**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

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**FORM 10-Q**

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

**For the Quarterly Period EndedMarch 31, 2007**

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

(Note: As voluntary filers, not subject to the filingrequirements, the registrants filed all reports under Section 13 or 15(d) ofthe Exchange Act during the preceding 12 months.)

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

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

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

Insight Midwest, L.P.   —NotApplicable

Insight Capital, Inc.    —NotApplicable

 

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**PART I.   FINANCIALINFORMATION**

**Item 1.**                        FinancialStatements

The accompanying unaudited consolidated financialstatements have been prepared in accordance with the requirements of Form 10-Qand, therefore, do not include all information and footnotes required byaccounting principles generally accepted in the United States. However, in ouropinion, all adjustments, consisting of normal recurring accruals, necessaryfor a fair presentation of the results of operations for the relevant periodshave been made. Results for the interim periods are not necessarily indicativeof the results to be expected for the year. These financial statements shouldbe read in conjunction with the summary of significant accounting policies andthe notes to the consolidated financial statements included in our AnnualReport on Form 10-K for the year ended December 31, 2006.

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

| ** **                                                                                                                                    | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                                                                                                                                    | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** **                                                                                                                                    | ** ** | **(unaudited)**    | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                                    |       |               |       |                  |       |   |   |
| Cash and cash equivalents                                                                                                                     |       | $                  | 31,789     |                  |       | $ | 39,235 |   |   |
| Investments                                                                                                                                   |       | 5,800              |       |                  | 5,800      |   |   |
| Trade accounts  receivable, net of allowance for doubtful accounts of $1,002 and $1,148 as of  March 31, 2007 and December 31, 2006 |       | 19,703             |       |                  | 31,060     |   |   |
| Launch funds  receivable                                                                                                                      |       | 220                |       |                  | 355        |   |   |
| Prepaid expenses  and other current assets                                                                                                    |       | 7,092              |       |                  | 7,748      |   |   |
| Total current assets                                                                                                                          |       | 64,604             |       |                  | 84,198     |   |   |
| Fixed assets, net                                                                                                                             |       | 1,147,100          |       |                  | 1,138,186  |   |   |
| Goodwill                                                                                                                                      |       | 14,684             |       |                  | 14,684     |   |   |
| Franchise costs                                                                                                                               |       | 2,357,535          |       |                  | 2,357,535  |   |   |
| Deferred  financing costs, net of accumulated amortization of $24,807 and $24,129 as of  March 31, 2007 and December 31, 2006       |       | 15,288             |       |                  | 15,554     |   |   |
| Other non-current  assets                                                                                                                     |       | 1,783              |       |                  | 2,265      |   |   |
| Total assets                                                                                                                                  |       | $                  | 3,600,994  |                  |       | $ | 3,612,422 |   |   |
| **Liabilities  and partners’ capital**                                                                                                   | ** ** | ** **         | ** ** |                  |       |   |   |
| Accounts payable                                                                                                                              |       | $                  | 44,810     |                  |       | $ | 43,484 |   |   |
| Accrued expenses  and other current liabilities                                                                                               |       | 36,329             |       |                  | 40,101     |   |   |
| Accrued property  taxes                                                                                                                       |       | 16,837             |       |                  | 13,446     |   |   |
| Accrued  programming costs (inclusive of $33,964 and $30,677 due to related parties as  of March 31, 2007 and December 31, 2006)    |       | 51,663             |       |                  | 45,880     |   |   |
| Deferred revenue                                                                                                                              |       | 1,457              |       |                  | 2,076      |   |   |
| Interest payable                                                                                                                              |       | 47,709             |       |                  | 33,440     |   |   |
| Due to affiliates                                                                                                                             |       | 38,876             |       |                  | 47,412     |   |   |
| Total current liabilities                                                                                                                     |       | 237,681            |       |                  | 225,839    |   |   |
| Deferred revenue                                                                                                                              |       | 493                |       |                  | 683        |   |   |
| Debt                                                                                                                                          |       | 2,531,772          |       |                  | 2,555,722  |   |   |
| Other non-current  liabilities                                                                                                                |       | 317                |       |                  | —     |   |   |
| Partners’  capital:                                                                                                                      |       |               |       |                  |       |   |   |
| Accumulated other  comprehensive income (loss)                                                                                                |       | (317               | )          |                  | 306        |   |   |
| Partners’  accumulated capital                                                                                                           |       | 831,048            |       |                  | 829,872    |   |   |
| Total partners’ capital                                                                                                                  |       | 830,731            |       |                  | 830,178    |   |   |
| Total liabilities  and partners’ capital                                                                                                 |       | $                  | 3,600,994  |                  |       | $ | 3,612,422 |   |   |

 

See accompanying notes

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**INSIGHTMIDWEST, LPCONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(dollars in thousands)**
|                                                                                                                                                                                                                                          | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                                                                               | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** |
| Revenue                                                                                                                                                                                                                                  |       |                                                                                                     | $          | 339,469 |   |   |   | $ | 301,281 |   |   |
| Operating costs and expenses:                                                                                                                                                                                                            |       |                                                                                                     |       |   |   |   |   |   |   |
| Programming and other operating costs (exclusive of  depreciation and amortization) (inclusive of $51,393 and $43,081 of  programming expense incurred through related parties for the three months  ended March 31, 2007 and 2006) |       |                                                                                                     | 120,168    |   |   |   | 112,084 |   |   |
| Selling, general and administrative (inclusive of  $71 and $38 of stock-based compensation for the three months ended  March 31, 2007 and 2006)                                                                                     |       |                                                                                                     | 82,133     |   |   |   | 70,307 |   |   |
| Management fees                                                                                                                                                                                                                          |       |                                                                                                     | 10,182     |   |   |   | 9,038 |   |   |
| Depreciation and amortization                                                                                                                                                                                                            |       |                                                                                                     | 76,047     |   |   |   | 62,953 |   |   |
| Total operating  costs and expenses                                                                                                                                                                                                      |       |                                                                                                     | 288,530    |   |   |   | 254,382 |   |   |
| Operating income                                                                                                                                                                                                                         |       |                                                                                                     | 50,939     |   |   |   | 46,899 |   |   |
| Other income  (expense):                                                                                                                                                                                                                 |       |                                                                                                     |       |   |   |   |   |   |   |
| Interest expense                                                                                                                                                                                                                         |       |                                                                                                     | (50,196    | ) |   |   | (52,363 | ) |   |
| Interest income                                                                                                                                                                                                                          |       |                                                                                                     | 314        |   |   |   | 513 |   |   |
| Other income (expense)                                                                                                                                                                                                                   |       |                                                                                                     | 48         |   |   |   | (59 | ) |   |
| Total other  expense, net                                                                                                                                                                                                                |       |                                                                                                     | (49,834    | ) |   |   | (51,909 | ) |   |
| Net income (loss)                                                                                                                                                                                                                        |       |                                                                                                     | $          | 1,105 |   |   |   | $ | (5,010 | ) |   |

