UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

FORM 10-Q

Commission File Number 1-6590

Registrant’s telephone number, including area code: (404) 843-5000

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

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

     There were 604,950,345 shares of Class A Common Stock and 27,597,792 shares of Class C Common Stock outstanding as of July 31, 2004.

Cox Communications, Inc.
Form 10-Q
For the Quarter Ended June 30, 2004

Table of Contents

Preliminary Note

     This quarterly report on Form 10-Q is for the three and six-month periods ended June 30, 2004. This quarterly report modifies and supersedes documents filed prior to this quarterly report. In this quarterly report, “Cox,” refers to Cox Communications, Inc. and its subsidiaries, unless the context requires otherwise. The SEC allows Cox to “incorporate by reference” information that Cox files with it, which means that Cox can disclose important information to you by referring you directly to those documents. Information incorporated by reference is considered to be part of this quarterly report. In addition, information that Cox files with the SEC in the future will automatically update and supersede information contained in this quarterly report.

Part I — Financial Information

Item 1. Condensed Consolidated Financial Statements

Cox Communications, Inc.
Condensed Consolidated Balance Sheets

See notes to condensed consolidated financial statements.

2

Cox Communications, Inc.
Condensed Consolidated Statements of Operations

See notes to condensed consolidated financial statements.

3

Cox Communications, Inc.
Condensed Consolidated Statement of Shareholders’ Equity

See notes to condensed consolidated financial statements.

4

Cox Communications, Inc.
Condensed Consolidated Statements of Cash Flows

See notes to condensed consolidated financial statements.

5

Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited)

Quarter Ended June 30, 2004

1.

Organization and Basis of Presentation

     Cox Communications, Inc. (Cox), an indirect 62.2% majority-owned subsidiary of Cox Enterprises, Inc. (CEI), is a multi-service broadband communications company serving approximately 6.6 million customers nationwide. Cox is the nation’s third-largest cable television provider and offers an array of broadband products and services to both residential and commercial customers in its markets. These services primarily include analog and digital video, high-speed Internet access and local and long-distance telephone. Cox operates in one operating segment, broadband communications.

     The accompanying unaudited interim condensed consolidated financial statements of Cox have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnote disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the accompanying unaudited interim condensed consolidated financial statements have been made. All such adjustments are of a normal recurring nature. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in Cox’s Annual Report on Form 10-K for the year ended December 31, 2003.

2.

Summary of Significant Accounting Policies

     The following is a summary of certain significant accounting policies. For a detailed description of all of Cox’s significant accounting policies, see Note 2. “Summary of Significant Accounting Policies and Other Items” contained in Cox’s Annual Report on Form 10-K for the year ended December 31, 2003.

Use of Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2004 or any other interim period.

Asset Retirement Obligations

     On January 1, 2003, Cox adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. SFAS No. 143 requires that a liability be recognized for an asset retirement obligation in the period in which it is incurred if a reasonable estimate of fair value can be made. Certain of Cox’s franchise agreements and lease agreements contain provisions requiring Cox to restore facilities or remove equipment in the event that the franchise or lease agreement is not renewed. Cox expects to continually renew its franchise agreements and lease agreements related to the continued operation of its broadband network, and has concluded that the related franchise right is an indefinite-lived intangible

6

Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

asset. Accordingly, Cox has concluded that the timing of the settlement related to any potential asset retirement obligation is indeterminate. Cox continually monitors the renewal status of its franchise agreements and its lease agreements. In the unlikely event that it is anticipated that a franchise agreement or lease agreement containing such a provision will not be renewed and Cox is required to remove its equipment (and accordingly the timing of the settlement related to any potential asset retirement obligation can be estimated), Cox will record an estimated asset retirement obligation, if material.

Stock Compensation Plans

     At June 30, 2004, Cox had two stock-based compensation plans for employees, a Long-Term Incentive Plan (LTIP) and an Employee Stock Purchase Plan (ESPP), which are more fully described in Cox’s Annual Report on Form 10-K for the year ended December 31, 2003. Cox accounts for these plans under the intrinsic value method, which follows the recognition and measurement principles of Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. All options granted under the LTIP had an exercise price equal to or greater than the market value of the underlying Class A common stock on the grant date; therefore, no employee compensation cost is reflected in net income with respect to options. Further, the ESPP is a noncompensatory plan under APB Opinion No. 25, and, as such, no compensation cost was recognized with respect to the ESPP. Cox recognizes compensation cost related to restricted stock awards granted under the LTIP, as the exercise price of the awards is less than the market value of the underlying Class A common stock on the grant date.

     The following table illustrates the effect on net income and net income per share if Cox had applied the fair value recognition provisions of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, and SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation:

7

Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

Recently Issued Accounting Pronouncements

     In March 2004, the Emerging Issues Task Force (EITF) ratified its consensus related to the application guidance within EITF Issue No. 03-1, The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments. EITF Issue No. 03-1 applies to investments in debt and equity securities within the scope of SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities, and equity securities that are not subject to the scope of SFAS No. 115 and not accounted for under the equity method under APB Opinion 18 and related interpretations. EITF Issue No. 03-1 requires that a three-step model be applied in determining when an investment is considered impaired, whether that impairment is other than temporary and the measurement of an impairment loss. The recognition and measurement guidance within EITF Issue No. 03-1 will be applied by Cox to other-than-temporary impairment evaluations beginning July 1, 2004. The adoption of EITF Issue No. 03-1 is not expected to have a material impact on Cox’s financial position or results of operations.

