tw telecom 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from             to            

Commission File Number 0-30218

tw telecom inc.

(Exact name of Registrant as specified in its charter)

Delaware	84-1500624
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
10475 Park Meadows Drive Littleton, Colorado	80124
(Address of principal executive offices)	(Zip Code)

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer  x	Accelerated filer  ¨
Non-accelerated filer  ¨ (Do not check if a smaller reporting company)	Smaller reporting company  ¨

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

The number of shares outstanding oftw telecom inc.’s common stock as of October 31, 2008 was 147,523,209 shares.

INDEX TO FORM 10-Q

			Page
Part I. Financial Information
	Item 1.	Financial Statements:
		Condensed Consolidated Balance Sheets at September 30, 2008 (unaudited) and     December 31, 2007	1
		Condensed Consolidated Statements of Operations for the three and nine months ended     September 30, 2008 and 2007 (unaudited)	2
		Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	3
		Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine     months ended September 30, 2008 (unaudited)	4
		Notes to Condensed Consolidated Financial Statements	5
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of     Operations	22
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	40
	Item 4.	Controls and Procedures	41
Part II. Other Information
	Item 1.	Legal Proceedings	41
	Item 1A.	Risk Factors	41
	Item 2.	Unregistered Shares of Equity Securities and Use of Proceeds	42
	Item 6.	Exhibits	42

i

tw telecom inc.

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30, 2008			December 31, 2007
	(unaudited)
	(amounts in thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents	$	333,687		$	321,531
Receivables, less allowances of $9,723 and $12,018, respectively		73,608			75,976
Prepaid expenses and other current assets		12,972			13,461
Deferred income taxes		8,703			8,703
Total current assets		428,970			419,671
Long-term investments		2,990			14,456
Property, plant, and equipment		3,221,218			3,022,752
Less accumulated depreciation		(1,921,960	)		(1,727,852	)
		1,299,258			1,294,900
Deferred income taxes		50,047			50,047
Goodwill		412,694			412,694
Intangible assets, net of accumulated amortization		43,553			51,002
Other assets, net of accumulated amortization		20,262			21,948
Total assets	$	2,257,774		$	2,264,718
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	38,757		$	46,972
Deferred revenue		29,183			26,015
Accrued taxes, franchise and other fees		69,378			73,130
Accrued interest		9,604			16,707
Accrued payroll and benefits		42,641			36,560
Accrued carrier costs		32,754			50,898
Current portion of debt and capital lease obligations (note 2)		7,275			7,337
Other current liabilities		24,508			30,647
Total current liabilities		254,100			288,266
Long-term debt and capital lease obligations (note 2)		1,367,164			1,370,318
Long-term deferred revenue		18,254			19,672
Other long-term liabilities		25,345			20,237
Stockholders’ equity (note 1):
Preferred stock, $0.01 par value, 20,000,000 shares authorized, no shares issued and outstanding		—			—
Common stock, $0.01 par value, 439,800,000 shares authorized, 147,518,518 and 146,542,435 shares issued and outstanding, respectively		1,475			1,465
Additional paid-in capital		1,641,496			1,618,352
Accumulated other comprehensive loss, net of taxes		(24	)		—
Accumulated deficit		(1,050,036	)		(1,053,592	)
Total stockholders’ equity		592,911			566,225
Total liabilities and stockholders’ equity	$	2,257,774		$	2,264,718

See accompanying notes.

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tw telecom inc.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(amounts in thousands, except per share amounts)
Revenue:
Data and Internet services	$	102,282		$	82,359		$	292,390		$	230,780
Network services		96,152			98,669			291,762			296,229
Voice services		83,927			82,475			251,707			242,700
Intercarrier compensation		9,258			11,290			28,514			34,494
Total revenue		291,619			274,793			864,373			804,203
Costs and expenses (a):
Operating (exclusive of depreciation, amortization, and accretion shown separately below)		123,051			118,412			365,146			350,859
Selling, general, and administrative		71,408			75,695			221,371			223,792
Depreciation, amortization, and accretion		71,537			71,580			212,315			206,325
Total costs and expenses		265,996			265,687			798,832			780,976
Operating income		25,623			9,106			65,541			23,227
Interest expense		(18,771	)		(22,623	)		(58,310	)		(68,794	)
Interest income		1,518			4,528			5,742			13,614
Other loss		(3,672	)		(2,415	)		(7,767	)		(2,415	)
Income (loss) before income taxes		4,698			(11,404	)		5,206			(34,368	)
Income tax expense		897			179			1,650			609
Net income (loss)	$	3,801		$	(11,583	)	$	3,556		$	(34,977	)
Net income (loss) per common share, basic and diluted	$	0.03		$	(0.08	)	$	0.02		$	(0.24	)
Weighted average shares outstanding, basic		147,443			145,174			147,131			144,564
Weighted average shares outstanding, diluted		148,914			145,174			148,977			144,564
(a)    Includes non-cash stock-based employee compensation expense (note 1):
Operating	$	824		$	897		$	2,552		$	2,607
Selling, general, and administrative	$	4,646		$	4,848		$	14,359		$	13,583

See accompanying notes.

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tw telecom inc.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Nine Months Ended September 30,
	2008			2007
	(amounts in thousands)
Cash flows from operating activities:
Net income (loss)	$	3,556		$	(34,977	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation, amortization, and accretion		212,315			206,325
Stock-based compensation		16,911			16,190
Investment impairment, amortization of deferred debt issue costs and other		10,590			4,157
Changes in operating assets and liabilities:
Receivables, prepaid expenses and other assets		2,762			(8,889	)
Accounts payable, deferred revenue, and other liabilities		(36,090	)		(14,450	)
Net cash provided by operating activities		210,044			168,356
Cash flows from investing activities:
Capital expenditures		(201,651	)		(191,864	)
Cash paid for acquisitions, net of cash acquired		—			2,397
Purchases of investments		—			(166,973	)
Proceeds from maturities of investments		3,699			185,512
Other investing activities		(781	)		(260	)
Net cash used in investing activities		(198,733	)		(171,188	)
Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise of stock options and in connection with the employee stock purchase plan		6,243			24,648
Net costs from issuance of debt		—			(850	)
Payment of debt and capital lease obligations		(5,398	)		(5,034	)
Net cash provided by financing activities		845			18,764
Increase in cash and cash equivalents		12,156			15,932
Cash and cash equivalents at beginning of period		321,531			221,553
Cash and cash equivalents at end of period	$	333,687		$	237,485
Supplemental disclosures of cash flow information:
Cash paid for interest	$	65,380		$	75,957
Cash paid for income taxes	$	1,061		$	—
Addition of capital lease obligation	$	2,338		$	1,076

See accompanying notes.

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tw telecom inc.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2008

(Unaudited)

				Additional paid-in capital		Accumulated other comprehensive loss, net of taxes			Accumulated deficit			Total stockholders’ equity
	Common Stock
	Shares	Amount
	(amounts in thousands)
Balance at January 1, 2008	146,542	$	1,465	$	1,618,352	$	—		$	(1,053,592	)	$	566,225
Net income.	—		—		—		—			3,556			3,556
Unrealized loss on hedging activities, net of tax	—		—		—		(24	)		—			(24	)
Total comprehensive income	—		—		—		—			—			3,532
Shares issued for cash in connection with the exercise of stock options and the employee stock purchase plan	718		7		6,236		—			—			6,243
Stock-based compensation	259		3		16,908		—			—			16,911
Balance at September 30, 2008	147,519	$	1,475	$	1,641,496	$	(24	)	$	(1,050,036	)	$	592,911

See accompanying notes.

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Description of Business and Capital Structure

On March 12, 2008, Time Warner Telecom Inc., a Delaware corporation, changed its corporate name totw telecom inc. (the “Company”) through an amendment to the Company’s Restated Certificate of Incorporation. The Company’s stockholders approved the name change by written consent on September 26, 2006. On July 1, 2008, the Company began usingtw telecom inc. as its name andtw telecom as its brand.

The Company is a leading national provider of managed network services, specializing in Ethernet and transport data networking, Internet access, local and long distance voice, virtual private network (“VPN”), voice over Internet protocol (“VoIP”) and network security services to enterprise organizations and communications services companies throughout the U.S.

The Company has one class of common stock outstanding with one vote per share. The Company also is authorized to issue shares of preferred stock. The Company’s Board of Directors has the authority to establish voting powers, preferences, and special rights for the preferred stock. No shares of preferred stock have been issued.

Basis of Presentation

The accompanying interim condensed consolidated financial statements are unaudited, but in the opinion of management, reflect all adjustments necessary for a fair presentation of the results for the periods indicated. The results of operations for any interim period are not necessarily indicative of results for the full year. The accompanying financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007.

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

Basis of Consolidation

The condensed consolidated financial statements include the accounts of the Company and all entities in which the Company has a controlling voting interest (“subsidiaries”). Significant intercompany accounts and transactions have been eliminated.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157,Fair Value Measurement (“SFAS 157”), which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. This statement applies to other accounting pronouncements that require or permit fair value measurements. The Company was required to adopt SFAS 157 effective January 1, 2008 on a prospective basis. Subsequent to the issuance of SFAS 157, the FASB deferred the effective date for one year for all nonfinancial assets and nonfinancial liabilities, except for those items that are recognized or disclosed at fair value in the financial statements on a recurring basis. The adoption of SFAS 157 did not have a material impact on the Company’s financial position and results of operations as of and for the nine months

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ended September 30, 2008. In October 2008, the FASB issued FASB Staff Position (“FSP”) 157-3,Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active, which clarifies the application of SFAS 157. The Company considered the clarifications set forth in FSP 157-3 in estimating the fair value of the Company’s long-term investments.

In February 2007, the FASB issued SFAS No. 159,The Fair Value Option for Financial Assets and Financial Liabilities(“SFAS 159”). The fair value option established by SFAS 159 permits entities to choose to measure eligible financial instruments at fair value. The unrealized gains and losses on items for which the fair value option has been elected should be reported in earnings. The decision to elect the fair value option is determined on an instrument by instrument basis and is irrevocable. Assets and liabilities measured at fair value pursuant to the fair value option should be reported separately in the balance sheet from those instruments measured using other measurement attributes. This statement was effective January 1, 2008. The Company did not elect the fair value option for its existing financial assets and financial liabilities upon adoption of SFAS 159.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), Business Combinations (“SFAS 141R”). SFAS 141R establishes the principles and requirements for how an acquirer: 1) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; 2) recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and 3) discloses the business combination. The statement is effective beginning January 1, 2009. SFAS 141R will impact the Company if it is party to a business combination after SFAS 141R is effective.

In March 2008, the FASB issued SFAS No. 161 “Disclosures about Derivative Instruments and Hedging Activities—An Amendment to FASB Statement No. 133,” which changes the disclosure requirements for derivative instruments and hedging activities. Companies are required to provide enhanced disclosures about how and why an entity uses derivative instruments, how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. The statement is effective for the Company on January 1, 2009 and the Company is currently evaluating the disclosure requirements of this statement.

In May 2008, the FASB issued FSP APB 14-1,“Accounting for Convertible Debt Instruments That May Be Settled in Cash (Including Partial Cash Settlement) upon Conversion.” FSP APB 14-1 requires certain convertible debt instruments to be separated into debt and equity components at issuance and a value to be assigned to each. The value assigned to the debt component is the estimated fair value, as of the issuance date, of a similar bond without the conversion feature. The difference between the bond cash proceeds and this estimated fair value is recorded as a debt discount and amortized to interest expense over the life of the bond. FSP APB 14-1 changes the accounting treatment for the Company’s convertible debentures (see Note 2 for a description) and is effective for the Company on January 1, 2009 with retrospective application required. Although FSP APB 14-1 will not impact the Company’s actual past or future cash flows, the Company is evaluating the impact to its results of operations, non-cash interest expense and net income (loss) per share beginning in fiscal year 2009 for financial statements covering past and future periods and expects the impact on those results to be material.

