UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004

COMMISSION FILE NUMBER: 000-32647

KNOLOGY, INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act:
None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock
Options to Purchase Shares of Common Stock

     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 þ No o

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

     The aggregate market value of the outstanding common equity held by non-affiliates of the registrant at June 30, 2004, was approximately $66.2 million, computed based on the closing sale price as quoted on the Nasdaq National Market on that date.

     As of January 31, 2005, we had 23,697,787 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

     Parts of the registrant’s proxy statement on Schedule 14A for its 2005 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.

TABLE OF CONTENTS

THIS ANNUAL REPORT ON FORM 10-K INCLUDES FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT INVOLVE RISKS AND UNCERTAINTIES. IN ADDITION, MEMBERS OF OUR SENIOR MANAGEMENT MAY, FROM TIME TO TIME, MAKE CERTAIN FORWARD-LOOKING STATEMENTS CONCERNING OUR OPERATIONS, PERFORMANCE AND OTHER DEVELOPMENTS. OUR ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE ANTICIPATED IN SUCH FORWARD-LOOKING STATEMENTS AS A RESULT OF VARIOUS FACTORS, INCLUDING THOSE SET FORTH IN ITEM 1 OF PART I UNDER THE CAPTION “BUSINESS—RISK FACTORS” AND ELSEWHERE IN THIS ANNUAL REPORT ON FORM 10-K, AS WELL AS FACTORS WHICH MAY BE IDENTIFIED FROM TIME TO TIME IN OUR OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION OR IN THE DOCUMENTS WHERE SUCH FORWARD-LOOKING STATEMENTS APPEAR.

PART I

     For convenience in this annual report, “Knology,” “we,” “us,” and “the Company” refer to Knology, Inc. and our consolidated subsidiaries, taken as a whole.

ITEM 1. BUSINESS

     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. As of and for the year ended December 31, 2004, we had approximately 398,000 total connections, our revenues were $211.5 million and we had a net loss of $75.6 million. Video, voice and data revenues accounted for approximately 46%, 34% and 20%, respectively, of our consolidated revenues for the year ended December 31, 2004.

     We provide our services over our wholly owned, fully upgraded 750 MHz interactive broadband network. As of December 31, 2004, our network passed approximately 756,000 marketable homes. Our network is designed with sufficient capacity to meet the growing demand for high-speed and high-bandwidth video, voice and data services, as well as the introduction of new communications services.

     We have operating experience in marketing, selling, provisioning, servicing and operating video, voice and data systems and services. We have delivered a bundled service offering for seven years, and we are supported by a management team with decades of experience operating video, voice and data networks. We provide a full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama City and portions of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. We began offering our bundled service package in Pinellas County, Florida during 2004 on a limited basis. We plan to complete the enhancement of our network assets in Pinellas County making the bundle offering available to all of our marketable passings.

     We also provide video services in Cerritos, California, but do not currently intend to upgrade or enhance this network to provide additional services. We have previously announced our intention to sell our Cerritos, California operations, which we acquired as part of the Verizon Media acquisition described below, but there can be no assurance that we will be able to do so on terms that are attractive to us.

     We have built our company through:

	•	acquisitions of other cable companies, networks and franchises;
	•	upgrades of acquired networks to introduce expanded broadband services, including bundled 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, along with new service offerings.

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

     In December 2003, we completed the acquisition from Verizon Media Ventures Inc., a wholly owned subsidiary of Verizon Communications Inc., of substantially all of the assets of the cable systems in Pinellas County, Florida and Cerritos, California operated by Verizon Media, including all franchises, leases for real property, customer agreements, accounts receivable, prepaid expenses, inventory and equipment. We also licensed certain intellectual property related to each network and assumed liabilities

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under acquired contracts, certain current liabilities and certain operating liabilities to the extent they related to the acquired network assets.

     We paid Verizon Media an aggregate of approximately $17.0 million in cash, which was funded with the net proceeds of our common stock offering. In connection with the completion of this acquisition, we also issued to a prior prospective purchaser and certain of its employees warrants to purchase one million shares of our common stock with an exercise price of $9.00 per share in exchange for the release of the prospective purchaser’s exclusivity rights with Verizon Media.

     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 in 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. 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.

Our Industry

     In recent years, regulatory developments and advances in technology have substantially altered the competitive dynamics of the communications industry and blurred the lines among traditional video, voice and data providers. The Telecommunications Act of 1996 and its implementation through FCC regulation have encouraged competition in these markets. Advances in technology have made the transmission of video, voice and data on a single platform feasible and economical. Communications providers seek to bundle products to leverage their significant capital investments, protect market share in their core service offerings from new sources of competition, and achieve operating efficiencies by providing more than one service over their networks at lower incremental costs while increasing revenue from the existing customer base.

     Incumbent cable operators are working to expand their core services to begin offering a bundled package of services. Many of the cable operators’ bundling strategies include the provision of Internet based voice services for their customers. Most of the major providers have announced plans to roll out Voice over Internet Protocol (“VoIP”) services in the next few years. Some operators have circuit-switched networks in some of their markets that are capable of offering voice services. According to the NCTA, as of December 31, 2004, there were approximately 3 million cable voice customers in the United States. However, most cable providers will need to incur additional capital costs to upgrade their existing networks for voice capability. In addition, they will need to devote and develop significant management resources for the deployment of voice services on a large scale.

     We believe the future of the industry will include a broader competitive landscape in which communications providers will offer bundled video, voice and data services and compete with each other based on scope and depth of the service offering, pricing and convenience. While many competitors have begun to offer bundled services in response to these industry factors, few have been able to offer a full suite of services on a large scale.

  Our Strategy

     Our goal is to be the leading provider of integrated broadband communications services to residential and business customers in our target markets and to fully leverage the capacity and capability of our interactive broadband network. The key components of our strategy include:

	•	Focus on offering fully integrated bundles of video, voice and data services. We provide video, voice and data services over our broadband network and promote the adoption of these services by new and existing customers in bundled offerings. Bundling is central to our operating strategy and provides us with meaningful revenue opportunities, enables us to increase penetration and operating efficiencies, facilitates customer service, and reduces customer acquisition and installation costs. We believe that offering our customers a bundle of video, voice and data services allows us to maximize the revenue generating capability of our network, increase revenue per customer, provide greater pricing flexibility and promote customer retention.
		Leverage our broadband network to provide new services. We built our high-capacity, interactive broadband network with fiber optics as close to the customer as economically feasible. We have completed our network upgrade in all of our current markets (with the exception of Cerritos, CA), which enables us to provide at least 750 MHz of capacity and two-way capability to all of our homes passed in these markets. We have invested in advanced technology platforms that support advanced communications services and multiple emerging interactive services such as video-on-demand, subscriber video-on-demand, digital video recorder, interactive television, high-definition television, Internet Protocol Centrex services and passive optical network services in those markets. We have begun to enhance our network assets in Pinellas County, Florida to provide voice services and started offering these services in late 2004.
	•	Deliver industry-leading customer service. Outstanding customer service is a critical element of our operating philosophy. Through our call center, which we operate 24 hours a day, seven days a week, we deliver personalized and

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responsive customer care that promotes customer loyalty. Through our network operations center, we monitor and evaluate network performance and quality of service. Our philosophy is to be proactive in retaining customers rather than reactive, and we strive to resolve service delivery problems prior to the customer becoming aware of them. As we own our network and actively monitor our digital services from a centralized location to the customer premises, we have greater control over the quality of the services we deliver to our customers and, as a result, the overall customer experience. We have introduced a new enterprise management system that enhances our service capability by providing us with a single platform for sales, provisioning, customer care, trouble ticketing, credit control, scheduling and dispatch of service calls, as well as providing our customers with a single bill for all services.

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Pursue expansion opportunities. We have a history of acquiring, integrating, upgrading and expanding systems, enabling us to offer bundled video, voice and data services and increasing our revenue opportunity, penetration and operating efficiency. To augment our organic growth, we will pursue value-enhancing expansion opportunities meeting our previously described target market criteria that allow us to leverage our experience as a bundled broadband provider and endorse our operating philosophy of delivering profitable growth. These opportunities include acquisitions and edge-out expansion in new or existing markets. We will continue to evaluate growth opportunities based on targeted return requirements.

  Our Interactive Broadband Network

     Our network is critical to the implementation of our operating strategy, allowing us to offer bundled video, voice and data services to our customers in an efficient manner and with a high level of service. In addition to providing high capacity and scalability, our network has been specifically engineered to have increased reliability, including features such as:

	•	redundant fiber routing and uses SONET protocol which enables the rapid, automatic redirection of network traffic in the event of a fiber cut;
	•	back-up power supplies in our network which ensure continuity of our service in the event of a power outage; and
	•	network monitoring to the customer premises for all digital video, voice and data services.

  Technical overview

     Our interactive broadband network consists of fiber-optic cable, coaxial cable and copper wire. Fiber-optic cable is a communications medium that uses hair-thin glass fibers to transmit signals over long distances with minimum signal loss or distortion. In most of our network, our system’s main high capacity fiber-optic cables connect to multiple nodes throughout a network. These nodes are connected to individual homes and buildings by coaxial cable and are shared by a number of customers, generally 500 homes. We have sufficient fibers in our cables to further subdivide our nodes to 125 homes if growth so dictates. Our network has excellent broadband frequency characteristics and physical durability, which is conducive to providing video and data transmission and telephone service.

     As of December 31, 2004, our network consisted of approximately 10,300 miles of network and passed approximately 756,000 marketable homes and serving approximately 398,000 connections. Our interactive broadband network is designed using redundant fiber-optic cables. Our fiber rings are “self-healing,” which means that they provide for the very rapid, automatic redirection of network traffic so that if there is a single point of failure on a fiber ring, our service will continue. By comparison, most traditional cable television systems do not have redundant architectures.

     We provide power to our systems from locations along each network called hub sites, each of which is equipped with a generator and battery back-up power source to allow service to continue during a power outage. Additionally, individual nodes that are served by hubs are equipped with back-up power. Our redundant fiber-optic cables and network powering systems allow us to provide circuit-based voice services consistent with industry reliability standards for traditional telephone systems.

     We monitor our network 24 hours a day, seven days a week from our network operations center in West Point, Georgia. Technicians in each of our service areas schedule and perform installations and repairs and monitor the performance of our interactive broadband network. We actively maintain the quality of our network to minimize service interruptions and extend the network’s operational life.

  Video

     We offer video services over our network in the same way that traditional cable companies provide cable TV service. Our network is designed for an analog and digital two-way interactive transmission with fiber-optic cable carrying signals from the headend to the distribution point within our customers’ neighborhoods, where the signals are transferred to our coaxial cable network for delivery to our customers.

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  Voice

     We offer telephone service over our broadband network in much the same way local phone companies provide service. We install a network interface box outside a customer’s home to provide dial tone service. Our network interconnects with those of other local phone companies. We provide long-distance service using leased facilities from other telecommunications service providers. We have two Class 5, full-featured Nortel DMS 500 switches located in West Point, Georgia and nearby Huguley, Alabama that direct all of our voice traffic and allow us to provide enhanced custom calling services including call waiting, call forwarding and three-way calling. We also operate a telephone system in Valley, Alabama and West Point, Georgia, where we are the rural incumbent telephone company.

  Data

     We provide Internet access using high-speed cable modems in much the same way customers currently receive Internet services over modems linked to the local telephone network. The cable modems we presently use are significantly faster than dial-up modems generally in use today. Our customers’ Internet connections are always on, and there is no need to dial-up for access to the Internet or wait to connect through a port leased by an Internet service provider. We provide our customers with a high level of data transfer rates through multiple peering arrangements with tier-one Internet facility providers.

Our Bundled Service Offering

     We offer a complete solution of video, voice and data services in all of our markets, except for Cerritos, CA. We have begun enhancing our network assets in Pinellas County, Florida that we acquired from Verizon Media to provide voice services and offer these services to a portion of the market.

     We offer a broad range of service bundles designed to address the varying needs and interests of existing and potential customers. We sell individual services at prices competitive to those of the incumbent providers, but attractively price additional services from our bundle. Bundling our services enables us to increase penetration and operating efficiencies, facilitate customer service, reduce customer acquisition and installation costs, and increase customer retention.

     Our bundled strategy means that we may deliver more than one service to each customer, and therefore we report an aggregate number of connections for video, voice and data services. For example, a single customer who purchases local video, voice and data services would count as three connections.

  Video services

     We offer our customers a full array of video services and programming choices. Customers generally pay initial connection charges and fixed monthly fees for video service. As of December 31, 2004, we provided video services to 177,323 customers. As of December 31, 2004, 31% of our video customers subscribed for digital video. We offer only analog video service in Cerritos, California and do not intend to upgrade that network to provide digital video services or other enhanced services.

     Our analog video service offering comprises the following:

	•	Basic Service: All of our video customers receive a package of basic programming, which generally consists of local broadcast television and local community programming, including public, government and educational access channels.
	•	Expanded Basic Service: This expanded programming level includes approximately 190 channels of satellite-delivered or non-broadcast channels, such as ESPN, MTV, USA, CNN, The Discovery Channel, Nickelodeon and various home shopping networks.
	•	Premium Channels: These channels provide commercial-free movies, sports and other special event entertainment programming, such as HBO, Showtime and Cinemax and are available through our expanded basic and digital tiers of services.

     Our platform enables us to provide an attractive service offering of extensive programming as well as interactive services. Our digital video service consists of approximately 190 digital channels of programming, including our expanded basic cable service. We have recently introduced new service offerings to strengthen our competitive position and generate additional revenues, including video-on-demand and subscriber video-on-demand. Video-on-demand permits customers to order movies and other programming on demand with VCR-like functions for a fee-per-viewing basis. Subscriber video-on-demand is a similar service that has specific content available from our premium channel offerings for an incremental charge.

   Voice services

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     Our voice services include local and long-distance telephone services. Our telephone packages can be customized to include different options of the following core services:

	•	local area calling plans;
	•	flat-rate local and long-distance plans;
	•	a variety of calling features; and
	•	measured and fixed rate toll packages based on usage.

     For local service, our customers pay a fixed monthly rate, plus additional charges per month for custom and advanced calling features such as call waiting, caller ID and voicemail. We provide other telephone features for an additional charge. We also offer off-net voice services to a small number of customers through an arrangement with a local utility provider in Newnan, Georgia.

  Data services

     We offer tiered data services to both residential and business customers that include high-speed connections to the Internet using cable modems. Because a customer’s Internet service is offered over the existing cable connection in the home, no second phone line is required and there is no disruption of service when the phone rings or when the television is on. We offer IntroNet, a high speed service aimed at first-time or dial-up Internet users. IntroNet is available at speeds of 256k which is faster than traditional dial-up, but slower than our typical high-speed service, and priced at a discount to our faster product. The IntroNet product has been successful in capturing additional market share for us and providing a customer base to which higher speed data services may be marketed. Our data packages generally include the following:

	•	speed up to three megabits per second;
	•	specialized technical support 24 hours a day, seven days a week;
	•	access to exclusive local content, weather, national news, sports and financial reports;
	•	value-added features such as e-mail accounts, on-line storage, spam protection and parental controls; and
	•	a DOCSIS-compliant modem installed by a trained professional.

  Business services

     Our broadband network also supports services to business customers, and accordingly, we have developed a full suite of products for small, medium and large enterprises. We offer the traditional bundled product offering to these business customers. We also have developed new products to meet the more complex voice and data needs of the larger business sector. We offer passive optical network service, which enables our customers to have T-1 voice services and data speeds of up to 100 megabits per second on our fiber network. We have introduced our Matrix product offering, which can replace customers’ aging, low functionality PBX products with an IP Centrex voice and data service that offers more flexible features at a lower cost. In addition, we offer a virtual private network service to provide businesses with multiple sites the ability to exchange information privately among their locations over our network. We serve our business customers from locally based business offices with customer service and network support 24 hours a day, seven days a week.