 

See accompanying notes

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**INSIGHTMIDWEST, LPConsolidated Statements OF CASHFLOWS(unaudited)(dollars in thousands)**
|                                                                                           | ** ** | **Three Months Ended March 31,**                                                     | ** ** |
|-------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                | ** ** | **        2007        ** | ** ** | **        2006        ** | ** ** |
| **Operating activities:**                                                                 |       |                                                                                                     |       |   |   |   |   |   |   |
| Net income (loss)                                                                         |       |                                                                                                     | $          | 1,105 |   |   |   | $ | (5,010 | ) |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operating activities: |       |                                                                                                     |       |   |   |   |   |   |   |
| Depreciation and amortization                                                             |       |                                                                                                     | 76,047     |   |   |   | 62,953 |   |   |
| Stock-based compensation                                                                  |       |                                                                                                     | 71         |   |   |   | 38 |   |   |
| Provision for losses on trade accounts receivable                                         |       |                                                                                                     | 2,559      |   |   |   | 2,904 |   |   |
| Amortization of note discount                                                             |       |                                                                                                     | 1,050      |   |   |   | 88 |   |   |
| Changes in  operating assets and liabilities:                                             |       |                                                                                                     |       |   |   |   |   |   |   |
| Trade accounts receivable                                                                 |       |                                                                                                     | 8,798      |   |   |   | 6,773 |   |   |
| Launch funds receivable                                                                   |       |                                                                                                     | 135        |   |   |   | 387 |   |   |
| Prepaid expenses and other assets                                                         |       |                                                                                                     | 1,120      |   |   |   | (2,532 | ) |   |
| Accounts payable                                                                          |       |                                                                                                     | 1,326      |   |   |   | (6,987 | ) |   |
| Interest payable                                                                          |       |                                                                                                     | 14,269     |   |   |   | 26,126 |   |   |
| Accrued expenses and other liabilities                                                    |       |                                                                                                     | (11,884    | ) |   |   | 2,569 |   |   |
| Net cash provided by operating activities                                                 |       |                                                                                                     | 94,596     |   |   |   | 87,309 |   |   |
| **Investing  activities:**                                                                |       |                                                                                                     |       |   |   |   |   |   |   |
| Purchase of fixed assets                                                                  |       |                                                                                                     | (76,639    | ) |   |   | (57,100 | ) |   |
| Sale of fixed assets                                                                      |       |                                                                                                     | 9          |   |   |   | 335 |   |   |
| Purchase of investments                                                                   |       |                                                                                                     | —     |   |   |   | (257 | ) |   |
| Net cash used in investing activities                                                     |       |                                                                                                     | (76,630    | ) |   |   | (57,022 | ) |   |
| **Financing  activities:**                                                                |       |                                                                                                     |       |   |   |   |   |   |   |
| Repayment of credit facilities                                                            |       |                                                                                                     | (25,000    | ) |   |   | (20,875 | ) |   |
| Debt issuance costs                                                                       |       |                                                                                                     | (412       | ) |   |   | — |   |   |
| Other                                                                                     |       |                                                                                                     | —     |   |   |   | (4 | ) |   |
| Net cash used in financing activities                                                     |       |                                                                                                     | (25,412    | ) |   |   | (20,879 | ) |   |
| Net increase (decrease) in cash and cash equivalents                                      |       |                                                                                                     | (7,446     | ) |   |   | 9,408 |   |   |
| Cash and cash  equivalents, beginning of period                                           |       |                                                                                                     | 39,235     |   |   |   | 24,853 |   |   |
| Cash and cash  equivalents, end of period                                                 |       |                                                                                                     | $          | 31,789 |   |   |   | $ | 34,261 |   |   |

 

See accompanying notes

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

**1.**   Organizationand Basis of Presentation

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

Through our wholly owned operating subsidiaries,Insight Communications Midwest, LLC (“Insight Communications Midwest”), InsightCommunications of Central Ohio, LLC (“Insight Ohio”) and Insight KentuckyPartners II, L.P. (“Insight Kentucky”), we own and operate cable televisionsystems in Illinois, Indiana, Kentucky and Ohio which passed approximately 2.5million homes and had approximately 1.4 million customer relationships as of March 31,2007.

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. Reclassificationshave been made to the prior year’s financial statements to conform to thoseclassifications used in 2007.

On April 1, 2007, ourpartnership agreement was amended, and Insight LP agreed with Comcast Cable ona division of our assets and liabilities. Upon completion of the transaction,we will own 100% of the cable systems serving customers in Louisville, Lexington,Bowling Green and Covington, Kentucky, in Evansville, Indiana, and in Columbus,Ohio, and Comcast Cable will own 100% of the cable systems serving customers inRockford/Dixon, Quincy/Macomb, Springfield, Peoria and Champaign/Urbana,Illinois and in Bloomington, Anderson, Lafayette and Kokomo, Indiana. Pendingcompletion of the transaction, Insight LP will continue to serve as our generalpartner and control and manage all of our cable systems. Insight LP willcontinue to include the results of our operations in its consolidated financialstatements. In conjunction with the division of assets and liabilities, theInsight systems group was initially allocated approximately $1,259.6 billion ofour debt and the Comcast systems group was initially allocated approximately$1,335.4 billion of our debt. The closing is subject to closing conditions,including local governmental approvals and regulatory approvals, and isexpected to be completed by the end of 2007.

**2.**   Responsibilityfor Interim Financial Statements

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

In management’s opinion, the consolidated financialstatements reflect all adjustments considered necessary for a fair presentationof the consolidated results of operations and financial position for theinterim periods presented. All such adjustments are of a normal recurringnature. These unaudited interim consolidated financial statements should beread in conjunction with the audited consolidated financial statements andnotes to consolidated financial statements contained in our Annual Report on Form 10-Kfor the year ended December 31, 2006.

