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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004

Commission file number 0-30218

TIME WARNER TELECOM INC.

(Exact name of Registrant as specified in its charter)

10475 Park Meadows Drive

Littleton, CO 80124

(Address of Principal Executive Offices)

(303) 566-1000

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Class A Common Stock, $.01 par value

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

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

As of June 30, 2004, the aggregate market value of the Registrant’s voting stock held by non-affiliates of the Registrant was approximately $206.4 million, based on the closing price of the Registrant’s Class A common stock on the Nasdaq National Market reported for such date. Shares of Class A common stock held by each executive officer and director have been excluded since those persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares outstanding of Time Warner Telecom Inc.’s common stock as of February 28, 2005 was:

Time Warner Telecom Inc. Class A common stock–50,026,969 shares

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

DOCUMENTS INCORPORATED BY REFERENCE

Certain information required in Part III of this Annual Report on Form 10-K is incorporated herein by reference to our definitive proxy statement for the 2005 Annual Meeting of our stockholders, which we will file with the U.S. Securities and Exchange Commission on or before April 30, 2005.

CAUTION REGARDING 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, business, and financing plans. These forward-looking statements are based on our 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,” “intends,” 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 this report. 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.

TELECOMMUNICATIONS DEFINITIONS

In order to assist the reader in understanding certain terms relating to the telecommunications business that are used in this report, a glossary is included following Part III.

PART I

Item 1.    Business

Overview

Time Warner Telecom Inc. is a leading provider of managed network solutions to a wide range of business customers throughout the United States. We deliver data, dedicated Internet access, and local and long distance voice services. Our customers are principally telecommunications-intensive businesses, long distance carriers, incumbent local exchange carriers (“ILECs”), competitive local exchange carriers (“CLECs”), wireless communications companies, Internet service providers (“ISPs”), enterprise organizations in the health care, finance, higher education, manufacturing and hospitality industries, and state, local and federal government entities. We operate in 44 U.S. metropolitan markets that have high concentrations of medium and large-sized businesses. As of December 31, 2004, our fiber networks covered 19,169 route miles, with the equivalent of 917,461 fiber miles, and offered service to 5,074 buildings served entirely by our facilities (“on-net”), and 14,139 buildings served through the use of facilities of other carriers to provide a portion of the link (“off-net”). We continue to expand our footprint within our existing markets by connecting our network into additional buildings. We also have expanded our Internet Protocol, or IP, backbone data networking capability between markets supporting end-to-end Ethernet connections for customers, and have selectively interconnected existing service areas within regional clusters with fiber optic facilities that we own or lease. In addition, we provide on-net inter-city switched services that provide our customers a virtual presence in a remote city.

Our principal executive offices are located at 10475 Park Meadows Drive, Littleton, Colorado 80124, and the telephone number is (303) 566-1000. Our Internet address is http://www.twtelecom.com. We are not including the information contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K. We make available free of charge (other than an investor’s own Internet access charges) through our website our Annual Report on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K, and amendments to these reports, as soon as reasonably practicable after we electronically file such material with, or furnish such material to, the Securities and Exchange Commission. In addition, we have posted and intend to disclose on our website any amendments to or waivers from our Code of Ethics applicable to our principal executive officer, principal financial officer, chief accounting officer, controller and treasurer and other persons performing similar functions within five business days following the date of such amendment or waiver.

Time Warner Cable (now a unit of Time Warner Inc.) began our business in 1993 with the intent to sell competitive residential and business services. Since 1997, we changed our business to exclusively focus on business customers, including carriers and governmental entities, and to expand from dedicated services into switched services, Internet and data, and geographic areas beyond the Time Warner Cable footprint.

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. Currently, the Class B common stock is collectively owned directly or indirectly by Time Warner Inc., and by Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation, or Advance/Newhouse, (collectively, the “Class B Stockholders”).

Business Strategy

Our primary objective is to be the leading provider of high quality data and telecommunications services in each of our service areas, principally utilizing our fiber facilities and our national IP backbone network to offer high value voice, data, Internet, and dedicated services to become the carrier of choice for medium- and large-sized business enterprises, governmental agencies, and other carriers. By delivering to our customers a suite of integrated network solutions, we can meet the specific application needs of those customers, location by location,

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and create efficiencies for the customer and migrate the management of their disparate networks and services to Time Warner Telecom. The key elements of our business strategy include the following:

Leverage Existing Fiber Networks.    We have built, licensed or acquired local and regional fiber networks to serve metropolitan geographic locations where management believes there are large numbers of potential customers. Our network architecture reflects a convergence of circuit switched (primarily using Time Division Multiplexing or “TDM”) technology, as used in the traditional public switched telephone network (“PSTN”), and packet switched technologies (using IP technology) with redundancy and diversity maintained throughout the network and Ethernet technology. The network architecture is designed to remain open and capable of supporting connections with other networks, as well as to allow for utilization of “best of breed” suppliers’ components to be integrated for enhanced diversity and availability. In addition, we operate a fully managed, fiber-based nationwide IP backbone network to provide the capacity and high quality service increasingly demanded by our customers. Our IP backbone network capacity ranges from OC-3 to OC-192, depending on the specific route, and includes long haul circuits leased from other carriers. We believe that our extensive network capacity allows us to:

We continue to extend our network in our present markets in order to reach additional commercial buildings directly with our fiber facilities. In 2004, we extended our fiber network into approximately 900 additional buildings in our existing markets. In addition, we have deployed technologies such as dense wave division multiplexing (“DWDM”) to provide additional bandwidth and higher speed without the need to add additional fiber capacity. While we have no immediate plans to expand our networks into additional markets beyond the 44 in which we already operate, we may do so in the future if we find attractive opportunities. We may also provide data services to locations outside our current market areas through our IP backbone and the use of leased facilities.

Expand Service Offerings.    We provide a broad range of switched services throughout our service area. We utilize high-capacity digital end office switches that enable us to offer both local and toll services to our customers. We have also installed “soft switches” and related network equipment—media gateways, signaling gateways, and applications servers (collectively referred to as “converged network elements”) in certain markets, which enable the switching and routing of voice calls over IP packet networks, also referred to as “VoIP” as well as managing the related PSTN call traffic interface. The converged network elements are collectively smaller and more cost effective than traditional PSTN end office switches, enabling us to offer traditional voice telephony services across our VoIP platform and to develop future service applications that enhance end user customers’ voice and data networking ability.

We have expanded our service offerings to include 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 IP-based services. In late 2003, we expanded our suite of metro Ethernet services to include Extended Native LAN, which allows customers to connect distant locations via Ethernet throughout our national footprint, and in 2004 we launched Multipoint Extended Native LAN, which allows customers to connect multiple distant locations within our service area. We also introduced a managed security service that prevents unwanted traffic from entering customers’ networks. We may also expand our product line by partnering or by purchasing technologies or operations from others, rather than developing the capabilities internally.

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Diversify Our Customer Base.    Our direct sales force targets medium- and large-sized enterprises, including other carriers. These businesses are potentially high-volume users of our services and are more likely to seek the greater reliability provided by an advanced network such as ours. As a result of weakness in the carrier sector, we have sought to broaden our revenue base through an increased focus on enterprise customers and government customers, while narrowing our carrier focus to those that are the most stable. To achieve revenue growth from end user customers, we target potential enterprise customers utilizing both local market and national sales groups. Over 90% of our sales force is in our local markets, focusing primarily on enterprise customer sales. These groups are complemented by our government and carrier sales group. In addition, in order to achieve further economies of scale and network utilization, we target smaller enterprise customers with a package of network services suited to their specific needs. We also plan to expand the types of services we offer to our carrier customers in order to create new revenue opportunities from that customer base.

Interconnect Service Areas.    We group the service areas in which we operate into geographic clusters across the United States. We selectively interconnect certain of our existing service areas within regional clusters with owned or leased fiber facilities. We expect the interconnection of service areas to increase our revenue potential and increase margins by addressing our customers’ regional long distance, voice, data, and video requirements.