  Broadband carrier services

     We use extra, unused capacity on our network to offer wholesale services to other local and long distance telephone companies, Internet service providers and other integrated services providers. We call these services our broadband carrier services. While this is not a part of our core strategy, we believe our interactive broadband network offers other service providers a reliable and cost competitive alternative to other telecommunications service providers.

Customer Service and Billing

  Customer service

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     Customer service is an essential element of our operations and marketing strategy, and we believe our quality of service and responsiveness differentiates us from many of our competitors. A significant number of our employees are dedicated to customer service activities, including:

	•	sales and service upgrades;
	•	customer activations and provisioning;
	•	service issue resolutions; and
	•	administration of our customer satisfaction programs.

     We provide customer service 24 hours a day, seven days a week. Our representatives are cross-trained to handle customer service transactions for all of our products and currently exceed the industry standards for call answer times. We operate a centralized customer call center in Augusta, Georgia, which handles all customer service transactions. In addition, we provide our business customers with local customer service, which we believe improves our responsiveness to customer needs and distinguishes our product in the market. We believe it is a competitive advantage to provide our customers with the convenience of a single point of contact for all customer service issues for our video, voice and data service offerings and is consistent with our bundling strategy.

     We monitor our network 24 hours a day, seven days a week. Through our network operations center, we monitor our digital video, voice and data services to the customer level and our analog video services to the node level. We strive to resolve service delivery problems prior to the customer being aware of any service interruptions.

  Billing

     We are an early adopter of a single billing platform for video, voice and data services, which is part of an enterprise management system that we have implemented system wide. This system, which was developed to our specifications, enables us to send a single bill to our customers for video, voice and data services.

Sales and Marketing

     We believe that we are the first provider of a bundled video, voice and data communications service package in our current markets. Our sales and marketing materials emphasize the convenience, savings and improved service that can be obtained by subscribing to bundled services.

     We position ourselves as the local provider of choice in our markets, with a strong local customer interface and community presence, while simultaneously taking advantage of economies of scale from centralization of certain marketing functions.

     We have a sales staff in each of our markets including managers and direct sales teams for both residential and business services. Our standard residential team consists of direct sales, outbound sales, and front counter sales as well as support personnel. Our business services sales team consists of our account executives, specialized business installation coordinators and dedicated installation service teams. Our call center sales team handles all inbound telemarketing sales.

     Our sales team is cross-trained on all our products to support our bundling strategy. Our sales team is compensated based on connections and is therefore motivated to sell more than one product to each customer. Our marketing and advertising strategy is to target bundled service prospects utilizing a broad mix of media tactics including broadcast television, cross channel cable spots, radio, newspaper, outdoor space, Internet and direct mail. We have utilized database-marketing techniques to shape our offers, segment and target our prospect base to increase response and reduce acquisition costs.

     We have implemented several retention and customer referral tactics including customer newsletters, personalized e-mail communications and loyalty programs. These programs are designed to increase loyalty, retention and up sell among our current base of customers.

  Pricing for Our Products and Services

     We attractively price our services to promote sales of bundled packages. We offer bundles of two or more services with tiered features and prices to meet the demands of a variety of customers. We also sell individual services at prices competitive to those of the incumbent providers. An installation fee, which is often waived during certain promotional periods for a bundled installation, is charged to new and reconnected customers. We charge monthly fees for cable customer premise equipment.

   Programming

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     We purchase our programming directly from the program networks by entering into affiliation agreements with the programming suppliers. We also benefit from our membership with the National Cable Television Cooperative, which enables us to take advantage of volume discounts. As of December 31, 2004, approximately 68% of our programming is sourced from the cooperative which also handles our contracting and billing arrangements on this programming.

Markets

 Current Markets

     We currently serve the following markets with our interactive broadband network:

  New Markets

     We plan to evaluate expansion of our operations to southeastern or other markets that have the size, market conditions, demographics and geographical location suitable for our business strategy. We plan to evaluate target cities that have the following characteristics, among others:

	•	targeted return requirements;
	•	an average of at least 70 homes per mile;
	•	competitive dynamics that allow us to be the leading provider of integrated video, voice and data services; and
	•	conditions that will afford us the opportunity to capture a substantial number of customers.

Competition

     We compete with a variety of communications companies because of the broad number of video, voice and data services we offer. Competition is based on service, content, reliability, bundling, value, and convenience. Virtually all markets for video, voice and data services are extremely competitive, and we expect that competition will intensify in the future. Our competitors are often larger, better-financed companies with greater access to capital resources. These incumbents presently have numerous advantages as a result of their historic monopolistic control of their respective markets, economies of scale and scope, and control of limited conduit relationships.

  Video services

     Cable television providers. Cable television systems are operated under non-exclusive franchises granted by local authorities, which may result in more than one cable operator providing video services in a particular market. Other cable television operations exist in each of our current markets, and many of those operations have long-standing customer relationships with the residents in those markets. Our competitors currently include Bright House, Charter, Comcast, Mediacom and Time Warner. We also encounter competition from direct broadcast satellite systems, including DirecTV and Echostar, that transmit signals to small dish antennas owned by the end-user.

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     According to industry sources, satellite television providers presently serve approximately 19.7% of pay television customers in the United States; however, the satellite provider penetration in our markets is substantially less. Competition from direct broadcast satellites could become significant as developments in technology increase satellite transmitter power and decrease the cost and size of equipment. Additionally, providers of direct broadcast satellites are not required to obtain local franchises or pay franchise fees. The Intellectual Property and Communications Omnibus Reform Act of 1999 permits satellite carriers to carry local television broadcast stations and is expected to enhance satellite carriers’ ability to compete with us for customers. As a result, we expect competition from these companies to increase.

     Other television providers. Cable television distributors may, in some markets, compete for customers with other video programming distributors and other providers of entertainment, news and information. Alternative methods of distributing the same or similar video programming offered by cable television systems exist. Congress and the FCC have encouraged these alternative methods and technologies in order to offer services in direct competition with existing cable systems. These competitors include satellite master antenna television systems and local telephone companies.

     We compete with systems that provide multichannel program services directly to hotel, motel, apartment, condominium and other multiunit complexes through a satellite master antenna—a single satellite dish for an entire building or complex. These systems are generally free of any regulation by state and local governmental authorities. Pursuant to the Telecommunications Act of 1996, these systems, called satellite master antenna television systems, are not commonly owned or managed and do not cross public rights-of- way and, therefore, do not need a franchise to operate.

     The Telecommunications Act of 1996 eliminated many restrictions on local telephone companies offering video programming, and we may face increased competition from them. Several major local telephone companies, including BellSouth, have announced plans to provide video services to homes.

     In addition to other factors, we compete with these companies using programming content, including the number of channels and the availability of local programming. We obtain our programming by entering into contracts or arrangements with video programming suppliers. A programming supplier may enter into an exclusive arrangement with one of our video competitors, creating a competitive disadvantage for us by restricting our access to programming.

  Voice services

     In providing local and long-distance voice services, we compete with the incumbent local phone company, various long-distance providers and VoIP telephone providers in each of our markets. BellSouth and Verizon are the incumbent local phone companies in our current markets and are particularly strong competitors. We also compete with a number of providers of long-distance telephone services, such as AT&T, BellSouth, MCI, Sprint and Verizon.

     We expect to continue to face intense competition in providing our telephone and related telecommunications services. The Telecommunications Act of 1996 allows service providers to enter markets that were previously closed to them. Incumbent local telephone carriers are no longer protected from significant competition in local service markets.

     We are anticipating an increase in the deployment of VoIP telephone services. Following years of development, VoIP has been deployed by a variety of service providers including other Multiple Service Operators (“MSOs”) such as Cox Communications and Comcast and independent service providers such as Vonage Holding Corporation. Unlike circuit switched technology, this technology does not require ownership of the last mile and eliminates the need to rent the last mile from the Regional Bell operating companies (“RBOCs). VoIP is essentially a data service and can be more feature rich than traditional circuit-switched telephone service. The VoIP providers will have differing levels of success based on their brand recognition, financial support, technical abilities, and legal and regulatory decisions.

     We believe that wireless telephone service, such as cellular and personal communication services, or PCS, currently is viewed by most consumers as a supplement to, not a replacement for, traditional telephone service. Wireless service generally is more expensive than traditional local telephone service and is priced on a usage-sensitive basis. However, there is evidence to indicate that wireless is gaining consideration as a replacement service, and the rate differential between wireless and traditional telephone service has begun to decrease and is expected to further decrease and lead to more competition between providers of these two types of services.

  Data services

     Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors benefit from greater experience, resources, marketing capabilities and name recognition. Cable television companies have entered the Internet access market. The incumbent cable television company in each of our markets currently offers high-speed Internet access services.

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     Other competitive high-speed data providers include:

	•	incumbent local exchange carriers that provide dial-up and DSL services;
	•	traditional dial-up Internet service providers;
	•	competitive local exchange carriers; and
	•	providers of satellite-based Internet access services.

     A large number of companies provide businesses and individuals with direct access to the Internet and a variety of supporting services. In addition, many companies such as AOL and Microsoft Corporation offer online services consisting of access to closed, proprietary information networks with services similar to those available on the Internet, in addition to direct access to the Internet. These companies generally offer data services over telephone lines using computer modems. Some of these data service providers also offer high-speed integrated services using digital network connections and DSL connections to the Internet, and the focus on delivering high-speed services is expected to increase.

  Bundled Services

     Several of our competitors have initiated business plans to deploy their own versions of the triple-play bundle in our markets. Comcast, Charter, Brighthouse, and other MSOs are in varying stages of launching Voice over Internet Protocol (VoIP) and thereby enabling their third service offering. Brighthouse launched VoIP in the Pinellas County market in mid-2004. Comcast and Charter have made numerous announcements about launching voice services and have done so in some of their markets. It is inevitable that these providers will launch VoIP in all of their markets in the not too distant future.

     BellSouth and Verizon have each initiated agreements / partnerships with satellite providers enabling their third service offering (video). The Bell companies each have facilities-based initiatives to construct broadband (last-mile) networks in several markets nationwide. None of these networks currently overlap with Knology. The RBOCs ability to provide the three services will increase competition for subscribers within Knology’s markets.

     Knology believes that its emphasis on proven technology for deploying telephone service enhances its product offering relative to the MSOs for the near future. Additionally, our direct relationship with the programmers and National Cable Television Cooperative (NCTC) for video content and control of our channel line-up provides an advantage for our video offering relative to the RBOCs for the foreseeable future.

Legislation and regulation

     The cable television industry is regulated by the FCC, some state governments and most local governments. Telecommunications carriers are regulated by the FCC and state public utility commissions. Providers of Internet services generally are not subject to regulation. Federal legislative and regulatory proposals under consideration may materially affect the cable television, telecommunications services, and Internet services industries. The following is a summary of federal laws and regulations affecting the growth and operation of the cable television and telecommunications industries and a description of relevant state and local laws.

     Future federal and state legislative and regulatory changes may affect our operations and the impact of such legislative or regulatory actions on our operations may be beneficial or adverse. The following description of certain major regulatory factors does not purport to be a complete summary of all present and proposed legislation and regulations pertaining to our operations.

  Federal Regulation

     Cable Television Consumer Protection and Competition Act of 1992

     The Cable Television Consumer Protection and Competition Act of 1992, or the 1992 Cable Act, increased the regulation of the cable industry by imposing rules governing, among other things:

	•	rates for tiers of cable video services;
	•	access to programming by competitors of cable operators and restrictions on certain exclusivity arrangements by cable operators;

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	•	access to cable channels by unaffiliated programming services;
	•	terms and conditions for the lease of channel space for commercial use by parties unaffiliated with the cable operator;
	•	ownership of cable systems;
	•	customer service requirements;
	•	mandating carriage of certain local television broadcast stations by cable systems and the right of television broadcast stations to withhold consent for cable systems to carry their stations;
	•	technical standards; and
	•	cable equipment compatibility.

     The legislation also encouraged competition with existing cable television systems by:

	•	allowing municipalities to own and operate their own cable television systems without a franchise;
	•	preventing franchising authorities from granting exclusive franchises or unreasonably refusing to award additional franchises covering an existing cable system’s service area; and
	•	prohibiting the common ownership of cable systems and other types of multichannel video distribution systems.

     Telecommunications Act of 1996

     The Telecommunications Act of 1996 and the FCC rules implementing this Act radically altered the regulatory structure of telecommunications markets by mandating that states permit competition for local telephone services. The Act placed certain requirements on most incumbent local exchange carriers to open their networks to competitors, resell their services at a wholesale discount, and permit other carriers to collocate equipment on incumbent local exchange carrier premises. Rural carriers may be exempt from these incumbent local exchange carrier requirements, as currently is the case with our incumbent local exchange carrier subsidiaries, Interstate Telephone and Valley Telephone. The following is a summary of the interconnection and other rights granted by this Act that are most important for full local telecommunications competition, and our belief as to the effect of the requirements, assuming vigorous implementation.

	•	interconnection of competitors with the networks of incumbents and other carriers, which permits customers of competitors to exchange traffic with customers connected to other networks;
	•	local loop unbundling, which allows competitors to selectively gain access to incumbent carriers’ facilities and wires that connect the incumbent carriers’ central offices with customer premises, thereby enabling competitors to serve customers on a facilities basis not directly connected to their networks;
	•	reciprocal compensation, which mandates arrangements for local traffic exchange between both incumbent and competitive carriers and compensation for terminating local traffic originating on other carriers’ networks, thereby improving competitors’ margins for local service;
	•	number portability, which allows customers to change local carriers without changing telephone numbers, thereby removing a significant barrier for a potential customer to switch to a different carrier’s local voice services; and
	•	dialing parity, which enables competitors to provide telephone numbers to new customers on the same basis as the incumbent carrier.

     This Act also permitted regional Bell operating companies under certain conditions to apply to the FCC for authority to provide long-distance services.

     The Act also included significant changes in the regulation of cable operators. For example, the FCC’s authority to regulate the rates for “cable programming service” tiers, that is all tiers other than the lowest level “basic service tier,” of all cable operators expired on March 31, 1999. The legislation also:

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	•	repealed the anti-trafficking provisions of the 1992 Cable Act, which required cable systems to be owned by the same person or company for at least three years before they could be sold to a third party;
	•	allows cable operators to enter telecommunications markets which historically have been closed to them;
	•	limits the rights of franchising authorities to require certain technology or to prohibit or condition the provision of telecommunications services by the cable operator;
	•	adjusts the favorable pole attachment rates afforded cable operators under federal law such that they may be increased, beginning in 2001, if the cable operator also provides telecommunications services over its network; and
	•	allows some telecommunications providers to begin providing competitive cable service in their local service areas.

     Regulation of Cable Services

     The FCC, the principal federal regulatory agency with jurisdiction over cable television, has promulgated regulations covering many aspects of cable television operations. The FCC may enforce its regulations through the imposition of fines, the issuance of cease and desist orders and/or the imposition of other administrative sanctions, such as the revocation of FCC licenses. A brief summary of certain key federal regulations follows.

     Rate regulation. The 1992 Cable Act authorized rate regulation for certain cable services and equipment. It requires communities to certify with the FCC before regulating basic cable rates. Cable service rate regulation does not apply where a cable operator demonstrates to the FCC that it is subject to effective competition in the community. To the extent that any municipality attempts to regulate our basic rates or equipment, we believe we could demonstrate to the FCC that our systems all face effective competition and, therefore, are not subject to rate regulation.

