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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

                     x       QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                 For the quarterly period ended June 30, 2002

OR

                     o       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
                                 For the transition period from __________ to ___________

                     Commission File Number 0-30218

TIME WARNER TELECOM INC.
(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code: (303) 566-1000

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

The number of shares outstanding of Time Warner Telecom Inc.’s common stock as of July 31, 2002 was:

Time Warner Telecom Inc. Class A common stock – 48,890,771 shares
Time Warner Telecom Inc. Class B common stock – 65,936,658 shares

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INDEX TO FORM 10-Q

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CONSOLIDATED AND CONDENSED BALANCE SHEETS

See accompanying notes.

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CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

See accompanying notes.

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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

See accompanying notes.

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CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2002
(Unaudited)

See accompanying notes.

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NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS


June 30, 2002
(unaudited)

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NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS – continued

       Set forth below is a reconciliation of the basic and diluted earnings (loss) per share for each period:

Reclassifications

       Certain prior period amounts have been reclassified for comparability with the 2002 presentation.

Recent Accounting Pronouncements

       In July 2001, the Financial Accounting Standards Board issued Statement No. 141, Business Combinations (“SFAS 141”) and Statement No. 142, Goodwill and Other Intangible Assets (“SFAS 142”). SFAS 141 requires companies to reflect intangible assets apart from goodwill and supersedes previous guidance related to business combinations. SFAS 142 eliminates amortization of goodwill and amortization of all intangible assets with indefinite useful lives. However, SFAS 142 also requires the Company to perform impairment tests at least annually on all goodwill and indefinite-lived intangible assets. These statements were adopted by the Company on January 1, 2002 and, as required, the Company completed its transitional impairment test as of January 1, 2002. The adoption of the statements did not negatively impact the Company’s financial position, results of operations, or cash flows. Had these statements been in effect on January 1, 2001, the Company would not have recorded approximately $522,000 and $946,000 in amortization expense, net of tax, during the three and six months ended June 30, 2001, and net income (loss) and basic and diluted earnings (loss) per share would have been $4.9 million and $(23.4) million and $0.04 and $(0.21), respectively.

       In August 2001, the Financial Accounting Standards Board issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (“SFAS 144”). SFAS 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets and

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Management’s Discussion and Analysis of Financial Condition and
Results of Operations

       The following discussion and analysis provides information concerning the results of operations and financial condition of Time Warner Telecom Inc. (the “Company”) and should be read in conjunction with the accompanying financial statements and notes thereto. Additionally, the following discussion and analysis should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements included in Part II of Time Warner Telecom Inc.’s Annual Report on Form 10-K for the year ended December 31, 2001.

Cautions Concerning Forward Looking Statements

       This document contains certain “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding, among other items, the Company’s expected financial position, business, and financing plans. These forward-looking statements are based on management’s current expectations and are naturally subject to risks, uncertainties, and changes in circumstances, certain of which are beyond the Company’s control. Actual results may differ materially from those expressed or implied by such forward-looking statements.

       The words “believe,” “plan,” “target,” “expect,” “intend,” and “anticipate,” and expressions of similar substance identify forward-looking statements. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that those expectations will prove to be correct. Important factors that could cause actual results to differ materially from the expectations described in this report are set forth under “Risk Factors” in Item 1 and elsewhere in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 and in this report. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

       The Company is a leading fiber facilities-based provider of metropolitan and regional optical broadband networks and services to business customers. The Company delivers broadband data, dedicated Internet access, and local and long distance voice services. As of June 30, 2002, the Company served customers in 44 metropolitan markets in the United States.

       Time Warner Cable (now a unit of AOL Time Warner Inc.) began the Company’s business in 1993. Since 1997, the Company’s business has changed substantially with an exclusive focus on business customers, including carriers and governmental entities, and a rapid expansion into switched services and geographic areas beyond the Time Warner Cable footprint.