Continue Disciplined Expenditure Program.    Our strategy of primarily using our fiber facilities-based services, rather than reselling network capacity of other providers, requires that we make significant capital investments to reach some new customers. We invest selectively in growth prospects which often require building entries, electronics, distribution rings, and product expansion. We also seek to increase operating efficiencies by investing selectively in back office and network management systems. We have a disciplined approach to capital and operating expenditures. The capital expenditure program requires that prior to making expenditures on a project, the project must be evaluated against certain financial criteria such as minimum recurring revenue, cash flow margins, and rate of return. We increased capital expenditures in 2004 to $171.8 million from $129.7 million in 2003, primarily to expand our networks, deploy new products and connect additional buildings to our network. We expect our capital expenditures in 2005 to be approximately $160 million to $175 million.

Services

We provide our customers with a wide range of telecommunications and managed data services, including dedicated transport, local and long distance voice services, data transmission services, high-speed dedicated Internet access, and intercarrier services.

Dedicated Transport Services

We currently provide a complete range of dedicated transport services with transmission speeds up to 9.953 gigabits per second to our carrier and end user customers. These services satisfy needs for voice, data, image, and video transmission. Each uses state-of-the-art fiber optics and is available as:

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These services are available in a wide variety of configurations and capacities:

Switched Services

Our switched voice services provide business customers with local and long distance calling capabilities and connections to IXCs. We own, house, manage, and maintain the switches used to provide the services. Our switched services include the following:

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Data Services

We offer our customers a broad array of data services that enable them to connect their own internal computer networks and access external computer networks and the Internet at very high speeds using the Ethernet protocol.

We offer the following range of Native LAN or “NLAN” services with speeds up to 1000 Mbps:

Except for Customer-Direct NLAN, the above services are provided over networks that are shared by multiple customers, but the traffic from each customer is uniquely identified through the use of logical connections. These logical connections virtually separate one customer’s traffic from that of another, and provide security in such a way that each customer’s traffic is securely delivered only to that customer’s Ethernet ports.

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Internet Services

Intercarrier Services

Because we are interconnected with other telecommunications carriers, we provide traffic origination and termination services to other carriers. These services consist of the origination and termination of long distance calls and the termination of local calls.

Limitation on Residential and Content Services

Our Capacity License Agreements with Time Warner Cable and Bright House Networks LLC prohibit us from using facilities licensed under those agreements for the term of the agreements (until 2028) to (i) engage in the business of providing, offering, packaging, marketing, promoting, or branding (alone or jointly with or as an agent for other parties) any residential services, or (ii) produce or otherwise provide entertainment, information, or other content services. Although we do not believe that these restrictions will materially affect our business and operations in the immediate future, we cannot predict the effect of such restrictions in the rapidly changing telecommunications industry. We do not currently have plans to offer residential or content services in our service areas not covered by the Capacity License Agreements with Time Warner Cable and Bright House Networks, LLC.

Telecommunications Networks and Facilities

Overview.    We use advanced technologies and network architectures to develop a highly reliable infrastructure for delivering high-speed, quality digital transmissions of voice, data and Internet telecommunications services. Our basic transmission platform consists primarily of optical fiber equipped with

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high-capacity SONET and DWDM equipment deployed in fully redundant, self-healing rings. These SONET and DWDM rings give us the capability of routing customer traffic in both directions around the ring, thereby eliminating loss of service in the event of a fiber cut. We have an advanced Internet backbone using redundant core routers to deliver Internet traffic to our customers. We have also added network-based Ethernet switches in our markets to deploy application-based services incorporated with our soft switches and media gateways to enable voice services over IP and metropolitan Ethernet switches to deliver Ethernet-based services directly to customer premises. Our networks are designed for remote automated provisioning, allowing us to meet customers’ real time service needs. We extend SONET rings or point-to-point links from rings to each customer’s premises over our own fiber when financially attractive or use customer links obtained from other local carriers. We also install diverse building entry points if a customer’s redundancy needs require such a design. We place necessary customer-dedicated or shared electronic equipment at a location near or in the customer’s premises to terminate the link.

We serve our customers from one or more central offices or hubs strategically positioned throughout our networks. The central offices house the transmission, switching, and Internet equipment needed to interconnect customers with each other, the long distance carriers, and other local exchange and Internet networks. Redundant electronics and power supplies, with automatic switching to the backup equipment in the event of failure, protects against signal deterioration or outages. We continuously monitor system components from our network operations center and seek to proactively focus on avoiding problems.

We add switched and dedicated data services to our basic fiber transmission platform by installing sophisticated routers, soft switches, and digital electronics at our central offices and nodes at customer locations. Our advanced digital telephone and IP switches are connected to multiple ILECs and long distance carrier switches to provide our customers ubiquitous access to the PSTN. We also provide high-speed routers and switches for our Internet backbone, LAN multiplexers at our customers’ premises and in our central offices to supply LAN interconnection services. Our Internet backbone is connected to multiple networks around the nation through public, private, and transit connection points. Our newest offerings connect customer LANs together in a metropolitan area, and connect LANs in geographically dispersed areas across our Internet backbone.

Our strategy for adding customers is designed to maximize revenue growth while maintaining attractive rates of return on capital invested to connect customers directly to our networks. To serve a new customer initially, we may use various transitional links, such as utilizing a portion of an ILEC’s network. When a customer’s communication volumes increase, we may build our own fiber connection between the customer’s premises and our network to accommodate the customer’s needs and increase our operating margins.

Telecommunications Networks.    The following chart sets forth our telecommunications networks.

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Network Monitoring and Management.    We provide a single point of contact for our customers and consolidate our systems support, expertise, and technical training for the network at our network operations center in Greenwood Village, Colorado. With 816 technicians and customer service representatives, we are generally able to quickly correct, and often anticipate, problems that may arise in our networks. We provide 24 hours-a-day, 7 days-a-week surveillance and monitoring of networks to achieve a high level of network reliability and performance. Network analysts monitor real-time alarm, status, and performance information for network circuits, which allows them to react swiftly to repair network trouble.

Infrastructure Migration.    We continually evaluate new technologies and suppliers in order to achieve a balance between utilizing best of breed technologies and suppliers and purchasing equipment at the best available price. We continue to expand IP capabilities throughout our network through the deployment of packet telephony systems such as media gateways and soft switches. In order to prepare to deliver the next generation voice and data services, we are using these new technologies to augment traditional circuit switched systems. We currently offer primary rate interface voice service and digital trunks over this platform. We plan to further converge TDM and IP services while utilizing Multi Protocol Label Switching (“MPLS”) to differentiate the multiple services traversing our IP backbone.

Information Technology Solutions.    We continue to focus on systems that provide high business value with a solid return on investment. Our strategy is to buy proven, commercially available software that can be tailored to our business processes, and conforms to our architectural framework. Where such products are not available, we contract with an integrator to develop a custom application. These systems must be flexible to a rapidly changing environment, while being scalable, and easily maintained and enhanced. Through the implementation of enterprise application integration, data accuracy is improved by eliminating the need to re-key information into multiple systems. We also use customized workflow software to manage the exchange of data in a timely manner between applications.

In 2004, we launched a customer self care platform that uses web portal technology to provide customer service through automated solutions. The web portal enables customers to view their bills, record disputes and pay their bills on-line. Our web portal is also designed to allow customers to interact with future IP based products, enabling them to control the quality of their interaction in using these products. We plan to expand the capability of this portal in the future to enable on-line purchasing, quotations, configuration, analysis and trouble-shooting.

Information Systems Infrastructure.    The strategy of buying “off-the-shelf” products and integrating them into our existing information systems infrastructure allows us to create an environment that is more cost-effective and flexible to maintain. We manage our desktop technology assets centrally to ensure software compatibility between all corporate locations and field offices. Our information systems infrastructure also provides real time support of network operations and delivers data to meet customer needs. Our systems utilize open system standards and architectures, allowing interoperability with third party systems.

Network Development and Application Laboratory.    We have a laboratory located in Greenwood Village, Colorado, equipped with state of the art systems and equipment, including those we use in the operation of our local digital networks. The center is designed to provide a self-contained testing and integration environment, fully compatible with our digital networks, for the purposes of:

Billing Systems.    We contract with outside vendors for customer billing. We have licensed software for end user billing that operates on our own equipment and contract with an outside vendor for operations support and development. In addition, we have a service bureau arrangement with another vendor for carrier and interconnection billing.