     Program access. To promote competition with incumbent cable operators by independent cable programmers, the 1992 Cable Act placed restrictions on dealings between cable programmers and cable operators. Satellite video programmers affiliated with cable operators are prohibited from favoring those cable operators over competing distributors of multichannel video programming, such as satellite television operators and competitive cable operators such as us. These restrictions are designed to limit the ability of vertically integrated satellite cable programmers from offering exclusive programming arrangements or preferred pricing or non-price terms to cable operators. Congress and the FCC have considered, but not adopted, proposals to expand the program access rights of cable competitors such as us, including the possibility of applying all program access requirements to terrestrially delivered video programming and all video programmers. The program access rules will “sunset” on October 5, 2007, unless further extended by the FCC. If the exclusivity restrictions are allowed to sunset, this could have a materially adverse impact on us if incumbent cable operators use the greater flexibility to deny important programming to our systems.

     Carriage of broadcast television signals. The 1992 Cable Act established broadcast signal carriage requirements that allow local commercial television broadcast stations to elect every three years whether to require the cable system to carry the station (must-carry) or whether to require the cable system to negotiate for consent to carry the station (retransmission consent). Stations are generally considered local to a cable system where the system is located in the station’s Nielsen designated market area. Cable systems must obtain retransmission consent for the carriage of all distant commercial broadcast stations, except for certain superstations, that are commercial satellite-delivered independent stations such as WGN. Pursuant to the Satellite Home Viewer Improvement Act, the FCC enacted rules governing retransmission consent negotiations between broadcasters and all distributors of multichannel video programming (including cable operators). Local non-commercial television stations are also given mandatory carriage rights, subject to certain exceptions, within a certain limited radius. Non-commercial stations are not given the option to negotiate for retransmission consent. Must-carry requests may decrease the attractiveness of the cable operator’s overall programming offerings by including less popular programming on the channel line-up, while retransmission consent elections may involve cable operator payments (or other concessions) to the programmer. We carry some stations pursuant to retransmission consent agreements and pay fees for such consents or have agreed to carry additional services. We carry other stations pursuant to must-carry elections.

     The rules the FCC has adopted for the carriage of digital broadcast signals do not require cable systems to carry both the analog and digital signals of television broadcast stations entitled to must-carry rights during those stations’ transition to full digital operations. The FCC has also ruled that a cable operator need only carry a broadcaster’s “primary video” service (rather than all of the digital broadcaster’s “multi-cast” services).

     Registration procedures and reporting requirements. Before beginning operation in a particular community, all cable television systems must file a registration statement with the FCC listing the broadcast signals they will carry and certain other information. Additionally, cable operators periodically are required to file various informational reports with the FCC. Cable operators that operate in certain frequency bands, including us, are required on an annual basis to file the results of their periodic

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cumulative leakage testing measurements. Operators that fail to make this filing or who exceed the FCC’s allowable cumulative leakage index risk being prohibited from operating in those frequency bands in addition to other sanctions.

     Customer equipment regulation. As noted, cable customer equipment is subject to rate regulation unless the FCC deems the cable system to face effective competition. The FCC has also required that cable customers be permitted to purchase cable converters and other navigation device equipment from third parties, such as retailers. It developed a multiyear phase-in period during which security functions (which remain in the exclusive control of the cable operator) would be unbundled from non-security functions, which then could be supplied by third-party vendors.

     The separate security module requirement applies to all digital devices as well as to devices that access both analog and digital services (hybrid devices), although it does not apply to analog-only devices. As long as cable operators subject to the rules comply with the separate security module requirement, they may continue to provide their customers with devices that contain both embedded security and nonsecurity functions (integrated devices) until July 1, 2006, at which time they will be prohibited from placing these devices in service.

     The FCC wants consumers to be able to directly connect their retail equipment, i.e., television receivers, digital recorders, video cassette recorders, etc., with cable television systems. In order to facilitate this connectivity, the FCC established rules requiring that, beginning April 1, 2004 all cable operators must replace or upgrade subscriber-leased high definition set-top boxes, upon customer request, to ensure that customers are able to access advanced, interactive cable services. The set-top boxes must be capable of meeting certain industry-established technical standards which will enable connectivity between customer equipment and cable systems. Starting on July 1, 2005, all high definition set-top boxes acquired by cable operators for distribution to subscribers must meet certain advanced industry-established standards.

     The FCC also recently issued regulations requiring all digital cable systems to separate out from its navigation equipment the security functions which control access to paid subscription programming. Unaffiliated manufacturers, retailers and vendors will be allowed to make the equipment commercially available and it will be integrated into or used in conjunction with subscriber-purchased navigation devices to allow access to all cable system features previously available only by using cable system provided-equipment. By July 1, 2004, all digital cable systems must maintain an adequate supply of the security equipment and must ensure that subscribers have convenient access to it. The FCC restrictions could negatively affect how we develop and market new services and equipment to our customers.

     Franchise authority. Cable television systems operate pursuant to franchises issued by local franchising authorities (which are the cities, counties or political subdivisions in which a cable operator provides cable service). Local franchising authority is premised upon the cable operator’s facilities crossing the public rights-of-way. Franchises are typically of fixed duration with the prospect for renewal. These franchises must be nonexclusive. The terms of local franchises vary by community, but typically include requirements concerning service rates, franchise fees, construction timelines, mandated service areas, customer service standards, technical requirements, public, educational and government access channels, and channel capacity. Franchises often may be terminated, or penalties may be assessed, if the franchised cable operator fails to adhere to the conditions of the franchise. Although largely discretionary, the exercise of local franchise authority is limited by federal law. For example, local franchise authorities may not issue exclusive franchises, may not require franchise fees that exceed 5% of gross revenues from the provision of cable services, and may not mandate the use of a particular technology. Local franchise authorities are permitted to charge fees other than cable franchise fees, such as fees for a telecommunications providers’ use of public rights-of-way. We hold cable franchises in all of the franchise areas in which we provide service. We believe that the conditions in our franchises are fairly typical for the industry. Our franchises generally provide for the payment of fees to the municipality ranging from 3% to 5% of revenues from telephone and cable television service, respectively. The Telecommunications Act of 1996 exempted those telecommunications services provided by a cable operator or its affiliate from cable franchise requirements, although municipalities retain authority to regulate the manner in which a cable operator uses the public rights-of-way to provide telecommunications services.

     Franchise renewal. Franchise renewal, or approval for the sale or transfer of a franchise, may involve the imposition of additional requirements not present in the initial franchise (such as facility upgrades or funding for public, educational, and government access channels). Although franchise renewal is not guaranteed, federal law imposes certain standards to prohibit the arbitrary denial of franchise renewal. Our franchises generally have 10 to 15 year terms, and we expect our franchises to be renewed by the relevant franchising authority before or upon expiration.

     Franchise transfer. Local franchise authorities are required to act on a cable operator’s franchise transfer request within 120 days after receipt of all information required by FCC regulations and the franchising authority. Approval is deemed granted if the franchising authority fails to act within such period.

     Pole attachments. 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. The right to access is beneficial to facilities-based providers such as us. Federal law also establishes principles to govern the pricing of and terms of such access. Utilities may charge

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telecommunications carriers (and cable operators providing both cable television service and telecommunications service, such as us) a different (often higher) rate for pole attachments than they charge cable operators providing solely cable service. The FCC has adopted rules implementing the two different statutory formulas for pole attachment rates. These regulations became effective on February 8, 2001, and increases in attachment rates relative to rates for providers that exclusively provide cable service resulting from the regulations are being phased-in in equal annual increments over a period of five years beginning on the effective date of the new FCC regulations. The federal pole attachment access and rate provisions apply only in those states that have not certified to the FCC that they regulate pole attachment rates. Currently, 18 states plus the District of Columbia have certified to the FCC, leaving pole attachment matters to be regulated by those states. Of the states in which we operate, none has certified to the FCC. The FCC has clarified that the provision of Internet services by a cable operator does not affect the agency’s jurisdiction over pole attachments by that cable operator, nor does it affect the rate formula otherwise applicable to the cable operator. The U.S. Court of Appeals for the Eleventh Circuit overturned the FCC’s conclusion. However, the U.S. Supreme Court has upheld the FCC’s decision by reversing the decision of the U.S. Court of Appeals for the Eleventh Circuit and confirming the FCC’s authority.

     Inside wiring of multiple dwelling units. FCC rules provide generally that, in cases where the cable operator owns the wiring inside a multiple dwelling unit but has no right of access to the premises, the multiple dwelling unit owner may give the cable operator notice that it intends to permit another cable operator to provide service there. The cable operator then must elect whether to remove the inside wiring, sell the inside wiring to the multiple dwelling unit owner at a price not to exceed the replacement cost of the wire on a per-foot basis, or abandon the inside wiring. The FCC also adopted rules that, among other things, require utilities (including incumbent local exchange carriers and other local exchange carriers) to provide telecommunications carriers and cable operators with reasonable and nondiscriminatory access to utility-owned or controlled conduits and rights-of-way in all “multiple tenant environments” (including, for example, apartment buildings, office buildings, campuses, etc.) in those states where the FCC possesses authority to regulate pole attachments, i.e., in those states where the state government has not certified to the FCC that it regulates utility pole attachments and rights-of-way matters.

     Access to and competition in multiple dwelling units by and among video operators. The FCC has preempted laws and rules that restrict occupants of multiple dwelling units from placing small satellite antennas on their balconies (or areas under the occupant’s exclusive use). The FCC’s action increases the ability of satellite television operators such as DirecTV to compete with us in certain multiple dwelling units. The FCC recently decided not to abrogate or restrict existing or future exclusive video multiple dwelling unit access contracts by multichannel video programming distributors. The decision not to abrogate existing exclusive multiple dwelling unit access contracts may restrict us in competing with the incumbent cable operator (or other video competitors) in those multiple dwelling units where another cable operator has obtained an exclusive access arrangement.

     Privacy. Federal law restricts the manner in which cable operators can collect and disclose data about individual system customers. Federal law also requires that the cable operator periodically provide all customers with written information about its policies regarding the collection and handling of data about customers, their privacy rights under federal law and their enforcement rights. Cable operators must also take such actions as are necessary to prevent unauthorized access to personally identifiable information. Failure to adhere to these requirements subjects the cable operator to payment of damages, attorneys’ fees and other costs.

     Copyright. Cable television systems are subject to federal compulsory copyright licensing covering carriage of broadcast signals. In exchange for making semi-annual payments to a federal copyright royalty pool and meeting certain other obligations, cable operators obtain a statutory license to retransmit broadcast signals. The amount of the royalty payment varies, depending on the amount of system revenues from certain sources, the number of distant signals carried, and the location of the cable system with respect to over-the-air television stations.

     Adjustments in copyright royalty rates are made through an arbitration process supervised by the U.S. Copyright Office. The modification or elimination of the compulsory copyright licensing scheme could adversely affect our ability to provide our customers with their desired broadcast programming.

     Internet service. The FCC rejected requests by some Internet service providers to require cable operators to provide unaffiliated Internet service providers with direct access to the operators’ broadband facilities. A contrary decision may have facilitated greater competition by non-facilities-based Internet service providers with our broadband service offerings. In addition, the FCC recently sought comment on the scope of its jurisdiction to regulate cable modem service and the extent to which state and local governments may regulate cable modem service. Although the FCC has indicated a clear preference for minimizing regulation of broadband services, future regulation of cable modem service by federal, state or local government entities remains possible. The FCC also sought comment on whether it should resolve any disputes that may arise over cable operators’ previous collection of franchise fees from their customers based, in part, on cable modem service revenues, or whether the FCC should leave such matters to the courts. There remains a risk that we will confront litigation on this issue. See also “Regulatory treatment of cable modem service.”

     Regulatory fees. The FCC requires payment of annual regulatory fees by the various industries it regulates, including the cable television industry. Regulatory fees may be passed on to customers as external cost adjustments to rates for basic cable service.

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Fees are also assessed for other FCC licenses, including licenses for business radio, cable television relay systems and earth stations. These fees, however, may not be collected directly from customers as long as the FCC’s rate regulations remain applicable to the cable system.

     Tier buy through. Federal law requires cable operators to allow customers to purchase premium services or pay-per-view video programming offered by the cable operator on a per-channel or per program basis without the need to subscribe to any tier of service except the basic service tier unless the cable system’s lack of addressable converter boxes or other technological limitations prohibit it from doing so. The exemption for cable operators lacking the technological ability to comply expired in October 2002, although the FCC may extend that period on a case-by-case basis as necessary pursuant to an appropriate waiver request. Our systems currently comply with these requirements and we do not avail ourselves of the technological exemption.

     Potential regulatory change. The regulation of cable television systems at the federal, state, and local levels is subject to the political process and has seen constant change over the past decade. Material changes in the law and regulatory requirements must be anticipated, and our business could be adversely affected by future legislation or new regulations.

     Regulation of Telecommunications Services

     Our telecommunications services are subject to varying degrees of federal, state and local regulation. Pursuant to the Communications Act of 1934, as amended by the Telecommunications Act of 1996, the FCC generally exercises jurisdiction over the facilities of, and the services offered by, telecommunications carriers that provide interstate or international communications services. Barring federal preemption, State regulatory authorities retain jurisdiction over the same facilities to the extent that they are used to provide intrastate communications services, as well as facilities solely used to provide intrastate services. Local regulation is largely limited to management of the occupation and use of county or municipal public rights-of-way. Various international authorities may also seek to regulate the provision of certain services.

     As explained above, incumbent local exchange carriers are subject to obligations (under Section 251(c) of the federal Communications Act) to open their networks to competitive access, including both unbundling and collocation obligations, as well as heightened interconnection obligations and a duty to make their services available to resellers at a wholesale discount rate. The Communications Act includes an exemption from Section 251(c) requirements for rural telephone companies, absent a finding by the appropriate state commission that the request is not unduly economically burdensome. Both Interstate Telephone and Valley Telephone are rural telephone companies as defined by the federal Communications Act. With respect to Valley Telephone, the Alabama Public Service Commission and, with respect to Interstate Telephone, the Georgia Public Service Commission have determined that these companies should be exempt from the incumbent local exchange carrier interconnection requirements under Section 251(c) of the Communications Act. In the event the circumstances upon which these determinations are based change in the future, it is possible these conclusions could be revisited and reversed, exposing either company to the incumbent local exchange carrier interconnection, unbundling, wholesale discount, and/or collocation obligations.

     Tariffs and detariffing. Our subsidiary, Knology Broadband, Inc., or Broadband, is classified by the FCC as a non-dominant carrier with respect to both its domestic interstate and international long-distance carrier services and its competitive local exchange carrier services. As a non-dominant carrier, its rates presently are not generally regulated by the FCC, although the rates are still subject to general requirements that they be just, reasonable, and nondiscriminatory. The FCC has ordered mandatory detariffing of non-dominant carriers’ interstate and international interexchange services, except in very limited circumstances. Rather, we must post standard rates, terms, and conditions on the web and negotiate and/or execute individual agreements with each of our customers to cover the rates, terms and conditions for our provision of such services, including limitations on liability. The FCC’s detariffing regime has no impact on our tariffs for intrastate services, nor does it affect the federal access charge tariff system. However, it is uncertain whether we will be able to execute individual agreements with each of our long-distance customers on favorable terms going forward and whether the additional costs of having to comply with the new regime will have an adverse effect on our revenues. There is also some uncertainty about whether, in the absence of a tariff, such carrier protections such as strict limitations on liability, can be negotiated with the end users and, if they are, whether they are enforceable.

