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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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

FOR THE
QUARTERLY PERIOD ENDED MARCH 31, 2006

COMMISSION FILE NUMBER: 000-32647



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KNOLOGY, INC.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                       |  | 58-2424258                          
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
|                                                               | 
|KNOLOGY, INC. 1241 O.G. SKINNER DRIVE WEST POINT, GEORGIA      |  | 31833                               
|(Address of principal executive offices)                       |  | (Zip Code)                          

Registrants telephone number, including area code: (706) 645-8553



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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and lard accelerated filer in Rule 12b-2 of the Exchange Act. (Check One)

Large accelerated filer ̈Accelerated filer ̈Non-accelerated Filer  x

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

As of April 30, 2006, Knology, Inc. had 24,424,466 shares of common stock outstanding.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED MARCH 31, 2006

INDEX



|        |  |                       |  |                                                                                                              |  |     
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|        |  |                       |  |                                                                                                              |  | PAGE
|PART I  |  | FINANCIAL INFORMATION |  |                                                                                                             
|        |  |                       | 
|        |  | ITEM 1                |  | FINANCIAL STATEMENTS                                                                                         |  |     
|        |  |                       |  | Unaudited Condensed Consolidated Balance Sheets as of December 31, 2005 and March 31, 2006                   |  | 3   
|        |  |                       |  | Unaudited Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2006 |  | 4   
|        |  |                       |  | Unaudited Condensed Consolidated Statement of Cash Flows for the three months ended March 31, 2005 and 2006  |  | 5   
|        |  |                       |  | Notes to Unaudited Condensed Consolidated Financial Statements                                               |  | 6   
|        |  | ITEM 2                |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS                        |  | 11  
|        |  | ITEM 3                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |  | 20  
|        |  | ITEM 4                |  | CONTROLS AND PROCEDURES                                                                                      |  | 21  
|        |  |                      
|PART II |  | OTHER INFORMATION     |  |                                                                                                             
|        |  |                       | 
|        |  | ITEM 1                |  | LEGAL PROCEEDINGS                                                                                            |  | 22  
|        |  | ITEM 2                |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                  |  | 22  
|        |  | ITEM 3                |  | DEFAULTS UPON SENIOR SECURITIES                                                                              |  | 22  
|        |  | ITEM 4                |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                          |  | 22  
|        |  | ITEM 5                |  | OTHER INFORMATION                                                                                            |  | 22  
|        |  | ITEM 6                |  | EXHIBITS                                                                                                     |  | 23  
|        |  |                       | 
|        |  |                       |  | SIGNATURES                                                                                                   |  | 24  
|        |  |                       |  | EXHIBIT INDEX                                                                                                |  |     



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##### Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(DOLLARS IN THOUSANDS,
EXCEPT PER SHARE DATA)



