**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**Forthe Quarterly Period Ended September 30, 2006**

**Commissionfile numbers   333-33540333-33540-1**

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**INSIGHT MIDWEST, L.P.INSIGHT CAPITAL, INC.**

(Exact name of registrantsas specified in their charters)

| **Delaware**                              |   | **13-4079232**       |
|-------------------------------------------|--------|----------------------|
| **Delaware**                              |   | **13-4079679**       |
| (State or other  jurisdiction of          |   | (I.R.S. Employer     |
| incorporation or  organization)           |   | Identification  No.) |
| **810 7****th Avenue**               |   |                 |
| **New  York, New York**                   |   | **10019**            |
| (Address of  principal executive offices) |   | (Zip code)           |

 

Registrants’ telephonenumber, including area code: **917-286-2300**

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Indicate by check markwhether the registrants (1) have filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrants wererequired to file such reports) and (2) have been subject to such filingrequirements for the past 90 days.  Yes* *x    No o

Indicate by check markwhether each registrant is a large accelerated filer, an accelerated filer, ora non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):  Large accelerated filer o Accelerated filer o  Non-accelerated filer* *x

Indicate by check markwhether the registrants are a shell company (as defined in Exchange Act Rule 12b-2). Yes* *o    No x

Indicate the number ofshares outstanding of each of the registrants’ classes of common stock, as ofthe latest practicable date.

InsightMidwest, L.P.                —NotApplicable

Insight Capital, Inc.                   —NotApplicable

 

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**PART I.   FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

The accompanying unaudited consolidated financialstatements have been prepared in accordance with the requirements of Form 10-Qand, therefore, do not include all information and footnotes required byaccounting principles generally accepted in the United States. However, in ouropinion, all adjustments, consisting of normal recurring accruals, necessaryfor a fair presentation of the results of operations for the relevant periodshave been made. Results for the interim periods are not necessarily indicativeof the results to be expected for the year. These financial statements shouldbe read in conjunction with the summary of significant accounting policies andthe notes to the consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2005.

#  

1

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**INSIGHTMIDWEST, LPCONSOLIDATED BALANCE SHEETS(dollars in thousands)**

| ** **                                                                                                                                        | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                        | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                        | ** ** | **(unaudited)**        | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                        | * *   |                   | * *   | ** **            |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                        |       |                   | $          | 15,782                |       |   |   | $ | 24,853 |   |   |
| Investments                                                                                                                                       |       |                   | 5,479      |                  |       |   | 4,701 |   |   |
| Trade accounts receivable,  net of allowance for doubtful accounts of $1,169 and $1,079 as of  September 30, 2006 and December 31, 2005 |       |                   | 26,395     |                  |       |   | 27,233 |   |   |
| Launch funds  receivable                                                                                                                          |       |                   | 516        |                  |       |   | 974 |   |   |
| Prepaid expenses  and other current assets                                                                                                        |       |                   | 10,969     |                  |       |   | 8,860 |   |   |
| Total current assets                                                                                                                              |       |                   | 59,141     |                  |       |   | 66,621 |   |   |
| Fixed assets, net                                                                                                                                 |       |                   | 1,126,128  |                  |       |   | 1,107,571 |   |   |
| Goodwill                                                                                                                                          |       |                   | 14,684     |                  |       |   | 14,684 |   |   |
| Franchise costs                                                                                                                                   |       |                   | 2,357,535  |                  |       |   | 2,357,535 |   |   |
| Deferred  financing costs, net of accumulated amortization of $23,386 and $19,769 as of  September 30, 2006 and December 31, 2005       |       |                   | 16,297     |                  |       |   | 19,910 |   |   |
| Other non-current  assets                                                                                                                         |       |                   | 2,110      |                  |       |   | 1,582 |   |   |
| Total assets                                                                                                                                      |       |                   | $          | 3,575,895             |       |   |   | $ | 3,567,903 |   |   |
| **Liabilities  and partners’ capital**                                                                                                       |       |                   |       |                  |       |   |   |   |   |
| Accounts payable                                                                                                                                  |       |                   | $          | 38,868                |       |   |   | $ | 40,843 |   |   |
| Accrued expenses  and other current liabilities                                                                                                   |       |                   | 35,086     |                  |       |   | 38,535 |   |   |
| Accrued property  taxes                                                                                                                           |       |                   | 13,839     |                  |       |   | 12,792 |   |   |
| Accrued  programming costs (inclusive of $32,316 and $29,878 due to related parties as  of September 30, 2006 and December 31, 2005)    |       |                   | 47,008     |                  |       |   | 43,705 |   |   |
| Deferred revenue                                                                                                                                  |       |                   | 2,152      |                  |       |   | 4,978 |   |   |
| Interest payable                                                                                                                                  |       |                   | 46,523     |                  |       |   | 20,459 |   |   |
| Debt—current  portion                                                                                                                        |       |                   | 83,500     |                  |       |   | 83,500 |   |   |
| Due to affiliates                                                                                                                                 |       |                   | 42,621     |                  |       |   | 46,013 |   |   |
| Total current liabilities                                                                                                                         |       |                   | 309,597    |                  |       |   | 290,825 |   |   |
| Deferred revenue                                                                                                                                  |       |                   | 874        |                  |       |   | 1,499 |   |   |
| Debt                                                                                                                                              |       |                   | 2,437,838  |                  |       |   | 2,432,811 |   |   |
| Other non-current  liabilities                                                                                                                    |       |                   | —     |                  |       |   | 2,382 |   |   |
| Partners’  capital:                                                                                                                          |       |                   |       |                  |       |   |   |   |   |
| Deferred stock  compensation                                                                                                                      |       |                   | (327       | )                     |       |   | (535 | ) |   |
| Partners’  accumulated capital                                                                                                               |       |                   | 827,913    |                  |       |   | 840,921 |   |   |
| Total partners’ capital                                                                                                                      |       |                   | 827,586    |                  |       |   | 840,386 |   |   |
| Total liabilities  and partners’ capital                                                                                                     |       |                   | $          | 3,575,895             |       |   |   | $ | 3,567,903 |   |   |

 

See accompanying notes

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**INSIGHTMIDWEST, LPCONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(dollars in thousands)**

| ** **                                                                                                                                                                                                                                                                                       | ** ** | **Three months ended September 30,**                                                                         | ** ** | **Nine months ended September 30,**                                                                          | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                       | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** | **          2006          ** | ** ** | **          2005          ** | ** ** |
| Revenue                                                                                                                                                                                                                                                                                          |       |                                                                                                                             | $          | 318,104                                                                                                                          |       |   |   | $ | 279,019 |   |   |   | $ | 931,102 |   |   |   | $ | 827,624 |   |   |
| Operating costs  and expenses:                                                                                                                                                                                                                                                                   |       |                                                                                                                             |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Programming and other operating costs (exclusive of  depreciation and amortization) (inclusive of $47,772 and $135,110, and  $39,438 and $120,114 of programming expense incurred through related  parties for the three and nine months ended September 30, 2006 and  2005) |       |                                                                                                                             | 112,847    |                                                                                                                             |       |   | 93,815 |   |   |   | 335,585 |   |   |   | 284,913 |   |   |
| Selling, general and administrative (inclusive of  $39 and $115, and $0 and $0 of stock-based compensation for the three and  nine months ended September 30, 2006 and 2005)                                                                                                                |       |                                                                                                                             | 74,175     |                                                                                                                             |       |   | 63,107 |   |   |   | 220,958 |   |   |   | 180,123 |   |   |
| Management fees                                                                                                                                                                                                                                                                                  |       |                                                                                                                             | 9,550      |                                                                                                                             |       |   | 8,371 |   |   |   | 27,933 |   |   |   | 24,830 |   |   |
| Depreciation and amortization                                                                                                                                                                                                                                                                    |       |                                                                                                                             | 67,402     |                                                                                                                             |       |   | 59,691 |   |   |   | 196,371 |   |   |   | 179,327 |   |   |
| Total operating  costs and expenses                                                                                                                                                                                                                                                              |       |                                                                                                                             | 263,974    |                                                                                                                             |       |   | 224,984 |   |   |   | 780,847 |   |   |   | 669,193 |   |   |
| Operating income                                                                                                                                                                                                                                                                                 |       |                                                                                                                             | 54,130     |                                                                                                                             |       |   | 54,035 |   |   |   | 150,255 |   |   |   | 158,431 |   |   |
| Other income (expense):                                                                                                                                                                                                                                                                          |       |                                                                                                                             |       |                                                                                                                             |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Interest expense                                                                                                                                                                                                                                                                                 |       |                                                                                                                             | (58,262    | )                                                                                                                                |       |   | (50,940 | ) |   |   | (164,314 | ) |   |   | (149,044 | ) |   |
| Interest income                                                                                                                                                                                                                                                                                  |       |                                                                                                                             | 366        |                                                                                                                             |       |   | 518 |   |   |   | 1,033 |   |   |   | 1,188 |   |   |
| Other income (expense)                                                                                                                                                                                                                                                                           |       |                                                                                                                             | (12        | )                                                                                                                                |       |   | 871 |   |   |   | 18 |   |   |   | 1,562 |   |   |
| Total other  expense, net                                                                                                                                                                                                                                                                        |       |                                                                                                                             | (57,908    | )                                                                                                                                |       |   | (49,551 | ) |   |   | (163,263 | ) |   |   | (146,294 | ) |   |
| Net income (loss)                                                                                                                                                                                                                                                                                |       |                                                                                                                             | $          | (3,778                                                                                                                           | )          |   |   | $ | 4,484 |   |   |   | $ | (13,008 | ) |   |   | $ | 12,137 |   |   |

