------------- |  | ---------------- | ------ | ------------ | - | -
|                       |  | December 31,2004 |        | June 30,2005
|Amortized Cost         |  | $                | 12,624 |              | $ | 0
|Fair Value             |  | $                | 12,625 |              | $ | 0
|Unrealized Gain (Loss) |  | $                | 1      |              | $ | 0



6. 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, 2005 impairment test.



7



---

##### Table of Contents

Intangible assets as of December 31, 2004 and June 30, 2005, respectively, were as follows:



|                                                                  |  |                   |        |              |   |                            |  |     
|----------------------------------------------------------------- |  | ----------------- | ------ | ------------ | - | -------------------------- |  | ----
|                                                                  |  | December 31, 2004 |        | June 30,2005 |   | AmortizationPeriod (Years)
|Customer base                                                     |  | $                 | 441    |              | $ | 441                        |  | 3   
|Other                                                             |  |                   | 356    |              |   | 457                        |  | 1-15
|                                                                  |  |                   |        |              |   |                            |  |     
|Gross carrying value of intangible assets subject to amortization |  |                   | 797    |              |   | 898                        |  |     
|Less accumulated amortization                                     |  |                   | 489    |              |   | 673                        |  |     
|                                                                  |  |                   |        |              |   |                            |  |     
|Net carrying value of intangible assets subject to amortization   |  | $                 | 308    |              | $ | 225                        |  |     
|                                                                  |  |                   |        |              |   |                            |  |     
|Goodwill                                                          |  | $                 | 40,834 |              | $ | 40,834                     |  |     
|                                                                  |  |                   |        |              |   |                            |  |     



Amortization expense
related to intangible assets was $155 and $184 for the six months ended June 30, 2004 and 2005, respectively.



7. DEBT



On June
29, 2005, we entered into a first lien credit agreement and second lien credit agreement providing us with aggregate cash proceeds of $280,000. Credit Suisse, Cayman Islands Branch, acted as administrative agent and sole lead arranger. We used these
proceeds, together with cash on hand, to repay all amounts outstanding under our credit facilities with Wachovia Bank, National Association and CoBank, ACB and to redeem our 12% senior notes due 2009, which were redeemed on July 29, 2005.



Long-term debt at December 31, 2004 and June 30, 2005 consists
of the following:



|                                                                                                                                                                                                                                                                                     |  |                  |         |              |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | ------------ | - | -------
|                                                                                                                                                                                                                                                                                     |  | December 31,2004 |         | June 30,2005
|First Lien term loan, at a rate of LIBOR plus 5.5%, with 1% annual principal amortization, interest payable quarterly with final principal and
any unpaid interest due June 29, 2010.                                                                                                |  | $                | 0       |              | $ | 185,000
|Second Lien term loan, with a face amount of $99,000, at a rate of LIBOR plus 10% (8.5% cash and 1.5% PIK), interest payable quarterly, with
principal and any unpaid interest due June 29, 2011.                                                                                    |  |                  | 0       |              |   | 95,002 
|Senior unsecured notes including accrued interest, with a face value of $194,659 bearing interest in-kind at 13% from November 6, 2002 to
November 30, 2004, interest payable semiannually at 12% as of November 30, 2004, with principal and unpaid interest due November 30, 2009. |  |                  | 237,096 |              |   | 237,096
|Senior secured Wachovia credit facility, at a rate of LIBOR plus 3.75%, interest payable quarterly, with principal and any unpaid interest due
September 10, 2007.                                                                                                                   |  |                  | 15,465  |              |   | 0      
|Senior secured CoBank term credit facility, at a rate of LIBOR plus 3.5%, interest payable quarterly, principal payments due quarterly
beginning Jan 2007 with final principal and any unpaid interest due June 30, 2009.                                                            |  |                  | 31,895  |              |   | 0      
|Capitalized lease obligation, at rates between 7% and 8%, with monthly principal and interest payments through November 2011.                                                                                                                                                        |  |                  | 2,257   |              |   | 2,353  
|                                                                                                                                                                                                                                                                                     |  |                  |         |              |   |        
|                                                                                                                                                                                                                                                                                     |  |                  | 286,713 |              |   | 519,451
|Less current maturities                                                                                                                                                                                                                                                              |  |                  | 179     |              |   | 239,203
|                                                                                                                                                                                                                                                                                     |  |                  |         |              |   |        
|                                                                                                                                                                                                                                                                                     |  | $                | 286,534 |              | $ | 280,248
|                                                                                                                                                                                                                                                                                     |  |                  |         |              |   |        



The first lien term
loan and second lien term loan are guaranteed by all of our subsidiaries, except that the guarantees by certain of our subsidiaries are subject to pending regulatory approval. The credit facilities are also secured by first and second liens on all
of our assets and the assets of our guarantor subsidiaries.



The credit agreements both contain customary representations and warranties and various affirmative and negative covenants, including:



| |  |  | limitations on the incurrence of additional debt;
| | - |  | -------------------------------------------------



8



---

##### Table of Contents

| |  |  | limitations on the incurrence of liens;
| | - |  | ---------------------------------------



| |  |  | restrictions on investments;
| | - |  | ----------------------------



| |  |  | restrictions on the sale of assets;
| | - |  | -----------------------------------



| |  |  | restrictions on the payment of cash dividends on and the redemption or repurchase of capital stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | mandatory prepayment of amounts outstanding under the first lien facilities or second lien facility, as applicable, with excess cash flow, proceeds from asset sales, proceeds from
the issuance of debt obligations, proceeds from any equity offerings, and proceeds from casualty losses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restrictions on mergers and acquisitions, sale/leaseback transactions and fundamental changes in the nature of our business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on capital expenditures; and
| | - |  | ----------------------------------------



| |  |  | maintenance of minimum ratios of first lien debt to EBITDA (as defined in the credit agreements), total debt to EBITDA, and EBITDA to cash interest.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



The credit agreements also include customary events of default, including but
not limited to:



| |  |  | nonpayment of principal, interest or other fees or amounts;
| | - |  | -----------------------------------------------------------



| |  |  | incorrectness of representations and warranties in any material respect;
| | - |  | ------------------------------------------------------------------------



| |  |  | violations of covenants;
| | - |  | ------------------------



| |  |  | cross defaults and cross acceleration;
| | - |  | --------------------------------------



| |  |  | bankruptcy;
| | - |  | -----------



| |  |  | material judgments;
| | - |  | -------------------



| |  |  | ERISA events;
| | - |  | -------------



| |  |  | actual or asserted invalidity of provisions of or liens created under guarantees or security documents;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | change of control;
| | - |  | ------------------



| |  |  | material violations of environmental laws;
| | - |  | ------------------------------------------



| |  |  | defaults under material contractual obligations; and
| | - |  | ----------------------------------------------------



| |  |  | the failure to maintain our licenses and franchises if such failure would have a material adverse effect.
| | - |  | ---------------------------------------------------------------------------------------------------------



The Company incurred and capitalized approximately $9,472 in debt issuance costs in connection with the first lien credit
and second lien credit agreements. This amount will be amortized to interest expense over the terms of the credit agreements.



