**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-Q**

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

**Forthe Quarterly Period Ended March 31, 2006**

| **Commission file numbers** |   | **333-33540                      ** |
|-----------------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                  |   | **333-33540-1                   **                 |

 

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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  incorporation or organization)                        |   | (I.R.S. Employer  Identification No.) |
| **810 7****th Avenue  New York, New York**(Address of principal executive offices) |   | **10019**(Zip code)                   |

 

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

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Indicate by check mark whether the registrants (1) havefiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrants were required to file such reports) and (2) havebeen subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether each registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer. Seedefinition of “accelerated filer and large accelerated filer” in Rule 12b-2of the Exchange Act. (Check one): Large accelerated filer o   Acceleratedfiler o   Non-accelerated filer x

Indicate by check mark whether the registrants are ashell company (as defined in Exchange Act Rule 12b-2). Yes o No x

Indicate the numberof shares outstanding of each of the registrants’ classes of common stock, asof the latest practicable date.

| Insight Midwest, L.P.                   |   | —Not Applicable |
|-----------------------------------------|--------|----------------------|
| Insight  Capital, Inc.   |   | —Not Applicable |

 

 

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**PART I.**   FINANCIALINFORMATION

**Item 1.**   Financial Statements

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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**INSIGHT MIDWEST, LPCONSOLIDATED BALANCE SHEETS(dollars in thousands)**

| ** **                                                                                                                                  | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                  | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                  | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                  |       |               |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                  |       | $                  | 34,261     |                  |       | $ | 24,853 |   |   |
| Investments                                                                                                                                 |       | 4,958              |       |                  | 4,701      |   |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $998 and $1,079 as of  March 31, 2006 and December 31, 2005 |       | 17,556             |       |                  | 27,233     |   |   |
| Launch funds  receivable                                                                                                                    |       | 587                |       |                  | 974        |   |   |
| Prepaid expenses  and other current assets                                                                                                  |       | 11,159             |       |                  | 8,860      |   |   |
| Total current assets                                                                                                                        |       | 68,521             |       |                  | 66,621     |   |   |
| Fixed assets, net                                                                                                                           |       | 1,102,612          |       |                  | 1,107,571  |   |   |
| Goodwill                                                                                                                                    |       | 14,684             |       |                  | 14,684     |   |   |
| Franchise costs                                                                                                                             |       | 2,357,535          |       |                  | 2,357,535  |   |   |
| Deferred  financing costs, net of accumulated amortization of $20,975 and $19,769 as of  March 31, 2006 and December 31, 2005     |       | 18,708             |       |                  | 19,910     |   |   |
| Other non-current  assets                                                                                                                   |       | 1,792              |       |                  | 1,582      |   |   |
| Total assets                                                                                                                                |       | $                  | 3,563,852  |                  |       | $ | 3,567,903 |   |   |
| **Liabilities  and partners’ capital**                                                                                                 | ** ** | ** **         | ** ** |                  |       |   |   |
| Accounts payable                                                                                                                            |       | $                  | 33,856     |                  |       | $ | 40,843 |   |   |
| Accrued expenses  and other current liabilities                                                                                             |       | 33,797             |       |                  | 38,535     |   |   |
| Accrued property  taxes                                                                                                                     |       | 16,079             |       |                  | 12,792     |   |   |
| Accrued  programming costs (inclusive of $29,877 and $29,878 due to related parties as  of March 31, 2006 and December 31, 2005)  |       | 45,613             |       |                  | 43,705     |   |   |
| Deferred revenue                                                                                                                            |       | 3,714              |       |                  | 4,978      |   |   |
| Interest payable                                                                                                                            |       | 46,585             |       |                  | 20,459     |   |   |
| Debt—current  portion                                                                                                                  |       | 83,500             |       |                  | 83,500     |   |   |
| Due to affiliates                                                                                                                           |       | 49,607             |       |                  | 46,013     |   |   |
| Total current liabilities                                                                                                                   |       | 312,751            |       |                  | 290,825    |   |   |
| Deferred revenue                                                                                                                            |       | 1,281              |       |                  | 1,499      |   |   |
| Debt                                                                                                                                        |       | 2,410,359          |       |                  | 2,432,811  |   |   |
| Other non-current  liabilities                                                                                                              |       | 4,047              |       |                  | 2,382      |   |   |
| Partners’  capital:                                                                                                                    |       |               |       |                  |       |   |   |
| Deferred stock  compensation                                                                                                                |       | (497               | )          |                  | (535       | ) |   |
| Partners’  accumulated capital                                                                                                         |       | 835,911            |       |                  | 840,921    |   |   |
| Total partners’ capital                                                                                                                |       | 835,414            |       |                  | 840,386    |   |   |
| Total liabilities  and partners’ capital                                                                                               |       | $                  | 3,563,852  |                  |       | $ | 3,567,903 |   |   |