 

See accompanying notes

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**InsightMIDWEST, LPConsolidated statements of cash flows**(unaudited)(dollars in thousands)

| ** **                                                                                | ** ** | **Nine Months Ended September 30,**                                                              | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **         2006         ** | ** ** | **         2005        ** | ** ** |
| **Operating activities:**                                                                 |       |                                                                                                                 |       |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                                                                                                                 | $          | (13,008 | ) |   |   | $ | 12,137 |   |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                                                                                                 |       |   |   |   |   |   |   |
| Depreciation and amortization                                                             |       |                                                                                                                 | 196,371    |   |   |   | 179,327 |   |   |
| Stock-based compensation                                                                  |       |                                                                                                                 | 115        |   |   |   | — |   |   |
| Provision for losses on trade accounts receivable                                         |       |                                                                                                                 | 13,960     |   |   |   | 13,196 |   |   |
| Amortization of note discount                                                             |       |                                                                                                                 | 270        |   |   |   | 247 |   |   |
| Gain on interest rate swaps                                                               |       |                                                                                                                 | —     |   |   |   | (1,684 | ) |   |
| Changes in  operating assets and liabilities:                                             |       |                                                                                                                 |       |   |   |   |   |   |   |
| Trade accounts receivable                                                                 |       |                                                                                                                 | (13,122    | ) |   |   | (4,428 | ) |   |
| Launch funds receivable                                                                   |       |                                                                                                                 | 458        |   |   |   | 2,232 |   |   |
| Prepaid expenses and other assets                                                         |       |                                                                                                                 | (2,702     | ) |   |   | (2,260 | ) |   |
| Accounts payable                                                                          |       |                                                                                                                 | (1,975     | ) |   |   | (5,051 | ) |   |
| Interest payable                                                                          |       |                                                                                                                 | 26,064     |   |   |   | 27,488 |   |   |
| Accrued expenses and other liabilities                                                    |       |                                                                                                                 | (5,849     | ) |   |   | (3,351 | ) |   |
| Net cash provided by operating activities                                                 |       |                                                                                                                 | 200,582    |   |   |   | 217,853 |   |   |
| **Investing  activities:**                                                                |       |                                                                                                                 |       |   |   |   |   |   |   |
| Purchase of fixed assets                                                                  |       |                                                                                                                 | (211,818   | ) |   |   | (140,357 | ) |   |
| Sale of fixed assets                                                                      |       |                                                                                                                 | 572        |   |   |   | 1,142 |   |   |
| Purchase of investments                                                                   |       |                                                                                                                 | (778       | ) |   |   | (1,552 | ) |   |
| Net cash used in investing activities                                                     |       |                                                                                                                 | (212,024   | ) |   |   | (140,767 | ) |   |
| **Financing  activities:**                                                                |       |                                                                                                                 |       |   |   |   |   |   |   |
| Repayment of credit facilities                                                            |       |                                                                                                                 | (62,625    | ) |   |   | (62,625 | ) |   |
| Net proceeds from borrowings under credit facility                                        |       |                                                                                                                 | 65,000     |   |   |   | — |   |   |
| Debt issuance costs                                                                       |       |                                                                                                                 | —     |   |   |   | (1,712 | ) |   |
| Other                                                                                     |       |                                                                                                                 | (4         | ) |   |   | — |   |   |
| Net cash provided by (used in) financing activities                                       |       |                                                                                                                 | 2,371      |   |   |   | (64,337 | ) |   |
| Net increase (decrease) in cash and cash equivalents                                      |       |                                                                                                                 | (9,071     | ) |   |   | 12,749 |   |   |
| Cash and cash  equivalents, beginning of period                                           |       |                                                                                                                 | 24,853     |   |   |   | 72,476 |   |   |
| Cash and cash  equivalents, end of period                                                 |       |                                                                                                                 | $          | 15,782 |   |   |   | $ | 85,225 |   |   |

 

See accompanying notes

4

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**INSIGHT MIDWEST, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**1. Organization andBasis of Presentation**

We were formed in September 1999 to serve as theholding company and a financing vehicle for Insight Communications Company, Inc.’s(“Insight Inc.”) cable television system joint venture with AT&T Broadband,LLC (now known as Comcast Cable Holdings, LLC (“Comcast Cable”)). We are owned50% by Insight Communications Company, L.P. (“Insight LP”), which is whollyowned by Insight Inc., and 50% by an indirect subsidiary of Comcast Cable. InsightLP serves as our general partner and manages and operates our systems.

Through our wholly owned operating subsidiaries,Insight Communications Midwest, LLC (“Insight Communications Midwest”), InsightCommunications of Central Ohio, LLC (“Insight Ohio”) and Insight KentuckyPartners II, L.P. (“Insight Kentucky”), we own and operate cable televisionsystems in Indiana, Kentucky, Ohio, and Illinois which passed approximately 2.5million homes and served approximately 1.3 million customers as of September 30,2006.

The accompanying consolidated financial statementsinclude the accounts of Insight Midwest Holdings, LLC, our wholly-ownedsubsidiary which owns 100% of the outstanding equity of our operatingsubsidiaries, and Insight Capital, Inc., our wholly-owned subsidiaryformed for the sole purpose of being the co-issuer of our senior notes, whichallows certain investors the ability to be holders of the debt.

Reclassifications havebeen made to the prior year’s financial statements to conform to thoseclassifications used in 2006.

**2. Responsibilityfor Interim Financial Statements**

The accompanying unaudited consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States for interim financial information andwith the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, they do not include all of the information and footnotedisclosures required by accounting principles generally accepted in the UnitedStates for complete financial statements.

In management’s opinion, the consolidated financialstatements reflect all adjustments considered necessary for a fair presentationof the consolidated results of operations and financial position for theinterim periods presented. All such adjustments are of a normal recurringnature. These unaudited interim consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to consolidated financial statements contained in our Annual Report on Form 10-Kfor the year ended December 31, 2005.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. The results of operations for thethree and nine months ended September 30, 2006 are not necessarilyindicative of the results to be expected for the year ending December 31,2006 or any other interim period.

**3.Recent Accounting Pronouncements**

In December 2004, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial AccountingStandards No. 123 (revised 2004), *Share-Based Payment*,(“SFAS 123R”). 

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**INSIGHT MIDWEST, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**3. RecentAccounting Pronouncements (Continued)**

SFAS 123Restablishes the accounting for transactions in which an entity pays foremployee services in share-based payment transactions. SFAS 123R requirescompanies to recognize the cost of employee services received in exchange forawards of equity instruments, based on the grant date fair value of thoseawards, in the financial statements. The Company adopted SFAS 123R effective January 1,2006 using the modified-prospective transition method. Under this methodstock-based compensation is recognized for awards granted in the period afteradoption. Prior year financial statements are not restated. The adoption ofthis standard did not have a material impact on our consolidated financialstatements.

