THE MANAGEMENT'S DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS QUARTERLY REPORT INCLUDE "FORWARD-LOOKING" STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE SUBJECT TO FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING AND NEW COMPETITORS, (3) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS THAT IMPACT OUR INDUSTRY AND MARKETS,
(4) THAT NEEDED FINANCING WILL NOT BE AVAILABLE TO US IF AND AS NEEDED, (5) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S. ECONOMY WILL OCCUR SUCH THAT THERE IS A MATERIAL IMPACT ON CONSUMER AND CORPORATE SPENDING,
(6) THAT WE WILL NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS, THAT WE MAY HAVE DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES, OR THAT THE COST OF SUCH INTEGRATION WILL BE GREATER THAN WE EXPECT, AND (7) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR, AS WELL AS THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2008, AND OUR OTHER FILINGS WITH THE SEC. THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN. FORWARD-LOOKING STATEMENTS RELATING TO EXPECTATIONS ABOUT FUTURE RESULTS OR EVENTS ARE BASED UPON INFORMATION AVAILABLE TO US AS OF TODAY'S DATE, AND WE DO NOT ASSUME ANY OBLIGATION TO UPDATE ANY OF THESE STATEMENTS

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

Overview

We were formed as a Delaware corporation in September 1998 and began trading publicly on the Nasdaq National Market in December 2003. We are a fully integrated provider of video, voice, data and advanced communications services to residential and business customers in ten markets in the Southeastern United States and two markets in the Midwestern United States. We provide a full suite of video, voice and data services in Dothan, Huntsville and Montgomery, Alabama; Panama City and portions of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; Knoxville, Tennessee; and Rapid City and Sioux Falls, South Dakota, as well as portions of Minnesota and Iowa. Our primary business is the delivery of bundled communication services over our own network. In addition to our bundled package offerings, we sell these services on an unbundled basis.

We have built our business through:

• construction and expansion of our broadband network to offer integrated video, voice and data services;

• organic growth of connections through increased penetration of services to new marketable homes and our existing customer base, along with new service offerings;

• upgrades of acquired networks to introduce expanded broadband services including bundled video, voice and data services; and

• acquisitions of other broadband companies.

The following is a discussion of our consolidated financial condition and results of operations for the six months ended June 30, 2009, and certain factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q.

Acquisition

On January 4, 2008, the Company completed its acquisition of all of the outstanding stock of Graceba Total Communications Group, Inc. ("Graceba"), a voice, video and high-speed Internet broadband services provider in Dothan, Alabama. The Company used the proceeds of the $59.0 million First Amendment to the Amended and Restated Credit Agreement and cash on hand to fund the $75.0 million purchase price. The financial position and results of operations for Graceba are included in the Company's consolidated statements since the date of acquisition. The acquisition has been accounted for in accordance with Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations." The total purchase price for the assets acquired, net of liabilities assumed and including direct acquisition costs, was $75.1 million.

Homes Passed and Connections

We report homes passed as the number of residential and business units, such as single family homes, apartments and condominium units, passed by our broadband network and listed in our database. Marketable homes passed are homes passed other than those we believe are covered by exclusive arrangements with other providers of competing services. Because we deliver multiple services to our customers, we report the total number of connections for video, voice and data rather than the total number of customers. We count each video, voice or data purchase as a separate connection. For example, a single customer who purchases cable television, local telephone and Internet access services would count as three connections. We do not record the purchase of digital video services by an analog video customer as an additional connection. As we continue to sell bundled services, we expect more of our video customers to purchase voice, data and other enhanced services in addition to video services. Accordingly, we expect that our number of voice and data connections will grow faster than our video connections and will represent a higher percentage of our total connections in the future.

The following table summarizes the number of marketable homes passed and connections as of June 30, 2008 and 2009.

                                                  June 30,
                                              2008        2009
                  Connections:(1)
                  Video                       229,026     231,050
                  Voice:
                  On-net                      240,445     247,185
                  Off-net                       5,936         526
                  Data:
                  High Speed Data             186,126     199,129
                  Dial-up                       2,387       1,455

                  Total connections           663,920     679,345

                  Residential connections     565,418     574,973
                  Business connections         98,502     104,372
                  Homes passed              1,124,725   1,171,960
                  Marketable homes passed     915,313     927,576

(1) All of our video connections are provided over our networks. Our voice and data connections consist of both "On-net" and "Off-net" connections. On-net refers to lines provided over our networks. Off-net refers to voice or data connections provided over lines leased from third parties.