|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                                                                                    |  | December 31,2005 |          |   | March 31,2006 |  
|ASSETS                                                                                                                                                                              | 
|CURRENT ASSETS:                                                                                                                                                                     |  |                  |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                                           |  | $                | 12,183   |   |               | $ | 13,617   |  
|Restricted cash                                                                                                                                                                     |  |                  | 3,537    |   |               |   | 2,328    |  
|Accounts receivable, net of allowance for doubtful accounts of $886 and $639 as of December 31, 2005 and March 31, 2006,
respectively                                               |  |                  | 19,283   |   |               |   | 18,044   |  
|Prepaid expenses and other                                                                                                                                                          |  |                  | 1,767    |   |               |   | 1,724    |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total current assets                                                                                                                                                                |  |                  | 36,770   |   |               |   | 35,713   |  
|                                                                                                                                                                                    |  |                 
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                                                  |  |                  | 285,638  |   |               |   | 274,967  |  
|                                                                                                                                                                                    |  |                 
|GOODWILL                                                                                                                                                                            |  |                  | 40,834   |   |               |   | 40,834   |  
|                                                                                                                                                                                    |  |                 
|DEBT ISSUANCE COSTS                                                                                                                                                                 |  |                  | 8,764    |   |               |   | 8,316    |  
|                                                                                                                                                                                    |  |                 
|INTEREST RATE CAP AGREEMENT                                                                                                                                                         |  |                  | 1,537    |   |               |   | 2,264    |  
|                                                                                                                                                                                    |  |                 
|INVESTMENTS                                                                                                                                                                         |  |                  | 1,243    |   |               |   | 1,243    |  
|                                                                                                                                                                                    |  |                 
|INTANGIBLE AND OTHER ASSETS, NET                                                                                                                                                    |  |                  | 748      |   |               |   | 573      |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total assets                                                                                                                                                                        |  | $                | 375,534  |   |               | $ | 363,910  |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                | 
|CURRENT LIABILITIES:                                                                                                                                                                |  |                  |          |   |               |   |          |  
|Current portion of notes payable                                                                                                                                                    |  | $                | 2,241    |   |               | $ | 2,270    |  
|Accounts payable                                                                                                                                                                    |  |                  | 20,010   |   |               |   | 17,864   |  
|Accrued liabilities                                                                                                                                                                 |  |                  | 18,620   |   |               |   | 18,524   |  
|Unearned revenue                                                                                                                                                                    |  |                  | 10,134   |   |               |   | 10,381   |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total current liabilities                                                                                                                                                           |  |                  | 51,005   |   |               |   | 49,039   |  
|                                                                                                                                                                                    |  |                 
|NONCURRENT LIABILITIES:                                                                                                                                                             |  |                  |          |   |               |   |          |  
|Notes payable                                                                                                                                                                       |  |                  | 270,882  |   |               |   | 270,855  |  
|Warrants                                                                                                                                                                            |  |                  | 285      |   |               |   | 507      |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total noncurrent liabilities                                                                                                                                                        |  |                  | 271,167  |   |               |   | 271,362  |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total liabilities                                                                                                                                                                   |  |                  | 322,172  |   |               |   | 320,401  |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|REDEEMABLE CONVERTIBLE PREFERRED STOCK                                                                                                                                              |  |                  | 19,851   |   |               |   | 20,002   |  
|                                                                                                                                                                                    |  |                 
|COMMITMENTS AND CONTINGENCIES (NOTE 7)                                                                                                                                              |  |                  |          |   |               |   |          |  
|                                                                                                                                                                                    |  |                 
|STOCKHOLDERS EQUITY:                                                                                                                                                               |  |                  |          |   |               |   |          |  
|Preferred stock, $.01 par value per share;                                                                                                                                          |  |                  |          |   |               |   |          |  
|199,000,000 shares authorized, 1,985,081 and 2,000,183 sharesissued and outstanding at December 31, 2005 and March 31, 2006,
respectively                                           |  |                  | 0        |   |               |   | 0        |  
|Non-voting common stock, $.01 par value per share; 25,000,000 sharesauthorized, 0 shares issued and outstandingat December 31,
2005 and March 31, 2006                              |  |                  | 0        |   |               |   | 0        |  
|Common stock, $.01 par value per share; 200,000,000 sharesauthorized, 24,153,201 and 24,395,042 shares
issued and outstanding at December 31, 2005 and March 31, 2006, respectively |  |                  | 242      |   |               |   | 244      |  
|Additional paid-in capital                                                                                                                                                          |  |                  | 561,503  |   |               |   | 562,171  |  
|Accumulated deficit                                                                                                                                                                 |  |                  | (528,234 | ) |               |   | (538,908 | )
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total stockholders equity                                                                                                                                                          |  |                  | 33,511   |   |               |   | 23,507   |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                                                          |  | $                | 375,534  |   |               | $ | 363,910  |  
|                                                                                                                                                                                    |  |                  |          |   |               |   |          |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(IN THOUSANDS, EXCEPT
SHARE AND PER SHARE DATA)