**4. Investments**

***Oxygen Cable, LLC***

Oxygen Cable, LLC (“Oxygen”) is an independent cabletelevision network with programming tailored to the interests of women. On July 9,2002 we entered into a carriage agreement with Oxygen, whereby we agreed tocarry programming content from Oxygen. In October 2006, we agreed toextend the term of the carriage agreement through December 31, 2008.

Concurrently with thecarriage agreement, we entered into an equity issuance agreement with Oxygen.The agreement called for Oxygen to deliver to us shares having an aggregatefair market value as of December 31, 2005 of $3.8 million, and by December 1,2006 deliver to us additional shares having an aggregate fair market value asof the December 31, 2005 valuation of $2.0 million. Pursuant to the equityissuance agreement, a portion of the monthly programming fees represent ourequity investment in Oxygen. As of September 30, 2006 and December 31,2005, our carrying value in this investment was $5.5 million and $4.7 million. InOctober 2006, in connection with the extension of the carriage term,Oxygen issued to us shares of common stock representing a value as of December 31,2005 of $5.8 million in full satisfaction of its obligation to issue equity tous under the equity issuance agreement.

**5. Fixed Assets**

Fixedassets consisted of:

| ** **                                       | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                       | ** ** | **(in thousands)**     | ** ** |
| Land, buildings  and improvements                |       |                   | $          | 39,403                |       |   | $ | 36,768 |   |
| Cable system  equipment                          |       |                   | 2,572,380  |                  |       | 2,365,956 |   |
| Furniture,  fixtures and office equipment        |       |                   | 20,948     |                  |       | 19,079 |   |
|                                             |       |                   | 2,632,731  |                  |       | 2,421,803 |   |
| Less: accumulated  depreciation and amortization |       |                   | (1,506,603 | )                     |       | (1,314,232 | ) |
| Total fixed  assets, net                         |       |                   | $          | 1,126,128             |       |   | $ | 1,107,571 |   |

 

We recorded depreciationexpense of $66.2 million and $192.7 million for the three and nine months endedSeptember 30, 2006 and $58.5 million and $175.9 million for the three andnine months ended September 30, 2005.

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**INSIGHT MIDWEST, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**6. Debt**

| ** **                                 | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(in thousands)**     | ** ** |
| Note payable to  Insight Inc.              |       |                   | $          | 100,000               |       |   |   | $ | 100,000 |   |   |
| Insight Midwest  Holdings Credit Facility  |       |                   | 1,406,625  |                  |       |   | 1,404,250 |   |   |
| Insight Midwest  93⁄4% Senior Notes     |       |                   | 385,000    |                  |       |   | 385,000 |   |   |
| Insight Midwest  101⁄2% Senior Notes    |       |                   | 630,000    |                  |       |   | 630,000 |   |   |
|                                       |       |                   | 2,521,625  |                  |       |   | 2,519,250 |   |   |
| Net unamortized  discount/premium on notes |       |                   | (287       | )                     |       |   | (557 | ) |   |
| Market value of  interest rate swaps       |       |                   | —     |                  |       |   | (2,382 | ) |   |
| Total debt                                 |       |                   | $          | 2,521,338             |       |   |   | $ | 2,516,311 |   |   |

 

***Insight Midwest Holdings Credit Facility***

Our wholly owned subsidiary, Insight Midwest Holdings,LLC, serves as borrower under a credit facility. Obligations under this creditfacility are secured by a pledge of the outstanding equity interests of InsightMidwest Holdings and its subsidiaries. On March 28, 2002, we borrowed$100.0 million from Insight Inc. The loan bears annual interest of 9%,compounded semi-annually, has a scheduled maturity date of January 31,2011 and permits prepayments. Insight Midwest Holdings is permitted under thecredit facility to make distributions to us for the purpose of repaying thisloan, including accrued interest, provided that there are no defaults existingunder the credit facility. In August 2006, Insight Midwest Holdings, LLCrepaid $12.6 million of the loan balance. As of September 30, 2006 and December 31,2005, the balance of the $100.0 million loan, including accrued interest, was$136.0 million and $139.1 million.

On September 11, 2006Insight announced plans to refinance certain indebtedness of Insight MidwestHoldings. The refinancing was completed on October 6, 2006. See SubsequentEvent Note 10.

***Debt Principal Payments***

As of September 30,2006, the remaining principal payments required on our debt were as follows (inthousands):

| 2006       |   | $         | 20,875    |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 83,500    |      |
| 2008       |   | 104,750   |      |
| 2009       |   | 1,582,500 |      |
| 2010       |   | 630,000   |      |
| Thereafter |   | 100,000   |      |
| Total      |   | $         | 2,521,625 |   |

 

**7. Derivative Instruments**

We enter into derivative instruments, typicallyinterest-rate swap agreements, to modify the interest characteristics of ouroutstanding debt to either a floating or fixed rate basis. These agreementsinvolve fixed rate interest payments in exchange for floating rate interestreceipts, known as cash flow hedges, and floating rate interest payments inexchange for fixed rate interest receipts, known as fair value hedges, over 

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**INSIGHT MIDWEST, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**7. DerivativeInstruments (Continued)**

the life of the agreementwithout an exchange of the underlying principal amount. The differential to bepaid or received is accrued as interest rates change and is recognized as anadjustment to interest expense related to the debt. The related amount payableor receivable is included in other liabilities or assets.

Gains and losses relatedto fair value hedges that are determined to be effective hedges are recorded inthe consolidated statements of operations as an adjustment to the swapinstrument and an offsetting adjustment to the carrying value of the underlyingdebt. Gains and losses related to interest rate swaps that are determined notto be effective hedges and do not qualify for hedge accounting are recorded inour consolidated statements of operations as other income or expense.

***Fair Value Hedges***

In July 2003, we entered into three interest rateswap agreements whereby we swapped fixed rates under a tranche of our 101⁄2%senior notes due in December 2010 for variable rates equal to six-monthLIBOR, plus the applicable margin of approximately 8.3%, on $185.0 millionnotional value of debt. These agreements expired on November 1, 2005. Werecorded a gain on these swaps of $872,000 and $1.7 million for the three andnine months ended September 30, 2005, which is included in other income.

In December 2003, weentered into an interest rate swap agreement whereby we swapped fixed ratesunder a different tranche of our 101⁄2% senior notes due in December 2010for variable rates equal to six-month LIBOR, plus the applicable margin ofapproximately 5.9%, on $130.0 million notional value of debt. We terminatedthis agreement as of September 30, 2006 and the cost of termination wasincluded in interest expense. This swap was determined to be perfectlyeffective in hedging against fluctuations in the fair value of the underlyingdebt. As such, changes in the fair value of the underlying debt equally offsetchanges in the value of the interest rate swap in our consolidated balancesheets. The cost, if terminated, of this swap as of December 31, 2005 was$2.4 million and was recorded in other non-current liabilities and as anadjustment to the carrying value of debt.

**8. Related PartyTransactions**

***Programming***

We purchase the majorityof our programming through affiliates of Comcast Cable. Charges for suchprogramming, including a 11⁄2% administrative fee, were $47.8 million and $135.1million for the three and nine months ended September 30, 2006 and $39.4million and $120.1 million for the three and nine months ended September 30,2005. As of September 30, 2006 and December 31, 2005, $32.3 millionand $29.9 million of accrued programming costs were due to affiliates ofComcast Cable. We believe that the programming rates charged through theseaffiliates are lower than those available from independent parties.

***Insight Interactive***

Effective November 17,1999, Insight Cable Services entered into a Contribution Agreement with SourceMedia, Inc., providing for the creation of a joint venture, InsightInteractive LLC. Under the terms of the Contribution Agreement, Source Mediacontributed its Virtual Modem 2.5 software and the Interactive Channel productsand services, including SourceGuide and LocalSource television content. On March 14,2002, Insight Cable Services purchased the remaining 50% equity interest inInsight

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**INSIGHT MIDWEST, LP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)**

**8. RelatedParty Transactions (Continued)**

Interactive that it did not already own from SourceMedia. We are currently providing Insight Interactive’s services to customersin some of our systems. Fees for such services totaled $874,000 and $2.6million for the three and nine months ended September 30, 2006 and$756,000 and $2.1 million for the three and nine months ended September 30,2005.

**Due To Affiliates**

As of September 30,2006 and December 31, 2005, we had amounts owed to Insight LP, ourmanager, primarily comprised of accrued interest related to our $100.0 millionnote payable to Insight Inc., incurred but unpaid management fees, calculatedas approximately 3% of revenues, and other operational expenses.

