TIME WARNER TELECOM INC - 10-Q Quarterly Report

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 September 30, 2004

¨	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)


State of Delaware		84-1500624
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

10475 Park Meadows Drive Littleton, Colorado		80124
(Address of principal executive offices)		(Zip Code)

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 ¨

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

The number of shares outstanding of Time Warner Telecom Inc.’s common stock as of October 31, 2004 was:

Time Warner Telecom Inc. Class A common stock — 49,859,672 shares

Time Warner Telecom Inc. Class B common stock — 65,936,658 shares

TIME WARNER TELECOM INC.

INDEX TO FORM 10-Q


			Page
Part I.	Financial Information

	Item 1.	Financial Statements:

		Consolidated and Condensed Balance Sheets at September 30, 2004 (unaudited) and December 31, 2003	1

		Consolidated Statements of Operations for the three and nine months ended September 30, 2004 and 2003 (unaudited)	2

		Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003 (unaudited)	3

		Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended September 30, 2004 (unaudited)	4

		Notes to Consolidated and Condensed Financial Statements	5

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	38

	Item 4.	Controls and Procedures	38

Part II.	Other Information

	Item 1.	Legal Proceedings	39

	Item 6.	Exhibits and Reports on Form 8-K	39

TIME WARNER TELECOM INC.

CONSOLIDATED AND CONDENSED BALANCE SHEETS


	September 30, 2004			December 31, 2003
	(unaudited)
	(amounts in thousands, except share amounts)
ASSETS

Current assets:
Cash and cash equivalents	$	172,501		353,032
Short-term investments		261,541		125,561
Receivables, less allowances of $10,546 and $15,011, respectively (a)		41,623		42,969
Prepaid expenses		16,453		10,511
Deferred income taxes		18,528		22,414

Total current assets		510,646		554,487

Long-term investments		1,615		—

Property, plant, and equipment		2,334,006		2,215,523
Less accumulated depreciation		(1,015,955	)	(852,276	)

		1,318,051		1,363,247

Deferred income taxes		40,213		36,060
Goodwill		26,773		26,773
Other assets, net of accumulated amortization		27,358		25,316

Total assets	$	1,924,656		2,005,883

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Accounts payable (b)	$	41,994		40,096
Deferred revenue		22,042		29,053
Accrued interest		19,612		35,078
Accrued payroll and benefits		24,841		28,402
Other current liabilities		156,748		165,585

Total current liabilities		265,237		298,214

Long-term debt and capital lease obligations (note 2)		1,249,494		1,203,383
Other long-term liabilities		6,949		6,487

Stockholders’ equity:
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued and outstanding		—		—
Class A common stock, $0.01 par value, 277,300,000 shares authorized, 49,847,912 shares issued and outstanding as of September 30, 2004 and 49,355,252 shares issued and outstanding as of December 31, 2003		499		493
Class B common stock, $0.01 par value, 162,500,000 shares authorized, 65,936,658 shares issued and outstanding as of September 30, 2004 and December 31, 2003		659		659
Additional paid-in capital		1,172,113		1,169,633
Accumulated other comprehensive income, net of taxes		—		417
Accumulated deficit		(770,295	)	(673,403	)

Total stockholders’ equity		402,976		497,799

Total liabilities and stockholders’ equity	$	1,924,656		2,005,883


(a) Includes receivables resulting from transactions with affiliates (note 3)	$	2,609		4,332

(b) Includes payables resulting from transactions with affiliates (note 3)	$	7,042		6,092

See accompanying notes.

TIME WARNER TELECOM INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,					Nine Months Ended September 30,
	2004			2003		2004			2003
	(amounts in thousands, except per share amounts)
Revenue (a):
Dedicated transport services	$	81,175		94,066		$	248,887		269,420
Switched services		39,418		38,957			116,852		115,281
Data and Internet services		31,708		25,700			90,040		74,135
Intercarrier compensation		8,287		13,705			29,284		41,377

Total revenue		160,588		172,428			485,063		500,213

Costs and expenses (a):
Operating (exclusive of depreciation, amortization, and accretion shown separately below)		65,550		66,631			194,088		198,461
Selling, general, and administrative		43,432		31,162			132,125		128,294
Depreciation, amortization, and accretion		54,754		56,408			166,157		164,876

Total costs and expenses		163,736		154,201			492,370		491,631

Operating income (loss)		(3,148	)	18,227			(7,307	)	8,582

Interest expense		(29,030	)	(25,908	)		(93,663	)	(78,520	)
Interest income		1,350		1,326			3,893		4,648
Investment gain		—		922			710		922

Loss before income taxes and cumulative effect of change in accounting principle		(30,828	)	(5,433	)		(96,367	)	(64,368	)

Income tax expense		75		225			525		675

Net loss before cumulative effect of change in accounting principle		(30,903	)	(5,658	)		(96,892	)	(65,043	)

Cumulative effect of change in accounting principle		—		—			—		2,965

Net loss	$	(30,903	)	(5,658	)	$	(96,892	)	(68,008	)

Amounts per common share, basic and diluted:
Net loss before cumulative effect of change in accounting principle	$	(0.27	)	(0.05	)	$	(0.84	)	(0.57	)
Cumulative effect of change in accounting principle		—		—			—		(0.02	)

Net loss	$	(0.27	)	(0.05	)	$	(0.84	)	(0.59	)

Weighted average shares outstanding, basic and diluted		115,679		114,936			115,621		114,931


(a) Includes revenue and expenses resulting from transactions with affiliates (note 3):
Revenue	$	4,580		9,404		$	15,283		24,758

Operating expenses	$	1,099		975		$	3,373		2,755

Selling, general, and administrative	$	490		482		$	1,632		1,397

See accompanying notes.

TIME WARNER TELECOM INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2004			2003
	(amounts in thousands)
Cash flows from operating activities:
Net loss	$	(96,892	)	(68,008	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization, and accretion		166,157		164,876
Cumulative effect of change in accounting principle		—		2,965
Stock-based compensation		876		1,178
Deferred debt issue costs		11,751		3,386
Gain on investments		(710	)	(922	)
Changes in operating assets and liabilities:
Receivables and prepaid expenses		(4,596	)	10,219
Accounts payable, deferred revenue, and other current liabilities		(34,140	)	(52,503	)

Net cash provided by operating activities		42,446		61,191

Cash flows from investing activities:
Capital expenditures		(118,447	)	(84,787	)
Purchases of investments		(405,960	)	(168,988	)
Proceeds from maturities of investments		268,365		108,957
Proceeds from sale of investments		752		1,262
Other investing activities		2,144		111

Net cash used in investing activities		(253,146	)	(143,445	)

Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise of stock options		647		155
Net proceeds from issuance of common stock in connection with the employee stock purchase plan		963		284
Net proceeds from issuance of debt		425,916		—
Payment of capital lease obligations		(1,357	)	(2,144	)
Payment of debt obligations		(396,000	)	(18,000	)

Net cash provided by (used in) financing activities		30,169		(19,705	)

Decrease in cash and cash equivalents		(180,531	)	(101,959	)
Cash and cash equivalents at beginning of period		353,032		506,460

Cash and cash equivalents at end of period	$	172,501		404,501

Supplemental disclosures of cash flow information:
Cash paid for interest	$	99,221		96,717

Cash paid for income taxes	$	605		1,189

Cancellation of a capital lease obligation	$	—		3,669

Addition of capital lease obligation	$	4,004		1,729

See accompanying notes.

TIME WARNER TELECOM INC.

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2004

(Unaudited)


	Common Stock							Additional paid-in capital	Accumulated other comprehensive income, net of taxes		Accumulated deficit		Total stockholders’ equity
	Class A				Class B
	Shares		Amount		Shares	Amount
	(amounts in thousands)
Balance at January 1, 2004	49,355		$	493	65,937	$	659	1,169,633	417		(673,403	)	497,799
Change in unrealized holding gain for available-for-sale security, net of taxes	—			—	—		—	—	(417	)	—		(417	)
Net loss	—			—	—		—	—	—		(96,892	)	(96,892	)

Comprehensive loss													(97,309	)
Shares issued for cash in connection with the exercise of stock options	209			3	—		—	644	—		—		647
Shares issued for cash in connection with the employee stock purchase plan	200			2	—		—	961	—		—		963
Forfeiture of restricted stock	(11	)		—	—		—	—	—		—		—
Stock based compensation	95			1	—		—	875	—		—		876

Balance at September 30, 2004	49,848		$	499	65,937	$	659	1,172,113	—		(770,295	)	402,976

See accompanying notes.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS

September 30, 2004

(unaudited)

1.	Organization and Summary of Significant Accounting Policies

Description of Business and Capital Structure

Time Warner Telecom Inc. (the “Company”), a Delaware corporation, is a leading provider of managed network solutions to business customers in 44 metropolitan markets in the United States. The Company delivers data, dedicated Internet access, and local and long distance voice services.

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 directly or indirectly by Time Warner Inc. (“Time Warner”) and Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation (“Advance/Newhouse”). Time Warner and Advance/Newhouse are referred to as the “Class B Stockholders.” 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 September 30, 2004, the Class B stockholders had approximately 93% of the combined voting power of the outstanding common stock and were represented by five members of the Board of Directors.

The Company also is authorized to issue shares of Preferred Stock. The Company’s Board of Directors has the authority to establish voting powers, preferences, and special rights for the Preferred Stock. No shares of Preferred Stock have been issued as of September 30, 2004.

Basis of Presentation

The accompanying interim consolidated and condensed financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods indicated. The results of operations for any interim period are not necessarily indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2003.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.

Basis of Consolidation

The consolidated and condensed financial statements include the accounts of the Company and all entities in which the Company has a controlling voting interest (“subsidiaries”). Significant intercompany accounts and transactions have been eliminated. Significant accounts and transactions with the Class B stockholders and their affiliates are disclosed as related party transactions.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

Investments

Marketable equity securities held by the Company are classified as available-for-sale. Accordingly, marketable equity securities are included in other assets at fair value. Unrealized holding gains and losses on equity securities classified as available-for-sale are carried, net of taxes, as a component of accumulated other comprehensive income in stockholders’ equity. Other equity investments which are not considered marketable securities and in which the Company’s ownership interest is less than 20% are generally carried at the lower of cost or net realizable value. Realized gains and losses are determined on a specific identification basis.

As of September 30, 2004, the Company had sold its remaining shares of marketable equity securities. For the nine months ended September 30, 2004, the sale of securities yielded a gain of $710,000 and proceeds of $752,000.

Marketable debt securities are classified as held-to-maturity as the Company has the intent and ability to hold the securities to maturity. Held-to-maturity securities are carried at amortized cost, which was $432 million at September 30, 2004. The fair value of marketable debt securities is not materially different than the amortized cost.