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

**2.**   Responsibility for Interim Financial Statements(Continued)

The preparation offinancial statements in conformity with accounting principles generallyaccepted in the United States requires us to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements andthe reported amounts of revenues and expenses during the reporting period. Actualresults could differ from those estimates. The results of operations for thethree months ended March 31, 2007 are not necessarily indicative of theresults to be expected for the year ending December 31, 2007 or any otherinterim period.

**3.**   Recent Accounting Pronouncements

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, *The Fair Value Option forFinancial Assets and Liabilities*(“SFAS No. 159”). SFAS No. 159provides the option to report certain financial assets and liabilities at fairvalue, with the intent to mitigate volatility in financial reporting that canoccur when related assets and liabilities are recorded on different bases. Thisstatement is effective for us beginning January 1, 2008. We do not expectSFAS No. 159 to have a material impact on our consolidated financialstatements.

**4.**   Investments

***Oxygen Cable, LLC***

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

Concurrently with thecarriage agreement, we entered into an equity issuance agreement with Oxygen.The agreement called for Oxygen to deliver to us shares having an aggregatefair market value as of December 31, 2005 of $3.8 million, and by December 1,2006 deliver to us additional shares having an aggregate fair market value asof the December 31, 2005 valuation of $2.0 million. Pursuant to the equityissuance agreement, a portion of the monthly programming fees represent ourequity investment in Oxygen. In October 2006, in connection with theextension of the carriage term, Oxygen issued shares to us of common stockrepresenting a value as of December 31, 2005 of $5.8 million in fullsatisfaction of its obligation to issue equity to us under the equity issuanceagreement. We are accounting for our investment in Oxygen under the costmethod. As of March 31, 2007 and December 31, 2006, our carryingvalue of this investment was $5.8 million.

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

**5.**   FixedAssets

Fixedassets consisted of:

| ** **                                       | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|--------------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                       | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                       | ** ** | **(unaudited)**         | ** ** | ** **            | ** ** |
| ** **                                       | ** ** | **(in thousands)** | ** ** |
| Land, buildings  and improvements                |       | $                       | 42,374     |                  | $          | 42,058 |   |
| Cable system  equipment                          |       | 2,730,509               |       | 2,654,416             |       |
| Furniture,  fixtures and office equipment        |       | 21,180                  |       | 20,990                |       |
|                                             |       | 2,794,063               |       | 2,717,464             |       |
| Less: accumulated  depreciation and amortization |       | (1,646,963              | )          | (1,579,278            | )          |
| Total fixed  assets, net                         |       | $                       | 1,147,100  |                  | $          | 1,138,186 |   |

 

We recorded depreciationexpense of $67.8 million and $61.7 million for the three months ended March 31,2007 and 2006.

**6.**   Debt

Debtconsisted of:

| ** **                                | ** ** | **March 31,**      | ** ** | **December 31,** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------|------------|
| ** **                                | ** ** | **2007**                | ** ** | **2006**              | ** ** |
| ** **                                | ** ** | **(unaudited)**         | ** ** | ** **            | ** ** |
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Note payable to  Insight Inc.             |       | $                       | 100,000    |                  |       | $ | 100,000 |   |   |
| Insight Midwest  Holdings Credit Facility |       | 2,261,000               |       |                  | 2,286,000  |   |   |
| Insight Midwest 93¤4%  Senior Notes  |       | 200,000                 |       |                  | 200,000    |   |   |
|                                      |       | 2,561,000               |       |                  | 2,586,000  |   |   |
| Net unamortized  discount                 |       | (29,228                 | )          |                  | (30,278    | ) |   |
| Total debt                                |       | $                       | 2,531,772  |                  |       | $ | 2,555,722 |   |   |

 

***Insight Midwest Holdings $2.445 Billion CreditFacility***

Our wholly owned subsidiary, Insight Midwest Holdings,LLC, serves as borrower under a $2.445 billion senior secured credit facility. Obligationsunder this credit facility are secured by a pledge of the outstanding equityinterests of Insight Midwest Holdings and its subsidiaries. The facility iscomprised of a $385.0 million A Term Loan scheduled to mature on October 6,2013, a $1.8 billion B Term Loan scheduled to mature on April 6, 2014 and$260.0 million in revolving commitments scheduled to terminate on October 6,2012. Insight Midwest Holdings used the proceeds to refinance the existingsenior credit facility and to redeem a portion of the outstanding Senior Notes.As of March 31, 2007 we were in compliance with the credit facility’scovenant requirements.

On March 28, 2002, weborrowed $100.0 million from Insight Inc. The loan bears annual interest of 9%,compounded semi-annually, has a scheduled maturity date of January 31,2011 and permits prepayments. Insight Midwest Holdings is permitted under thecredit facility to make distributions to us for the purpose of repaying thisloan, including accrued interest, provided that there are no defaults existingunder the credit facility. During the three months ended March 31, 2007,we repaid a total of 

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

**6.**   Debt (Continued)

$4.5 millionof the loan balance. As of March 31, 2007 and December 31, 2006, thebalance of the $100.0 million loan, including accrued interest, was $134.6million and $136.1 million.

***Debt Principal Payments***

As of March 31,2007, the remaining principal payments required on our debt were as follows (inthousands):

| 2007       |   | $         | —    |   |
|------------|--------|-----------|-----------|--------|
| 2008       |   | 9,312     |      |
| 2009       |   | 242,063   |      |
| 2010       |   | 61,313    |      |
| 2011       |   | 180,562   |      |
| Thereafter |   | 2,067,750 |      |
| Total      |   | $         | 2,561,000 |   |

 

**7.**   DerivativeInstruments

We enter into derivative instruments, typicallyinterest-rate swap agreements, to modify the interest characteristics of ouroutstanding debt to either a floating or fixed rate basis. These agreementsinvolve fixed rate interest payments in exchange for floating rate interestreceipts, known as cash flow hedges, and floating rate interest payments inexchange for fixed rate interest receipts, known as fair value hedges, over thelife of the agreement without an exchange of the underlying principal amount. Thedifferential to be paid or received is accrued as interest rates change and isrecognized as an adjustment to interest expense related to the debt. Therelated amount payable or receivable is included in other non-currentliabilities or assets.