     In May 2004, the Financial Accounting Standards Board issued FASB Staff Position (FSP) 106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). FSP 106-2 provides accounting and disclosure guidance for employers who sponsor postretirement health care plans that provide prescription drug benefits and becomes effective for Cox on July 1, 2004. In accordance with FSP 106-2, Cox will begin to recognize the effects of the Act on July 1, 2004. The adoption of FSP 106-2 will not have a material impact on Cox’s financial position or results of operations.

Reclassifications

     Certain amounts in the 2003 unaudited interim condensed consolidated financial statements have been reclassified for comparative purposes with 2004.

3.

Investments

8

Investments Stated at Fair Value

     The aggregate cost of Cox’s investments stated at fair value at June 30, 2004 and December 31, 2003 was $1.7 million and $42.5 million, respectively. Gross unrealized losses on investments were nominal as of June 30, 2004. Gross unrealized gains on investments were $25.3 million as of December 31, 2003. For the three and six months ended June 30, 2004, gross realized gains on investments stated at fair value were $2.3 million and $29.1 million, respectively. For the three and six months ended June 30, 2003, gross realized gains and losses on investments stated at fair value were $124.5 million and $0.4 million, respectively, and $124.5 million and $2.1 million, respectively. Derivative instruments classified within investments are comprised of certain warrants to purchase shares of publicly-traded and privately-held entities, as further described in Note 6. “Derivative Instruments and Hedging Activities.”

     Sprint Corporation. In March 2004, Cox sold 0.1 million shares of Sprint’s PCS Group preferred stock for aggregate net proceeds of approximately $56.9 million. Cox recognized a pre-tax gain of $19.5 million on the sale of these shares.

     In April 2004, Sprint eliminated its PCS tracking stock by mandating the exchange of its PCS shares for shares of its FON common stock. Cox held certificates representing approximately 330,000 PCS shares and received approximately 165,000 FON shares in exchange for the certificates. In June 2004, Cox sold the FON shares for net proceeds of approximately $3.0 million. Cox recognized a pre-tax gain of approximately $2.3 million on the sale of these shares. As a result of the sale, Cox no longer holds any shares of Sprint stock.

Other

     During the first quarter of 2004, Cox sold certain other non-strategic investments for aggregate net proceeds of approximately $10.3 million. Cox recognized a pre-tax gain of $7.3 million on the sale of these investments.

     Cox has several other fair value, equity and cost method investments that were not, individually or in the aggregate, significant in relation to the Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003.

4.

Intangible Assets

     On January 1, 2002, Cox adopted SFAS No. 142, Goodwill and Other Intangible Assets, which requires that goodwill and certain intangible assets with indefinite useful lives no longer be amortized, but instead be tested for impairment at least annually. Cox has determined that its franchise value intangible assets have an indefinite useful life. Cox assesses franchise value for impairment under SFAS No. 142 by utilizing a residual approach whereby Cox measures the implied fair value of each franchise value intangible asset subject to the same unit of accounting by deducting from the fair value of each cable system cluster the fair value of the cable system cluster’s other net assets, including previously unrecognized intangible assets. In performing an impairment test in accordance with SFAS No. 142, Cox considers the guidance contained in EITF Issue No. 02-17, Recognition of Customer Relationship Intangible Assets Acquired in a Business Combination, whereby Cox considers assumptions that marketplace participants would consider, such as expectations of future contract renewals and other benefits related to the intangible asset, when measuring the fair value of the cable system cluster’s other net assets. The January 2003 impairment test in accordance with SFAS No. 142 resulted in a non-cash impairment charge of approximately $25.0 million, which is classified within amortization expense in Cox’s Condensed Consolidated Statements of Operations for the six months ended June 30, 2003. Cox completed its next impairment test in accordance with SFAS No. 142 in August 2003. The August 2003 test indicated no impairment of franchise value.

9

Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

     Summarized below are the carrying value and accumulated amortization of intangible assets that continue to be amortized under SFAS No. 142, as well as the carrying value of those intangible assets, which are no longer amortized:

5.

Debt

     See Note 6. “Derivative Instruments and Hedging Activities” for a discussion of the accounting for certain derivative instruments embedded in the exchangeable subordinated debentures, which have been classified as a component of debt in the Condensed Consolidated Balance Sheets at June 30, 2004 and December 31, 2003.

Revolving Credit Facilities

     In June 2004, Cox entered into a new five-year revolving bank credit facility with a capacity of $1.25 billion, which will be available through June 4, 2009. This new credit facility replaces Cox’s $900.0 million 364-day and $900.0 million five-year revolving bank credit facilities. At Cox’s election, the interest rate on the credit agreement is based on London Interbank Offered Rate (LIBOR), the certificate of deposit rate plus varying percentages or an alternate base rate. The credit agreement also imposes a commitment fee on the unused portion of the total amount available based on a ratio of debt to operating cash flow, a measure of performance not calculated in accordance with GAAP, and a utilization fee based on the level of borrowing. Cox had no borrowings outstanding under any of its credit agreements at June 30, 2004 and December 31, 2003.