Critical Accounting Policies

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. See our consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2008, which contains accounting policies including those that may involve a higher degree of judgment and complexity and other disclosures required by accounting principles generally accepted in the United States.

Revenues

Our operating revenues are primarily derived from monthly charges for video, voice and Internet data services and other services to residential and business customers. We provide these services over our network. Our products and services involve different types of charges and in some cases several methods of accounting for or recording revenues. Below is a description of our significant sources of revenue:

• Video revenues. Our video revenues consist of fixed monthly fees for expanded basic, premium and digital cable television services, as well as fees from pay-per-view movies, fees for video-on-demand and events such as boxing matches and concerts that involve a charge for each viewing. Video revenues accounted for approximately 42.8% and 43.2% of our consolidated revenues for the three and six months ended June 30, 2009, respectively, compared to 42.1% and 41.9% for the three and six months ended June 30, 2008, respectively.

• Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local service and enhanced services, such as call waiting, voice mail and measured and flat rate long-distance service. Voice revenues accounted for approximately 31.3% of our consolidated revenues for the three and six months ended June 30, 2009, compared to 33.8% and 34.0% for the three and six months ended June 30, 2008, respectively.

• Data revenues. Our data revenues consist primarily of fixed monthly fees for data service and rental of cable modems. Data revenues accounted for approximately 22.8% and 23.1% of our consolidated revenues for the three and six months ended June 30, 2009, respectively, compared to 22.7% and 22.5% for the three and six months ended June 30, 2008, respectively.

• Other revenues. Other revenues result principally from broadband carrier services. Other revenues accounted for approximately 3.1% and 2.4% of our consolidated revenues for the three and six months ended June 30, 2009, respectively, compared to 1.4% and 1.5% for the three and six months ended June 30, 2008, respectively.

Our ability to increase the number of our connections and, as a result, our revenues is directly affected by the level of competition we face in each of our markets with respect to each of our service offerings:

• In providing video services, we currently compete with Bright House, Charter, Comcast, Mediacom, MidContinent Communications and Time Warner. We also compete with certain local telephone companies offering video programming such as AT&T, CenturyTel, and Verizon, in addition to satellite television providers such as DirecTV and EchoStar. Our other competitors include broadcast television stations and other satellite television companies. We expect in the future to face additional competition from telephone companies providing video services within their service areas.

• In providing local and long-distance telephone services, we compete with the incumbent local phone company and various long-distance providers in each of our markets. AT&T, CenturyTel, Qwest Communications and Verizon are the incumbent local phone companies in our markets. They offer both local and long-distance services in our markets and are particularly strong competitors. We also compete with providers of long-distance telephone services, such as AT&T, Embarq (formerly Sprint) and Verizon. We also expect to compete with Vonage Holding Company, Comcast and other providers who offer Voice over Internet Protocol ("VoIP") services .

• In providing data services, we compete with cable television companies, incumbent local exchange carriers that provide DSL and dial-up services, and satellite and other wireless Internet acess service providers.

• Some of our competitors have competitive advantages such as greater experience, resources, marketing capabilities and stronger name recognition.

Costs and Expenses

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

Direct costs of services include:

• Direct costs of video services. Direct costs of video services consist primarily of monthly fees to the National Cable Television Cooperative and other programming providers. Programming costs are our largest single cost and we expect this trend to continue. Programming costs as a percentage of video revenue were approximately 51.6% and 52.3% for the three and six months ended June 30, 2009, respectively, compared to 52.0% and 53.2% for the three and six months ended June 30, 2008, respectively. We have entered into contracts with various entities to provide programming to be aired on our network. We pay a monthly fee for these programming services, generally based on the average number of subscribers to the program, although some fees are adjusted based on the total number of subscribers to the system and/or the system penetration percentage. Since programming cost is partially based on numbers of subscribers, it will increase as we add more subscribers. It will also increase as costs per channel increase over time.

• Direct costs of data services. Direct costs of data services consist primarily of transport cost and network access fees. The direct cost of data services as a percentage of data revenue was approximately 6.9% and 6.7% for the three and six months ended June 30, 2009, respectively, compared to 5.8% and 5.6% for the three and six months ended June 30, 2008, respectively.

• Direct costs of other services. Direct costs of other services consist primarily of transport cost and network access fees. The direct cost of other services as a percentage of other revenue was approximately 18.8% and 18.9% for the three and six months ended June 30, 2009, respectively, compared to 15.6 and 15.2% for the three and six months ended June 30, 2008, respectively.