     Non-dominant local exchange carriers are not permitted to file tariffs with the FCC for their interstate access services if the charges for such services are higher than FCC benchmarks established in 2001. If a non-dominant carrier’s charges for interstate access services are equal to or below the FCC-established benchmark, it is permitted, but not required, to file tariffs with the FCC for such services. Our interstate access services fall within the FCC-established benchmark and we have a tariff on file with the FCC for those services. Over time, we can be expected to face “downward pressure” on our switched access rates because of the FCC’s regulations which require a phase-down to incumbent local exchange carrier access charge level by 2005 and to the extent incumbent local exchange carrier switched access rates are reduced from current levels.

     Interstate Telephone and Valley Telephone are regulated by the FCC as dominant carriers in the provision of interstate-switched access services. As dominant carriers, Interstate Telephone and Valley Telephone must file tariffs with the FCC and must provide the FCC with notice prior to changing their rates, terms or conditions of interstate access services. Interstate Telephone has its own tariffs on file with the FCC, while Valley Telephone concurs in tariffs filed by the National Exchange Carrier Association.

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Interstate Telephone and Valley Telephone are both classified as non-dominant in the provision of interstate and international interexchange services, rendering them subject to mandatory detariffing at the FCC for such services, as described above.

     Interconnection and compensation for transport and termination. The Telecommunications Act of 1996 established a national policy of permitting the development of local telephone competition. This Act preempts laws that prohibit competition for local telephone services and establishes requirements and standards for local network interconnection, unbundling of network elements and resale. The Telecommunications Act of 1996 also requires incumbent local telephone carriers to enter into mutual compensation arrangements with competitive local telephone companies for transport and termination of local calls on each other’s networks. The interconnection, unbundling and resale standards were developed by the FCC through several iterations and have been further implemented by the states and reviewed by the federal courts of appeals. The terms of interconnection agreements among the carriers have been, and are likely to continue to be, overseen by the states. Although a panel of judges from the U.S. Court of Appeals for the Eleventh Circuit (the jurisdiction in which many of our markets are located), previously concluded that state public service commissions lack the authority under Section 252 of the federal Communications Act to interpret and enforce interconnection agreements, the court en banc has reversed that conclusion and agreed with at least six other federal circuits that the states do have such authority.

     We have executed local network interconnection agreements with BellSouth and Verizon for, among other things, the transport and termination of local telephone traffic. These agreements have been filed with, and approved by, the applicable regulatory authority in each state in which we conduct our operations and in which the agreements apply. These agreements are subject to changes as a result of changes in laws and regulations, and there is no guarantee that the interconnection agreement rates and terms under which we operate today will be available in the future.

     The FCC has concluded that calls to Internet service providers are jurisdictionally interstate and the exchange of ISP-bound traffic is not subject to the reciprocal compensation requirements of the Communications Act. The FCC established an interim scheme, however, whereby traffic below a 3:1 originating-to-terminating ratio is presumed to be reciprocal compensation traffic and traffic above 3:1 is presumed to be ISP-bound. While the FCC decision was remanded by the U.S. Court of Appeals for the D.C. Circuit to the FCC for further elaboration and as to the legal basis for its decision, the Court let the interim scheme remain in effect. Until the FCC addresses the issue again, ISP-bound traffic is generally being exchanged at a lower rate than reciprocal compensation traffic. Under our interconnection agreements, we exchange local traffic with incumbent carriers on a bill-and-keep basis (in which no compensation is actually paid).

     In March 2005, the FCC issued a further notice of proposed rulemaking requesting comment on various proposals to replace the existing intercarrier compensation regimes with a unified regime designed for the developing marketplace. As part of the proceeding, the FCC will review numerous aspects of intercarrier compensation, including transport and termination. The FCC’s decision will impact the amounts that we both pay and receive from all carriers with whom we are interconnected, both directly and indirectly.

     Access to unbundled network elements. Until March 2005, the FCC’s rules had required incumbent local telephone carriers to provide an unbundled network element platform that included all of the network elements required by a competitor to provide a retail local telecommunications service, including mass market circuit switching. Competitors using such platforms had the opportunity to provide retail local services entirely through the use of the local telephone carriers’ facilities at lower discounts than those available for local resale. In the FCC’s Triennial Review Order, effective October 2, 2003, the FCC determined that certain network elements would no longer be subject to unbundling, while other elements must continue to be offered subject to further, detailed review by the state public utility commissions. On March 2, 2004, the Court vacated and remanded much of the FCC’s Triennial Review Order. In the FCC’s Triennial Review Remand Order, effective March 11, 2005, the agency fundamentally changed its unbundling rules, adopting materially significant limits on the availability of unbundled network elements. Although the FCC adopted transition plans for competing carriers to transition away from use of the delisted network elements to alternative facilities or arrangements, the plans apply only to the embedded customer base and do not permit competitive carriers to add new customers or capacity to delisted network elements. The rules are subject to further clarification and reconsideration by the FCC, and review on appeal by the D.C. Circuit. In view of the uncertainty surrounding the FCC’s rules adopted in the Triennial Review Remand Order, we cannot at this time state with any certainty the impact of that Order upon our business. The availability of a wide variety of unbundled network elements could benefit those of our local telecommunications competitors who, unlike us, do not provide service entirely over their own facilities; conversely, the limiting of network elements available on an unbundled basis may discourage potential competitors who cannot, or do not wish to expend the capital required to build out their own facilities, and strengthen the positions of incumbent carriers such as BellSouth and Verizon. Any material change in the FCC’s regulations upon further review or appeal of the Triennial Review Remand Order could have a significant impact on competition.

     Unbundled network element pricing. In September 2003, the FCC commenced a rulemaking proceeding, which is still pending, to review globally the pricing principles that states must use to set rates for unbundled network elements. This proceeding ultimately could lead to significant changes in the pricing of unbundled network elements, which could in turn lead to significant changes in the relative competitive position of our competitors. Apart from this proceeding, the FCC, in its Triennial Review Remand Order, effective March 11, 2005, adopted pricing rules that, in the absence of negotiated alternative commercial arrangements, will

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apply to the dedicated transport, high-capacity loop, and mass market circuit switching elements of the incumbent local exchange carrier networks during specifically defined transition periods. The state commissions have significant responsibility for the implementation of the FCC’s rules, including the actual setting of rates for unbundled network elements. The availability of a wide variety of available unbundled network elements at attractive prices could benefit those of our local telecommunications competitors who, unlike us, do not provide service entirely over their own facilities; conversely, the limiting of elements available on an unbundled basis or a relative increase in the prices of such elements and platforms may discourage potential competitors who cannot, or do not wish to expend the capital required to build out their own facilities.

     Number portability. All providers of telecommunications services must offer service provider local number portability, which the FCC has defined as the ability to retain, at the same location, existing telephone numbers when switching local telephone companies without impairment of quality, reliability or convenience. Number portability is intended to remove one barrier to entry faced by new competitors, which would otherwise have to persuade customers to switch local service providers despite having to change telephone numbers. Although number portability benefits our competitive local exchange carrier operations, it represents a burden to Valley Telephone and Interstate Telephone. Moreover, wireline-to-wireless number portability is likely to have an adverse impact on all wireline carriers because end users are expected to port more numbers from wireline to wireless carriers for some time, than vice versa.

     Universal service. The FCC has adopted rules implementing the universal service requirements of the Telecommunications Act of 1996. The federal universal service fund is the support mechanism established by the FCC to ensure that high quality, affordable telecommunications service is available to all Americans. Pursuant to the FCC’s universal service rules, all telecommunications providers must contribute a percentage of their telecommunications revenues to the federal universal service fund. As a telecommunications carrier, we are required to contribute to the federal universal service fund on the basis of our projected, collected interstate and international end user telecommunications revenues. The FCC devises a quarterly factor for contribution to the federal universal service fund based on the ratio of total projected demand for universal service support as compared to total end user interstate and international revenue for a given quarter. The contribution factor for the first quarter of 2005 is 10.7%. Accordingly, we presently contribute almost eleven percent of our combined interstate and international end user telecommunications revenues to the federal universal service fund.

     Carriers may assess a federal universal service surcharge on their customers, either as a flat amount or a percentage of a customer’s revenue; however, this amount may not exceed the total amount of the universal service contribution factor currently in effect. As a result, we are precluded from assessing a federal universal service-related charge on our end user customers in excess of the relevant interstate and international telecommunications portion of each customer’s bill times the relevant contribution factor. We remain able to recover legitimate administrative costs relating to our contribution to the federal universal service fund, provided that such cost recovery is made through areas other than our universal service line item surcharge.

     The FCC currently is conducting a comprehensive review of the rules governing contributions to the federal universal service fund. The FCC is considering the adoption of a connection-based universal service contribution methodology in which entities would contribute to the federal universal service fund based on either the number of end user connections, the number of working telephone numbers, or the amount of capacity per connection. The FCC is also considering the issue of broadband providers’ contribution to universal service and whether and how connections that provide broadband Internet access—including those using cable modem technology—would be assessed for federal universal service fund purposes. Although the outcome of this proceeding and its effect on our business cannot be predicted, if any of these proposals are implemented, the amount of our contributions to the federal universal service fund may increase, and could negatively impact our business, prospects, gross profits, cash flows and financial condition. Changes to federal universal service funding obligations could adversely affect us by increasing the payments owed to support the fund.

     Access charge reform. The FCC has adopted several orders in recent years having the effect of reducing switched access charges imposed by local telephone companies for origination and termination of interstate long-distance traffic. Overall decreases in local telephone carriers’ access charges as contemplated by the FCC’s access reform policies would likely put downward pricing pressure on our charges to domestic interstate and international long-distance carriers for comparable access. Changes to the federal access charge regime could adversely affect us by reducing the revenues that we generate from charges to domestic interstate and international long-distance carriers for originating and terminating interstate traffic over our telecommunications facilities.

     The FCC has adopted an order, the MAG Plan, to reform interstate access charges and universal service support for rate-of-return incumbent local exchange carriers such as Valley Telephone and Interstate Telephone. The MAG Plan is designed to lower access charges toward cost, replace implicit support for universal service with explicit support that is portable to all eligible telecommunications carriers, and provide certainty and stability for the small and mid-sized local telephone companies serving rural and high-cost areas by permitting them to continue to set rates based on a rate-of-return of 11.25%, thereby encouraging rural investment. The MAG Plan, as adopted, will reduce switched access fees for small incumbent local exchange carriers and protect universal service in areas served by those incumbent local exchange carriers. Although the MAG Plan significantly reduces per-minute access charge revenues to these carriers, it is designed to protect them for at least the term of the plan from potentially much larger revenue reductions. On February 12, 2004, the FCC issued an order regarding the MAG Plan designed to streamline the FCC’s

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rules further and increase rural carriers’ flexibility to respond to market conditions. Petitions for reconsideration of the MAG Plan are currently pending before the FCC and the FCC has sought further comment on certain proposals related to the MAG Plan.

     In March 2005, the FCC requested further comment in its intercarrier compensation proceeding on replacing the existing intercarrier compensation regimes with a unified regime designed for the developing marketplace, as previously discussed. As part of the proceeding, the FCC will review numerous aspects of intercarrier compensation, including access charges. The FCC’s decision will impact the amounts that we both pay and receive from all carriers with whom we are interconnected, both directly and indirectly.

     Regulatory treatment of VoIP telephone services. Currently, the FCC and state regulators do not treat most IP-enabled services, including those offering real time voice transmission, as regulated telecommunications services. A number of providers are using VoIP to compete with our voice services, and some providers using VoIP may be avoiding certain regulatory obligations or access charges for interexchange services that might otherwise be due if such voice over IP offerings were subject to regulation. However, in March 2004, the FCC commenced a rulemaking proceeding to address the regulatory treatment of IP enabled services, including VoIP applications. Although we cannot predict when the FCC will issue a decision in this proceeding, the FCC has precluded states from regulating VoIP services by ruling that IP-enabled services are subject to its exclusive jurisdiction. In response to individual petitions for declaratory ruling, the FCC has addressed specific VoIP applications. For example, the FCC ruled that an AT&T service using VoIP solely as an intermediate routing technology is a telecommunications service. By contrast, the FCC ruled that pulver.com’s Free World Dialup service, which enables customers to make computer-to-computer VoIP calls, is an information service. The FCC is currently considering a petition filed by Level 3 Communications LLC requesting the agency to forbear from enforcing the Act and its regulations to the extent they could be interpreted as permitting local exchange carriers to impose access charges on certain IP-enabled services. Unless the FCC acts on this petition by March 22, 2005, the petition will be deemed granted. These and other similar proceedings could lead to an increase in the costs of VoIP providers if they become subject to additional regulation (in the absence of forbearance from the same), and may change the compensation structure for IP-enabled services. At this time, we are unable to predict the impact, if any, that additional regulatory action on this issue will have on our business.

     Regulatory treatment of cable modem services. A decision of the U.S. Court of Appeals for the Ninth Circuit issued in October 2003 vacated in part an FCC declaratory ruling that cable modem services consisted of information services only, and did not include a separate offering of telecommunications service. The U.S. Court of Appeals for the Ninth Circuit found that cable modem service included, in part, the offering of telecommunications services. On December 3, 2004, the United States Supreme Court granted two petitions for writ of certiorari of the Ninth Circuit’s 2003 decision, and thus will address the question of whether cable modem service includes a separate, underlying telecommunications service component that is subject to regulation as a common carrier service under Title II of the Communications Act of 1934, as amended. The Supreme Court’s decision in this matter will impact the industry, as well as future actions by the FCC. However, pending a decision by the Supreme Court and further FCC consideration of the matter, providers of cable modem service such as us may be deemed and treated as telecommunications carriers, at least in part, in their provision of such services and subject to common carrier requirements, such as nondiscrimination and authorization obligations under Title II of the Communications Act (see “Additional requirements” below) and universal service contribution obligations, depending upon what the FCC determines in response to the Court’s instruction. In addition, cable modem service providers may become subject to franchise and right-of-way requirements separately applicable to telecommunications carriers, including franchise fees. Results imposing authorization and other telecommunications carrier requirements, obligations to contribute to universal service, franchise fees, or similar burdens would have the effect of increasing the costs of providing cable modem service relative to non-cable-based alternatives, such as providers of Internet access through DSL service. Furthermore, the determination by the U.S. Court of Appeals for the Ninth Circuit may expose providers of cable modem services to potential claims that, because they are offering, in part, telecommunications services, as well as information services (in part), they fall under FCC requirements that facilities-based providers of information services must open their networks to competitive providers of information services. However, to date, we have offered—and will continue to offer—access to our network on a wholesale basis, so this aspect of the U.S. Court of Appeals for the Ninth Circuit decision is not expected to have a material impact on our business or our operations.

     Advanced services. The FCC’s Triennial Review Order, effective October 2, 2003, significantly changed many of the regulations governing the telecommunications industry. Among the changes adopted, the FCC determined that all-fiber loops to a customer’s premises are not subject to the mandatory unbundling provisions of the Telecommunications Act of 1996, and that in the case of “hybrid” loops containing some fiber and some copper, the broadband capabilities of these loops do not need to be unbundled. These rulings give the incumbent local exchange carriers greater control over whether, and at what price, broadband access facilities will be made available to third parties. Although the U.S. Court of Appeal for the D.C. Circuit vacated and remanded several aspects of the Triennial Review Order, the FCC’s decisions regarding broadband unbundling were upheld. Subsequently, the FCC extended its deregulation of broadband facilities to fiber loops deployed to multi-tenant buildings or campuses where the predominant use is residential and to loops with no more than 500 feet of copper (so-called “fiber-to-the-curb” loops). In October 2004, the FCC exempted the former Bell Telephone Company entities from long distance market entry provisions to the extent those provisions might have imposed a separate obligation to unbundled all fiber or fiber-to-the-curb broadband loops.