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Capacity License Agreements with Affiliates

We currently license fiber capacity from Time Warner Cable and Bright House Networks, LLC, a subsidiary of the Time Warner Entertainment-Advance/Newhouse Partnership between the affiliates of our Class B Stockholders that is managed by Advance/Newhouse, in 23 of our 44 markets. Each of our local operations in those markets is party to a Capacity License Agreement with the local cable television operation of Time Warner Cable or Bright House Networks, LLC (collectively the “Cable Operations”) providing us with an exclusive right to use all of the capacity of specified fiber-optic cable owned by the Cable Operations. The Capacity License Agreements expire in 2028. The Capacity License Agreements for networks that existed as of July 1998 have been fully paid and do not require additional license fees. However, we must pay maintenance fees and fees for splicing and similar services. We may request that the Cable Operations construct and provide additional fiber-optic cable capacity to meet our needs. The Cable Operations are not obligated to provide such fiber capacity and we are not obligated to take fiber capacity from them. If the Cable Operations provide additional capacity, we pay an allocable share of the cost of construction of the fiber upon which capacity is to be provided, plus a permitting fee. We are permitted to use the capacity for telecommunications services and any other lawful purpose, but not for the provision of residential services and content services. If we violate the limitations on our business activities, the Cable Operations may terminate the Capacity License Agreements.

The Capacity License Agreements do not restrict us from licensing fiber-optic capacity from parties other than the Cable Operations. Although the Cable Operations have agreed to negotiate renewal or alternative provisions in good faith upon expiration of the Capacity License Agreements, we cannot assure that the parties will agree on the terms of any renewal or alternative provisions or that the terms of any renewal or alternative provisions will be favorable to us. If the Capacity License Agreements are not renewed in 2028, we will have no further interest in the fiber capacity covered by those agreements and may need to build, lease, or otherwise obtain transmission capacity to replace the capacity previously licensed under the agreements. The terms of such arrangements may be materially less favorable to us than the terms of the Capacity License Agreements. We have the right to terminate a Capacity License Agreement in whole or in part at any time upon 180 days’ notice. The Cable Operations have the right to terminate the Capacity License Agreements prior to their expiration under certain circumstances. See “Risks Relating to Our Business—We must obtain access to rights-of-way and pole attachments on reasonable terms and conditions.”

Customers and Sales and Marketing

Our customers are principally telecommunications-intensive medium- and large-sized business enterprises, long distance carriers, ILECs, CLECs, ISPs, wireless communication companies, educational institutions, state and local governments, and the military.

We have substantial business relationships with a few large customers, and especially other carriers. For the year ended December 31, 2004, our top ten customers accounted for approximately 33% of our total revenue. Our largest customer for the year ended December 31, 2004, AT&T Corp., accounted for approximately 7% of our total revenue. A portion of the revenue from our top ten customers includes intercarrier compensation resulting from end users that have selected those customers as their long distance carrier.

We maintain a direct sales effort in each of our service areas along with regional and national sales support. We had 296 sales account executives at December 31, 2004. Commissions for our sales representatives are linked to incremental revenue from services installed. We provide higher commissions for executing service contracts with terms of two years or greater and for services entirely on our network.

In addition to our direct sales channels, we have sales agency arrangements with certain vendors to develop additional sales opportunities. We market our services through advertisements, trade journals, media relations, direct mail, and participation in conferences.

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Our national sales organization includes sales groups focused on three types of national customers: enterprise, carrier, and federal government.

Our marketing emphasizes our:

Our centrally managed customer support operations are designed to facilitate the processing of new orders as well as changes and upgrades in customer services. To reduce the risk in bringing new and untested telecommunications services to a dynamically changing market, we introduce our services once market demand develops, and offer them in diversified, competitively priced bundles in order to increase usage among our existing customers and to attract new customers. The traditional switched and dedicated services we offer are typically priced at a discount to the ILECs’ prices for comparable services.

Customer Service

To provide customer service, account representatives or customer service specialists are assigned to our customers to act as local points of contact. Technicians and other support personnel are available in each of our service areas to react to any network failures or problems. In addition, the network operations center provides 24 hours-a-day, 7 days-a-week surveillance and monitoring of networks to maintain network reliability and performance. See “Telecommunications Networks and Facilities—Network Monitoring and Management.”

Competition

We believe that the principal competitive factors affecting our business are and will continue to be:

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We believe that we compete favorably with other companies in the industry or are generally impacted favorably with respect to each of these factors, with the exception of pricing on certain products. Although we compete with other carriers primarily on service quality and customer service rather than price, price competition for certain products such as long distance service, inter-city point-to-point services, and POP to POP dedicated services has driven down prices for these products. Also, we typically price our traditional switched and dedicated services at a discount to the ILEC’s prices for comparable services. We believe that the ILECs have become more aggressive in pricing competition, especially for large enterprise customers that we also target. With several facilities-based carriers providing the same service in a given market, price competition is likely to continue to occur. We believe that weakness in the CLEC sector has led to aggressive price cutting as certain competitors seek to gain or retain market share. In addition, industry consolidation through acquisitions and business combinations, both past and future, may result in larger competitors with greater economies of scale serving certain of our markets.

The ILECs—Verizon Corporation, BellSouth Corporation, Qwest Communications Inc., and SBC Communications Inc., among others—offer services substantially similar to those we offer. We believe that the ILECs may have competitive advantages over us, such as their long-standing relationships with customers, greater technical and financial resources, and the potential to subsidize services of the type we offer from service revenue in unrelated businesses. In addition, the Telecommunications Act of 1996 (the “1996 Act”) allows the regional Bell operating companies (“RBOCs”) to enter the long distance market. RBOCs in all states now have authority to provide in-region interLATA services that enable them to offer customers both local and long distance telephone services which is expected to make them even stronger competitors. Recently announced consolidations such as the AT&T Corp. and SBC merger and the Verizon Communications or Qwest Communications purchase of MCI Inc., if consummated, are likely to result in SBC and Verizon or Qwest becoming more formidable competitors. However, we believe that our customers are increasingly interested in alternative providers for redundancy of networks, enhanced disaster recovery, and advanced services. In light of the bankruptcies in the CLEC sector, some customers are seeking financially stable providers to a greater extent than in prior years. In most of the metropolitan areas in which we currently operate, at least one, and sometimes several other CLECs, offer substantially similar services at substantially similar, and in the case of some services, substantially lower prices than we offer.

We also face competition from electric utilities, long distance carriers, wireless telephone system operators, private networks built by large end users using dark fiber providers, and cable television companies that presently, and may in the future, offer services similar to those we offer. See “Risk Factors—The Class B Stockholders or their affiliates may compete with us.”

Wireless consolidation has affected the market for our services and may continue to do so. The acquisition of a wireless carrier by local exchange carriers has resulted in the disconnection of some services we previously provided to the wireless carrier and may result in additional disconnects in the future as that customer’s local service needs are met by its new parent companies. However, we believe that there may be future opportunities to provide services to that wireless carrier outside of its parent companies’ service areas.

Regulatory environments at both the state and federal level differ widely and have considerable influence on our market and economic opportunities and resulting investment decisions. We believe we must continually monitor regulatory developments and remain active in our participation in regulatory issues. Some regulatory decisions have or may in the future have negative impacts on our revenue or expenses, and may favor certain classes of competitors over us. See “Government Regulation.”

We believe that certain IXCs have and may continue to pursue alternatives to their practices with regard to obtaining local telecommunications services from ILECs and CLECs, including acquisition of their own facilities. SBC’s acquisition of AT&T, if consummated, could result in AT&T buying less local transport service from us in SBC’s service area in the long run, although we do not expect that the acquisition will materially affect our revenue over the next several years. The proposed Verizon acquisition of MCI could also result in MCI

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buying less local transport service from us in Verizon’s service areas if the transaction is completed. The same would likely be true in the Qwest service area if Qwest were to prevail in its competing bid for MCI. However, neither MCI’s purchases from us in the Verizon service area nor the Qwest service area are material to our revenue as a whole. In addition, IXCs may be able to provide local service by reselling the facilities or services of an ILEC or the services of another CLEC, which may be more cost effective for an IXC than using our services. We believe this alternative has become less attractive due to recent regulatory rulings limiting the availability of unbundled network elements.