Cash Equivalents

The Company considers all highly liquid debt instruments with an original maturity of three months or less, when purchased, to be cash equivalents. At September 30, 2008 and December 31, 2007, investments included in cash and cash equivalents of $333.2 million and $320.9 million, respectively, were measured at fair value and comprised of U.S. treasury money market funds that were traded in an active market and for which market prices are readily available.

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Investments

At September 30, 2008 and December 31, 2007, investments of $3.0 million and $14.5 million, respectively, included in long-term investments were comprised of commercial paper with exposure to sub-prime mortgages that were past their maturity dates. During the three months ended September 30, 2008, the Company received proceeds of $3.7 million resulting from liquidation of one of these securities. During the three and nine months ended September 30, 2008, the Company recognized a loss of $3.7 million and $7.8 million, respectively, included in other loss in the condensed consolidated statements of operations resulting from impairment losses and liquidation of one of these securities. The carrying value of the remaining securities as of September 30, 2008 was estimated based principally on data from financial advisors to fiduciaries for the commercial paper holders. The valuation considered a combination of (i) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (ii) individual valuation estimates of the securities underlying the commercial paper using multiple indicators of value; and (iii) the probabilities of repayment of the underlying securities under various liquidation scenarios. Actual values and amounts the Company receives from these investments could differ from those estimates.

Receivables

The Company generally bills in advance for the majority of the services it provides and does not require significant collateral from its customers. The Company determines whether receivables are reasonably assured of collection by evaluation of certain factors, including ongoing credit evaluations of significant customers’ financial condition, and provides an allowance for doubtful accounts based on the expected collectability of all receivables. The allowance for doubtful accounts was $9.7 million, or 12% of gross receivables, at September 30, 2008, and $12.0 million, or 14% of gross receivables, at December 31, 2007.

Revenue

The Company’s revenue is derived primarily from business communications services. Network services transmit voice, data and images as well as enable transmission for storage, using state-of-the-art fiber optics. Data and Internet services include services that enable customers to interconnect their internal computer networks and to access external networks, including Internet access at high speeds using Ethernet protocol, metro and wide area Ethernet, virtual private network solutions. Voice services include traditional and next generation voice capabilities, including voice services from stand alone and bundled products, long distance, toll free services, and VoIP. Intercarrier compensation is comprised of switched access services and reciprocal compensation. Switched access represents the compensation from another carrier for the delivery of traffic from a long distance carrier’s point of presence to an end-user’s premises provided through the Company’s switching facilities. The Federal Communications Commission (“FCC”) and state public utility commissions regulate switched access rates in their respective jurisdictions. Reciprocal compensation represents compensation from local exchange carriers (“LECs”) for local exchange traffic originated on their LEC’s facilities and terminated on the Company’s facilities. Reciprocal compensation rates are established by interconnection agreements between the parties based on federal and state regulatory and judicial rulings.

The Company’s customers are principally enterprise organizations from a wide variety of business segments including, among others, the distribution, health care, finance, service and manufacturing industries, state, local and federal government entities as well as long distance carriers, incumbent local exchange carriers (“ILECs”), competitive local exchange carriers (“CLECs”), wireless communications companies, and Internet service providers (“ISPs”).

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Revenue for network, data and Internet, and the majority of voice services is generally billed in advance on a fixed rate basis and recognized over the period the services are provided. Revenue for the majority of intercarrier compensation and components of voice services, such as long distance, is generally billed on a transactional basis in arrears determined by customer usage and estimates are used to recognize revenue in the period earned.

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

Pursuant to Emerging Issues Task Force 99-19,Reporting Revenue Gross as a Principal Versus Net as an Agent,the Company classifies certain taxes and fees billed to customers and remitted to government authorities on a gross versus net basis in revenue and expense. The total amount classified as revenue associated with such taxes and fees was approximately $9.4 million and $8.7 million for the three months ended September 30, 2008 and 2007, respectively, and approximately $27.2 million and $23.0 million for the nine months ended September 30, 2008 and 2007, respectively.

Significant Customers

The Company has substantial business relationships with a few large customers, including major long distance carriers. The Company’s top 10 customers accounted for an aggregate of 23% and 26% of the Company’s total revenue for the nine months ended September 30, 2008 and 2007, respectively. No customer accounted for 10% or more of total revenue for the nine months ended September 30, 2008 or 2007.

Operating Expenses

Operating expenses consist of costs directly related to the operation and maintenance of networks and the provisioning of services but exclude depreciation, amortization and accretion, which is reported separately. These costs include the salaries and related benefits and expenses, including stock-based compensation, of customer care, provisioning, network maintenance, technical field, network operations and engineering personnel, costs to repair and maintain the Company’s network, costs paid to other carriers to carry a portion of the Company’s traffic and to interconnect the Company’s networks and for facility leases.

Income Taxes

Income tax expense for all periods presented is comprised solely of current state income taxes.

As of September 30, 2008, the Company had a deferred tax asset of $58.8 million, net of a valuation allowance of $329.5 million. The Company has concluded that it is more likely than not that the net deferred tax asset of $58.8 million will be realized because the Company could utilize tax-planning strategies in the event its net operating losses were to expire. However, the Company believes there may be risks in realizing amounts in excess of the $58.8 million through utilization of available tax planning strategies. Accordingly, the Company has established a valuation allowance for amounts in excess of $58.8 million.

At September 30, 2008, the Company had net operating losses for federal income tax purposes of approximately $1.1 billion. These net operating loss carryforwards, if not utilized to reduce taxable income in future periods, will expire in various amounts beginning in 2019 and ending in 2026.

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Asset Retirement Obligations

The Company accounts for asset retirement obligations under FASB Statement No. 143,Accounting for Asset Retirement Obligations (“SFAS 143”) as interpreted by FASB Interpretation No. 47,Accounting for Conditional Asset Retirement Obligations. SFAS 143 requires that the estimated fair value of an asset retirement obligation be recorded when incurred. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset and depreciated over the asset’s estimated useful life. The Company has asset retirement obligations related to decommissioning of electronics in leased facilities and the removal of certain fiber and conduit systems upon contract termination. Considerable management judgment is required in estimating these obligations. Important assumptions include estimates of retirement costs, the timing of the future retirement activities, and the likelihood of retirement provisions being enforced. Changes in these assumptions based on future information could result in adjustments to estimated liabilities.

The Company’s asset retirement obligations were $18.3 million and $17.2 million as of September 30, 2008 and December 31, 2007, respectively, and are included as a component of other long-term liabilities in the accompanying condensed consolidated balance sheets.

Segment Reporting

The Company operates in one segment across the United States.

Earnings (Loss) Per Common Share and Potential Common Share

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

Options to purchase shares of the Company’s common stock, restricted stock units to be settled in common stock upon vesting and shares of common stock subject to issuance upon conversion of the Company’s convertible debentures which were excluded from the computation of diluted weighted average shares outstanding because their inclusion would be anti-dilutive totaled 30.7 million shares and 33.0 million shares for the three months ended September 30, 2008 and 2007, respectively, and 29.8 million shares and 33.0 million shares for the nine months ended September 30, 2008 and 2007, respectively. The following table provides the calculation of basic and diluted EPS:

	Three months ended September 30,					Nine months ended September 30,
	2008		2007			2008		2007
	(amounts in thousands, except per share amounts)
Net income (loss) as reported	$	3,801	$	(11,583	)	$	3,556	$	(34,977	)
Basic weighted average shares outstanding		147,443		145,174			147,131		144,564
Dilutive effect of stock options outstanding		1,154		—			1,502		—
Dilutive effect of unvested restricted stock		317		—			344		—
Diluted weighted average shares		148,914		145,174			148,977		144,564
Earnings (loss) per share—basic and diluted	$	0.03	$	(0.08	)	$	0.02	$	(0.24	)

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tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Stock-Based Compensation

The Company applies the fair value recognition provisions of FASB Statement No. 123R,Share-Based Payment (“SFAS 123R”), which requires the cost of share-based payments to be recognized as expense over the requisite service period. The fair value of options was estimated at the date of grant using a Black-Scholes option pricing model. For purposes of the actual expense recognized in the nine months ended September 30, 2008 and 2007, the estimated fair value of the options is amortized to expense on a straight-line basis (net of estimated forfeitures) over the options’ vesting period, which is equivalent to the requisite service period. The weighted-average fair value of options granted was $7.21 and $10.50 for the nine months ended September 30, 2008 and 2007, respectively, with the following weighted-average assumptions:

	Nine months ended September 30,
	2008		2007
Expected volatility	50	%	58	%
Risk-free interest rate	2.5	%	4.6	%
Dividend yield	0	%	0	%
Expected term	4 years		4 years

Expected volatilities are based on historical volatility of the Company’s common stock over a period generally commensurate with the expected term of the option. The risk-free rate for stock options granted during the period is determined by using the U.S. Treasury rate for the nearest period that coincides with the expected term. The expected term of stock options represents the weighted-average period the stock options are expected to remain outstanding. The expected term is based on a combination of historical data and a study of the expected term of options in the Company’s peer group.

As of September 30, 2008, there was $32.4 million of total unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.5 years, and $20.7 million of total unrecognized compensation expense related to unvested restricted stock which is expected to be recognized over a weighted-average period of 1.3 years.

2. Long-Term Debt and Capital Lease Obligations

	September 30, 2008			December 31, 2007
	(amounts in thousands)
Term Loan B, due 2013	$	589,500		$	594,000
9 1/4% Senior Notes, due 2014		400,000			400,000
2.375% Convertible Senior Debentures, due 2026		373,750			373,750
Capital lease obligations		10,890			9,565
Total obligations		1,374,140			1,377,315
Unamortized premium		299			340
Current portion		(7,275	)		(7,337	)
Total long-term obligations	$	1,367,164		$	1,370,318

As of September 30, 2008, the Company’s wholly owned subsidiary,tw telecom holdings inc. (“Holdings”), had outstanding $400 million principal amount of 9 ¹/4% Senior Notes due February 2014 (the “2014 Notes”). The 2014 Notes are unsecured, unsubordinated obligations of Holdings and are guaranteed by the Company and Holdings’ subsidiaries. The 2014 Notes are callable as of February 15, 2009, 2010, 2011 and 2012 at 104.625%, 103.083%, 101.542% and 100%, respectively. Interest is payable semi-annually on February 15

10

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

and August 15. Interest expense, including amortization of deferred debt issuance costs and premium relating to the 2014 Notes, was $28.4 million for both the nine months ended September 30, 2008 and 2007. At September 30, 2008, the fair market value of the $400 million principal amount of the 2014 Notes was approximately $370 million. The 2014 Notes have not been listed on any securities exchange or inter-dealer automated quotation system, and the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

The 2014 Notes are governed by an indenture that contains certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.