As of June 30, 2005, the Company was in compliance with all of its debt covenants.



8. COVERTIBLE PREFERRED STOCK



On May 26, 2005, the Company issued 920,000 shares of a newly created series of preferred stock, the Series AA preferred stock, in a private offering to
certain new and existing investors at a purchase price of $10.00 per share, for aggregate gross proceeds before expenses of $9.2 million. The certificate of designations for the Series AA preferred stock provides for a cumulative dividend



9



---

##### Table of Contents

of 8% per annum to be paid on the Series AA preferred stock, which dividend may be paid in cash or in additional shares
of Series AA preferred stock. However, pursuant to the restrictions in its credit facilities described above the Company is prohibited from paying dividends in cash, other than cash in lieu of fractional shares. On June 30, 2005, the Company issued
7,051 additional shares of Series AA preferred stock as a dividend on the privately sold shares of Series AA preferred stock.



In accordance with the guidance the Emerging Issues Task Force Topic D-98, the Company has classified the proceeds from the issuance of the preferred
stock outside of permanent equity in the mezzanine level.



9. COMMITMENTS
AND CONTINGENCIES



LEGAL PROCEEDINGS



We are subject to 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.



10.
BUSINESS HELD FOR SALE



During the second quarter 2004,
the Company announced its intention to sell its cable assets in Cerritos, California. The Company acquired the Cerritos cable system in December 2003 from Verizon Media Ventures Inc. in conjunction with its acquisition of Verizon Medias
Pinellas County, Florida operations. In March 2005, the Company entered into a definitive asset purchase agreement to sell its cable assets located in Cerritos, California to WaveDivision Holdings, LLC for $10,000 cash, subject to customary closing
adjustments. The Company expects the sale of the Cerritos system to close near the end of the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory approvals with respect to the municipal franchise
in Cerritos, California. However, there can be no assurance that the Company will complete the sale of the Cerritos cable system or that it completes the sale in a timely manner. In the event the purchaser does not receive necessary regulatory or
other approvals or the other conditions to closing are not satisfied, the sale will not be completed.



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 30,2005
|Assets:                            |  |              |    
|Cash                               |  | $            | 108
|Accounts Receivable                |  |              | 174
|Net Property, Plant, and Equipment |  |              | 602
|Prepayments and Other              |  |              | 21 
|                                   |  |              |    
|Total Assets                       |  | $            | 905
|                                   |  |              |    
|Liabilities:                       |  |              |    
|Accounts Payable                   |  | $            | 251
|Accrued Liabilities                |  |              | 73 
|Unearned Revenue                   |  |              | 184
|Advance from Affiliate             |  |              | 188
|                                   |  |              |    
|Total Liabilities                  |  | $            | 696
|                                   |  |              |    



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 $837 of revenue for the six months ended
June 30, 2005.



11. SUBSEQUENT EVENTS



On July 29, 2005, the Company paid $241,680 out of escrow to fully repay the
principal and accrued interest on its 12% senior notes due 2009.



10



---

##### Table of Contents

On July 12, 2005, the Company entered into an interest rate agreement to mitigate interest rate risk on
its adjustable rate first and second lien term loans.



The
Companys board of directors has approved a $10,800 rights offering of Series AA preferred stock, which will be made available to all of the holders of the Companys common stock. A registration statement relating to the rights offering
was filed on August 8, 2005, and the Company will commence the rights offering when the SEC declares the registration statement effective.



11



---

##### Table of Contents

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, (9) THAT WE MAY NOT COMPLETE OUR RIGHTS OFFERING OR THAT WE WILL NOT SELL ALL OF THE SECUTITIES OFFERED, 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, 2004, 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, 2005, 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.



For convenience in this quarterly report, Knology,
we, us, and the Company refer to Knology, Inc. and our consolidated subsidiaries, taken as a whole.



Overview



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 and a portion of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South
Carolina; and Knoxville, Tennessee. We also provide video services in Cerritos, California, but have entered into an agreement to sell our cable assets in that market. 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 cable systems;
| | - |  | ------------------------------



| |  |  | 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 will depend in large part on our ability to increase
revenues to offset the costs of construction and operation of our business.



12



---

##### Table of Contents

Recent Transactions



On May 26, 2005, we issued 920,000 shares of a newly created series of preferred stock, the Series AA preferred stock, in a private offering to certain
new and existing investors at a purchase price of $10.00 per share, for aggregate gross proceeds before expenses of $9.2 million. The certificate of designations for the Series AA preferred stock provides for a cumulative dividend of 8% per annum to
be paid on the Series AA preferred stock, which dividend may be paid in cash or in additional shares of Series AA preferred stock. However, pursuant to the restrictions in our new credit facilities described under Liquidity and Capital
Resources, we are prohibited from paying dividends in cash, other than cash in lieu of fractional shares. On June 30, 2005, we issued 7,051 additional shares of Series AA preferred stock as a dividend on the privately sold shares of Series AA
preferred stock. We also plan to issue an additional dividend with respect to the outstanding shares of Series AA preferred stock immediately before the completion of the rights offering.



On June 29, 2005, we entered into a first lien credit agreement and second lien credit agreement providing us with aggregate
cash proceeds of $280 million. Credit Suisse, Cayman Islands Branch, acted as administrative agent and sole lead arranger. We used these proceeds, together with cash on hand, to repay all amounts outstanding under our credit facilities with Wachovia
Bank, National Association and CoBank, ACB and to redeem our 12% senior notes due 2009, which were redeemed on July 29, 2005. Both credit facilities are guaranteed by all of our subsidiaries, except that the guarantees by certain of our subsidiaries
are subject to pending regulatory approval. The credit facilities are also secured by first and second liens on all of our assets and the assets of our guarantor subsidiaries.



Highlights and Outlook



Highlights of the quarter ended June 30, 2005 include the following:



| |  |  | Continue significant operating efficiencies realized from the utilization of our single billing platform for video, voice and data services;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Achieved a net connection gain of 7,927, the second largest growth in connections since the second quarter of 2002;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Revenue for the three months ended June 30, 2005, increased to $57.3 million, the highest in the companys history; and
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | Completed a private equity placement and issued 920,000 shares of a newly created series of preferred stock, the Series AA preferred stock for gross proceeds of $9.2 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 purchase 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.