     The FCC is currently reviewing the regulatory treatment of incumbent local exchange carrier provision of stand-alone broadband and broadband sold in combination with Internet access services in several proceedings including the following: (1) a pending FCC proceeding that is considering deregulating incumbent local exchange carrier broadband services and facilities where the

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incumbent local exchange carrier is classified as non-dominant in the provision of local exchange and exchange access service; (2) a pending FCC proceeding that is considering re-classifying broadband services as information services, meaning that they would no longer be subject to telecommunications service regulations; and (3) the FCC, as noted above, has initiated a proceeding that will consider the regulatory status of IP-based services. If the FCC further exempts or substantially reduces incumbent local exchange carriers from regulation of broadband services (for example, by eliminating regulations governing end user prices or collocation of competitive DSL providers’ equipment in central offices), broadband offerings by incumbent local exchange carriers may place even greater competitive pressures on our broadband service offerings.

     Access to, and competition in, multiple dwelling units by and among telecommunications carriers. In October 2000, the FCC prohibited telecommunications carriers from entering into future exclusive access agreements with building owners or managers in commercial (but not residential) multi-tenant environments. Simultaneously, the FCC adopted rules that require utilities (including incumbent local exchange carriers and other local exchange carriers) to provide telecommunications carriers (and cable operators) with reasonable and non-discriminatory access to utility-owned or controlled conduits and rights-of-way in all multiple tenant environments (e.g., apartment buildings, office buildings, campuses, etc.) in those states where the state government has not certified to the FCC that it regulates utility pole attachments and rights-of-way matters. The FCC has pending before it the question of whether to adopt rules abrogating existing exclusive telecommunications carrier access arrangements in commercial multitenant environments. The FCC is also considering whether to extend prohibitions against exclusivity to residential multiple dwelling units. Finally, the FCC is considering rules that would require owners of multi-tenant environments to allow telecommunications carriers nondiscriminatory access to their buildings. If adopted, these requirements may facilitate our access (as well as the access of competitors) to customers in multi-tenant environments, at least with regard to its provision of telecommunications services. These prospective requirements, if adopted, may also increase competition in multiple dwelling units and other multi-tenant environments where we currently provide service.

  State Regulation

     Traditionally, the states have exercised jurisdiction over intrastate telecommunications services. The Telecommunications Act of 1996 modifies the dimensions of state authority in relation to federal authority. It also prohibits states and localities from adopting or imposing any legal requirement that may prohibit, or have the effect of prohibiting, market entry by new providers of interstate or intrastate telecommunications services. The FCC is required to preempt any such state or local requirement to the extent necessary to enforce the Telecommunications Act of 1996’s open market entry requirements. States and localities may, however, continue to regulate the provision of intrastate telecommunications services (barring federal preemption) and require carriers to obtain certificates or licenses before providing service.

     Alabama, Georgia, Florida, Kentucky, South Carolina and Tennessee each have adopted statutory and regulatory schemes that require us to comply with telecommunications certification and other regulatory requirements. To date, we are authorized to provide intrastate local telephone, long-distance telephone and operator services in Alabama, Georgia, Florida, Kentucky, South Carolina and Tennessee. As a condition of providing intrastate telecommunications services, we are required, among other things:

	•	to file and maintain intrastate tariffs or price lists describing the rates, terms and conditions of our services;
	•	to comply with state regulatory reporting, tax and fee obligations, including contributions to intrastate universal service funds; and
	•	to comply with, and to submit to, state regulatory jurisdiction over consumer protection policies (including regulations governing customer privacy, changing of service providers, and content of customer bills), complaints, transfers of control and certain financing transactions.

     Generally, state regulatory authorities can condition, modify, cancel, terminate or revoke certificates of authority to operate in a state for failure to comply with state laws or the rules, regulations and policies of the state regulatory authority. Fines and other penalties may also be imposed for such violations. As we expand our telecommunications services into new states, we will likely be required to obtain certificates of authority to operate, and be subject to similar ongoing regulatory requirements, in those states as well. We are certified in all states where we currently have operations and certification is required. We cannot be sure that we will retain such certifications or that we will receive authorization for markets in which we expect to operate in the future.

     In addition, the states have authority under the Telecommunications Act of 1996 to determine whether we are eligible to receive funds from the federal universal service fund. They also possess authority to approve or (in limited circumstances) reject agreements for the interconnection of telecommunications carriers’ facilities with those of the local exchange carrier, and to arbitrate disputes arising in negotiations for interconnection, although, as mentioned, the Court of Appeals for the Eleventh Circuit (which governs many of our markets), recently concluded that state public service commissions have the authority under Section 252 of the federal Communications Act to interpret and enforce interconnection agreements. The states also have jurisdiction over whether Interstate Telephone and Valley Telephone will continue to be subject to exemptions as rural carriers from the incumbent local exchange carrier obligations under Section 251(c) of the Communications Act.

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     Interstate Telephone and Valley Telephone are subject to additional requirements under state law, including rate regulation and quality of service requirements. In Alabama and Georgia, both Interstate Telephone and Valley Telephone are subject to a price cap form of rate regulation. Under price caps, the companies have limited ability to raise rates for intrastate telephone services, but the Alabama and Georgia Public Service Commissions do not regulate the rate of return earned by the companies.

  Local Regulation

     In certain locations, we must obtain local franchises, licenses or other operating rights and street opening and construction permits to install, expand and operate our telecommunications facilities in the public rights-of-way. In some of the areas where we provide services, we pay license or franchise fees based on a percentage of gross revenues. Cities that do not currently impose fees might seek to impose them in the future, and after the expiration of existing franchises, fees could increase. Under the Telecom Act, state and local governments retain the right to manage the public rights-of-way and to require fair and reasonable compensation from telecommunications providers, on a competitively neutral and nondiscriminatory basis, for use of public rights-of-way. As noted above, these activities must be consistent with the Telecommunications Act, and may not have the effect of prohibiting us from providing telecommunications services in any particular local jurisdiction.

     If an existing franchise or license agreement were to be terminated prior to its expiration date and we were forced to remove our facilities from the streets or abandon them in place, our operations in that area would cease, which could have a material adverse effect on our business as a whole. We believe that the provisions of the Telecommunications Act barring state and local requirements that prohibit or have the effect of prohibiting any entity from providing telecommunications service should be construed to limit any such action, but there is no guarantee that they would be.

  Environmental Regulation

     Our switch site and some customer premise locations are equipped with back-up power sources in the event of an electrical failure. Each of our switch site locations has battery and diesel fuel powered backup generators, and we use batteries to back-up some of our customer premise equipment. Federal, state and local environmental laws require that we notify certain authorities of the location of hazardous materials and that we implement spill prevention plans. We believe that we currently are in compliance with these requirements in all material respects.

Franchises

     As described above, cable television systems and local telephone systems generally are constructed and operated under the authority of nonexclusive franchises, granted by local and/or state governmental authorities. Franchises typically contain many conditions, such as:

	•	time limitations on commencement and completion of system construction;
	•	customer service standards;
	•	minimum number of channels; and
	•	the provision of free service to schools and certain other public institutions.

     We believe that the conditions in our franchises are fairly typical for the industry. Our franchises generally provide for the payment of fees to the municipality ranging from 3% to 5% of revenues from telephone and cable television service, respectively. Our franchises generally have ten to 15 year terms, and we expect our franchises to be renewed by the relevant franchising authority before or upon expiration.

     Prior to the scheduled expiration of most franchises, we initiate renewal proceedings with the relevant franchising authorities. The Cable Communications Policy Act of 1984 provides for an orderly franchise renewal process in which the franchising authorities may not unreasonably deny renewals. If a renewal is withheld and the franchising authority takes over operation of the affected cable system or awards the franchise to another party, the franchising authority must pay the cable operator the “fair market value” of the system. The Cable Communications Policy Act of 1984 also established comprehensive renewal procedures requiring that the renewal application be evaluated on its own merit and not as part of a comparative process with other proposals.

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     The following table lists our existing and pending franchises by market, term and expiration date.

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     The Cable Communications Policy Act of 1984 also prohibits franchising authorities from granting exclusive franchises or unreasonably refusing to award additional franchises covering an existing cable system’s service area. This simplifies the application process for our obtaining a new franchise. This process usually takes about six to nine months. While this makes it easier for us to enter new markets, it also makes it easier for competitors to enter the markets in which we currently have franchises.

RISK FACTORS

Risks Related to Our Business

We have a history of net losses and may not be profitable in the future.

     As of December 31, 2004, we had an accumulated deficit of $473.4 million. We expect to incur net losses for the next several years as our business matures. Our ability to generate profits and positive cash flow from operating activities will depend in large part on our ability to increase our revenues to offset the costs of operating our network and providing services. If we cannot achieve operating profitability or positive cash flow from operating activities, our business, financial condition and operating results will be adversely affected.

Failure to obtain additional funding may limit our ability to complete our existing networks or to expand our business.

     As of December 31, 2004, we had $3.2 million of working capital and $473.4 million of accumulated deficit. We currently expect to spend approximately $33.2 million during 2005 to expand and upgrade our networks in the markets where we currently provide service, including our network in Pinellas County, Florida. Planned capital expenditures in 2005 and thereafter to complete the buildout of our network in Pinellas County, Florida will have to be funded by cash flow from operations in that market or from additional equity financings. We may not be able to raise proceeds sufficient to complete our buildout in Pinellas County. In addition, if financing is available, it may not be obtained on a timely basis and with acceptable terms. If we fail to obtain sufficient financing, we may be required to discontinue our buildout of Pinellas County, which could have a material adverse effect on our business. See Item 7-“Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources”.

Our substantial indebtedness may adversely affect our cash flows, future financing and flexibility.

     As of December 31, 2004, we had approximately $286.7 million of outstanding indebtedness, including accrued interest, and our stockholders’ equity was $86.3 million. We pay interest in cash on our credit facilities and on our outstanding 12% senior notes due 2009. We may incur additional indebtedness in the future. Our level of indebtedness could adversely affect our business in a number of ways, including:

	•	we may have to dedicate a significant amount of our available funding and cash flow from operating activities to the payment of interest and the repayment of principal on outstanding indebtedness;
	•	depending on the levels of our outstanding debt and the terms of our debt agreements, we may have trouble obtaining future financing for working capital, capital expenditures, general corporate and other purposes;
	•	high levels of indebtedness may limit our flexibility in planning for or reacting to changes in our business; and
	•	increases in our outstanding indebtedness and leverage will make us more vulnerable to adverse changes in general economic and industry conditions, as well as to competitive pressure.

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We may not be able to make future principal and interest payments on our debt.

     Our earnings were not sufficient to cover our fixed charges in each year of the seven-year period ended December 31, 2004. We currently generate sufficient cash flow from operating activities to service our debt. However, our ability to make future principal and interest payments on our debt depends upon our future performance, which is subject to general economic conditions, industry cycles and financial, business and other factors affecting our operations, many of which are beyond our control. If we cannot grow and generate sufficient cash flow from operating activities to service our debt payments, we may be required, among other things to:

	•	seek additional financing in the debt or equity markets;
	•	refinance or restructure all or a portion of our debt;
	•	sell selected assets; or
	•	reduce or delay planned capital expenditures.

     These measures may not be sufficient to enable us to service our debt. In addition, any such financing, refinancing or sale of assets may not be available on commercially reasonable terms, or at all.

Restrictions on our business imposed by our debt agreements could limit our growth or activities.

     Our indenture and our credit agreements place operating and financial restrictions on us and our subsidiaries. These restrictions affect, and any restrictions created by future financings, will affect our and our subsidiaries’ ability to, among other things:

	•	incur additional debt or issue mandatorily redeemable equity securities;
	•	create liens on our assets;
	•	make certain loans, investments and capital expenditures;
	•	use the proceeds from any sale of assets;
	•	make distributions on or redeem our stock;
	•	consolidate, merge or transfer all or substantially all our assets;
	•	enter into transactions with affiliates;
	•	utilize revenues except for specified uses; and
	•	utilize excess liquidity except for specified uses.

     In addition, our credit facilities require us to maintain specified financial ratios, such as a maximum leverage ratio and a minimum liquidity ratio. We are also required to maintain a minimum level of earnings before income, taxes, depreciation and amortization (or EBITDA). These limitations may affect our ability to finance our future operations or to engage in other business activities that may be in our interest. If we violate any of these restrictions or any restrictions created by future financings, we could be in default under our agreements and be required to repay our debt immediately rather than at scheduled maturity.

We may not be able to sell our cable system in Cerritos, California which may adversely affect our financial condition.

     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 in 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. 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. If we are unable to sell the Cerritos assets in a timely manner, or on acceptable terms, our financial condition may be adversely affected

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The demand for our bundled broadband communications services may be lower than we expect.

     The demand for video, voice and data services, either alone or as part of a bundle, cannot readily be determined. Our business could be adversely affected if demand for bundled broadband communications services is materially lower than we expect. If the markets for the services we offer, including voice and data services, fail to develop, grow more slowly than anticipated or become saturated with competitors, our ability to generate revenue will suffer.

Competition from other providers of video services could adversely affect our results of operations.

     To be successful, we will need to retain our existing video customers and attract video customers away from our competitors. Some of our competitors have advantages over us, such as long-standing customer relationships, larger networks, and greater experience, resources, marketing capabilities and name recognition. In addition, a continuing trend toward business combinations and alliances in the cable television area and in the telecommunications industry as a whole may create significant new competitors for us. In providing video service, we currently compete with Bright House Networks, or Bright House, Charter Communications Inc., or Charter, Comcast Corporation, or Comcast, Mediacom Communications Corporation, or Mediacom, and Time Warner Cable Inc., or Time Warner. We also compete with satellite television providers, including DirecTV, Inc., or DirecTV, and Echostar Communications Corporation, or Echostar. Legislation now allows satellite television providers to offer local broadcast television stations. This may reduce our current advantage over satellite television providers and our ability to attract and maintain customers.

     The providers of video services in our markets have, from time to time, adopted promotional discounts. We expect these promotional discounts in our markets to continue into the foreseeable future and additional promotional discounts may be adopted. We may need to offer additional promotional discounts to be competitive, which could have an adverse impact on our revenues. In addition, incumbent local phone companies may market video services in their service areas to provide a bundle of services. BellSouth Corporation, or BellSouth, has entered into a strategic marketing alliance with DirecTV to jointly market voice and video services. If telephone service providers offer video services in our markets, it could increase our competition for our video and voice services and for our bundled services.

Competition from other providers of voice services could adversely affect our results of operations.

     In providing local and long-distance telephone services, we compete with the incumbent local phone company in each of our markets. We are not the first provider of telephone services in most of our markets and we therefore must attract customers away from other telephone companies. BellSouth and Verizon are the primary incumbent local exchange carriers in our targeted region. They offer both local and long-distance services in our markets and are particularly strong competitors. We also compete with a number of providers of long-distance telephone services, such as AT&T Corp., or AT&T, Bellsouth, MCI, Inc., or MCI, Sprint Corporation, or Sprint, and Verizon. Our other competitors include competitive local exchange carriers, which are local phone companies other than the incumbent phone company that provide local telephone services and access to long-distance services over their own networks or over networks leased from other companies, and wireless telephone carriers. In the future, we may face other competitors, such as cable television service operators who have announced their intention to offer telephone services with Internet-based telephony. If cable operators offer voice services in our markets, it could increase competition for our bundled services.

     The past several years have seen the emergence in our markets of carriers relying on the so-called unbundled network element platform obtained from incumbent local exchange carriers under Section 251(c)(3) of the Communications Act of 1934 and the Federal Communications Commission’s, or FCC’s, implementing regulations. Some of these carriers have been successful in capturing market share in a relatively short period of time. In the FCC’s Triennial Review Order, the framework was established whereby the obligations of incumbent local exchange carriers to continue to make available the unbundled network element platform may be eliminated in the future subject to certain conditions being satisfied and certified by state public service commissions. It is difficult at this time to determine the extent to which competition from unbundled network element platform providers in our markets may intensify or diminish and it is impossible to predict, in the event that the unbundled network element platform is no longer available in certain markets in the future, whether and which unbundled network element platform-based carriers will successfully transition to other means of serving their local exchange customers.