• Pole attachment and other network rental expenses. Pole attachment and other network rental expenses consist primarily of pole attachment rents paid to utility companies for space on their utility poles to deliver our various services and network hub rents. Pole attachment and other network rental expenses as a percentage of total revenue was approximately 1.2% for the three and six months ended June 30, 2009, compared to 1.2% and 1.3% for the three and six months ended June 30, 2008, respectively.

Relative to our current product mix, we expect voice and data revenue will become larger percentages of our overall revenue and potentially will provide higher gross profits. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of our consolidated revenues will decrease.

Selling, general and administrative expenses include:

• Sales and marketing expenses. Sales and marketing expenses include the cost of sales and marketing personnel and advertising and promotional expenses.

• Network operations and maintenance expenses. Network operations and maintenance expenses include payroll and departmental costs incurred for network design, 24 hours a day, seven days a week maintenance monitoring and plant maintenance activity.

• Service and installation expenses. Service and installation expenses include payroll and departmental costs incurred for customer installation and service technicians.

• Customer service expenses. Customer service expenses include payroll and departmental costs incurred for customer service representatives and customer service management, primarily at our centralized call center.

• General and administrative expenses. General and administrative expenses consist of corporate and subsidiary management and administrative costs.

Depreciation and amortization expenses include depreciation of our interactive broadband networks and equipment and amortization of costs in excess of net assets and other intangible assets related to acquisitions.

As our sales and marketing efforts continue and our networks expand, we expect to add customer connections resulting in increased revenue. We also expect our cost of services and operating expenses to increase as we add connections and grow our business.

Results of Operations

Three months ended June 30, 2009 compared to three months ended June 30, 2008

The following table sets forth financial data as a percentage of operating
revenues for the three months ended June 30, 2008 and 2009.



                                                           Three months ended
                                                                June 30,
                                                          2008            2009
  Operating revenues:
  Video                                                       42 %            43 %
  Voice                                                       34              31
  Data                                                        23              23
  Other                                                        1               3

  Total                                                      100             100
  Operating expenses:
  Direct costs                                                30              32
  Selling, general and administrative                         39              36
  Depreciation and amortization                               24              21

  Total                                                       93              89

  Operating income                                             7              11
  Interest income                                              0               0
  Interest expense                                           (11 )            (9 )
  Gain on interest rate swaps                                  0               3
  Amortization of deferred loss on interest rate swaps         0              (4 )
  Other income, net                                            0               0

  Total other expense                                        (11 )           (10 )

  Income (Loss) from continuing operations                    (4 )             1

  Net income (loss)                                           (4 )             1

Revenues. Operating revenues increased 5.7% from $102.1 million for the three months ended June 30, 2008, to $107.9 million for three months ended June 30, 2009. Operating revenues from video services increased 7.4% from $43.0 million for the three months ended June 30, 2008, to $46.2 million for the same period in 2009. Operating revenues from voice services decreased 2.0% from $34.5 million for the three months ended June 30, 2008, to $33.8 million for the same period in 2009. Operating revenues from data services increased 6.3% from $23.2 million for the three months ended June 30, 2008, to $24.6 million for the same period in 2009. Operating revenues from other services increased 128.7% from $1.4 million for the three months ended June 30, 2008, to $3.3 million for the same period in 2009.

The increased revenues are due primarily to price increases and an increase in the number of connections, from 663,920 as of June 30, 2008, to 679,345 as of June 30, 2009. The increase in operating revenues from other services contained $1.3 million of fiber sales recorded during the second quarter of 2009. In addition, revenue was positively impacted by approximately $1.2 million in the second quarter 2009 due to a change in the reporting of universal service fees compared to the same period last year. The additional connections resulted primarily from:

• continued growth in our bundled customers;

• continued strong growth in business sales; and

• continued penetration in our mature markets.

Direct Costs. Direct costs increased 11.1% from $30.7 million for the three months ended June 30, 2008, to $34.1 million for the three months ended June 30, 2009. Direct costs of video services increased 6.5% from $22.4 million for the three months ended June 30, 2008, to $23.8 million for the same period in 2009. Direct costs of voice services increased 21.4% from $5.5 million for the three months ended June 30, 2008, to $6.7 million for the same period in 2009. Direct costs of data services increased 26.8% from $1.3 million for the three months ended June 30, 2008, to $1.7 million for the same period in 2009. Direct costs of other services increased 175.7% from $225,000 for the three months ended June 30, 2008, to $619,000 for the same period in 2009. Pole attachment and other network rental expenses remained relatively flat at $1.3 million for the three months ended June 30, 2008 and 2009. We expect our cost of services to increase as we add more connections. The increase in direct costs of video services are primarily due to programming costs increases, which have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. Further, local commercial television broadcast stations are charging retransmission fees beginning in 2009, similar to fees charged by other program providers. We expect the trend of annual increases to continue and we may not be able to pass these higher costs on to customers because of competitive factors, which could adversely affect our cash flow and gross profit. We expect increases in voice, data and other direct costs of services with the additions of leased facilities used to backhaul our traffic to our switching facilities as connections and data capacity requirements increase.