Receivables

The Company performs ongoing credit evaluations of significant customers’ financial conditions and has established an allowance for doubtful accounts based on the expected collectability of all receivables. In certain cases, the Company requires deposits from customers that it deems to represent a higher credit risk. 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 a 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 deteriorates, the Company’s bad debt expense and cash collections will be negatively impacted. The allowance for doubtful accounts was $10.5 million or 20% of gross receivables at September 30, 2004, and $15.0 million or 26% of gross receivables at December 31, 2003.

Revenue

The Company’s revenue is derived primarily from business communications services, including dedicated transport, local switched, long distance, data and Internet access services, and intercarrier compensation, which is comprised of reciprocal compensation and switched access services. The Company’s customers are principally telecommunications-intensive businesses, long distance carriers, Internet service providers (“ISPs”), wireless communications companies, incumbent local exchange carriers (“ILECs”), competitive local exchange carriers (“CLECs”), and governmental entities.

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. Revenue for the majority of switched access services and long distance is 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.

The Company evaluates whether receivables are reasonably assured of collection based on certain factors, including the likelihood of billing being disputed by customers. In situations where a dispute is likely, revenue is not recognized until cash is collected.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

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. The Company recognizes reciprocal compensation revenue primarily on a cash basis except in those cases where the revenue 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. Reciprocal compensation represented 3% and 4% of revenue during the nine months ended September 30, 2004 and 2003, respectively. Reciprocal compensation rates are established by interconnection agreements between the parties based on federal and state regulatory and judicial rulings. A 2001 Federal Communications Commission (“FCC”) ruling on reciprocal compensation for ISP-bound traffic reduced reciprocal compensation rates and capped the number of minutes for which ISP-bound traffic can be compensated. Reciprocal compensation rates were further reduced in 2003. As of September 30, 2004, the Company had deferred recognition of $5.1 million in reciprocal compensation revenue for payments received associated with pending disputes and amounts that are subject to adjustments based on regulatory rulings. The Company pays reciprocal compensation expense to the other LECs for local exchange traffic it terminates on the LEC’s facilities. These costs are recognized as incurred.

Switched access is also an element of intercarrier compensation revenue and represents the connection between a long distance carrier’s point of presence and an end-user’s premises provided through the Company’s switching facilities. Historically, the FCC has regulated the access rates imposed by the ILECs, while the access rates of CLECs, including the Company, have been less regulated. Effective September 2001, the FCC began regulating CLECs’ interstate switched 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. There were further reductions beginning in June 2004. The FCC’s regulation of CLEC access charge rates does not affect the rates stipulated in the Company’s contracts with certain long distance carriers. The Company’s contracts with certain carriers also have access rate reductions in relationship to volume commitments. 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 3% and 4% of total revenue during the nine months ended September 30, 2004 and 2003, respectively.

Significant Customers

The Company has substantial business relationships with a few large customers, including major long distance carriers. The Company’s top 10 customers accounted for 33% and 39% of the Company’s consolidated revenue for the nine months ended September 30, 2004 and 2003, respectively. MCI Inc. (formerly WorldCom Inc.), the Company’s largest customer in 2003, discontinued a significant amount of services it purchased from the Company as a result of its bankruptcy proceedings. A settlement was negotiated in 2003 to resolve a number of open disputes and claims between the parties. The balance of these disputes and claims were resolved in the first quarter of 2004, resulting in recognition of $2.3 million in previously deferred revenue and a reduction of $400,000 of expense. MCI accounted for 5% and 8% of the Company’s total revenue for the nine months ended September 30, 2004 and 2003, respectively, including the dispute resolution. No single customer accounted for 10% or more of total revenue in the nine months ended September 30, 2004 or 2003.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

Income Taxes

As of September 30, 2004, the Company has recorded a deferred tax asset of $58.7 million, net of a valuation allowance of $207.2 million. The Company has concluded that it is more likely than not that the net deferred tax asset will be realized because the Company could utilize tax-planning strategies in the event its net operating losses were to expire. However, the Company believes there may be risks in realizing amounts in excess of the $58.7 million through utilization of available tax planning strategies. Accordingly, the Company has established a valuation allowance for the excess amount.

Asset Retirement Obligations

Effective January 1, 2003, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 requires that the estimated fair value of an asset retirement obligation be recorded when incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s estimated useful life. The Company has asset retirement obligations related to decommissioning of electronics in leased facilities and the removal of certain fiber and conduit systems. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of retirement costs, the timing of the future retirement activities, and the likelihood of retirement provisions being enforced. Changes in these assumptions based on future information could result in adjustments to estimated liabilities.

In conjunction with the adoption of SFAS 143, the Company recorded a $5.9 million liability, an asset of $2.9 million in property, plant, and equipment, and a $3.0 million charge to earnings to account for the cumulative effect of the depreciation and accretion expense that would have been recorded had SFAS 143 been in effect in earlier periods. The asset retirement obligation increased due to the accretion of the liability, and was $6.9 million and $6.5 million as of September 30, 2004 and December 31, 2003, respectively.

Segment Reporting

As of September 30, 2004, the Company operated in 44 service areas. The Company’s management makes decisions on resource allocation and assesses performance based on total revenue, expenses, and capital spending of these operating locations. Each of the service areas offers similar products and services, has similar customers and networks, and are regulated by the same type of authorities, and are managed directly by the Company’s executives, allowing the 44 service areas to be aggregated, resulting in one line of business.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

Loss Per Common Share and Potential Common Share

The Company computes loss per common share in accordance with the provisions of FASB Statement No. 128, Earnings Per Share, which requires companies with complex capital structures to present basic and diluted earnings per share (“EPS”). Basic EPS is measured as the income or loss available to common stockholders divided by the weighted average outstanding common shares for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, stock options, etc.) as if they had been converted at the beginning of the periods presented. Potential common shares that have an anti-dilutive effect (e.g., those that increase income per share or decrease loss per share) are excluded from diluted EPS.

Basic loss per share for all periods presented herein was computed by dividing the net loss by the weighted average shares outstanding for the period.

The diluted loss per common share for all periods presented was computed by dividing the net loss attributable to common shares by the weighted average common shares outstanding for the period. Potential common shares related to stock options were not included in the computation of weighted average shares outstanding because their inclusion would be anti-dilutive.

Options to purchase 19,619,000 and 18,074,000 shares of the Company’s Class A common stock outstanding at September 30, 2004 and 2003, were excluded from the computation of weighted average shares outstanding because their inclusion would be anti-dilutive.

Stock Option Accounting

The Company has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (“APB 25”), and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of the Company’s employee stock options is generally equal to the market price of the underlying stock on the date of the grant, no compensation expense is recognized. FASB Statement No. 123, Accounting and Disclosure of Stock-Based Compensation (“SFAS 123”), establishes an alternative method of expense recognition for stock-based compensation awards to employees based on fair values. The Company has elected not to adopt SFAS 123 for expense recognition purposes.

Pro-forma information regarding net income and earnings per share is required by SFAS 123 and has been determined as if the Company had accounted for its employee stock options under the fair value method of SFAS 123. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rate of 3% in each of the nine month periods ended September 30, 2004 and 2003; dividend yield of 0.0% during each period; volatility factor of the expected market price of the Company’s common stock of 3.1 and 1.22 as of September 30, 2004 and 2003, respectively; and a weighted-average expected life of the option of five years during each period.

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including expected stock price characteristics significantly different from those of traded options. Because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of the Company’s employee stock options.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

The weighted-average fair value of options granted was $4.91 and $4.80 for the nine months ended September 30, 2004 and 2003, respectively. For purposes of pro-forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. The Company’s pro-forma net loss and pro-forma net loss per share, as if the Company had used the fair value accounting provisions of SFAS 123, are shown below:


	Three months ended September 30,					Nine months ended September 30,
	2004			2003		2004			2003
	(amounts in thousands, except per share amounts)
Net loss	$	(30,903	)	(5,658	)	$	(96,892	)	(68,008	)
Expense calculated under APB 25		—		132			—		395
Expense calculated under SFAS 123		(8,078	)	(14,509	)		(30,299	)	(44,956	)

Pro-forma net loss	$	(38,981	)	(20,035	)	$	(127,191	)	(112,569	)

Pro-forma basic and diluted loss per share	$	(0.34	)	(0.17	)	$	(1.10	)	(0.98	)

The FASB expects to issue FASB Statement No. 123R, Share-Based Payments (“SFAS 123R”) in the fourth quarter of 2004, which would require all companies to measure compensation cost for all share-based payments (including employee stock options) at fair value. The statement is expected to be effective for public companies for interim or annual periods beginning after June 15, 2005. SFAS 123R is an amendment of SFAS 123 and SFAS 95. Retroactive application of the requirements of SFAS 123R to the beginning of the fiscal year that includes the effective date would be permitted, but not required. The Company is currently evaluating the impact SFAS 123R will have on stock-based compensation expense and how the expense recorded in the future under SFAS 123R may differ from amounts currently disclosed under SFAS 123.