**9.Commitments and Contingencies**

***ProgrammingContracts***

We enter into long-termcontracts with third parties who provide us with programming for distributionover our cable television systems. These programming contracts are asignificant part of our business and represent a substantial portion of ouroperating costs. Since future fees under such contracts are based on numerousvariables, including number and type of customers, we have not recorded anyliabilities with respect to such contracts.

***Litigation***

In April 2005, AcaciaMedia Technologies Corporation filed a lawsuit against us and others in theUnited States District Court for the Southern District of New York. Thecomplaint alleges, among other things, infringement of certain United Statespatents that allegedly relate to systems and methods for transmitting and/orreceiving digital audio and video content. The complaint seeks injunctiverelief and damages in an unspecified amount. In the event that a Court ultimatelydetermines that we infringe on any of the patents, we may be subject tosubstantial damages, which may include treble damages and/or an injunction thatcould require us to materially modify certain products and services that wecurrently offer to subscribers. We believe that the claims are without meritand intend to defend the action vigorously. The final disposition of this claimis not expected to have a material adverse effect on our consolidated financialposition but could possibly be material to our consolidated results ofoperations of any one period. Further, at this time the outcome of thelitigation is impossible to predict, and no assurance can be given that anyadverse outcome would not be material to our consolidated financial position.

We are subject to variouslegal proceedings that arise in the ordinary course of business. While it isimpossible to determine with certainty the ultimate outcome of these matters,it is our opinion that the resolution of these matters will not have a materialadverse affect on our consolidated financial condition.

**10.Subsequent Event**

On October 6, 2006,Insight completed the financing of $2.445 billion of senior secured creditfacilities for Insight Midwest Holdings. The facilities comprise term loans in theamount of $2.185 billion and a $260.0 million revolving credit facility. Theproceeds were used to refinance Insight Midwest Holdings’ existing seniorcredit facilities and to redeem all of Insight Midwest’s 101⁄2% Senior Notes due November 1,2010 and $185.0 million principal amount of Insight Midwest’s 93⁄4% Senior Notesdue October 1, 2009.

9

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**INSIGHTCAPITAL, INC.BALANCE SHEETS(dollars in thousands, except share and per share amounts)**

| ** **                                                                                                                                  | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**               | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                  | ** ** | **unaudited**          | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                  | ** ** |                   | ** ** | ** **            |       | ** ** | ** ** |
| Cash                                                                                                                                        |       |                   | $          | 1                     |       |   | $ | 1 |   |
| Deferred  financing costs, net of accumulated amortization of $13,645 and $11,689 as of  September 30, 2006 and December 31, 2005 |       |                   | 9,136      |                  |       | 11,092 |   |
| Total assets                                                                                                                                |       |                   | $          | 9,137                 |       |   | $ | 11,093 |   |
| **Liabilities  and shareholder’s deficit**                                                                                             |       |                   |       |                  |       |   |   |
| Accrued interest                                                                                                                            |       |                   | $          | 46,331                |       |   | $ | 20,409 |   |
| Total current liabilities                                                                                                                   |       |                   | 46,331     |                  |       | 20,409 |   |
| Senior notes, to be paid by Insight Midwest, LP                                                                                             |       |                   | 1,014,713  |                  |       | 1,014,443 |   |
| Total liabilities                                                                                                                           |       |                   | 1,061,044  |                  |       | 1,034,852 |   |
| Shareholder’s  deficit:                                                                                                                |       |                   |       |                  |       |   |   |
| Common stock;  $.01 par value; 1,000 shares authorized, issued and outstanding                                                              |       |                   | —     |                  |       | — |   |
| Paid-in-capital                                                                                                                             |       |                   | 1          |                  |       | 1 |   |
| In-substance  allocation of proceeds related to senior notes to be paid by Insight Midwest                                                  |       |                   | (479,772   | )                     |       | (531,616 | ) |
| Accumulated  deficit                                                                                                                        |       |                   | (572,136   | )                     |       | (492,144 | ) |
| Total shareholder’s deficit                                                                                                            |       |                   | (1,051,907 | )                     |       | (1,023,759 | ) |
| Total liabilities  and shareholder’s deficit                                                                                           |       |                   | $          | 9,137                 |       |   | $ | 11,093 |   |

 

See accompanying notes

10

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**INSIGHT CAPITAL, INC.STATEMENTS OF OPERATIONS(unaudited)(dollars in thousands)**

| ** **    | ** ** | **Three months  Ended September 30,** | ** ** | **Nine months  Ended September 30,** | ** ** |
|---------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **    | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Expenses:** |       |                                                 |       |                                                |       |   |   |   |   |
| Amortization  |       | $                                                    | (652       | )                                                   | $          | (652 | ) | $ | (1,956 | ) | $ | (1,956 | ) |
| Interest      |       | (26,014                                              | )          | (26,006                                             | )          | (78,036 | ) | (78,013 | ) |
| Net loss      |       | $                                                    | (26,666    | )                                                   | $          | (26,658 | ) | $ | (79,992 | ) | $ | (79,969 | ) |

 

See accompanying notes

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**INSIGHT CAPITAL, INC.STATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**

| ** **                                                                       | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                            | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                       | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                   | (79,992    | ) | $ | (79,969 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                                |       |   |   |
| Accretion of discount on notes                                                   |       | 270                                                 |       | 247 |   |
| Amortization                                                                     |       | 1,956                                               |       | 1,956 |   |
| Interest expense assumed by affiliate                                            |       | 77,766                                              |       | 77,766 |   |
| Net cash provided by operating activities                                        |       | —                                              |       | — |   |
| Net increase in cash                                                             |       | —                                              |       | — |   |
| Cash, beginning  of period                                                       |       | 1                                                   |       | 1 |   |
| Cash, end of period                                                              |       | $                                                   | 1          |   | $ | 1 |   |

 

See accompanying notes

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**INSIGHT CAPITAL,INC.NOTES TO FINANCIAL STATEMENTS**

**1.   Nature ofBusiness**

Insight Capital, Inc.(the “Company”), a Delaware corporation, was formed on September 23, 1999,for the sole purpose of being a co-issuer with Insight Midwest, L.P. (“InsightMidwest”) of senior notes which allows certain investors the ability to beholders of the debt. The Company has no operations. The outstanding shares ofthe Company are owned by Insight Midwest.

**2.   Responsibilityfor Interim Financial Statements**

The accompanying unaudited financial statements of theCompany have been prepared in accordance with accounting principles generallyaccepted in the United States for interim financial information and with theinstructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly,they do not include all of the information and footnote disclosures required byaccounting principles generally accepted in the United States for completefinancial statements.

In management’s opinion, the financial statementsreflect all adjustments considered necessary for a fair presentation of thestatement of financial position as of the interim dates presented. Theseunaudited interim financial statements should be read in conjunction with theaudited financial statements and notes to financial statements contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2005.

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States requires theCompany to make estimates and assumptions that affect the reported amounts ofassets and liabilities and disclosure of contingent assets and liabilities atthe date of the financial statements. Actual results could differ from thoseestimates.

#  

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**Item 2.**                        Management’sDiscussion and Analysis of Financial Condition and Results of Operations

**CautionaryStatement Regarding Forward-Looking Information**

This quarterlyreport on Form 10-Q contains certain forward-looking statements withrespect to the financial condition, results of operations, plans, objectives,future performance and business of our company, including, without limitation,statements preceded by, followed by or that include the words “believes,” “expects,”“anticipates,” “estimates” or similar expressions. We believe it is importantto communicate management’s expectations to our investors. However, there maybe events in the future that we are not able to accurately predict or overwhich we have no control. The risk factors listed in our Annual Report on Form 10-Kfor the year ended December 31, 2005, as well as any other cautionarylanguage in this quarterly report, provide examples of risks, uncertainties andevents that may cause our actual results to differ materially from theexpectations we describe in our forward-looking statements. You should be awarethat the occurrence of the events described in these risk factors and elsewherein this quarterly report could have a material adverse effect on our business,operating results and financial condition. Examples of these risks include:

·       All of the services offeredby our company face a wide range of competition that could adversely affect ourfuture results of operations;

·       We have substantial debtand have significant interest payment requirements, which may adversely affectour ability to obtain financing in the future to finance our operations and ourability to react to changes in our business;

·       There is uncertaintysurrounding our potential dissolution, the process for which may be triggeredby either of our partners;

·       The terms of InsightMidwest Holdings’ credit facility may limit our ability to access the cash flowof our subsidiaries;

·       Our programming costs aresubstantial, and they are expected to increase; and

·       General businessconditions, economic uncertainty or slowdown, and the effects of governmentalregulation could adversely affect our future results of operations.