As of September 30, 2008, the Company had outstanding $373.8 million principal amount of 2 ³/8% Convertible Senior Debentures due April 1, 2026 (the “Convertible Debentures”). The Convertible Debentures are general, unsecured obligations of the Company. Interest is payable semi-annually on April 1 and October 1, commencing October 1, 2006. The Convertible Debentures are redeemable in whole or in part at the Company’s option at any time on or after April 6, 2013 at a redemption price equal to 100% of the principal amount of the debentures to be redeemed, plus accrued and unpaid interest. Holders of the debentures have the option, at any time prior to April 1, 2026, to convert the debentures into shares of the Company’s common stock at a conversion rate of 53.6466 per $1,000 principal amount of debentures representing a conversion price of $18.64 per share. Upon conversion, the Company will have the right to deliver, in lieu of shares of common stock, cash or a combination of cash and shares of common stock. Interest expense, including amortization of deferred debt issuance costs, was $7.1 million for both the nine months ended September 30, 2008 and 2007. As of September 30, 2008, none of the holders had converted any Convertible Debentures into common stock. At September 30, 2008, the fair market value of the $373.8 million principal amount of the Convertible Debentures was approximately $284 million. The Convertible Debentures have not been listed on any securities exchange or inter-dealer automated quotation system, and the estimated market value is based on indicative pricing published by investment banks. While the Company believes these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

As of September 30, 2008, Holdings had a $700 million senior secured credit facility (the “Credit Facility”) consisting of a $600 million Term Loan B (“Term Loan”) maturing in January 2013 and an undrawn $100 million revolving credit facility (the “Revolver”) expiring in October 2011, of which $20 million is believed to be currently unavailable to the Company because one of the lenders of the Revolver is a financial institution (a Lehman Brothers affiliate) that filed for reorganization under Chapter 11 of the Bankruptcy Code in September 2008. If any of the other lenders under the Revolver were to go into bankruptcy or receivership, we may be unable to access a portion of the remaining $80 million of the Revolver that is available to the Company. Components of the Credit Facility and related financing are detailed below:

• The Term Loan is a secured obligation, on a first lien basis, of Holdings. The Term Loan is guaranteed by the Company and Holdings’ subsidiaries. On October 6, 2006, Holdings drew $200 million on the Term Loan to extinguish its then outstanding term loan. On October 31, 2006, Holdings drew the remaining $400 million on the Term Loan. Repayments of the Term Loan are due quarterly in an amount equal to 1/4 of 1% of the aggregate principal amount on the last day of each quarter beginning March 31, 2007, and the balance is payable on January 7, 2013. Interest is computed based on a specified Eurodollar rate plus 1.75% to 2.0%. Interest will be reset periodically and is payable at least

11

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

quarterly. Based on the Eurodollar rate in effect at September 30, 2008 of 3.7%, the interest rate was 5.7%. Interest expense, including amortization of deferred debt issuance costs relating to the Term Loan, was $22.9 million and $34.1 million for the nine months ended September 30, 2008 and 2007, respectively.

• The Revolver is secured and guaranteed in the same manner as the Term Loan. Interest on outstanding amounts, if any, will be computed based on a specified Eurodollar rate plus 2.0% to 2.75% and will be reset periodically and payable at least quarterly. The Company is required to pay a commitment fee on the undrawn commitment amounts on a quarterly basis of 0.5% per annum. If the Revolver were drawn, certain restrictive financial covenants would apply. Commitment fee expense and amortization of deferred debt issuance costs relating to the Revolver was approximately $476,000 for both the nine months ended September 30, 2008 and 2007.

The variable rate Term Loan exposes the Company to variability in interest payments due to changes in interest rates. On April 30, 2008, Holdings entered into a two year interest rate swap agreement that effectively converts a portion of its floating-rate debt to a fixed-rate basis for the term of the agreement to reduce the impact of interest rate changes on future interest expense. The interest rate swap has a 3.23% fixed interest rate that hedges the interest rate on the first $100 million of the $600 million principal amount variable rate Term Loan for a total rate, including the applicable spread, of 5.23% on a notional amount of $100 million. The fair value of the interest rate swap agreement was a liability of $24,000 as of September 30, 2008 and is included as a component of other long-term liabilities in the condensed consolidated balance sheet as of September 30, 2008. The fair value of the interest rate swap agreement was based on prices obtained from a financial institution who develops values based on inputs observable in active markets, including interest rates. The Company has designated the interest rate swap as a cash flow hedge. For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income. During the three and nine months ended September 30, 2008, the Company did not recognize any gain or loss in earnings for hedge ineffectiveness.

On November 5, 2008, Holdings entered into a three year interest rate swap commencing November 28, 2008 with a 2.96% fixed interest rate that hedges the interest rate on the second $100 million of its $600 million principal amount variable rate Term Loan for a total rate, including the applicable spread, of 4.96% on a notional amount of $100 million. The transaction will be accounted for in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted, which requires all derivatives to be recorded at fair value on the balance sheet and establishes criteria for designation and effectiveness of derivative transactions for which hedge accounting is applied.

The credit agreement for the Term Loan contains restrictions similar to those contained in the indenture for the 2014 Notes. The Revolver covenants contain additional restrictions, as well as certain financial covenants that the Company and its subsidiaries must comply with if it draws on the Revolver.

As of September 30, 2008, the Company and Holdings were in compliance with all of their debt covenants.

3. Commitments and Contingencies

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

12

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

4. Supplemental Guarantor Information

On February 20, 2004, Holdings (“Issuer”) issued $200 million principal amount of the 2014 Notes. On February 9, 2005, Holdings issued an additional $200 million principal amount of the 2014 Notes. The 2014 Notes are guaranteed by the Company (“Parent Guarantor”) and Holdings’ subsidiaries (“Combined Subsidiary Guarantors”). The guarantees are joint and several. A significant amount of the Issuer’s cash flow is generated by the Combined Subsidiary Guarantors. As a result, funds necessary to meet the Issuer’s debt service obligations are provided in large part by distributions or advances from the Combined Subsidiary Guarantors. The 2014 Notes are governed by an indenture that contains certain restrictive covenants. These restrictions affect, and in many respects significantly limit or prohibit, among other things, the ability of the Company and its subsidiaries to incur indebtedness, make prepayments of certain indebtedness, pay dividends, make investments, engage in transactions with stockholders and affiliates, issue capital stock of subsidiaries, create liens, sell assets, and engage in mergers and consolidations.

13

tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following information sets forth the Company’s Condensed Consolidating Balance Sheets as of September 30, 2008 and December 31, 2007, Condensed Consolidating Statements of Operations for the three and nine months ended September 30, 2008 and 2007, and Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2008 and 2007.

tw telecom inc.

CONDENSED CONSOLIDATING BALANCE SHEET

September 30, 2008

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	21,002		$	312,685		$	—		$	—		$	333,687
Receivables, net		—			—			73,608			—			73,608
Prepaid expenses and other current assets		1,516			7,632			3,824			—			12,972
Deferred income taxes		—			8,703			—			—			8,703
Total current assets		22,518			329,020			77,432			—			428,970
Long-term investments		—			2,990			—			—			2,990
Property, plant and equipment, net		—			36,832			1,262,426			—			1,299,258
Deferred income taxes		—			50,047			—			—			50,047
Goodwill		—			—			412,694			—			412,694
Intangible and other assets, net		9,924			8,753			45,138			—			63,815
Total assets	$	32,442		$	427,642		$	1,797,690		$	—		$	2,257,774
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	—		$	(363	)	$	39,120		$	—		$	38,757
Other current liabilities		4,438			57,675			153,230			—			215,343
Intercompany payable (receivable)		(1,832,761	)		(709,737	)		2,542,498			—			—
Total current liabilities		(1,828,323	)		(652,425	)		2,734,848			—			254,100
Losses in subsidiary in excess of investment		894,080			1,128,319			—			(2,022,399	)		—
Long-term debt and capital lease obligations		373,750			984,290			9,124			—			1,367,164
Long-term deferred revenue		—			—			18,254			—			18,254
Other long-term liabilities		—			5,265			20,080			—			25,345
Stockholders’ equity (deficit)		592,935			(1,037,807	)		(984,616	)		2,022,399			592,911
Total liabilities and stockholders’ equity (deficit)	$	32,442		$	427,642		$	1,797,690		$	—		$	2,257,774

14

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING BALANCE SHEET

December 31, 2007

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
ASSETS
Current assets:
Cash and cash equivalents	$	20,563		$	300,968		$	—		$	—		$	321,531
Receivables, net		—			—			75,976			—			75,976
Prepaid expenses and other current assets		2,720			7,148			3,593			—			13,461
Deferred income taxes		—			8,703			—			—			8,703
Total current assets		23,283			316,819			79,569			—			419,671
Long-term investments		—			14,456			—			—			14,456
Property, plant and equipment, net		—			36,454			1,258,446			—			1,294,900
Deferred income taxes		—			50,047			—			—			50,047
Goodwill		—			—			412,694			—			412,694
Intangible and other assets, net		10,349			10,728			51,873			—			72,950
Total assets	$	33,632		$	428,504		$	1,802,582		$	—		$	2,264,718
LIABILITIES AND STOCKHOLDERS’
EQUITY (DEFICIT)
Current liabilities:
Accounts payable	$	—		$	4,720		$	42,252		$	—		$	46,972
Other current liabilities		2,219			62,881			176,194			—			241,294
Intercompany payable (receivable)		(1,812,586	)		(715,560	)		2,528,146			—			—
Total current liabilities		(1,810,367	)		(647,959	)		2,746,592			—			288,266
Losses in subsidiary in excess of investment		904,024			1,125,511			—			(2,029,535	)		—
Long-term debt and capital lease obligations		373,750			989,246			7,322			—			1,370,318
Long-term deferred revenue		—			—			19,672			—			19,672
Other long-term liabilities		—			3,045			17,192			—			20,237
Stockholders’ equity (deficit)		566,225			(1,041,339	)		(988,196	)		2,029,535			566,225
Total liabilities and stockholders’ equity (deficit)	$	33,632		$	428,504		$	1,802,582		$	—		$	2,264,718

15

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2008

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Total revenue	$	—		$	—		$	291,619		$	—		$	291,619
Costs and expenses:
Operating, selling, general and administrative		—			35,159			159,300			—			194,459
Depreciation, amortization and accretion		—			2,390			69,147			—			71,537
Corporate expense allocation		—			(37,549	)		37,549			—			—
Total costs and expenses		—			—			265,996			—			265,996
Operating income		—			—			25,623			—			25,623
Interest expense, net		(2,241	)		(10,741	)		(4,271	)		—			(17,253	)
Other loss		—			(3,672	)		—			—			(3,672	)
Interest expense and other loss allocation		2,241			14,413			(16,654	)		—			—
Income before income taxes and equity in undistributed earnings of subsidiaries		—			—			4,698			—			4,698
Income tax expense		—			20			877			—			897
Net income (loss) before equity in undistributed earnings of subsidiaries		—			(20	)		3,821			—			3,801
Equity in undistributed earnings of subsidiaries		3,801			3,821			—			(7,622	)		—
Net income	$	3,801		$	3,801		$	3,821		$	(7,622	)	$	3,801

16

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Three Months Ended September 30, 2007

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations		Consolidated
	(amounts in thousands)
Total revenue	$	—		$	—		$	274,793		$	—	$	274,793
Costs and expenses:
Operating, selling, general and administrative		—			37,994			156,113			—		194,107
Depreciation, amortization and accretion		—			3,330			68,250			—		71,580
Corporate expense allocation		—			(41,324	)		41,324			—		—
Total costs and expenses		—			—			265,687			—		265,687
Operating income		—			—			9,106			—		9,106
Interest expense, net		(2,043	)		(11,853	)		(4,199	)		—		(18,095	)
Other loss		—			(2,415	)		—			—		(2,415	)
Interest expense and other loss allocation		2,043			14,268			(16,311	)		—		—
Loss before income taxes and equity in undistributed losses of subsidiaries		—			—			(11,404	)		—		(11,404	)
Income tax expense		—			—			179			—		179
Net loss before equity in undistributed losses of subsidiaries		—			—			(11,583	)		—		(11,583	)
Equity in undistributed losses of subsidiaries		(11,583	)		(11,583	)		—			23,166		—
Net loss	$	(11,583	)	$	(11,583	)	$	(11,583	)	$	23,166	$	(11,583	)

17

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2008

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Total revenue	$	—		$	—		$	864,373		$	—		$	864,373
Costs and expenses:
Operating, selling, general and administrative		—			116,670			469,847			—			586,517
Depreciation, amortization and accretion		—			10,155			202,160			—			212,315
Corporate expense allocation		—			(126,825	)		126,825			—			—
Total costs and expenses		—			—			798,832			—			798,832
Operating income		—			—			65,541			—			65,541
Interest expense, net		(6,644	)		(38,531	)		(7,393	)		—			(52,568	)
Other loss		—			(7,767	)		—			—			(7,767	)
Interest expense and other loss allocation		6,644			46,298			(52,942	)		—			—
Income before income taxes and equity in undistributed earnings of subsidiaries		—			—			5,206			—			5,206
Income tax expense		—			24			1,626			—			1,650
Net income (loss) before equity in undistributed earnings of subsidiaries		—			(24	)		3,580			—			3,556
Equity in undistributed earnings of subsidiaries		3,556			3,580			—			(7,136	)		—
Net income	$	3,556		$	3,556		$	3,580		$	(7,136	)	$	3,556