Reclassifications

Certain prior period amounts have been reclassified for comparability with the 2004 presentation.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

2.	Long-Term Debt and Capital Lease Obligations

Long-term debt and capital lease obligations are summarized as follows:


	September 30, 2004		December 31, 2003
	(amounts in thousands)
9³/4% Senior Notes	$	400,000	400,000
10¹/8% Senior Notes		400,000	400,000
Floating Rate Senior Notes		240,000	—
9¹/4% Senior Notes		200,000	—
Credit Facility		—	396,000
Capital lease obligations		11,365	7,908

Total obligations		1,251,365	1,203,908
Less current portion of capital lease obligations		1,871	525

Total long-term obligations	$	1,249,494	1,203,383

The $400 million principal amount 9³/4% Senior Notes due July 2008 (the “9³/4% Senior Notes”) are unsecured, unsubordinated obligations of the Company. Interest on the 9³/4% Senior Notes is payable semi-annually on January 15 and July 15. Interest expense, including amortization of deferred debt issue costs relating to the 9³/4% Senior Notes, totaled approximately $30.0 million in each of the nine month periods ended September 30, 2004 and 2003. At September 30, 2004, the fair market value of the $400 million of 9³/4% Senior Notes was approximately $400 million. These notes have not been listed on any securities exchange or inter-dealer automated quotation system, so the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

The $400 million principal amount 10¹/8% Senior Notes due February 2011 (the “10¹/8% Senior Notes”) are unsecured, unsubordinated obligations of the Company. Interest on the 10¹/8% Senior Notes is payable semi-annually on February 1 and August 1. Interest expense, including amortization of deferred debt issue costs, relating to the 10¹/8% Senior Notes totaled approximately $31.0 million in each of the nine months ended September 30, 2004 and 2003. At September 30, 2004, the fair market value of the $400 million of 10¹/8% Senior Notes was approximately $388 million. These notes have not been listed on any securities exchange or inter-dealer automated quotation system, so the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

As of December 31, 2003, the Company’s wholly owned subsidiary Time Warner Telecom Holdings, Inc. (“Holdings”) maintained a senior secured credit facility with lender commitments of $800 million, of which $420 million had been drawn and $396 million was outstanding. Interest expense, including commitment fees and amortization and write-off of deferred debt issue costs, relating to the credit facility totaled approximately $11.8 million and $17.1 million for the nine months ended September 30, 2004 and 2003, respectively. On February 20, 2004, Holdings issued

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

$440 million in Senior Notes, repaid the outstanding indebtedness of $396 million under the credit facility, terminated the facility, and entered into a new $150 million Senior Secured Revolving Credit Facility (the “Revolver”), which is currently undrawn. Significant terms and components of the financing are detailed below:

•

The $240 million principal amount of Second Priority Senior Secured Floating Rate Notes due February 15, 2011 (the “2011 Notes”) are secured obligations, on a second lien basis, of Holdings. The 2011 Notes are guaranteed by the Company and its and Holdings’ subsidiaries. The amount of guarantee attributable to any one subsidiary is subject to a maximum that is equivalent to 20% of the outstanding principal balance of the 2011 Notes. Interest is computed based on a specified LIBOR rate plus 4.0% and is reset and payable quarterly. Based on the LIBOR rate in effect as of September 30, 2004, the rate was 5.71% and interest expense would be approximately $12.0 million for 2004. Interest expense, including amortization of deferred debt issuance costs relating to the 2011 Notes, was $8.2 million for the nine months ended September 30, 2004. At September 30, 2004, the fair market value of the $240 million of 2011 Notes was approximately $240 million. These notes have not been listed on any securities exchange or inter-dealer automated quotation system, so the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

•

The $200 million principal amount of 9¹/4% Senior Notes due February 15, 2014 (the “2014 Notes”) are unsecured, unsubordinated obligations of Holdings. The 2014 Notes are subject to similar guarantees as the 2011 Notes, except that the guarantees are unsecured. Interest is payable semi-annually on February 15 and August 15. The notes are guaranteed by the Company and its and Holdings’ subsidiaries. Interest expense including amortization of deferred debt issuance costs relating to the 2014 Notes was $11.7 million for the nine months ended September 30, 2004. At September 30, 2004, the fair market value of the $200 million of 2014 Notes was approximately $202 million. These notes have not been listed on any securities exchange or inter-dealer automated quotation system, so the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

•

The $150 million Revolver is fully available on a revolving basis and expires on February 20, 2009, or April 14, 2008 if the 9³/4% Senior Notes remain outstanding on that date. Holdings is the borrower under the facility and the Company and its subsidiaries and Holdings’ subsidiaries are guarantors. Interest is calculated based on a specified Eurodollar rate plus 2¹/4% to 3%. If the Revolver were drawn, certain restrictive financial covenants would apply. The Company is required to pay commitment fees on a quarterly basis of 0.5% per annum on the undrawn available commitment of the Revolver. Commitment fee expense was $880,000 for the nine months ended September 30, 2004, including $415,000 of expense related to the terminated credit facility, and has been classified as a component of interest expense in the accompanying consolidated statements of operations.

The Senior Notes are governed by indentures that contain certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.

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

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

3.	Related Party Transactions

In the normal course of business, the Company engages in various transactions with affiliates of the Class B stockholders, generally on negotiated terms among the numerous affected operating units that, in management’s view, result in reasonable arms-length terms.

The Company benefits from its relationship with Time Warner Cable, an affiliate of Time Warner, both through access to local rights-of-way and construction cost sharing. The Company has similar arrangements with Bright House Networks, LLC, an affiliate of Advance/Newhouse, that manages certain cable systems in Florida and Indiana. Twenty-three of the Company’s 44 markets use fiber capacity licensed from Time Warner Cable or Bright House Networks, LLC (the “Cable Operations”). Under the terms of those agreements, if the Company wishes to license fiber capacity in addition to the capacity initially licensed in 1998, the Company must pay the Cable Operations an amount equal to the Company’s allocable share of the total cost of constructing the route in question, plus permitting and supervision fees as a license fee. The Company pays the license fee at the time the network is constructed. Under those agreements, the Company licenses discrete fibers and attaches its own electronics so that the Company’s networks are functionally separate from the licensor’s. Pursuant to the licensing arrangements, the Company paid the Cable Operations $2.3 million and $1.4 million for the nine months ended September 30, 2004 and 2003, respectively, and entered into a capital lease agreement of $1.5 million during the second quarter of 2004. These fees are capitalized to property, plant, and equipment and amortized over their useful lives as depreciation and amortization expense. As of September 30, 2004, the Company’s property, plant, and equipment included $188.2 million in licenses of fiber capacity pursuant to the capacity license agreements.

Under the licensing arrangements, the Company reimburses the Cable Operations for facility maintenance and pole and conduit rental costs. The reimbursements to the Cable Operations aggregated $3.4 million and $2.8 million, for the nine months ended September 30, 2004 and 2003, respectively, and are a component of operating expenses in the consolidated statements of operations. In certain cases, the Company’s operations are co-located with the Cable Operations facilities and are allocated a charge for various overhead expenses. Under the terms of leases and subleases between the Company and the Cable Operations, allocations for rent from the Cable Operations are typically based on square footage and allocations for utility charges are based on actual usage. These charges from the Cable Operations aggregated $1.6 million and $1.4 million for the nine months ended September 30, 2004 and 2003, respectively, and are a component of selling, general, and administrative expenses in the consolidated statements of operations. The charges by these affiliates for rent and utilities do not differ materially from charges the Company incurs in locations where the Company leases spaces from unaffiliated parties.

Affiliates of the Class B Stockholders purchase services from the Company. Revenue from these affiliates, which includes dedicated transport services, switched services, and data and Internet services, aggregated $15.3 million and $24.8 million for the nine months ended September 30, 2004 and 2003, respectively.

4.	Commitments and Contingencies

Pending legal proceedings are substantially limited to litigation incidental to the business of the Company. In the opinion of management, the ultimate resolution of these matters will not have a material adverse effect on the Company’s financial statements.

Management routinely reviews the Company’s exposure to liabilities incurred in the normal course of its business operations. Where a probable contingency exists and the amount of loss can be reasonably estimated, the Company records the estimated liability. Considerable judgment is required in analyzing and recording such liabilities, and actual results could vary from the estimates.

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

5.	Supplemental Guarantor Information

On February 20, 2004, Holdings (Issuer) issued $440 million in Senior Notes consisting of $240 million principal amount of Second Priority Senior Secured Floating Rate Notes due 2011, and $200 million principal amount of 9¹/4% Senior Notes due 2014. These notes are guaranteed by the Company (Parent Guarantor) and its subsidiaries and Holdings’ subsidiaries (Combined Subsidiary Guarantors). The guarantees are joint and several. A significant amount of the Issuer’s cash flow is generated by the Combined Subsidiary Guarantors. As a result, funds necessary to meet the Issuer’s debt service obligations are provided in large part by distributions or advances from the Combined Subsidiary Guarantors. Under certain circumstances, contractual and legal restrictions as well as the Company’s financial condition and operating requirements and those of the Company’s subsidiaries could limit the Issuer’s ability to obtain cash for the purpose of meeting its debt service obligations, including the payment of principal and interest on the 2011 and 2014 Notes.

The following information sets forth the Company’s Condensed Consolidating Balance Sheets as of September 30, 2004 and December 31, 2003, Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2004 and 2003, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2004 and 2003.

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2004


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations		Consolidated
	(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	568		174,826		(2,893	)	—		172,501
Marketable debt securities		18,810		242,731		—		—		261,541
Receivables, net		1		(339	)	41,961		—		41,623
Prepaid expenses and other current assets		2,828		8,743		4,882		—		16,453
Deferred income taxes		12,307		6,221		—		—		18,528

Total current assets		34,514		432,182		43,950		—		510,646

Marketable Securities, long-term		—		1,615		—				1,615
Property, plant and equipment, net		—		50,884		1,267,167		—		1,318,051

Deferred income taxes		7,869		32,344		—		—		40,213
Goodwill		—		—		26,773		—		26,773
Other assets, net of accumulated amortization		12,076		14,129		1,153		—		27,358

Total assets	$	54,459		531,154		1,339,043		—		1,924,656

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	—		2,373		39,621		—		41,994
Other current liabilities		14,969		39,493		168,781		—		223,243
Intercompany payable (receivable)		(1,870,574	)	50,208		1,820,366		—		—

Total current liabilities		(1,855,605	)	92,074		2,028,768		—		265,237

Losses in subsidiary in excess of investment		707,088		327,145		—		(1,034,233	)	—
Long-term debt and capital lease obligations		800,000		441,130		8,364		—		1,249,494
Other long-term liabilities		—		—		6,949		—		6,949

Stockholders’ equity (deficit)		402,976		(329,195	)	(705,038	)	1,034,233		402,976

Total liabilities and stockholders’ equity (deficit)	$	54,459		531,154		1,339,043		—		1,924,656

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2003


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations		Consolidated
	(amounts in thousands)
ASSETS
Current assets:

Cash and cash equivalents	$	10,959		342,216		(143	)	—		353,032
Short-term investments		14,172		111,389		—		—		125,561
Receivables, net		49		123		42,797		—		42,969
Prepaid expenses and other current assets		1,300		6,312		2,899		—		10,511
Deferred income taxes		17,322		5,092		—		—		22,414

Total current assets		43,802		465,132		45,553		—		554,487

Property, plant and equipment, net		—		64,323		1,298,924		—		1,363,247

Deferred income taxes		2,845		33,215		—		—		36,060
Goodwill		—		—		26,773		—		26,773
Other assets, net of accumulated amortization		14,705		9,470		1,141		—		25,316

Total assets	$	61,352		572,140		1,372,391		—		2,005,883

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable	$	—		1,137		38,959		—		40,096
Other current liabilities		34,916		41,885		180,792		—		257,593
Intercompany payable (receivable)		(1,882,049	)	134,509		1,747,540		—		—
Accrued restructure costs		—		—		—		—		—
Current portion debt and capital lease obligations		—		58		467		—		525