10

Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

Notes and Debentures

     In accordance with the terms of the indenture governing Cox’s convertible senior notes due 2021, Cox became obligated to purchase for cash convertible notes tendered and not withdrawn before the close of business on February 23, 2004. Cox repurchased $19.0 million aggregate principal amount at maturity of the convertible notes that had been properly tendered and not withdrawn, for aggregate cash consideration of $13.9 million, which represented the accreted value of the repurchased notes. As a result, no convertible notes remain outstanding.

Exchangeable Subordinated Debentures

     In 2003, Cox purchased approximately 99% of its outstanding exchangeable subordinated debentures due 2029 (PRIZES), approximately 99% of its outstanding 3% exchangeable subordinated debentures due 2030 (Premium PHONES) and approximately 97% of its outstanding exchangeable subordinated discount debentures due 2029 (Discount Debentures) pursuant to cash tender offers. In June 2004, Cox redeemed all remaining outstanding PRIZES and Premium PHONES for aggregate cash consideration of $14.7 million. Exchangeable subordinated debentures at June 30, 2004 were comprised of $62.3 million aggregate principal amount at maturity of Discount Debentures.

Interest Rate Swaps

     Cox utilizes interest rate swap agreements to manage its exposure to changes in interest rates associated with certain of its fixed-rate debt obligations whereby these fixed-rate debt obligations are effectively converted into floating-rate debt obligations. The variable rates with respect to Cox’s interest rate swaps are adjusted quarterly or semi-annually based on LIBOR. The notional amounts with respect to the interest rate swaps do not quantify risk, but are used in the determination of cash settlements under the interest rate swap agreements. Cox is exposed to a credit loss in the event of nonperformance by the counterparties; however, these counterparties are major financial institutions, rated investment grade or better. Accordingly, Cox does not anticipate nonperformance by the counterparties. For a further discussion regarding Cox’s accounting for interest rate swaps, see Note 6. “Derivative Instruments and Hedging Activities.”

     The following table summarizes the notional amounts, weighted-average interest rate data and maturities for Cox’s interest rate swap agreements at June 30, 2004 and December 31, 2003:

     As a result of the settlements under Cox’s interest rate swap agreements, interest expense was reduced by $15.7 million and $33.8 million, respectively, during the three and six months ended June 30, 2004, and $15.2 million and $29.0 million, respectively, during the same periods in the prior year.

6.

Derivative Instruments and Hedging Activities

     Cox accounts for derivative instruments in accordance with SFAS No. 133, which requires all freestanding and embedded derivative instruments to be measured at fair value and recognized on the balance sheet as either assets or liabilities. In addition, all derivative instruments used in hedging relationships must be designated, reassessed and accounted for as either fair value hedges or cash flow hedges pursuant to the provisions of SFAS No. 133.

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

     Cox does not hold or issue derivative instruments for trading purposes and is not a party to leveraged instruments. From time to time, however, Cox uses derivative instruments to manage its exposure to changes in the fair value of certain of its assets or liabilities or to manage its exposure to changes in interest rates or equity prices. These derivative instruments are designated and accounted for by Cox as hedges of the underlying exposure being managed, as prescribed by SFAS No. 133. In addition, upon adoption of SFAS No. 133, certain of Cox’s debt instruments and investments contained embedded or freestanding derivatives, as defined. Cox has not designated these embedded and freestanding derivatives as hedges under SFAS No. 133 and, as such, changes in their fair value are being recognized in earnings as derivative gains or losses. Cox’s use of derivative instruments may result in short-term gains or losses and may increase volatility in its earnings.

     The credit risks associated with Cox’s derivative financial instruments are controlled through the evaluation and monitoring of the creditworthiness of the counterparties. The counterparties are major financial institutions, rated investment grade or better. Accordingly, Cox does not anticipate nonperformance by the counterparties.

     Cox recorded nominal pre-tax losses on derivative instruments during the three and six months ended June 30, 2004 and pre-tax losses on derivative instruments of $24.2 million and $26.7 million during the three and six months ended June 30, 2003, respectively. Derivative adjustments made in accordance with SFAS No. 133 have historically had a material impact on reported indebtedness. As a result of Cox’s purchase of its exchangeable subordinated debentures, net settlement of its zero-coupon debt and sale of Sprint PCS stock during 2003, SFAS No. 133 adjustments did not significantly impact reported indebtedness at June 30, 2004 or December 31, 2003. The following is a detail of Cox’s loss on derivative instruments for the three and six months ended June 30, 2004 and 2003 followed by a summary of Cox’s derivative instruments.

Interest Rate Swap Agreements

     Cox utilizes interest rate swap agreements designed to assist Cox in maintaining a mix of fixed and floating rate debt by converting a portion of existing fixed rate debt into a floating rate obligation. Cox has designated and accounted for its interest rate swap agreements as fair value hedges whereby the fair value of the related interest rate swap agreements are classified as a component of other assets with the corresponding fixed-rate debt obligations being classified as a component of debt in the Condensed Consolidated Balance Sheets. Cox has assumed no ineffectiveness with regard to these interest rate swap agreements as the agreements qualify for the short-cut method of accounting for fair value hedges of debt instruments, as prescribed by SFAS No. 133. Cox’s interest rate swap agreements approximated a derivative asset of $21.0 million and $61.2 million at June 30, 2004 and December 31, 2003, respectively.