Selling, general and administrative expenses. Our selling, general and administrative expenses decreased 3.4% from $40.1 million for the three months ended June 30, 2008, to $38.7 million for the three months ended June 30, 2009. The decrease in our operating costs, included in selling, general and administrative expenses consists mainly of decreases in salaries and wages, employee benefits, sales and marketing, gas for vehicles, billing expense, and travel costs due to the lack of non-recurring charges associated with the integration of PrairieWave Holdings, Inc. ("PrairieWave") and Graceba, included in selling, general and administrative expenses for the three months ended June 30, 2008. These decreases were partially offset by increases in vehicles lease expense, professional services related mainly to consulting costs, and hub utilities. Our non-cash stock option compensation expense, included in selling, general and administrative expenses, increased from $1.3 million for the three months ended June 30, 2008, to $1.5 million for the three months ended June 30, 2009 as a result of the issuance of additional stock awards.

Depreciation and amortization. Our depreciation and amortization decreased from $23.8 million for the three months ended June 30, 2008, to $22.9 million for the three months ended June 30, 2009 primarily due to the maturing of our asset base.

Interest expense. Interest expense decreased from $11.7 million for the three months ended June 30, 2008, to $9.7 million for the three months ended June 30, 2009. The decrease in interest expense is primarily a result of the decline in interest rates on our term loan due to the PrairieWave acquisition and the incremental loan due to the Graceba acquisition. As discussed in the Notes to the Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008, the Company no longer qualifies to use hedge accounting for our interest rate swaps on these debts and we recorded $4.6 million in amortization of deferred loss associated with these derivative instruments for the three months ended June 30, 2009. A gain of $3.0 million was recorded on the value of the interest rate swaps for the three months ended June 30, 2009 as a result of the decrease in the market value of the liability representing the derivative instruments.

Net loss. We incurred a net loss of $4.0 million and net income of $1.3 million for the three months ended June 30, 2008, and 2009, respectively.

Six months ended June 30, 2009 compared to six months ended June 30, 2008

The following table sets forth financial data as a percentage of operating revenues for the six months ended June 30, 2008 and 2009.

                                                             Six months ended
                                                                 June 30,
                                                            2008          2009
    Operating revenues:
    Video                                                      42 %          43 %
    Voice                                                      34            31
    Data                                                       23            23
    Other                                                       1             3

    Total                                                     100           100
    Operating expenses:
    Direct costs                                               31            31
    Selling, general and administrative                        38            37
    Depreciation and amortization                              23            21

    Total                                                      92            89

    Operating income                                            8            11
    Interest income                                             0             0
    Interest expense                                          (12 )          (9 )
    Gain on interest rate swaps                                 0             2
    Amortization of deferred loss on interest rate swaps        0            (4 )
    Other income, net                                           0             0

    Total other expense                                       (12 )         (11 )

    Loss from continuing operations                            (4 )          (0 )

    Net loss                                                   (4 )          (0 )

Revenues. Operating revenues increased 4.5% from $203.5 million for the six months ended June 30, 2008, to $212.6 million for six months ended June 30, 2009. Operating revenues from video services increased 7.5% from $85.3 million for the six months ended June 30, 2008, to $91.8 million for the same period in 2009. Operating revenues from voice services decreased 3.9% from $69.3 million for the six months ended June 30, 2008, to $66.5 million for the same period in 2009. Operating revenues from data services increased 7.2% from $45.8 million for the six months ended June 30, 2008, to $49.1 million for the same period in 2009. Operating revenues from other services increased 70.3% from $3.0 million for the six months ended June 30, 2008, to $5.2 million for the same period in 2009.

The increased revenues are due primarily to price increases and an increase in the number of connections, from 663,920 as of June 30, 2008, to 679,345 as of June 30, 2009. The increase in operating revenues from other services contained $1.3 million of fiber sales recorded during the first half of 2009. In addition, revenue was positively impacted by approximately $1.2 million in the first six months of 2009 due to a change in the reporting of universal service fees . . .