 

See accompanying notes

2

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

| ** **                                                                                                                                                                                                                               | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenue                                                                                                                                                                                                                                  |       | $                                                | 301,281    |   | $ | 269,327 |   |
| Operating costs and  expenses:                                                                                                                                                                                                           |       |                                             |       |   |   |
| Programming and other operating costs (exclusive of  depreciation and amortization) (inclusive of $43,081 and $41,499 of  programming expense incurred through related parties for the three months  ended March 31, 2006 and 2005) |       | 110,255                                          |       | 98,773 |   |
| Selling, general and administrative (inclusive of  $38 and $0 of stock-based compensation as of March 31, 2006 and 2005)                                                                                                            |       | 72,136                                           |       | 57,428 |   |
| Management fees                                                                                                                                                                                                                          |       | 9,038                                            |       | 8,098 |   |
| Depreciation and amortization                                                                                                                                                                                                            |       | 62,953                                           |       | 59,684 |   |
| Total operating  costs and expenses                                                                                                                                                                                                      |       | 254,382                                          |       | 223,983 |   |
| Operating income                                                                                                                                                                                                                         |       | 46,899                                           |       | 45,344 |   |
| Other income  (expense):                                                                                                                                                                                                                 |       |                                             |       |   |   |
| Interest expense                                                                                                                                                                                                                         |       | (52,363                                          | )          | (48,341 | ) |
| Interest income                                                                                                                                                                                                                          |       | 513                                              |       | 105 |   |
| Other income (expense)                                                                                                                                                                                                                   |       | (59                                              | )          | 92 |   |
| Total other  expense, net                                                                                                                                                                                                                |       | (51,909                                          | )          | (48,144 | ) |
| Net loss                                                                                                                                                                                                                                 |       | $                                                | (5,010     | ) | $ | (2,800 | ) |

 

See accompanying notes

3

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**INSIGHT MIDWEST, LPCONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)(dollars in thousands)**

| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Operating activities:**                                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                | (5,010     | ) | $ | (2,800 | ) |
| Adjustments to  reconcile net loss to net cash provided by operating activities: |       |                                             |       |   |   |
| Depreciation and amortization                                                    |       | 62,953                                           |       | 59,684 |   |
| Stock-based compensation                                                         |       | 38                                               |       | — |   |
| Provision for losses on trade accounts receivable                                |       | 2,904                                            |       | 3,801 |   |
| Amortization of note discount                                                    |       | 88                                               |       | 80 |   |
| Loss on interest rate swaps                                                      |       | —                                           |       | 233 |   |
| Changes in  operating assets and liabilities:                                    |       |                                             |       |   |   |
| Trade accounts receivable                                                        |       | 6,773                                            |       | 8,872 |   |
| Launch funds receivable                                                          |       | 387                                              |       | 2,156 |   |
| Prepaid expenses and other assets                                                |       | (2,532                                           | )          | (3,845 | ) |
| Accounts payable                                                                 |       | (6,987                                           | )          | (2,339 | ) |
| Interest payable                                                                 |       | 26,126                                           |       | 7,375 |   |
| Accrued expenses and other liabilities                                           |       | 2,569                                            |       | (1,290 | ) |
| Net cash provided by operating activities                                        |       | 87,309                                           |       | 71,927 |   |
| **Investing  activities:**                                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Purchase of fixed assets                                                         |       | (57,100                                          | )          | (37,515 | ) |
| Sale of fixed assets                                                             |       | 335                                              |       | — |   |
| Purchase of investments                                                          |       | (257                                             | )          | — |   |
| Net cash used in investing activities                                            |       | (57,022                                          | )          | (37,515 | ) |
| **Financing  activities:**                                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Repayment of credit facilities                                                   |       | (20,875                                          | )          | (20,875 | ) |
| Other                                                                            |       | (4                                               | )          | — |   |
| Net cash used in financing activities                                            |       | (20,879                                          | )          | (20,875 | ) |
| Net increase in cash and cash equivalents                                        |       | 9,408                                            |       | 13,537 |   |
| Cash and cash  equivalents, beginning of period                                  |       | 24,853                                           |       | 72,476 |   |
| Cash and cash  equivalents, end of period                                        |       | $                                                | 34,261     |   | $ | 86,013 |   |

 

See accompanying notes

4

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

**1. Organization and Basisof 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 2.4million homes and served approximately 1.3 million customers as of March 31,2006.

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 subsidiary formedfor the sole purpose of being the co-issuer of our senior notes, which allowscertain 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. Responsibility forInterim 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 months ended March 31, 2006 are not necessarily indicative of theresults to be expected for the year ending December 31, 2006 or any otherinterim period.

5

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

**3.Recent Accounting Pronouncements**

In December 2004, the FinancialAccounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards No. 123 (revised 2004), *Share-BasedPayment*, (“SFAS 123R”). SFAS 123R establishes the accountingfor transactions in which an entity pays for employee services in share-basedpayment transactions. SFAS 123R requires companies to recognize the cost ofemployee services received in exchange for awards of equity instruments, basedon the grant date fair value of those awards, in the financial statements. TheCompany adopted SFAS 123R effective January 1, 2006 using themodified-prospective transition method. Under this method stock-basedcompensation is recognized for awards granted in the period after adoption. Prioryear financial statements are not restated. The adoption of this standard didnot have a material impact on our consolidated financial statements.

In May 2005, FASBissued SFAS No. 154, *Accounting**Changes and Error Corrections*. SFAS No. 154 replaces AccountingPrinciples Board (“APB”) Opinion No. 20, *AccountingChanges*, and SFAS No. 3, *Reporting AccountingChanges in Interim Financial Statements* and changes the requirementsfor the accounting for and reporting of a change in accounting principles. SFASNo. 154 applies to all voluntary changes in an accounting principle. Italso applies to changes required by an accounting pronouncement in the unusualinstance that the pronouncement does not include specific transitionprovisions. When a pronouncement includes specific provisions, those provisionsshould be followed. SFAS 154 is effective for accounting changes andcorrections of errors made in fiscal years beginning in 2006.

**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. The term of the carriage agreementexpires on December 31, 2006.

Concurrently with thecarriage agreement, we entered into an equity issuance agreement with Oxygen.The agreement calls for Oxygen to deliver to us shares having an aggregate fairmarket 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 as of the December 31,2005 valuation of $2.0 million. Pursuant to the equity issuance agreement, aportion of the monthly programming fees represent our equity investment inOxygen. As of March 31, 2006 and December 31, 2005, our carryingvalue in this investment was $5.0 million and $4.7 million. We andOxygen are currently in the process of negotiating the fair market value ofOxygen which will be used to determine the number of shares that we willreceive. As of March 31, 2006, no shares have been delivered to us.

6

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

**5. Fixed Assets**

Fixedassets consisted of:

| ** **                                       | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Land, buildings  and improvements                |       | $                       | 37,815     |                  | $          | 36,768 |   |
| Cable system  equipment                          |       | 2,420,786               |       | 2,365,956             |       |
| Furniture,  fixtures and office equipment        |       | 20,059                  |       | 19,079                |       |
|                                             |       | 2,478,660               |       | 2,421,803             |       |
| Less: accumulated  depreciation and amortization |       | (1,376,048              | )          | (1,314,232            | )          |
| Total fixed  assets, net                         |       | $                       | 1,102,612  |                  | $          | 1,107,571 |   |

 

We recorded depreciationexpense of $61.7 million and $58.6 million for the three months ended March 31,2006 and 2005.

**6.Debt**

| ** **                                 | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Note payable to  Insight Inc.              |       | $                       | 100,000    |                  |       | $ | 100,000 |   |   |
| Insight Midwest  Holdings Credit Facility  |       | 1,383,375               |       |                  | 1,404,250  |   |   |
| Insight Midwest 93¤4%  Senior Notes   |       | 385,000                 |       |                  | 385,000    |   |   |
| Insight Midwest 101¤2%  Senior Notes  |       | 630,000                 |       |                  | 630,000    |   |   |
|                                       |       | 2,498,375               |       |                  | 2,519,250  |   |   |
| Net unamortized  discount/premium on notes |       | (469                    | )          |                  | (557       | ) |   |
| Market value of  interest rate swaps       |       | (4,047                  | )          |                  | (2,382     | ) |   |
| Total debt                                 |       | $                       | 2,493,859  |                  |       | $ | 2,516,311 |   |   |

 

***Insight Midwest Holdings $1.975 Billion CreditFacility***

Our wholly owned subsidiary, Insight Midwest Holdings,LLC, serves as borrower under a $1.975 billion credit facility. Obligationsunder this credit facility are secured by a pledge of the outstanding equityinterests of Insight Midwest Holdings and its subsidiaries. On March 28,2002, we borrowed $100.0 million from Insight Inc. The loan bears annualinterest 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. As of March 31, 2006 and December 31,2005, the balance of the $100.0 million loan including accrued interest was$142.2 million and $139.1 million.

7

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

**6. Debt(Continued)**

***Debt Principal Payments***

As of March 31,2006, the remaining principal payments required on our debt were as follows (inthousands):

| 2006       |   | $         | 62,625    |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 83,500    |      |
| 2008       |   | 104,750   |      |
| 2009       |   | 1,517,500 |      |
| 2010       |   | 630,000   |      |
| Thereafter |   | 100,000   |      |
| Total      |   | $         | 2,498,375 |   |

 

**7. Derivative Instruments**

We enter into derivative instruments, typically interest-rateswap agreements, to modify the interest characteristics of our outstanding debtto either a floating or fixed rate basis. These agreements involve fixed rateinterest payments in exchange for floating rate interest receipts, known ascash flow hedges, and floating rate interest payments in exchange for fixedrate interest receipts, known as fair value hedges, over the life of theagreement without an exchange of the underlying principal amount. Thedifferential to be paid or received is accrued as interest rates change and isrecognized as an adjustment to interest expense related to the debt. Therelated amount payable or receivable is included in other liabilities orassets.

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 loss on these swaps of $233,000 for the three months ended March 31,2005, which is included in other income (expense).

8

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

**7. DerivativeInstruments (Continued)**

In December 2003, weentered into an interest rate swap agreement whereby we swapped fixed ratesunder a different tranche of our 101¤2% senior notesdue in December 2010 for variable rates equal to six-month LIBOR, plus theapplicable margin of approximately 5.9%, on $130.0 million notional value ofdebt. This agreement expires November 1, 2010. This swap has beendetermined to be perfectly effective in hedging against fluctuations in thefair value of the underlying debt. As such, changes in the fair value of theunderlying debt equally offset changes in the value of the interest rate swapin our consolidated statements of operations. The cost, if terminated, of thisswap as of March 31, 2006 and December 31, 2005 was $4.0 million and$2.4 million and has been 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 $43.1 million and $41.5 million for the three monthsended March 31, 2006 and 2005. As of March 31, 2006 and December 31,2005, $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 Interactive thatit did not already own from Source Media. We are currently providing InsightInteractive’s services to customers in some of our systems. For the threemonths ended March 31, 2006 and 2005, fees for such services totaled$831,000 and $707,000.

***Due To Affiliates***

As of March 31, 2006and December 31, 2005, we had amounts owed to Insight LP, our manager,primarily comprised of accrued interest related to our $100.0 million notepayable to Insight Inc., incurred but unpaid management fees, calculated asapproximately 3% of revenues, and other operational expenses.

**9. Commitments andContingencies**

***Programming Contracts***

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.

9

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

**9. Commitmentsand Contingencies (Continued)**

***Litigation***

In April 2005, Acacia Media TechnologiesCorporation filed a lawsuit against us and others in the United States DistrictCourt for the Southern District of New York. The complaint alleges, among otherthings, infringement of certain United States patents that allegedly relate tosystems and methods for transmitting and/or receiving digital audio and videocontent. The complaint seeks injunctive relief and damages in an unspecifiedamount. In the event that a Court ultimately determines that we infringe on anyof the patents, we may be subject to substantial damages, which may includetreble damages and/or an injunction that could require us to materially modifycertain products and services that we currently offer to subscribers. Webelieve that the claims are without merit and intend to defend the action vigorously.The final disposition of this claim is not expected to have a material adverseeffect on our consolidated financial position but could possibly be material toour consolidated results of operations of any one period. Further, at this timethe outcome of the litigation is impossible to predict, and no assurance can begiven that any adverse outcome would not be material to our consolidatedfinancial position.

We are subject to various legal proceedings that arisein the ordinary course of business. While it is impossible to determine withcertainty the ultimate outcome of these matters, it is our opinion that theresolution of these matters will not have a material adverse affect on ourconsolidated financial condition.

10

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**INSIGHT CAPITAL, INC.BALANCE SHEETS(dollars in thousands, except per share amounts)**

| ** **                                                                                                                              | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2006**           | ** ** | **2005**              | ** ** |
| ** **                                                                                                                              | ** ** | **unaudited**      | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                              | ** ** | ** **         | ** ** | ** **            | ** ** |
| Cash                                                                                                                                    |       | $                  | 1          |                  | $          | 1 |   |
| Deferred  financing costs, net of accumulated amortization of $12,341 and $11,689 as of  March 31, 2006 and December 31, 2005 |       | 10,440             |       | 11,092                |       |
| Total assets                                                                                                                            |       | $                  | 10,441     |                  | $          | 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                                                                                        |       | 1,014,531          |       | 1,014,443             |       |
| Total liabilities                                                                                                                       |       | 1,060,862          |       | 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                                              |       | (531,616           | )          | (531,616              | )          |
| Accumulated  deficit                                                                                                                    |       | (518,806           | )          | (492,144              | )          |
| Total shareholder’s deficit                                                                                                        |       | (1,050,421         | )          | (1,023,759            | )          |
| Total liabilities  and shareholder’s deficit                                                                                       |       | $                  | 10,441     |                  | $          | 11,093 |   |

 

See accompanying notes

11

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

| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Expenses:**    |       |                                             |       |   |   |
| Amortization     |       | $                                                | (652       | ) | $ | (652 | ) |
| Interest expense |       | (26,010                                          | )          | (26,003 | ) |
| Net loss         |       | $                                                | (26,662    | ) | $ | (26,655 | ) |

 

See accompanying notes

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

| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| **Cash flows from operating  activities:**                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                | (26,662    | ) | $ | (26,655 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |       |                                             |       |   |   |
| Accretion of discount on notes                                                   |       | 88                                               |       | 81 |   |
| Amortization                                                                     |       | 652                                              |       | 652 |   |
| Interest expense assumed by affiliate                                            |       | 25,922                                           |       | 25,922 |   |
| 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

13

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

**1. Nature of Business**

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. Responsibility forInterim 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

**Cautionary StatementRegarding 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 onForm 10-K for the year ended December 31, 2005, as well as any othercautionary language in this quarterly report, provide examples of risks, uncertaintiesand events 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 report could have a material adverse effect on our business, operatingresults and financial condition. Examples of these risks include:

·       Allof the services offered by our company face a wide range of competition thatcould adversely affect our future results of operations;

·       Wehave substantial debt and have significant interest payment requirements, whichmay adversely affect our ability to obtain financing in the future to financeour operations and our ability to react to changes in our business;

·       Thereis uncertainty surrounding our potential dissolution, the process for which maybe triggered by either of our partners;

·       Theterms of Insight Midwest Holdings’ credit facility may limit our ability toaccess the cash flow of our subsidiaries;

·       Wehave a history of net losses and may not be profitable in the future;

·       Ourprogramming costs are substantial, and they are expected to increase; and

·       Generalbusiness conditions, economic uncertainty or slowdown, and the effects ofgovernmental regulation could adversely affect our future results ofoperations.

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 March 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| Revenue                                    |       | $                                                | 301,281    |   | $ | 269,327 |   |
| Operating costs  and expenses:             |       |                                             |       |   |   |
| Programming and other operating costs      |       | 110,255                                          |       | 98,773 |   |
| Selling, general and administrative        |       | 72,136                                           |       | 57,428 |   |
| Management Fees                            |       | 9,038                                            |       | 8,098 |   |
| Depreciation and amortization              |       | 62,953                                           |       | 59,684 |   |
| Total operating  costs and expenses        |       | 254,382                                          |       | 223,983 |   |
| Operating income                           |       | 46,899                                           |       | 45,344 |   |
| Interest expense                           |       | 52,363                                           |       | 48,341 |   |
| Net loss                                   |       | (5,010                                           | )          | (2,800 | ) |
| Net cash provided  by operating activities |       | 87,309                                           |       | 71,927 |   |
| Net cash used in  investing activities     |       | 57,022                                           |       | 37,515 |   |
| Net cash used in  financing activities     |       | 20,879                                           |       | 20,875 |   |
| Capital expenditures                       |       | 57,100                                           |       | 37,515 |   |
|                                            |            |                                                  |            |  |  |  |  |

 

**Use of AdjustedOperating Income 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, amortizationand 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, NetIncome and 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 Loss to Adjusted OperatingIncome before Depreciation and Amortization***

Thefollowing table reconciles Net Loss to Adjusted Operating Income beforeDepreciation and Amortization. In addition, the table provides the componentsfrom Net Loss to Operating Income for purposes of the discussions that follow.

| ** **                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                          | ** ** |
| Net loss                                                        |       | $                                                | (5,010     | ) | $ | (2,800 | ) |
| Other (income) expense:                                         |       |                                             |       |   |   |
| Other                                                           |       | 59                                               |       | (92 | ) |
| Interest income                                                 |       | (513                                             | )          | (105 | ) |
| Interest expense                                                |       | 52,363                                           |       | 48,341 |   |
| Total other  expense, net                                       |       | 51,909                                           |       | 48,144 |   |
| Operating income                                                |       | 46,899                                           |       | 45,344 |   |
| Depreciation and  amortization                                  |       | 62,953                                           |       | 59,684 |   |
| Stock-based  compensation                                       |       | 38                                               |       | — |   |
| Adjusted Operating  Income before Depreciation and Amortization |       | $                                                | 109,890    |   | $ | 105,028 |   |

 

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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 for purposesof the discussions that follow.

| ** **                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                         | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                          | ** ** |
| Operating income                                                |       | $                                                | 46,899     |   | $ | 45,344 |   |
| Depreciation and amortization                                   |       | 62,953                                           |       | 59,684 |   |
| Stock-based compensation                                        |       | 38                                               |       | — |   |
| Adjusted  Operating Income before Depreciation and Amortization |       | 109,890                                          |       | 105,028 |   |
| Changes in working capital accounts(1)                          |       | 506                                              |       | 4,981 |   |
| Cash paid for interest(2)                                       |       | (23,087                                          | )          | (38,082 | ) |
| Net cash provided  by operating activities                      |       | 87,309                                           |       | 71,927 |   |
| Capital expenditures                                            |       | (57,100                                          | )          | (37,515 | ) |
| Free Cash Flow                                                  |       | $                                                | 30,209     |   | $ | 34,412 |   |

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(1)          Changes in workingcapital accounts are based on the net cash changes in current assets andcurrent liabilities, excluding charges related to interest and taxes and othernon-cash expenses.

(2)          Interest for the first quarter of 2005included bond interest payments due April 1, 2005 that were made onMarch 31, 2005. Had the payments been made on April 1, 2005, FreeCash Flow for the three months ended March 31, 2005 would have been$53,181.

**Results ofOperations**

***Three Months Ended March 31, 2006 Compared toThree Months Ended March 31, 2005***

Revenue for the three months ended March 31, 2006 totaled $301.3 million, anincrease of 12% over the prior year, due primarily to customer gains in allservices, as well as video rate increases. High-speed Internet service revenueincreased 34% 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 44,400 high-speed Internetcustomers during the quarter to end at 514,800 customers. In addition, digitalservice revenue increased 19% over the prior year due to an increased customerbase. We added a net 41,700 digital customers during the quarter to end at560,500 customers.

Basic cable service revenue increased 7% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. We are increasing customer growth and retention effortsby increasing spending on sales and marketing efforts, emphasizing bundling andenhancing and differentiating our video services by providing video-on-demand,high definition television and digital video recorders. We are also continuingto focus on improving customer satisfaction through higher service levels andincreased education of product offerings.

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Revenueby service offering was as follows for the three months ended March 31(dollars in thousands):

| ** **           | ** ** | **Revenue by Service Offering**       | ** ** | ** **                    | ** ** | ** **                                           | ** ** |
|----------------------|------------|------------------------------------------------------|------------|-------------------------------|------------|------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended  March 31,2006** | ** ** | **% of  Total  Revenue** | ** ** | **Three Months Ended  March 31,2005** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                                 | $          | 158,207                       |       |                                                 |       | 52.5 | % |   |   | $ | 147,632 |   |   |   | 54.8 | % |   |   |   |   | 7.2 | % |   |
| High-Speed  Internet |       |                                                 | 56,497     |                          |       |                                                 | 18.8       | % |   |   | 42,113 |   |   |   | 15.6 | % |   |   |   |   | 34.2 | % |   |
| Digital              |       |                                                 | 31,723     |                          |       |                                                 | 10.5       | % |   |   | 26,761 |   |   |   | 9.9 | % |   |   |   |   | 18.5 | % |   |
| Advertising          |       |                                                 | 17,697     |                          |       |                                                 | 5.9        | % |   |   | 16,988 |   |   |   | 6.3 | % |   |   |   |   | 4.2 | % |   |
| Premium              |       |                                                 | 13,394     |                          |       |                                                 | 4.4        | % |   |   | 14,344 |   |   |   | 5.3 | % |   |   |   |   | -6.6 | % |   |
| Telephone            |       |                                                 | 11,355     |                          |       |                                                 | 3.8        | % |   |   | 7,732 |   |   |   | 2.9 | % |   |   |   |   | 46.9 | % |   |
| Franchise fees       |       |                                                 | 7,354      |                          |       |                                                 | 2.4        | % |   |   | 7,420 |   |   |   | 2.8 | % |   |   |   |   | -0.8 | % |   |
| Other                |       |                                                 | 5,054      |                          |       |                                                 | 1.7        | % |   |   | 6,337 |   |   |   | 2.4 | % |   |   |   |   | -20.2 | % |   |
| Total                |       |                                                 | $          | 301,281                       |       |                                                 |       | 100.0 | % |   |   | $ | 269,327 |   |   |   | 100.0 | % |   |   |   |   | 11.9 | % |   |

 

TotalCustomer Relationships were 1,376,800 as of March 31, 2006, an increase of49,700 from 1,327,100 as of March 31, 2005. Total Customer Relationshipsrepresent the number of customers who receive one or more of our products(i.e., basic cable, high-speed Internet or telephone) without regard to whichproduct they purchase. Total Revenue Generating Units (“RGUs”) which representthe sum of basic, digital, high-speed Internet and telephone customers, as of March 31,2006 increased 15% as compared to March 31, 2005. RGUs by category were asfollows (in thousands):

| ** **           | ** ** | **March 31, 2006** | ** ** | **March 31, 2005** | ** ** |
|----------------------|------------|------------------------------|------------|------------------------------|------------|
| Basic                |       |                         | 1,306.7    |                         |       |   | 1,271.4 |   |   |
| Digital              |       |                         | 560.5      |                         |       |   | 459.0 |   |   |
| High-speed  Internet |       |                         | 514.8      |                         |       |   | 367.8 |   |   |
| Telephone            |       |                         | 99.7       |                         |       |   | 68.6 |   |   |
| Total RGUs           |       |                         | 2,481.7    |                         |       |   | 2,166.8 |   |   |

 

Average monthly revenue per basic customer was $77.60for the three months ended March 31, 2006 compared to $70.58 for the threemonths ended March 31, 2005. This primarily reflects the continued growthof high-speed Internet and digital product offerings in all markets, as well asvideo rate increases.

Programming and other operating costs increased $11.5million, or 12%. Increases in customers and substantial increases inprogramming rates were partially offset by programming credits. The creditsresulted from favorable resolution of pricing negotiations related to certainprior period programming costs that were accrued at a higher rate than theamount actually paid. In addition, direct operating costs increased due to anincrease in our high-speed Internet service provider costs. This increase isprimarily attributable to the addition of 44,400 high-speed Internet customersand the payment of contractually obligated and other one-time transition coststo bring Internet services in house. Other operating costs increased primarilyas a result of increases in repair, maintenance and warranty costs; an increasein taxes due to a change in the tax law in Kentucky; and an increase ininstallation labor due to increased customer activity.

Selling, general and administrative expenses increased$14.7 million, or 26%, primarily due to increased payroll, payroll relatedcosts and temporary help, including an increase in the number of employees andsalary increases for existing employees. Marketing expenses increased over theprior year to support the continued rollout of high-speed Internet, digital andtelephone products, and to grow our core video customer base.

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Management fees increased $940,000 or 12% to $9.0million for the three months ended March 31, 2006 from $8.1 million forthe three months ended Mach 31, 2005. Management fees, equal to approximately3% of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $3.3million or 5% primarily as a result of additional capital expenditures through March 31,2006. These expenditures wereprimarily for purchases of customer premise equipment, installation materials,capitalized labor and network extensions, all of which we consider necessary inorder to continue to maintain and grow our customer base and expand our serviceofferings. Partially offsetting this increase was a decrease in depreciationexpense related to certain assets that have become fully depreciated since March 31,2005.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization increased $4.9 million to$109.9 million, an increase of 5% over the prior year’s quarter.

Interest expense increased$4.0 million, or 8%, due to higher interest rates, which averaged 8.36% for thethree months ended March 31, 2006, as compared to 7.46% for the threemonths ended March 31, 2005. 

**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 in the future will be made for network extensions, installationof new services, customer premise equipment (e.g., set-top boxes), deploymentof new product and service offerings, and, to a lesser extent, network upgrades.Historically, we have been able to meet our cash requirements with cash flowfrom operations, borrowings under our credit facilities and issuances ofprivate and public debt and equity.

Cash provided by operations for the three months endedMarch 31, 2006 and 2005 was $87.3 million and $71.9 million. The increasewas primarily attributable to the timing of cash receipts and payments relatedto our working capital accounts and the effect of non-cash items and waspartially offset by an increase in our net loss.

Cash used in investing activities for the three monthsended March 31, 2006 and 2005 was $57.0 million and $37.5 million. Theincrease primarily was due to increases in capital expenditures. For the threemonths ended March 31, 2006 and 2005, we spent $57.1 million and $37.5million in capital expenditures. These expenditures principally constitutedpurchases of customer premise equipment, capitalized labor, installationmaterials, headend equipment and system upgrades and rebuilds, all of which arenecessary to maintain our existing network, grow our customer base and expandour service offerings.

Cash used in financing activities for the three monthsended March 31, 2006 and 2005 was $20.9 million for the amortizationpayments on the credit facility.

Free Cash Flow forthe three months ended March 31, 2006 totaled $30.2 million compared to $34.4million for the three months ended March 31, 2005. The decrease in FreeCash Flow from March 31, 2005 to March 31, 2006 of $4.2 million wasprimarily driven by the following:

·       A$19.6 million increase in capital expenditures; and

·       A$500,000 source of Free Cash Flow for the three months ended March 31,2006 compared to a $5.0 million source for the three months ended March 31,2005 from changes in working capital accounts.

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These uses of cashwere offset by:

·       A$15.0 million decrease in cash interest expense paid due to a timing differencein the bond interest payments; and

·       A$4.9 million increase in Adjusted Operating Income before Depreciation andAmortization.

While we expect to continue to use Free Cash Flow torepay our indebtedness, as interest rates continue to increase, we expect ourinterest costs will also be higher, thus reducing Free Cash Flow.

On July 21, 2005 we completed a refinancing ofthe existing $1.1 billion Term B loan facility under the Midwest Holdings creditfacility. This refinancing reduced the applicable margins for LIBOR rateborrowings from LIBOR plus 275 basis points to LIBOR plus 200 basis points andthe applicable margin will be reduced an additional 25 basis points if MidwestHoldings’ leverage ratio drops below 2.75. The maximum total leverage ratiocovenant was reset from 3.75 to 4.50 on July 1, 2005 with step downs to4.25 on July 1, 2006 and 4.00 on July 1, 2007. The facility was alsoamended to provide certain flexibility to refinance our senior notes.

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. We had the ability to draw upon $283.7million of unused availability under the Insight Midwest Holdings creditfacility as of March 31, 2006 tofund any shortfall resulting from the inability of our cash from operations tofund our capital expenditures, meet our debt service requirements or otherwisefund our operations.

Thefollowing table summarizes our contractual obligations and commitments,excluding interest and commitments for programming, as of March 31, 2006, including periods in which therelated payments are due (in thousands):

| ** **              | ** ** | **Contractual Obligations** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Long-Term  Debt**              | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
| 2006                    |       | $                                | 62,625     |   |   | $ | 2,300 |   |   | $ | 64,925 |   |
| 2007                    |       | 83,500                           |       |   | 1,943 |   |   | 85,443 |   |
| 2008                    |       | 104,750                          |       |   | 1,400 |   |   | 106,150 |   |
| 2009                    |       | 1,517,500                        |       |   | 1,025 |   |   | 1,518,525 |   |
| 2010                    |       | 630,000                          |       |   | 539 |   |   | 630,539 |   |
| Thereafter              |       | 100,000                          |       |   | 975 |   |   | 100,975 |   |
| Total cash  obligations |       | $                                | 2,498,375  |   |   | $ | 8,182 |   |   | $ | 2,506,557 |   |

 

 

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**Item 3.**                        Quantitativeand 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.

The aggregate fair marketvalue and aggregate carrying value of our 93⁄4% and 101⁄2% senior notes was $1.1billion and $1.0 billion as of March 31, 2006. The fair market value of our credit facility borrowingsapproximates its carrying value as the credit facility borrowings bear interestat floating rates of interest. As of March 31, 2006 and December 31, 2005, the cost, if terminated, of ourinterest rate swap agreement was $4.0 million and $2.4 million and isreflected in our financial statements as an other non-current liability. Changesin the fair value of our interest rate derivative financial instruments areeither recognized in income or in partners’ capital as a component of othercomprehensive income depending on whether the derivative financial instrumentsqualify for hedge accounting.

**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 March 31, 2006.Based upon that evaluation, its Chief Executive Officer and Chief FinancialOfficer concluded that (i) Insight Midwest’s disclosure controls andprocedures were effective to ensure that information required to be disclosedby it in reports that it files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission, and (ii) Insight Midwest’s disclosure controls and procedureswere designed to ensure that information required to be disclosed by us inreports that we file or submit under the Securities Exchange Act of 1934 isaccumulated 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 March 31, 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 March 31, 2006.Based upon that evaluation, its Chief Executive Officer and Chief FinancialOfficer concluded that (i) Insight Capital’s disclosure controls andprocedures were effective to ensure that information required to be disclosedby it in reports that it files or submits under the Securities Exchange Act of1934 is recorded, processed, summarized and reported, within the time periodsspecified in the rules and forms of the Securities and ExchangeCommission, and (ii) Insight Capital’s disclosure controls and procedureswere designed to ensure that information required to be disclosed by us inreports that we file or submit under the Securities Exchange Act of 1934 isaccumulated 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 March 31, 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**

**SeeNote 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.

**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: May 11, 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: May 11, 2006 | INSIGHT CAPITAL, INC. |
|-------------------------|-----------------------|
|                    | By:                   | /s/ JOHN ABBOT |
|                    |                  | John Abbot |
|                    |                  | Executive Vice President and Chief Financial Officer  (Principal Financial Officer) |

 

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