18

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

Nine Months Ended September 30, 2007

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations		Consolidated
	(amounts in thousands)
Total revenue	$	—		$	—		$	804,203		$	—	$	804,203
Costs and expenses:
Operating, selling, general and administrative		—			113,970			460,681			—		574,651
Depreciation, amortization and accretion		—			10,711			195,614			—		206,325
Corporate expense allocation		—			(124,681	)		124,681			—		—
Total costs and expenses		—			—			780,976			—		780,976
Operating income		—			—			23,227			—		23,227
Interest expense, net		(6,295	)		(37,418	)		(11,467	)		—		(55,180	)
Other loss		—			(2,415	)		—			—		(2,415	)
Interest expense and other loss allocation		6,295			39,833			(46,128	)		—		—
Loss before income taxes and equity in undistributed losses of subsidiaries		—			—			(34,368	)		—		(34,368	)
Income tax expense		—			—			609			—		609
Net loss before equity in undistributed losses of subsidiaries		—			—			(34,977	)		—		(34,977	)
Equity in undistributed losses of subsidiaries		(34,977	)		(34,977	)		—			69,954		—
Net loss	$	(34,977	)	$	(34,977	)	$	(34,977	)	$	69,954	$	(34,977	)

19

tw telecom inc.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2008

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Cash flows from operating activities:
Net income	$	3,556		$	3,556		$	3,580		$	(7,136	)	$	3,556
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion		—			10,155			202,160			—			212,315
Intercompany change		(3,264	)		5,823			(9,695	)		7,136			—
Stock based compensation		—			—			16,911			—			16,911
Investment impairment, deferred debt issue and other		425			9,082			1,083			—			10,590
Changes in operating assets and liabilities		(6,521	)		(5,913	)		(20,894	)		—			(33,328	)
Net cash provided by (used in) operating activities		(5,804	)		22,703			193,145			—			210,044
Cash flows from investing activities:
Capital expenditures		—			(8,656	)		(192,995	)		—			(201,651	)
Proceeds from maturities of investments		—			3,699			—			—			3,699
Other investing activities		—			(1,154	)		373			—			(781	)
Net cash used in investing activities		—			(6,111	)		(192,622	)		—			(198,733	)
Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise of stock options and in connection with the employee stock purchase plan		6,243			—			—			—			6,243
Payment of debt and capital lease obligations		—			(4,875	)		(523	)		—			(5,398	)
Net cash provided by (used in) financing activities		6,243			(4,875	)		(523	)		—			845
Increase in cash and cash equivalents		439			11,717			—			—			12,156
Cash and cash equivalents at beginning of period		20,563			300,968			—			—			321,531
Cash and cash equivalents at end of period	$	21,002		$	312,685		$	—		$	—		$	333,687

20

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

tw telecom inc.

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

Nine Months Ended September 30, 2007

	Parent Guarantor			Issuer			Combined Subsidiary Guarantors			Eliminations			Consolidated
	(amounts in thousands)
Cash flows from operating activities:
Net loss	$	(34,977	)	$	(34,977	)	$	(34,977	)	$	69,954		$	(34,977	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities:
Depreciation, amortization, and accretion		—			10,711			195,614			—			206,325
Intercompany change		680			(14,776	)		84,050			(69,954	)		—
Stock based compensation		—			—			16,190			—			16,190
Deferred debt issue, extinguishment costs and other		425			3,719			13			—			4,157
Changes in operating assets and liabilities		13,778			45,941			(83,058	)		—			(23,339	)
Net cash provided by (used in) operating activities		(20,094	)		10,618			177,832			—			168,356
Cash flows from investing activities:
Capital expenditures		—			(12,994	)		(178,870	)		—			(191,864	)
Cash paid for acquisitions, net of cash acquired		—			—			2,397			—			2,397
Purchases of investments		(8,867	)		(158,106	)		—			—			(166,973	)
Proceeds from maturities of investments		21,967			163,545			—			—			185,512
Other investing activities		—			2,561			(2,821	)		—			(260	)
Net cash provided by (used in) investing activities		13,100			(4,994	)		(179,294	)		—			(171,188	)
Cash flows from financing activities:
Net proceeds from issuance of common stock upon exercise of stock options and in connection with the employee stock purchase plan		24,648			—			—			—			24,648
Net costs from issuance of debt		—			(850	)		—			—			(850	)
Payment of debt and capital lease obligations		—			(4,838	)		(196	)		—			(5,034	)
Net cash provided by (used in) financing activities		24,648			(5,688	)		(196	)		—			18,764
Increase (decrease) in cash and cash equivalents		17,654			(64	)		(1,658	)		—			15,932
Cash and cash equivalents at beginning of period		681			223,116			(2,244	)		—			221,553
Cash and cash equivalents at end of period	$	18,335		$	223,052		$	(3,902	)	$	—		$	237,485

21

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

The following discussion and analysis provides information concerning the results of operations and financial condition oftw telecom inc. (the “Company”) and should be read in conjunction with the accompanying condensed consolidated financial statements and notes thereto. The following discussion and analysis also should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results of Operations and the consolidated financial statements included in Part II of our Annual Report on Form 10-K for the year ended December 31, 2007. References in this item to “we,” “our,” or “us” are to the Company and its subsidiaries on a consolidated basis unless the context otherwise requires.

Cautions Concerning Forward Looking Statements

This document contains certain “forward-looking statements,” within the meaning of the Private Securities Litigation Reform Act of 1995, including statements regarding, among other items, our expected financial position, expected capital expenditures, expected revenue mix, expected margins, expected branding expenditures, growth or stability from particular customer segments, the effects of consolidation in the telecommunications industry, anticipated customer disconnections, Modified EBITDA trends, expected network expansion, and business plans. These forward-looking statements are based on management’s current expectations and are naturally subject to risks, uncertainties, and changes in circumstances, certain of which are beyond our control. Actual results may differ materially from those expressed or implied by such forward-looking statements.

The words “believe,” “plan,” “target,” “expect,” “intend,” and “anticipate,” and expressions of similar substance identify forward-looking statements. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we can give no assurance that those expectations will prove to be correct. Important factors that could cause actual results to differ materially from the expectations described in this report are set forth under “Risk Factors” in Item 1A and elsewhere in our Annual Report on Form 10-K for the year ended December 31, 2007, and elsewhere in this report. In addition, actual results may differ from our expectations due to increased customer disconnects, increased competition, inability to obtain rights to build networks into commercial buildings, the current or a future economic downturn, delays in launching new products, decreased demand for our existing products, further declines in the prices of and revenue from our services due to competitive pressures, industry consolidation and other industry conditions, increases in the price we pay for use of facilities of Incumbent Local Exchange Carriers, or “ILECs”, due to consolidation in the industry or further deregulation and adverse regulatory rulings or legislative developments, and our failure to achieve all of the expected benefits of our acquisition of Xspedius Communications, LLC (“Xspedius”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

Overview

We amended our Restated Certificate of Incorporation to change our corporate name totw telecom inc. on March 12, 2008. Our stockholders approved the name change by written consent on September 26, 2006. On July 1, 2008, we began usingtw telecom inc. as our name andtw telecom as our brand.

We are a leading national provider of managed network services, specializing in Ethernet and data networking, Internet access, local and long distance voice, VPN, VoIP and network security services to enterprise organizations and communications services companies throughout the U.S. Our customers include, among others, enterprise organizations in the distribution, health care, finance, service and manufacturing industries, state, local and federal government entities and long distance carriers, ILECs, competitive local exchange carriers (“CLECs”), wireless communications companies, and Internet service providers (“ISPs”).

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Through our subsidiaries, we operate in 75 U.S. metropolitan markets. As of September 30, 2008, our fiber networks spanned approximately 26,000 route miles directly connecting approximately 9,100 buildings served by our fiber facilities (on-net). We continue to expand our footprint within our existing markets by connecting our network into additional buildings. We have continued to expand our IP backbone data networking capability between markets supporting end-to-end Ethernet connections and VPN 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 between our markets that offer customers a virtual presence in a remote city.

On October 31, 2006, we acquired Xspedius, which expanded our markets served from 44 to 75 and increased our market density in 12 markets that we already served. This acquisition provided us additional opportunities to serve multi-city and multi-location customers and provide our full product portfolio in additional markets.

Our revenue is derived primarily from business communications services, including network, voice, data, and high-speed Internet access services. Our revenue by customer type by quarter in 2007 and 2008 is as follows:

	For the Three Months Ended
	2007								2008
	March 31,		June 30,		September 30,		December 31,		March 31,		June 30,		September 30,
Enterprise / End Users	67	%	68	%	70	%	71	%	71	%	72	%	73	%
Carrier	29	%	28	%	26	%	25	%	25	%	25	%	24	%
Intercarrier Compensation	4	%	4	%	4	%	4	%	4	%	3	%	3	%
Total Revenue	100	%	100	%	100	%	100	%	100	%	100	%	100	%

The key elements of our business strategy include:

• Leveraging our extensive local and regional fiber networks and IP backbone networks to increase customer and building penetration in our existing markets;

• Increasing revenue by focusing on service offerings that meet the sophisticated data needs of our customers, such as our Ethernet and IP business-to-business VPN services, Internet-based services and converged voice and data bundled services, and developing future services to enhance our customers’ voice and data networking ability;

• Continuing to diversify our customer base and increasing revenue from enterprise customers, including businesses and local and federal government entities;

• Pursuing selected opportunities to expand our network reach to serve new customers and additional locations for existing customers;

• Continuing our disciplined approach to capital and operating expenditures in order to increase operational efficiencies, preserve our liquidity and drive us towards greater profitability; and

• Delivering a proactive and comprehensive customer care strategy that differentiates us from our competitors.

Enterprise Customer Revenue

Revenue from enterprise customers has increased for the past 25 consecutive quarters through the three months ended September 30, 2008 primarily through sales of our data and Internet products such as Internet and Ethernet. Revenue from our enterprise customers represented 73% of our total revenue in the three months ended

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September 30, 2008 as compared to 69% for the full year 2007 and 62% for the full year 2006. We expect a growing percentage of our revenue will come from the enterprise customer base. Our expanded market footprint resulting from the Xspedius acquisition provides for new growth opportunities for us to extend our customer reach and product portfolio into new markets. While we continued to experience growth from this customer base in the three months ended September 30, 2008, our enterprise revenue growth was impacted for the past several quarters by disconnects primarily from customers in our acquired customer base that buys less complex services, especially smaller customers, as well as mortgage related businesses. Revenue churn has increased since the end of 2007 and has caused downward pressure on revenue growth.

We expect that the success of initiatives we have implemented to improve customer retention, the success of product offerings targeted at enterprise customers, our ability to compete for multi-location customers, the success of extending our product portfolio into our acquired markets, our extensive fiber network and our strong liquidity which provides us the ability to invest in the right opportunities to capture additional market share will influence our future growth rates; however, we can not predict whether these initiatives or other factors will offset pressure to the enterprise customer base caused by the current economic conditions.

Carrier Customer Revenue

Revenue from carrier customers declined 2% for the three months ended September 30, 2008 as compared to the same period in 2007. Carrier revenue represented a smaller percentage of our total revenue at 24% in the three months ended September 30, 2008 and continues to decline as a percentage of total revenue due to growth in revenue from enterprise customers, re-pricing of certain services in connection with contract renewals, and disconnections primarily resulting from industry consolidations. We expect continued disconnects from carriers and ISPs related to these and other factors, as discussed below under “Customer Disconnections and Pricing Trends”.

Intercarrier Compensation Revenue

Intercarrier compensation revenue consists of switched access and reciprocal compensation and represented 3% of our total revenue for the three months ended September 30, 2008 and continues to decline as a percentage of total revenue due to growth in revenue from enterprise customers and federal and state mandated rate reductions. Intercarrier compensation revenue may fluctuate from quarter to quarter based on variations in minutes of use terminating on our network and the resolution of disputes. We believe intercarrier compensation revenue will continue to decline as a result of expected further federally and state mandated rate reductions. Switched access revenue is compensation we receive from other carriers for the delivery of traffic between a long distance carrier’s point of presence and an end user’s premises provided through our switching facilities. Switched access rates are regulated by the Federal Communications Commission (“FCC”) and state public utility commissions. Reciprocal compensation represents compensation from a local exchange carrier (“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.