Total current liabilities		(1,847,133	)	177,589		1,967,758		—		298,214

Losses in subsidiary in excess of investment		610,686		280,524				(891,210	)	—
Long-term debt and capital lease obligations		800,000		396,563		6,820		—		1,203,383
Other long-term liabilities		—		—		6,487		—		6,487

Stockholders’ equity (deficit)		497,799		(282,536	)	(608,674	)	891,210		497,799

Total liabilities and stockholders’ equity (deficit)	$	61,352		572,140		1,372,391		—		2,005,883

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2004


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations	Consolidated
	(amounts in thousands)
Total revenue	$	—		—		160,588		—	160,588

Costs and expenses:		—
Operating, selling, general and administrative		—		31,904		77,078		—	108,982
Depreciation, amortization and accretion		—		7,542		47,212		—	54,754
Corporate expense allocation		—		(39,446	)	39,446		—	—

Total costs and expenses		—		—		163,736		—	163,736

Operating loss		—		—		(3,148	)	—	(3,148	)

Interest expense, net		(20,331	)	(7,256	)	(93	)	—	(27,680	)
Interest expense allocation		20,331		7,256		(27,587	)	—	—
Investment gain		—		—		—		—	—

Income (loss) before income taxes and equity in undistributed losses of subsidiaries		—		—		(30,828	)	—	(30,828	)
Income tax expense		75		—		—		—	75

Net loss before equity in undistributed losses of subsidiaries		(75	)	—		(30,828	)	—	(30,903	)

Equity in undistributed losses of subsidiaries		(30,828	)	(12,935	)	—		43,763	—

Net loss	$	(30,903	)	(12,935	)	(30,828	)	43,763	(30,903	)

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2003


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations	Consolidated
	(amounts in thousands)
Total revenue	$	—		—		172,428		—	172,428

Costs and expenses:
Operating, selling, general and administrative		—		30,411		67,383		—	97,794
Depreciation, amortization and accretion		—		9,521		46,886		—	56,407
Corporate expense allocation		—		(39,932	)	39,932		—	—

Total costs and expenses		—		—		154,201		—	154,201

Operating income		—		—		18,227		—	18,227

Interest expense, net		(20,452	)	(3,490	)	(640	)	—	(24,582	)
Interest expense allocation		19,530		3,490		(23,020	)	—	—
Investment gain		922		—		—		—	922

Loss before income taxes and equity in undistributed losses of subsidiaries		—		—		(5,433	)	—	(5,433	)
Income tax expense		—		225		—		—	225

Net loss before equity in undistributed losses of subsidiaries and cumulative effect of change in accounting principle		—		(225	)	(5,433	)	—	(5,658	)

Equity in undistributed losses of subsidiaries		(5,658	)	(20,934	)	—		26,592	—

Net loss	$	(5,658	)	(21,159	)	(5,433	)	26,592	(5,658	)

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2004


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations	Consolidated
	(amounts in thousands)
Total revenue	$	—		—		485,063		—	485,063

Costs and expenses:
Operating, selling, general and administrative		—		95,046		231,167		—	326,213
Depreciation, amortization and accretion		—		22,124		144,033		—	166,157
Corporate expense allocation		—		(117,170	)	117,170		—	—

Total costs and expenses		—		—		492,370		—	492,370

Operating loss		—		—		(7,307	)	—	(7,307	)

Interest expense, net		(61,119	)	(24,760	)	(3,891	)	—	(89,770	)
Interest expense allocation		60,409		24,760		(85,169	)	—	—
Investment gain		710		—		—		—	710

Loss before income taxes and equity in undistributed losses of subsidiaries		—		—		(96,367	)	—	(96,367	)
Income tax expense		75		450		—		—	525

Net loss before equity in undistributed losses of subsidiaries		(75	)	(450	)	(96,367	)	—	(96,892	)

Equity in undistributed losses of subsidiaries		(96,817	)	(46,209	)	—		143,026	—

Net loss	$	(96,892	)	(46,659	)	(96,367	)	143,026	(96,892	)

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2003


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors		Eliminations	Consolidated
	(amounts in thousands)
Total revenue	$	—		—		500,213		—	500,213

Costs and expenses:		—
Operating, selling, general and administrative		—		95,512		231,244		—	326,756
Depreciation, amortization and accretion		—		23,844		141,031		—	164,875
Corporate expense allocation		—		(119,356	)	119,356		—	—

Total costs and expenses		—		—		491,631		—	491,631

Operating income		—		—		8,582		—	8,582

Interest expense, net		(60,844	)	(10,859	)	(2,169	)	—	(73,872	)
Interest expense allocation		59,922		10,859		(70,781	)	—	—
Investment gain		922		—		—			922

Loss before income taxes and equity in undistributed losses of subsidiaries		—		—		(64,368	)	—	(64,368	)
Income tax expense		—		675		—		—	675

Net loss before equity in undistributed losses of subsidiaries and cumulative effect of change in accounting principle		—		(675	)	(64,368	)	—	(65,043	)

Equity in undistributed losses of subsidiaries		(68,008	)	(33,932	)	—		101,940	—

Cumulative effect of change in accounting principle		—		—		2,965			2,965

Net loss	$	(68,008	)	(34,607	)	(67,333	)	101,940	(68,008	)

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2004


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Cash flows from operating activities:
Net loss	$	(96,892	)	(46,659	)	$	(96,367	)	$	143,026		(96,892	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization, and accretion		—		22,124			144,033			—		166,157
Intercompany change		108,747		(37,678	)		71,957			(143,026	)	—
Amortization of deferred debt issue costs		1,793		9,958						—		11,751
Investment gains, net		(710	)	—			—			—		(710	)
Stock based compensation		—		—			876			—		876
Changes in operating assets and liabilities		(21,053	)	(5,333	)		(12,350	)		—		(38,736	)

Net cash (used in) provided by operating activities		(8,115	)	(57,588	)		108,149			—		42,446

Cash flows from investing activities:
Capital expenditures		—		(6,186	)		(112,261	)		—		(118,447	)
Purchases of marketable debt securities		(27,838	)	(378,122	)		—			—		(405,960	)
Proceeds from maturities of marketable debt securities		23,200		245,165			—			—		268,365
Other investing activities		752		—			2,144			—		2,896

Net cash provided by (used in) investing activities		(3,886	)	(139,143	)		(110,117	)		—		(253,146	)

Cash flows from financing activities:
Net proceeds from issuance of debt		—		425,916			—			—		425,916
Repayment of debt		—		(396,000	)		—			—		(396,000	)
Net proceeds from issuance of common stock upon exercise of stock options		647		—			—			—		647
Net proceeds from issuance of common stock in connection with the employee stock purchase plan		963		—			—			—		963
Payment of capital lease obligations		—		(575	)		(782	)		—		(1,357	)

Net cash provided by (used in) financing activities		1,610		29,341			(782	)		—		30,169

Increase (Decrease) in cash and cash equivalents		(10,391	)	(167,390	)		(2,750	)		—		(180,531	)
Cash and cash equivalents at beginning of period		10,959		342,216			(143	)		—		353,032

Cash and cash equivalents at end of period	$	568		174,826			(2,893	)		—		172,501

TIME WARNER TELECOM INC.

NOTES TO CONSOLIDATED AND CONDENSED FINANCIAL STATEMENTS - continued

TIME WARNER TELECOM INC.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2003


	Parent Guarantor			Issuer		Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Cash flows from operating activities:
Net loss	$	(68,008	)	(34,607	)	$	(67,333	)	$	101,940		(68,008	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation, amortization, and accretion		—		23,844			141,032			—		164,876
Intercompany change		81,672		3,120			(9,444	)		(75,348	)	—
Amortization of deferred debt issue costs		1,794		1,592			—			—		3,386
Cumulative effect of change in accounting principle		—		—			2,965			—		2,965
Investment (gains) losses, net		(922	)	—			—					(922	)
Stock based compensation		—		—			1,178			—		1,178
Changes in operating assets and liabilities		(15,995	)	(6,579	)		(19,710	)		—		(42,284	)

Net cash provided by (used in) operating activities		(1,459	)	(12,630	)		48,688			26,592		61,191

Cash flows from investing activities:
Capital expenditures		—		(9,025	)		(75,762	)				(84,787	)
Purchase of marketable securities		(18,293	)	(150,695	)		—					(168,988	)
Proceed from maturities of marketable securities		9,132		99,825			—			—		108,957
Other investing activities		1,262		—			111			—		1,373

Net cash used in investing activities		(7,899	)	(59,895	)		(75,651	)		—		(143,445	)

Cash flows from financing activities:
Repayment of debt		—		(18,000	)		—			—		(18,000	)
Net proceeds from issuance of common stock upon exercise of stock options		155		—			—			—		155
Net proceeds from issuance of common stock in connection with employee stock purchase plan		284		—			—					284
Payment of capital lease obligations		—		(2,079	)		(65	)		—		(2,144	)

Net cash provided by (used in) financing activities		439		(20,079	)		(65	)		—		(19,705	)

Increase (Decrease) in cash and cash equivalents		(8,919	)	(92,604	)		(27,028	)		26,592		(101,959	)
Cash and cash equivalents at beginning of year		24,832		482,257			(629	)		—		506,460

Cash and cash equivalents at end of year	$	15,913		389,653			(27,657	)		26,592		404,501

TIME WARNER TELECOM INC.

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. 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 our Annual Report on Form 10-K for the year ended December 31, 2003.

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, our expected financial position, expected capital expenditures, expected revenue mix, EBITDA trends, expected network expansion, 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 our 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 we believe that the expectations reflected in such forward-looking statements are reasonable, we 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 our Annual Report on Form 10-K for the year ended December 31, 2003 and elsewhere in this report. In addition, actual results may differ from our expectations due to increased customer churn, inability to obtain rights to build networks into commercial buildings, delays in launching new products, decreased demand for our existing products, further declines in the prices of our products due to competitive pressures and adverse regulatory rulings or legislative developments. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

We are a leading provider of managed network solutions to a wide array of business customers and organizations throughout the United States. We deliver data, dedicated Internet access, and local and long distance voice services to our customers, which include, among others, telecommunications-intensive businesses, long distance carriers, Internet service providers, wireless communications companies, incumbent local exchange carriers, competitive local exchange carriers, and enterprise organizations such as health care, finance, higher education, manufacturing, hospitality, state and local government and military. We operate in 44 metropolitan markets that have high concentrations of medium- and large-sized businesses.

We have 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 subsidiaries of Time Warner Inc. and Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation. 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 September 30, 2004, the Class B Stockholders had approximately 93% of the combined voting power of the outstanding common stock.

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As of September 30, 2004, our networks spanned 19,147 route miles and contained 920,812 fiber miles. We offered service to 4,839 buildings served entirely by our facilities (on-net) and 13,895 buildings through the use of another carrier’s facilities to provide a portion of the link (off-net).