Competition from other providers of data services could adversely affect our results of operations.

     Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors have advantages over us, such as greater experience, resources, marketing capabilities and name recognition. In providing data services, we compete with:

	•	traditional dial-up Internet service providers;
	•	incumbent local exchange carriers that provide dial-up and digital subscriber line, or DSL, services;
	•	providers of satellite-based Internet access services;

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	•	competitive local exchange carriers; and
	•	cable television companies.

     In addition, some providers of data services have reduced prices and engaged in aggressive promotional activities. We expect these price reductions and promotional activities to continue into the foreseeable future and additional price reductions may be adopted. We may need to lower our prices for data services to remain competitive.

Our programming costs are increasing, which could reduce our gross profit.

     Programming has been our largest single operating expense and we expect this to continue. In recent years, the cable industry has experienced rapid increases in the cost of programming, particularly sports programming. Our relatively small base of subscribers limits our ability to negotiate lower programming costs. We expect these increases to continue, and we may not be able to pass our programming cost increases on to our customers. In addition, as we increase the channel capacity of our systems and add programming to our expanded basic and digital programming tiers, we may face additional market constraints on our ability to pass programming costs on to our customers. Any inability to pass programming cost increases on to our customers would have an adverse impact on our gross profit.

Programming exclusivity in favor of our competitors could adversely affect the demand for our video services.

     We obtain our programming by entering into contracts or arrangements with programming suppliers. A programming supplier could enter into an exclusive arrangement with one of our video competitors that could create a competitive advantage for that competitor by restricting our access to this programming. If our ability to offer popular programming on our cable television systems is restricted by exclusive arrangements between our competitors and programming suppliers, the demand for our video services may be adversely affected and our cost to obtain programming may increase.

The rates we pay for pole attachments may increase significantly.

     The rates we must pay utility companies for space on their utility poles is the subject of frequent disputes. If the rates we pay for pole attachments were to increase significantly or unexpectedly, it would cause our network to be more expensive to operate. It could also place us in a competitive disadvantage to video and telecommunications service providers who do not require, or who are less dependent upon, pole attachments, such as satellite providers and wireless voice service providers. See “Legislation and regulation—Federal Regulation—Regulation of Cable Services—Pole Attachments” for more information.

Loss of interconnection arrangements could impair our telephone service.

     We rely on other companies to connect our local telephone customers with customers of other local telephone providers. We presently have access to BellSouth’s telephone network under a nine-state interconnection agreement, which expires in September 2005. We have access to Verizon’s telephone network in Florida under an interconnection agreement covering Florida, which expires in [August 2005]. If either interconnection agreement is not renewed, we will have to negotiate another interconnection agreement with the respective carrier. The renegotiated agreement could be on terms less favorable than our current terms.

     It is generally expected that the Telecommunications Act of 1996 will continue to undergo considerable interpretation and implementation, which could have a negative impact on our interconnection agreements with BellSouth and Verizon. It is also possible that further amendments to the Communications Act of 1934 may be enacted which could have a negative impact on our interconnection agreements with BellSouth and Verizon. The contractual arrangements for interconnection and access to unbundled network elements with incumbent carriers generally contain provisions for incorporation of changes in governing law. Thus, future FCC, state public service commission and/or court decisions may negatively impact the rates, terms and conditions of the interconnection services we have obtained and may seek to obtain under these agreements, which could adversely affect our business, financial condition or results of operations. Our ability to compete successfully in the provision of services will depend on the nature and timing of any such legislative changes, regulations and interpretations and whether they are favorable to us or to our competitors. See “Legislation and Regulation” for more information.

We could be hurt by future interpretation or implementation of regulations.

     The current communications and cable legislation is complex and in many areas sets forth policy objectives to be implemented by regulation, at the federal, state, and local levels. It is generally expected that the Communications Act of 1934, as amended, the Telecommunications Act of 1996 and implementing regulations and decisions, as well as applicable state laws and regulations, will continue to undergo considerable interpretation and implementation. Regulations that enhance the ability of certain classes of our competitors, or interpretation of existing regulations to the same effect, would adversely affect our competitive position. It is also possible that further amendments to the Communications Act of 1934 and state statutes to which we or our competitors are subject may be enacted. Our ability to compete successfully will depend on the nature and timing of any such legislative changes,

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regulations, and interpretations and whether they are favorable to us or to our competitors. See “Legislation and Regulation” for more information.

We operate our network under franchises that are subject to non-renewal or termination.

     Our network generally operates pursuant to franchises, permits or licenses typically granted by a municipality or other state or local government controlling the public rights-of-way. Often, franchises are terminable if the franchisee fails to comply with material terms of the franchise order or the local franchise authority’s regulations. Although none of our existing franchise or license agreements have been terminated, and we have received no threat of such a termination, one or more local authorities may attempt to take such action. We may not prevail in any judicial or regulatory proceeding to resolve such a dispute.

     Further, franchises generally have fixed terms and must be renewed periodically. Local franchising authorities may resist granting a renewal if they consider either past performance or the prospective operating proposal to be inadequate. In a number of jurisdictions, local authorities have attempted to impose rights-of-way fees on providers that have been challenged as violating federal law. A number of FCC and judicial decisions have addressed the issues posed by the imposition of rights-of-way fees on competitive local exchange carriers and on video distributors. To date, the state of the law is uncertain and may remain so for some time. We may become subject to future obligations to pay local rights-of-way fees which are excessive or discriminatory.

     The local franchising authorities can grant franchises to competitors who may build networks in our market areas. Local franchise authorities have the ability to impose regulatory constraints or requirements on our business, including constraints and requirements that could materially increase our expenses. In the past, local franchise authorities have imposed regulatory constraints, by local ordinance or as part of the process of granting or renewing a franchise, on the construction of our network. They have also imposed requirements on the level of customer service we provide, as well as other requirements. The local franchise authorities in our new markets may also impose regulatory constraints or requirements, which could increase our expenses in operating our business.

We may not be able to obtain telephone numbers for new voice customers in a timely manner.

     In providing voice services, we rely on access to numbering resources in order to provide our customers with telephone numbers. A shortage of or a delay in obtaining new numbers from numbering administrators, as has sometimes been the case for local exchange carriers in the recent past, could adversely affect our ability to expand into new markets or enlarge our market share in existing markets.

Substantially all of our voice traffic passes through one of our two switches located in West Point, Georgia and nearby Huguley, Alabama, and these switches may fail to operate.

     Substantially all of our voice traffic passes through one of our two switches located in West Point, Georgia and nearby Huguley, Alabama. If one or both of our switches were to fail to operate, a portion or all of our customers would not be able to access our voice services, which likely would damage our relationship with our customers and could adversely affect our business.

We may encounter difficulties in implementing and developing new technologies.

     We have invested in advanced technology platforms that support advanced communications services and multiple emerging interactive services, such as video-on-demand, subscriber video-on-demand, digital video recording, interactive television, IP Centrex services and passive optical network services. We have also invested in our new enterprise management system. However, existing and future technological implementations and developments may allow new competitors to emerge, reduce our network’s competitiveness or require expensive and time-consuming upgrades or additional equipment, which may also require the write-down of existing equipment. In addition, we may be required to select in advance one technology over another and may not choose the technology that is the most economic, efficient or attractive to customers. We may also encounter difficulties in implementing new technologies, products and services and may encounter disruptions in service as a result.

We may encounter difficulties expanding into additional markets.

     To expand into additional cities we will have to obtain pole attachment agreements, construction permits, telephone numbers, franchises and other regulatory approvals. Delays in entering into pole attachment agreements, receiving the necessary construction permits and conducting the construction itself have adversely affected our schedule in the past and could do so again in the future. Difficulty in obtaining numbering resources may also adversely affect our ability to expand into new markets. Further, as we recently experienced in Louisville, we may face legal or similar resistance from competitors who are already in these markets. See “Item 3—Legal Proceedings.” For example, a competitor may oppose or delay our franchise application or our request for pole attachment space. These difficulties could significantly harm or delay the development of our business in new markets.

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It may take us longer to construct our network than anticipated, which could adversely affect our growth, financial condition and results of operations.

     When we enter new markets or upgrade or expand our network in existing markets, we project the capital expenditures that will be required based in part on the amount of time necessary to complete the construction or upgrade of the network and the difficulty of such construction. For example we currently expect to spend approximately $7.5 million in capital expenditures in 2005 to enhance the network assets in Pinellas County Florida acquired from Verizon Media. If construction lasts longer than anticipated or is more difficult than anticipated, our capital expenditures could be significantly higher, which could adversely affect our growth, financial condition or results of operations.

It may take us longer to increase connections than anticipated.

     When we enter new markets or expand existing markets, we project the amount of revenue we will receive in such markets based in part on how quickly we are able to generate new connections. If we are not able to generate connections as quickly as anticipated, we will not be able to generate revenue in such markets as quickly as anticipated, which could adversely affect our growth, financial condition or results of operations.

Future acquisitions and joint ventures could strain our business and resources.

     If we acquire existing companies or networks or enter into joint ventures, we may:

	•	miscalculate the value of the acquired company or joint venture;
	•	divert resources and management time;
	•	experience difficulties in integrating the acquired business or joint venture with our operations;
	•	experience relationship issues, such as with customers, employees and suppliers, as a result of changes in management;
	•	incur additional liabilities or obligations as a result of the acquisition or joint venture; and
	•	assume additional financial burdens or dilution in connection with the transaction.

     Additionally, ongoing consolidation in our industry may be shrinking the number of attractive acquisition targets.

We depend on the services of key personnel to implement our strategy. If we lose the services of our key personnel or are unable to attract and retain other qualified management personnel, we may be unable to implement our strategy.

     Our business is currently managed by a small number of key management and operating personnel. We do not have any employment agreements with, nor do we maintain “key man” life insurance policies on, these or any other employees. The loss of members of our key management and certain other members of our operating personnel could adversely affect our business.

     Our ability to manage our anticipated growth depends on our ability to identify, hire and retain additional qualified management personnel. While we are able to offer competitive compensation to prospective employees, we may still be unsuccessful in attracting and retaining personnel which could affect our ability to grow effectively and adversely affect our business.

Since our business is concentrated in specific geographic locations, our business could be hurt by a depressed economy and natural disasters in these areas.

     We provide our services to areas in Alabama, Florida, Georgia, South Carolina and Tennessee, which are all in the southeastern United States, as well as California. A stagnant or depressed economy in the United States and the southeastern United States in particular could affect all of our markets, and adversely affect our business and results of operations.

     Our success depends on the efficient and uninterrupted operation of our communications services. Our network is attached to poles and other structures in our service areas, and our ability to provide service depends on the availability of electric power. A tornado, hurricane, flood, mudslide or other natural catastrophe in one of these areas could damage our network, interrupt our service and harm our business in the affected area. In addition, many of our markets are close together, and a single natural catastrophe could damage our network in more than one market.

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Risks Related to Relationships with Stockholders, Affiliates and Related Parties

A small number of stockholders control a significant portion of our stock and could exercise significant influence over matters requiring stockholder approval, regardless of the wishes of other stockholders.

     As of January 31, 2005, Silver Point Capital, or Silver Point, our largest stockholder, owned approximately 20% of our outstanding voting stock. Additionally, private equity funds affiliated with Whitney & Co., LLC, or Whitney, and The Blackstone Group L.P., or Blackstone, owned approximately 6.7% and 5.1% of our outstanding voting stock, respectively. Further, approximately 5.8% of our outstanding voting stock was owned by Campbell B. Lanier, III, the chairman of our board of directors, and members of Mr. Lanier’s immediate family. As a result, these stockholders have significant voting power with respect to the ability to:

	•	authorize additional shares of capital stock or otherwise amend our certificate of incorporation or bylaws;
	•	elect our directors; or
	•	effect a merger, sale of assets or other corporate transaction.

     The extent of ownership by these stockholders may also discourage a potential acquirer from making an offer to acquire us. This could reduce the value of our stock.

Some of our major stockholders own stock in our competitors and may have conflicts of interest.

     Some of our major stockholders, including Silver Point, Whitney, Blackstone and Mr. Lanier, own or in the future may own interests in companies that may compete with us. When the interest of one of our competitors differs from ours, these stockholders may support our competitor or take other actions that could adversely affect our interests.

Risks Related to Our Common Stock

If we issue more stock in future offerings, the percentage of our stock that our stockholders own will be diluted.

     As of January 31, 2005, we had outstanding 23,697,787 shares of common stock. We also had outstanding on that date options to purchase 2,026,285 shares of common stock as well as warrants to purchase 1,090,733 shares of common stock. Our authorized capital stock includes 200,000,000 shares of common stock and 199,000,000 shares of preferred stock, which our board of directors has the authority to issue without further stockholder action. Future stock issuances also will reduce the percentage ownership of our current stockholders.

     Our board of directors has the authority to issue, without stockholder approval, shares of preferred stock with rights and preferences senior to the rights and preferences of the common stock. As a result our board of directors could issue shares of preferred stock with the right to receive dividends and the assets of the company upon liquidation prior to the holders of the common stock.

The value of our stock could be hurt by substantial price fluctuations.

     The value of our common stock could be subject to sudden and material increases and decreases. The value of our stock could fluctuate in response to:

	•	our quarterly operating results;
	•	changes in our business;
	•	changes in the market’s perception of our bundled services;
	•	changes in the businesses or market perceptions of our competitors; and
	•	changes in general market or economic conditions.

     In addition, the stock market has experienced extreme price and volume fluctuations in recent years that have significantly affected the value of securities of many companies. The changes often appear to occur without regard to specific operating performance. The value of our common stock could increase or decrease based on change of this type. These fluctuations could materially reduce the value of our stock. Fluctuations in the value of our stock will also affect the value of our outstanding warrants and options, which may adversely affect shareholders’ equity, net income or both.

Forward-looking statements should be read with caution.

     This annual report on Form 10-K for the year ended December 31, 2004 contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 including, specifically, the information under the captions

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“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business,” as well as other places in this annual report. Statements in this annual report that are not historical facts are “forward-looking statements.” Such forward-looking statements include those relating to:

	•	our anticipated capital expenditures;
	•	our anticipated sources of capital and other funding;
	•	plans to develop future networks and upgrade facilities;
	•	the market opportunity presented by markets we have targeted;
	•	the current and future markets for our services and products;
	•	the effects of regulatory changes on our business;
	•	competitive and technological developments;
	•	possible acquisitions, alliances or dispositions; and
	•	projected revenues, liquidity, interest costs and income.

     The words “estimate,” “project,” “intend,” “expect,” “believe,” “may,” “could,” “plan” and similar expressions are intended to identify forward-looking statements. Wherever they occur in this annual report or in other statements attributable to us, forward-looking statements are necessarily estimates reflecting our best judgment. These statements relate to future events or our future financial performance and involve known and unknown risks, uncertainties and other factors that could cause our actual results, levels of activity, performance or achievements to differ materially from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. The most significant of these risks, uncertainties and other factors are discussed above. We caution you to carefully consider these risks and not to place undue reliance on our forward-looking statements. Except as required by law, we assume no responsibility for updating any forward-looking statements.

EMPLOYEES

     At December 31, 2004 we had 1,448 full-time employees. We consider our relations with our employees to be good, and we structure our compensation and benefit plans in order to attract and retain high-caliber personnel. We will need to recruit additional employees in order to implement our expansion plan, including general managers for each new city and additional personnel for installation, sales, customer service and network construction. We recruit from several major industries for employees with skills in video, voice and data technologies.