In response to an August 2008 federal court order, the FCC Chairman announced that he was prepared to adopt comprehensive intercarrier compensation and Universal Service reform in November 2008. The Chairman subsequently announced that he had circulated a draft order to the other Commissioners, and broadly outlined the actions proposed in the draft order. We believe the proposed order would require the states to establish a unified rate for intrastate switched access, interstate switched access, and reciprocal compensation over a ten-year transition period. The proposal also establishes a new cost methodology the states would be required to follow, which would produce significantly lower rates. Lost revenue from rate reductions would be recovered from increased end-user subscriber line charges and a replacement mechanism similar to the Universal Service Fund

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for small rural carriers only. The draft order also would establish a new Universal Service Fund contribution method based on telephone numbers, rather than the current revenue-based method, classify VoIP calls terminating on the public switched telephone network as an Information Service and preempt states from regulation of VoIP services.

Numerous sectors, including state commissions, consumer groups, some members of Congress, CLECs, and rural ILECs have expressed strong concern that the public has not been fully informed, nor given the opportunity to comment, as to the specifics of the proposals. On November 3, 2008, the FCC Chairman pulled the intercarrier compensation and Universal Service reform items from the agenda. The other Commissioners have urged the Chairman to put specific proposals out for public comment, with the intent to act on the proposals in December. At this time we do not know what specific actions the FCC will take, nor do we know what financial impact it would have on us.

Customer Disconnections and Pricing Trends

Increasing consolidation in the telecommunications industry has occurred in recent years, and in some cases has reduced our revenue from the customers involved. If any of our other carrier customers are acquired or merge, we may lose a portion of their business, which could have a significant impact on our revenue. Consolidation could also result in other communications companies becoming more formidable competitors, which could result in pressure on our revenue growth. The consolidations involving AT&T over the past several years have and may continue to result in the combined company buying less local transport service from us in SBC’s and BellSouth’s former local service areas. In addition, our revenue from AT&T’s wireless unit (formerly Cingular Wireless) has been declining over the past 11 quarters due to Cingular’s acquisition of AT&T Wireless in 2004 and Cingular’s acquisition by AT&T in 2006 and is expected to further decline. In the three months ended September 30, 2008 compared to the same period last year, total revenue declined $1.9 million as a result of disconnects from this customer. Revenue from AT&T’s wireless unit represented less than 1% of our total revenue for the three months ended September 30, 2008 compared with less than 2% of our total revenue for the three months ended September 30, 2007. The revenue impact of AT&T’s acquisitions of SBC and BellSouth may be mitigated by revenue commitments in our agreement with AT&T. As a result, we do not expect that the impact of these consolidations will materially affect our total revenue through the end of 2010. Revenue from AT&T, including AT&T’s wireless unit, represented 5% and 7% of our total revenue for the three months ended September 30, 2008 and 2007, respectively.

Monthly revenue loss from disconnects averaged 1.2% of monthly revenue for the three months ended September 30, 2008, which is consistent with an average of 1.2% for the full year 2006 and up from an average of 1.1% for the full year 2007. Customer and service disconnects occur as part of the normal course of business and are primarily associated with industry consolidation, customer network optimization, cost cutting, business contractions, customer financial difficulties, the impact of the economic downturn, discontinuance of certain acquired products or price competition from other providers. We have experienced a concentration of churn from the acquired customer base that buys less complex services, especially smaller customers, as well as mortgage related businesses and carriers over the past year. We expect to continue to experience customer and service disconnects for these reasons and expect that higher revenue churn may continue.

Average monthly customer churn was 1.5% and 1.0% for the three months ended September 30, 2008 and 2007, respectively. Most of this churn came from our small acquired customers that are below our desired service profile, which we expect to continue.

Our revenue and margins may also be reduced as a result of price-cutting by other telecommunications service providers or by pricing pressure on certain more mature products such as point of presence to point of presence dedicated services and inter-city point to point transport services, especially as existing contracts expire and we negotiate renewals.

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Pricing of Special Access Services

We provide special access services over our own fiber facilities in competition with ILECs, and we also purchase special access and other services from ILECs to extend the reach of our network. The ILECs have argued before the FCC that the broadband services that they sell, including special access services we buy from them, should no longer be subject to regulation governing price and quality of service. If the special access services we buy from the ILECs were to be further deregulated, ILECs would have a greater ability to increase the price and reduce the service quality of special access services they sell to us.

We have advocated before the FCC that it should modify its special access pricing flexibility rules so that these services return to price-cap regulation to protect against unreasonable price increases. The FCC is reviewing its regulation of special access pricing in a pending proceeding. In addition, the ILECs have filed numerous petitions for forbearance from regulation of their broadband special access services, including Ethernet services offered as special access. The FCC has granted several of these petitions with the result that prices for the Ethernet and OC-n high capacity data services of the petitioning carriers are no longer regulated. We and several of our competitors have appealed these FCC rulings. These FCC actions did not impact the availability of the tariffed time division multiplexed special access circuits that we use for access to buildings that are not connected to our network with our fiber. We expect that the ILECs will continue to advocate deregulation of all forms of special access services, and we cannot predict the outcome of the FCC’s proceedings in this regard or the impact of that outcome on our business.

In 2005, we negotiated a five-year wholesale service agreement with AT&T Inc. (formerly SBC Communications Inc.) under which AT&T supplies us with special access and other services for end user access and transport with certain service level commitments through 2010 in SBC’s former 13 state local service territories. We have agreed to maintain certain volume levels in order to receive specified discounts and other terms and conditions, and are subject to certain penalties for early termination of the contract. We have a similar three year agreement with AT&T for the former BellSouth service area that expired in October 2008 and is being renegotiated. After expiration of the agreement, AT&T’s ability to increase its special access prices is limited by FCC imposed conditions on its merger with BellSouth until 2010. We have agreements or tariffed term and volume plans with the other ILECs, which in some cases do not preclude prospective price increases. However, the ability of the ILECs to increase their special access prices is in some cases subject to regulatory constraints.

Name and Branding Change

As discussed above, we have changed our corporate name totw telecom inc. and began usingtw telecom as our brand name effective July 1, 2008. In connection with our name and branding change, we incurred approximately $2.9 million in branding expense and $0.3 million in capital expenditures for branding for the nine months ended September 30, 2008 and expect to spend less than $1 million in capital and operating expenditures for the remainder of 2008 associated with the name change.

Other Financial Trends

Our acquisition of Xspedius resulted in lower consolidated margins as a result of higher operating costs, especially network costs, in relationship to revenue in the acquired operations. Historically the acquired operations sold a higher proportion of services utilizing the facilities of other carriers than our previously existing operations, resulting in lower gross margins and Modified EBITDA margins (Modified EBITDA as a percentage of revenue) than we experienced prior to the acquisition. We have integrated the acquired operations with our operations and achieved synergies through cost reductions that have been reflected in expanding Modified EBITDA margins over the past five quarters. Our Modified EBITDA margin, which declined to 29% following our acquisition of Xspedius, has improved to our pre-acquisition margin of 35% for the three months ended September 30, 2008 reflecting revenue growth and cost synergies.

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We have historically experienced and expect to continue to experience fluctuations in our revenue, margins, and cash flows in the normal course of business from customer and service disconnects, the timing of sales and installations, seasonality of sales and usage, customer disputes and dispute resolutions and repricing of services upon contract renewals. However, we cannot predict the total impact on revenue, margins, and cash flows from these items or their timing.

We have undertaken several initiatives to increase revenue growth, margins and cash flows including revenue assurance and retention initiatives, cost reduction measures such as network grooming and pricing optimization intended to reduce the overall access costs paid to carriers, enhancing back office support systems to improve operating efficiencies, and network investment initiatives to reduce the cost of equipment to increase overall capital efficiency. If our revenue growth, margins and cash flows decline in the future, we cannot predict whether continued initiatives will be sufficient to maintain current financial performance.

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:

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

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

Goodwill

We perform impairment tests at least annually on all goodwill and indefinite-lived intangible assets as required by Financial Accounting Standards Board (“FASB”) Statement No. 142,Goodwill and Other Intangible Assets (“SFAS 142”). Our goodwill and indefinite-lived intangible assets have grown significantly due to our acquisition of Xspedius and the related purchase price allocation. SFAS 142 requires goodwill to be assigned to a reporting unit and tested using a consistent measurement date, which for us is the fourth quarter of each year or more frequently if impairment indicators arise. For purposes of testing goodwill for impairment, our goodwill has been assigned to our one consolidated reporting unit. Potential impairment is indicated when the book value of a reporting unit, including goodwill, exceeds its fair value. If a potential impairment exists, the fair value of the reporting unit is compared to the fair value of its assets and liabilities, excluding goodwill, to estimate the implied value of the reporting unit’s goodwill. If an impairment charge is deemed necessary, a charge is recognized for any excess of the book value over the implied fair value. We determine fair value by performing internal valuation analyses using discounted cash flow, which is a widely accepted valuation technique. Considerable management judgment is necessary to estimate the fair value of assets using inputs such as discount rate and terminal value, among others; accordingly, actual results could vary significantly from estimates.

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.

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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 our eight regions. 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.

Regulatory and Other Contingencies

We are subject to significant government regulation, some of which is uncertain due to legal challenges of existing rules. Such regulation is subject to different interpretations and 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 expectations regarding regulatory rulings, historic experience and ongoing negotiations. We evaluate these reserves on an ongoing basis and make adjustments as necessary.

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 September 30, 2008, our net deferred tax asset after a valuation allowance of $329.5 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 approximate our best estimates including market growth rates, future pricing, market acceptance of our products and services, future expected capital investments and discount rates. No material changes have been made to our estimates since December 31, 2007.

At September 30, 2008, we had net operating loss carryforwards for federal income tax purposes of approximately $1.1 billion. These net operating loss carryforwards, if not utilized to reduce taxable income in future periods, will expire in various amounts beginning in 2019 and ending in 2026.

Revenue and Receivables

Our services are complex and our tariffs and contracts may be correspondingly complex and subject to interpretations that cause 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, such as contract termination charges. We also reserve for customer billing disputes until they are resolved even if the customer has already paid the disputed amount.

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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. As a result of, among other things, our overall receivables management, our bad debt expense historically has trended below 1% as a percentage of our total revenue. For the three months ended September 30, 2008, bad debt expense increased to 1% of our total revenue as a result of the current economic environment.

Stock-Based Compensation

We apply the fair value method of accounting for stock-based compensation using the modified prospective method of transition as outlined in Financial Accounting Standards Board Statement No. 123R, Share-Based Payment (“SFAS 123R”). Under SFAS 123R, the estimated fair value of stock-based compensation is recognized as compensation expense. The estimated fair value of stock options is expensed on a straight-line basis over the expected term of the grant. We use the Black-Scholes pricing model to estimate the fair value of the stock-based compensation as of the grant date. The Black-Scholes model by its design is dependent upon key data inputs estimated by management such as expected volatility, expected term and expected dividend yield. See Note 1 to our condensed consolidated financial statements for further discussion of stock-based compensation.

Other Estimates

Our condensed consolidated financial statements reflect other accounting estimates, 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.

During the three and nine months ended September 30, 2008, we recognized losses of $3.7 million and $7.8 million, respectively, on commercial paper with exposure to sub-prime mortgages that is past its maturity date resulting from impairment losses and upon liquidation of one of these securities. The carrying value of the remaining securities after recognition of the impairment loss is $3.0 million at September 30, 2008. These securities are classified as long term investments in the condensed consolidated balance sheet. The carrying value of these securities represents an estimate of the fair value of the investments based principally on data from financial advisors for the commercial paper holders. The valuation considered a combination of (i) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; (ii) individual valuation estimates of the securities underlying the commercial paper using multiple indicators of value; and (iii) the probabilities of repayment of the underlying securities under various liquidation scenarios. At September 30, 2008, investments included in cash and cash equivalents were measured at fair value and comprised of U.S. treasury money market funds that were traded in an active market and for which prices are readily available.