To the extent we interconnect with and use ILEC networks to service our customers, we depend on the technology and capabilities of the ILECs to meet certain telecommunications needs of our customers and to maintain our service standards. We also use ILEC special access services to reach certain customer locations that are not served by our network. Special access service is the connection between a long distance carrier’s POP or some other point and an end-user’s premises provided over the dedicated transport facilities of a LEC. Although the 1996 Act imposes interconnection obligations on ILECs, the regulation of ILEC performance standards and the imposition of non-performance remedies is still developing and there is no assurance that we will be able to obtain all of the ILEC services we need on a timely basis or that the quality of service we receive will be acceptable. In the event that we experience difficulties in obtaining high-quality, reliable, and reasonably priced service from the ILECs, the attractiveness of certain of our services to our customers could be impaired.

Government Regulation

Historically, interstate and foreign communication services were subject to the regulatory jurisdiction of the Federal Communications Commission, or “FCC”, and intrastate and local telecommunications services were subject to regulation by state public service commissions. With enactment of the 1996 Act, competition in all telecommunications market segments, including local, toll, and long distance, became matters of national policy even though the states continue to have a significant role in administering policy. We believe that the national policy fostered by the 1996 Act has contributed to significant market opportunities for us. However, since 1996, various ILEC legal challenges and lobbying efforts have resulted in state and federal regulatory decisions affecting implementation of the 1996 Act that favor the ILECs and other competitors. Since federal and state regulatory commissions have largely implemented the provisions of the 1996 Act, we believe that future regulatory activity relating to the 1996 Act will focus largely on intercarrier compensation and network interconnection issues. Although we have described the principal regulatory factors that currently affect our business, the regulation of telecommunications services is still evolving and regulatory changes could occur in the future that we cannot presently anticipate.

Telecommunications Act of 1996.    The 1996 Act is intended to increase competition in local telecommunications services by requiring ILECs to interconnect their networks with CLECs. The 1996 Act imposes a number of access and interconnection requirements on all LECs, including CLECs, with additional requirements imposed on ILECs. Under the 1996 Act, ILECs are required to attempt to negotiate with CLECs that want to interconnect with their networks. We have negotiated interconnection agreements with the ILECs in each of the markets in which we offer switched services and have negotiated, or are negotiating, secondary interconnection arrangements with carriers whose territories are adjacent to ours for intrastate intraLATA toll traffic and extended area services. To the extent agreements have expired, we have either renegotiated or are in the process of negotiating new contracts. Typically, expired agreements allow us to continue to exchange traffic with the other carrier pending execution of a new agreement.

In August 1996, the FCC promulgated rules to govern interconnection, resale, dialing parity, unbundled network elements (“UNE”), and the pricing of those facilities and services, including the Total Element Long Run Incremental Cost (“TELRIC”) standard for UNEs. As part of its Triennial Review, the FCC has revised its rules relating to UNEs and has initiated a new rulemaking on TELRIC, as discussed below.

Reciprocal compensation revenue is an element of switched services revenue that represents compensation from LECs for local exchange traffic terminated on our facilities originated by other LECs. Historically, a

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portion of the reciprocal compensation revenue payable to us has resulted from the termination of calls to our ISP customers. As dial-up Internet traffic grew, ILECs challenged the requirement to pay reciprocal compensation for ISP-bound traffic under various legal theories.

In June 2001, the FCC reaffirmed its jurisdiction over dial-up Internet-bound traffic, and adopted an interim carrier-to-carrier cost recovery scheme for such traffic that phased in reductions on the maximum compensation rate for dial-up Internet-bound traffic over a three-year period beginning in 2001. The FCC’s order also imposed “bill and keep” payment arrangements for Internet-bound traffic as carriers enter new markets. “Bill and keep” means that neither carrier receives compensation from the other for Internet-bound traffic. The interim Internet-bound cost recovery rule has negatively impacted our revenue from reciprocal compensation. CLECs successfully challenged the FCC’s stated statutory basis for the Internet-bound traffic order in federal court in May 2002. However, the FCC’s order remained in effect pending further FCC action on the court’s remand. The outcome of the remand is uncertain. In October 2004, the FCC adopted an order that forbears from enforcing certain portions of its 2001 ISP-Bound Traffic Order. Under the 2001 order, the amount of ISP-bound traffic eligible for compensation was capped at 120% of eligible traffic for the first quarter of 2001 annualized; and no compensation for ISP-bound traffic was permitted for new markets entered after April 2001. The FCC has now determined that it is no longer in the public interest to apply these rules. The impact of this order on us is likely to be a slight positive in intercarrier compensation revenue.

Federal Regulation.    Switched access is the connection between a long distance carrier’s POP and an end user’s premises provided through the switching facilities of a LEC. Historically, the FCC has regulated the access rates imposed by the ILECs while the CLEC access rates have been less regulated. In May 2000, the FCC ordered a substantial reduction in ILEC per-minute access charges and an increase in the flat monthly charge paid by local residential service subscribers for access to interstate long distance service. The FCC also released an order effective in June 2001 that subjects CLECs’ interstate switched access charges to regulation. Effective with that order, our per-minute switched access rates were phased-down over a three-year period to parity with the ILEC rates competing in each of the Company’s market areas. The ILEC access reform decision, as well as the CLEC access charge regulations, resulted in reductions in the per-minute rates we received for switched access service for the period June 2001 through June 2004. The FCC issued an Order in May 2004 resolving several outstanding petitions that sought to clarify the original CLEC Access Charge Order. The implementation of these clarifications may result in further reductions to our switched access revenue.

The FCC recently adopted a Further Notice of Proposed Rulemaking as part of its intercarrier compensation reform proceeding initiated in 2001. This proceeding will be highly complex and controversial, and implementation of any resulting order is unlikely to be issued until mid-2005 at the earliest. Implementation of bill and keep or a unified rate across all forms of intercarrier compensation is likely to require a transition period of several years. The outcome of this proceeding could further reduce or eliminate our switched access revenue. There is no assurance that we will be able to compensate for these potential reductions with revenue from other sources. However, at this time we cannot predict the likely outcome of an FCC intercarrier compensation proceeding or the impact on our revenues and costs.

During 2001, the FCC initiated a Triennial Review of UNEs to determine which of these elements the ILECs must continue to provide under sections 251 and 252 of the 1996 Act. The FCC rendered a decision in February 2003, largely delegating to the states the determination of the availability of specific UNEs. The FCC established limits on competitors’ access to interoffice transport as a UNE and also limited CLEC access to ILEC broadband facilities as UNEs. Several parties appealed the FCC’s order, and in March 2004 the Fifth Circuit Court of appeals vacated certain aspects of it. In response to the Court’s decision, the FCC adopted permanent rules governing the availability of UNEs in December 2004. These rules set forth specific marketplace “triggers” that will eliminate the ILECs’ obligation to provide UNE-loop and UNE-transport in particular locations. Because we have used UNEs very minimally, we do not expect any material impact on our revenues or costs from this proceeding. The FCC also has pending a rulemaking, initiated in September 2003, to review TELRIC rules, which determine the prices for available UNEs.

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In January 2005, the FCC commenced a broad examination of the regulatory framework applicable to LECs’ pricing of interstate special access services after June 30, 2005. The outcome of this proceeding could have an impact on the costs the Company pays for off-net connectivity. If LEC price reductions were to occur, we would likely experience downward pressure on the prices we charge our customers for special access services and some reduction in the prices we pay LECs for special access services that we purchase.

In a February 1999 order, the FCC allowed for increases to commingled cable and telephony pole attachment rates beginning in February 2001. While we have seen some rate increases, there has been no significant impact to us to date. This order could result in future increases to our costs associated with pole attachments.

State Regulation.    We have obtained all state government authority needed to conduct our business as currently contemplated. Most state public service commissions require carriers that wish to provide local and other common carrier services provided within the state to be authorized to provide such services. Our operating subsidiaries and affiliates are authorized as common carriers in 24 states. These certifications cover the provision of switched services including local basic exchange service, point-to-point private line, competitive access services, and long distance services.

Local Government Authorizations.    We may be required to obtain from municipal authorities street opening and construction permits and other rights-of-way to install and expand our networks in certain cities. In some cities, our affiliates or subcontractors already possess the requisite authorizations to construct or expand our networks. Any increase in the difficulty or cost of obtaining these authorizations and permits could adversely affect us, particularly where we must compete with companies that already have the necessary permits.