       In July 1998, the Company was reorganized into a limited liability company called Time Warner Telecom LLC (“TWT LLC”) and conducted an offering of $400 million principal amount of 93/4% Senior Notes due July 2008 (the “93/4% Senior Notes”). In the transaction, Time Warner Inc. (now wholly owned by AOL Time Warner Inc.), MediaOne Group, Inc. (now wholly owned by AT&T Corp.), and Advance/Newhouse Partnership, either directly or through subsidiaries, became the owners of all of the limited liability company interests in TWT LLC.

       In May 1999, in preparation for the Company’s initial public offering (“IPO”), TWT LLC was reconstituted as a Delaware corporation under the name Time Warner Telecom Inc. The outstanding limited liability company interests were converted into common stock of the newly formed corporation, Time Warner Telecom Inc. In May 1999, the Company completed its IPO of 20,700,000 shares of Class A common stock at a price of $14 per share.

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       The Company has two classes of common stock outstanding, Class A common stock and Class B common stock. Holders of Class A common stock have one vote per share and holders of Class B common stock have ten votes per share. Each share of Class B common stock is convertible, at the option of the holder, into one share of Class A common stock. The Class B common stock is collectively owned by Time Warner Inc. (now a wholly owned subsidiary of AOL Time Warner Inc. (“AOL Time Warner”)) and Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation (“Advance/Newhouse”). Holders of Class A common stock and Class B common stock generally vote together as a single class. However, some matters require the approval of 100% of the holders of the Class B common stock, voting separately as a class, and some matters require the approval of a majority of the holders of the Class A common stock, voting separately as a class. As of June 30, 2002, the Class B stockholders had approximately 93.1% of the combined voting power of the outstanding common stock.

       On January 25, 2001, the Company completed a public offering of 7,475,000 shares of Class A common stock at a price of $747/16 per share (the “Offering”). The Offering generated $532 million in proceeds for the Company, net of underwriting discounts and expenses. Also on January 25, 2001, the Company completed a private placement of $400 million principal amount of 101/8% Senior Notes due February 2011 (the “Old Notes”). Pursuant to an exchange offer in March 2001, all of the holders of the Old Notes exchanged their Old Notes for new 101/8% Senior Notes due February 2011 (the “101/8% Senior Notes”) with the same financial terms that were registered under the Securities Act of 1933. The Company used all of the net proceeds from the Offering and a portion of the net proceeds from the offering of the Old Notes to repay the $700 million senior unsecured bridge facility that initially financed the acquisition of substantially all of the assets of GST Telecommunications, Inc. (“GST”).

       The Company operates in metropolitan areas that have high concentrations of medium- and large-sized businesses. Historically, the Company has focused its sales and marketing efforts on such businesses, as they are potentially high volume users of the Company’s services. The Company’s revenue has been derived primarily from business telephony services, including dedicated transport, local switched, long distance, data, and high-speed Internet access services.

       On January 10, 2001, the Company expanded its geographic coverage by acquiring substantially all of the assets of GST out of bankruptcy. See “Acquisition” below. Additionally, during 2001 the Company activated networks in Chicago, Illinois; Atlanta, Georgia; Minneapolis, Minnesota; Denver, Colorado; and Columbia, South Carolina. As of June 30, 2002, the Company’s networks spanned 17,268 route miles, contained 800,259 fiber miles in 21 states, and offered service to 11,490 buildings served either entirely by the Company’s facilities (“on-net”) or through the use of facilities of another carrier to provide a portion of the link (“off-net”). The Company continues to expand its footprint within its existing markets by expanding its network into new buildings. The Company is also selectively interconnecting existing service areas within regional clusters with owned or leased fiber optic facilities and has launched on-net inter-city switched services that provide customers the ability to offer a virtual presence in a remote city.

       The Company plans to continue expanding its revenue base by utilizing available network capacity in its existing markets, by servicing additional buildings in existing markets, and by continuing to develop and selectively tailor new services in competitively-priced packages to meet the needs of its medium- and large-sized business customers. The Company intends to expand its service offerings on a continuous basis to achieve a diverse revenue base. The Company’s goal is to deploy new services and technologies when technically proven and when customer demand is evident. As new technologies that enable the switching of voice calls over an Internet protocol (“IP”) and local area network infrastructure are becoming commercially viable, the Company is integrating these technologies into its infrastructure. There is no assurance that the Company will bring any or all of these services to market successfully or profitably.