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

New Accounting Pronouncements

See Note 1 to the condensed consolidated financial statements for the impact of new accounting pronouncements on our condensed consolidated financial statements.

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Results of Operations

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2008				2007				2008				2007
	(amounts in thousands, except per share amounts)								(amounts in thousands, except per share amounts)
Statements of Operations Data:
Revenue:
Data and Internet services	$	102,282	35	%	$	82,359	30	%	$	292,390	34	%	$	230,780	29	%
Network services		96,152	33			98,669	36			291,762	34			296,229	37
Voice services		83,927	29			82,475	30			251,707	29			242,700	30
Intercarrier compensation		9,258	3			11,290	4			28,514	3			34,494	4
Total revenue		291,619	100			274,793	100			864,373	100			804,203	100
Costs and expenses (1):
Operating (exclusive of depreciation, amortization, and accretion shown separately below) (1)		123,051	42			118,412	43			365,146	42			350,859	43
Selling, general, and administrative (1)		71,408	24			75,695	28			221,371	26			223,792	28
Depreciation, amortization, and accretion		71,537	25			71,580	26			212,315	25			206,325	26
Total costs and expenses		265,996	91			265,687	97			798,832	92			780,976	97
Operating income		25,623	9			9,106	3			65,541	7			23,227	3
Interest expense		(18,771)	(6)			(22,623)	(8)			(58,310)	(7)			(68,794)	(9)
Interest income		1,518	1			4,528	2			5,742	1			13,614	2
Other loss		(3,672)	(1)			(2,415)	(1)			(7,767)	(1)			(2,415)	—
Income (loss) before income taxes		4,698	2			(11,404)	(4)			5,206	1			(34,368)	(4)
Income tax expense		897	—			179	—			1,650	—			609	—
Net income (loss)	$	3,801	1	%	$	(11,583)	(4)	%	$	3,556	—	%	$	(34,977)	(4)	%
Income (loss) per share, basic and diluted	$	0.03			$	(0.08)			$	0.02			$	(0.24)
Weighted average shares outstanding, basic		147,443				145,174				147,131				144,564
Weighted average shares outstanding, diluted		148,914				145,174				148,977				144,564
Modified EBITDA (2)(3)	$	102,630	35	%	$	86,431	31	%	$	294,767	34	%	$	245,742	31	%
Net cash provided by operating activities	$	79,391			$	58,365			$	210,044			$	168,356
Net cash used in investing activities	$	(71,109)			$	(37,271)			$	(198,733)			$	(171,188)
Net cash provided by financing activities	$	249			$	5,250			$	845			$	18,764

(1) Includes the following non-cash stock-based employee compensation:

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	Three Months Ended September 30,				Nine Months Ended September 30,
	2008		2007		2008		2007
	(amounts in thousands)				(amounts in thousands)
Operating	$	824	$	897	$	2,552	$	2,607
Selling, general, and administrative	$	4,646	$	4,848	$	14,359	$	13,583

(2) “Modified EBITDA” is defined as net income (loss) before depreciation, amortization, and accretion expense, interest expense, interest income, debt extinguishment costs, other income (loss), impairment charges, income tax expense, cumulative effect of change in accounting principle, and non-cash stock-based compensation. Modified EBITDA is not intended to replace operating income (loss), net income (loss), cash flow and other measures of financial performance and liquidity reported in accordance with accounting principles generally accepted in the United States. Rather, Modified EBITDA is a measure of operating performance and liquidity that investors may consider in addition to such measures. Our management believes that Modified EBITDA is a standard measure of operating performance and liquidity that is commonly reported and widely used by analysts, investors, and other interested parties in the telecommunications industry because it eliminates many differences in financial, capitalization, and tax structures, as well as non-cash and non-operating charges to earnings. We believe that Modified EBITDA trends are a valuable indicator of whether our operations are able to produce sufficient operating cash flow to fund working capital needs, service debt obligations, and fund capital expenditures. We currently use Modified EBITDA for these purposes. Modified EBITDA also is used internally by our management to assess ongoing operations and is a measure used to test compliance with certain covenants of our senior notes, our revolving credit facility and our term loan. The definition of EBITDA under our revolving credit facility, our term loan and our senior notes differs from the definition of Modified EBITDA used in this table. The definition of EBITDA in our credit facility discussed below also eliminates certain non-cash losses within certain limits and certain extraordinary gains and the senior notes definition eliminates other non-cash items. However, the resulting calculation is not materially different for the periods presented. Modified EBITDA as used in this document may not be comparable to similarly titled measures reported by other companies due to differences in accounting and disclosure policies. The reconciliation between net income (loss) and Modified EBITDA is as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2008			2007			2008			2007
	(amounts in thousands)						(amounts in thousands)
Net income (loss)	$	3,801		$	(11,583	)	$	3,556		$	(34,977	)
Income tax expense		897			179			1,650			609
Other loss		3,672			2,415			7,767			2,415
Interest income		(1,518	)		(4,528	)		(5,742	)		(13,614	)
Interest expense		18,771			22,623			58,310			68,794
Depreciation, amortization, and accretion		71,537			71,580			212,315			206,325
Non-cash stock-based compensation		5,470			5,745			16,911			16,190
Modified EBITDA	$	102,630		$	86,431		$	294,767		$	245,742

(3) Modified EBITDA margin represents Modified EBITDA as a percentage of revenue.

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Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

Revenue. Total revenue increased $16.8 million, or 6%, to $291.6 million for the three months ended September 30, 2008, from $274.8 million for the comparable period in 2007. The primary contributor to the growth in revenue was increased data and Internet services revenue from sales to enterprise customers.

Data and Internet services revenue increased $19.9 million, or 24%, to $102.3 million for the three months ended September 30, 2008, from $82.4 million for the comparable period in 2007. The increase in data and Internet services revenue primarily resulted from growth in revenue from enterprise customers and our Ethernet and IP-based product sales.

Revenue from network services decreased $2.5 million, or 3%, to $96.2 million for the three months ended September 30, 2008 from $98.7 million for the comparable period in 2007. The decrease in network services revenue was primarily from repricing of renewed customer contracts and disconnects predominantly from carrier customers including a $1.9 million decrease from one wireless customer.

Voice services revenue increased $1.5 million, or 2%, to $83.9 million for the three months ended September 30, 2008 from $82.5 million for the comparable period in 2007. The increase was predominantly from growth in bundled and other local product sales partially offset by churn in the acquired customer base and from mortgage related businesses. Usage based revenue included in voice services was 4% and 5% of our total revenue for the three months ended September 30, 2008 and 2007, respectively, and declined as a percentage of total revenue due to growth in data and Internet services.

Intercarrier compensation revenue, including switched access and reciprocal compensation, decreased $2.0 million, or 18%, to $9.3 million for the three months ended September 30, 2008 from $11.3 million for the comparable period in 2007. The decrease was primarily due to rate reductions.

Operating Expenses. Our operating expenses consist of costs directly related to the operation and maintenance of our networks and the provisioning of our services. These costs include the salaries and related expenses of customer care, provisioning, network maintenance, technical field and network operations and engineering personnel, costs to repair and maintain our network, and costs paid to other carriers for access to their facilities, interconnection, and facilities leased and associated utilities. We carry a significant portion of our traffic on our own fiber infrastructure, which enhances our ability to control access costs, which are the costs to purchase network services from other carriers. Operating expenses increased by $4.6 million, or 4%, to $123.1 million for the three months ended September 30, 2008, from $118.4 million for the comparable period in 2007. The increase in operating expenses is primarily due to higher direct costs associated with serving our customers resulting from revenue growth, an increase in employee expense related to the continuing effect of annual merit-based salary increases and higher utility expenses. The impacts of these increases were partially offset by achievement of cost synergies through increased use of our network facilities by the acquired operations instead of other carriers’ facilities and network optimization through grooming efforts intended to reduce costs. Operating expenses declined to 42% of total revenue for the three months ended September 30, 2008 compared to 43% of total revenue for the same period in 2007, reflecting synergies from the integration of acquired operations and scaling of our business. We continue our network grooming and pricing optimization activities intended to reduce the overall costs paid to carriers as a percentage of total revenue.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses consist of salaries and related costs for employees and other expenses related to sales and marketing, bad debt, information technology, billing, regulatory, administrative, and legal functions. Selling, general, and administrative expenses decreased $4.3 million, or 6%, to $71.4 million for the three months ended September 30, 2008, from $75.7 million for the comparable period in 2007. The decrease is primarily due to integration synergies, favorable transactional tax settlements, and a decline in employee related expenses attributable to cost containment

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initiatives and reduced integration expenses. These reductions were partially offset by the continuing effect of annual merit-based salary increases and higher commissions, an increase in branding expenses and higher bad debt expense. Selling, general, and administrative expenses declined to 24% of total revenue for the three months ended September 30, 2008 compared to 28% of total revenue for the same period in 2007, reflecting synergies from the integration of acquired operations and scaling of our business.

Depreciation, Amortization, and Accretion Expense. Depreciation, amortization, and accretion expense, for the three months ended September 30, 2008 and 2007, remained relatively consistent. The increases attributable to additions to property, plant and equipment made during 2007 and 2008 were offset by a reduction in depreciation as older assets became fully depreciated.

Interest Expense.Interest expense decreased $3.9 million, or 17%, to $18.8 million for the three months ended September 30, 2008, from $22.6 million for the comparable period in 2007. The decrease is primarily due to lower interest rates on our variable rate Term Loan (defined below). Based on changes in the variable rate subsequent to September 30, 2008, we expect an estimated increase in interest expense of up to 5% for the three months ended December 31, 2008 compared to the three months ended September 30, 2008.

Interest Income. Interest income decreased $3.0 million, or 66%, to $1.5 million for the three months ended September 30, 2008, from $4.5 million for the comparable period in 2007. The decrease is due to a decline in interest rates earned on investments resulting from a shift of investments from commercial paper to money market funds heavily weighted in government securities.

Other Loss.During the three months ended September 30, 2008 and 2007, we recognized a $3.7 million and $2.4 million loss, respectively, resulting from an impairment of commercial paper investments that we hold past the maturity dates and upon liquidation of one of these securities. See Note 1 to our condensed consolidated financial statements.

Net Income (Loss) and Modified EBITDA. Net income was $3.8 million, or $0.03 per share, for the three months ended September 30, 2008 compared to a net loss of $11.6 million, or $0.08 per share for the comparable period in 2007. The change of $15.4 million primarily resulted from increased revenue, decreased selling, general and administrative costs slightly offset by an increase in operating expenses and the other loss described above. Modified EBITDA increased $16.2 million to $102.6 million, or 35% of total revenue for the three months ended September 30, 2008, from $86.4 million, or 31% of total revenue for the comparable period in 2007. The increase in Modified EBITDA and Modified EBITDA margin resulted from revenue growth and a lower rate of operating and selling, general and administrative expense increases due to integration cost synergies and scaling of our business.

Modified EBITDA is defined as net income or loss before depreciation, amortization, accretion, impairment charges, interest expense, interest income, debt extinguishment costs, other income (loss), income tax expense, cumulative effect of change in accounting principle, and non-cash stock-based compensation. We believe that Modified EBITDA is a standard measure of operating performance and liquidity that is commonly reported and widely used by analysts, investors, and other interested parties in the telecommunications industry because it eliminates many differences in financial, capitalization, and tax structures, as well as non-cash and non-operating income or charges to earnings. Modified EBITDA is not intended to replace operating income (loss), net income (loss), cash flow, and other measures of financial performance and liquidity reported in accordance with generally accepted accounting principles. We use Modified EBITDA internally to assess on-going operations and it is the basis for various financial covenants contained in our debt agreements. Although we expect to continue to generate positive Modified EBITDA in the future as we expand our business in existing markets, there is no assurance that we will sustain the current level of Modified EBITDA or sufficient positive Modified EBITDA to meet our working capital requirements, comply with our debt agreements, and service our indebtedness. See Note 2 to the table under “Results of Operations” for a reconciliation between net income (loss) and Modified EBITDA.