Gains and losses relatedto cash flow hedges that are determined to be effective hedges are recorded asaccumulated other comprehensive income or loss in the accompanying consolidatedbalance sheets. Gains and losses related to fair value hedges that aredetermined to be effective hedges are recorded in the consolidated statementsof operations as an adjustment to the swap instrument and an equal andoffsetting adjustment to the carrying value of the underlying debt. Gains andlosses related to interest rate swaps that are determined not to be effectivehedges and do not qualify for hedge accounting are recorded in our consolidatedstatements of operations as other income or expense.

**Cash Flow Hedges**

In October 2006,we entered into two interest rate swap agreements that were determined to beeffective cash flow hedges whereby we swapped floating rates for:

·       afixed rate of 5.240% on $450.0 million notional value of debt which expires in December 2007;and

·       afixed rate of 5.148% on $400.0 million notional value of debt which expires in December 2008.

At March 31, 2007 andDecember 31, 2006, the estimated fair value (cost if terminated) of theseinterest rate swap agreements were approximately ($317,000) and $306,000.

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

**8.**   RelatedParty Transactions

***Programming***

We purchase the majorityof our programming through affiliates of Comcast Cable. Charges for suchprogramming, including a 11⁄2% administrative fee, were $51.4 million and $43.1million for the three months ended March 31, 2007 and 2006. As of March 31,2007 and December 31, 2006, $34.0 million and $30.7 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. Upon the completion of the division ofassets and liabilities described in Note 1, we will no longer have the right topurchase programming services for our systems through this affiliatearrangement.

***Insight Interactive***

Effective November 17,1999, Insight Cable Services entered into a Contribution Agreement with SourceMedia, Inc., providing for the creation of a joint venture, InsightInteractive LLC. Under the terms of the Contribution Agreement, Source Mediacontributed its Virtual Modem 2.5 software and the Interactive Channel productsand services, including SourceGuide and LocalSource television content. On March 14,2002, Insight Cable Services purchased the remaining 50% equity interest inInsight Interactive that it did not already own from Source Media. We arecurrently providing Insight Interactive’s services to customers in some of oursystems. For the three months ended March 31, 2007 and 2006, fees for suchservices totaled $567,000 and $831,000.

***Due To Affiliates***

As of March 31, 2007and December 31, 2006, 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, capital expenditures and other operationalexpenses.

**9.**   Commitmentsand Contingencies

***Programming Contracts***

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

***Litigation***

In April 2005, Acacia Media TechnologiesCorporation filed a lawsuit against us and others in the United States DistrictCourt for the Southern District of New York. The complaint alleges, among otherthings, infringement of certain United States patents that allegedly relate tosystems and methods for transmitting and/or receiving digital audio and videocontent. The complaint seeks injunctive relief and damages in an unspecifiedamount. In the event that a Court ultimately determines that we infringe on anyof the patents, we may be subject to substantial damages, which may includetreble damages and/or an 

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

**9.**   Commitments and Contingencies (Continued)

injunction that couldrequire us to materially modify certain products and services that we currentlyoffer to subscribers. We believe that the claims are without merit and intendto defend the action vigorously. The final disposition of this claim is notexpected 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 various legal proceedings that arisein the ordinary course of business. While it is impossible to determine withcertainty the ultimate outcome of these matters, it is our opinion that theresolution of these matters will not have a material adverse affect on ourconsolidated financial condition.

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

| ** **                                                                                                                              | ** ** | **March31,**    | ** ** | **December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------|------------|-----------------------|------------|
| ** **                                                                                                                              | ** ** | **2007**        | ** ** | **2006**              | ** ** |
| ** **                                                                                                                              | ** ** | **(unaudited)** | ** ** | ** **            | ** ** |
| **Assets**                                                                                                                              | ** ** | ** **      | ** ** |                  | ** ** | ** ** |   |
| Cash                                                                                                                                    |       | $               | 1          |                  |       | $ | 1 |   |   |
| Deferred  financing costs, net of accumulated amortization of $14,579 and $14,149 as of  March 31, 2007 and December 31, 2006 |       | 8,207           |       |                  | 8,637      |   |   |
| Total assets                                                                                                                            |       | $               | 8,208      |                  |       | $ | 8,638 |   |   |
| **Liabilities  and shareholder’s deficit**                                                                                         |       |            |       |                  |       |   |   |
| Accrued interest                                                                                                                        |       | $               | 9,750      |                  |       | $ | 4,875 |   |   |
| Total current liabilities                                                                                                               |       | 9,750           |       |                  | 4,875      |   |   |
| Senior notes, to  be paid by Insight Midwest, LP                                                                                        |       | 176,725         |       |                  | 175,675    |   |   |
| Total liabilities                                                                                                                       |       | 186,475         |       |                  | 180,550    |   |   |
| 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                                              |       | 427,631         |       |                  | 427,631    |   |   |
| Accumulated  deficit                                                                                                                    |       | (605,899        | )          |                  | (599,544   | ) |   |
| Total shareholder’s deficit                                                                                                        |       | (178,267        | )          |                  | (171,912   | ) |   |
| Total liabilities  and shareholder’s deficit                                                                                       |       | $               | 8,208      |                  |       | $ | 8,638 |   |   |

 

See accompanying notes

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

| ** **       | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------|------------|--------------------------------------------------|------------|
| ** **       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Expenses:**    |       |                                             |       |   |   |
| Amortization     |       | $                                                | (430       | ) | $ | (652 | ) |
| Interest expense |       | (5,925                                           | )          | (26,010 | ) |
| Net loss         |       | $                                                | (6,355     | ) | $ | (26,662 | ) |

 

See accompanying notes

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

| ** **                                                                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Cash flows from operating  activities:**                                       | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net loss                                                                         |       | $                                                | (6,355     | ) | $ | (26,662 | ) |
| Adjustments to reconcile  net loss to net cash provided by operating activities: |       |                                             |       |   |   |
| Accretion of discount on notes                                                   |       | 1,050                                            |       | 88 |   |
| Amortization                                                                     |       | 430                                              |       | 652 |   |
| Interest expense assumed by affiliate                                            |       | 4,875                                            |       | 25,922 |   |
| Net cash provided by operating activities                                        |       | —                                           |       | — |   |
| Net increase in cash                                                             |       | —                                           |       | — |   |
| Cash, beginning  of period                                                       |       | 1                                                |       | 1 |   |
| Cash, end of period                                                              |       | $                                                | 1          |   | $ | 1 |   |

 

See accompanying notes

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

**1.   Nature ofBusiness**

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

**2.   Responsibilityfor Interim Financial Statements**

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

In management’s opinion, the financial statementsreflect all adjustments considered necessary for a fair presentation of thestatement of financial position as of the interim dates presented. Theseunaudited interim financial statements should be read in conjunction with theaudited financial statements and notes to financial statements contained in theCompany’s Annual Report on Form 10-K for the year ended December 31,2006.