|                                                                                 |  |                              |            |   |      |   |            |  
|-------------------------------------------------------------------------------- |  | ---------------------------- | ---------- | - | ---- | - | ---------- | -
|                                                                                 |  | Three Months Ended March 31, |           
|                                                                                 |  | 2005                         |            |   | 2006 |  
|OPERATING REVENUES:                                                              |  |                              |            |   |      |   |            |  
|Video                                                                            |  | $                            | 24,736     |   |      | $ | 27,696     |  
|Voice                                                                            |  |                              | 18,905     |   |      |   | 20,440     |  
|Data services and other                                                          |  |                              | 11,389     |   |      |   | 14,563     |  
|                                                                                 |  |                              |            |   |      |   |            |  
|Total operating revenues                                                         |  |                              | 55,030     |   |      |   | 62,699     |  
|                                                                                 |  |                              |            |   |      |   |            |  
|                                                                                 |  |                             
|OPERATING EXPENSES:                                                              |  |                              |            |   |      |   |            |  
|Costs of services (excluding depreciation and amortization)                      |  |                              | 16,112     |   |      |   | 17,511     |  
|Selling, general and administrative expenses                                     |  |                              | 29,703     |   |      |   | 30,433     |  
|Depreciation and amortization                                                    |  |                              | 18,640     |   |      |   | 17,384     |  
|                                                                                 |  |                              |            |   |      |   |            |  
|Total operating expenses                                                         |  |                              | 64,455     |   |      |   | 65,328     |  
|                                                                                 |  |                              |            |   |      |   |            |  
|OPERATING LOSS                                                                   |  |                              | (9,425     | ) |      |   | (2,629     | )
|                                                                                 |  |                              |            |   |      |   |            |  
|OTHER INCOME (EXPENSE):                                                          |  |                              |            |   |      |   |            |  
|Interest income                                                                  |  |                              | 203        |   |      |   | 88         |  
|Interest expense                                                                 |  |                              | (7,843     | ) |      |   | (8,618     | )
|Gain on interest rate cap agreement                                              |  |                              | 0          |   |      |   | 727        |  
|Gain (loss) on adjustment of warrants to market                                  |  |                              | 139        |   |      |   | (222       | )
|Other income (expense), net                                                      |  |                              | 3          |   |      |   | (20        | )
|                                                                                 |  |                              |            |   |      |   |            |  
|Total other expense                                                              |  |                              | (7,498     | ) |      |   | (8,045     | )
|                                                                                 |  |                              |            |   |      |   |            |  
|LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUEDOPERATIONS                    |  |                              | (16,923    | ) |      |   | (10,674    | )
|INCOME FROM DISCONTINUED OPERATIONS                                              |  |                              | 45         |   |      |   | 0          |  
|                                                                                 |  |                              |            |   |      |   |            |  
|NET LOSS                                                                         |  |                              | (16,878    | ) |      |   | (10,674    | )
|PREFERRED STOCK DIVIDENDS                                                        |  |                              | 0          |   |      |   | (391       | )
|                                                                                 |  |                              |            |   |      |   |            |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                     |  | $                            | (16,878    | ) |      | $ | (11,065    | )
|                                                                                 |  |                              |            |   |      |   |            |  
|LOSS FROM CONTINUING OPERATIONS PER SHAREATTRIBUTABLE TO COMMON STOCKHOLDERS     |  | $                            | (0.71      | ) |      | $ | (0.46      | )
|INCOME FROM DISCONTINUED OPERATIONS PER SHAREATTRIBUTABLE TO COMMON STOCKHOLDERS |  |                              | 0.00       |   |      |   | 0.00       |  
|                                                                                 |  |                              |            |   |      |   |            |  
|BASIC AND DILUTED NET LOSS PER SHAREATTRIBUTABLE TO COMMON STOCKHOLDERS          |  | $                            | (0.71      | ) |      | $ | (0.46      | )
|                                                                                 |  |                              |            |   |      |   |            |  
|BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OFCOMMON SHARES OUTSTANDING            |  |                              | 23,697,787 |   |      |   | 24,295,867 |  
|                                                                                 |  |                              |            |   |      |   |            |  

See notes to condensed consolidated financial statements.



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KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)



|                                                                               |  |                              |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | ---------------------------- | ------- | - | ---- | - | ------- | -
|                                                                               |  | Three Months Ended March 31, |        
|                                                                               |  | 2005                         |         |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                          |  |                              |         |   |      |   |         |  
|Net loss                                                                       |  | $                            | (16,878 | ) |      | $ | (10,674 | )
|Adjustments to reconcile net loss to net cashprovided by operating activities: |  |                              |         |   |      |   |         |  
|Depreciation and amortization                                                  |  |                              | 18,640  |   |      |   | 17,384  |  
|Non-cash stock option compensation                                             |  |                              | 326     |   |      |   | 792     |  
|Accretion of second lien term loan                                             |  |                              | 0       |   |      |   | 165     |  
|Non-cash bank loan interest expense                                            |  |                              | 0       |   |      |   | 831     |  
|Gain on interest rate cap agreement                                            |  |                              | 0       |   |      |   | (727    | )
|Provision for bad debt                                                         |  |                              | 725     |   |      |   | 779     |  
|Gain on disposition of assets                                                  |  |                              | 0       |   |      |   | 22      |  
|(Gain) loss on adjustment of warrants to market                                |  |                              | (139    | ) |      |   | 222     |  
|Changes in operating assets and liabilities:                                   |  |                              |         |   |      |   |         |  
|Accounts receivable                                                            |  |                              | 424     |   |      |   | 461     |  
|Prepaid expenses and other                                                     |  |                              | (167    | ) |      |   | 138     |  
|Accounts payable                                                               |  |                              | (1,498  | ) |      |   | (2,146  | )
|Accrued liabilities                                                            |  |                              | 8,207   |   |      |   | (96     | )
|Unearned revenue                                                               |  |                              | 823     |   |      |   | 247     |  
|                                                                               |  |                              |         |   |      |   |         |  
|Total adjustments                                                              |  |                              | 27,341  |   |      |   | 18,072  |  
|                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities from continuing operations           |  |                              | 10,463  |   |      |   | 7,398   |  
|                                                                               |  |                              |         |   |      |   |         |  
|Net cash used in operating activities from discontinued operations             |  |                              | (45     | ) |      |   | 0       |  
|                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by operating activities                                      |  |                              | 10,418  |   |      |   | 7,398   |  
|                                                                               |  |                              |         |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                          |  |                              |         |   |      |   |         |  
|Capital expenditures                                                           |  |                              | (8,805  | ) |      |   | (6,663  | )
|Purchase of short term investments                                             |  |                              | (4,000  | ) |      |   | 0       |  
|Proceeds from sale of short term investments                                   |  |                              | 16,625  |   |      |   | 0       |  
|Franchise and other intangible expenditures                                    |  |                              | (43     | ) |      |   | (5      | )
|Proceeds from sale of property                                                 |  |                              | 17      |   |      |   | 27      |  
|Cash returned as security                                                      |  |                              | 340     |   |      |   | 1,209   |  
|                                                                               |  |                              |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                            |  |                              | 4,134   |   |      |   | (5,432  | )
|                                                                               |  |                              |         |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                          |  |                              |         |   |      |   |         |  
|Principal payments on debt and short-term borrowings                           |  |                              | (24     | ) |      |   | (551    | )
|Expenditures related to issuance of debt                                       |  |                              | 0       |   |      |   | (9      | )
|Stock options exercised                                                        |  |                              | 0       |   |      |   | 28      |  
|                                                                               |  |                              |         |   |      |   |         |  
|Net cash used in financing activities                                          |  |                              | (24     | ) |      |   | (532    | )
|                                                                               |  |                              |         |   |      |   |         |  
|NET INCREASE IN CASH AND CASH EQUIVALENTS                                      |  |                              | 14,528  |   |      |   | 1,434   |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 |  |                              | 6,082   |   |      |   | 12,183  |  
|                                                                               |  |                              |         |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                       |  | $                            | 20,610  |   |      | $ | 13,617  |  
|                                                                               |  |                              |         |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                             |  |                              |         |   |      |   |         |  
|Cash paid during the year for interest                                         |  | $                            | 541     |   |      | $ | 7,507   |  
|                                                                               |  |                              |         |   |      |   |         |  
|Non-cash financing activities: Debt acquired in capital lease transactions     |  | $                            | 172     |   |      | $ | 14      |  
|                                                                               |  |                              |         |   |      |   |         |  
|Preferred stock dividend paid in kind                                          |  | $                            | 0       |   |      | $ | 391     |  
|                                                                               |  |                              |         |   |      |   |         |  