Zero-Coupon Debt

     In August 2003, Cox terminated its series of prepaid forward contracts to sell up to 19.5 million shares of its Sprint PCS common stock. Prior to the termination, these contracts met the definition of a hybrid instrument, as prescribed by SFAS No. 133. These hybrid instruments were comprised of a zero-coupon debt instrument, as the host contract, and an embedded derivative, which derived its value, in part, based on

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

the trading price of Sprint PCS common stock. Cox did not designate these embedded derivatives as a hedge of its investment in Sprint PCS common stock. As a result, changes in the fair value of these embedded derivatives were recognized in earnings and classified within gain (loss) on derivative instruments in Cox’s Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2003.

Exchangeable Subordinated Debentures

     Prior to June 2004, Cox had three series of exchangeable subordinated debentures, referred to as PRIZES, Premium Phones, and Discount Debentures. In June 2004, Cox purchased all remaining outstanding PRIZES and Premium Phones; as a result, the only remaining exchangeable subordinated debentures are the Discount Debentures. The exchangeable subordinated debentures meet the definition of a hybrid instrument, as prescribed by SFAS No. 133. These hybrid instruments are comprised of an exchangeable subordinated debt instrument, as the host contract, and an embedded derivative, which derives its value, in part, based on the trading price of Sprint PCS common stock, U.S. Treasury rates and Cox’s credit spreads. Cox has not designated these embedded derivatives as a hedge of its investment in Sprint PCS common stock. As a result, changes in the fair value of these embedded derivatives are recognized in earnings and classified within gain (loss) on derivative instruments in the Condensed Consolidated Statements of Operations. The aggregate fair value of these embedded derivatives approximated a derivative obligation of $0 at June 30, 2004 and December 31, 2003.

Stock Purchase Warrants

     Cox holds warrants to purchase equity securities of certain publicly-traded and privately-held entities. Warrants that can be exercised and settled by the delivery of net shares such that Cox pays no cash upon exercise are deemed freestanding derivative instruments, as prescribed by SFAS No. 133. Cox has not designated net share warrants as hedging instruments; accordingly, changes in the fair value of these warrants are recognized in earnings and classified within gain (loss) on derivative instruments in the Condensed Consolidated Statements of Operations. The aggregate fair value of these warrants approximated a derivative asset of $1.2 million and $1.3 million at June 30, 2004 and December 31, 2003, respectively, and has been classified as a component of investments in the Condensed Consolidated Balance Sheets.

7.

Net Income Per Share

     The following table reconciles the numerator and the denominator of the basic and diluted per share computations for net income for the three and six months ended June 30, 2004 and 2003:

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

     For the three and six months ended June 30, 2004, 19.0 million Class A common shares related to employee stock-based compensation plans were not included in the computation of diluted net income per share because such effects would have been antidilutive for the period.

     For the three and six months ended June 30, 2003, 15.7 million Class A common shares related to employee stock-based compensation plans and convertible senior notes were not included in the computation of diluted net income per share because such effects would have been antidilutive for the period.

     In June 2004, all 4,836,372 issued and outstanding shares of Cox’s Series A convertible preferred stock were converted into 11,212,121 shares of Cox’s Class A common stock, in accordance with the terms of the Series A convertible preferred stock. Cox issued the Series A convertible preferred stock in October 1998 in conjunction with its acquisition of a cable system located in Las Vegas, Nevada. In accordance with SFAS No. 141, Cox recorded additional franchise value of $367.6 million, which includes the related deferred tax effects, representing the appreciation realized upon conversion of the Series A convertible preferred stock as contingent purchase price related to the acquisition. Upon conversion, all of the issued and outstanding shares of Series A convertible preferred stock were retired.

8.

Transactions with Affiliated Companies

     Cox receives day-to-day cash management services from CEI, with settlements of outstanding balances between Cox and CEI occurring periodically at market interest rates. The amounts due to CEI are generally due on demand and represent the net balance of the intercompany transactions. The amount due from CEI at June 30, 2004 was $10.9 million and the amount due to CEI at December 31, 2003 was $4.0 million. The interest rate was 1.3% at June 30, 2004 and December 31, 2003, respectively. Included in amounts due (to)/from CEI are the following transactions:

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

9.

Retirement Plans

     The following table provides a detail of the components of net periodic benefit cost for the three and six months ended June 30, 2004 and 2003:

     Cox contributed its total planned 2003 plan year contributions for the funded pension plans during 2003. Due to this accelerated contribution, Cox does not anticipate additional contributions during 2004 for the funded pension plans.

     Cox contributed $2.4 million on January 7, 2004 into its account to fund post-retirement welfare benefits. Additional contributions, if any, will be determined later in 2004.

10.

Financial Instruments with Characteristics of both Liabilities and Equity

     In May 2003, the Financial Accounting Standards Board (FASB) issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. SFAS No. 150 establishes standards for classification and measurement by an issuer of certain financial instruments with characteristics of both liabilities and equity. The statement requires that an issuer classify a financial instrument that is within its scope as a liability (or asset in some circumstances); however, the FASB indefinitely deferred the effective date of this statement as it relates to certain mandatorily redeemable non-

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

controlling interests in consolidated limited-life subsidiaries. For all periods presented, Cox consolidated a 75% majority-owned interest in a limited-life partnership. The estimated liquidation value of the 25% minority interest was approximately $177.0 million as of June 30, 2004.

11.

Supplemental Financial Information

12.