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Nine Months Ended September 30, 2008 Compared to Nine Months Ended September 30, 2007

Revenue. Total revenue increased $60.2 million, or 7%, to $864.4 million for the nine months ended September 30, 2008, from $804.2 million for the comparable period in 2007. The primary contributor to the growth in revenue was increased data and Internet services revenue from sales to enterprise customers.

Data and Internet services revenue increased $61.6 million, or 27%, to $292.4 million for the nine months ended September 30, 2008, from $230.8 million for the comparable period in 2007. The increase in data and Internet services revenue primarily resulted from growth in revenue from enterprise customers and our Ethernet and IP-based product sales.

Revenue from network services decreased $4.5 million, or 2%, to $291.8 million for the nine months ended September 30, 2008 from $296.2 million for the comparable period in 2007. The decrease in network services revenue was primarily from repricing of renewed customer contracts and disconnects primarily from carrier customers, including $6.7 million from one wireless customer, partially offset by new customer sales.

Voice services revenue increased $9.0 million, or 4%, to $251.7 million for the nine months ended September 30, 2008 from $242.7 million for the comparable period in 2007. The increase was predominantly from growth in bundled and other local product sales, partially offset by churn in the acquired customer base and from mortgage related businesses. Usage based revenue included in voice services was 4% and 5% of our total revenue for the nine months ended September 30, 2008 and 2007, respectively, and declined as a percentage of total revenue due to growth in data and Internet services revenue.

Intercarrier compensation revenue, including switched access and reciprocal compensation, decreased $6.0 million, or 17%, to $28.5 million for the nine months ended September 30, 2008 from $34.5 million for the comparable period in 2007. The decrease was primarily due to rate reductions, increased disputes, and discontinuance of certain products previously offered by Xspedius.

Operating Expenses. Operating expenses increased by $14.3 million, or 4%, to $365.1 million for the nine months ended September 30, 2008, from $350.9 million for the comparable period in 2007. The increase in operating expenses is primarily due to higher direct costs associated with serving our customers resulting from increased revenue, an increase in employee expense resulting from increased average headcount and annual merit-based salary increases, additional costs to launch new product capabilities in 16 acquired markets and increased utility costs. The impacts of these increases were partially offset by achievement of cost synergies through increased use of our network facilities by the acquired operations instead of other carriers’ facilities and network optimization. Operating expenses declined to 42% of total revenue for the nine months ended September 30, 2008 compared to 43% of total revenue for the same period in 2007 reflecting synergies from the integration of acquired operations and scaling of our business. We continue our network grooming and cost optimization activities intended to reduce the overall costs paid to carriers as a percentage of total revenue.

Selling, General, and Administrative Expenses. Selling, general, and administrative expenses decreased $2.4 million, or 1%, to $221.4 million for the nine months ended September 30, 2008, from $223.8 million for the comparable period in 2007. The decrease is primarily due to lower integration expenses, higher capitalized labor, cost containment initiatives, and integration synergies somewhat offset by an increase in branding expenses associated with our name change, bad debt expense and employee compensation expense as a result of increased average employee headcount, annual merit-based salary increases, and non-cash stock-based compensation. Selling, general, and administrative expenses declined to 26% of total revenue for the nine months ended September 30, 2008 compared to 28% of total revenue for the same period in 2007 reflecting synergies from the integration of acquired operations and scaling of our business.

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Depreciation, Amortization, and Accretion Expense. Depreciation, amortization, and accretion expense increased $6.0 million, or 3%, to $212.3 million for the nine months ended September 30, 2008, from $206.3 million for the comparable period in 2007. The increase was primarily attributable to additions to property, plant and equipment made during 2007 and 2008. These increases were partially offset by a reduction in depreciation as certain assets became fully depreciated.

Interest Expense.Interest expense decreased $10.5 million, or 15%, to $58.3 million for the nine months ended September 30, 2008, from $68.8 million for the comparable period in 2007. The decrease is primarily due to lower interest rates on the variable rate Term Loan.

Interest Income. Interest income decreased $7.9 million, or 58%, to $5.7 million for the nine months ended September 30, 2008, from $13.6 million for the comparable period in 2007. The decrease is due to a decline in interest rates earned on investments resulting from a shift of investments from commercial paper to money market funds heavily weighted in government securities.

Other Loss. During the nine months ended September 30, 2008 and 2007, we recognized a $7.8 million and $2.4 million loss, respectively, resulting from an impairment of commercial paper investments that we hold past the maturity dates and upon liquidation of one of these securities. See Note 1 to our condensed consolidated financial statements.

Net Income (Loss) and Modified EBITDA. Net income was $3.6 million, or $0.02 per share, for the nine months ended September 30, 2008 compared to a net loss of $35.0 million, or $0.24 per share for the comparable period in 2007. The change of $38.6 million primarily resulted from increased revenue, decreased selling, general and administrative expense, a reduction in net interest expense partially offset by an increase in operating and depreciation expenses and the other loss described above. Modified EBITDA increased $49.0 million to $294.8 million, or 34% of total revenue for the nine months ended September 30, 2008, from $245.7 million, or 31% of total revenue from the comparable period in 2007. The increase in Modified EBITDA and Modified EBITDA margin resulted from revenue growth and a lower rate of operating expense increases due to integration cost synergies and scaling of our business.

Liquidity and Capital Resources

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

At September 30, 2008, we had $1.4 billion of total debt and $333.7 million of cash and cash equivalents compared to $1.4 billion of total debt and $321.5 million of cash and cash equivalents at December 31, 2007. Net debt (defined as total debt less cash and cash equivalents) was $1.0 billion at September 30, 2008 and $1.1 billion at December 31, 2007.

Working capital, defined as current assets less current liabilities, was $174.9 million as of September 30, 2008, an increase of $43.5 million from December 31, 2007. Our working capital ratio, defined as current assets divided by current liabilities, was 1.69 as of September 30, 2008 as compared to 1.46 as of December 31, 2007. The increase in working capital is a result of Modified EBITDA exceeding net interest expense and capital expenditures.

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Cash Flow Activity

Cash and cash equivalents were $333.7 million and $321.5 million as of September 30, 2008 and December 31, 2007, respectively. The change in cash and cash equivalents during the periods presented were as follows:

	Nine months ended September 30,
	2008			2007
	(amounts in thousands)
Cash provided by operating activities	$	210,044		$	168,356
Cash used in investing activities		(198,733	)		(171,188	)
Cash provided by financing activities		845			18,764
Increase in cash and cash equivalents	$	12,156		$	15,932

Operations. Cash provided by operating activities was $210.0 million for the nine months ended September 30, 2008 compared to $168.4 million for the same period in 2007. This increase in cash provided by operating activities primarily related to higher Modified EBITDA and changes in working capital, primarily due to the timing of payments to vendors and lower interest payments as a result of lower average interest rates on the Term Loan. The changes in components of working capital are generally subject to fluctuations based on the timing of cash transactions related to collection of receivables and payments to vendors and employees and interest payments, among other items.

Investing. Cash used in investing activities was $198.7 million for the nine months ended September 30, 2008 compared to $171.2 million for the same period in 2007. The change is primarily a result of a decrease in net proceeds from investment as we shifted investments from commercial paper to money market funds heavily weighted in government securities and increased capital expenditures. At September 30, 2008, investments included in cash and cash equivalents were comprised of U.S. treasury money market funds. Cash used for capital expenditures in the nine months ended September 30, 2008 was $201.7 million, the majority of which was used to expand our networks in our existing markets and to reach new customer buildings compared to $191.9 million in the nine months ended September 30, 2007. Capital expenditures for integration included in these amounts were $7.0 million and $25.3 million in the nine months ended September 30, 2008 and 2007, respectively.

Financing. Cash provided by financing activities was $0.8 million for the nine months ended September 30, 2008, primarily from proceeds from the exercise of stock options substantially offset by quarterly interest payments on the $600 million Term Loan. Cash provided by financing activities was $18.8 million for the nine months ended September 30, 2007, primarily from proceeds from the exercise of stock options and purchases of common stock under our employee stock purchase plan somewhat offset by quarterly payments on the $600 million Term Loan.

As of September 30, 2008, we had outstanding $400 million principal amount of 9¹/4% Senior Notes due 2014 (“2014 Notes”), $373.8 million principal amount of Convertible Debentures due 2026 (“Convertible Debentures”), $589.5 million of our Term Loan due 2013 (“Term Loan”) and the undrawn $100 million Revolver maturing 2011 (“Revolver”) of which $20 million is believed to be currently unavailable to the Company because one of the lenders of the Revolver is a financial institution (a Lehman Brothers affiliate) that filed for reorganization under Chapter 11 of the Bankruptcy Code in September 2008. If any of the other lenders under the Revolver were to go into bankruptcy or receivership, we may be unable to access a portion of the remaining $80 million of the Revolver that is available to us. The interest on the Term Loan is computed based on a specified Eurodollar rate plus 1.75% to 2.0%. On April 30, 2008, we entered into a two year interest rate swap with a 3.23% fixed interest rate that hedges the first $100 million of our $600 million principal amount

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variable rate Term Loan for a total rate, including the applicable spread, of 5.23% on a notional amount of $100 million. On November 5, 2008, we entered into a three year interest rate swap commencing November 28, 2008 with a 2.96% fixed interest rate that hedges the interest rate on the second $100 million of our variable rate Term Loan resulting in a total rate, including the applicable spread, of 4.96% on a notional amount of $100 million. Based on the interest rate of 5.7% in effect at September 30, 2008, aggregate annual interest payments on $589.5 million of borrowings outstanding under the Term Loan, including the interest rate swaps in effect at November 5, 2008, would be $32.4 million. Aggregate annual interest payments on the 2014 Notes and the Convertible Debentures are $37.0 million and $8.9 million, respectively. See Note 2 to our condensed consolidated financial statements for a complete description of the terms of our outstanding debt.

In order to reduce future cash interest payments, as well as future amounts due at maturity or mandatory redemption and reduce our leverage, we or our affiliates may, from time to time, enter into additional interest rate swap agreements or purchase our outstanding 2014 Notes or Convertible Debentures for cash or equity securities in the open market or privately negotiated transactions or engage in other transactions to reduce the amount of outstanding 2014 Notes or Convertible Debentures. Under the terms of our Revolver, which is more restrictive than our Term Loan or the Indenture for the 2014 Notes, we currently may repurchase a portion of our 2014 Notes or Convertible Debentures if we meet a minimum current liquidity test of $300 million and other tests and do not use the Revolver proceeds for this purpose. In addition, in order to reduce dilution, we may consider repurchasing shares of our common stock in a public or private transaction. Our Revolver would permit a repurchase of up to $50 million of our stock in the aggregate if after the transaction we still have a minimum of $225 million in cash and cash equivalents and meet certain other conditions. This test under the Revolver is more restrictive than our other debt agreements. We could also prepay our Term Loan in whole or in part. We will evaluate any such transactions in light of market conditions, taking into account our liquidity and prospects for future access to capital, benefits to us of any such transaction and contractual constraints.

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The following diagram summarizes our corporate structure in relation to our outstanding indebtedness and credit facility as of September 30, 2008. The diagram does not depict all aspects of ownership structure among the operating and holding entities, but rather summarizes the significant elements relative to our debt in order to provide a basic overview.

Capital Expenditures and Requirements

Our total capital expenditures were $204.0 million for the nine months ended September 30, 2008 compared to $192.9 million for the same period in 2007. We incurred capital expenditures to develop and expand our network, products and systems and spent $7.0 million in connection with the integration of the acquired operations. Success based spending consists of short-to-medium term capital expenditures made primarily to enable revenue producing activities, including costs to connect to new customer locations with our fiber network and increase capacity to our networks, IP backbone and central office infrastructure to serve growing customer demands. The increase in capital expenditures year over year was primarily due to increased success based capital investments, including to fund the expansion of our markets, collocation facilities, national IP backbone, regional fiber networks as well as other IT investments to increase efficiencies and enhance our disaster recovery capabilities partially offset by a reduction in integration capital expenditures. For 2008, we expect total capital expenditures of approximately $275 million, which we expect will primarily be used to fund growth opportunities. We generally do not make long-term commitments for capital expenditures and have the ability to adjust our capital expenditures if our cash from operations is lower than anticipated.