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

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

**CautionaryStatement Regarding Forward-Looking Information**

This quarterlyreport on Form 10-Q contains certain forward-looking statements withrespect to the financial condition, results of operations, plans, objectives,future performance and business of our company, including, without limitation,statements preceded by, followed by or that include the words “believes,” “expects,”“anticipates,” “estimates” or similar expressions. We believe it is importantto communicate management’s expectations. However, there may be events in thefuture that we are not able to accurately predict or over which we have nocontrol. The risk factors listed in our Annual Report on Form 10-Kfor the year ended December 31, 2006, as well as any other cautionarylanguage in this quarterly report, provide examples of risks, uncertainties andevents that may cause our actual results to differ materially from theexpectations we describe in our forward-looking statements. You should be awarethat the occurrence of the events described in these risk factors and elsewherein this quarterly report could have a material adverse effect on our business,operating results and financial condition. Examples of these risks include:

·       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 fund ouroperations and our ability to react to changes in our business;

·       Uponcompletion of the transfer to a subsidiary of Comcast Corporation of the assetscomprising its systems group, we will face new challenges as a smaller company,including operating at lower margins;

·       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,particularly as a result of the pending transfer to Comcast of the assetscomprising its systems group; and

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

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

**Overview**

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

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

| ** **                                 | ** ** | **Three Months  Ended March 31,** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                 | ** ** | **(unaudited)**                                  | ** ** |
| ** **                                 | ** ** | **(in thousands)**                          | ** ** |
| Revenue                                    |       | $                                                | 339,469    |   | $ | 301,281 |   |
| Operating costs  and expenses:             |       |                                             |       |   |   |
| Programming and other operating costs      |       | 120,168                                          |       | 112,084 |   |
| Selling, general and administrative        |       | 82,133                                           |       | 70,307 |   |
| Management Fees                            |       | 10,182                                           |       | 9,038 |   |
| Depreciation and amortization              |       | 76,047                                           |       | 62,953 |   |
| Total operating  costs and expenses        |       | 288,530                                          |       | 254,382 |   |
| Operating income                           |       | 50,939                                           |       | 46,899 |   |
| Interest expense                           |       | 50,196                                           |       | 52,363 |   |
| Net income (loss)                          |       | 1,105                                            |       | (5,010 | ) |
| Net cash provided  by operating activities |       | 94,596                                           |       | 87,309 |   |
| Net cash used in  investing activities     |       | 76,630                                           |       | 57,022 |   |
| Net cash used in  financing activities     |       | 25,412                                           |       | 20,879 |   |
| Capital expenditures                       |       | 76,639                                           |       | 57,100 |   |
|                                            |            |                                                  |            |  |  |  |  |

 

**Use of AdjustedOperating Income before Depreciation and Amortization and Free Cash Flow**

We utilize Adjusted Operating Income beforeDepreciation and Amortization, (defined as operating income beforedepreciation, amortization and non-cash stock-based compensation) among othermeasures, to evaluate the performance of our businesses. Adjusted OperatingIncome before Depreciation and Amortization is considered an importantindicator of the operational strength of our businesses and is a component ofour annual compensation programs. In addition, our debt agreements use AdjustedOperating Income before Depreciation and Amortization, adjusted for certainnon-recurring items, in our leverage and other covenant calculations. We alsouse this measure to determine how we will allocate resources and capital. Ourmanagement finds this measure helpful because it captures all of the revenueand ongoing operating expenses of our businesses and therefore provides a meansto directly evaluate the ability of our business operations to generate returnsand to compare operating capabilities across our businesses. This measure isalso used by equity and fixed income research analysts in their reports toinvestors evaluating our businesses and other companies in the cable televisionindustry. We believe Adjusted Operating Income before Depreciation andAmortization is useful to investors and bondholders because it enables them toassess our performance in a manner similar to the methods used by ourmanagement 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 Adjusted Operating Income beforeDepreciation and Amortization, however, is that it does not reflect theperiodic costs of certain capitalized tangible and intangible assets used ingenerating revenues in our businesses. Management evaluates the costs of suchtangible and intangible assets through other financial measures such as capitalexpenditures, investment spending and Free Cash Flow. Management also evaluatesthe costs of capitalized tangible and intangible assets by analyzing returnsprovided on the capital dollars deployed. Another limitation of AdjustedOperating Income before Depreciation and Amortization is that it does notreflect income net of interest expense, which is a significant expense for usbecause of the substantial debt we incurred to acquire cable television systemsand finance capital expenditures to upgrade our cable network. Managementevaluates the impact of 

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interest expense throughmeasures including interest expense, Free Cash Flow, the returns analysisdiscussed above and debt service covenant ratios under our credit facility.

Free Cash Flow is net cash provided by operatingactivities (as defined by accounting principles generally accepted in theUnited States) less capital expenditures. Free Cash Flow is considered to be animportant indicator of our liquidity, including our ability to repayindebtedness. We believe Free Cash Flow is useful for investors and bondholdersbecause 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 of Net Income (Loss) to AdjustedOperating Income before Depreciation and Amortization***

Thefollowing table reconciles Net Income (Loss) to Adjusted Operating Incomebefore Depreciation and Amortization. In addition, the table provides thecomponents from Net Income (Loss) to Operating Income for purposes of thediscussions that follow.

| ** **                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(unaudited)**                                  | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                          | ** ** |
| Net income (loss)                                               |       | $                                                | 1,105      |   | $ | (5,010 | ) |
| Other (income)  expense:                                        |       |                                             |       |   |   |
| Other                                                           |       | (48                                              | )          | 59 |   |
| Interest income                                                 |       | (314                                             | )          | (513 | ) |
| Interest expense                                                |       | 50,196                                           |       | 52,363 |   |
| Total other  expense, net                                       |       | 49,834                                           |       | 51,909 |   |
| Operating income                                                |       | 50,939                                           |       | 46,899 |   |
| Depreciation and  amortization                                  |       | 76,047                                           |       | 62,953 |   |
| Stock-based compensation                                        |       | 71                                               |       | 38 |   |
| Adjusted Operating  Income before Depreciation and Amortization |       | $                                                | 127,057    |   | $ | 109,890 |   |