       In light of the current economic conditions and the weakness in the carrier sector, the Company is also seeking to broaden its revenue base by an increased focus on end-user (non-carrier) customers. However, despite carrier bankruptcies and business contractions, carrier customers remain an important part of the Company’s business.

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       As part of the process of diversifying its revenue base, the Company is targeting the expansion of data and Internet services offered on the Company’s existing network. The Company’s revenue from data and Internet services for the six months ended June 30, 2002 grew 39% over the comparable period in 2001 and represented 12% of the Company’s total revenue for the six months ended June 30, 2002. The Company expects an increasing portion of its future revenue to be contributed by data and Internet services.

       The impact of a slowing economy and down turn in the telecommunications sector has resulted in customers going out of business, filing bankruptcy, or looking for opportunities to cut costs. Since the beginning of 2001, the Company has experienced a significant increase in customers disconnecting service that has resulted in downward pressure on the Company’s revenue performance. During the six months ended June 30, 2002, the Company lost monthly recurring revenue of approximately $7.0 million due to customer disconnects and bankruptcies. Recurring revenue excludes non-recurring reciprocal compensation settlements of $13.9 million and $37.0 million recognized in the second quarter of 2002 and 2001, respectively. Approximately 5% of the Company’s monthly recurring revenue at June 30, 2002 was represented by customers who had entered into bankruptcy proceedings. This percentage did not include revenue from WorldCom, Inc. and its affiliates (“WorldCom”), the Company’s largest customer, which filed for Chapter 11 bankruptcy protection on July 21, 2002. WorldCom accounted for approximately 12% of the Company’s recurring revenue during the first six months of 2002. The Company cannot predict the amount of revenue from WorldCom and other customers in bankruptcy that will be lost to disconnections. The Company anticipates further disconnections by other customers due to network optimization, cost cutting efforts, and additional customer bankruptcies or other customer financial difficulties. There is no assurance that the Company will be able to replace revenue lost to customer disconnections.

       The Company’s allowance for doubtful accounts represented 31% of accounts receivable at June 30, 2002, compared to 28% and 17% of accounts receivable as of December 31, 2001, and 2000, respectively. During 2001, the Company began increasing its reserve for doubtful accounts due to credit deterioration among telecommunications carriers and to an increase in the number of customers filing for bankruptcy protection. The Company monitors the status of significant customers and increases its allowance for doubtful accounts when there is evidence that a customer may not meet its obligations to the Company. As of June 30, 2002, the Company's total receivables were $101.8 million, of which $14.7 million were from WorldCom. The Company believes that it has adequately reserved for its doubtful accounts as of June 30, 2002, including the amounts due from WorldCom. The Company continues to provide services to many of the customers that are in bankruptcy as they restructure their businesses. While the Company writes off receivables incurred by these customers prior to their bankruptcy filing, it continues to carry receivable balances when the customers continue service following their bankruptcy filings due to the higher priority accorded to post-petition claims under the bankruptcy laws. While many of these customers continue to pay following bankruptcy, the Company assigns a higher risk of collectability to these accounts and provides for an allowance for doubtful accounts for a large percentage of the outstanding post-bankruptcy receivables, resulting in an increase in the allowance for doubtful accounts. The Company has put in place additional controls to improve the collectability of accounts receivable, such as more thorough credit checks on all new and existing customers, discontinuing to sell new service to high risk customers, and requiring deposits on new services. While the Company believes these efforts will result in improved collectability of receivables, there is no assurance that these efforts will result in improved financial results.

       Factors that could negatively impact the Company’s margins in a slowing economy include below-cost pricing by some competitors to increase short-term revenue and competitive pressure on long distance rates. In addition, pricing pressure from long haul providers could impact pricing of inter-city point to point services, and the Company has seen intense price competition in common POP (point of presence) to POP locations in central business districts in certain cities.

       While bankruptcies in the telecommunications and Internet service provider (“ISP”) sectors present a threat to revenue growth, the contraction in the number of providers may benefit the Company if their customers seek to purchase services from the Company. There is no assurance that the Company will realize any benefits from the downturn in these sectors or that the Company will not continue to be adversely affected by conditions in its market sectors or the economy in general.