We do not undertake anyobligation to publicly update or release any revisions to these forward-lookingstatements to reflect events or circumstances after the date that this reportis filed with the SEC or to reflect the occurrence of unanticipated events,except as required by law.

**Overview**

Our revenues are earned from customer fees for cabletelevision video services including basic, premium, digital and pay-per-viewservices and ancillary services, such as rental of converters, remote controldevices and installations. In addition, we earn revenues from providinghigh-speed Internet services, selling advertising, providing telephoneservices, and commissions for products sold through home shopping networks.

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Thefollowing table is derived from our consolidated financial statements that areincluded in this report and sets forth certain statement of operations data forour consolidated operations:

| ** **                                           | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                           | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                              | ** ** |
| Revenue                                              |       | $                                                    | 318,104    |                                                | $          | 279,019 |   | $ | 931,102 |   | $ | 827,624 |   |
| Operating costs and  expenses:                       |       |                                                 |       |                                                |       |   |   |   |   |
| Programming and other operating costs                |       | 112,847                                              |       | 93,815                                              |       | 335,585 |   | 284,913 |   |
| Selling, general and administrative                  |       | 74,175                                               |       | 63,107                                              |       | 220,958 |   | 180,123 |   |
| Management fees                                      |       | 9,550                                                |       | 8,371                                               |       | 27,933 |   | 24,830 |   |
| Depreciation and amortization                        |       | 67,402                                               |       | 59,691                                              |       | 196,371 |   | 179,327 |   |
| Total operating  costs and expenses                  |       | 263,974                                              |       | 224,984                                             |       | 780,847 |   | 669,193 |   |
| Operating income                                     |       | 54,130                                               |       | 54,035                                              |       | 150,255 |   | 158,431 |   |
| Interest expense                                     |       | 58,262                                               |       | 50,940                                              |       | 164,314 |   | 149,044 |   |
| Net income (loss)                                    |       | (3,778                                               | )          | 4,484                                               |       | (13,008 | ) | 12,137 |   |
| Net cash provided  by operating activities           |       | 65,553                                               |       | 82,680                                              |       | 200,582 |   | 217,853 |   |
| Net cash used in  investing activities               |       | 71,322                                               |       | 50,305                                              |       | 212,024 |   | 140,767 |   |
| Net cash used in  (provided by) financing activities |       | (19,125                                              | )          | 22,587                                              |       | (2,371 | ) | 64,337 |   |
| Capital expenditures                                 |       | 71,131                                               |       | 50,245                                              |       | 211,818 |   | 140,357 |   |
|                                                      |            |                                                      |            |                                                     |            |  |  |  |  |  |  |  |  |

 

**Use of Adjusted OperatingIncome before Depreciation and Amortization and Free Cash Flow**

We utilize Adjusted Operating Income beforeDepreciation and Amortization, (defined as operating income beforedepreciation, amortization and non-cash stock-based compensation) among othermeasures, to evaluate the performance of our businesses. Adjusted OperatingIncome before Depreciation and Amortization is considered an importantindicator of the operational strength of our businesses and is a component ofour annual compensation programs. In addition, our debt agreements use AdjustedOperating Income before Depreciation and Amortization, adjusted for certainnon-recurring items, in our leverage and other covenant calculations. We alsouse this measure to determine how we will allocate resources and capital. Ourmanagement finds this measure helpful because it captures all of the revenueand ongoing operating expenses of our businesses and therefore provides a meansto directly evaluate the ability of our business operations to generate returnsand to compare operating capabilities across our businesses. This measure isalso used by equity and fixed income research analysts in their reports toinvestors evaluating our businesses and other companies in the cable televisionindustry. We believe Adjusted Operating Income before Depreciation andAmortization is useful to investors because it enables them to assess ourperformance in a manner similar to the methods used by our management andprovides a measure that can be used to analyze, value and compare companies inthe cable television industry, which may have different depreciation,amortization and stock-based compensation policies.

A limitation of Adjusted Operating Income beforeDepreciation and Amortization, however, is that it does not reflect theperiodic costs of certain capitalized tangible and intangible assets used ingenerating revenues in our businesses. Management evaluates the costs of suchtangible and intangible assets through other financial measures such as capitalexpenditures, investment spending and Free Cash Flow. Management also evaluatesthe costs of capitalized tangible and intangible assets by analyzing returnsprovided on the capital dollars deployed. Another limitation of AdjustedOperating Income before Depreciation and Amortization is that it does notreflect income net of interest expense, which is a significant expense for usbecause of the substantial debt we incurred to acquire cable television systemsand finance capital expenditures to upgrade our cable network. Managementevaluates the impact of interest expense through measures including interestexpense, Free Cash Flow, the returns analysis discussed above and debt servicecovenant ratios under our credit facility.

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Free Cash Flow is net cash provided by operatingactivities (as defined by accounting principles generally accepted in theUnited States) less capital expenditures. Free Cash Flow is considered to be animportant indicator of our liquidity, including our ability to repayindebtedness. We believe Free Cash Flow is useful for investors because itenables them to assess our ability to service our debt and to fund continuedgrowth with internally generated funds in a manner similar to the methods usedby our management, and provides a measure that can be used to analyze, valueand compare companies in the cable television industry.

Both Adjusted OperatingIncome before Depreciation and Amortization and Free Cash Flow should beconsidered in addition to, not as a substitute for, Operating Income, Net Incomeand various cash flow measures (e.g., Net Cash Provided by OperatingActivities), as well as other measures of financial performance and liquidityreported in accordance with accounting principles generally accepted in theUnited States.

***Reconciliation of Net Income (Loss) to AdjustedOperating Income before Depreciation and Amortization***

Thefollowing table reconciles Net Income (Loss) to Adjusted Operating Incomebefore Depreciation and Amortization. In addition, the table provides thecomponents from Net Income (Loss) to Operating Income.

| ** **                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                              | ** ** |
| Net income (loss)                                               |       | $                                                    | (3,778     | )                                                   | $          | 4,484 |   | $ | (13,008 | ) | $ | 12,137 |   |
| Other (income) expense:                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Other (income) expense                                          |       | 12                                                   |       | (871                                                | )          | (18 | ) | (1,562 | ) |
| Interest income                                                 |       | (366                                                 | )          | (518                                                | )          | (1,033 | ) | (1,188 | ) |
| Interest expense                                                |       | 58,262                                               |       | 50,940                                              |       | 164,314 |   | 149,044 |   |
| Total other  expense, net                                       |       | 57,908                                               |       | 49,551                                              |       | 163,263 |   | 146,294 |   |
| Operating income                                                |       | 54,130                                               |       | 54,035                                              |       | 150,255 |   | 158,431 |   |
| Depreciation and  amortization                                  |       | 67,402                                               |       | 59,691                                              |       | 196,371 |   | 179,327 |   |
| Stock-based  compensation                                       |       | 39                                                   |       | —                                              |       | 115 |   | — |   |
| Adjusted Operating  Income before Depreciation and Amortization |       | $                                                    | 121,571    |                                                | $          | 113,726 |   | $ | 346,741 |   | $ | 337,758 |   |

 

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***Reconciliation of Net Cash Provided by OperatingActivities to Free Cash Flow***

Thefollowing table provides a reconciliation from net cash provided by operatingactivities to Free Cash Flow. In addition, the table provides the componentsfrom net cash provided by operating activities to operating income.

| ** **                                                      | ** ** | **Three Months  Ended September 30,** | ** ** | **Nine Months  Ended September 30,** | ** ** |
|-----------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                             | ** ** | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                              | ** ** |
| Operating income                                                |       | $                                                    | 54,130     |                                                | $          | 54,035 |   | $ | 150,255 |   | $ | 158,431 |   |
| Depreciation and amortization                                   |       | 67,402                                               |       | 59,691                                              |       | 196,371 |   | 179,327 |   |
| Stock-based compensation                                        |       | 39                                                   |       | —                                              |       | 115 |   | — |   |
| Adjusted  Operating Income before Depreciation and Amortization |       | 121,571                                              |       | 113,726                                             |       | 346,741 |   | 337,758 |   |
| Changes in working capital accounts(1)                          |       | (26,850                                              | )          | (10,566                                             | )          | (17,520 | ) | (7,307 | ) |
| Cash paid for interest                                          |       | (29,168                                              | )          | (20,480                                             | )          | (128,639 | ) | (112,598 | ) |
| Net cash provided  by operating activities                      |       | 65,553                                               |       | 82,680                                              |       | 200,582 |   | 217,853 |   |
| Capital expenditures                                            |       | (71,131                                              | )          | (50,245                                             | )          | (211,818 | ) | (140,357 | ) |
| Free Cash Flow                                                  |       | $                                                    | (5,578     | )                                                   | $          | 32,435 |   | $ | (11,236 | ) | $ | 77,496 |   |

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(1)          Changesin working capital accounts are based on the net cash changes in current assetsand current liabilities, excluding charges related to interest and taxes andother non-cash expenses.