The key elements of our business strategy include:

•

Leveraging our extensive local fiber networks to increase customer penetration in our existing markets. We plan to expand our revenue base by increasing customer and building penetration and using available network capacity in our existing markets. Approximately two-thirds of our capital expenditures during the nine months ended September 30, 2004 was used to expand our fiber network in existing markets, connect additional buildings to our network and deploy new product infrastructure. We may also expand our service reach by acquiring networks or operations in our existing markets, or in markets we do not currently serve.

•

Expanding our service offerings including high-speed, high-quality data networking services such as local area networks, or LAN, native LAN, which are networks that do not require protocol conversion, and Internet protocol or IP-based services, security and virtual private network or VPN services, and installing “soft switches” and other converged network elements that are smaller and more cost effective than traditional end-office switches to provide traditional voice services and to develop future service applications to enhance our customers’ voice and data networking ability. We may also expand our product line by partnering or by purchasing technologies or operations from others, rather than developing the capabilities internally. Revenue from data and Internet services for the three months ended September 30, 2004 grew 23% compared to the same quarter in 2003. We expect an increasing portion of our future revenue to be contributed by data and Internet services.

•

Increasing revenue growth from enterprise customers, including business and governmental customers, by expanding our product offerings targeted at those customers, while still focusing on carrier customers that we believe are more financially stable.

•

Continuing our disciplined approach to capital and operating expenditures in order to increase operational efficiencies, preserve our liquidity and drive toward profitability.

Revenue and Expense Trends

Our revenue is derived primarily from business communications services, including dedicated transport, local switched, long distance, data, and high-speed Internet access services. Our customer revenue mix by quarter in 2004 and 2003 breaks down as follows:


	For the Three Months Ended
	2003					2004
	March 31,		June 30,	September 30,	December 31,	March 31,	June 30,	September 30,
	(dollars in millions)
Enterprise / End Users	$	66.9	72.3	74.3	76.2	78.9	81.6	83.9
Carrier and ISP		76.1	69.4	69.8	65.6	63.9	66.1	63.8
Related Parties		7.7	7.7	9.4	8.6	5.6	5.1	4.6
Intercarrier Compensation		14.3	13.4	9.9	9.8	10.9	10.0	8.3

		165.0	162.8	163.4	160.2	159.3	162.8	160.6
Reciprocal Compensation Settlements		—	—	3.8	—	—	—	—
MCI Settlements		—	—	5.2	9.2	2.3	—	—

Total Revenue	$	165.0	162.8	172.4	169.4	161.6	162.8	160.6

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Enterprise Customer Revenue

Revenue from enterprise customers has been increasing primarily through sales of our data and Internet products such as Ethernet and IP-based product bundling as well as network expansion. Enterprise revenue represented 52% of our total revenue in the third quarter of 2004 as compared to 43% for the same period in 2003. We expect a growing percentage of our revenue will come from our enterprise customer base as we expand the customer base for our existing products and offer additional data and Internet products and services that will be available in conjunction with the Ethernet and IP services our customers are buying from us today. However, our enterprise revenue base continues to be challenged by customer disconnections, although to a lesser degree than revenue from carriers or ISPs. Our ability to increase the rate of revenue growth from enterprise customers will in part depend upon the success of new initiatives we have implemented to improve customer retention and the success of new product offerings targeted at enterprise customers.

Carrier and ISP Customer Revenue

Revenue from carrier and ISP customers has been declining primarily from service disconnections resulting from bankruptcies and contractions in their businesses. Carrier and ISP revenue represented 40% of our total revenue in the third quarter of 2004 and 2003, respectively. In 2002 and 2003, MCI, (formerly WorldCom), previously our largest customer, discontinued a significant amount of services it purchased from us as a result of its bankruptcy proceedings. As a result of a settlement between MCI and the Company to resolve a number of open disputes and claims relating to the bankruptcy, we recognized settlement revenue in the third and fourth quarters of 2003 and in the first quarter of 2004. In addition to revenue decreases related to MCI, we also have experienced service disconnections from other carriers and ISPs, as described below, and in some cases we are re-pricing our existing carrier services in response to competitive pressures in order to obtain extensions of existing contracts. This has created downward pressure on revenue from this customer base.

Related Party Revenue

We provide dedicated transport services, switched services and data and Internet services to affiliates of our Class B stockholders including Time Warner Cable, Time Inc. and Bright House Networks, LLC. Sales transactions with affiliates are in the normal course of business and are negotiated between us and the operating units of our affiliates on a basis that, in management’s view, result in reasonable arm’s-length terms. Related party revenue has been declining in 2004 primarily as a result of the transfer of services from our transport network to networks owned by America Online and Roadrunner, affiliates of Time Warner Inc., as they continue to build out their network facilities. Revenue from related parties represented approximately 3% and 5% of our total revenue in the third quarter of 2004, and 2003, respectively. Related party revenue is disclosed in Note 1 to “Statement of Operations Data” in Results of Operations. We expect that revenue from some affiliates of Time Warner Inc. will continue to decline in the near future as they use more of their own network facilities.

Intercarrier Compensation

Intercarrier compensation revenue consists of reciprocal compensation and switched access. Reciprocal compensation represents compensation from a LEC for local exchange traffic originated on their facilities and terminated on our facilities. Reciprocal compensation rates are established by interconnection agreements between the parties based on federal and state regulatory and judicial rulings. A 2001 Federal Communications Commission, or FCC, ruling reduced rates and capped the number of minutes for which ISP-bound traffic can be compensated. Rates have been declining since the ruling, with a further decline in June 2003. As a result, and because of reduced traffic terminating to our ISP customers, we have experienced a decline in our reciprocal compensation revenue over the past several years. Reciprocal compensation represented 3% and 5% of our total revenue in the third quarter of 2004 and 2003, respectively. The FCC has commenced a rulemaking on intercarrier compensation and is also reviewing the basis for the distinction between ISP-bound and other local traffic in its 2001 ruling pursuant to a federal court order. These proceedings may result in additional changes to the intercarrier compensation regime that we cannot predict at this time. We also cannot predict the potential impact on our reciprocal compensation revenue, but we believe that a continuation of the downward trend is likely.

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Switched access represents the connection between a long distance carrier’s point of presence and an end user’s premises provided through our switching facilities. Historically, the FCC has regulated the access rates imposed by the Incumbent Local Exchange Carriers, or ILECs, while our access rates and those of other Competitive Local Exchange Carriers, or CLECs, have been less regulated. In June 2001, the FCC began regulating CLEC’s interstate switched access charges. Our rates were reduced pursuant to that order and were further reduced in June 2004 to parity with the rates of the ILEC in each of our service areas, which resulted in a quarterly decrease of approximately $2 million in switched access revenue. The order does not affect the rates stipulated in our contracts with certain long distance carriers, although certain contracts provide for access rate reductions in relation to volume commitments. The FCC is considering further changes to the access rate regime that could result in a further reduction or elimination of access charges. As a result, we expect that switched access revenue will continue to decline as a percentage of revenue; however, we are unable to predict the extent of any such decline. Switched access revenue represented 2% and 3% of total revenue in the third quarter of 2004 and 2003, respectively.

Regulatory uncertainty surrounds the appropriate intercarrier compensation rates applicable to Voice over IP, or VoIP, traffic that originates over the Internet and terminates in different local service areas on the public switched telephone network. This traffic is currently subject to local reciprocal compensation rates. The FCC has opened a proceeding to resolve the uncertainty but we cannot presently predict when the proceeding will be concluded or the impact of any new rules that may result from the proceeding. In the interim, carriers may hand off voice traffic to us or other carriers as IP traffic and the terminating carrier may attempt to assess switched access charges against us to terminate the traffic, resulting in higher intercarrier compensation expense to us. In response to a 2002 petition filed by AT&T Corp., the FCC recently ruled that telephony services that both originate on the traditional public switched telephone network, but use long-haul IP transport facilities are telecommunications services subject to access charges, but clarified that the charges should be assessed against long distance carriers and not against intermediate local carriers like us. Notwithstanding this ruling, terminating carriers may attempt to assess switched access charges against us. We cannot predict the outcome of such disputes. The FCC reserved the right to reach a different conclusion in its rule-making proceeding and did not address whether its ruling applies retroactively to access charges imposed on this type of traffic for prior periods.

Pricing of Special Access Circuits

Although we expect to continue to negotiate with the ILECs for volume and term-based pricing of special access circuits, it is possible that Total Element Long Run Incremental Cost - based pricing of DS-1 and DS-3 loops as unbundled network elements has served as a constraining factor relative to ILEC pricing of special access. The FCC is presently considering the continued availability of DS-1 circuits, transport and DS-3 circuits as unbundled network elements as a result of the remand proceedings required by the D.C Circuit Court of Appeals when it set aside certain unbundling provisions of the FCC’s Triennial Review Order. If the FCC should decide to eliminate DS-1 circuits and transport from the list of unbundled network elements that incumbent LECs must make available to competitors, it is possible that the prices we pay for special access circuits could increase. Such price increases would put margin pressure on the services we provide to customers on an off-net basis.

Customer Disconnects and Pricing Trends

We continue to experience customer and service disconnects primarily associated with customer network optimization, cost cutting, business contractions, bankruptcies or other financial difficulties, or service migration as a result of price competition from other providers. Disconnects in the first nine months of 2004 resulted in the loss of $8.0 million of monthly revenue versus $10.3 million, of which $3.5 million was related to MCI, in the first nine months of 2003. While we expect that some customers will continue to disconnect services due to the aforementioned reasons, we cannot predict the total impact on revenue from these disconnects.

TIME WARNER TELECOM INC.

Our revenue and margins may also be reduced from price-cutting by other telecommunications service providers that may require us to adjust prices for existing services upon contract renewals. In particular, we believe that in some of the markets in which we operate, the ILECs are pricing their business services more aggressively than in the past, which could adversely affect our future revenues and margins.

Other Expense Trends

In response to the impact of the downturn in the telecommunications sector and revenue performance that began in 2001, we have undertaken several cost reduction measures. These measures include increased focus on collection of receivables, as discussed below, network grooming activities and term and volume plans to reduce costs paid to other carriers, and workforce reductions in 2001 and 2002 that eliminated approximately 560 positions. We will continue to manage our costs but we cannot predict whether cost reductions will offset further revenue declines.