                                                                                                                

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

The following tableprovides a reconciliation from net cash provided by operating activities toFree Cash Flow. In addition, the table provides the components from net cashprovided by operating activities to operating income for purposes of thediscussions that follow.

| ** **                                                      | ** ** | **Three Months  Ended March 31,** | ** ** |
|-----------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                      | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **                                                      | ** ** | **(unaudited)**                                  | ** ** |
| ** **                                                      | ** ** | **(in thousands)**                          | ** ** |
| Operating income                                                |       | $                                                | 50,939     |   | $ | 46,899 |   |
| Depreciation and  amortization                                  |       | 76,047                                           |       | 62,953 |   |
| Stock-based compensation                                        |       | 71                                               |       | 38 |   |
| Adjusted Operating  Income before Depreciation and Amortization |       | 127,057                                          |       | 109,890 |   |
| Changes in working  capital accounts(1)                         |       | (157                                             | )          | 506 |   |
| Cash paid for interest                                          |       | (32,304                                          | )          | (23,087 | ) |
| Net cash provided by  operating activities                      |       | 94,596                                           |       | 87,309 |   |
| Capital expenditures                                            |       | (76,639                                          | )          | (57,100 | ) |
| Free Cash Flow                                                  |       | $                                                | 17,957     |   | $ | 30,209 |   |

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(1)          Changes in working capitalaccounts are based on the net cash changes in current assets and currentliabilities, excluding charges related to interest and taxes and other non-cashexpenses.

**Results ofOperations**

***Three Months Ended March 31, 2007 Compared toThree Months Ended March 31, 2006***

Revenue for the three months ended March 31, 2007 totaled $339.5 million, anincrease of 13% over the prior year, due primarily to Revenue Generating Unit(“RGU”) growth across all of our services, as well as video rate increases. High-speedInternet service revenue increased 23% over the prior year, which wasattributable to an increased customer base and was partially offset by loweraverage revenue per customer due to promotional discounts. We added a net44,800 high-speed Internet customers during the quarter to end at 656,000customers.

Basic cable service revenue increased 6% due to anincreased customer base and video rate increases, partially offset bypromotional discounts. We added a net 21,200 basic customers during the quarterto end at 1,344,000 customers. In addition, digital service revenue increased28% over the prior year due to an increased customer base and a $1.60 increasein digital average revenue per customer. We added a net 32,200 digitalcustomers during the quarter to end at 653,800 customers.

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

To increase our bundling opportunities and extend ourgrowth potential in future years, we, during the second half of 2006 and in January 2007,successfully rolled out our telephone product in eight previously unserveddistricts. As a result, we added a net 24,400 telephone customers during thequarter to end at 147,800 customers.

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

| ** **           | ** ** | **Revenue by Service Offering**   | ** ** | ** **                    | ** ** | ** **                                       | ** ** |
|----------------------|------------|--------------------------------------------------|------------|-------------------------------|------------|--------------------------------------------------|------------|
| ** **           | ** ** | **Three Months  Ended  March 31,2007** | ** ** | **% of  Total  Revenue** | ** ** | **Three Months  Ended  March 31,2006** | ** ** | **% of  Total  Revenue** | ** ** | ** ** | ** ** | **% Change  in Revenue** | ** ** |
| Basic                |       |                                             | $          | 168,151                       |       |                                             |       | 49.5 | % |   |   | $ | 158,207 |   |   |   | 52.5 | % |   |   |   |   | 6.3 | % |   |
| High-Speed  Internet |       |                                             | 69,531     |                          |       |                                             | 20.5       | % |   |   | 56,497 |   |   |   | 18.8 | % |   |   |   |   | 23.1 | % |   |
| Digital              |       |                                             | 40,540     |                          |       |                                             | 11.9       | % |   |   | 31,723 |   |   |   | 10.5 | % |   |   |   |   | 27.8 | % |   |
| Advertising          |       |                                             | 17,385     |                          |       |                                             | 5.1        | % |   |   | 17,697 |   |   |   | 5.9 | % |   |   |   |   | –1.8 | % |   |
| Telephone            |       |                                             | 15,803     |                          |       |                                             | 4.7        | % |   |   | 11,355 |   |   |   | 3.8 | % |   |   |   |   | 39.2 | % |   |
| Premium              |       |                                             | 14,195     |                          |       |                                             | 4.2        | % |   |   | 13,394 |   |   |   | 4.4 | % |   |   |   |   | 6.0 | % |   |
| Franchise fees       |       |                                             | 7,998      |                          |       |                                             | 2.4        | % |   |   | 7,354 |   |   |   | 2.4 | % |   |   |   |   | 8.8 | % |   |
| Other                |       |                                             | 5,866      |                          |       |                                             | 1.7        | % |   |   | 5,054 |   |   |   | 1.7 | % |   |   |   |   | 16.1 | % |   |
| Total                |       |                                             | $          | 339,469                       |       |                                             |       | 100.0 | % |   |   | $ | 301,281 |   |   |   | 100.0 | % |   |   |   |   | 12.7 | % |   |

 

Total CustomerRelationships were 1,426,300 as of March 31, 2007, an increase of 49,500from 1,376,800 as of March 31, 2006. 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.

In thequarter ended March 31, 2007, we added 122,600 RGUs which represent thesum of basic, digital, high-speed Internet and telephone customers, and as of March 31,2007 had 2,801,600 RGUs, an increase of 13% from March 31, 2006. RGUs bycategory were as follows (in thousands):

| ** **           | ** ** | **March 31,  2007** | ** ** | **March 31,  2006** | ** ** |
|----------------------|------------|--------------------------|------------|--------------------------|------------|
| Basic                |       |                     | 1,344.0    |                     |       |   | 1,306.7 |   |   |
| High-speed  Internet |       |                     | 656.0      |                     |       |   | 514.8 |   |   |
| Digital              |       |                     | 653.8      |                     |       |   | 560.5 |   |   |
| Telephone            |       |                     | 147.8      |                     |       |   | 99.7 |   |   |
| Total RGUs           |       |                     | 2,801.6    |                     |       |   | 2,481.7 |   |   |

 

Average monthly revenue per basic customer was $84.86for the three months ended March 31, 2007, compared to $77.60 for thethree months ended March 31, 2006. This primarily reflects the continuedgrowth of high-speed Internet and video product offerings in all markets, aswell as video rate increases.