13



---

##### Table of Contents

The following table summarizes the number of marketable homes passed and connections as of June 30, 2004
and 2005.



|                           |  |                |  |        
|-------------------------- |  | -------------- |  | -------
|                           |  | AS OF JUNE 30,
|                           |  | 2004           |  | 2005   
|Connections:(1)            |  |                |  |        
|Video(2)                   |  | 168,031        |  | 173,268
|Voice:                     |  |                |  |        
|On-net                     |  | 121,819        |  | 137,604
|Off-net                    |  | 6,040          |  | 6,096  
|Data                       |  | 77,174         |  | 97,373 
|                           |  |                |  |        
|Total connections          |  | 373,064        |  | 414,341
|                           |  |                |  |        
|Residential connections    |  | 336,705        |  | 373,200
|Business connections       |  | 36,359         |  | 41,141 
|                           |  |               
|Homes passed(2)            |  | 934,437        |  | 953,021
|Marketable homes passed(2) |  | 731,187        |  | 745,406

---

|(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 23,894 and 23,337 lines as of June 30, 2004 and 2005, 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, total connections, residential connections, business connections, homes passed and marketable homes passed as of June 30, 2004
and 2005 excludes our Cerritos, California market which we plan to sell during near the end of the third quarter of 2005, and treat as discontinued operations.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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, of our significant accounting policies described in Note 2 to our audited consolidated financial statements included in Item 8 of our Annual Report on Form 10-K, the following may involve a higher
degree of judgment and complexity.



Revenue Recognition.
The Company generates 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. Revenues generated from these services primarily consist 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.



14



---

##### Table of Contents

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 delinquent customer accounts receivable.



Capitalization of labor and overhead costs.Our business is capital intensive, and a large portion of the capital we have raised to date has been
spent on activities associated with building, extending, upgrading and enhancing our network. As of June 30, 2005 and 2004, the net carrying amount of our property, plant and equipment was approximately $303.5 million, 48% of total assets, and
$325.3 million, 72% of total assets, respectively. Total capital expenditures for the six months ended June 30, 2005 and 2004 were approximately $14.0 million and $26.8 million, respectively.



Costs associated with network construction, network enhancements and initial
customer installation are capitalized. Costs capitalized as part of the initial customer installation includes materials, direct labor, and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in
connecting and activating the new service and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customers premise or reconnecting service to a previously installed
premise are charged to operating expense in the period incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while equipment replacement and significant enhancements, including replacement of cable drops from the
pole to the premise, are capitalized.



We make judgments
regarding the installation and construction activities to be capitalized. We capitalize direct labor and certain indirect costs (overhead) using standards developed from time costs studies and operational data. We calculate standards for
items such as the labor rates, overhead rates and the actual amount of time required to perform a capitalizable activity. Overhead rates are established based on an analysis of the nature of costs incurred in support of capitalizable activities and
a determination of the portion of costs that is directly attributable to capitalizable activities.



Judgment is required to determine the extent to which overhead is incurred as a result of specific capital activities, and therefore should be
capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation costs, (iii) the cost of support personnel that directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities.



While we believe our existing capitalization policies are reasonable, a
significant change in the nature or extent of our system activities could affect managements judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization
policies and perform updates to our internal studies on an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies.



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 significant changes in our overall business strategy; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



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



Significant and Subjective Estimates.The following discussion and analysis of our results of operations and financial condition is based upon our
condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires us to
make estimates that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and contingent liabilities. 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. We base our judgments on historical experience and on various other assumptions that we believe are reasonable
under the circumstances, the results of which form the basis for making estimates about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different
assumptions or conditions. See our condensed consolidated financial statements and related notes thereto included elsewhere in this quarterly report, which contain accounting policies and other disclosures required by accounting principles generally
accepted in the United States.



The foregoing list of critical
accounting policies 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.



15



---

##### Table of Contents

Revenues



Our operating revenues are primarily derived from monthly charges for video, voice and Internet data services and other services to residential and
business customers. We provide these services over our network. Our products and services involve different types of charges and in some cases a different method of accounting for or recording revenues. Below is a description of our significant
sources of revenue:



| |  |  | 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 44.7% and 44.8% of our consolidated revenues for the three and six months ended June 30, 2005,
compared to 46.1% and 46.7% for the three and six months ended June 30, 2004. Video revenues as a percentage of our total revenues have decreased as we continue to bundle more of our customers and add voice connections in Pinellas County, FL.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local service and enhanced services, such as call waiting, voice mail and measured and flat
rate long-distance service. Voice revenues accounted for approximately 33.9% and 34.1% of our consolidated revenues for the three and six months ended June 30, 2005, compared to 34.8% and 34.2% for the three and six months ended June 30, 2004.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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. These combined revenues accounted for approximately 21.4% and 21.1% of our consolidated revenues for the three and six months ended June 30, 2005, compared to 19.1% and 19.1% for the three and six months ended June
30, 2004.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We expect to add new video connections
in the future, but as our video segment matures in our current markets, we expect our video product to grow at a decreasing rate compared to our historical experience. While the number of new video connections may grow at a declining rate, we
believe that the opportunity to increase revenue and video gross profits is available through price increases and 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 customers a bundle of services, penetrating untapped market segments and offering new services. 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 gross profits. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of consolidated revenues will decrease.



Our ability to increase the number of our connections and, as a result, our
revenues is directly affected by the level of competition we face in each of our markets with respect to each of our service offerings:



| |  |  | In providing video services, we currently compete with BellSouth, Bright House Networks, Charter, Comcast, Mediacom and Time Warner. We also compete with satellite television
providers such as DirecTV and Echostar. Our other competitors include broadcast television stations and other satellite television companies. We expect in the future to face additional competition from telephone companies providing video services
within their service areas.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In providing local and long-distance telephone services, we compete with the incumbent local phone company and various long-distance providers in each of our markets. BellSouth and
Verizon are the incumbent local phone companies in our markets. They offer both local and long-distance services in our markets and are particularly strong competitors. We also compete with providers of long-distance telephone services, such as
AT&T, MCI and Sprint. We also expect to compete in the near future with voice-over-IP providers.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In providing data services, we compete with traditional dial-up Internet service providers; incumbent local exchange carriers that provide dial-up and DSL services; providers of
satellite-based Internet access services; cable television companies; and providers of wireless high-speed data services. 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.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Costs and Expenses



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



16



---

##### Table of Contents

Costs of services includes:



| |  |  | Video cost of services. Video cost of services consists primarily of monthly fees to the National Cable Television Cooperative and other programming providers. Programming
costs are our largest single cost and we expect this trend to continue. Programming costs as a percentage of video revenue were approximately 50.3% and 50.6% for the three and six months ended June 30, 2005, compared to 49.7% and 49.2% for the three
and six months ended June 30, 2004. 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.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 was
approximately 16.2% and 16.4% for the three and six months ended June 30, 2005, compared to 14.3% and 15.1% for the three and six months ended June 30, 2004.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data and other costs of services. Data and other costs of services consist primarily of transport cost and network access fees. The data and other costs of services as a
percentage of data and other revenue were approximately 4.4% and 3.9% for the three and six months ended June 30, 2005, compared to 4.1% and 4.4% for the three and six months ended June 30, 2004.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 gross profits. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of our consolidated revenues
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 design, 24/7 maintenance
monitoring and plant maintenance activity.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | Customer service expenses. Customer service expenses include payroll and departmental costs incurred for customer service representatives and customer service management,
primarily at our centralized call center.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 costs in excess of net assets and other intangible assets related to 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 cost of services and operating expenses to increase as we add connections and grow our business.