Bad debt expense has trended from a net recovery of 0.9% of revenue in 2003 to a net recovery of 0.7% for the first nine months of 2004. Bad debt expense in 2003 was impacted by a $15.1 million recovery from MCI, and 2004 bad debt expense was impacted by a $2.3 million recovery from another customer. Excluding these large recoveries, bad debt expense continues to improve as compared to the prior year, primarily as a result of improved collection efforts. The improvement in collections was the result of added controls and more aggressive collection efforts. We believe that the continued improvement in 2004 also reflects a higher quality customer base as our carrier customer base becomes more stable and as more of our revenue is derived from enterprise customers. Although we have experienced an improvement in bad debt expense in the first nine months of 2004, net of the MCI recovery, there is no assurance that this trend will continue.

Related Party Expense

We benefit from our relationship with Time Warner Cable, an affiliate of one of our Class B stockholders, both through access to local rights-of-way and construction cost sharing. We have similar arrangements with Bright House Networks, LLC, also an affiliate of a Class B stockholder. We have constructed 23 of our 44 metropolitan networks substantially through the use of fiber capacity licensed from these affiliates. As of September 30, 2004, our property, plant, and equipment included $188.2 million in licenses of fiber capacity pursuant to these capacity license agreements. We pay the license fee at the time the network is constructed and capitalize the cost of fiber under the license agreements to property, plant, and equipment. These costs are amortized over the useful life as depreciation and amortization expense. We pay Time Warner Cable and Bright House Networks, LLC negotiated fees for facility maintenance and reimburse them for our allocable share of pole rental costs on an ongoing basis. These maintenance and pole rental costs are included in our operating expenses. We believe that certain regulatory decisions regarding the pole rental rates that are passed through to us under the capacity license agreements pose a risk that our expense for these items could increase over time. Our selling, general, and administrative expenses include charges from affiliates of our Class B stockholders for office rent, utilities, and other administrative costs. The terms of these transactions have been negotiated on a basis that management’s believes result in reasonable arm’s- length terms. We have also benefited from discounts available to Time Warner Inc. and its affiliates by aggregating our purchases of long distance services, car rental services, overnight delivery services, and wireless usage with those of Time Warner Inc. Related party expense is disclosed in Note 2 to “Statements of Operations Data” in Results of Operations.

Critical Accounting Policies and Significant Estimates

We prepare our financial statements in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions that affect reported amounts and related disclosures. We consider an accounting estimate to be critical if:

•

it requires assumptions to be made that were uncertain at the time the estimate was made; and

TIME WARNER TELECOM INC.

•

changes in the estimate or different estimates that could have been selected could have a material impact on our consolidated results of operations or financial condition.

Impairment of Long-lived Assets

Accounting rules require that we periodically assess our ability to recover the carrying amount of property, plant and equipment and intangible assets which requires an assessment of risk associated with our ability to generate sufficient future cash flows from these assets. If we determine that the future cash flows expected to be generated by a particular asset do not exceed the carrying value of that asset, we must recognize a charge to write down the value of the asset to its fair value.

Estimates are used to determine whether sufficient cash flows will be generated to recover the carrying amount of our investments in long term assets. The estimates are made for each of the 44 markets and our western long haul network. Expected future cash flows are based on historic experience and management’s expectations of future performance. The assumptions used represent our best estimates of market growth rates, future pricing, market acceptance of our products and services and the future capital investments necessary. No significant changes have been made to our estimates since December 31, 2003.

Regulatory and Other Contingencies

We are subject to significant government regulation, some of which is in a state of flux due to challenges of existing rules. Such regulation is subject to different interpretations, inconsistent application and has historically given rise to disputes with other carriers and municipalities regarding the classification of traffic, rights of way, rates and minutes of use.

Management estimates and reserves for the risk associated with regulatory and other carrier contingencies. These estimates are based on assumptions and other considerations including studies of traffic patterns, expectations regarding regulatory rulings, historic experience and ongoing negotiations. No significant changes have been made to our estimates since December 31, 2003.

Deferred Tax Accounting

We have a history of net operating losses (NOLs) for tax purposes. As a result, our balance sheet reflects a net deferred tax asset that represents the tax benefit of NOLs and timing differences between book and tax recognition of certain revenue and expense items, net of a valuation allowance. When it is more likely than not that all or some portion of deferred tax assets may not be realized, we are required to establish a valuation allowance for the amount that may not be realized. At September 30, 2004, our net deferred tax asset after a valuation allowance of $207.2 million was $58.7 million.

We have concluded that it is more likely than not that the net deferred tax asset will be realized through the utilization of tax-planning strategies including the sale and leaseback of certain of our high-value, low-basis assets to generate gains to which the NOLs can be applied. We base our analysis on discounted expected future cash flows and our expectations regarding the size of transaction that would be allowable under financing agreements that may be in place at the time we implement strategies to utilize the benefit of the NOLs. The assumptions represent our best estimates including market growth rates, future pricing, market acceptance of our products and services, future expected capital investments and discount rates. No significant changes have been made to our estimates since December 31, 2003.

Revenue and Receivables

Our services are complex and our tariffs and contracts may be correspondingly complex and subject to interpretations causing disputes over billing. In addition, changes in and interpretations of regulatory rulings create uncertainty and may cause disputes over minutes of use, rates or other provisions of our service.

TIME WARNER TELECOM INC.

Consequently, we defer recognition of revenue until cash is collected on certain of our components of revenue, including reciprocal compensation and contract termination charges. We also reserve for customer billing disputes until they are resolved even if the customer has already paid the disputed amount.

We estimate the ability to collect our receivables by performing ongoing credit evaluations of our customers’ financial condition, and provide a valuation allowance based on expected collection of our receivables through a charge to selling, general and administrative expense. Our estimates are based on assumptions and other considerations, including historical collection experience, credit worthiness and financial performance of our customers, industry financial performance and aging analysis. No significant changes have been made to our estimates since December 31, 2003.

Other Estimates

In addition, there are other accounting estimates reflected in our consolidated financial statements, including reserves for certain losses, compensation accruals, unpaid claims for medical and other self-insured plans and property and other tax exposures that require judgment but are not deemed critical in nature.

We believe the current assumptions and other considerations used to estimate amounts reflected in the consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in the consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, on our financial condition.

TIME WARNER TELECOM INC.

Results of Operations

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


	Three Months Ended September 30,										Nine Months Ended September 30,
	2004					2003					2004					2003
	(amounts in thousands, except per share amounts)
Statements of Operations Data:
Revenue (1):
Dedicated transport services	$	81,175		51	%		94,066		55	%		248,887		51	%		269,420		54	%
Switched services		39,418		24			38,957		22			116,852		24			115,281		23
Data and Internet services		31,708		20			25,700		15			90,040		19			74,135		15
Intercarrier compensation		8,287		5			13,705		8			29,284		6			41,377		8

Total revenue		160,588		100			172,428		100			485,063		100			500,213		100

Costs and expenses (2):
Operating (exclusive of depreciation, amortization, and accretion shown separately below)		65,550		41			66,631		39			194,088		40			198,461		39
Selling, general, and administrative		43,432		27			31,162		18			132,125		27			128,294		26
Depreciation, amortization, and accretion		54,754		34			56,408		33			166,157		34			164,876		33

Total costs and expenses		163,736		102			154,201		89			492,370		101			491,631		98

Operating income (loss)		(3,148	)	(2	)		18,227		11			(7,307	)	(1	)		8,582		2

Interest expense		(29,030	)	(18	)		(25,908	)	(15	)		(93,663	)	(20	)		(78,520	)	(16	)
Interest income		1,350		1			1,326		1			3,893		1			4,648		1
Investment gain		—		—			922		—			710		—			922		—

Loss before income taxes and cumulative effect of change in accounting principle		(30,828	)	(19	)		(5,433	)	(3	)		(96,367	)	(20	)		(64,368	)	(13	)

Income tax expense		75		—			225		—			525		—			675		—

Net loss before cumulative effect of change in accounting principle		(30,903	)	(19	)		(5,658	)	(3	)		(96,892	)	(20	)		(65,043	)	(13	)

Cumulative effect of change in accounting principle		—		—			—		—			—		—			2,965		1

Net loss	$	(30,903	)	(19	)%		(5,658	)	(3	)%		(96,892	)	(20	)%		(68,008	)	(14	)%

Basic and diluted loss per share	$	(0.27	)			$	(0.05	)			$	(0.84	)			$	(0.59	)

Weighted average shares outstanding, basic and diluted		115,679					114,936					115,621					114,931

EBITDA (3)(4)	$	51,606		32	%(5)		74,635		43	%(5)		158,850		33	%(5)		173,458		35	%(5)
Net cash provided by (used in) operating activities		4,539					(1,094	)				42,446					61,191
Net cash used in investing activities		(40,304	)				(25,896	)				(253,146	)				(143,445	)
Net cash (used in) provided by financing activities		(70	)				(6,455	)				30,169					(19,705	)

(1)	Includes revenue resulting from transactions with affiliates of $4.6 million and $9.4 million for the three months ended September 30, 2004 and 2003, respectively, and $15.3 million and $24.8 million for the nine months ended September 30, 2004 and 2003, respectively.

(2)	Includes expenses resulting from transactions with affiliates of $1.6 million and $1.5 million for the three months ended September 30, 2004 and 2003, respectively, and $5.0 million and $4.2 million for the nine months ended September 30, 2004 and 2003, respectively.

(3)

“EBITDA” is defined as net income or loss before depreciation, amortization, accretion, asset impairment charge, interest expense, interest income, investment gains and losses, income tax expense, and cumulative effect of change in accounting principle. EBITDA is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance reported in accordance with generally accepted accounting principles in the United States. Rather, EBITDA is a measure of operating performance and liquidity that investors may consider in addition to such measures. Our management believes that EBITDA is a standard measure of operating performance and liquidity that is commonly reported and widely used by analysts, investors, and other interested parties in the telecommunications industry because it eliminates many differences in financial capitalization, and tax structures, as well as non-cash and non-operating charges to earnings. EBITDA is used internally by our management to assess on-going operations and is a measure used to test compliance with certain covenants of our four series of senior notes and our new Revolver. The definition of EBITDA under our new Revolver and our four series of senior notes differs from the definition of EBITDA used in this table because the Revolver definition also eliminates certain non-cash losses within certain limits and certain extraordinary gains. EBITDA as used in this document may not be comparable to similarly titled measures reported by other companies due to differences in accounting policies.