       Reciprocal compensation is an element of intercarrier compensation revenue that represents compensation from local exchange carriers (“LECs”) for local exchange traffic originated on another LEC’s facilities and terminated on the Company’s facilities. Reciprocal compensation rates are established by

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interconnection agreements between the parties based on federal and state regulatory and judicial rulings. Several of the Company’s significant agreements expired in 2001 and have been renegotiated, or are expiring in 2002 and are under renegotiation. In most states, regulatory bodies have established lower traffic termination rates than the rates provided under the Company’s expired agreements. As a result, the rates under the new agreements, while reasonable in light of the regulatory environment, are lower than the rates under the expired agreements. In addition, a 2001 Federal Communications Commission (“FCC”) ruling on reciprocal compensation for ISP-bound traffic reduced rates in 2001 and early 2002 and will further reduce rates in June 2003. The ruling also capped the number of minutes for which ISP-bound traffic can be compensated and eliminates reciprocal compensation for ISP-bound traffic as carriers enter new markets after the date of the order. The Company and several other competitive local exchange carriers (“CLECs”) filed legal challenges to the FCC’s order in federal court. The United States Court of Appeals for the D.C. Circuit ruled in May 2002 that the FCC’s stated statutory basis for the reciprocal compensation order was precluded and remanded the matter to the FCC for further action. However, the court did not vacate the FCC’s order. As a result, the order remains in effect pending further FCC action. The outcome of the remand is uncertain. Reciprocal compensation, exclusive of the effects of non-recurring reciprocal compensation of $13.9 million and $37.0 million, represented 5% and 7% of total revenue for the six months ended June 30, 2002 and 2001, respectively. The non-recurring amounts reflect recognition of reciprocal compensation revenue, previously deferred under the Company’s revenue recognition policy, resulting from resolution of disputed reciprocal compensation billings with other LECs. As of June 30, 2002, the Company had deferred recognition of $16.1 million in reciprocal compensation revenue for payments received associated with pending disputes and amounts that are subject to adjustments based on regulatory rulings.

       Switched access is also an element of intercarrier compensation revenue and represents the connection between a long distance carrier’s POP and an end-user’s premises provided through the Company’s switching facilities. Historically, the FCC has regulated the access rates imposed by the incumbent local exchange carriers (“ILECs”), while the access rates of CLECs have been less regulated. The FCC released an order effective in June 2001 that subjects CLECs’ interstate switched access charges to regulation. Effective with that order, the Company’s rates were reduced and will continue to decline over a three-year period to parity with the ILEC rates competing in each area. In addition, when a CLEC enters a new market, its access charges may be no higher than the ILEC’s. This order does not affect the rates stipulated in contracts between the Company and certain long distance carriers. The Company and several other CLECs have filed petitions with the FCC for reconsideration of the provisions of the order relating to new markets, and other carriers have challenged the order in federal appeals court. There is no assurance that any legal challenge will be successful or that a successful challenge will change the trend toward lower access charges. The CLEC access charge regulation and related regulatory developments resulted in reductions in the per-minute rates the Company receives for switched access service that occurred in June 2001 and June 2002 and will result in further reductions in June 2003. In addition, the Company has contracts with certain carriers that have access rate reductions in relationship to volume commitments. The Company expects that switched access revenue will continue to decline as a percentage of revenue due to mandated rate reductions or contracted rate reductions. There is no assurance that the Company will be able to compensate for reductions in switched access revenue with revenue from other sources. Switched access revenue represented 5% and 8% of total revenue, exclusive of the effects of non-recurring reciprocal compensation of $13.9 million and $37.0 million, during the six months ended June 30, 2002 and 2001, respectively.