In some of the metropolitan areas where we provide network services, we pay right-of-way or franchise fees based on a percentage of gross revenue or other metrics such as access lines. Municipalities that do not currently impose fees may seek to impose fees in the future, and following the expiration of existing franchises, fees may be increased. Under the 1996 Act, municipalities are required to impose such fees on a competitively neutral and nondiscriminatory basis. Municipalities that have fee structures that currently favor the ILECs may or may not conform their practices in a timely manner or without legal challenges by us or other CLECs. Moreover, ILECs with which we compete may be exempted from such local franchise fee requirements by previously-enacted legislation that allows the ILECs to utilize rights-of-way throughout their states without being required to pay franchise fees to local governments.

If any of our existing franchise or license agreements for a particular metropolitan area are terminated prior to their expiration date and we are forced to remove our fiber optic cables from the streets or abandon our network in place, even with compensation, such termination could have a material adverse effect on us.

We are party to various regulatory and administrative proceedings. Subject to the discussion above, we do not believe that any such proceedings will have a material adverse effect on our business.

Employees

As of December 31, 2004, we had 1,986 employees, compared to 2,009 employees at December 31, 2003. We believe that our relations with our employees are good. By succession to certain operations of Time Warner Cable, our operation in New York City is party to a collective bargaining agreement that covers certain of our technicians in New York City. We believe that our success will depend in part on our ability to attract and retain highly qualified employees and maintain good working relations with our current employees.

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RISK FACTORS

Risk Relating to Our Business

We may be unable to grow our revenue and cash flow despite the implementation of several initiatives designed to do so.

We must expand our business and revenue in order to generate sufficient cash flow that, together with funds available under the Company’s revolving credit facility, will be sufficient to fund our capital expenditures and our debt service requirements. In 2003 and 2004, we pursued several growth initiatives, including:

Our ability to manage this expansion depends on many factors, including our ability to:

There is no assurance that these initiatives will result in an improvement in our financial position or our results of operations. We have historically incurred net losses, and we expect those losses to continue for the foreseeable future.

Several customers account for a significant portion of our revenue, and some of our customer agreements may not continue due to bankruptcies or other factors.

We have substantial business relationships with a few large customers, especially other carriers. For the year ended December 31, 2004, our top ten customers accounted for approximately 33% of our total revenue. AT&T Corp., our largest customer for 2004, accounted for approximately 7% of our total revenue. Revenue from AT&T Corp. was $47.0 million for 2004 compared to $39.9 million in 2003. The highly competitive environment in the long haul carrier sector, including interexchange carriers, has challenged the financial condition and growth prospects of some of our carrier customers and could lead to further reductions in our revenue in the future. Replacing this revenue with new enterprise customer revenue may be difficult because individual enterprise customers tend to place smaller service orders than some of our larger carrier customers. In addition, pricing pressure on some of our more mature products may challenge our ability to grow our revenue.

Some of our service agreements with customers are subject to termination on short notice and do not require the customer to maintain the services at current levels. Customers may not continue to purchase the same services or level of services. We have experienced significant service disconnections since 2001 due to customer bankruptcies, customers contracting their operations, price competition from other carriers for certain services, and customers optimizing their existing networks in response to the economic downturn. A number of our customers are other telecommunications carriers and Internet service providers, which are sectors that have been particularly depressed over the past five years. In addition, there has been increasing consolidation in the telecommunications industry in recent years, and if any of our customers are acquired we may lose a significant portion of their business. We believe revenue from a wireless carrier customer that was recently acquired may decrease substantially in 2005 as a result of the acquisition. This customer accounted for approximately 4.5% of our revenue for the year ended December 31, 2004, some portion of which we may lose.

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A number of our customers have filed bankruptcy proceedings, including MCI. In connection with those proceedings, customers in bankruptcy may choose to assume or reject their contracts with us. If they choose to reject those contracts, our only recourse is an unsecured claim for rejection damages that is likely to result in little or no compensation to us for the lost revenue. We lost monthly revenue of approximately $14 million in 2002 and 2003, and approximately $10 million in the year ended December 31, 2004, due to customer disconnects and bankruptcies. We anticipate that customers will continue to disconnect services due to network optimization, cost cutting efforts, business contractions, consolidation and additional customer bankruptcies or other customer financial difficulties, but we cannot predict the total impact on revenue from these disconnections.

We will require substantial capital to expand our operations.

The development and expansion of our networks requires substantial capital investment. If this capital is not available when needed, our business will be adversely affected. Our 2004 capital expenditures were $171.8 million, and our estimate of our 2005 capital expenditures is $160 million to $175 million. We also expect to have substantial capital expenditures thereafter.

Our wholly-owned subsidiary has a senior secured revolving credit facility that, subject to certain conditions, allows us to borrow up to $150 million. We may be required to seek additional financing if:

If we were to seek additional financing, the terms offered may place significant limits on our financial and operating flexibility, or may not be acceptable to us. The failure to raise sufficient funds if needed and on reasonable terms may require us to modify or significantly curtail our business plan. This could have a material adverse impact on our growth, ability to compete, and ability to service our debt.

We may complete a significant business combination or other transaction that could increase our shares outstanding, affect our leverage, result in a change in control, or both.

We regularly evaluate potential acquisitions, joint ventures and other arrangements that would extend our geographic markets, expand our services, enlarge the capacity of our networks or increase the types of services provided through our networks. If we enter into a definitive agreement with respect to any acquisition, joint venture or other arrangement, we may require additional financing that could result in an increase in our leverage, result in a change of control, or both. A substantial transaction may require the consent of our lenders. There can be no assurance that we will enter into any transaction or, if we do, on what terms.

We have experienced reductions in switched access and reciprocal compensation revenue as a result of regulatory rate reform, and we may experience further such reductions in the future.

Over the past several years FCC regulations have reduced our interstate access revenue as well as our reciprocal compensation revenue associated with the exchange of dial-up ISP-bound traffic. The FCC is now considering proposals for an integrated intercarrier compensation regime under which all traffic, possibly including traffic subject to interstate access charges, would be subject to “bill and keep” (i.e., traffic would be exchanged without charge) or some other arrangement that would materially reduce our switched access or reciprocal compensation revenue. Such a regime would likely create an opportunity for us to recover some, but not all, lost intercarrier compensation revenue directly from end users. Switched access and reciprocal compensation together represented 12% of our 2002 revenue, 8% of our 2003 revenue, and 6% of our 2004

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revenue. Even without a significant change in FCC regulations, we anticipate that the contribution to revenue and Modified EBITDA from these services will continue to decline over time due to the decline in minutes terminated over our network as Internet service provider customers disconnect primary rate interface services. We cannot assure you that we will be able to compensate for the reduction in switched access and/or reciprocal compensation revenue with other revenue sources or increased volume.

Regulatory uncertainty surrounds the intercarrier compensation rates applicable to long distance voice traffic that originates or terminates in IP. The FCC is considering, but has not yet resolved, this issue in several pending proceedings. In the meantime, the uncertainty may give long distance carriers the incentive to disguise long distance traffic originating in traditional circuit-switched format and delivered to our network for termination as traffic that originated in IP. This is because some carriers believe that IP-originated traffic is subject to reciprocal compensation rather than higher priced interstate access charges. These actions could reduce incrementally our interstate access charge revenue and increase our risk with respect to such traffic terminated over local trunks.

We may be adversely affected by changes in the regulation of special access services.

We provide special access services in competition with incumbent local exchange carriers, or ILECs, and we also purchase special access services from incumbent local exchange carriers to extend the reach of our network. A significant change in the regulations governing special access services could result in either significant reductions in the special access prices charged by our ILEC competitors or in the elimination of regulations that increase the likelihood that ILECs will sell us special access on reasonable terms and conditions.

In 2002, AT&T Corp. filed a petition at the FCC asserting that ILEC special access prices are unreasonably high and that the FCC must prescribe lower rates while it conducts a proceeding to review the appropriate framework for regulating ILEC special access prices. On January 31, 2005, the FCC released an order in which it denied AT&T’s request that it prescribe lower rates and a notice of proposed rulemaking in which it proposes the adoption of new regulations that could eventually result in significant reductions in ILEC special access prices. If such price reductions were to occur, we would experience increased downward pressure on the prices we charge for special access services.