17



---

##### Table of Contents

Results of Operations



Three months ended June 30, 2004 compared to three months ended June 30, 2005



The following table sets forth financial data as a percentage of operating revenues for the three months ended June 30, 2004
and 2005.



|                                                                               |  |                            |   |  |      |  
|------------------------------------------------------------------------------ |  | -------------------------- | - |  | ---- | -
|                                                                               |  | Three months endedJune 30, |  
|                                                                               |  | 2004                       |   |  | 2005 |  
|Operating revenues:                                                            |  |                            |   |  |      |  
|Video.                                                                         |  | 46                         | % |  | 45   | %
|Voice.                                                                         |  | 35                         |   |  | 34   |  
|Data                                                                           |  | 19                         |   |  | 21   |  
|                                                                               |  |                            |   |  |      |  
|Total.                                                                         |  | 100                        |   |  | 100  |  
|Operating expenses:                                                            |  |                            |   |  |      |  
|Cost of services                                                               |  | 29                         |   |  | 29   |  
|Selling, operating and administrative.                                         |  | 58                         |   |  | 51   |  
|Depreciation and amortization.                                                 |  | 34                         |   |  | 33   |  
|Loss on early extinguishment of debt                                           |  | 0                          |   |  | 1    |  
|                                                                               |  |                            |   |  |      |  
|Total.                                                                         |  | 121                        |   |  | 114  |  
|                                                                               |  |                            |   |  |      |  
|Operating loss                                                                 |  | (21                        | ) |  | (14  | )
|                                                                               |  |                           
|Interest expense, net                                                          |  | (15                        | ) |  | (14  | )
|Other income, net                                                              |  | 1                          |   |  | 1    |  
|                                                                               |  |                            |   |  |      |  
|Total other income and (expense)                                               |  | (14                        | ) |  | (13  | )
|                                                                               |  |                            |   |  |      |  
|Loss before income taxes, discontinued operations and preferred stock dividend |  | (35                        | ) |  | (27  | )
|Income tax benefit (provision)                                                 |  | 0                          |   |  | 0    |  
|Income from discontinued operations                                            |  | 0                          |   |  | 0    |  
|Preferred stock dividends                                                      |  | 0                          |   |  | 0    |  
|                                                                               |  |                            |   |  |      |  
|Net loss                                                                       |  | (35                        | ) |  | (27  | )



Revenues.
Operating revenues increased 8.6% from $52.8 million for the three months ended June 30, 2004, to $57.3 million for three months ended June 30, 2005. Operating revenues from video services increased 5.3% from $24.3 million for the three months ended
June 30, 2004, to $25.6 million for the same period in 2005. Operating revenues from voice services increased 5.6% from $18.4 million for the three months ended June 30, 2004, to $19.4 million for the same period in 2005. Operating revenues from
data and other services increased 22.0% from $10.1 million for the three months ended June 30, 2004, to $12.3 million for the same period in 2005.



The increased revenues are due primarily to an increase in the number of connections, from 373,064 as of June 30, 2004, to 414,341 as of June 30, 2005.
The additional connections resulted primarily from:



| |  |  | New service offerings specifically marketed to increase sales, customer bundling and connections penetration;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | Continued strong results from sales of voice and data services; and,
| | - |  | --------------------------------------------------------------------



| |  |  | Reduction in the churn of our customer base by offering and selling a more bundled service offering.
| | - |  | ----------------------------------------------------------------------------------------------------



Cost of Services. Cost of services increased 9.7% from $15.1 million for the three months ended June 30, 2004, to
$16.6 million for the three months ended June 30, 2005. Cost of services for video services increased 6.8% from $12.1 million for the three months ended June 30, 2004, to $12.9 million for the same period in 2005. Cost of services for voice services
increased 19.6% from $2.6 million for the three months ended June 30, 2004, to $3.1 million for the same period in 2005. Cost of services for data and other services increased 30.9% from $410,000 for the three months ended June 30, 2004, to $540,000
for the same period in 2005. The increase in our cost of services is primarily due to gains in connections and customers and cost associated with sales of our broadband carrier services. We expect our cost of services to continue to increase as we
grow our customer base and 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, as a result of
internally generated growth and acquisitions, 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
factors, which could adversely affect our cash flow and gross profit.



Gross Profit. Gross profit increased 8.2% from $37.6 million for the three months ended June 30, 2004, to $40.7 million for the three months ended June 30, 2005. Gross profit for video services increased 3.9% from 12.2 million for
the three months ended June 30, 2004, to $12.7.million for the same period in 2005. Gross profit for voice services increased 3.3% from $15.7 million for the three months ended June 30, 2004, to $16.3 million for the same period in 2005. Gross
profit for data and other services increased 21.6% from $9.7 million for the three months ended June 30, 2004, to $11.7 million for the same period in 2005. The increase in gross profit is primarily a result of the changes in revenues and cost of
services as described above.



18



---

##### Table of Contents

Operating Expenses. Our operating expenses, excluding depreciation and amortization, decreased
4.3% from $30.7 million for the three months ended June 30, 2004, to $29.3 for the three months ended June 30, 2005. The decrease in our operating expenses included savings as operating efficiencies are realized from the utilization of our single
billing platform.



Our capital market activities were $235,000
for the three months ended June 30, 2004. The 2004 expense was primarily a result of fees and charges related to our proposed financing transactions.



Our non-cash stock option compensation expense decreased from $1.8 million for the three months ended June 30, 2004 to $600,000 for the three months ended
June 30, 2005. We expense options in accordance with SFAS No. 123 (revised 2004), Share-Based Payment using a fair value based on a Black-Scholes calculation.



Our litigation fees were $23,000 for the three months ended June 30, 2004, compared to $11,000 for the three months ended
June 30, 2005.



Our depreciation and amortization
increased from $18.3 million for the three months ended June 30, 2004, to $18.7 million for the three months ended June 30, 2005. The increase in depreciation and amortization resulted primarily from the increased spending for additions in property,
plant, equipment to upgrade our Pinellas County market to broadband capacity. We expect depreciation and amortization expense to decrease as our overall capital expenditures decrease and existing long-lived assets become fully depreciated.



Other Income and Expense, Including Interest Income and
Interest Expense. Our total other expense increased from $7.4 million for the three months ended June 30, 2004, to $7.7 million for the three months ended June 30, 2005. Interest income was $180,000 for the three months ended June 30, 2004,
compared to $88,000 for the same period in 2005. The decrease in interest income primarily reflects a lower average cash balance for the three months ended June 30, 2005. Interest expense was $7.7 million for the three months ended June 30, 2004,
and $8.0 million for the three months ended June 30, 2005.



During the second quarter of 2004 and 2005, 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. The published market per share value of our common stock on June 30, 2005 was $1.91 resulting in a $42,000 gain on
the adjustment of warrants to market value. Other income, net increased from $12,000 for three months ended June 30, 2004 to $139,000 for the three months June 30, 2005.