       The Company benefits from its strategic relationship with Time Warner Cable both through access to local rights-of-way and construction cost-sharing. In the normal course of business, the Company engages in various transactions with AOL Time Warner and its affiliates, generally on negotiated terms among the affected units that, in management’s view, result in reasonable arms-length terms. The Company entered into several contracts with these affiliates with respect to certain of these transactions. The Company has constructed 23 of its 44 metropolitan networks substantially through the use of fiber capacity licensed from Time Warner Cable. As of June 30, 2002, the Company had $180.0 million in licenses of fiber capacity pursuant to the licensing agreement, included in property, plant, and equipment. The Company

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reimburses Time Warner Cable for facility maintenance and pole rental costs on an ongoing basis. The cost of fiber under the license agreements is capitalized and included in property, plant, and equipment and amortized over the useful life to depreciation and amortization expense. The maintenance and pole rental costs are included in the Company’s operating expenses. The Company believes that as a result of certain regulatory decisions regarding the pole rental rates that Time Warner Cable passes through to the Company, there is a risk that the Company’s expenses for these items could increase over time. The Company's revenue includes services provided to AOL Time Warner and its affiliates. Revenue from these services was $15.9 million and $10.7 million for the six months ended June 30, 2002 and 2001, respectively. The Company's selling, general, and administrative expenses include charges from affiliates of AOL Time Warner for office rent and overhead charges for limited administrative functions they perform for the Company. The Company also benefits from discounts available to AOL Time Warner and its affiliates by aggregating its purchases of certain goods and services with those of AOL Time Warner, including long distance services, car rental services, overnight delivery services, and wireless usage.

       The transactions described above include capacity license agreements and leases with the Time Warner Entertainment-Advance/Newhouse Partnership (“TWE-A/N”), a partnership between affiliates of AOL Time Warner and Advance/Newhouse that owns or has interests in cable television systems that have been managed by the AOL Time Warner affiliates. On August 1, 2002 the partnership agreement governing TWE-A/N was modified so that, upon the closing of the restructuring transaction contemplated by the amendment (which is expected to occur at year end), the capacity license agreements and leases with the Company covering certain TWE-A/N markets, including Tampa, Orlando, and Indianapolis, will be assigned to a new subsidiary of TWE-A/N to be managed by the affiliates of Advance/Newhouse.

       Both AOL Time Warner and Advance/Newhouse are diversified communications providers. They are not restricted from competing with the Company and may, now or in the future, provide services in competition with the Company's services. The Company is aware that an affiliate of AOL Time Warner offers an Internet access service for business customers that is functionally, but not technologically, similar to services that the Company offers.

Acquisition

       On January 10, 2001, the Company completed the acquisition of substantially all of the assets of GST out of bankruptcy for a contractual purchase price of $690 million. The $690 million included payments to GST or third parties on behalf of GST totaling approximately $662 million, the assumption of approximately $21 million in obligations to complete certain fiber networks, and a liability to provide transitional services to GST of approximately $7 million. In addition to the $690 million contractual purchase price, the Company paid approximately $6 million in transaction expenses and assumed approximately $17 million in liabilities primarily related to capital leases. Through this acquisition, the Company added 15 markets, approximately 4,210 route miles, and approximately 227,674 fiber miles in the western United States.

       A portion of the purchase price paid by the Company was deposited in various escrow accounts established to discharge certain liabilities that were contingent or undetermined at the closing date, including certain tax liabilities arising prior to closing or in connection with the transaction, and to provide for the completion of certain fiber routes that were delayed prior to closing. Some of these escrow accounts have been closed out, but others, including the tax escrow account, remain outstanding pending the resolution of certain proceedings between GST and taxing authorities. The cash held in escrow in these accounts is not included in the accompanying consolidated and condensed balance sheets, as these funds will either be paid to GST or other third parties.

       The Company has completed the integration of GST assets with the exception of certain back office systems and network optimization. The Company activated a regional fiber network covering approximately 4,100 miles that was under construction at the time of the GST asset acquisition and expanded the metropolitan networks in several of the acquired markets.

       The Company’s acquisition of the GST assets increased its geographic presence, expanded its service offerings, and enlarged the capacity of its networks. This transaction is considerably larger than the transactions the Company has completed in the past and therefore presents greater risks. The Company completed the acquisition with the expectation that the asset purchase would result in certain efficiencies. Achieving the benefits of the asset purchase will depend upon the successful completion of network optimization efforts and the generation of new revenue from the acquired markets. The networks purchased in most of the markets are less extensive than those in many of the Company’s previously existing markets. There is no assurance that the Company will be successful in generating significant additional revenue from those assets or achieving the expected operating efficiencies.