With respect to special access services that we purchase from ILECs, those carriers have argued before the FCC that their broadband services, including special access services, should no longer be subject to regulation governing price and quality of service. If the FCC were to adopt this proposal, ILECs would have a greater ability to increase the price and reduce the service quality of special access services they sell to us. In addition, we believe that the requirement that ILECs make available as unbundled network elements the same broadband loops and transport that we purchase as special access acts as a regulatory constraint on special access service offerings by ILECs. The FCC recently announced the adoption of, but has not yet released, new regulations governing the extent to which broadband loops and transport will continue to be available as unbundled network elements. We do not expect the new regulations to significantly reduce the availability of unbundled broadband loops and transport of the type we purchase as special access, but we expect the ILECs to appeal the FCC’s rules in an effort to reduce or eliminate their broadband unbundling obligations. If their appeal is unsuccessful, we also expect the ILECs to seek such relief in the future from the FCC. We cannot assure you that the ILECs’ broadband unbundling obligations will remain and, if eliminated, that we will continue to be able to obtain special access service on reasonable terms and conditions.

We may be adversely affected by changes to the Communications Act.

Congress will likely consider adopting significant revisions to the Communications Act this year. As part of that process, Congress is likely to consider proposals for new statutory provisions requiring intercarrier compensation reform (including the adoption of “bill and keep”) and the deregulation of incumbent local exchange broadband services (including the elimination of the incumbent local exchange carriers’ unbundling

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obligations and regulations governing special access services). The adoption of a new intercarrier compensation regime and the deregulation of ILEC broadband service would pose the risks described above regarding analogous FCC action.

The market for our services is highly competitive, and many of our competitors have significant advantages that may adversely affect our ability to compete with them.

We operate in an increasingly competitive environment and some companies may have competitive advantages over us. Most ILECS offer substantially the same services as we offer, in some cases at higher prices and in some cases at lower prices. Incumbent local exchange carriers benefit from:

We also face competition from other competitive local exchange carriers, or CLECs. We believe that weakness in the CLEC sector has led to price competition as certain competitors seek to increase their short-term revenue. 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.

We depend on key personnel for our current and future performance.

Our current and future performance depends to a significant degree upon the continued contributions of our senior management team and other key personnel. The loss or unavailability to us of any member of our senior management team or a key employee could significantly harm us. We cannot assure you that we would be able to locate or employ qualified replacements on acceptable terms for senior management or key employees if their services are no longer available.

We recorded an impairment charge in 2002 and may be required to record additional impairment charges in the future.

Under generally accepted accounting principles in the United States, or U.S. GAAP, we are required to review the carrying amounts of our assets to determine whether current events or circumstances warrant adjustments to those amounts. These determinations are based in part on our judgments regarding the cash flow potential of various assets, and involve projections that are inherently subject to change based on future events. If we conclude in the future that the cash flow potential of any of our assets is significantly less than we believed at the time of purchase, and that conclusion is based on a long-term rather than short-term trend, we may need to record an impairment charge. As a result of such an analysis, we recorded a non-cash impairment charge of $212.7 million in the fourth quarter of 2002 with respect to certain long haul network assets we acquired from GST Telecommunications, Inc. out of bankruptcy and certain other local network assets. Any additional impairment charges would have a negative impact on our earnings.

Terrorism or other business disruptions could affect our future operating results.

Our operating results and financial condition could be materially and adversely affected in the event of a catastrophic event such as a terrorist attack on the United States, or a major earthquake, fire, or similar event that affects our central offices, corporate headquarters, or network operations center. Although we have implemented measures that are designed to mitigate the effects of a catastrophic event, we cannot predict the impact of such events.

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We depend on third party vendors for information systems.

We have entered into agreements with vendors that provide for the development and operation of information technology systems such as provisioning and billing systems. The failure of those vendors to perform their services in a timely and effective manner at acceptable costs could have a material adverse effect on our operations and our ability to monitor costs, bill customers, provision customer orders, and achieve operating efficiencies.

If we do not adapt to rapid changes in the telecommunications industry, we could lose customers or market share.

The telecommunications industry continues to experience rapid and significant changes in technologies and architectures to deliver new services to customers. We expect that trend to continue into the foreseeable future. Additionally, we expect that these new technologies, such as voice over IP, will enable new applications that will facilitate new services both in the network as well as at customers’ premises. We believe that our future success will depend in part on our ability to anticipate or adapt to these changes and integrate them into the infrastructure and operations of our business, in order to offer on a timely basis a service that meets customer needs and demands. Our failure to obtain and integrate new technologies and applications could impact the breadth of our product portfolio resulting in product gaps, a less differentiated product suite and a less compelling offer to customers, as well as having a material adverse impact on our business, financial condition and results of operations.

We must obtain access to rights-of-way and pole attachments on reasonable terms and conditions.

The development, expansion, and maintenance of our networks depend on, among other things, our ability to obtain rights-of-way and pole attachments as well as certain governmental authorizations and permits. In order to compete effectively, we must obtain such rights, authorizations and permits in a timely manner, at reasonable costs, and on satisfactory terms and conditions. Any increase in the difficulty or cost of obtaining these rights, authorizations or permits could adversely affect us, particularly in areas where we must compete with companies that already have the necessary permits and access.

We currently license fiber optic capacity from Time Warner Cable and an affiliate of Advance/Newhouse in 23 of our markets, and we must reimburse Time Warner Cable and Advance/Newhouse for the license and franchise fees associated with the fiber optic capacity we license from them. In addition, in certain cities and municipalities where we provide network services over our own fiber optic facilities, we pay license or franchise fees for the use of public rights-of-way. The 1996 Act permits municipalities to charge these fees only if they are competitively neutral and nondiscriminatory, but certain municipalities may not conform their practices to the requirements of the 1996 Act in a timely manner or without legal challenge. We also face the risks that other cities may start imposing fees, fees will be increased, or franchises will not be renewed. Some of our franchise agreements also provide for increases or renegotiation of fees at certain intervals. Increases in fees may have a negative impact on our financial condition. Similarly, the owners of poles to which Time Warner Cable or Advance/Newhouse attach facilities for which we hold a license may seek to impose higher pole attachment fees, and we would be required to pay such increased fees. An increase in pole attachment fees could have a negative impact on our financial condition. Time Warner Cable and Advance/Newhouse may terminate our capacity license before expiration upon:

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If the capacity licenses are terminated prior to their scheduled expiration in 2028 or are not renewed, we may need to build, lease, or otherwise obtain fiber optic capacity. The terms of those arrangements may be materially less favorable to us than the terms of our existing capacity license. In addition, the capacity licenses prohibit us from offering residential services or content services utilizing the licensed capacity.

Changes in accounting standards regarding stock option plans could limit the desirability of granting stock options, which could harm our ability to attract and retain employees and would also negatively impact our results of operations.

The Financial Accounting Standards Board has issued Statement No. 123R, “Share-Based Payments,” or SFAS 123R, which requires all companies to treat the fair value of stock options granted to employees as an expense beginning July 1, 2005. Currently, we are generally not required to record compensation expense in connection with stock option grants. The attractiveness to us of granting stock options will be reduced because of the additional expense we will be required to record in connection with these grants, which will negatively impact our results of operations. For example, had we been required to expense stock option grants by applying the measurement provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” our recorded net loss for the year ended December 31, 2004 of $133.0 million and loss per share of $1.15 would have been a net loss of $169.3 million and loss per share of $1.46. Nevertheless, stock options are an important employee recruitment and retention tool, and we may not be able to attract and retain key personnel if we reduce the scope of our employee stock option program. Accordingly, after SFAS 123R becomes effective, our results of operations will be negatively impacted by our unvested options as of the date of adoption and further if we continue to use stock options as an employee recruitment and retention tool.

Risks Relating to Our Ownership Structure

We are controlled by the Class B Stockholders.

The Class B Stockholders, hold all the outstanding shares of our Class B common stock. At December 31, 2004, the Time Warner Inc. stockholder group held 71% of our voting power and 44% of our outstanding common stock, and the Advance/ Newhouse stockholder group held 22% of our voting power and 13% of the our outstanding common stock. The Class B Stockholders generally have the collective ability to control all other matters requiring stockholder approval.

Our Board of Directors consists of nine director positions. Under a stockholders’ agreement, the Time Warner Inc. stockholder group has the right to designate four members for the board of directors, the Advance/Newhouse stockholder group has the right to designate one member, and the Class B Stockholders have the power to elect the other members of the board.