Income Tax Provision. We recorded no income tax benefit for the three months ended June 30, 2004 and 2005,
respectively, as our net operating losses are fully offset by a valuation allowance.



Loss Before Discontinued Operations. We incurred a loss before discontinued operations of $18.7 million for the three months ended June 30, 2004, compared to a loss before discontinued operations of $15.5
million for the three months ended June 30, 2005.



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, California cable system to be a long-lived
asset to be disposed of based on our actions taken to sell the property. Our income from discontinued operations was $10,000 for the three months ended June 30, 2004 compared to $47,000 for the same period in 2005, and represents the income from our
Cerritos operations.



Preferred Stock Dividends. On June
30, 2005, we issued 7,051 additional shares of Series AA preferred stock as a dividend on the privately sold shares of Series AA preferred stock and recognized an expense of $71,000 for the three months ended June 30, 2005.



Net LossAttributable to Common Stockholders. We incurred a net
loss attributable to common stockholders of $18.7 million and $15.6 million for the three months ended June 30, 2004 and 2005, respectively. The decrease in net loss is a result of the changes in revenues and expenses as described above.



19



---

##### Table of Contents

Six months ended June 30, 2004 compared to six months ended June 30, 2005



The following table sets forth financial data as a percentage of operating
revenues for the six months ended June 30, 2004 and 2005.



|                                                                               |  |                          |   |  |      |  
|------------------------------------------------------------------------------ |  | ------------------------ | - |  | ---- | -
|                                                                               |  | Six months endedJune 30, |  
|                                                                               |  | 2004                     |   |  | 2005 |  
|Operating revenues:                                                            |  |                          |   |  |      |  
|Video.                                                                         |  | 47                       | % |  | 45   | %
|Voice.                                                                         |  | 34                       |   |  | 34   |  
|Data                                                                           |  | 19                       |   |  | 21   |  
|                                                                               |  |                          |   |  |      |  
|Total.                                                                         |  | 100                      |   |  | 100  |  
|Operating expenses:                                                            |  |                          |   |  |      |  
|Cost of services                                                               |  | 29                       |   |  | 29   |  
|Selling, operating and administrative.                                         |  | 57                       |   |  | 52   |  
|Depreciation and amortization.                                                 |  | 35                       |   |  | 33   |  
|Loss on early extinguishment of debt                                           |  | 0                        |   |  | 1    |  
|                                                                               |  |                          |   |  |      |  
|Total.                                                                         |  | 121                      |   |  | 115  |  
|                                                                               |  |                          |   |  |      |  
|Operating loss                                                                 |  | (21                      | ) |  | (15  | )
|                                                                               |  |                         
|Interest expense, net                                                          |  | (14                      | ) |  | (14  | )
|Other income, net                                                              |  | 0                        |   |  | 0    |  
|                                                                               |  |                          |   |  |      |  
|Total other income and (expense)                                               |  | (14                      | ) |  | (14  | )
|                                                                               |  |                          |   |  |      |  
|Loss before income taxes, discontinued operations and preferred stock dividend |  | (35                      | ) |  | (29  | )
|Income tax benefit (provision)                                                 |  | 0                        |   |  | 0    |  
|Income from discontinued operations                                            |  | 0                        |   |  | 0    |  
|Preferred stock dividends                                                      |  | 0                        |   |  | 0    |  
|                                                                               |  |                          |   |  |      |  
|Net loss                                                                       |  | (35                      | ) |  | (29  | )



Revenues.
Operating revenues increased 5.4% from $106.5 million for the six months ended June 30, 2004, to $112.3 million for six months ended June 30, 2005. Operating revenues from video services increased 1.2% from $49.7 million for the six months ended
June 30, 2004, to $50.3 million for the same period in 2005. Operating revenues from voice services increased 5.2% from $36.4 million for the six months ended June 30, 2004, to $38.3 million for the same period in 2005. Operating revenues from data
and other services increased 16.0% from $20.4 million for the six months ended June 30, 2004, to $23.7 million for the same period in 2005.



Cost of Services. Cost of services increased 5.8% from $30.9 million for the six months ended June 30, 2004, to $32.7 million for the six months
ended June 30, 2005. Cost of services for video services increased 4.1% from $24.5 million for the six months ended June 30, 2004, to $25.5 million for the same period in 2005. Cost of services for voice services increased 13.7% from $5.5 million
for the six months ended June 30, 2004, to $6.3 million for the same period in 2005. Cost of services for data and other services decreased 2.4% from $905,000 for the six months ended June 30, 2004, to $927,000 for the same period in 2005.



Gross Profit. Gross profit increased 5.3% from $75.6
million for the six months ended June 30, 2004, to $79.6 million for the six months ended June 30, 2005. Gross profit for video services decreased 1.6% from 25.2 million for the six months ended June 30, 2004, to $24.9.million for the same period in
2005. Gross profit for voice services increased 3.7% from $30.9 million for the six months ended June 30, 2004, to $32.0 million for the same period in 2005. Gross profit for data and other services increased 16.7% from $19.5 million for the six
months ended June 30, 2004, to $22.7 million for the same period in 2005.



Operating Expenses. Our operating expenses, excluding depreciation and amortization, decreased 2.4% from $60.5 million for the six months ended June 30, 2004, to $59.1 for the six months ended June 30, 2005.



Our capital market activities were $648,000 for the six months
ended June 30, 2004, compared to $62,000 for the six months ended June 30, 2005.



Our non-cash stock option compensation expense decreased from $2.3 million for the six months ended June 30, 2004 to $930,000 for the six months ended June 30, 2005.



Our litigation fees were $23,000 for the six months ended June 30, 2004,
compared to $26,000 for the six months ended June 30, 2005.



Our depreciation and amortization increased from $37.6 million for the six months ended June 30, 2004, to $37.3 million for the six months ended June 30, 2005.



Other Income and Expense, Including Interest Income and Interest Expense. Our total other expense increased from
$14.6 million for the six months ended June 30, 2004, to $15.2 million for the six months ended June 30, 2005. Interest income was $339,000 for the six months ended June 30, 2004, compared to $292,000 for the same period in 2005. Interest expense
was $15.5 million for the six months ended June 30, 2004, and $15.8 million for the six months ended June 30, 2005.



20



---

##### Table of Contents

During the first and second quarter of 2004 and 2005, 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 $6.97 and on June 30, 2004 was $4.97 resulting in
a $419.000 gain on the adjustment of warrants to market value. The published market per share value of our common stock on March 31, 2005 was $2.37 on June 30, 2005 was $1.91 resulting in a $181,000 gain on the adjustment of warrants to market
value. Other income, net decreased from $164,000 for six months ended June 30, 2004 to $141,000 for the six months June 30, 2005.



Income Tax Provision. We recorded no income tax benefit for the six months ended June 30, 2004 and 2005, respectively, as our net operating losses
are fully offset by a valuation allowance.