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(4)	The reconciliation between net loss and EBITDA is as follows:


	Three Months Ended September 30,					Nine Months Ended September 30,
	2004			2003		2004			2003
	(amounts in thousands)
Net loss	$	(30,903	)	(5,658	)	$	(96,892	)	(68,008	)
Cumulative effect of change in accounting principle		—		—			—		2,965
Income tax expense		75		225			525		675
Investment gain		—		(922	)		(710	)	(922	)
Interest income		(1,350	)	(1,326	)		(3,893	)	(4,648	)
Interest expense		29,030		25,908			93,663		78,520
Depreciation, amortization, and accretion		54,754		56,408			166,157		164,876

EBITDA	$	51,606		74,635		$	158,850		173,458

(5)	EBITDA margin represents EBITDA as a percentage of revenue.

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Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003

Revenue. Total revenue decreased $11.8 million, or 7%, to $160.6 million for the three months ended September 30, 2004, from $172.4 million for the comparable period in 2003. Revenue by product line for the third quarter of 2004 compared to the same period of 2003 included a 14%, or $12.9 million, decrease in transport revenue caused by net customer disconnects and price adjustments for existing services upon contract renewals, as well as the impact of the MCI settlement on transport revenue of $2.8 million in the same period in 2003. Switched services revenue increased 1%, or $461,000, primarily due to an increase in bundled voice services. Data and Internet revenue increased 23%, or $6 million, as we continue to grow our enterprise customer base, and our Ethernet and IP product sales. This increase was partially offset by the impact of the MCI settlement on data and Internet revenue of $2.2 million in 2003. Intercarrier compensation decreased 40%, or $5.4 million, due to mandated and contractual rate reductions and fewer minutes of use due to the loss of certain ISP customers, and a $3.9 million reciprocal compensation settlement in the three months ended September 30, 2003 that did not recur in the current quarter.

Operating Expenses. Our operating expenses consist of costs directly related to the operation and maintenance of our networks and the provision of our services. These costs include the salaries and related expenses of operations and engineering personnel, as well as costs paid to other carriers for facility leases and interconnection. We carry a significant portion of our traffic on our own fiber infrastructure, which enhances our ability to control our costs. Operating expenses decreased $1.1 million, or 2%, to $65.6 million for the three months ended September 30, 2004 as compared to the same period last year. The decrease in operating expense is primarily due to an increase in capitalized labor costs resulting from increased capital spending as compared to a year ago, partially offset by an increase in network facility costs from the growth in the enterprise customer base.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include costs related to sales and marketing, information technology, billing, regulatory, accounting, finance, and legal functions. Selling, general, and administrative expenses increased $12.3 million, or 39%, to $43.4 million for the three months ended September 30, 2004, from $31.2 million for the comparable period in 2003. Selling, general, and administrative expenses were 27% and 18% of revenue for the three months ended September 30, 2004 and 2003, respectively. The increase in selling, general, and administrative expenses primarily resulted from the settlement with MCI, which reduced bad debt expense by $15.1 million for the three months ended September 20, 2003. This increase was somewhat offset by an improvement in bad debt expense resulting from successful collection activity in 2004. Other changes include increased personnel costs, primarily due to an increase in sales personnel as compared to the same period last year off set by a reduction in property tax expense.

Depreciation, Amortization, and Accretion Expense. Depreciation, amortization, and accretion expense decreased $1.7 to $54.8 million for the three months ended September 30, 2004, from $56.4 million for the comparable period in 2003. The decrease is related to the retirement of assets in 2003 partially offset by additions to property, plant and equipment during 2003 and 2004.

Interest Expense. Interest expense increased $3.1 million to $29.0 million for the three months ended September 30, 2004, from $25.9 million for the comparable period in 2003. The increase in interest expense is primarily due to higher interest rates associated with our new debt.

Interest Income. Interest income remained unchanged at $1.3 million for the three months ended September 30, 2004 and 2003, due to slightly higher effective interest rates earned offset by lower average cash and investment balances.

Net Loss and EBITDA. Net loss increased $25.2 million to a loss of $30.9 million for the three months ended September 30, 2004, from a net loss of $5.7 million for the comparable period in 2003. The increase primarily resulted from an increase in selling, general, and administrative costs compared to the 2003 period, which were lower due to our settlement with MCI in 2003 as described above, and an increase in interest expense due to higher interest rates associated with our new debt.

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EBITDA is calculated by excluding the impacts of depreciation, amortization, accretion, interest expense, interest income, investment gains, income tax expense and cumulative effect of change in accounting principle from net loss. We believe that EBITDA trends are a valuable indicator of whether our operations are able to produce operating cash flow to fund working capital needs, to service debt obligations, and to fund capital expenditures. We currently use the results depicted by EBITDA for these purposes. EBITDA decreased $23.0 million to $51.6 million for the three months ended September 30, 2004, from $74.6 for the comparable period in 2003. EBITDA margin was 32% for the three months ended September 30, 2004 as compared to 43% for the same period last year. The decrease resulted primarily from increased selling, general and administrative costs as described above. Although we expect to continue to generate positive EBITDA in the future as we expand our business in existing markets, there is no assurance that we will sustain the current level of EBITDA or sufficient positive EBITDA to meet our working capital requirements,and service our indebtedness.

Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003

Revenue. Total revenue decreased $15.2 million, or 3%, to $485.1 million for the nine months ended September 30, 2004, from $500.2 million for the comparable period in 2003. Revenue by product line for the first nine months of 2004 compared to the same period of 2003 included an 8%, or $20.5 million, decrease in transport revenue caused by net customer disconnects and price adjustments for existing services upon contract renewals, as well as the impact of the MCI settlement on transport revenue of $2.8 million in the same period in 2003. Switched services revenue increased 1%, or $1.6 million primarily due to an increase in bundled voice services somewhat offset by a reduction in contract termination and other nonrecurring revenue. Data and Internet revenue increased 21%, or $15.9 million, as we continue to grow our enterprise customer base and our Ethernet and IP product sales. This increase was partially offset by the impact of the MCI settlement on data and Internet revenue of $2.2 million in 2003. Intercarrier compensation decreased 29%, or $12.1 million, due to mandated and contractual rate reductions and fewer minutes of use due to the loss of certain ISP customers, and a $3.9 million reciprocal compensation settlement in 2003 that did not recur in the current year.

Operating Expenses. Our operating expenses consist of costs directly related to the operation and maintenance of our networks and the provision of our services. These costs include the salaries and related expenses of operations and engineering personnel, as well as costs paid to other carriers for facility leases and interconnection. We carry a significant portion of our traffic on our own fiber infrastructure, which enhances our ability to control our costs. Operating expenses decreased $4.4 million, or 2%, to $194.1 million for the nine months ended September 30, 2004 as compared to the same period last year. The operating expense decrease is primarily due to an increase in capitalized labor costs resulting from increased capital spending as compared to a year ago, partially offset by an increase in network facility costs from the growth in the enterprise customer base.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses include costs related to sales and marketing, information technology, billing, regulatory, accounting, finance, and legal functions. Selling, general, and administrative expenses increased $3.8 million, or 3%, to $132.1 million for the nine months ended September 30, 2004, from $128.3 million for the comparable period in 2003. Selling, general, and administrative expenses were 27% and 26% of revenue for the nine months ended September 30, 2004 and 2003, respectively. The increase in selling, general, and administrative expenses primarily resulted from the settlement with MCI which reduced bad debt expense by $15.1 million in the nine months ended September 20, 2003. This increase was somewhat offset by an improvement in bad debt expense resulting from successful collection activity in 2004. Other changes include increased personnel costs, primarily due to an increase in sales personnel as compared to the same period last year off set by a reduction in property tax expense.

Depreciation, Amortization, and Accretion Expense. Depreciation, amortization, and accretion expense increased $1.3 million to $166.2 million for the nine months ended September 30, 2004, from $164.9 million for the comparable period in 2003. The increase is related to the retirement of assets and additions to property, plant and equipment during 2003 and 2004.

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Interest Expense. Interest expense increased $15.1 million to $93.7 million for the nine months ended September 30, 2004, from $78.5 million for the comparable period in 2003. The increase in interest expense is primarily due to $8.9 million of deferred loan costs and other fees that were expensed in connection with the credit facility that was repaid and terminated in February 2004 and the higher interest rates associated with our new debt.

Interest Income. Interest income decreased $755,000 to $3.9 million for the nine months ended September 30, 2004, from $4.6 million for the comparable period in 2003. The decrease is related to lower cash and investment balances, partially offset by slightly higher effective interest rates earned.

Cumulative Effect of Change in Accounting Principle. Effective January 1, 2003, we adopted the provisions of FASB Statement No. 143, Accounting for Asset Retirement Obligations (“SFAS 143”). SFAS 143 requires that the estimated fair value of an asset retirement obligation be recorded when incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s estimated useful life. We have asset retirement obligations related to decommissioning of electronics in leased facilities and the removal of certain fiber and conduit systems. Estimating these obligations requires considerable management judgment to estimate retirement costs, the timing of the future retirement activities, and the likelihood of retirement provisions being enforced. Changes in the assumptions underlying these estimates based on future information could result in adjustments to estimated liabilities. In conjunction with SFAS 143, we recorded a $3.0 million charge to earnings for the nine months ended September 30, 2003 to account for the cumulative effect of the depreciation and accretion expense that would have been recorded had SFAS 143 been in effect in earlier periods.

Net Loss and EBITDA. Net loss increased $28.9 million to a loss of $96.9 million for the nine months ended September 30, 2004, from a net loss of $68.0 million for the comparable period in 2003. The change primarily resulted from an increase in selling, general, and administrative costs compared to the 2003 period, which were lower due to our settlement with MCI in 2003 as described above, and increased interest expense of $8.9 million related to the debt repayment and higher interest rates associated with our new debt, partially offset by a $3.0 million charge for change in accounting principle during 2003.

EBITDA decreased $14.6 million to $158.9 million for the nine months ended September 30, 2004, from $173.5 for the comparable period in 2003. EBITDA margin was 33% for the nine months ended September 30, 2004 as compared to 35% for the same period last year. The decrease resulted primarily from higher selling, general and administrative costs as described above. Although we expect to continue to generate positive EBITDA in the future as we expand our business in existing markets, there is no assurance that we will sustain the current level of EBITDA or sufficient positive EBITDA to meet our working capital requirements and service our indebtedness.

Liquidity and Capital Resources

Historically, we have generated cash flow from operations consisting primarily of payments received from customers for the provision of business communications services offset by payments to other telecommunications carriers, payments to employees, and payments for other operating, selling, general, and administrative costs. We have also generated cash from debt and equity financing activities and have used funds to service our debt obligations, fund acquisitions, and make capital expenditures to expand our networks.

Operations. Cash provided by operating activities was $42.4 million for the nine months ended September 30, 2004 compared to $61.2 million for the same period in 2003. The decrease primarily related to a change in accounts receivable and prepaid expense balances for the nine months ended September 30, 2004 as compared to the same period of 2003, as well as a reduction in cash used for accounts payable and other current liabilities. Cash provided by operating activities during the nine months ended September 30, 2003 was significantly impacted by improved collection activity as compared to the same period in 2002, as well as the benefits of the MCI settlement in 2003 described above.