Commitments and Contingencies

     In connection with certain of Cox’s recent acquisitions and other transactions, Cox has provided certain indemnities to the respective counterparties with respect to future claims that may arise from state or federal taxing authorities. The nature and terms of these indemnities vary by transaction and generally remain in force through the requisite statutory review periods. In addition, the events or circumstances that would require Cox to perform under these indemnities are transaction and circumstance specific. As of June 30, 2004, Cox believes the likelihood that it will be required to perform under these indemnities is remote and that the maximum potential future payments that Cox could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all available defenses, which are not reasonably estimable. Cox has not historically incurred any material costs related to performance under these types of indemnities.

     Cox’s subsidiary Cox Communications Louisiana L.L.C. (Cox Louisiana) is a defendant in a putative subscriber class action suit in Louisiana state court filed on November 5, 1997. The suit challenges the propriety of late fees charged by Cox Louisiana in the greater New Orleans area to customers who fail to pay for services in a timely manner. The suit seeks injunctive relief and damages under certain claimed state law causes of action. On March 29, 2004, the parties entered into a settlement agreement, which does

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

not have a material impact on Cox’s operations or liquidity. This settlement has been submitted to the court for final approval.

     On November 14, 2000, GTE.NET, L.L.C. d/b/a Verizon Internet Solutions and Verizon Select Services, Inc. filed suit against Cox in the United States District Court for the Southern District of California. Verizon alleged that Cox has violated various sections of the Communications Act of 1934 by allegedly refusing to provide Verizon with broadband telecommunications service and interconnection, among other things. On November 29, 2000, Verizon amended its complaint to add CoxCom, Inc. (CoxCom), a subsidiary of Cox, as an additional defendant. On January 8, 2002, Verizon filed a second amended complaint, dropping its claims for interconnections and damages. Verizon seeks various forms of relief, including declaratory and injunctive relief. On January 29, 2002, the Court granted defendants’ motion to stay the case on primary jurisdiction grounds. Cox and CoxCom intend to defend this action vigorously. The outcome cannot be predicted at this time.

     Cox @Home, Inc., a wholly-owned subsidiary of Cox, is a stockholder of At Home Corporation, also called Excite@Home, formerly a provider of high-speed Internet access and content services, which filed for bankruptcy protection in September 2001. On September 24, 2002, a committee of bondholders of Excite@Home sued Cox, Cox @Home and Comcast Corporation, among others, in the United States District Court for the District of Delaware. The suit alleges the realization of short-swing profits under Section 16(b) of the Securities Exchange Act of 1934 from purported transactions relating to Excite@Home common stock involving Cox, Comcast and AT&T Corp., and purported breaches of fiduciary duty. The suit seeks disgorgement of short-swing profits allegedly received by the Cox and Comcast defendants totaling at least $600.0 million, damages for breaches of fiduciary duties in an unspecified amount, attorney’s fees, pre-judgment interest and post-judgment interest. On November 12, 2002, Cox, Cox @Home, and David Woodrow filed a motion to dismiss or transfer the action for improper venue or, in the alternative, to transfer the action pursuant to 28 U.S.C. Sec. 1404. On September 30, 2003, the Delaware District Court ordered the action transferred to the United States District Court for the Southern District of New York. On December 22, 2003, Cox and Cox@Home filed a motion to dismiss, or, in the alternative, for judgment on the pleadings, with respect to the Section 16(b) claim. That motion is pending. Cox and Cox @Home intend to defend this action vigorously. The outcome cannot be predicted at this time.

     Jerrold Schaffer and Kevin J. Yourman, on May 26, 2000 and May 30, 2000, respectively, filed class action lawsuits in the Superior Court of California, San Mateo County, on behalf of themselves and all other stockholders of Excite@Home as of March 28, 2000, seeking (a) to enjoin consummation of a March 28, 2000 letter agreement among Excite@Home’s principal investors, including Cox, and (b) unspecified compensatory damages. Cox and David Woodrow, Cox’s former Executive Vice President, Business Development, among others, are named defendants in both lawsuits. Mr. Woodrow formerly served on the Excite@Home board of directors. The plaintiffs assert that the defendants breached purported fiduciary duties of care, candor and loyalty to the plaintiffs by entering into the letter agreement and/or taking certain actions to facilitate the consummation of the transactions contemplated by the letter agreement. On February 26, 2001, the Court stayed both actions, which had been previously consolidated, on grounds of forum non-conveniens. A related suit styled Linda Ward, et al. v. At Home Corporation (No. 418233) was filed on September 6, 2001, in the same court. On February 7, 2002, the Court consolidated the Ward action with the Schaffer/Yourman action, thereby also staying the Ward action. On June 18, 2002, the court granted plaintiffs’ motion to lift the stay and authorized discovery to proceed regarding Cox’s pending motion to dismiss for lack of personal jurisdiction. On September 10, 2002, the United States Bankruptcy Court for the Northern District of California in the Excite@Home bankruptcy proceeding held that the claims in the suits were derivative and, thus, constituted the exclusive property of the Excite@Home bankruptcy estate. The Bankruptcy Court thereafter ordered the plaintiffs to dismiss the suits. Plaintiffs subsequently appealed the Bankruptcy Court’s decision to the United States District Court for the Northern District of California. On September 29, 2003, the District Court affirmed the order of the Bankruptcy Court. On October 27, 2003, plaintiffs filed a notice of appeal of the District Court’s decision to the United States Court of Appeals for the Ninth Circuit. Cox intends to defend this action vigorously. The outcome cannot be predicted at this time.