**Results ofOperations**

***Three Months Ended September 30, 2006 Compared toThree Months Ended September 30, 2005***

Revenue for the three months ended September 30, 2006 totaled $318.1 million, anincrease of 14% over the prior year, due primarily to customer gains in allservices, as well as video rate increases. High-speed Internet service revenueincreased 22% over the prior year, which was attributable to an increasedcustomer base and was partially offset by lower average revenue per customerdue to promotional discounts. We added a net 44,800 high-speed Internetcustomers during the quarter to end at 579,300 customers.

Basic cable service revenue increased 8% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. In addition, digital service revenue increased 28% overthe prior year primarily due to an increased customer base. We added a net22,500 digital customers during the quarter to end at 597,700 customers. Otherrevenue also increased as a result of a settlement of a fiber lease dispute.

We have been increasing customer growth and retentionefforts by increasing spending on sales and marketing efforts, emphasizingbundling and enhancing and differentiating our video services by providingvideo-on-demand, high definition television and digital video recorders. We arealso continuing to focus on improving customer satisfaction through higherservice levels and increased customer education of product offerings.

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Revenueby service offering was as follows for the three months ended September 30(dollars in thousands):

| ** **           | ** ** | **Revenue by Service Offering**       | ** ** | ** **                    | ** ** | ** **                                           | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months  Ended  September 30,2006** | ** ** | **% of  Total  Revenue** | ** ** | **Three Months  Ended  September 30,2005** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                                 | $          | 159,677                       |       |                                                 |       | 50.2 | % |   |   | $ | 148,393 |   |   |   | 53.2 | % |   |   |   |   | 7.6 | % |   |
| High-Speed  Internet |       |                                                 | 60,402     |                          |       |                                                 | 19.0       | % |   |   | 49,677 |   |   |   | 17.8 | % |   |   |   |   | 21.6 | % |   |
| Digital              |       |                                                 | 34,979     |                          |       |                                                 | 11.0       | % |   |   | 27,300 |   |   |   | 9.8 | % |   |   |   |   | 28.1 | % |   |
| Advertising          |       |                                                 | 20,024     |                          |       |                                                 | 6.3        | % |   |   | 18,416 |   |   |   | 6.6 | % |   |   |   |   | 8.7 | % |   |
| Premium              |       |                                                 | 13,891     |                          |       |                                                 | 4.4        | % |   |   | 13,215 |   |   |   | 4.7 | % |   |   |   |   | 5.1 | % |   |
| Telephone            |       |                                                 | 13,249     |                          |       |                                                 | 4.2        | % |   |   | 9,020 |   |   |   | 3.2 | % |   |   |   |   | 46.9 | % |   |
| Franchise fees       |       |                                                 | 7,496      |                          |       |                                                 | 2.3        | % |   |   | 7,681 |   |   |   | 2.8 | % |   |   |   |   | -2.4 | % |   |
| Other                |       |                                                 | 8,386      |                          |       |                                                 | 2.6        | % |   |   | 5,317 |   |   |   | 1.9 | % |   |   |   |   | 57.7 | % |   |
| Total                |       |                                                 | $          | 318,104                       |       |                                                 |       | 100.0 | % |   |   | $ | 279,019 |   |   |   | 100.0 | % |   |   |   |   | 14.0 | % |   |

 

TotalCustomer Relationships were 1,395,400 as of September 30, 2006, anincrease of 61,200 from 1,334,200 as of September 30, 2005. Total CustomerRelationships represent the number of customers who receive one or more of ourproducts (i.e., basic cable, high-speed Internet or telephone) without regardto which product they purchase. In the three months ending September 30,2006, we added 92,400 total Revenue Generating Units (“RGUs”), which representthe sum of basic, digital, high-speed Internet and telephone customers, and asof September 30, 2006, had 2,608,700 RGUs, an increase of 14% from September 30,2005. RGUs by category were as follows (in thousands):

| ** **           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
|----------------------|------------|------------------------------|------------|------------------------------|------------|
| Basic                |       |                         | 1,318.8    |                         |       |   | 1,271.0 |   |   |
| Digital              |       |                         | 597.7      |                         |       |   | 489.9 |   |   |
| High-Speed  Internet |       |                         | 579.3      |                         |       |   | 439.2 |   |   |
| Telephone            |       |                         | 112.9      |                         |       |   | 80.9 |   |   |
| Total RGUs           |       |                         | 2,608.7    |                         |       |   | 2,281.0 |   |   |

 

Average monthly revenue per basic customer was $80.90for the three months ended September 30, 2006 compared to $73.58 for thethree months ended September 30, 2005. This primarily reflects thecontinued growth of high-speed Internet and digital product offerings in allmarkets, as well as video rate increases and one-time revenue from thesettlement of a fiber lease dispute.

Programming and other operating costs increased $19.0million, or 20%. Increases in customers, the addition of new programmingcontent and substantial increases in programming rates were significant driversof the cost increase for the three months ended September 30, 2006. Forthe three months ended September 30, 2005, our programming costs reflectedcertain programming credits and a one-time settlement for a disputed claim witha vendor. These credits resulted from favorable resolution of pricingnegotiations related to certain prior period programming costs that wereaccrued at a higher rate than the amount actually paid. Programming credits forthe three months ended September 30, 2006, were significantly lower,causing our overall programming cost increases to be greater. Direct operatingcosts decreased due to a decrease in our high-speed Internet service costs aswe finalized the transition of our Internet services in-house and realized boththe cost savings and operational benefits of this investment partially offsetby increases in telephone cost of sales as we continue to invest and roll outthis product. Other operating costs increased primarily as a result ofincreases in technical salaries for new and existing 

18

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employees; increases inrepair, maintenance and warranty costs; an increase in taxes due to a change inthe tax law in Kentucky; and an increase in outside installation labor due toincreased customer activity.

Selling, general and administrative expenses increased$11.2 million, or 18%, primarily due to increased payroll, payroll relatedcosts and temporary help associated with an increase in the number of employeesand salary increases for existing employees. The increase in the number ofemployees represents investments in direct sales, customer care and informationtechnology personnel to continue to upgrade and enhance our product offeringsand increase customer satisfaction. A portion of these information technologypersonnel increases were directly related to the transition of our Internetservices in-house. Marketing expenses increased over the prior year to supportthe continued rollout of high-speed Internet, digital and telephone products,and to grow our core video customer base. Customer billing, collection fees andbad debt expense increased due to the increase in our customer base for thethree months ended September 30, 2006.

Management fees increased $1.2 million or 14% to $9.6million for the three months ended September 30, 2006 from $8.4 millionfor the three months ended September 30, 2005. Management fees, equal toapproximately 3% of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $7.7million or 13% primarily as a result of an increased level of capitalexpenditures through September 30, 2006. These expenditures were primarily for purchases of customerpremise equipment, installation materials, capitalized labor, headendequipment, network extensions and network capacity and bandwidth increases, allof which we consider necessary in order to continue to maintain and grow ourcustomer base and expand our service offerings. Partially offsetting thisincrease was a decrease in depreciation expense related to certain assets thathave become fully depreciated since September 30, 2005.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization increased $7.8 million to$121.6 million, an increase of 7% over the prior year’s third quarter.