Loss Before
Discontinued Operations. We incurred a loss before discontinued operations of $37.0 million for the six months ended June 30, 2004, compared to a loss before discontinued operations of $32.5 million for the six months ended June 30, 2005.



Net Income from Discontinued Operations.Our income
from discontinued operations was $10,000 for the six months ended June 30, 2004 compared to $92,000 for the same period in 2005.



Preferred Stock Dividends. On June 30, 2005, we recognized an expense of $71,000 for the six months ended June 30, 2005.



Net LossAttributable to Common Stockholders. We incurred a net
loss attributable to common stockholders of $37.0 million and $32.4 million for the six months ended June 30, 2004 and 2005, respectively.



Liquidity and Capital Resources



Overview.



In March 2005, we entered into a definitive asset purchase agreement to sell our cable assets located in Cerritos, California to WaveDivision Holdings,
LLC for $10.0 million in cash, subject to customary closing adjustments. We expect the sale of the Cerritos system to close near the end of the third quarter of 2005, subject to the satisfaction of closing conditions, including receipt of regulatory
approvals with respect to the municipal franchise in Cerritos, California. However, there can be no assurance that we will complete the sale of the Cerritos cable system or we may not complete the sale in a timely manner.



On May 26, 2005, we issued 920,000 shares of a newly created series of
preferred stock, the Series AA convertible preferred stock, in a private offering to certain new and existing investors at a purchase price of $10.00 per share, for aggregate gross proceeds before expenses of $9.2 million. We have also announced our
plans to complete a rights offering in the third or fourth quarter of 2005, that could result in net proceeds to the Company of up to $10.5 million. The net proceeds from the rights offering will be used to pay down existing indebtedness.



On June 29, 2005, we entered into a first lien credit
agreement and second lien credit agreement providing us with aggregate cash proceeds of $280 million. Credit Suisse, Cayman Islands Branch, acted as administrative agent and sole lead arranger. We used these proceeds, together with cash on hand, to
repay all amounts outstanding under our credit facilities with Wachovia Bank, National Association and CoBank, ACB and to redeem our 12% senior notes due 2009, which were redeemed on July 29, 2005.



We believe there is adequate liquidity from cash on hand, cash provided from
operations and funds available under the $25.0 million revolver to meet our capital spending requirements and to execute our current business plan.



The first lien credit agreement provides for a five-year senior secured $185 million term loan facility, all of which is currently outstanding, and a $25
million revolving loan and letter of credit facility of which no funds have been drawn. The first lien term facility bears interest at a base rate plus 4.5% or a Eurodollar rate plus 5.5%. The unused portion of the first lien revolving facility is
subject to an annual fee of between .375% and .75%, depending on usage of the facility. Interest on the first lien facilities is payable quarterly. The first lien term facility amortizes at a rate of 1.0% per annum, payable quarterly, and matures on
June 29, 2010. We may prepay amounts outstanding under the first lien term facility prior to maturity, but we must pay a premium if we prepay prior to June 29, 2008, except for prepayments made with the proceeds from the sale of our equity
securities..



The second lien credit agreement provides for a
six-year senior secured term loan facility with an aggregate principal amount at maturity of approximately $99 million. On June 29, 2005, we received proceeds of $95 million. Borrowings under the second lien term facility bear interest at a base
rate plus 9.0% or a Eurodollar rate plus 10.0%. This facility does not amortize and the entire unpaid principal amount is due in full on the maturity date of June 29, 2011. We may not prepay any amount outstanding prior to June 29, 2008, except for
prepayments made with the proceeds from the sale of our equity securities. If we prepay any amounts after June 29, 2008 but prior to June 29, 2011, we are required to pay a premium.



21



---

##### Table of Contents

Both credit facilities are guaranteed by all of our subsidiaries, except that the guarantees by certain
of our subsidiaries are subject to pending regulatory approval. The credit facilities are also secured by first and second liens on all of our assets and the assets of our guarantor subsidiaries.



The credit agreements both contain customary representations and warranties
and various affirmative and negative covenants, including:



| |  |  | limitations on the incurrence of additional debt;
| | - |  | -------------------------------------------------



| |  |  | limitations on the incurrence of liens;
| | - |  | ---------------------------------------



| |  |  | restrictions on investments;
| | - |  | ----------------------------



| |  |  | restrictions on the sale of assets;
| | - |  | -----------------------------------



| |  |  | restrictions on the payment of cash dividends on and the redemption or repurchase of capital stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | mandatory prepayment of amounts outstanding under the first lien facilities or second lien facility, as applicable, with excess cash flow, proceeds from asset sales, proceeds from
the issuance of debt obligations, proceeds from any equity offerings, and proceeds from casualty losses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restrictions on mergers and acquisitions, sale/leaseback transactions and fundamental changes in the nature of our business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on capital expenditures; and
| | - |  | ----------------------------------------



| |  |  | maintenance of minimum ratios of first lien debt to EBITDA (as defined in the credit agreements), total debt to EBITDA, and EBITDA to cash interest.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------



The credit agreements also include customary events of default, including but
not limited to:



| |  |  | nonpayment of principal, interest or other fees or amounts;
| | - |  | -----------------------------------------------------------



| |  |  | incorrectness of representations and warranties in any material respect;
| | - |  | ------------------------------------------------------------------------



| |  |  | violations of covenants;
| | - |  | ------------------------



| |  |  | cross defaults and cross acceleration;
| | - |  | --------------------------------------



| |  |  | bankruptcy;
| | - |  | -----------



| |  |  | material judgments;
| | - |  | -------------------



| |  |  | ERISA events;
| | - |  | -------------



| |  |  | actual or asserted invalidity of provisions of or liens created under guarantees or security documents;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | change of control;
| | - |  | ------------------



| |  |  | material violations of environmental laws;
| | - |  | ------------------------------------------



| |  |  | defaults under material contractual obligations; and
| | - |  | ----------------------------------------------------



| |  |  | the failure to maintain our licenses and franchises if such failure would have a material adverse effect.
| | - |  | ---------------------------------------------------------------------------------------------------------



As discussed above, the borrowings under our credit facilities bear interest at variable rates and expose us to interest
rate risk. If interest rates increase, our debt service obligations on our variable rate debt would also increase even though the amount borrowed remained the same. An increase of 1.0% in the interest rates payable on our credit facilities would
increase our estimated debt service requirements for the third and fourth quarters of 2005 by approximately $140,000 in the aggregate. We have entered into hedging arrangements to mitigate our risk with respect to our variable rate debt.



22



---

##### Table of Contents

Operating, Investing and Financing Activities.



As of June 30, 2005, we had a net working capital deficit of $11.3 million, compared to net working capital of $3.2 million
as of December 31, 2004. The decrease in working capital from December 31, 2004, to June 30, 2005, is primarily due to the use of the cash to satisfy long-term debt obligations and the accrual of cash interest payable during the second quarter of
2005.