Programming and other operating costs increased $8.1million, or 7%. Increases in programming rates, customers and the addition ofnew programming content were significant drivers of the cost increase for thequarter ended March 31, 2007. For the quarter ended March 31, 2006,programming costs reflected certain programming credits resulting fromfavorable resolution of pricing negotiations related to certain prior periodprogramming costs that were accrued at a higher rate than the amount actuallypaid. Programming credits for the quarter ended March 31, 2007 weresignificantly lower, causing overall programming costs increases to be greater.Direct operating costs decreased due to decreases in our high-speed Internetservices costs as the company, in 2006, transitioned its Internet servicesin-house and realized both cost savings and operational benefits from thisinvestment even while increasing our customer base. These decreases werepartially offset by an increase in telephone cost of service as we successfullyrolled out this product in eight previously unserved districts during thesecond half of 2006 and in January 2007.

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Selling, general andadministrative expenses increased $11.8 million, or 17%, primarily due toincreased payroll, payroll-related costs and temporary help associated with anincrease in the number of employees and salary increases for existing employees.The increase in the number of employees represents investments in sales andmarketing, customer care and information technology personnel to continue toupgrade and enhance our product offerings, manage our increasingly complexnetwork and increase customer satisfaction. A portion of the informationtechnology personnel increases were directly related to the transition of ourInternet services in-house. Marketing expenses increased over the prior year tosupport the continued rollout of high-speed Internet, digital and telephoneproducts, and to grow our core video customer base. Franchise fees, customerbilling and collection fees increased primarily due to the increase in ourrevenues and our customer base.

Management fees increased $1.2 million or 13% to $10.2million for the three months ended March 31, 2007 from $9.0 million forthe three months ended Mach 31, 2006. Management fees, equal to approximately3% of revenues, are paid to Insight LP.

Depreciation and amortization expense increased $13.1million or 21% primarily as a result of an increased level of capitalexpenditures through March 31, 2007.These expenditures were primarily for purchases of customer premiseequipment, installation labor and materials, capitalized labor, headendequipment, network extensions and network capacity and bandwidth increases, allof which we consider necessary in order to continue to maintain and grow ourcustomer base and expand our service offerings. Partially offsetting thisincrease was a decrease in depreciation expense related to certain assets thathave become fully depreciated since March 31, 2006.

As a result of the factors discussed above, AdjustedOperating Income before Depreciation and Amortization increased $17.2 millionto $127.1 million, an increase of 16% over the prior year’s quarter.

Interest expense decreased$2.2 million, or 4%, because of lower interest rates, which averaged 7.9% forthe three months ended March 31, 2007, as compared to 8.4% for the threemonths ended March 31, 2006, and as a result of the redemption of our 101⁄2%senior notes and a portion of our 93⁄4% senior notes with the proceeds from ournew credit facility in the fourth quarter of 2006.

**Liquidity andCapital Resources**

Our business requires cash for operations, debtservice and capital expenditures. The cable television business has substantialongoing capital requirements for the provision of new services and theconstruction, expansion and maintenance of its broadband networks. In the past,expenditures have been made for various purposes including the upgrade of theexisting cable network, and will continue to be made for customer premiseequipment (e.g., set-top boxes), installation and deployment of new product andservice offerings, capitalized payroll, network capacity, bandwidth increases,network extensions, and, to a lesser extent, network upgrades. Historically, wehave been able to meet our cash requirements with cash flow from operations,borrowings under our credit facilities and issuances of private and public debtand equity.

Cash provided by operations for the three months endedMarch 31, 2007 and 2006 was $94.6 million and $87.3 million. The increasewas primarily attributable to the increase in non-cash items, specificallydepreciation and amortization and the decrease in our net loss. These increaseswere partially offset by a decrease in interest payable because of theredemption of our 101⁄2% senior notes and a portion of our 93⁄4% senior notes andthe refinancing of our credit facility in the fourth quarter of 2006.

Cash used in investing activities for the three monthsended March 31, 2007 and 2006 was $76.6 million and $57.0 million and wasprimarily for capital expenditures. These expenditures principally constitutedpurchases of customer premise equipment, installation labor and materials andcapitalized labor, all of which are necessary to grow our customer base andexpand our service offerings. The increase 

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in capital expenditureswas driven primarily by increases in customer premise equipment purchases andinstallation labor and material expenditures.

Cash used in financing activities for the three monthsended March 31, 2007 and 2006 was $25.4 million and $20.9 million. Theseexpenditures were primarily for the repayment of our credit facility.

Free Cash Flow for thethree months ended March 31, 2007 totaled $18.0 million compared to $30.2million for the three months ended March 31, 2006. This decrease in FreeCash Flow from March 31, 2006 to March 31, 2007 of $12.2 million wasprimarily driven by the following:

·       A$19.5 million increase in capital expenditures; and

·       A$9.2 million increase in cash interest expense paid primarily driven by therefinancing of our credit facility in the fourth quarter of 2006. We payinterest quarterly on the new credit facility and paid interest semi-annually(in Q2 and Q4) on the bonds it refinanced.

These increaseduses of cash were offset by:

·       A$17.2 million increase in Adjusted Operating Income before Depreciation andAmortization.

We have a substantial amount of debt. Our high levelof debt could have important consequences. Our principal source of cash we needto pay our obligations and to repay the principal amount of our debtobligations is the cash that our subsidiaries generate from their operationsand their borrowings. We believe that the Insight Midwest Holdings creditfacility, cash on-hand and our cash flow from operations are sufficient tosupport our current operating plan. As of March 31, 2007 we had theability to draw upon $174.7 million of unused availability under the InsightMidwest Holdings credit facility tofund any shortfall resulting from the inability of our cash from operations tofund our capital expenditures, meet our debt service requirements or otherwisefund our operations. As of March 31, 2007 we were in compliance with allcovenants under our credit agreement.

On October 6, 2006, we entered into a new $2.445billion senior secured credit facility for the purpose of reducing our interestexpense and near term debt amortizations. The facility is comprised of a $385.0million A Term Loan scheduled to mature on October 6, 2013, a $1.8 billionB Term Loan scheduled to mature on April 6, 2014 and $260.0 million inrevolving commitments scheduled to terminate on October 6, 2012. Theproceeds were used to refinance our existing senior credit facility and toredeem all $630.0 million outstanding principal amount of our 101⁄2% Senior Notesdue November 1, 2010 at a redemption price of 103.5% of the principalamount and $185.0 million principal amount of our total outstanding $385.0million of the 93⁄4% Senior Notes due October 1, 2009 at a redemption priceof 101.625% of the principal amount redeemed, plus accrued and unpaid interest.