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Investing. Cash used in investing activities was $253.1 million in the nine months ended September 30, 2004 compared to $143.4 million for the same period in 2003. The increase of $109.7 million primarily relates to capital expenditures and net purchases of investments. Our total investments increased $137.6 million from December 31, 2003 to $263.2 million as of September 30, 2004 as we sought the enhanced rate of return on securities not classified as cash equivalents. Capital expenditures in the nine months ended September 30, 2004 were $122.5 million, of which approximately two-thirds was spent to expand networks in existing markets, add new buildings to our network and deploy new product infrastructure, and includes $4.0 million of capital lease additions, compared to $86.5 million in capital expenditures in the nine months ended September 30, 2003.

Financing. Financing activities provided $30.2 million in cash for the nine months ended September 30, 2004 and were primarily related to the net proceeds from the issuance of debt and repayment of our existing credit facility.

On February 20, 2004, our wholly owned subsidiary, Time Warner Telecom Holdings, Inc. (“Holdings”) issued $440 million in Senior Notes, repaid the outstanding indebtedness of $396 million under Holdings’ Senior Secured Credit Facility, and executed a new $150 million Senior Secured Revolving Credit Facility (the “Revolver”), which is currently undrawn, to replace the existing Senior Secured Credit Facility. Significant terms and components of the financing are detailed below:

•

The $200 million principal amount of 9¹/4% Senior Notes due February 15, 2014 (the “2014” Notes”) are unsecured, unsubordinated obligations of Holdings. The 2014 Notes are subject to similar guarantees as the 2011 Notes, except that the guarantees are unsecured. Interest is payable semiannually on February 15 and August 15. Aggregate annual interest payments on the 9¹/4% Senior Notes are approximately $19 million. The 9¹/4% Senior Notes are due on February 15, 2014.

•

The $150 million Revolver is fully available on a revolving basis and expires on February 20, 2009, or at April 14, 2008 if the 9³/4% Senior Notes remain outstanding on that date. Holdings is the borrower under the facility and we and our subsidiaries and Holdings’ subsidiaries are guarantors. Interest is calculated based on a specified Euro dollar rate plus 2.25% to 3.0%. If the facility were drawn, certain restrictive financial covenants would apply.

The $400 million principal amount of 9³/4% Senior Notes that we issued in July 1998 are unsecured, unsubordinated obligations. Interest on the 9³/4% Senior Notes is payable semi-annually on January 15 and July 15. Aggregate annual interest payments on the 9³/4% Senior Notes are approximately $39 million. The 9³/4% Senior Notes are due on July 15, 2008.

The $400 million principal amount of 10¹/8% Senior Notes that we issued in January 2001 are unsecured, unsubordinated obligations. Interest on the 10¹/8% Senior Notes is payable semi-annually on February 1 and August 1. Aggregate annual interest payments on the 10¹/8% Senior Notes are approximately $41 million. The 10¹/8% Senior Notes are due on February 1, 2011.

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Our four series of Senior Notes are governed by indentures that contain certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, our ability to incur indebtedness, make prepayments of certain indebtedness, pay cash dividends, make investments, engage in transactions with shareholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.

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

In order to reduce future cash interest payments, as well as future amounts due at maturity or mandatory redemption, we or our affiliates may, from time to time, purchase our outstanding four series of Senior Notes for cash or equity securities in open market or privately negotiated transactions or engage in other transactions to reduce the amount of outstanding Senior Notes. We will evaluate any such transactions in light of market conditions, taking into account our liquidity and prospects for future access to capital, and contractual constraints.

The following diagram summarizes our corporate structure in relation to the outstanding indebtedness and credit facility as of September 30, 2004. The diagram does not depict all aspects of ownership structure among the operating and holding entities, but rather summarizes the significant elements relative to our debt in order to provide you a basic overview.

LOGO

TIME WARNER TELECOM INC.

In 2004, we expect that cash from operations, along with cash, cash equivalents and marketable debt securities will provide sufficient funds to meet our expected capital expenditures and liquidity needs to operate our business and service our current debt. Based on current assumptions, we expect to generate sufficient cash from operations along with available cash on hand, including cash equivalents, marketable debt securities, and borrowing capacity under our Revolver to provide sufficient funds to meet our expected capital expenditures and liquidity needs to operate our business and service our debt at least into 2008. If our assumptions prove incorrect or if there are other factors that negatively affect our cash position such as material unanticipated losses, a significant reduction in demand for our services or an acceleration of customer disconnects or other risk factors, we may need to seek additional sources of funds through financing or other means. We generally do not make long term commitments for capital expenditures and have the ability to adjust our capital expenditures if our cash from operations is lower than anticipated.

Our ability to draw upon the available commitments under our Revolver is subject to compliance with all of the financial and other covenants contained in the credit agreement and our continued ability to make certain representations and warranties. Financial covenants, including leverage and interest coverage ratios and limitations on capital expenditures, are primarily derived from EBITDA and debt levels. We are required to comply with these ratios as a condition to any borrowing under the Revolver and for as long as any loans are outstanding. The representations and warranties include the absence of liens on our properties other than certain permitted liens, the absence of litigation or other developments that have or could reasonably be expected to have a material adverse effect on us and our subsidiaries as a whole, and continued effectiveness of the documents granting security for the loans. Although we presently meet all of the conditions for making draws under the Revolver, factors beyond our control could cause us to fail to meet these conditions in the future.

A lack of revenue growth or an inability to control costs could negatively impact EBITDA performance and cause our failure to meet the required minimum ratios. Although we currently believe that we will continue to be in compliance with the covenants, factors outside our control, including deterioration of the economy, an acceleration of customer disconnects, a significant reduction in demand for our services without adequate reductions in capital expenditures and operating expenses, or an uninsured catastrophic loss of physical assets or other risk factors could cause us to fail to meet our covenants. If our revenue growth is not sufficient to sustain the EBITDA performance required to meet the debt covenants described above, and we have loans outstanding under the Revolver or wish to draw on it, we would have to consider cost cutting or other measures to maintain required EBITDA levels or to enhance liquidity.

The Revolver also limits our ability to declare cash dividends, incur indebtedness, incur liens on property, and undertake mergers and acquisitions. The Revolver also includes cross default provisions under which we are deemed to be in default under that facility if we default under any of the other material outstanding obligations, such as our four series of Senior Notes. In addition, the lenders may declare a default if a change of voting control occurs as defined in the Revolver agreement. If we do not meet these covenants, we would not be able to draw funds under the Revolver or the lenders could cancel the Revolver unless the lenders agree to further modify the covenants and we could potentially be subject to an acceleration of the repayment date if we have borrowed under the facility. Although we believe our relationships with our lenders are good, there is no assurance that we would be able to obtain the necessary modifications on acceptable terms. If our plans or assumptions change or prove to be inaccurate, or the foregoing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions or joint ventures, we would be required to seek additional capital. Additional sources of financing may include public or private debt, equity financing by us or our subsidiaries, or other financing arrangements. There is no assurance that we would be able to obtain additional financing on terms acceptable to us or at all. Our revenue and costs are partially dependent upon factors that are outside our control, such as general economic conditions, regulatory changes, adverse changes in customers’ financial condition, changes in technology, and increased competition. Due to the uncertainty of these and other factors, actual revenue and costs may vary from expected amounts, possibly to a material degree, and these variations would likely affect the level of our future capital expenditures and expansion plans. Our Class B stockholders are under no obligation to make any additional investments in us or to provide guarantees for debt financing by banks or other financing sources and we expect that they would be unwilling to do so.

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Commitments. Our long-term commitments have not materially changed from those disclosed in our filing on Form 10-K for the year ended December 31, 2003.

Effects of Inflation

Historically, inflation has not had a material effect on us.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Our interest income is sensitive to changes in the general level of interest rates. In this regard, changes in interest rates can affect the interest earned on our cash equivalents, marketable debt securities and other investments. To mitigate the impact of fluctuations in interest rates, we generally enter into fixed rate investing arrangements.

The following table provides information at September 30, 2004 about our investments that are sensitive to changes in interest rates. For these securities, the table presents related weighted-average interest rates expected by the maturity dates.


	Expected Maturity Date
	2004			2005		Total
	(amounts in thousands)
Assets
Marketable debt securities:
Shares of money market mutual funds	$	11,503		—		11,503
Weighted average interest rate		1.5	%	—		1.5	%
Commercial paper, corporate and municipal debt securities	$	261,809		158,482		420,291
Weighted average interest rate		1.6	%	2.1	%	1.8	%

At September 30, 2004, the fair values of our fixed rate 9³/4% Senior Notes due 2008, our fixed rate 10¹/8% Senior Notes due 2011, our Second Priority Floating Rate Senior Notes due 2011, and our fixed rate 9¹/4% Senior Notes due 2014 were approximately $400 million, $388 million, $240 million, and $202 million, respectively, as compared to a carrying values of $400 million, $400 million, $240 million, and $200 million, respectively, each on the same date. These notes have not been listed on any securities exchange or inter-dealer automated quotation system, so the estimated market value is based on indicative pricing published by investment banks. While we believe these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank.

Based on the $240 million outstanding balance as of September 30, 2004 of our floating rate debt, a one-percent change in the applicable LIBOR rate would change the amount of annual interest paid by $2.4 million. Our interest rates are not linked to changes in ratings of us by public rating agencies.

Item 4. Controls and Procedures

As of September 30, 2004, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2004. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to September 30, 2004.

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Part II

Other Information

Item 1. Legal Proceedings

We have no material legal proceedings pending.

Item 6. Exhibits and Reports on Form 8-K.

(a)

Exhibits

The exhibits listed on the accompanying Exhibit Index are filed or incorporated by reference as part of this report and the Exhibit Index is incorporated herein by reference.

(b)

Reports on Form 8-K

(i)

Form 8-K dated August 5, 2004 furnishing the Company’s second quarter 2004 press release.

(ii)

Form 8-K dated September 27, 2004 regarding the resignation of an independent director.

Signature

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


	TIME WARNER TELECOM INC.

Date: November 9, 2004	By:	/s/ Jill R. Stuart
		Jill R. Stuart
		Vice President, Accounting and Finance and
		Chief Accounting Officer

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EXHIBIT INDEX


Exhibit Number		Description of Exhibit
10.1 -		Employment Agreement dated October 27, 2004 between the Company and Larissa L. Herda.

31.1 -		Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 -		Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulations S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 -		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2 -		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.