Net cash provided by operating activities from
continuing operations totaled $22.5 million and $6.5 million for the six months ended June 30, 2004 and 2005, respectively, and operating activities from discontinued operations used $0.1 million for the six months ended June 30, 2004 and 2005,
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;
| | - |  | -----------------------------------



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



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



| |  |  | gain on disposition of assets;
| | - |  | ------------------------------



| |  |  | accretion of bank loans;
| | - |  | ------------------------



| |  |  | loss on early extinguishment of debt; and
| | - |  | -----------------------------------------



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



Net cash used for investing activities was $27.5 million and $238.2 million for the six months ended June 30, 2004 and 2005, respectively. Our investing
activities for the six months ended June 30, 2004, consisted of $26.8 million of capital expenditures, $161.6 million for the purchase of short term investments, $253,000 of organizational and franchise expenditures and $500,000 of cash pledged as
security partially offset by $161.5 million from the sale of short term investments and $152,000 of proceeds from the sale of property. Investing activities for the six months ended June 30, 2005, consisted of $14.0 million of capital expenditures,
$4.0 million for the purchase of short term investments, $101,000 of organizational and franchise expenditures and $236.9 million of cash pledged as security, partially offset by $16.6 million from the sale of short term investments and $104,000 of
proceeds from the sale of property.



We received net cash flow
from financing activities of $5.5 million and $232,000 for the six months ended June 30, 2004 and 2005, respectively. Financing activities for the six months ended June 30, 2004 consisted primarily of $7.3 million of net proceeds from the
fulfillment of the over allotment option of our initial public offering of common stock partially offset by $1.8 million in principal payments on debt. For the six months ended June 30, 2005, financing activities primarily consisted of $9.2 million
in proceeds from the issuance of the Series AA convertible preferred stock and $280.0 million in proceeds from long-term debt, a portion of which was used to redeem our 12% senior notes due 2009 on July 29, 2005, partially offset by $47.4 million in
principal payment to repay all amounts outstanding under our credit facilities with Wachovia Bank, National Association and CoBank, ACB and $9.5 million in expenditures related to the issuance of long-term debt.



Capital Expenditures



We spent approximately $14.0 million in capital expenditures during the six months ended June 30, 2005, of which
approximately $5.5 million related to network construction and enhancement and the remainder related 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 expect to
spend approximately $30.5 million in capital expenditures during 2005. The credit agreements and covenants on our new debt limit the amount of our capital expenditures on an annual basis.



We do not intend to expand into 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



23



---

##### Table of Contents

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.



Contractual Obligations



The following table sets forth, as of June 30, 2005, our long-term debt, capital leases and operating lease obligations for
the next twelve months ending June 30, 2006, the following five years and thereafter. The long-term debt obligations are our cash debt service obligations, including both principal and interest. The capital lease obligations are our future rental
payments under one lease with a 10-year term and network fiber leasing aggreements. Operating lease obligations are the future minimum rental payments required under the operating leases that have initial or remaining non-cancelable lease terms in
excess of one year as of June 30, 2005.



|                               |  |                |         |                                  |   |                                                         |  |                                  |         |                    |   |         |  |   |        
|------------------------------ |  | -------------- | ------- | -------------------------------- | - | ------------------------------------------------------- |  | -------------------------------- | ------- | ------------------ | - | ------- |  | - | -------
|Contractual obligations        |  | Total          |         | July 1, 2005Through June 30,2006 |   | Payment due by periodJuly 1, 2006 Through June 30, 2008 |  | July 1, 2008through June 30,2010 |         | After June 30,2009
|                               |  | (in thousands)
|Long-term debt obligations     |  | $              | 517,097 |                                  | $ | 238,286                                                 |  | $                                | 2,381   |                    | $ | 178,131 |  | $ | 98,299 
|Interest                       |  |                | 161,982 |                                  |   | 33,701                                                  |  |                                  | 57,675  |                    |   | 56,908  |  |   | 13,698 
|Capital lease obligation       |  |                | 2,354   |                                  |   | 233                                                     |  |                                  | 623     |                    |   | 743     |  |   | 755    
|Operating lease obligations    |  |                | 12,024  |                                  |   | 2,422                                                   |  |                                  | 3,378   |                    |   | 2,051   |  |   | 4,173  
|                               |  |                |         |                                  |   |                                                         |  |                                  |         |                    |   |         |  |   |        
|Programming contracts(1)       |  |                | 152,337 |                                  |   | 50,193                                                  |  |                                  | 102,144 |                    |   | 0       |  |   | 0      
|                               |  |                |         |                                  |   |                                                         |  |                                  |         |                    |   |         |  |   |        
|Pole attachment obligations(2) |  |                | 9,053   |                                  |   | 2,972                                                   |  |                                  | 6,081   |                    |   | 0       |  |   | 0      
|                               |  |                |         |                                  |   |                                                         |  |                                  |         |                    |   |         |  |   |        
|Total                          |  | $              | 854,847 |                                  | $ | 327,807                                                 |  | $                                | 172,282 |                    | $ | 237,833 |  | $ | 116,925
|                               |  |                |         |                                  |   |                                                         |  |                                  |         |                    |   |         |  |   |        

---

|(1) | The Company has entered into contracts with various entities to provide
programming to be aired by the Company. The Company pays a monthly fee for the programming services, generally based on the number of average video subscribers to the program, although some fees are adjusted based on the total number of video
subscribers to the system and/or the system penetration percentage. The amounts presented are based on the estimated number of connections we will have in future periods through the completion of the current contracts
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Federal law requires utilities, defined to include all local telephone companies and electric
utilities except those owned by municipalities and co-operatives, to provide cable operators and telecommunications carriers with nondiscriminatory access to poles, ducts, conduit and rights-of-way at just and reasonable rates. Utilities may charge
telecommunications carriers a different rate for pole attachments than they charge cable operators providing solely cable service. The amounts presented are based on the estimated number of poles we will attach to in future periods through the
completion of the current contracts.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Recent Accounting
Pronouncements



In December 2004, the FASB issued SFAS No.
123 (revised 2004), Share-Based Payment (SFAS No. 123R), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (SFAS No. 123) and supercedes APB Opinion No. 25, Accounting for
Stock Issued to Employees. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the first interim or
annual period after June 15, 2005, with early adoption encouraged. In addition, SFAS No. 123R will cause unrecognized expense related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over
the remaining vesting period. In December 2002 we elected to adopt the recognition provisions of SFAS No. 123 which is considered the preferable accounting method for stock-based employee compensation. We also elected to report the change in
accounting principle using the prospective method in accordance with SFAS No. 148. Under the prospective method, the recognition of compensation costs is applied to all employee awards granted, modified or settled after the beginning of the fiscal
year in which the recognition provisions are first applied. Because the fair value recognition provisions of SFAS No. 123 were adopted effective January 1, 2002, we do not expect this revised standard to have a material impact on our financial
statements.