Circumstances could arise in which the interests of the Class B Stockholders, as equity holders, could conflict with the interests of our Class A Stockholders. In addition, the Class B Stockholders may have an interest in pursuing acquisitions, divestitures and financings that could, in their judgment, enhance their investment, even though such transactions could impose risks on our Class A Stockholders.

Time Warner Inc. can sell control of us at any time, and sales by the Class B Stockholders could adversely affect us.

The stockholders’ agreement among the Class B Stockholders provides that, subject to the rights of first refusal of the other holders of Class B common stock, the Class B Stockholders may transfer their Class B common stock. If a holder sells all, but not less than all, of its Class B common stock as shares of Class B common stock, such holder may transfer its right to nominate Class B nominees for election to the board of directors. In addition, Advance/Newhouse has the right to participate in certain sales by the Time Warner Inc. stockholder group of its Class B common stock and any Class A common stock Time Warner Inc. may own, or Advance/Newhouse may elect to sell its shares at any time in an unrelated transaction.

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Time Warner Inc. has publicly engaged in de-leveraging initiatives, including the sale of non-strategic assets, and has indicated to us that it does not consider its investment in us to be strategic. Time Warner Inc. has informed us that, as part of its de-leveraging initiatives, it may monetize its investment in us in the future. A sale by Time Warner Inc. of some or all of its shares of our stock could adversely affect us in a variety of ways depending on the size of the transaction and whether it is done in the form of a sale of Class B common stock to a third party or as a sale of Class A common stock. For example, if Time Warner Inc. owned less than 30% of the our equity as a result of a transaction, we would be required to change our name to one such as “TW Telecom” or some other name that does not include “Time Warner.” Such a transaction could also trigger a requirement that we repurchase certain debt obligations. The sale of common stock by the Class B Stockholders could have other adverse impacts on our business that we cannot predict at this time. We do not know when, if ever, Time Warner Inc. or Advance/Newhouse may engage in any such transaction.

Each of the Class B Stockholders has veto rights over certain actions.

Under our restated certificate of incorporation, as long as the outstanding Class B common stock represents at least 50% of the aggregate voting power of both classes of common stock outstanding, the approval of 100% of the Class B Stockholders is required:

The approval of 100% of the Class B Stockholders also is required for the issuance of any additional shares of Class B common stock or any capital stock having more than one vote per share.

The Class B Stockholders and their affiliates may compete with us.

Both Time Warner Inc. and Advance/Newhouse are diversified communications providers. They are not restricted from competing with us. We are aware that an affiliate of Time Warner Inc. offers Internet access and data services for smaller business customers that we believe are functionally, but not technologically, similar to services that we offer and that Time Warner Cable has competed with us to gain business customers for transport services in some of our markets. They may, now or in the future, provide these or other services in competition with our services. On the other hand, a provision in our capacity license agreement with Time Warner Cable precludes us, until 2028, from utilizing fiber capacity licensed from Time Warner Cable or Advance/Newhouse to offer any residential services or providing any entertainment, information or content services without the consent of the Class B Stockholders in the service areas in which we license capacity from the Class B Stockholders. Our business may be adversely affected if the Class B Stockholders or their affiliates chose to offer additional competing services.

Some of our directors may have conflicts of interest.

Some of our directors are also directors, officers, or employees of the Class B Stockholders or their affiliates. Although these directors have fiduciary obligations to us under Delaware law, they may face conflicts of interest. For example, conflicts of interest may arise with respect to certain business opportunities available to, and certain transactions involving, us. The Class B Stockholders have not adopted any special voting procedures to deal with such conflicts of interest. The resolution of these conflicts may be unfavorable to us. Our restated certificate of incorporation provides for the allocation of corporate opportunities between the Class B Stockholders and us.

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Executive Officers of the Registrant

The following table sets forth information concerning the individuals who serve as our executive officers.

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Item 2.    Properties

We lease network hub sites and other facility locations and sales and administrative offices, including some from Time Warner Cable and from Bright House Networks, LLC, in each of the cities in which we operate networks. During 2004, 2003, and 2002, rental expense for our facilities and offices totaled approximately $28.5 million, $29.6 million, and $29.7 million, respectively. We believe that our properties, taken as a whole, are in good operating condition and are adequate for our business operations. We currently lease approximately 104,000 square feet of space in Littleton, Colorado, where our corporate headquarters are located, and approximately 130,000 square feet of space in Greenwood Village, Colorado, and approximately 40,000 square feet of space in Englewood, Colorado, where our national operations center and other administrative functions are located.

Item 3.    Legal Proceedings

We are party to various claims and legal and regulatory proceedings in the ordinary cause of business. We do not believe that these claims or proceedings, individually or in the aggregate, are material or will have a material adverse effect on our business, financial condition, or results of operations.

Item 4.    Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended December 31, 2004.

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PART II

Market Information

Our Class A common stock has traded on the Nasdaq National Market under the symbol “TWTC” since May 12, 1999. The following table sets forth the high and low sales prices for the Class A common stock for each of the quarters of 2004 and 2003 as reported on the Nasdaq National Market:

Dividends

We have never paid or declared any dividends and do not anticipate paying any dividends in the foreseeable future. The decision whether to pay dividends will be made by our Board of Directors in light of conditions then existing, including our results of operations, financial condition and requirements, business conditions, covenants under loan agreements and other contractual arrangements, and other factors. In addition, the indentures for our four series of Senior Notes and the credit agreement governing our revolving credit facility contain covenants that effectively prevent us from paying cash dividends on our common stock for the foreseeable future.

Number of Stockholders

As of February 28, 2005, there were 359 holders of record of our Class A common stock, and six holders of record of the Class B common stock, including four wholly owned subsidiaries of Time Warner Inc., Advance Telecom Holdings Corporation and Newhouse Telecom Holdings Corporation. We believe that there are in excess of 14,000 beneficial owners of our Class A common stock.

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Item 6.    Selected Financial Data

Selected Consolidated Financial and Other Operating Data

The following table is derived in part from our audited consolidated financial statements. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited consolidated financial statements and the notes thereto.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis in conjunction with our audited consolidated financial statements, including the notes thereto, appearing elsewhere in this report.

Overview

We are a leading provider of managed network solutions to a wide range 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, and federal, state and local government entities. 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 December 31, 2004, the Class B Stockholders had approximately 93% of the combined voting power of the outstanding common stock.

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 for fiscal years ended 2004 and 2003 breaks down as follows:

As of December 31, 2004, our fiber networks spanned 19,169 route miles and contained 917,461 fiber miles. We offered service to 5,074 buildings served entirely by our facilities (on-net) and 14,139 buildings through the use of another carrier’s facilities to provide a portion of the link (off-net). We continue to expand our footprint within our existing markets by connecting our network into new buildings. We have also expanded our IP backbone data networking capability between markets supporting end-to-end Ethernet connections for customers and have also selectively interconnected existing service areas within regional clusters with fiber optic facilities that we own or lease. In addition, we provide on-net inter-city switched services that provide customers the ability to offer a virtual presence in a remote city.

The key elements of our business strategy include:

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Our annual revenue increased from $55.4 million in 1997 to $737.7 million in 2001. In early 2001, general economic conditions and the downturn in the telecommunications sector began to negatively impact our revenue. Our revenue decreased 6% in 2002 to $695.6 million from 2001 and decreased 4% in 2003, to $669.6 million from 2002 and declined 2% in 2004, to $653.1 million. The decline in revenue resulted from customer disconnects, including service disconnections by our largest customer, MCI, and from a decrease in intercarrier compensation, as more fully explained later in this section.

Revenue from MCI, which filed for Chapter 11 bankruptcy protection in July 2002, totaled $29.9 million in 2004 (including a $2.3 million settlement) compared to $55.9 million in 2003, including $14.3 million resulting from the settlement with MCI that is discussed below. In September 2003, as part of the MCI bankruptcy proceedings, we completed a settlement with MCI that resolved a number of open disputes and claims (the “MCI Settlement”), including amounts payable to and from each party. The settlement provides for the continued effectiveness of the Master Capacity Agreement under which MCI purchases services from us. As a result of the settlement, we recognized $7.4 million in previously deferred revenue and reversed $15.1 million in expenses in 2003 that had previously been recorded because of uncertainties created by the bankruptcy process. The settlement also provided us an allowed damage claim against MCI for contract rejections that would have been payable after the confirmation of MCI’s bankruptcy plan. In 2003, we monetized and recognized as revenue this claim by selling it to a third party for approximately $6.9 million in cash.