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Critical Accounting Policies

       The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require the Company to make estimates and assumptions. The Company believes that of its significant accounting policies, the following involve a higher degree of judgment and complexity, and are therefore considered critical.

       Revenue Recognition. Revenue for dedicated transport, data, Internet, and the majority of switched services is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Switched access, a component of intercarrier compensation revenue, and long distance are generally billed on a transactional basis determined by customer usage with some fixed rate elements. The transactional elements of switched services are billed in arrears and estimates are used to recognize revenue in the period earned.

       Reciprocal compensation, a component of intercarrier compensation revenue, is based on contracts between the Company and other LECs. The Company recognizes reciprocal compensation revenue primarily on a cash basis, except in those cases where the payment is under dispute or at risk, in which case the Company defers recognition of the revenue until the outstanding issues are resolved. The Company utilizes the cash basis because changes in, and interpretations of, regulatory rulings create disputes and often result in significant delays in payments. As of June 30, 2002, the Company had deferred recognition of $16.1 million in reciprocal compensation revenue for payments received associated with pending disputes and amounts that are subject to adjustments based on regulatory rulings. As a result of a settlement of a dispute regarding reciprocal compensation, the Company recognized $13.9 million of previously deferred revenue in the second quarter of 2002. The Company pays reciprocal compensation expense to other LECs for local exchange traffic it terminates on the LECs’ facilities. These costs are recognized as incurred.

       Receivables. The Company performs ongoing credit evaluations of its customers’ financial conditions and has provided an allowance for doubtful accounts based on the expected collectability of all receivables. A higher risk of collectability is assigned to certain customers with deteriorating financial conditions and customers in bankruptcy that continue service subsequent to filing bankruptcy, resulting in greater allowance for doubtful accounts. Considerable management judgment is required in evaluating the collectability of receivables and establishing the related allowance for doubtful accounts. If the financial condition of the Company’s customers continues to deteriorate, the Company’s bad debt expense and cash collections will be negatively impacted. The allowance for doubtful accounts was $31.1 million and $29.8 million at June 30, 2002 and December 31, 2001, respectively.

       Impairment of Long-Lived Assets. The Company periodically reviews the carrying amounts of property, plant, and equipment and intangible assets to determine whether current events or circumstances warrant adjustments to the carrying amounts. As part of this review, management analyzes the budgeted undiscounted cash flows associated with its property, plant, and equipment and intangible assets. Considerable management judgment is necessary to complete this analysis. Although management believes these estimates to be reasonable, actual results could vary significantly from these estimates. Variances in results could result in changes to the carrying value of the Company’s assets including, but not limited to, recording an impairment for some of these assets in future periods. During the six months ended June 30, 2001, the Company recorded a $9.6 million impairment charge when it abandoned a software system it was developing for use in its back office operations. This charge was included as a component of depreciation and amortization expense.

       Deferred Taxes. As of June 30, 2002, the Company has recorded a net deferred tax asset of $59.1 million, net of a valuation allowance of $27.8 million that the Company established in the first six months of 2002. The Company has concluded that it is more likely than not that the net deferred tax asset of $59.1 million will be realized because the Company could utilize tax-planning strategies to realize this amount. However, the Company believes there may be risks in realizing amounts in excess of the $59.1 million through utilization of available tax planning strategies. Accordingly, the Company has established a valuation allowance for amounts in excess of $59.1 million. The Company’s treatment of its deferred taxes and its tax

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planning strategies are based on certain assumptions that the Company believes are reasonable. However, actual results could vary significantly from current assumptions and could result in changes to the accounting treatment of these items, including, but not limited to, the necessity to record a greater valuation allowance.

Results of Operations

       The following table sets forth certain data from the Company’s consolidated and condensed unaudited financial statements presented in thousands of dollars and expressed as a percentage of total revenue. This table should be read together with the Company’s consolidated and condensed financial statements, including the notes thereto, appearing elsewhere in this report: