**UNITED STATESSECURITIES 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 June 30, 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          |   | (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

Indicateby check mark whether each registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the Exchange Act.(Check one):

| 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 oNo x

Indicatethe number of shares outstanding of each of the registrants’ classes of commonstock, as of the latest practicable date.
| Insight Midwest, L.P.       |   | —Not Applicable |
|-----------------------------|--------|----------------------|
| Insight  Capital, Inc. |   | —Not Applicable |

 

 

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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)**

| ** **                                                                                                                                 | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                                 | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                                 | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                 | * *   | * *          |       |                  |       |   |   |
| Cash and cash  equivalents                                                                                                                 |       | $                 | 2,426      |                  |       | $ | 24,853 |   |   |
| Investments                                                                                                                                |       | 5,219             |       |                  | 4,701      |   |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $813 and $1,079 as of  June 30, 2006 and December 31, 2005 |       | 24,824            |       |                  | 27,233     |   |   |
| Launch funds  receivable                                                                                                                   |       | 470               |       |                  | 974        |   |   |
| Prepaid expenses  and other current assets                                                                                                 |       | 11,677            |       |                  | 8,860      |   |   |
| Total current assets                                                                                                                       |       | 44,616            |       |                  | 66,621     |   |   |
| Fixed assets, net                                                                                                                          |       | 1,121,244         |       |                  | 1,107,571  |   |   |
| Goodwill                                                                                                                                   |       | 14,684            |       |                  | 14,684     |   |   |
| Franchise costs                                                                                                                            |       | 2,357,535         |       |                  | 2,357,535  |   |   |
| Deferred  financing costs, net of accumulated amortization of $22,181 and $19,769 as of  June 30, 2006 and December 31, 2005     |       | 17,502            |       |                  | 19,910     |   |   |
| Other non-current  assets                                                                                                                  |       | 2,145             |       |                  | 1,582      |   |   |
| Total assets                                                                                                                               |       | $                 | 3,557,726  |                  |       | $ | 3,567,903 |   |   |
| **Liabilities  and partners’ capital**                                                                                                |       |              |       |                  |       |   |   |
| Accounts payable                                                                                                                           |       | $                 | 42,003     |                  |       | $ | 40,843 |   |   |
| Accrued expenses  and other current liabilities                                                                                            |       | 39,560            |       |                  | 38,535     |   |   |
| Accrued property  taxes                                                                                                                    |       | 13,287            |       |                  | 12,792     |   |   |
| Accrued  programming costs (inclusive of $30,245 and $29,878 due to related parties as  of June 30, 2006 and December 31, 2005)  |       | 46,654            |       |                  | 43,705     |   |   |
| Deferred revenue                                                                                                                           |       | 2,804             |       |                  | 4,978      |   |   |
| Interest payable                                                                                                                           |       | 20,601            |       |                  | 20,459     |   |   |
| Debt—current  portion                                                                                                                 |       | 83,500            |       |                  | 83,500     |   |   |
| Due to affiliates                                                                                                                          |       | 58,398            |       |                  | 46,013     |   |   |
| Total current liabilities                                                                                                                  |       | 306,807           |       |                  | 290,825    |   |   |
| Deferred revenue                                                                                                                           |       | 1,066             |       |                  | 1,499      |   |   |
| Debt                                                                                                                                       |       | 2,413,414         |       |                  | 2,432,811  |   |   |
| Other non-current  liabilities                                                                                                             |       | 5,207             |       |                  | 2,382      |   |   |
| Partners’ capital:                                                                                                                    |       |              |       |                  |       |   |   |
| Deferred stock  compensation                                                                                                               |       | (459              | )          |                  | (535       | ) |   |
| Partners’  accumulated capital                                                                                                        |       | 831,691           |       |                  | 840,921    |   |   |
| Total partners’ capital                                                                                                               |       | 831,232           |       |                  | 840,386    |   |   |
| Total liabilities  and partners’ capital                                                                                              |       | $                 | 3,557,726  |                  |       | $ | 3,567,903 |   |   |

 

See accompanying notes

2

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

| ** **                                                                                                                                                                                                                                                               | ** ** | **Three months ended June 30,** | ** ** | **Six months ended June 30,** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                                                               | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| Revenue                                                                                                                                                                                                                                                                  |       | $                                                   | 311,717    |                                              | $          | 279,278 |   | $ | 612,998 |   | $ | 548,605 |   |
| Operating costs and  expenses:                                                                                                                                                                                                                                           |       |                                                |       |                                              |       |   |   |   |   |
| Programming and other operating costs (exclusive of  depreciation and amortization) (inclusive of $44,257 and $87,338, and $39,176  and $80,675 of programming expense incurred through related parties for the  three and six months ended June 30, 2006 and 2005) |       | 112,483                                             |       | 92,325                                            |       | 222,738 |   | 191,098 |   |
| Selling, general and administrative (inclusive of  $38 and $76, and $0 and $0 of stock-based compensation for the three and six  months ended June 30, 2006 and 2005)                                                                                               |       | 74,647                                              |       | 59,588                                            |       | 146,783 |   | 117,016 |   |
| Management fees                                                                                                                                                                                                                                                          |       | 9,345                                               |       | 8,361                                             |       | 18,383 |   | 16,459 |   |
| Depreciation and amortization                                                                                                                                                                                                                                            |       | 66,016                                              |       | 59,952                                            |       | 128,969 |   | 119,636 |   |
| Total operating  costs and expenses                                                                                                                                                                                                                                      |       | 262,491                                             |       | 220,226                                           |       | 516,873 |   | 444,209 |   |
| Operating income                                                                                                                                                                                                                                                         |       | 49,226                                              |       | 59,052                                            |       | 96,125 |   | 104,396 |   |
| Other income (expense):                                                                                                                                                                                                                                                  |       |                                                |       |                                              |       |   |   |   |   |
| Interest expense                                                                                                                                                                                                                                                         |       | (53,689                                             | )          | (49,763                                           | )          | (106,052 | ) | (98,104 | ) |
| Interest income                                                                                                                                                                                                                                                          |       | 154                                                 |       | 565                                               |       | 667 |   | 670 |   |
| Other income                                                                                                                                                                                                                                                             |       | 89                                                  |       | 599                                               |       | 30 |   | 691 |   |
| Total other  expense, net                                                                                                                                                                                                                                                |       | (53,446                                             | )          | (48,599                                           | )          | (105,355 | ) | (96,743 | ) |
| Net income (loss)                                                                                                                                                                                                                                                        |       | $                                                   | (4,220     | )                                                 | $          | 10,453 |   | $ | (9,230 | ) | $ | 7,653 |   |

 

See accompanying notes

3

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**INSIGHTMIDWEST, LP**

# **CONSOLIDATED STATEMENTS OF CASH FLOWS**

# **(unaudited)**

# **(dollarsin thousands)**

| ** **                                                                                | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                                | ** ** | **2006**                                          | ** ** | **2005** | ** ** |
| **Operating activities:**                                                                 | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Net income (loss)                                                                         |       | $                                                 | (9,230     | ) | $ | 7,653 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                              |       |   |   |
| Depreciation and amortization                                                             |       | 128,969                                           |       | 119,636 |   |
| Stock-based compensation                                                                  |       | 76                                                |       | — |   |
| Provision for losses on trade accounts receivable                                         |       | 7,026                                             |       | 8,220 |   |
| Amortization of note discount                                                             |       | 178                                               |       | 162 |   |
| Gain on interest rate swaps                                                               |       | —                                            |       | (812 | ) |
| Changes in  operating assets and liabilities:                                             |       |                                              |       |   |   |
| Trade accounts receivable                                                                 |       | (4,617                                            | )          | (1,065 | ) |
| Launch funds receivable                                                                   |       | 504                                               |       | 2,194 |   |
| Prepaid expenses and other assets                                                         |       | (3,426                                            | )          | (6,351 | ) |
| Accounts payable                                                                          |       | 1,160                                             |       | 11,608 |   |
| Interest payable                                                                          |       | 142                                               |       | 42 |   |
| Accrued expenses and other liabilities                                                    |       | 14,247                                            |       | (6,114 | ) |
| Net cash provided by operating activities                                                 |       | 135,029                                           |       | 135,173 |   |
| **Investing  activities:**                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Purchase of fixed assets                                                                  |       | (140,687                                          | )          | (90,112 | ) |
| Sale of fixed assets                                                                      |       | 503                                               |       | 957 |   |
| Purchase of investments                                                                   |       | (518                                              | )          | (1,307 | ) |
| Net cash used in investing activities                                                     |       | (140,702                                          | )          | (90,462 | ) |
| **Financing  activities:**                                                                | ** ** | ** **                                        | ** ** | ** ** | ** ** |
| Repayment of credit facilities                                                            |       | (41,750                                           | )          | (41,750 | ) |
| Net proceeds from borrowings under credit facility                                        |       | 25,000                                            |       | — |   |
| Other                                                                                     |       | (4                                                | )          | — |   |
| Net cash used in financing activities                                                     |       | (16,754                                           | )          | (41,750 | ) |
| Net increase (decrease) in cash and cash equivalents                                      |       | (22,427                                           | )          | 2,961 |   |
| Cash and cash  equivalents, beginning of period                                           |       | 24,853                                            |       | 72,476 |   |
| Cash and cash  equivalents, end of period                                                 |       | $                                                 | 2,426      |   | $ | 75,437 |   |

 

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 June 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. 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 and six months ended June 30, 2006 are not necessarily indicative ofthe results to be expected for the year ending December 31, 2006 or anyother interim period.

5

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

**3. Recent AccountingPronouncements**

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards No. 123 (revised 2004),*Share-Based Payment*, (“SFAS 123R”). SFAS123R establishes 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.

In May 2005, FASBissued SFAS No. 154, *Accounting**Changes and Error Corrections*. SFAS No. 154 replacesAccounting Principles 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 cable television network with programming tailored to theinterests of women. On July 9, 2002 we entered into a carriage agreementwith Oxygen, whereby we agreed to carry programming content from Oxygen. Theterm of the carriage agreement expires 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 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 inOxygen. As of June 30, 2006 and December 31, 2005, our carrying valuein this investment was $5.2 million and $4.7 million. We and Oxygen arecurrently in the process of negotiating the fair market value of Oxygen whichwill be used to determine the number of shares that we will receive. As of June 30,2006, no shares have been delivered to us.

**5. Fixed Assets**

Fixed assetsconsisted of:

| ** **                                       | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Land, buildings  and improvements                |       | $                       | 38,399     |                  | $          | 36,768 |   |
| Cable system  equipment                          |       | 2,502,964               |       | 2,365,956             |       |
| Furniture,  fixtures and office equipment        |       | 20,425                  |       | 19,079                |       |
|                                             |       | 2,561,788               |       | 2,421,803             |       |
| Less: accumulated  depreciation and amortization |       | (1,440,544              | )          | (1,314,232            | )          |
| Total fixed  assets, net                         |       | $                       | 1,121,244  |                  | $          | 1,107,571 |   |

** **

6

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

**5. Fixed Assets(Continued)**

 

We recorded depreciationexpense of $64.8 million and $126.5 million for the three and six months ended June 30,2006 and $58.8 million and $117.4 million for the three and six months ended June 30,2005.

**6.Debt**

| ** **                                 | ** ** | **June 30,**       | ** ** | **December 31,** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                 | ** ** | **2006**                | ** ** | **2005**              | ** ** |
| ** **                                 | ** ** | **(in thousands)** | ** ** |
| Note payable to  Insight Inc.              |       | $                       | 100,000    |                  |       | $ | 100,000 |   |   |
| Insight Midwest  Holdings Credit Facility  |       | 1,387,500               |       |                  | 1,404,250  |   |   |
| Insight Midwest  93⁄4% Senior Notes     |       | 385,000                 |       |                  | 385,000    |   |   |
| Insight Midwest  101⁄2% Senior Notes    |       | 630,000                 |       |                  | 630,000    |   |   |
|                                       |       | 2,502,500               |       |                  | 2,519,250  |   |   |
| Net unamortized  discount/premium on notes |       | (379                    | )          |                  | (557       | ) |   |
| Market value of  interest rate swaps       |       | (5,207                  | )          |                  | (2,382     | ) |   |
| Total debt                                 |       | $                       | 2,496,914  |                  |       | $ | 2,516,311 |   |   |

 

***Insight MidwestHoldings Credit Facility***

Our wholly owned subsidiary,Insight Midwest Holdings, LLC, serves as borrower under a 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 June 30, 2006 and December 31, 2005,the balance of the $100.0 million loan, including accrued interest, was $145.4million and $139.1 million.

***Debt PrincipalPayments***

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

| 2006       |   | $         | 41,750    |   |
|------------|--------|-----------|-----------|--------|
| 2007       |   | 83,500    |      |
| 2008       |   | 104,750   |      |
| 2009       |   | 1,542,500 |      |
| 2010       |   | 630,000   |      |
| Thereafter |   | 100,000   |      |
| Total      |   | $         | 2,502,500 |   |

 

7

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

**7.Derivative Instruments**

We enter into derivativeinstruments, typically interest-rate swap agreements, to modify the interestcharacteristics of our outstanding debt to either a floating or fixed rate basis.These agreements involve fixed rate interest payments in exchange for floatingrate interest receipts, known as cash flow hedges, and floating rate interestpayments in exchange for fixed rate interest receipts, known as fair valuehedges, over the life of the agreement without an exchange of the underlyingprincipal amount. The differential to be paid or received is accrued asinterest rates change and is recognized as an adjustment to interest expenserelated to the debt. The related amount payable or receivable is included inother 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, weentered into three interest rate swap agreements whereby we swapped fixed ratesunder a tranche of our 101⁄2% senior notes due in December 2010 for variablerates equal to six-month LIBOR, plus the applicable margin of approximately8.3%, on $185.0 million notional value of debt. These agreements expired on November 1,2005. We recorded a gain on these swaps of $1.1 million and $812,000 for thethree and six months ended June 30, 2005, which is included in otherincome.

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. This agreementexpires November 1, 2010. This swap has been 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 June 30, 2006 and December 31,2005 was $5.2 million and $2.4 million and has been recorded in othernon-current liabilities and as an adjustment to the carrying value of debt.

**8.Related Party Transactions**

***Programming***

We purchase the majorityof our programming through affiliates of Comcast Cable. Charges for such programming,including a 11⁄2% administrative fee, were $44.3 million and $87.3 million forthe three and six months ended June 30, 2006 and $39.2 million and $80.7million for the three and six months ended June 30, 2005. As of June 30,2006 and December 31, 2005, $30.2 million and $29.9 million of accruedprogramming costs were due to affiliates of Comcast Cable. We believe that theprogramming rates charged through these affiliates are lower than thoseavailable from independent parties.

8

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

**8. RelatedParty Transactions (Continued)**

***Insight Interactive***

EffectiveNovember 17, 1999, Insight Cable Services entered into a ContributionAgreement with Source Media, Inc., providing for the creation of a jointventure, Insight Interactive LLC. Under the terms of the ContributionAgreement, Source Media contributed its Virtual Modem 2.5 software and theInteractive Channel products and services, including SourceGuide andLocalSource television content. On March 14, 2002, Insight Cable Servicespurchased the remaining 50% equity interest in Insight Interactive that it didnot already own from Source Media. We are currently providing InsightInteractive’s services to customers in some of our systems. Fees for suchservices totaled $879,000 and $1.7 million for the three and six months ended June 30,2006 and $649,000 and $1.4 million for the three and six months ended June 30,2005.

***Due To Affiliates***

As of June 30, 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 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 Courtultimately determines that we infringe on any of the patents, we may be subjectto substantial damages, which may include treble damages and/or an injunctionthat could require us to materially modify certain products and services thatwe currently 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.

9

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**INSIGHT CAPITAL, INC.**

**BALANCE SHEETS**

**(dollarsin thousands, except share and per share amounts)**

| ** **                                                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ** **                                                                                                                             | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| ** **                                                                                                                             | ** ** | **(unaudited)**   | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                             |       |              |       |                  |       |
| Cash                                                                                                                                   |       | $                 | 1          |                  | $          | 1 |   |
| Deferred  financing costs, net of accumulated amortization of $12,993 and $11,689 as of  June 30, 2006 and December 31, 2005 |       | 9,788             |       | 11,092                |       |
| Total assets                                                                                                                           |       | $                 | 9,789      |                  | $          | 11,093 |   |
|                                                                                                                                   |       |              |       |                  |       |
| **Liabilities and shareholder’s  deficit**                                                                                        | ** ** | ** **        | ** ** | ** **            | ** ** |
| Accrued interest                                                                                                                       |       | $                 | 20,409     |                  | $          | 20,409 |   |
| Total current liabilities                                                                                                              |       | 20,409            |       | 20,409                |       |
|                                                                                                                                   |       |              |       |                  |       |
| Senior notes, to  be paid by Insight Midwest, LP                                                                                       |       | 1,014,621         |       | 1,014,443             |       |
| Total liabilities                                                                                                                      |       | 1,035,030         |       | 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                                                                                                                   |       | (545,470          | )          | (492,144              | )          |
| Total shareholder’s deficit                                                                                                       |       | (1,025,241        | )          | (1,023,759            | )          |
| Total liabilities  and shareholder’s deficit                                                                                      |       | $                 | 9,789      |                  | $          | 11,093 |   |

 

See accompanying notes

10

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**INSIGHT CAPITAL, INC.**

# **STATEMENTS OF OPERATIONS**

**(unaudited)**

**(dollars in thousands)**

| ** **    | ** ** | **Three months  Ended June 30,** | ** ** | **Six months  Ended June 30,** | ** ** |
|---------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **    | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Expenses:** |       |                                            |       |                                          |       |   |   |   |   |
| Amortization  |       | $                                               | (652       | )                                             | $          | (652 | ) | $ | (1,304 | ) | $ | (1,304 | ) |
| Interest      |       | (26,012                                         | )          | (26,004                                       | )          | (52,022 | ) | (52,007 | ) |
| Net loss      |       | $                                               | (26,664    | )                                             | $          | (26,656 | ) | $ | (53,326 | ) | $ | (53,311 | ) |

 

 

See accompanying notes

11

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**INSIGHTCAPITAL, INC.**

**STATEMENTSOF CASH FLOWS**

**(unaudited)**

**(dollars in thousands*)***

| ** **                                                                       | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Cash  flows from operating activities:**                                       | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                             | (53,326    | ) | $ | (53,311 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |       |                                          |       |   |   |
| Accretion of discount on notes                                                   |       | 178                                           |       | 163 |   |
| Amortization                                                                     |       | 1,304                                         |       | 1,304 |   |
| Interest expense assumed by affiliate                                            |       | 51,844                                        |       | 51,844 |   |
| 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

12

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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 for Interim Financial Statements**

The accompanying unauditedfinancial statements of the Company have been prepared in accordance withaccounting principles generally accepted in the United States for interimfinancial information and with the instructions to Form 10-Q and Article 10of Regulation S-X. Accordingly, they do not include all of the information andfootnote disclosures required by accounting principles generally accepted inthe United States for complete financial statements.

In management’s opinion,the financial statements reflect all adjustments considered necessary for afair presentation of the statement of financial position as of the interimdates presented. These unaudited interim financial statements should be read inconjunction with the audited financial statements and notes to financialstatements contained in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2005.

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires the Company to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements. Actual results could differ from those estimates.

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

**Cautionary Statement Regarding Forward-LookingInformation**

Thisquarterly report on Form 10-Q contains certain forward-lookingstatements with respect 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 thewords “believes,” “expects,” “anticipates,” “estimates” or similar expressions.We believe it is important to communicate management’s expectations to ourinvestors. However, there may be events in the future that we are not able toaccurately predict or over which we have no control. The risk factors listed inour Annual Report on Form 10-K for the year ended December 31,2005, as well as any other cautionary language in this quarterly report,provide examples of risks, uncertainties and events that may cause our actualresults to differ materially from the expectations we describe in our forward-lookingstatements. You should be aware that the occurrence of the events described inthese risk factors and elsewhere in this quarterly report could have a materialadverse effect on our business, operating results 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;

·       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 u ndertake 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 earnedfrom customer fees for cable television video services including basic,premium, digital and pay-per-view services and ancillary services, such asrental of converters, remote control devices and installations. In addition, weearn revenues from providing high-speed Internet services, selling advertising,providing telephone services, and commissions for products sold through homeshopping networks.

14

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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 June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2006**                              | ** ** | **2005**                            | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                           | ** ** | **(in thousands)**                    | ** ** |
| Revenue                                              |       | $311,717                              |       | $279,278                            |       | $612,998 |   | $548,605 |   |
| Operating costs and  expenses:                       |       |                                  |       |                                |       |   |   |   |   |
| Programming and other operating  costs               |       | 112,483                               |       | 93,325                              |       | 222,738 |   | 191,098 |   |
| Selling, general and administrative                  |       | 74,647                                |       | 59,588                              |       | 146,783 |   | 117,016 |   |
| Management fees                                      |       | 9,345                                 |       | 8,361                               |       | 18,383 |   | 16,459 |   |
| Depreciation and amortization                        |       | 66,016                                |       | 59,952                              |       | 128,969 |   | 119,636 |   |
| Total operating  costs and expenses                  |       | 262,491                               |       | 220,226                             |       | 516,873 |   | 444,209 |   |
| Operating income                                     |       | 49,226                                |       | 59,052                              |       | 96,125 |   | 104,396 |   |
| Interest expense                                     |       | 53,689                                |       | 49,763                              |       | 106,052 |   | 98,104 |   |
| Net income (loss)                                    |       | (4,220                                | )          | 10,453                              |       | (9,230 | ) | 7,653 |   |
| Net cash provided  by operating activities           |       | 47,720                                |       | 63,246                              |       | 135,029 |   | 135,173 |   |
| Net cash used in  investing activities               |       | 83,680                                |       | 52,947                              |       | 140,702 |   | 90,462 |   |
| Net cash used in  (provided by) financing activities |       | (4,125                                | )          | 20,875                              |       | 16,754 |   | 41,750 |   |
| Capital expenditures                                 |       | 83,587                                |       | 52,597                              |       | 140,687 |   | 90,112 |   |

 

**Use of Adjusted Operating Income before Depreciationand Amortization and Free Cash Flow**

We utilize AdjustedOperating Income before Depreciation and Amortization, (defined as operatingincome before depreciation, amortization and non-cash stock-based compensation)among other measures, to evaluate the performance of our businesses. AdjustedOperating Income before Depreciation and Amortization is considered animportant indicator of the operational strength of our businesses and is acomponent of our annual compensation programs. In addition, our debt agreementsuse Adjusted Operating Income before Depreciation and Amortization, adjustedfor certain non-recurring items, in our leverage and other covenantcalculations. We also use this measure to determine how we will allocateresources and capital. Our management finds this measure helpful because itcaptures all of the revenue and ongoing operating expenses of our businessesand therefore provides a means to directly evaluate the ability of our businessoperations to generate returns and to compare operating capabilities across ourbusinesses. This measure is also used by equity and fixed income researchanalysts in their reports to investors evaluating our businesses and othercompanies in the cable television industry. We believe Adjusted OperatingIncome before Depreciation and Amortization is useful to investors because itenables them to assess our performance in a manner similar to the methods usedby our management and provides a measure that can be used to analyze, value andcompare companies in the cable television industry, which may have differentdepreciation, amortization and stock-based compensation policies.

A limitation of AdjustedOperating Income before Depreciation and Amortization, however, is that it doesnot reflect the periodic costs of certain capitalized tangible and intangibleassets used in generating revenues in our businesses. Management evaluates thecosts of such tangible and intangible assets through other financial measuressuch as capital expenditures, investment spending and Free Cash Flow. Managementalso evaluates the costs of capitalized tangible and intangible assets byanalyzing returns provided on the capital dollars deployed. Another limitationof Adjusted Operating Income before Depreciation and Amortization is that itdoes not reflect income net of interest expense, which is a significant expensefor us because of the substantial debt we incurred to acquire cable televisionsystems and finance capital expenditures to upgrade our cable network. Managementevaluates the impact of 

15

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interestexpense through measures including interest expense, Free Cash Flow, thereturns analysis discussed above and debt service covenant ratios under ourcredit facility.

Free Cash Flow is net cashprovided by operating activities (as defined by accounting principles generallyaccepted in the United States) less capital expenditures. Free Cash Flow isconsidered to be an important indicator of our liquidity, including our abilityto repay indebtedness. We believe Free Cash Flow is useful for investorsbecause it enables them to assess our ability to service our debt and to fundcontinued growth with internally generated funds in a manner similar to themethods used by our management, and provides a measure that can be used toanalyze, value and 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 ofNet Income (Loss) to Adjusted Operating Income before Depreciation andAmortization***

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 June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                      | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                         | ** ** |
| Net Income (Loss)                                               |       | $                                               | (4,220     | )                                             | $          | 10,453 |   | $ | (9,230 | ) | $ | 7,653 |   |
| Other (income) expense:                                         |       |                                            |       |                                          |       |   |   |   |   |
| Other income                                                    |       | (89                                             | )          | (599                                          | )          | (30 | ) | (691 | ) |
| Interest income                                                 |       | (154                                            | )          | (565                                          | )          | (667 | ) | (670 | ) |
| Interest expense                                                |       | 53,689                                          |       | 49,763                                        |       | 106,052 |   | 98,104 |   |
| Total other  expense, net                                       |       | 53,446                                          |       | 48,599                                        |       | 105,355 |   | 96,743 |   |
| Operating income                                                |       | 49,226                                          |       | 59,052                                        |       | 96,125 |   | 104,396 |   |
| Depreciation and  amortization                                  |       | 66,016                                          |       | 59,952                                        |       | 128,969 |   | 119,636 |   |
| Stock-based  compensation                                       |       | 38                                              |       | —                                        |       | 76 |   | — |   |
| Adjusted Operating  Income before Depreciation and Amortization |       | $                                               | 115,280    |                                          | $          | 119,004 |   | $ | 225,170 |   | $ | 224,032 |   |

 

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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 June 30,** | ** ** | **Six Months  Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                  | ** ** | **2006**                                        | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                                                  | ** ** | **(in thousands)**                         | ** ** |
| Operating income                                                            |       | $                                               | 49,226     |                                          | $          | 59,052 |   | $ | 96,125 |   | $ | 104,396 |   |
| Depreciation and amortization                                               |       | 66,016                                          |       | 59,952                                        |       | 128,969 |   | 119,636 |   |
| Stock-based compensation                                                    |       | 38                                              |       | —                                        |       | 76 |   | — |   |
| Adjusted  Operating Income before Depreciation and Amortization   |       | 115,280                                         |       | 119,004                                       |       | 225,170 |   | 224,032 |   |
| Changes in working capital accounts(1)                                      |       | 8,824                                           |       | (1,722                                        | )          | 9,330 |   | 3,259 |   |
| Cash paid for interest                                                      |       | (76,384                                         | )          | (54,036                                       | )(2)       | (99,471 | ) | (92,118 | ) |
| Net cash provided  by operating activities                                  |       | 47,720                                          |       | 63,246                                        |       | 135,029 |   | 135,173 |   |
| Capital expenditures                                                        |       | (83,587                                         | )          | (52,597                                       | )          | (140,687 | ) | (90,112 | ) |
| Free Cash Flow                                                              |       | $                                               | (35,867    | )                                             | $          | 10,649 |   | $ | (5,658 | ) | $ | 45,061 |   |

----

(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)          Excludes bond interest payments dueApril 1, 2005 that were made on March 31, 2005. Had the payments beenmade on April 1, 2005, Free Cash Flow for the three months endedJune 30, 2005 would have been ($9,427).

**Results ofOperations**

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

Revenue for the three months ended June 30, 2006 totaled $311.7 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 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 19,700 high-speed Internetcustomers during the quarter to end at 534,500 customers.

Basic cable service revenue increased 7% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. Historically, we have experienced a seasonal decline inbasic customers during the second quarter primarily as a result of studentsleaving the university communities we serve. In addition, digital servicerevenue increased 23% over the prior year due to an increased customer base. Weadded a net 11,700 digital customers during the quarter to end at 572,200customers.

We are increasing customergrowth and retention efforts by increasing spending on sales and marketingefforts, emphasizing bundling and enhancing and differentiating our videoservices by providing video-on-demand, high definition television and digitalvideo recorders. We are also continuing to focus on improving custoomersatisfaction through higher service levels and increased education of productofferings.

17

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

| ** **           | ** ** | **Revenue by Service Offering**          | ** ** | ** **                        | ** ** | ** **                                        | ** ** |
|----------------------|------------|---------------------------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------|------------|
| ** **           | ** ** | **Three Months  Ended  June 30,   2006** | ** ** | **% of Total  Revenue** | ** ** | **Three Months  Ended  June 30,  2005** | ** ** | **% of Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                                    | $          | 160,328                           |       |                                              |       | 51.5 | % |   |   | $ | 150,071 |   |   |   | 53.7 | % |   |   |   |   | 6.8 | % |   |
| High-Speed  Internet |       |                                                    | 58,616     |                              |       |                                              | 18.8       | % |   |   | 46,318 |   |   |   | 16.6 | % |   |   |   |   | 26.6 | % |   |
| Digital              |       |                                                    | 34,307     |                              |       |                                              | 11.0       | % |   |   | 27,838 |   |   |   | 10.0 | % |   |   |   |   | 23.2 | % |   |
| Advertising          |       |                                                    | 20,020     |                              |       |                                              | 6.4        | % |   |   | 19,749 |   |   |   | 7.1 | % |   |   |   |   | 1.4 | % |   |
| Premium              |       |                                                    | 13,852     |                              |       |                                              | 4.4        | % |   |   | 13,746 |   |   |   | 4.9 | % |   |   |   |   | 0.8 | % |   |
| Telephone            |       |                                                    | 12,528     |                              |       |                                              | 4.0        | % |   |   | 8,387 |   |   |   | 3.0 | % |   |   |   |   | 49.4 | % |   |
| Franchise fees       |       |                                                    | 7,384      |                              |       |                                              | 2.4        | % |   |   | 7,782 |   |   |   | 2.8 | % |   |   |   |   | -5.1 | % |   |
| Other                |       |                                                    | 4,682      |                              |       |                                              | 1.5        | % |   |   | 5,387 |   |   |   | 1.9 | % |   |   |   |   | -13.1 | % |   |
| Total                |       |                                                    | $          | 311,717                           |       |                                              |       | 100.0 | % |   |   | $ | 279,278 |   |   |   | 100.0 | % |   |   |   |   | 11.6 | % |   |

 

TotalCustomer Relationships were 1,375,100 as of June 30, 2006, an increase of59,700 from 1,315,400 as of June 30, 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 June 30,2006 increased 15% as compared to June 30, 2005. RGUs by category were asfollows (in thousands):

| ** **           | ** ** | **June 30, 2006** | ** ** | **June 30, 2005** | ** ** |
|----------------------|------------|-----------------------------|------------|-----------------------------|------------|
| Basic                |       |                        | 1,302.4    |                        |       |   | 1,257.2 |   |   |
| Digital              |       |                        | 572.2      |                        |       |   | 460.8 |   |   |
| High-Speed  Internet |       |                        | 534.5      |                        |       |   | 391.3 |   |   |
| Telephone            |       |                        | 107.2      |                        |       |   | 73.5 |   |   |
| Total RGUs           |       |                        | 2,516.3    |                        |       |   | 2,182.8 |   |   |

 

Average monthly revenue per basic customer was $79.65for the three months ended June 30, 2006 compared to $73.63 for the threemonths ended June 30, 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 $20.2million, or 22%. Increases in customers and substantial increases inprogramming rates were significant drivers of the cost increase for the threemonths ended June 30, 2006. For the three months ended June 30, 2005our programming costs reflected certain programming credits. These creditsresulted from favorable resolution of pricing negotiations related to certainprior period programming costs that were accrued at a higher rate than theamount actually paid. Programming credits for the three months ended June 30,2006, were significantly lower, causing our overall programming cost increasesto be greater. In addition, direct operating costs increased due to an increasein our high-speed Internet service costs as we continued to transition ourInternet services in-house. Other operating costs increased primarily as aresult of increases in repair, maintenance and warranty costs; an increase intaxes 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$15.1 million, or 25%, primarily due to increased payroll, payroll relatedcosts and temporary help associated with an increase in the number of employeesand salary increases for existing employees. Marketing expenses increased overthe prior year to support the continued rollout of high-speed Internet, digitaland telephone products, and to grow our core video customer base. Professionalfees also increased due to increased legal activity for the three months ended June 30,2006.

18

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Management fees increased $900,000 or 12% to $9.3million for the three months ended June 30, 2006 from $8.4 million for thethree months ended June 30, 2005. Management fees, equal to approximately3% of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $6.1million or 10% primarily as a result of additional capital expenditures throughJune 30, 2006. Theseexpenditures were primarily for purchases of customer premise equipment,installation materials, capitalized labor, headend equipment and networkextensions, all of which we consider necessary in order to continue to maintainand grow our customer base and expand our service offerings. Partiallyoffsetting this increase was a decrease in depreciation expense related tocertain assets that have become fully depreciated since June 30, 2005.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization decreased $3.7 million to$115.3 million, a decrease of 3% over the prior year’s second quarter.

Interest expense increased$3.9 million, or 8%, due to higher interest rates, which averaged 8.6% for thethree months ended June 30, 2006, as compared to 7.8% for the three monthsended June 30, 2005. 

***Six Months Ended June 30, 2006 Compared to SixMonths Ended June 30, 2005***

Revenue for the six months ended June 30, 2006 totaled $613.0 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 30% 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 64,100 high-speed Internetcustomers during the six months ended June 30, 2006 to end at 534,500customers.

Basic cable service revenue increased 7% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. In addition, digital service revenue increased 21% overthe prior year due to an increased customer base. We added a net 53,400 digitalcustomers during the six months ended June 30, 2006 to end at 572,200customers.

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

| ** **           | ** ** | **Revenue by Service Offering** | ** ** | ** **                    | ** ** | ** **                                    | ** ** |
|----------------------|------------|------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------------|------------|
| ** **           | ** ** | **Six Months  Ended  June 30,2006**  | ** ** | **% of  Total  Revenue** | ** ** | **Six Months  Ended  June 30,2005** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                           | $          | 318,535                       |       |                                          |       | 52.0 | % |   |   | $ | 297,703 |   |   |   | 54.3 | % |   |   |   |   | 7.0 | % |   |
| High-Speed  Internet |       |                                           | 115,113    |                          |       |                                          | 18.8       | % |   |   | 88,431 |   |   |   | 16.1 | % |   |   |   |   | 30.2 | % |   |
| Digital              |       |                                           | 66,030     |                          |       |                                          | 10.8       | % |   |   | 54,599 |   |   |   | 10.0 | % |   |   |   |   | 20.9 | % |   |
| Advertising          |       |                                           | 37,717     |                          |       |                                          | 6.2        | % |   |   | 36,737 |   |   |   | 6.7 | % |   |   |   |   | 2.7 | % |   |
| Premium              |       |                                           | 27,246     |                          |       |                                          | 4.4        | % |   |   | 28,090 |   |   |   | 5.1 | % |   |   |   |   | -3.0 | % |   |
| Telephone            |       |                                           | 23,883     |                          |       |                                          | 3.9        | % |   |   | 16,119 |   |   |   | 2.9 | % |   |   |   |   | 48.2 | % |   |
| Franchise fees       |       |                                           | 14,738     |                          |       |                                          | 2.4        | % |   |   | 15,202 |   |   |   | 2.8 | % |   |   |   |   | -3.1 | % |   |
| Other                |       |                                           | 9,736      |                          |       |                                          | 1.5        | % |   |   | 11,724 |   |   |   | 2.1 | % |   |   |   |   | -17.0 | % |   |
| Total                |       |                                           | $          | 612,998                       |       |                                          |       | 100.0 | % |   |   | $ | 548,605 |   |   |   | 100.0 | % |   |   |   |   | 11.7 | % |   |

 

Average monthly revenue per basic customer was $78.77for the six months ended June 30, 2006 compared to $72.16 for the sixmonths ended June 30, 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 $31.6million, or 17%. Increases in customers and substantial increases inprogramming rates were significant drivers of the cost increase for the sixmonths 

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ended June 30, 2006. Inaddition, direct operating costs increased due to an increase in our high-speedInternet service costs. This increase is primarily attributable to the growthin our high-speed Internet customer base and the payment of contractuallyobligated and other one-time transition costs to bring Internet servicesin-house. Other operating costs increased primarily as a result of increases inrepair, maintenance and warranty costs; an increase in taxes due to a change inthe tax law in Kentucky; and an increase in installation labor due to increasedcustomer activity.

Selling, general and administrative expenses increased$29.8 million, or 25%, primarily due to increased payroll, payroll relatedcosts, temporary help and travel and entertainment expenses associated with anincrease in the number of employees and salary increases for existing employees.Marketing expenses increased over the prior year to support the continuedrollout of high-speed Internet, digital and telephone products, and to grow ourcore video customer base. Professional fees also increased due to increasedlegal activity for the six months ended June 30, 2006. Billing and creditcard fees also increased due to increased customer and revenue growth.

Management fees increased $1.9 million or 12% to $18.4million for the six months ended June 30, 2006 from $16.5 million for thesix months ended June 30, 2005. Management fees, equal to approximately 3%of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $9.3million or 8% primarily as a result of additional capital expenditures through June 30,2006. These expenditures wereprimarily for purchases of customer premise equipment, installation materials,capitalized labor, headend equipment and network extensions, all of which weconsider necessary in order to continue to maintain and grow our customer baseand expand our service offerings. Partially offsetting this increase was adecrease in depreciation expense related to certain assets that have becomefully depreciated since June 30, 2005.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization increased $1.1 million to$225.2 million, an increase of 1%.

Interest expense increased$7.9 million, or 8%, due to higher interest rates, which averaged 8.5% for thesix months ended June 30, 2006, as compared to 7.6% for the six monthsended June 30, 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 will continue to be made for network extensions,installation of new services, customer premise equipment (e.g., set-top boxes),deployment of new product and service offerings, and, to a lesser extent,network upgrades. Historically, we have been able to meet our cash requirementswith cash flow from operations, borrowings under our credit facilities and issuancesof private and public debt and equity.

Cash provided by operations for the six months ended June 30,2006 and 2005 was $135.0 million and $135.2 million. This slight decrease wasattributable to the increase in our net loss almost entirely offset by thetiming of cash receipts and payments related to our working capital accounts.

Cash used in investing activities for the six monthsended June 30, 2006 and 2005 was $140.7 million and $90.5 million. Theincrease primarily was due to increases in capital expenditures. For the sixmonths ended June 30, 2006 and 2005, we spent $140.7 million and $90.1million 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.

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Cash used in financing activities for the six monthsended June 30, 2006 and 2005 was $16.8 million and $41.8 million. Thedecrease was due to $25.0 million in net proceeds from borrowings under theMidwest Holdings credit facility for the three months ended June 30, 2006.

Free Cash Flow forthe six months ended June 30, 2006 totaled ($5.7) million compared to$45.1 million for the six months ended June 30, 2005. The decrease in FreeCash Flow from June 30, 2005 to June 30, 2006 of $50.8 million wasprimarily driven by the following:

·       A$50.5 million increase in capital expenditures; and

·       A$7.4 million increase in cash interest expense paid primarily driven by anincrease in interest rates.

These uses of cashwere offset by:

·       A$9.3 million source of Free Cash Flow for the six months ended June 30,2006 compared to a $3.3 million source for the six months ended June 30,2005 from changes in working capital accounts; and

·       A$1.1 million increase in Adjusted Operating Income before Depreciation andAmortization.

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 thatthe Insight Midwest Holdings credit facility, cash on-hand and our cash flowfrom operations are sufficient to support our current operating plan. We hadthe ability to draw upon $231.4 million of unused availability under theInsight Midwest Holdings credit facility as of June 30, 2006 to fund anyshortfall resulting from the inability of Insight Midwest’s cash fromoperations to fund its capital expenditures, meet its debt servicerequirements, including mandatory redemptions, or otherwise fund itsoperations.

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

| ** **              | ** ** | **Contractual Obligations** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **Long-Term  Debt**              | ** ** | **Operating  Leases** | ** ** | **Total** | ** ** |
| 2006                    |       | $                                | 41,750     |   |   | $ | 1,644 |   |   | $ | 43,394 |   |
| 2007                    |       | 83,500                           |       |   | 2,075 |   |   | 85,575 |   |
| 2008                    |       | 104,750                          |       |   | 1,531 |   |   | 106,281 |   |
| 2009                    |       | 1,542,500                        |       |   | 1,151 |   |   | 1,543,651 |   |
| 2010                    |       | 630,000                          |       |   | 622 |   |   | 630,622 |   |
| Thereafter              |       | 100,000                          |       |   | 1,408 |   |   | 101,408 |   |
| Total cash  obligations |       | $                                | 2,502,500  |   |   | $ | 8,431 |   |   | $ | 2,510,931 |   |

 

**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 major financialinstitutions. We do not enter into derivatives or other financial instrumentsfor 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 June 30, 2006. The fair market value of our credit facility borrowings 

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approximatesits carrying value as the credit facility borrowings bear interest at floatingrates of interest. As of June 30,2006 and December 31, 2005, the cost, if terminated, of ourinterest rate swap agreements was approximately $5.2 million and $2.4 millionand is reflected in our financial statements as an other non-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 June 30, 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 June 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 June 30, 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 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 June 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 6.**                        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: August 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: August 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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