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

     On April 26, 2002, Frieda and Michael Eksler filed an amended complaint naming Cox as a defendant in a putative class action lawsuit in the United States District Court for the Southern District of New York against AT&T Corp. and certain former officers and directors of Excite@Home, among others. Cox was served on May 10, 2002. This case has been consolidated with a related case captioned Semen Leykin v. AT&T Corp., et al., and another related case, and an amended complaint in the consolidated case, naming Cox as a defendant, was filed and served on November 7, 2002. The putative class includes persons who purchased and held shares of Excite@Home common stock between the time period March 28, 2000 and September 28, 2001. The complaint asserts a claim against Cox as an alleged “controlling person” of Excite@Home under Section 20(a) of the Securities Exchange Act for violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. The suit seeks from Cox unspecified monetary damages, statutory compensation and other relief. In addition, a claim against Cox’s former Executive Vice President, David Woodrow, who formerly served on Excite@Home’s board of directors, is asserted for breach of purported fiduciary duties. The suit seeks from Woodrow unspecified monetary and punitive damages. On February 11, 2003, Cox and Woodrow filed a dispositive motion to dismiss on various grounds, including failure to state a claim. On September 17, 2003, the District Court granted the motion in part and denied it in part. Specifically, the Court dismissed several purported statements by Excite@Home as bases for potential liability because they were merely generalized expressions of confidence and optimism constituting “puffery,” dismissed the fiduciary duty claim against Mr. Woodrow as pre-empted by the federal securities laws, and denied the motions as to the remaining allegations of the complaint. On October 7, 2003, Cox and Mr. Woodrow sought reconsideration of a portion of the Court’s order. On December 24, 2003, the plaintiffs moved to certify a class of persons who purchased Excite@Home stock between March 28, 2000 and September 28, 2001, or held such stock as of April 28, 2000. This motion is pending. On February 17, 2004, the Court granted plaintiffs leave to file a motion to amend the complaint to add an additional claim for relief against all defendants under Section 14(a) of the Securities Exchange Act in connection with an allegedly false or misleading proxy statement issued by Excite@Home. On February 24, 2004, the Court granted Cox’s and Mr. Woodrow’s motion for reconsideration and dismissed plaintiffs’ allegations that Cox and Mr. Woodrow were “control persons” with respect to primary violations of Rule 10b-5 alleged to have occurred after August 28, 2000. On April 5, 2004, Cox and certain other defendants jointly filed a motion to dismiss the Section 14(a) cause of action that was added in plaintiffs’ amended complaint, and briefing of that motion has concluded. Cox intends to defend this action vigorously. The outcome cannot be predicted at this time.

     On July 3, 2003, Leo James filed a putative class action lawsuit against Cox and David Woodrow, among others, in the United States District Court for the Southern District of New York. Cox was served on October 27, 2003. Mr. James is represented by the same attorneys who represent the individuals who were previously designated lead plaintiffs in the Leykin action described above. The complaint in the James action asserts claims substantially similar to the operative allegations in the Leykin action described above. Accordingly, the sole count against Cox asserts a claim against Cox as an alleged “controlling person” of Excite@Home under Section 20(a) of the Securities Exchange Act for violations of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder and seeks from Cox unspecified monetary damages, statutory compensation and other relief. On November 17, 2003, Cox and certain other defendants jointly filed a motion to dismiss the James action on the grounds that, among other things, it was duplicative of the Leykin action. That motion is pending. Cox intends to defend the action vigorously. The outcome cannot be predicted at this time.

     On June 14, 2004, Acacia Media Technologies Corporation filed a lawsuit against Cox and Hospitality Network, Inc., (a wholly-owned subsidiary of Cox) among others, in the United States District Court for the Northern District of California asserting claims for patent infringement. Specifically, the complaint alleges that Cox and Hospitality Network have infringed Acacia Media’s U.S. Patent Nos. 5,132,992, 5,550, 863, and 6,144,702 and that Cox has also infringed certain Acacia Media patents. The complaint seeks preliminary and permanent injunctive relief and damages in an unspecified amount. On June 18, 2004, prior to being served with the Acacia Media Complaint, CoxCom, Inc. and Hospitality Network filed a lawsuit against Acacia Media in the United States District Court for the Northern District of Georgia seeking a declaratory judgment that the Acacia Media patents are invalid and that CoxCom and Hospitality Network are not infringing those patents. On July 7, 2004, Acacia Media filed an amended complaint to its

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Cox Communications, Inc.
Notes to Condensed Consolidated Financial Statements (Unaudited) – Continued

lawsuit to add CoxCom as a defendant. The deadline for Cox, CoxCom and Hospitality Network to answer or otherwise respond to the amended complaint is August 13, 2004. The deadline for Acacia Media to answer or otherwise respond to CoxCom and Hospitality Network’s complaint is July 28, 2004. Cox, CoxCom and Hospitality Network intend to defend the action vigorously. The outcome cannot be predicted at this time.