In March 2005, the FASB issued FASB Interpretation
No. 47, Accounting for Conditional Asset Retirement Obligations (FIN 47). FIN 47 clarifies that the term conditional asset retirement obligation as used in FASB Statement No. 143, Accounting for Asset Retirement Obligations,
refers to a legal obligation of an entity to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not he within the control of the entity. Such an obligation to
perform the asset retirement activity is unconditional even though uncertainty exists about the timing and/or method of settlement. Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement
obligation if the fair value of the liability can be reasonably estimated. FIN 47 is effective for us no later than December 31, 2005. We are currently evaluating the impact, if any, on our results of operations and financial position.



In May 2005, the FASB issued SFAS No. 154, Accounting Changes and Error
Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3 (SFAS No. 154). This Statement replaces APB Opinion No. 20, Accounting Changes and FASB



24



---

##### Table of Contents

Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in an accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the
pronouncement does not include specific transition provisions. SFAS No. 154 is effective for accounting changes and error corrections occurring in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a
material effect 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, if used, are employed as risk management tools and not for trading purposes.



The borrowings under our credit facilities bear interest at variable rates and expose us to interest rate risk. If interest rates increase, our debt
service obligations on our variable rate debt would also increase even though the amount borrowed remained the same. We entered into hedging arrangement on July 14, 2005, to mitigate our risk with respect to our variable rate debt.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures. The Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer, have evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2005. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that,
as of June 30, 2005, the Companys disclosure controls and procedures were effective.



In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute,
assurance of achieving the desired control objectives and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.



Changes in
Internal Control over Financial Reporting.There have been no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2005 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.



25



---

##### Table of Contents

PART II. OTHER INFORMATION



ITEM 1. Legal Proceedings



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. Unregistered Sales Of Equity Securities And Use Of Proceeds



Previously Reported



ITEM 3. Default Upon Senior Securities



None



ITEM 4. Submission Of Matters To A Vote Of Security Holders



On May 4, 2004, we held our annual meeting of stockholders. At the meeting, the holders of our common stock voted to re-elect Mr. Eugene I. Davis (with 19,638,192 shares voting for and 15,129 shares withheld), Mr.
Rodger L. Johnson (with 19,637,965 shares voting for and 15,356 shares withheld) and Mr. Campbell B. Lanier (with 19,634,865 shares voting for and 18,456 shares withheld) as Class III board members to serve for three-year terms or until their
successors are duly elected and qualified.



ITEM 5. Other Information



On
August 11, 2005, Robert K. Mills resigned from his position as Chief Financial Officer of Knology, Inc. to pursue another career opportunity. Also on August 11, 2005, Knology Inc. appointed M. Todd Holt to serve as its Chief Financial Officer. Mr.
Holt, 38, has served as Knologys Corporate Controller since 1998. Mr. Holt has over 17 years of experience in the accounting and finance field and previously practiced public accounting as an audit manager with Ernst & Young. Mr. Holt is a
member of the American Institute of Certified Public Accountants.



26



---

##### Table of Contents

ITEM 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                                                                          
|------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                                                                                                      
|3.1           |  | Amended and Restated Certificate of Incorporation of Knology, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.s Quarterly Report Form 10-Q for the period ended
June 30, 2004)                                                                                                                                    
|              | 
|3.2           |  | Certificate of Designations defining the rights of the Series AA Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.s Current Report on Form
8-K filed on May 27, 2005)                                                                                                                       
|              | 
|3.3           |  | Certificate of Designations of Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of Series X Junior Participating Preferred Stock of Knology, Inc. (Incorporated herein
by reference to Exhibit 3.1 to Knology, Inc.s Current Report on Form 8-K filed July 29, 2005)                                           
|              | 
|3.4           |  | 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))                                                                                                                                                                                      
|              | 
|10.1          |  | $210,000,000 First Lien Credit Agreement, dated as of June 29, 2005, among Knology, Inc., as Borrower and the Lenders and Issuers Party thereto and Credit Suisse, Cayman Islands Branch, as
Administrative Agent and Collateral Agent and Credit Suisse, Cayman Islands Branch, as Sole Bookrunner and Sole Lead Arranger               
|              | 
|10.2          |  | First Lien Pledge and Security Agreement, dated as of June 29, 2005, among Knology, Inc. as a Grantor and Each Other Grantor From Time to Time Party Thereto and Credit Suisse, Cayman Islands
Branch, as Collateral Agent                                                                                                               
|              | 
|10.3          |  | First Lien Guaranty, dated as of June 29, 2005, by Knology, Inc., as Borrower, and each of the subsidiaries of Knology listed on the signature pages thereof or that becomes a party thereto
pursuant to Section 24 thereof.                                                                                                             
|              | 
|10.4          |  | $98,958,333 Second Lien Credit Agreement, dated as of June 29, 2005, among Knology, Inc., as Borrower and the Lenders Party thereto and Credit Suisse, Cayman Islands Branch, as Administrative
Agent and Collateral Agent and Credit Suisse, Cayman Islands Branch, as Sole Bookrunner and Sole Lead Arranger                           
|              | 
|10.5          |  | Second Lien Pledge and Security Agreement, dated as of June 29, 2005, among Knology, Inc. as a Grantor and Each Other Grantor From Time to Time Party Thereto and Credit Suisse, Cayman Islands
Branch, as Collateral Agent                                                                                                              
|              | 
|10.6          |  | Second Lien Guaranty, dated as of June 29, 2005, by Knology, Inc., as Borrower, and each of the subsidiaries of Knology listed on the signature pages thereof or that becomes a party thereto
pursuant to Section 24 thereof.                                                                                                            
|              | 
|10.7          |  | Series AA Preferred Stock Purchase Agreement, dated as of May 4, 2005, by and among Knology, Inc. and the Purchasers named therein.                                                                                                                                                                                                      
|              | 
|10.8          |  | Registration Rights Agreement, dated May 26, 2005, among Knology, Inc., certain holders of the Series AA Convertible Preferred Stock (Incorporated herein by reference to Exhibit 4.7 to
Knology Inc.s Registration Statement on Form S-3 (File No. 333-127129))                                                                        
|              | 
|10.9          |  | Shareholder Protection Rights Agreement, dated as of July 27, 2005, by and between Knology, Inc. and Wachovia Bank, N.A., acting as Rights Agent (which includes as Exhibit A thereto the Form
of Rights Certificate) (Incorporated herein by reference to Exhibit 4.1 to Knology, Inc.s Current Report on Form 8-K filed July 29, 2005)
|              | 
|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                                                                                                                                                                                                                                                   



27



---

##### Table of Contents

SIGNATURES



Pursuant to the
requirements of Section 13 or 15(d) 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 15, 2005 |  |  |  | By:           |  | /s/ Rodger L. Johnson                
|                |  |  |  |               |  | Rodger L. Johnson                    
|                |  |  |  |               |  | President and Chief Executive Officer
|                |  |  | 
|August 15, 2005 |  |  |  | By:           |  | /s/ M. Todd Holt                     
|                |  |  |  |               |  | M. Todd Holt                         
|                |  |  |  |               |  | Chief Financial Officer              



28