ITEM 2. PROPERTIES

     Our primary assets consist of voice, video and data distribution plant and equipment, including voice switching equipment, data receiving equipment, data decoding equipment, data encoding equipment, headend reception facilities, distribution systems and customer premise equipment.

     Our plant and related equipment are generally attached to utility poles under pole rental agreements with public electric utilities, electric cooperative utilities, municipal electric utilities and telephone companies. In certain locations our plant is buried underground. We own or lease real property for signal reception sites. Our headend locations are located on owned or leased parcels of land

     We own or lease the real property and buildings for our market administrative offices, customer call center, data center, and our corporate offices.

     The physical components of our broadband systems require maintenance as well as periodic upgrades to support the new services and products we may introduce. We believe that our properties are generally in good operating condition and are suitable for our business operations.

ITEM 3. LEGAL PROCEEDINGS

     In September 2000, the City of Louisville, Kentucky granted Knology of Louisville, Inc., our subsidiary, a cable television franchise. On November 2, 2000, Insight filed a complaint against the City of Louisville in Kentucky Circuit Court in Jefferson

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County, Kentucky claiming that our franchise was more favorable than Insight’s franchise. Insight’s complaint suspended our franchise until there is a final, nonappealable order in Insight’s Kentucky Circuit Court case. In April 2001 the City of Louisville moved for summary judgment in Kentucky Circuit Court against Insight. In March 2002, the Kentucky Circuit Court ruled that Insight’s complaint had no merit and the Kentucky Circuit Court granted the City of Louisville’s motion to dismiss Insight’s complaint. Insight appealed the Kentucky Circuit Court order dismissing their complaint and in June 2003 the Kentucky Court of Appeals upheld the Kentucky Circuit Court ruling. Insight sought discretionary review of the Kentucky Court of Appeals ruling by the Kentucky Supreme Court and that request is pending.

     On November 8, 2000, we filed an action in the U.S. District Court for the Western District of Kentucky against Insight seeking monetary damages, declaratory and injunctive relief from Insight and the City arising out of Insight’s complaint and the suspension of our franchise. In March 2001, the U.S. District Court issued an order granting our motion for preliminary injunctive relief and denying Insight’s motion to dismiss. In June 2003 the U.S. District Court ruled on the parties’ cross motions for summary judgment, resolving certain claims and setting others down for trial. The U.S. District Court granted our motion for summary judgment based on causation on certain claims. In August 2003, the U.S. District Court granted Insight’s motion for an immediate interlocutory appeal on certain issues, which was accepted in October 2003 by the U.S. Court of Appeals for the Sixth Circuit.

     On December 29, 2004, the Sixth Circuit reversed the U.S. District Court’s decision denying Insight’s Noerr-Pennington immunity and granting summary judgment to Knology on its First Amendment Section 1983 claim. The Sixth Circuit remanded to the U.S. District Court for further proceedings consistent with its Opinion. On January 12, 2005, we filed a Petition for Rehearing En Banc with the Sixth Circuit. On March 2, 2005, the Sixth Circuit denied our Petition for Rehearing. The parties dispute what remains, if any, of our case now that the Sixth Circuit has denied our Petition. We contend we are entitled to a trial on whether Insight’s State Court Action was protected by Noerr-Pennington immunity. Insight contends the Sixth Circuit’s Opinion requires a dismissal with prejudice of all of our claims. At this time it is impossible to determine with certainty the ultimate outcome of the litigation.

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

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     None

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PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Market Information

     Our common stock has been traded on the Nasdaq National Market under the symbol “KNOL” since December 18, 2003. The following table sets forth the high and low sales prices as reported on the Nasdaq National Market for the period from January 1, 2003 through December 31, 2004:

Holders

     As of January 31, 2005, there were approximately 2,250 shareholders of record of our common stock (excluding beneficial owners of shares registered in nominee or street name).

Dividends

     We have never declared or paid any cash dividends on our common stock and do not anticipate paying cash dividends on our common stock in the foreseeable future. It is the current policy of our board of directors to retain earnings to finance the expansion of our operations. As we are a holding company, our ability to pay cash dividends depends on our receiving cash dividends, advances and other payments from our subsidiaries. Future declaration and payment of dividends, if any, will be determined based on the then-current conditions, including our earnings, operations, capital requirements, financial condition, and other factors our board of directors deems relevant. In addition, our ability to pay dividends is limited by the terms of the indenture governing our outstanding senior notes and by the terms of our credit facilities.

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ITEM 6. SELECTED FINANCIAL DATA

     The selected financial data set forth below should be read in conjunction with the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our financial statements and the related notes, and other financial data included elsewhere in this Annual Report.

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 provide video services in Cerritos, California. 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:

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	•	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 consists of a fixed monthly fee for access to cable programming, local phone services and enhanced services and access to the internet. Additional fees are charged for services including pay-per-view movies, events such as boxing matches and concerts, long distance service and cable modem rental. Revenues are recognized as services are provided and advance billings or cash payments received in advance of services performed are recorded as deferred revenue.

     Allowance for Doubtful Accounts. We use estimates to determine our allowance for bad debts. These estimates are based on historical collection experience, current trends, credit policy and a percentage of our 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 December 31, 2004 and 2003, the net carrying amount of our property, plant and equipment was approximately $326.5 million, 78% of total assets, and $336.1 million, 72% of total assets, respectively. Total capital expenditures for the years ended December 31, 2004, 2003 and 2002 were approximately $63.6 million, $35.5 million and $44.4 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.

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     In July 2001, the FASB issued SFAS No. 144, “Impairment or Disposal of Long-Lived Assets,” which is effective for fiscal years beginning after December 15, 2001. The provisions of this statement provide a single accounting model for impairment of long-lived assets. We recognized an asset impairment of approximately $9.9 million during the year ended December 31, 2002 in accordance with SFAS No. 144.

     We adopted SFAS No. 142 on January 1, 2002 and have performed a goodwill impairment test annually in accordance with SFAS No. 142. Based on the results of the goodwill impairment test, we recorded an impairment loss of $1.3 million in the first quarter of 2002 as a cumulative effect of change in accounting principle. There have been no other impairments to our recorded goodwill.

     Significant and Subjective Estimates The following discussion and analysis of our results of operations and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 consolidated financial statements and related notes thereto included elsewhere in this annual report, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

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.

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 42.8%, 41.6% and 46.2% of our consolidated revenues for the years ended December 31, 2002, 2003 and 2004, respectively. Video revenues as a percentage of our total revenues increased significantly in 2004 as a result of the acquisition of video-only connections in Cerritos, California and video and data connections in Pinellas County, FL. 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.
	•	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 41.4%, 40.5% and 34.3% of our consolidated revenues for the years ended December 31, 2002, 2003 and 2004, respectively. 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.

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•

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 15.8%, 17.9% and 19.5% of our consolidated revenues for the years ended December 31, 2002, 2003 and 2004, respectively. Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our competitors have competitive advantages such as greater experience, resources, marketing capabilities and stronger name recognition. In providing data services, we compete with traditional dial-up Internet service providers; incumbent local exchange 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.

     We experienced a loss of video connections in 2004. While we expect to have positive growth in video connections in 2005, we believe that the historical rate of growth will decline as the video segment matures in our current markets. While the number of new video connections may grow at a declining rate, the company believes there is an opportunity to increase revenue and gross profits with the introduction of new products, price increases 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.

Costs and Expenses

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

     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 48.1%, 46.1% and 49.6% for the years ended December 31, 2002, 2003 and 2004, respectively. 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. We paid approximately $47.0 million in programming fees under programming contracts during 2004.
	•	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 17.3%, 16.2% and 14.7% for the years ended December 31, 2002, 2003 and 2004, respectively.
	•	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 7.4%, 6.5% and 4.2% for the years ended December 31, 2002, 2003 and 2004, respectively.

     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.

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     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. For periods beginning after January 1, 2002, we no longer amortize goodwill related to acquisitions in accordance with SFAS 142.

     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.

Results of Operations

     The following table sets forth financial data as a percentage of operating revenues for the years ended December 31, 2002, 2003 and 2004.

Quarterly Comparison

     The following table presents certain unaudited consolidated statements of operations and other operating data for our eight most recent quarters. The information for each of these quarters is unaudited and has been prepared on the same basis as our audited consolidated financial statements appearing elsewhere in this annual report. In the opinion of our management, all necessary adjustments, consisting only of normal recurring adjustments, have been included to present fairly the unaudited quarterly results when read in conjunction with our consolidated financial statements and related notes included elsewhere in this annual report. We believe that results of operations for interim periods should not be relied upon as any indication of the results to be expected or achieved in any future periods or any year as a whole. The information presented includes 391,798 homes passed, 287,094 marketable homes passes, 49,717 video connections and 8,705 data connections acquired as part of the Verizon Media acquisition in the quarter ended December 31, 2003.

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Year Ended December 31, 2004 Compared to Year Ended December 31, 2003

     Revenues. Operating revenues increased 22.3% from $172.9 million for the year ended December 31, 2003, to $211.5 million for the year ended December 31, 2004. Operating revenues from video services increased 35.8% from $71.9 million for the year ended December 31, 2003, to $97.6 million for the same period in 2004. Operating revenues from voice services increased 3.3% from $70.1 million for the year ended December 31, 2003, to $72.4 million for the same period in 2004. Operating revenues from data and other services increased 33.9% from $30.9 million for the year ended December 31, 2003, to $41.4 million for the same period in 2004.

     The increased revenues from video, voice and data and other services are due primarily to an increase in the number of connections, from 381,815 as of December 31, 2003, which included 58,422 connections acquired from Verizon Media in December of 2003, to 398,433 as of December 31, 2004. For the year ended December 2003, the connections acquired from Verizon Media generated less than $300,000 in revenues. Rate increases accounted for approximately 3% of the increased revenues for the twelve months ended December 31, 2004, and the increase in the number of connections accounted for approximately 97% of the increased revenue for the same period. The additional connections resulted primarily from:

	•	New service offerings specifically marketed to increase sales and connections penetration.
	•	Sales of voice and data services, which accounted for the positive growth in our connections added from December 31, 2003 through December 31, 2004. We gained these connections by offering competitive plans that focus on bundling services to customers.
	•	The acquisition of certain cable system assets in Cerritos, California and Pinellas County, Florida from Veizon Media.

     We experienced a loss of video connections in 2004 as we transitioned our acquired Pinellas County customers to new plans and rates. We expect to add new video connections in the future, but as our video segment matures in our current markets, we expect 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.

     Cost of Services. Cost of services increased 30.7% from $46.5 million for the year ended December 31, 2003, to $60.8 million for the year ended December 31, 2004. Cost of services for video services increased 46.2% from $33.1 million for the year ended December 31, 2003, to $48.4 million for the same period in 2004. Cost of services for voice services decreased 6.5% from $11.4 million for the year ended December 31, 2003, to $10.6 million for the same period in 2004. Cost of services for data and other services decreased 12.8% from $2.0 million for the year ended December 31, 2003, to $1.8 million for the same period in 2004. The decrease in voice and data cost of services is primarily due to efficiency gains in our network architecture. We expect our cost of services to increase as we add more connections. Programming costs, which are one of our largest single expense items, have been increasing over the last several years on an aggregate basis due to an increase in subscribers, as a result of internal growth and the Verizon Media acquisition noted above, 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.

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     Gross Profit. Gross profit increased 19.2% from $126.4 million for the year ended December 31, 2003, to $150.6 million for the year ended December 31, 2004. Gross profit for video services increased 26.9% from $38.7 million for the year ended December 31, 2003, to $49.2.million for the same period in 2004. Gross profit for voice services increased 5.2% from $58.7 million for the year ended December 31, 2003, to $61.8 million for the same period in 2004. Gross profit for data and other services increased 37.1% from $28.9 million for the year ended December 31, 2003, to $39.7 million for the same period in 2004. The increase in gross profit is primarily a result of the changes in revenues and cost of services as described above.

     Operating Expenses. Our operating expenses, excluding depreciation and amortization, increased 25.9% from $93.4 million for the year ended December 31, 2003, to $117.6 for the year ended December 31, 2004. The increase in our operating expenses is consistent with the growth in revenues and is a result of the expansion of our operations and an increase in the number of employees associated with such expansion and growth. During 2004 we incurred certain incremental expenses associated with the unusual storm and hurricane activity. Selling, operations and administrative expenses will continue to increase as we continue to grow our business.

     Our depreciation and amortization decreased from $77.8 million for the year ended December 31, 2003, to $74.2 million for the year ended December 31, 2004. The decrease in depreciation and amortization resulted from a combination of lower spending for additions in property, plant, equipment and intangible assets in 2004, and a portion of our long-lived assets becoming fully depreciated. We expect depreciation and amortization expense to continue to decrease as our overall capital expenditures decrease and existing long-lived assets become fully depreciated..

     Our capital market activities were $84,000 for the year ended December 31, 2003, compared to $880,000 for the year ended December 31, 2004. The increase is primarily a result fees and expenses for our proposed debt offering which was withdrawn during the first quarter of 2004.

     Our non-cash stock option compensation expense increased from $1.9 million for the year ended December 31, 2003 to $3.6 million for the year ended December 31, 2004. The increase in the non-cash stock option compensation expense was primarily due to a re-pricing of certain stock options during the second quarter of 2004.

     Our litigation fees decreased from $907,000 for the year ended December 31, 2003, to $377,000 for the year ended December 31, 2004. The decrease in litigation fees is primarily due to less activity related to the Insight litigation.

     Other Income and Expense, Including Interest Income and Interest Expense. Our total other expense decreased from $40.2 million for the year ended December 31, 2003, to $29.7 million for the year ended December 31, 2004. Interest income was $379,000 for the year ended December 31, 2003, compared to $720,000 for the same period in 2004. The increase in interest income primarily reflects a higher average cash and cash equivalent balance for the year ended December 31, 2004. Interest expense increased from $29.2 million for the year ended December 31, 2003, to $31.1 million for the year ended December 31, 2004. The increase in interest expense for 2004 resulted from a higher average debt balance outstanding due to in-kind interest payments associated with our senior notes..

     In the fourth quarter of 2003, 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 December 31, 2003 was $9.03 resulting in a $929,000 gain on the adjustment of warrants to market value. During 2004, we adjusted the carrying value of the outstanding warrants to purchase our common stock to market value based on the published market per share value of our common stock. The published market per share value of our common stock on December 31, 2004 was $3.90 resulting in a $535,000 gain on the adjustment of warrants to market value. Other expenses, net decreased from $12.3 million for the year ended December 31, 2003 to $134,000 for the year ended December 31, 2004. We recorded a loss on our investment in Grande Communications, Inc. of $12.4 million for the year ended December 31, 2003 after we determined that the adverse conditions at Grande were other than temporary.

     Income Tax Provision. We recorded no income tax benefit for the years ended December 31, 2003 and 2004, 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 $87.8 million for the year ended December 31, 2003, compared to a loss before discontinued operations of $75.7 million for the year ended December 31, 2004.

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

     Net Loss Attributable to Common Stockholders. We incurred a net loss attributable to common stockholders of $87.8 million and $75.6 million for the years ended December 31, 2003 and 2004, respectively. We expect net losses to continue as our business matures.

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Year Ended December 31, 2003 Compared to Year Ended December 31, 2002

     Revenues. Operating revenues increased 21.9% from $141.9 million for the year ended December 31, 2002, to $172.9 million for the year ended December 31, 2003. Operating revenues from video services increased 18.3% from $60.8 million for the year ended December 31, 2002, to $71.9 million for the same period in 2003. Operating revenues from voice services increased 19.4% from $58.7 million for the year ended December 31, 2002, to $70.1 million for the same period in 2003. Operating revenues from data and other services increased 38.3% from $22.4 million for the year ended December 31, 2002, to $30.9 million for the same period in 2003.