     Nine purported class action lawsuits have been filed naming Cox and each of its directors as defendants. Eight of the lawsuits also name Cox Enterprises, Inc. (CEI) as a defendant. The complaints allege, among other things, that the defendants have breached their fiduciary duties to the stockholders of Cox in connection with CEI’s proposal to acquire the outstanding publicly held minority interest in Cox. The complaints also seek variously the certification of a class of Cox stockholders, preliminary and permanent injunctive relief prohibiting the defendants from proceeding with CEI’s proposal or requiring them to take certain actions with respect to CEI’s proposal, an accounting or compensatory damages (except in one instance), attorneys’ fees and costs, and other relief, and in certain complaints, rescission or other damages in the event CEI’s proposal is consummated.

     On August 2, 2004, the following lawsuits were filed in the Delaware Court of Chancery: Smith v. Cox Communications Inc. et al.; Wilson v. Cox Enterprises Inc., et al.; Steiner v. Cox Communications Inc., et al.; Guerin v. Cox Enterprises Inc. et al.; Eastside Investors LLP v. Cox Communications Inc., et al.; and Hill v. Cox Communications Inc. et al. On August 3, 2004, an additional action captioned Schaefer v. Cox Communications, Inc., et al. was filed in the Delaware Court of Chancery. The outcome of these actions cannot be predicted at this time.

     Also on August 2, 2004, two other purported shareholders of Cox also filed lawsuits in the Superior Court of Fulton County, Georgia; Brody v. Cox Communications, Inc., et al.; and Golombuski v. Kennedy, et al. In addition to the allegations set forth above, the complaint in the Golombuski action also alleges derivative claims on behalf of Cox for corporate waste, abuse of control, breach of fiduciary duty and unjust enrichment. The outcome of these actions cannot be predicted at this time.

     Cox and its subsidiaries are parties to various other legal proceedings that are ordinary and incidental to their businesses. Management does not expect that any of these other currently pending legal proceedings will have a material adverse impact on Cox’s consolidated financial position, results of operations or cash flows.

13.     Subsequent Event

     On August 2, 2004, Cox received Cox Enterprises’ proposal to acquire the outstanding, publicly-held minority interest in Cox. Cox’s Board of Directors will appoint a special committee of independent directors to review Cox Enterprises’ proposal.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements for the three and six-month periods ended June 30, 2004 and 2003.

Results of Operations

Three Months Ended June 30, 2004 Compared with Three Months Ended June 30, 2003

     The following table sets forth summarized consolidated financial information for the three months ended June 30, 2004 and 2003.

NM denotes percentage is not meaningful

Revenues

     The following table sets forth summarized revenue information for the three months ended June 30, 2004 and 2003.

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     The $171.3 million increase in total revenues is primarily attributable to:

	•		a 27% increase in customers for advanced services, which include digital cable, high-speed Internet access and telephony customers;
	•		an increase in basic cable rates resulting from increased programming costs and inflation, as well as increased channel availability; and
	•		an increase in commercial broadband customers, as well as an increase in advertising sales.

     Cox has experienced solid growth in digital cable, residential high-speed Internet and telephony customers. For the second quarter of 2004, Cox:

	•		ended the quarter with approximately 6.3 million basic video customers, up 0.6% from June 30, 2003.
	•		added 60,351 digital cable customers, which contributed to year-over-year growth of 18%.
	•		added 97,517 high-speed Internet customers, which contributed to year-over-year growth of 34%.
	•		added 66,265 telephony customers, which contributed to year-over-year customer growth of 35%.

     Cox experiences some seasonality in its business, primarily as a result of college students leaving school for the summer break and people traveling to warmer climates for the winter months. The college students’ annual summer departure contributed to a slight decline in basic video customers during the second quarter of 2004. This seasonality has generally resulted in increased revenues during the third quarter of the year. Cox expects this trend to continue in 2004.

     Cox expects its overall growth trend to continue. Cox also anticipates continued customer demand for its existing portfolio of broadband products, as well as for new services such as Entertainment On Demand, Home Networking, high-definition television and digital video recorders.

Costs and expenses (cost of services and selling, general and administrative expenses)

     The following table sets forth summarized operating expenses for the three months ended June 30, 2004 and 2003.

     Cost of services includes cable programming costs, which are costs paid to programmers for cable content and are generally paid on a per-subscriber basis. Cost of services also includes other direct costs and field service and call center costs. Other direct costs include costs that Cox incurs in conjunction with providing its residential, commercial and advertising services. Field service costs include costs associated with providing and maintaining Cox’s broadband network and customer care costs necessary to maintain its customer base.

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     Cost of services increased $54.5 million over the comparable period in 2003 due to a $34.0 million increase in programming costs reflecting programming rate increases and customer growth. Approximately 10% of the increase in programming costs was attributable to programming rate increases, and 2% was related to customer growth. Other cost of services increased $20.5 million, primarily due to 27% growth in advanced-service customers over the last twelve months, partially offset by cost savings achieved through successful field service initiatives.

     Selling, general and administrative expenses include marketing, salaries and benefits, commissions and bonuses, travel, facilities, insurance and other administrative expenses. Selling, general and administrative expenses increased $32.9 million due to:

	•		a $23.9 million increase in general and administrative expenses primarily related to increased salaries and benefits and the cost of trials of new video and telephony products; and
	•		a $9.0 million increase in marketing expense primarily due to additional marketing related to new video products and an industry-wide campaign aimed at satellite competition, as well as a 9% increase in marketing costs associated with Cox Media, Cox’s advertising sales business.