Interest expense increased$7.3 million, or 14%, due to i) higher interest rates, which averaged 8.8% forthe three months ended September 30, 2006, as compared to 8.0% for thethree months ended September 30, 2005, and ii) the termination of ourinterest rate swap during the three months ended September 30, 2006. 

***Nine Months Ended September 30, 2006 Compared toNine Months Ended September 30, 2005***

Revenue for the nine months ended September 30, 2006 totaled $931.1 million, anincrease of 13% over the prior year, due primarily to customer gains in allservices, as well as video rate increases. High-speed Internet service revenueincreased 27% over the prior year, which was attributable to an increasedcustomer base and was partially offset by lower average revenue per customerdue to promotional discounts. We added a net 108,900 high-speed Internetcustomers during the nine months ended September 30, 2006 to end at579,300 customers.

Basic cable service revenue increased 7% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. We added a net 37,200 basic customers during the ninemonths ended September 30, 2006 to end at 1,318,800 customers. Inaddition, digital service revenue increased 23% over the prior year primarilydue to an increased customer base. We added a net 78,900 digital customersduring the nine months ended September 30, 2006 to end at 597,700customers.

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Revenueby service offering was as follows for the nine months ended September 30(dollars in thousands):

| ** **           | ** ** | **Revenue by Service Offering**      | ** ** | ** **                    | ** ** | ** **                                          | ** ** |
|----------------------|------------|-----------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------------|------------|
| ** **           | ** ** | **Nine Months  Ended  September 30,2006** | ** ** | **% of  Total  Revenue** | ** ** | **Nine Months  Ended  September 30,2005** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                                | $          | 478,212                       |       |                                                |       | 51.4 | % |   |   | $ | 446,096 |   |   |   | 53.9 | % |   |   |   |   | 7.2 | % |   |
| High-Speed  Internet |       |                                                | 175,515    |                          |       |                                                | 18.9       | % |   |   | 138,108 |   |   |   | 16.7 | % |   |   |   |   | 27.1 | % |   |
| Digital              |       |                                                | 101,009    |                          |       |                                                | 10.8       | % |   |   | 81,899 |   |   |   | 9.9 | % |   |   |   |   | 23.3 | % |   |
| Advertising          |       |                                                | 57,741     |                          |       |                                                | 6.2        | % |   |   | 55,153 |   |   |   | 6.7 | % |   |   |   |   | 4.7 | % |   |
| Premium              |       |                                                | 41,137     |                          |       |                                                | 4.4        | % |   |   | 41,305 |   |   |   | 5.0 | % |   |   |   |   | -0.4 | % |   |
| Telephone            |       |                                                | 37,132     |                          |       |                                                | 4.0        | % |   |   | 25,139 |   |   |   | 3.0 | % |   |   |   |   | 47.7 | % |   |
| Franchise fees       |       |                                                | 22,234     |                          |       |                                                | 2.4        | % |   |   | 22,884 |   |   |   | 2.8 | % |   |   |   |   | -2.8 | % |   |
| Other                |       |                                                | 18,122     |                          |       |                                                | 1.9        | % |   |   | 17,040 |   |   |   | 2.0 | % |   |   |   |   | 6.3 | % |   |
| Total                |       |                                                | $          | 931,102                       |       |                                                |       | 100.0 | % |   |   | $ | 827,624 |   |   |   | 100.0 | % |   |   |   |   | 12.5 | % |   |

 

Average monthly revenue per basic customer was $79.43for the nine months ended September 30, 2006 compared to $72.52 for thenine months ended September 30, 2005. This primarily reflects thecontinued growth of high-speed Internet and digital product offerings in allmarkets, as well as video rate increases.

Programming and other operating costs increased $50.7million, or 18%. Increases in customers, the addition of new programmingcontent and substantial increases in programming rates were significant driversof the cost increase for the nine months ended September 30, 2006. For thenine months ended September 30, 2005, our programming costs reflectedcertain programming credits and a one-time settlement for a disputed claim witha vendor. These credits resulted from favorable resolution of pricingnegotiations related to certain prior period programming costs that wereaccrued at a higher rate than the amount actually paid. Programming credits forthe nine months ended September 30, 2006, were significantly lower,causing our overall programming cost increases to be greater. In addition,direct operating costs increased due to an increase in our high-speed Internetservice costs and telephone cost of sales. These increases are primarilyattributable to the growth in our high-speed Internet and telephone customerbase and the payment of contractually obligated and other one-time transitioncosts to bring Internet services in-house. Other operating costs increasedprimarily as a result of increases in repair, maintenance and warranty costs;increases in gasoline prices for our vehicle fleet; an increase in taxes due toa change in the tax law in Kentucky; an increase in utility related expenses;and an increase in outside installation labor due to increased customerinstallation and disconnect activity.

Selling, general and administrative expenses increased$40.9 million, or 23%, primarily due to increased payroll, payroll relatedcosts and temporary help expenses associated with an increase in the number ofemployees and salary increases for existing employees. Marketing expensesincreased over the prior year to support the continued rollout of high-speedInternet, digital and telephone products, and to grow our core video customerbase. Customer billing, collection fees and bad debt expense increased due tothe increase in our customer base. Professional fees also increased due toincreased legal activity for the nine months ended September 30, 2006.

Management fees increased $3.1 million or 12% to $27.9million for the nine months ended September 30, 2006 from $24.8 millionfor the nine months ended September 30, 2005. Management fees, equal toapproximately 3% of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $17.0million or 10% primarily as a result of an increased level of capitalexpenditures through September 30, 2006. These expenditures were primarily for 

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purchases of customerpremise equipment, installation materials, capitalized labor, headendequipment, network extensions and network capacity and bandwidth increases, allof which we consider necessary in order to continue to maintain and grow ourcustomer base and expand our service offerings. Partially offsetting thisincrease was a decrease in depreciation expense related to certain assets thathave become fully depreciated since September 30, 2005.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization increased $9.0 million to$346.7 million, an increase of 3% over the nine months ended September 30,2005.

Interest expense increased$15.3 million, or 10%, due to i) higher interest rates, which averaged 8.6% forthe nine months ended September 30, 2006, as compared to 7.8% for the ninemonths ended September 30, 2005, and ii) the termination of our interestrate swap agreement during the nine months ended September 30, 2006. 

**Liquidity andCapital Resources**

Our business requires cash for operations, debtservice and capital expenditures. The cable television business has substantialongoing capital requirements for the construction, expansion and maintenance ofits broadband networks and provision of new services. In the past, expenditureshave been made for various purposes, including the upgrade of the existingcable network, and will continue to be made for network extensions, networkcapacity and bandwidth increases, installation of new services, customerpremise equipment (e.g., set-top boxes), deployment of new product and serviceofferings, and, to a lesser extent, network upgrades. Historically, we havebeen able to meet our cash requirements with cash flow from operations,borrowings under our credit facilities and issuances of private and public debtand equity.

Cash provided by operations for the nine months ended September 30,2006 and 2005 was $200.6 million and $217.9 million. This decrease wasprimarily attributable to the increase in our net loss partially offset by thetiming of cash receipts and payments related to our working capital accounts.

Cash used in investing activities for the nine monthsended September 30, 2006 and 2005 was $212.0 million and $140.8million. The increase primarily was due to increases in capital expenditures.For the nine months ended September 30, 2006 and 2005, we spent $211.8million and $140.4 million in capital expenditures. These expendituresprincipally constituted purchases of customer premise equipment, capitalizedlabor, installation materials, headend equipment, network capacity andbandwidth increases and system upgrades and rebuilds, all of which arenecessary to maintain our existing network, grow our customer base and expandour service offerings.

Cash provided by financing activities for the ninemonths ended September 30, 2006 was $2.4 million compared to $64.3million of cash used in financing activities for the nine months endedSeptember 30, 2005. The decrease was due to $65.0 million in net proceedsfrom borrowings under the Midwest Holdings credit facility for the nine monthsended September 30, 2006.

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Free Cash Flow for the nine months ended September 30,2006 totaled ($11.2) million compared to $77.5 million for the nine monthsended September 30, 2005. The decrease in Free Cash Flow from September 30,2005 to September 30, 2006 of $88.7 million was primarily driven by thefollowing:

·       A$71.5 million increase in capital expenditures;

·       A$16.0 million increase in cash interest expense paid primarily driven by anincrease in interest rates; and

·       A$10.2 million increase in the use of Free Cash Flow over the same period in theprior year from changes in working capital accounts.