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Capital Resources

In 2008, we expect that cash from operations, along with cash, cash equivalents and investments will provide sufficient funds to meet our expected capital expenditure requirements and liquidity needs to operate our business and service our current debt. Based on current assumptions, we expect to generate sufficient cash from operations along with available cash on hand, including cash equivalents, investments, and borrowing capacity under our Revolver to provide sufficient funds to meet our expected capital expenditure and liquidity needs to operate our business and service our debt for the foreseeable future. We believe that as of September 30, 2008, the absence of significant debt maturities until 2013, the absence of financial maintenance covenants in our outstanding Term Loan, $333.7 million in cash and an undrawn Revolver, provides us flexibility to make investments that we deem appropriate for ongoing opportunities. However, if our assumptions prove incorrect or if there are other factors that negatively affect our cash position such as material unanticipated losses, a significant reduction in demand for our products or an acceleration of customer disconnects or other risk factors, we may need to seek additional sources of funds through financing or other means. Of the undrawn $100 million Revolver, we believe that $20 million is currently unavailable to us because one of the lenders of the Revolver is a financial institution (a Lehman Brothers affiliate) that filed for reorganization under Chapter 11 of the Bankruptcy Code in September 2008. If any of the other lenders under the Revolver were to go into bankruptcy or receivership, we may be unable to access a portion of the remaining $80 million of the Revolver that is available to us.

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

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

The Revolver and Term Loan limit our ability to declare cash dividends, incur indebtedness, incur liens on property, and undertake acquisitions. The Revolver and Term Loan also include cross default provisions under which we are deemed to be in default if we default under any of our other material outstanding obligations, such as our 2014 Notes. In addition, each group of lenders under the Revolver and Term Loan may require a prepayment if a change of control occurs as defined in the Revolver and Term Loan agreements. If we do not comply with the covenants, we would not be able to draw funds under the Revolver or the lenders could cancel the Revolver unless the lenders agree to further modify the covenants. If we are in default under any of the covenants, we also could potentially be subject to an acceleration of the repayment date of the Term Loan and the

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Revolver, if we have borrowed under that facility. Although we believe our relationships with our lenders are good, there is no assurance that we would be able to obtain the necessary covenant modifications on acceptable terms or at all. The current tightening of credit markets may make such modifications more difficult to obtain than in the past. If our plans or assumptions change or prove to be inaccurate, or the foregoing sources of funds prove to be insufficient to fund our growth and operations, or if we consummate acquisitions or joint ventures, we would be required to seek additional capital. Additional sources of financing may include public or private debt, equity financing by us or our subsidiaries, or other financing arrangements. There is no assurance that we would be able to obtain additional financing on terms acceptable to us or at all, especially in the current credit environment where traditional sources of financing may not be as readily available to us as in the past. Other risk factors, such as a ratings downgrade could further impact our potential access to financing sources.

Our revenue and costs are partially dependent upon factors that are outside our control, such as general economic conditions, regulatory changes, adverse changes in customers’ financial condition, changes in technology, and increased competition. Due to the uncertainty of these and other factors, actual revenue and costs may vary from expected amounts, possibly to a material degree, and these variations would likely affect the level of our future capital expenditures and expansion plans.

Commitments. Our long-term commitments have not materially changed from those disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007.

Effects of Inflation

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our interest income is sensitive to changes in the general level of interest rates. In this regard, changes in interest rates can affect the interest earned on our cash and cash equivalents. Based on our cash and cash equivalents of $333.7 million on September 30, 2008, a one-percent change in the annual interest rate would change the interest earned by $3.3 million. At September 30, 2008, investments included in cash and cash equivalents were comprised of treasury money market funds. To mitigate our risk of exposure to the current market conditions, for the near-term we expect to continue to invest in market funds composed entirely or primarily of U.S. treasury securities as these investments are considered less risky. We are exposed to risks resulting from deterioration in the financial condition of financial institutions holding our cash deposits, the investment managers of the money market funds and defaults in securities underlying the funds, but to the extent practical we diversify our investments amongst several institutions to minimize exposure to any one of these institutions or funds.

At September 30, 2008, we held commercial paper of $3.0 million, after giving effect to an impairment loss of $7.8 million in the nine months ended September 30, 2008, with exposure to sub-prime mortgages that is past its maturity date. These securities are classified as long-term investments in the September 30, 2008 condensed consolidated balance sheet. We do not expect the current lack of liquidity of this commercial paper to adversely impact our ability to meet capital expenditure and other liquidity needs.

We have fixed and variable rate debt. Our exposure with respect to variable rate debt is from changes in the Eurodollar rate as interest on the Term Loan varies based on a specified Eurodollar rate. We have entered into interest rate swap agreements to mitigate interest fluctuations in our variable rate Term Loan. On April 30, 2008, we entered into a two year interest rate swap with a 3.23% fixed interest rate that hedges the interest rate on the first $100 million of our variable rate Term Loan resulting in a total rate, including the applicable spread, of 5.23% on a notional amount of $100 million. On November 5, 2008, we entered into a three year interest rate swap commencing November 28, 2008 with a 2.96% fixed interest rate that hedges the interest rate on the second $100 million of our variable rate Term Loan resulting in a total rate, including the applicable spread, of 4.96% on

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a notional amount of $100 million. Based on the $589.5 million outstanding balance as of September 30, 2008 and the interest rate swaps in effect at November 5, 2008, a one-percent change in the applicable rate would change the annual amount of interest paid by $3.9 million. We had variable-rate debt instruments representing approximately 29%, 36% and 43% of our total debt at November 5, 2008, September 30, 2008 and December 31, 2007, respectively. Based on changes in the variable rate subsequent to September 30, 2008, we expect an estimated increase in interest expense of up to 5% for the three months ended December 31, 2008 compared to the three months ended September 30, 2008.

At September 30, 2008, the fair values of our fixed rate 2014 Notes and our Convertible Debentures were approximately $370 million and $284 million, respectively, as compared to carrying values of $400 million and $373.8 million, respectively, each on the same date. These notes and debentures are not listed on any securities exchange or inter-dealer automated quotation systems, and the estimated market value is based on indicative pricing published by investment banks. While we believe these approximations to be reasonably accurate at the time published, indicative pricing can vary widely depending on volume traded by any given investment bank and other factors.

Item 4. Controls and Procedures

As of September 30, 2008, an evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2008.

There were no changes in our internal controls over financial reporting that occurred during the three months ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

We have no material legal proceedings pending.

Item 1A. Risk Factors

We may be adversely impacted by deterioration in the financial condition of financial institutions or mutual funds that hold our investments.

Our cash and cash equivalents are held in financial institutions and money market mutual funds. We actively monitor the depository institutions and the performance of the mutual funds that hold our cash and cash equivalents. Since the beginning of the current financial downturn, we have prioritized safety over investment return in choosing the investment vehicles for cash and cash equivalents, selecting mutual funds composed entirely or primarily of U.S. Treasury securities and diversifying these investments to the extent practical to minimize our exposure to any one mutual fund or financial institution. We may change the nature of our investments as market conditions change. Our daily cash sweeps are managed through a banking institution that we believe is not presently at risk of failure. Balances in our accounts with financial institutions in the U.S. may exceed the Federal Deposit Insurance Corporation insurance limit when is it impractical to spread these amounts over multiple institutions. Although we have prioritized the safety of our cash and cash equivalents, we cannot assure that access to our cash and cash equivalents will not be impacted by additional and yet unforeseeable adverse conditions in the financial markets. While we monitor and adjust the cash balances in our accounts as

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appropriate, our ability to access these cash balances could be impacted if the financial institutions fail, if there are defaults in the securities that are held in money market funds, if the investment managers of the mutual funds fail, or there are other unforeseen adverse conditions in the financial markets.

The current macro-economic environment in the U.S. and globally could affect our future operating results.

Through the end of the third quarter 2008, the current macro-economic environment had some impact on our business, reflected primarily in somewhat higher customer disconnections. However, if current conditions persist or worsen, there is risk that customer disconnections may accelerate, bad debt could increase, pricing pressure could increase and new sales may drop or be delayed due to decreased demand for our services, our customers’ cash flow constraints, customer credit deteriorations and other factors. Our operating results and financial condition could be materially and adversely affected if there were to be a material adverse change in any of these factors. In addition, the worsening economy could amplify the effect on our results of normal fluctuations in our revenue, margins, and cash flows, the timing of sales and installations, seasonality of sales and usage, customer disputes and dispute resolutions and repricing of services upon contract renewals.

Item 2. Unregistered Shares of Equity Securities and Use of Proceeds

The following table presents the Company’s purchases of equity securities reportable under Item 703 of Regulation S-K:

ISSUER PURCHASES OF EQUITY SECURITIES

Period	(a) Total Number of Shares (or Units) Purchased (1)	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
July 1 - July 31, 2008	6,163	$	16.19	—	—
August 1 - August 31, 2008	—		—	—	—
September 1 - September 30, 2008	—		—	—	—
Total	6,163	$	16.19	—	—

(1) Consists of unvested restricted shares delivered back to the Company by certain employees to satisfy tax withholding obligations that arise upon the vesting of restricted stock. The Company, pursuant to its equity compensation plans, gives certain employees the opportunity to tender back to the Company the number of shares from the award sufficient to satisfy the person’s minimum tax withholding obligations that arise upon the vesting of the restricted stock. The Company then satisfies the withholding obligation on behalf of the employee. The Company does not have any publicly announced equity securities repurchase plans or programs.

Item 6. Exhibits

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

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Signature

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

	tw telecom inc.
Date: November 7, 2008	By:	/s/    JILL R. STUART
		Jill R. Stuart Sr. Vice President, Accounting and Finance and Chief Accounting Officer

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EXHIBIT INDEX

Exhibit Number	Description of Exhibit
2.1 –	Agreement and Plan of Merger by and among Time Warner Telecom Inc., XPD Acquisition LLC, Xspedius Communications, LLC, Xspedius Management Co. LLC and Xspedius Holding Corp. dated as of July 27, 2006 (filed as Exhibit 2.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)*
3.1 –	Restated Certificate of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2007)*
3.2 –	Certificate of Amendment to Restated Certificate of Incorporation of the Company (filed as Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2008)*
3.3 –	Amended By-laws of the Company (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated September 17, 2007)*
4.1 –	Indenture between Time Warner Telecom Holdings Inc., Time Warner Telecom Inc., Subsidiary Guarantors parties thereto and Wells Fargo Bank, National Association, as Trustee for 91/4% Senior Notes due 2014 (filed as Exhibit 4.7 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2004)*
4.2 –	Indenture dated as of March 29, 2006 between Time Warner Telecom Inc. and Wells Fargo Bank, National Association, as Trustee (filed as Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)*
4.3 –	First Supplemental Indenture dated as of March 29, 2006 between Time Warner Telecom Inc. and Wells Fargo Bank, National Association, creating 2.375% Convertible Senior Debentures due 2026 (filed as Exhibit 4.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006)*
4.4 –	Credit Agreement dated October 6, 2006 between Time Warner Telecom Inc., Time Warner Telecom Holdings Inc., the Several Lenders from Time to Time Party thereto, Lehman Commercial Paper Inc., as syndication agent, Bank of America, N.A., as documentation agent and Wachovia Bank, National Association, as administrative agent and as collateral agent (filed as Exhibit 99.1 to the Company’s Current Report on Form 8-K dated October 11, 2006)*
10.1 –	Employment Agreement between the Company and John T. Blount dated October 28, 2008.
10.2 –	Change of Control Employment Agreement between the Company and John T. Blount dated October 28, 2008.
31.1 –	Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 –	Certification of Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 –	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 –	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Incorporated by reference

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