     Cox expects continued increases in programming costs and will continue to pass through some portion of these increases to its customers. In addition, Cox expects to have continued growth in advanced services, which include digital cable, high-speed Internet access and telephony, both as a result of increased penetration where these services were available in 2003 and continued roll-out of these services in new areas during 2004. As a result of these trends, Cox expects its cost of services and, to a lesser degree, selling, general and administrative expenses to increase.

Depreciation and amortization

     Depreciation and amortization increased to $397.1 million from $364.3 million in the second quarter of 2003 due to an increase in depreciation from Cox’s continuing investments in its broadband network in order to deliver additional programming and services.

Loss (gain) on sale of cable systems

     In the second quarter of 2004, Cox recorded a $5.0 million pre-tax loss on the sale of certain small, non-clustered cable systems in Oklahoma, Kansas, Texas and Arkansas, which in the aggregate consisted of approximately 53,000 basic cable subscribers.

Interest expense

     Interest expense decreased 29% to $95.6 million primarily due to a reduction of outstanding indebtedness and interest savings as a result of Cox’s interest rate swap agreements.

Loss on derivative instruments, net

     In August 2003, Cox terminated a series of prepaid forward contracts accounted for as zero-coupon debt. While these contracts were outstanding, changes in the market value of the Sprint PCS common stock associated with the contracts impacted the loss on derivative instruments. As a result of the termination of the contracts, the pre-tax loss on derivative instruments for the second quarter of 2004 was insignificant. During the second quarter of 2003, Cox recorded a $24.2 million pre-tax loss on derivative instruments primarily resulting from the change in the fair value of certain derivative instruments embedded in Cox’s zero-coupon debt that were indexed to shares of Sprint PCS common stock that Cox owned.

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Gain on investments, net

     Net gain on investments of $2.3 million for the second quarter of 2004 was due to the sale of all remaining shares of Sprint stock held by Cox. The net gain on investments for the comparable period in 2003 of $124.1 million was primarily due to a $97.2 million pre-tax gain on the sale of 32.9 million shares of Sprint PCS common stock and a $27.1 million pre-tax gain as a result of the change in the market value of Cox’s investment in Sprint PCS common stock classified as trading.

Equity in net losses of affiliated companies

     Equity in net losses of affiliated companies for the second quarter of 2004 was $1.2 million compared to $4.4 million for the second quarter of 2003. Generally, this loss is attributable to Cox’s proportionate share of the investee’s income or loss. Although Cox has various levels of ownership and rights with respect to the companies in which it has equity investments, Cox has little, if any, control over the financial position of these companies. Therefore, Cox cannot predict the impact that its equity investments will have on its future operations.

(Loss) gain on extinguishment of debt

     During the second quarter of 2004, Cox recorded a $7.0 million pre-tax loss on extinguishment of debt due to the redemption of $14.6 million aggregate principal amount of Cox’s exchangeable subordinated debentures due 2029 (PRIZES) and $0.1 million aggregate principal amount of Cox’s 3% exchangeable subordinated debentures due 2030 (Premium PHONES), which represented all remaining outstanding PRIZES and Premium PHONES. During the comparable period in 2003, Cox recorded a $3.9 million pre-tax gain resulting from the purchase of $1.3 billion aggregate principal amount of the PRIZES and $274.9 million aggregate principal amount of the Premium PHONES pursuant to Cox’s offer to purchase any and all PRIZES and Premium PHONES.

Income tax expense (benefit)

     Income tax expense was $49.9 million for the second quarter of 2004 compared to $13.4 million for the same period in 2003. The change in the effective tax rate was primarily due to the impact of investing and financing transactions in the prior year, along with varying effective state tax rates across Cox’s operations.

Net income

     Net income for the second quarter of 2004 was $62.7 million compared to $117.7 million for the comparable period in 2003.

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Six Months Ended June 30, 2004 Compared with Six Months Ended June 30, 2003

     The following table sets forth summarized consolidated financial information for the six months ended June 30, 2004 and 2003.

NM denotes percentage is not meaningful

Revenues

     The following table sets forth summarized revenue information for the six months ended June 30, 2004 and 2003.

     The $345.4 million increase in total revenues is primarily attributable to:

	•		a 27% increase in customers for advanced services, which include digital cable, high-speed Internet access and telephony customers;
	•		an increase in basic cable rates resulting from increased programming costs and inflation, as well as increased channel availability; and
	•		an increase in commercial broadband customers, as well as an increase in advertising sales.

     Cox has experienced solid growth in digital cable, residential high-speed Internet and telephony customers. For the six months ended June 30, 2004, Cox:

	•		ended the period with approximately 6.3 million basic video customers, up 0.6% from June 30, 2003.
	•		added 137,304 digital cable customers, which contributed to year-over-year growth of 18%.
	•		added 258,872 high-speed Internet customers, which contributed to year-over-year growth of 34%.
	•		added 145,224 telephony customers, which contributed to year-over-year customer growth of 35%.

     Cox expects its overall growth trend to continue. Cox also anticipates continued customer demand for its existing portfolio of broadband products, as well as for new services such as Entertainment On Demand, Home Networking, high-definition television and digital video recorders.

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Costs and expenses (cost of services and selling, general and administrative expenses)

     The following table sets forth summarized operating expenses for the six months ended June 30, 2004 and 2003.