Offsetting these uses of cash was a $9.0 millionincrease in Adjusted Operating Income before Depreciation and Amortization.

On October 6, 2006, Insight completed thefinancing of $2.445 billion of senior secured credit facilities for InsightMidwest Holdings. The facilities comprise term loans in the amount of $2.185billion and a $260.0 million revolving credit facility. The proceeds were usedto refinance Insight Midwest Holdings’ existing senior credit facilities and toredeem all of Insight Midwest’s 101⁄2% Senior Notes due November 1, 2010 and$185.0 million principal amount of Insight Midwest’s 93⁄4% Senior Notes due October 1,2009. This financing will reduce Insight’s interest payments and near term debtamortizations. As of November 8, 2006, $110.3 million of the $260.0million revolving credit facility was drawn (including $9.3 million inletters of credit) and Insight had the ability to draw upon $149.7 million ofunused availability to fund any shortfall resulting from the inability ofInsight Midwest’s cash from operations to fund its capital expenditures, meetits debt service requirements or otherwise fund its operations. Insight expectsto use any available Free Cash Flow to repay its indebtedness.

We have a substantial amount of debt. Our high levelof debt could have important consequences for you. Our principal source of cashwe need to pay our obligations and to repay the principal amount of our debtobligations is the cash that our subsidiaries generate from their operationsand their borrowings. We believe that the Insight Midwest Holdings creditfacility, cash on-hand and our cash flow from operations are sufficient tosupport our current operating plan.

Thefollowing table summarizes our contractual obligations and commitments,excluding interest and commitments for programming, as of September 30, 2006 (in thousands):

| ** **              | ** ** | **Contractual Obligations** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Long-Term  Debt**              | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
| 2006                    |       | $                                | 20,875     |   |   | $ | 853 |   |   | $ | 21,728 |   |
| 2007                    |       | 83,500                           |       |   | 2,276 |   |   | 85,776 |   |
| 2008                    |       | 104,750                          |       |   | 1,721 |   |   | 106,471 |   |
| 2009                    |       | 1,582,500                        |       |   | 1,290 |   |   | 1,583,790 |   |
| 2010                    |       | 630,000                          |       |   | 667 |   |   | 630,667 |   |
| Thereafter              |       | 100,000                          |       |   | 1,434 |   |   | 101,434 |   |
| Total cash  obligations |       | $                                | 2,521,625  |   |   | $ | 8,241 |   |   | $ | 2,529,866 |   |

 

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

Our revolving credit and term loan agreements bearinterest at floating rates. Accordingly, we are exposed to potential lossesrelated to changes in interest rates. In order to manage our exposure tointerest rate risk, we enter into derivative financial instruments, typicallyinterest rate swaps. The counter-parties to our swap agreements are majorfinancial institutions. We do not enter into derivatives or other financialinstruments for trading or speculative purposes.

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The aggregate fair marketvalue and aggregate carrying value of our 93⁄4% and 101⁄2% senior notes was $1.0billion as of September 30, 2006.The fair market value of our credit facility borrowings approximates itscarrying value as the credit facility borrowings bear interest at floatingrates of interest. As of December 31,2005, the cost, if terminated, of our interest rate swap agreement was$2.4 million and was reflected in our financial statements as an othernon-current liability.

**Item 4. Controlsand Procedures**

Insight Midwest’s management carried out anevaluation, with the participation of its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of its disclosure controls andprocedures as of September 30,2006. Based upon that evaluation, its Chief Executive Officer and ChiefFinancial Officer concluded that (i) Insight Midwest’s disclosure controlsand procedures were effective to ensure that information required to bedisclosed by it in reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the rules and forms of the Securities andExchange Commission, and (ii) Insight Midwest’s disclosure controls andprocedures were designed to ensure that information required to be disclosed byus in reports that we file or submit under the Securities Exchange Act of 1934is accumulated and communicated to Insight Midwest’s management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

There has not been any change in its internal controlover financial reporting in connection with the evaluation required by Rule 13a-15(d) or15d-15(d) under the Exchange Act that occurred during the quarterended September 30, 2006 thathas materially affected, or is reasonably likely to materially affect, itsinternal control over financial reporting.

Insight Capital’s management carried out anevaluation, with the participation of its Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of its disclosure controls andprocedures as of September 30,2006. Based upon that evaluation, its Chief Executive Officer and ChiefFinancial Officer concluded that (i) Insight Capital’s disclosure controlsand procedures were effective to ensure that information required to bedisclosed by it in reports that it files or submits under the SecuritiesExchange Act of 1934 is recorded, processed, summarized and reported, withinthe time periods specified in the rules and forms of the Securities andExchange Commission, and (ii) Insight Capital’s disclosure controls andprocedures were designed to ensure that information required to be disclosed byus in reports that we file or submit under the Securities Exchange Act of 1934is accumulated and communicated to Insight Capital’s management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure.

There has not been any change in its internal controlover financial reporting in connection with the evaluation required by Rule 13a-15(d) or15d-15(d) under the Exchange Act that occurred during the quarterended September 30, 2006 thathas materially affected, or is reasonably likely to materially affect, itsinternal control over financial reporting.

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**PART II. OTHERINFORMATION**

**Item 1. LegalProceedings**

See Note 9 in Item 1 of PART I,Notes to Consolidated Financial Statements.

**Item 1A. RiskFactors**

There have been nomaterial changes in our risk factors from those disclosed in our annual reporton Form 10-K for the year ended December 31, 2005.

**Item 5. OtherInformation**

**Termination of aMaterial Definitive Agreement**

As previously reported, on October 6, 2006,notices of redemption were delivered to the holders of our 101¤2%Senior Notes due 2010 (“101⁄2% notes”) and our 93¤4% Senior Notesdue 2009 (“93⁄4% notes), in accordance with the terms and conditions of the101¤2%notes and the 93¤4%notes. On November 7, 2006, in accordance with the notices of redemption,we redeemed all $630 million outstanding principal amount of the 101¤2%notes at a redemption price of 103.5% of the principal amount, plus accrued andunpaid interest, and $185 million principal amount of the 93¤4% notes at aredemption price of 101.625% of the principal amount redeemed, plus accrued andunpaid interest. The aggregate redemption price, including the redemptionpremium and accrued but unpaid interest, of $843 million was funded withour credit facilities and cash on hand.

As of November 7,2006, following the redemption, the 101¤2% notes ceasedto be issued and outstanding. The 93¤4%notes were redeemed on a pro rata basis, and we will continue to make scheduledinterest payments on the remaining outstanding $200 million aggregate principalamount of 93¤4%notes in accordance with, and otherwise comply with, the indenture governingthe 93¤4%notes.

**Item6. Exhibits**
| Exhibits: | ** ** | ** **                                                                                                                 |
|-----------|------------|----------------------------------------------------------------------------------------------------------------------------|
| 31.1      |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Chief Executive Officer of Insight Midwest, L.P.                 |
| 31.2      |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Chief Financial Officer of Insight Midwest, L.P.                 |
| 31.3      |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Chief Executive Officer of Insight Capital, Inc.            |
| 31.4      |       | Rule 13a-14(a)/15d-14(a) Certifications  of the Chief Financial Officer of Insight Capital, Inc.            |
| 32.1      |       | Section 1350 Certifications of the Chief  Executive Officer and Chief Financial Officer of Insight Midwest, L.P.      |
| 32.2      |       | Section 1350 Certifications of the Chief  Executive Officer and Chief Financial Officer of Insight Capital, Inc. |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

| Date: November 14, 2006 | INSIGHT  MIDWEST, L.P.                                  |
|------------------------------|---------------------------------------------------------|
|                         | By: /s/ JOHN ABBOT                                      |
|                         | John Abbot                                              |
|                         | *Executive Vice President and Chief Financial  Officer* |
|                         | *(Principal Financial Officer)*                         |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

| Date: November 14, 2006 | INSIGHT CAPITAL, INC.                                   |
|------------------------------|---------------------------------------------------------|
|                         | By: /s/ JOHN ABBOT                                      |
|                         | John Abbot                                              |
|                         | *Executive Vice President and Chief Financial  Officer* |
|                         | *(Principal Financial Officer)*                         |

 

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