     The increased revenues from video, voice and data and other services are due primarily to an increase in the number of connections, from 293,149 as of December 31, 2002, to 381,815 as of December 31, 2003. Rate increases accounted for approximately 23% of the increased revenues for the twelve months ended December 31, 2003, and the increase in the number of connections accounted for approximately 77% of the increased revenue for the same period. The additional connections resulted primarily from:

	•	New service offerings specifically marketed to increase sales and penetration.
	•	Sales of voice and data services, which accounted for approximately 85% of the additional connections added from December 31, 2002 through December 31, 2003. We gained these connections by offering competitive plans that focus on bundling services to customers.
	•	The continued construction of the broadband network in the Knoxville market.
	•	The acquisition of certain cable system assets in Cerritos, California from Verizon Media, with revenue included in the month ended December 31, 2003 (We also acquired the Pinellas County, FL assets prior to year end, but no revenue was included in the operating results for the year ended December 31, 2003).

     Cost of Services. Cost of services increased 13.5% from $41.0 million for the year ended December 31, 2002, to $46.5 million for the year ended December 31, 2003. Cost of services for video services increased 13.5% from $29.2 million for the year ended December 31, 2002, to $33.1 million for the same period in 2003. Cost of services for voice services increased 12.1% from $10.1 million for the year ended December 31, 2002, to $11.4 million for the same period in 2003. Cost of services for data and other services increased 21.2% from $1.7 million for the year ended December 31, 2002, to $2.0 million for the same period in 2003.

     Gross Profit. Gross profit increased 25.3% from $100.9 million for the year ended December 31, 2002, to $126.4 million for the year ended December 31, 2003. Gross profit for video services increased 22.8% from $31.6 million for the year ended December 31, 2002, to $38.7 million for the same period in 2003. Gross profit for voice services increased 20.9% from $48.6 million for the year ended December 31, 2002, to $58.7 million for the same period in 2003. Gross profit for data and other services increased 39.7% from $20.7 million for the year ended December 31, 2002, to $28.9 million for the same period in 2003.

     Operating Expenses. Our operating expenses, excluding depreciation and amortization, increased 16.9% from $79.8 million for the year ended December 31, 2002, to $93.4 for the year ended December 31, 2003.

     Our depreciation and amortization decreased from $80.4 million for the year ended December 31, 2002, to $77.8 million for the year ended December 31, 2003. The decrease in depreciation and amortization is due to lower spending for additions in property, plant, equipment and intangible assets in 2003 compared to 2002.

     We recognized a gain of $109.8 million with the completion of our financial restructuring and generated related professional fees of $3.8 million for the year ended December 31, 2002.

     We recognized $9.9 million in asset impairment for the year ended December 31, 2002 in accordance with SFAS No. 144.

     We recorded a non-cash stock option compensation expense of $3.3 million for the year ended December 31, 2002 and $1.9 million for the year ended December 31, 2003.

     Our litigation fees decreased from $1.2 million for the year ended December 31, 2002, to $907,000 for the year ended December 31, 2004. The decrease in litigation fees is primarily due to less activity related to the Insight litigation.

     Other Income and Expense, Including Interest Income and Interest Expense. Our total other expense increased from $33.3 million for the year ended December 31, 2002, to $40.2 million for the year ended December 31, 2003. Interest income was $395,000 for the year ended December 31, 2002, compared to $379,000 for the same period in 2003. The decrease in interest income primarily reflects a lower average cash balance for the year ended December 31, 2003. Interest expense decreased from $36.3 million for the year ended December 31, 2002, to $29.2 million for the year ended December 31, 2003. The interest expense is principally the in-kind

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interest on our 12% senior notes due 2009. The interest expense in 2003 is significantly lower than in prior years as a result of our financial restructuring. Although the interest rate payable on the our senior notes is comparable to the rate payable on the canceled Broadband notes, the aggregate amount of notes outstanding is substantially lower.

     In the fourth quarter of 2003, 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 December 31, 2003 was $9.03 resulting in a $929,000 gain on the adjustment of warrants to market value. Other expenses, net increased from $321,000 for the year ended December 31, 2002 to $12.3 million for the year ended December 31, 2003. We recorded a loss on our investment in Grande Communications, Inc. of $12.4 million for the year ended December 31, 2003 after we determined that the adverse conditions at Grande were other than temporary.

     Income Tax Provision. We recorded no income tax benefit for the years ended December 31, 2002 and 2003, respectively, as our net operating losses are fully offset by a valuation allowance.

     Loss Before Cumulative Effect of Change in Accounting Principle. We incurred a loss before cumulative effect of change in accounting principle of $1.3 million for the year ended December 31, 2002, compared to a loss before extraordinary item and cumulative effect of change in accounting principle of $87.8 million for the year ended December 31, 2003.

     Cumulative Effect of Change in Accounting Principle. We adopted SFAS No. 142 on January 1, 2002. We have performed a goodwill impairment test in accordance with SFAS 142 and based on the results of this test we recorded an impairment loss of $1.3 million for the year ended December 31, 2002.

     Net Loss Attributable to Common Stockholders. We incurred a net loss attributable to common stockholders of $2.6 million and $87.8 million for the years ended December 31, 2002 and 2003, respectively. We expect net losses to continue as our business matures.

Liquidity and Capital Resources

Overview.

     We may need to issue equity or debt and/or sell assets to raise additional cash to fund the future operations of our business and meet our debt service obligations. We currently expect to spend approximately $33.2 million during 2005 to expand and upgrade our networks in the markets where we currently provide service, including our network in Pinellas County, Florida. Under the terms of the indenture for our existing 12% senior notes due 2009, capital expenditures to complete the buildout of our network in Pinellas County, Florida must be funded by cash flow from operations in that market or from additional equity financings or proceeds from the sale of our Cerritos division. Through 2004, the Pinellas operation was funded by the proceeds from our initial public offering. 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 in 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. 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. If the Cerritos sale or an equity offering is not completed, we expect the cash available to fund the Pinellas operation under our indenture to be exhausted before the end of the third quarter 2005. If we are unable to sell the Cerritos assets in a timely manner, or on acceptable terms, or an equity offering is not completed, we may not be able to complete our buildout in Pinellas County and grow our Pinellas County operations in accordance with our business plan, which may have any adverse impact on our financial condition.

Operating, Investing and Financing activities.

     As of December 31, 2004, we had net working capital of $3.2 million, compared to net working capital of $42.9 million as of December 31, 2003. The decrease in working capital from December 31, 2003 to December 31, 2004 is primarily due to the use of the cash proceeds from our initial public offering to enhance the network and fund operations in the Pinellas County market.

     Net cash provided by operating activities from continuing operations totaled $10.3 million, $29.5 million and $22.4 million for the years ended December 31, 2002, 2003 and 2004, respectively, and operating activities from discontinued operations used $0.1 million for the year ended December 31, 2004. 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;

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	•	asset impairment;
	•	litigation fees;
	•	write off of investments;
	•	accretion of discounted debt;
	•	non-cash bond interest expense;
	•	provision for bad debt;
	•	gain on reorganization;
	•	loss (gain) on disposition of assets;
	•	cumulative effect of change in accounting principle; and
	•	gain on adjustment of warrants to market;

     Net cash used for investing activities was $44.8 million, $95.5 million and $36.3 million for the years ended December 31, 2002, 2003 and 2004, respectively. Our investing activities for the year ended December 31, 2002, consisted of $44.4 million of capital expenditures and $1.4 million of organizational and franchise expenditures partially offset by $1.0 million of proceeds from the sale of property. Investing activities in 2003 consisted of $35.5 million of capital expenditures, $50.0 million for the purchase of short term investments, $0.4 million in organizational and franchise expenditures, $18.8 million for the acquisition of Verizon Media, an additional investment of $1.1 million Grande partially offset by $10.0 million from the sale of short term investments and $0.4 million of proceeds from the sale of property. Investing activities in 2004 consisted of $63.6 million of capital expenditures, $210.1 million for the purchase of short term investments, $0.3 million in organizational and franchise expenditures, partially offset by $237.4 million from the sale of short term investments and $0.2 million of proceeds from the sale of property.

     We received net cash flow from financing activities of $39.4 million and $43.9 million for the years ended December 31, 2002 and 2003, respectively, and used $0.4 million in financing activities for the year ended December 31, 2004. Financing activities in 2002 consisted primarily of $39.0 million of proceeds from an equity private placement offering of our Series C preferred stock and $5.5 million of proceeds from our long-term debt facility partially offset by $1.0 million of cash pledged as security and $4.1 million in expenditures related to the prepackaged plan of reorganization. In 2003 financing activities consisted primarily of $48.8 million of net proceeds from our initial public offering of common stock partially offset by $3.4 million in principal payments on debt and $1.5 million of cash pledged as security. In 2004 financing activities 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 $2.7 million in principal payments on debt, $0.4 million of expenditures related to issuance of debt and $4.6 million of cash pledged as security.

Verizon Media Acquisition and Related Planned Expenditures

     In December 2003, we completed our acquisitions of the cable system and franchise rights in Cerritos, California, and Pinellas County, Florida, for which we paid Verizon Media approximately $17.0 million in cash, which we funded with the proceeds of our initial public offering of common stock. In connection with the completion of the Verizon Media acquisition, we issued to a prior prospective purchaser and certain of its employees warrants to purchase one million shares of our common stock with an exercise price of $9.00 per share as compensation for the release of an agreement with Verizon Media granting exclusive rights to negotiate with respect to the purchase of the Verizon Media businesses.

     We currently expect to spend approximately $7.5 million in capital expenditures during 2005 to complete the enhancement of the network assets in Pinellas County, Florida. Under the terms of the indenture for our existing 12% senior notes due 2009, substantially all of our capital expenditures in the Verizon Media markets will have to be funded with the net cash proceeds from issuances of our capital stock or the sale of our Cerritos division and cash flow provided by the Pinellas operations.

Capital Expenditures

     We spent approximately $63.6 million in capital expenditures during 2004, of which approximately $36.8 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.

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     We expect to spend approximately $33.2 million in capital expenditures during 2005. We believe if we complete the sale of our Cerritos, California operations we will have sufficient cash on hand and cash from internally generated cash flow to cover our planned operating expenses and capital expenditures during 2005. If the Cerritos sale or an equity offering is not completed, however, we expect the cash available to fund the Pinellas operation under our indenture to be exhausted before the end of the third quarter 2005. There can be no assurance that we will successfully complete a timely sale of our Cerritos cable assets. If we are unable to sell the Cerritos assets in a timely manner, or on acceptable terms, the financial condition of the company may be adversely affected.

     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 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 December 31, 2004, our long-term debt, capital leases and operating lease obligations for 2005, 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 noncancelable lease terms in excess of one year as of December 31, 2004.

     As discussed above, we currently expect to spend $33.2 million in capital expenditures in 2005, including capital expenditures related to the Pinellas County, Florida market. We expect to fund these contractual obligations, programming costs and expected capital expenditures using a portion of the $18.7 million of cash and cash equivalents and short term investments on hand as of December 31, 2004, with the remainder funded by cash flow generated by operations. In particular, we believe we can satisfy all of our anticipated funding requirements, including capital expenditures, through 2005 using a combination of cash flow from operations, our cash on hand and proceeds from the sale of our Cerritos, California operations. In order to satisfy funding requirements, including capital expenditures, beyond 2005, we may need to raise additional capital through equity offerings, asset sales or debt financing.

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

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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 we adopted the fair value recognition provisions of SFAS No. 123 on January 1, 2003, we do not expect this revised standard to have a material impact on our financial statements.

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

     In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability or an asset in some circumstances. SFAS No. 150 is effective for the first interim period beginning after June 15, 2003. We adopted SFAS No. 150 effective July 1, 2003, which resulted in no material impact our financial position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     Item 8 is incorporated by reference to pages F-1 through F-21.

ITEM 9. CHANGES AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     None.

ITEM 9A. 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 December 31, 2004. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of December 31, 2004, the Company’s disclosure controls and procedures are effective.

     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 December 31, 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

     None.

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PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     A portion of the information required by this Item 10 will be contained in the sections entitled “Information About Our Executive Officers, Directors and Nominees,” “Meetings and Committees of the Board” and “Section 16(a) Beneficial Ownership Reporting Compliance” of our definitive proxy statement for our 2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report on Form 10-K by this reference.

     We have adopted a code of ethics that applies to our employees, officers and directors, including our chief executive officer, chief financial officer, principal accounting officer and controller. This code of ethics is posted on our website located at www.knology.com. The code of ethics may be found as follows: From our main web page, first click on “About Us” at the bottom of the page and then on “Investor Relations.” Next, click on “Corporate Governance.” Finally, click on “Standards of Conduct.” We intend to satisfy the disclosure requirement under Item 10 of Form 8-K regarding an amendment to, or waiver from, a provision of this code of ethics by posting such information on our website, at the address and location specified above.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this Item 11 will be contained in the section entitled “Executive Compensation” and “Meetings and Committees of the Board” of our definitive proxy statement for our 2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report on Form 10-K by this reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     A portion of the information required by this Item 12 will be contained in the section entitled “Principal Stockholders” of our definitive proxy statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report on Form 10-K by this reference.

Securities Authorized for Issuance Under Equity Compensation Plans

     The following table gives information about the common stock that may be issued upon the exercise of options, warrants and rights under all of our existing equity compensation plans as of December 31, 2004.

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Sales of Unregistered Securities

     During the year ended December 31, 2004, we had no sales of unregistered securities.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     The information required by this Item 13 will be contained in the section entitled “Certain Relationships and Related Transactions” of our definitive proxy statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report on Form 10-K by this reference.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

     The information required by this Item 14 will be contained in the section entitled “Independent Registered Public Accounting Firm” of our definitive proxy statement for its 2005 Annual Meeting of Stockholders to be filed with the SEC, and such information is incorporated in this Annual Report on Form 10-K by this reference.

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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)(1) The following Consolidated Financial Statements of the Company and independent auditor’s report are included in Item 8 of this Form 10-K.

Independent Auditors’ Report

Report of Independent Public Accountants.

Consolidated Balance Sheets as of December 31, 2003 and 2004.

Consolidated Statements of Operations for the Years Ended December 31, 2002, 2003 and 2004.

Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2003 and 2004.

Consolidated Statements of Stockholders’ (Deficit) Equity for the Years Ended December 31, 2002, 2003 and 2004.

Notes to Consolidated Financial Statements.

     All other schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission either have been included in the Consolidated Financial Statements of the Company or the notes thereto, are not required under the related instructions or are inapplicable, and therefore have been omitted.

(a)(3) The following exhibits are either provided with this Form 10-K or are incorporated herein by reference:

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47

48

49

50

51

52

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     (b) REPORTS ON FORM 8-K.

     On October 27, 2004, Knology furnished a current report on Form 8-K, under item 12, announcing its 2004 third quarter results.

     On November 3, 2004, Knology furnished a current report on Form 8-K, under item 9, providing the transcripts from its third quarter earnings conference call held on October 28, 2004.

     (c) EXHIBITS

     We hereby file as part of this Form 10-K the Exhibits listed in the Index to Exhibits.

     (d) FINANCIAL STATEMENT SCHEDULE

     Financial statement schedules required to be included in this report are either shown in the financial statements and notes thereto, included in Item 8 of this report, or have been omitted because they are not applicable.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amended report to be signed on its behalf by the undersigned, thereunto duly authorized.

                KNOLOGY, INC.

	By:	/s/ Rodger L. Johnson
		Rodger L. Johnson
		President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the dates indicated.