We continue to experience customer disconnects primarily associated with the overall economic environment, industry consolidation and continued customer network optimization. In 2003, we lost monthly revenue of approximately $13.3 million due to customer disconnects and bankruptcies, including $3.6 million related to MCI. Disconnects in 2004 resulted in the loss of approximately $10.1 million in monthly revenue. While we expect that other customers will continue to disconnect services due to network optimization, cost cutting, business contractions, consolidations, bankruptcies or other customer financial difficulties, or price competition from other providers, we cannot predict the total impact on revenue from these disconnects.

There has been increasing consolidation in the telecommunications industry in recent years, and if any of our customers are acquired, we may lose a portion of their business, which could be significant. We believe that revenue from a wireless carrier that was recently acquired may decrease significantly in 2005 as a result of the acquisition. This customer accounted for approximately 4.5% of our revenue for the year ended December 31, 2004, some portion of which we may lose. The acquisition of MCI by Verizon Communications Inc. or Qwest Communications International Inc. could result in MCI buying less local transport service from us in Verizon’s or Qwest’s service area if a transaction is completed. However, MCI’s purchases from us in each of the respective Verizon or Qwest service areas accounted for less than 1% of our revenue for the year ended December 31, 2004. SBC’s acquisition of AT&T, if consummated, could result in AT&T buying less local

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transport service from us in SBC’s service area in the long run, although we do not expect that the acquisition will materially affect our revenue over the next several years. AT&T’s purchases from us in SBC’s service area accounted for less than 4% of our revenue for the year ended December 31, 2004.

Our revenue and margins may also be reduced as a result of price-cutting by other CLECs and telecommunications service providers. Revenue growth and margins may also be adversely impacted by pricing pressure on our more mature products, especially as existing contracts expire and we negotiate renewals.

Customers that have filed for bankruptcy or have experienced other financial difficulties have impacted our bad debt expense over the last few years. Bad debt expense as a percentage of revenue increased from 3% in 2000 to 5% in 2002. The Company had essentially no bad debt expense for 2003 and 2004 due to the recovery of expenses previously recorded from the MCI bankruptcy that were reversed as a result of the settlements. Excluding the impact of the settlements of $15.1 million and $2.3 million, bad debt expense decreased to 2% of revenue for 2003 and 0% of revenue for 2004 due to successful collection efforts and a reduction in receivable write-offs related to customer bankruptcies. The improved collections experienced in 2003 and 2004 were the result of added controls, including more stringent credit reviews on new and existing customers, collecting deposits on higher risk accounts, and more aggressive collection efforts. Although we have experienced a continued improvement in bad debt expense, there is no assurance that this trend will continue.

Intercarrier Compensation Revenue and Expense

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 FCC ruling reduced rates and capped the number of minutes for which ISP-bound traffic can be compensated. This ruling further reduced rates 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. Reciprocal compensation represented 3% and 4% of revenue for the years ended December 31, 2004 and 2003, respectively. The FCC has commenced further rulemaking proceedings on intercarrier compensation that we do not expect will result in an order until later in 2005. At this time, we cannot predict the outcome of that proceeding or its potential impact on our reciprocal compensation revenue, but we believe that a continuation of the downward trend is more likely than future increases.

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 ILECs, while the access rates of CLECs have been less regulated. In June 2001, the FCC began regulating CLECs’ interstate switched access charges. Our rates were reduced pursuant to that order and continued to decline through June 2004 to parity with the rates of the ILEC in each of our service areas. In addition, when a CLEC enters a new market, its access charges may be no higher than the ILEC’s. We experienced mandatory rate decreases in June 2004 and expect that switched access revenue will continue to decline as a percentage of revenue due to anticipated future rate reductions. Switched access revenue represented 3% and 4% of revenue for the years ended December 31, 2004 and 2003, respectively.

Regulatory uncertainty surrounds the appropriate intercarrier compensation rates applicable to VoIP traffic that originates and terminates in different local service areas and whether it is subject to local access charges, which are significantly higher than the reciprocal compensation rates currently charged. The FCC is considering, but has not yet resolved this issue in several pending proceedings. In the interim, carriers may hand off voice traffic to us or other carriers as IP traffic under the belief that IP traffic is subject to reciprocal compensation rather than higher priced interstate access charges. These actions could reduce incrementally our access charge revenue and increase our risk with respect to such traffic terminated over local trunks.

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Related Parties

In the normal course of business, we engage in various transactions with affiliates of our Class B Stockholders, generally on negotiated terms among the numerous affected operating units that, in management’s view, result in reasonable arms-length terms. We benefit from our relationship with Time Warner Cable both through access to local rights-of-way and construction cost sharing. We have similar arrangements with a partnership owned by affiliates of our Class B Stockholders that is currently managed by Bright House Networks LLC (“Bright House”), an affiliate of Advance/Newhouse. We have constructed 23 of our 44 metropolitan networks substantially through the use of fiber capacity licensed from Time Warner Cable or Bright House. As of December 31, 2004, our property, plant, and equipment included $188.1 million in licenses of fiber capacity pursuant to the 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 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 Time Warner Inc. and from Bright House for office rent, utilities, and other administrative costs. We also benefit 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. We provide dedicated transport services, switched services and data and Internet services to affiliates of Time Warner Inc. and Bright House. Revenue for services we provided to Time Warner Inc. affiliates and Bright House was $19.0 million and $0.9 million, respectively, for the year ended December 31, 2004. We expect that revenue from the ISP portion of Time Warner’s business will decline in the future as Time Warner’s affiliates use more of their own facilities. Operating and selling, general, and administrative expenses for amounts paid to Time Warner Cable and Bright House were $6.0 million and $0.9 million for the year ended December 31, 2004, respectively.

Critical Accounting Policies and 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:

Impairment of Long-lived Assets

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 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 including market growth rates, future pricing, market acceptance of our products and services and the future capital investments necessary.

If we were to change assumptions in such a way as to reduce the amount of future cash flows expected from any particular asset, in some cases we would be required to recognize asset impairment losses in our results of

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operations. For example, a hypothetical 10% reduction in the projected Modified EBITDA for each market would result in an asset impairment of approximately $6 million, and a 20% reduction would result in an impairment of approximately $38 million as of December 31, 2004.

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. A 10% unfavorable change in the estimates used for such reserves would result in a $12 million increase in net loss.

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 net operating loss carryforwards 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 establish a valuation allowance for the amount that may not be realized. At December 31, 2004, our net deferred tax asset after a valuation allowance of $233.3 million was $58.8 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.

Stock-based Compensation

We have elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”), and related interpretations in accounting for our employee stock options. Under APB 25, because the exercise price of our 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. 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. We elected not to adopt SFAS 123 for expense recognition purposes.

In December 2004, the Financial Accounting Standards Board, (“FASB”) issued Statement No. 123R, Share-Based Payments, (“SFAS 123R”). The statement is effective for us as of July 1, 2005. The statement requires recognition of compensation cost in financial statements for all share-based payments (including employee stock options) at fair value. SFAS 123R applies to all future grants, as well as the unamortized expense as of June 30, 2005 related to existing grants. As of December 31, 2004, we had approximately $20 million of unamortized expense related to existing stock option grants that will be recognized over the remaining vesting period of up to 4 years, beginning in our 3rd fiscal quarter of 2005.

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We are currently evaluating our total compensation strategy, including the use of stock-based compensation. We may choose to employ compensation vehicles other than stock options in the future as part of our overall strategy. Our stock option expense under SFAS 123 as disclosed in the pro-forma disclosure in Item 8, Note 1 of our consolidated financial statements has a significant pro-forma impact to our results of operations and has been impacted by the high volatility of our stock price. We cannot yet quantify the impact SFAS 123R will have to our results of operations in the future since this will depend on our equity compensation strategy, number of shares granted and the volatility of our stock price.

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. As such, 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 an allowance for doubtful accounts based on expected collection of our receivables. Our estimates are based on assumptions and other considerations, including payment history, credit ratings, customer financial performance, industry financial performance and aging analysis.

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.

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Results of Operations

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