On February 12, 2007, we amended the creditfacility to reduce the applicable margin with respect to the $1.8 billion BTerm Loan facility by 25 basis points, or 0.25%.

On April 1, 2007, our partnership agreement wasamended, and our manager agreed with Comcast on a division of our assets andliabilities. Upon completion of the transaction, we will own 100% of the cablesystems serving customers in Louisville, Lexington, Bowling Green andCovington, Kentucky, in Evansville, Indiana, and in Columbus, Ohio, and Comcastwill own 100% of the cable systems serving customers in Rockford/Dixon,Quincy/Macomb, Springfield, Peoria and Champaign/Urbana, Illinois and inBloomington, Anderson, Lafayette and Kokomo, Indiana. Pending completion of thetransaction, our manager will continue to serve as our general partner and controland manage all of our cable systems. Our manager will continue to include theresults of our operations in its consolidated financial statements. Inconjunction with the division of assets and liabilities, the Insight systemsgroup was initially allocated approximately $1,259.6 billion of our debt andthe Comcast systems group was initially allocated approximately $1,335.4billion of our debt. The closing is subject to closing conditions, includinglocal governmental approvals and regulatory approvals, and is expected to becompleted by the end of 2007.

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The credit facilityhas been structured to survive the division, subject to certain conditions,including:

·       proforma financial covenant compliance upon consummation of the division;

·       compliancewith the financial covenants for the remaining life of the credit facility; and

·       thereshall not have occurred and be continuing any event of default that wouldcontinue after giving effect to the division.

Subject to pro forma financial covenant compliance,any cash received as a result of the division may be applied, at our manager’s option,to: (a) repay the remaining 9 3⁄4% senior notes, (b) repay the InsightInc. 12 1⁄4% senior discount notes, (c) repay the $100.0 millionintercompany note, (d) prepay the Term Loans on a pro rata basis, (e) repayother debt and/or (f) for general corporate purposes. After the occurrenceof the division, the margin with respect to the Term Loan B will increase by 50basis points, or 0.50%, if and for so long as the Insight Midwest Holdings’leverage ratio exceeds 6.50:1.00. Upon the occurrence of the division, themaximum leverage permitted will increase by 0.50:1.00.

The following table summarizes our contractualobligations and commitments, excluding interest and commitments forprogramming, as of March 31, 2007,including periods in which the related payments are due (unaudited, inthousands):

| ** **             | ** ** | **Contractual Obligations** | ** ** |
|------------------------|------------|----------------------------------|------------|
| ** **             | ** ** | **Long-Term Debt**          | ** ** | **Operating Leases** | ** ** | **Total** | ** ** |
| 2007                   |       |                             | $          | — |   |   |   | $ | 1,965 |   |   | $ | 1,965 |   |
| 2008                   |       |                             | 9,312      |   |   |   | 1,954 |   |   | 11,266 |   |
| 2009                   |       |                             | 242,063    |   |   |   | 1,527 |   |   | 243,590 |   |
| 2010                   |       |                             | 61,313     |   |   |   | 843 |   |   | 62,156 |   |
| 2011                   |       |                             | 180,562    |   |   |   | 374 |   |   | 180,936 |   |
| Thereafter             |       |                             | 2,067,750  |   |   |   | 2,019 |   |   | 2,069,769 |   |
| Total cash obligations |       |                             | $          | 2,561,000 |   |   |   | $ | 8,682 |   |   | $ | 2,569,682 |   |

 

**Item 3.**                        Quantitativeand Qualitative Disclosures About Market Risk

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

The aggregate fair marketvalue and aggregate carrying value of our 93⁄4% senior notes was $202.5 millionand $200.0 million as of March 31,2007. The fair market value of our credit facility borrowingsapproximates its carrying value as the credit facility borrowings bear interestat floating rates of interest. As of March 31, 2007, the cost, if terminated, of our interest rate swapagreements was $317,000 and is reflected in our financial statements as othernon-current liabilities. Changes in the fair value of our interest ratederivative financial instruments are either recognized in income or instockholders’ equity as a component of other comprehensive income (loss)depending on whether the derivative financial instruments qualify for hedgeaccounting.

**Item 4.**                        Controlsand Procedures

Under the supervision and with the participation ofInsight Midwest’s management, including its Chief Executive Officer and ChiefFinancial Officer, Insight Midwest evaluated the effectiveness of itsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934) as of March 31,2007. Based upon that evaluation, its Chief Executive Officer and ChiefFinancial Officer concluded that its disclosure controls and procedures wereeffective.

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There has not been any change in Insight Midwest’sinternal control over financial reporting (as defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the quarter ended March 31,2007 that has materially affected, or is reasonably likely to materiallyaffect, its internal control over financial reporting.

Under the supervision and with the participation ofInsight Capital’s management, including its Chief Executive Officer and ChiefFinancial Officer, Insight Capital evaluated the effectiveness of itsdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934) as of March 31,2007. Based upon that evaluation, its Chief Executive Officer and ChiefFinancial Officer concluded that its disclosure controls and procedures wereeffective.

There has not been anychange in Insight Capital’s internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under theExchange Act) during the quarter ended March 31, 2007 that has materiallyaffected, or is reasonably likely to materially affect, its internal controlover financial reporting.

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**PART II. OTHERINFORMATION**

**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, 2006.

**Item6. Exhibits**

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

 

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**SIGNATURES**

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

| Date: May 15, 2007 |       | INSIGHT MIDWEST, L.P.                                |
|-------------------------|------------|------------------------------------------------------|
| ** **              | ** ** | By: /s/ JOHN ABBOT                                   |
| ** **              | ** ** | John Abbot                                           |
| ** **              | ** ** | Executive Vice President and Chief Financial Officer |
|                    |       | (Principal Financial Officer)                        |

 

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

| Date: May 15, 2007 |       | INSIGHT CAPITAL, INC.                                |
|-------------------------|------------|------------------------------------------------------|
|                    | ** ** | By: /s/ JOHN ABBOT                                   |
|                    | ** ** | John Abbot                                           |
|                    | ** ** | Executive Vice President and Chief Financial Officer |
|                    |       | (Principal Financial Officer)                        |

 

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