See notes to condensed consolidated financial statements



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KNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Three Months Ended MARCH 31, 2006

(UNAUDITED)

(DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)

1. ORGANIZATION AND NATURE OF BUSINESS

Knology, Inc. and its
subsidiaries, including its predecessors, (Knology or the Company) is a publicly traded company incorporated under the laws of the State of Delaware in September 1998.

Knology and its subsidiaries own and operate an advanced interactive broadband network and provide residential and business customers broadband communications services,
including analog and digital cable television, local and long-distance telephone, high-speed Internet access, and broadband carrier services to various markets in the southeastern United States.

Our telephone operations group, consisting of Interstate Telephone Company, Globe Telecommunications, Inc., ITC Globe, Inc., and Valley Telephone Co., LLC (our
Telephone Operations Group) is wholly owned and provides a full line of local telephone and related services and broadband services. Certain of the Telephone Operations Group subsidiaries are subject to regulation by state public service
commissions of applicable states for intrastate telecommunications services. For applicable interstate matters related to telephone service, certain Telephone Operations Group subsidiaries are subject to regulation by the Federal Communications
Commission.

2. BASIS OF PRESENTATION

The accompanying
unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted (GAAP) in the United States for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all
adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. These
financial statements should be read in conjunction with the consolidated financial statements and notes thereto, together with managements discussion and analysis of financial condition and results of operations contained in the Companys
Annual Report on Form 10-K for the year ended December 31, 2005.

The preparation of financial statements in conformity with GAAP requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2006, or any other
interim period.

In our Consolidated Statement of Cash Flows for the three months ended March 31, 2006, we changed the classification of changes in
restricted cash balances to present such changes as an investing activity. We previously presented such changes as financing activity. In the accompanying Consolidated Statements of Cash Flows for the three months ended March 31, 2005, we
reclassified changes in restricted cash balances to be consistent with our 2006 presentation, which resulted in a $340 increase in investing cash flows and a corresponding decrease in financing cash flows from the amounts previously reported.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. On an on-going basis,
the Company evaluates its estimates, including those related to collectability of accounts receivable, valuation of inventories and investments, recoverability of goodwill and intangible assets, income taxes and contingencies. The Company bases its
estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. These changes in estimates are recognized in the period they are realized.

RECENT ACCOUNTING PRONOUNCEMENTS

Effective January 1, 2006 the
Company adopted Statement of Financial Accounting Standard No. 123R (SFAS No. 123R) Share-Based Payment, transitioning to the modified prospective approach. The Financial Accounting Standards Board
(FASB) issued SFAS No. 123R, in December 2004, revising SFAS No. 123, Accounting for Stock-Based Compensation and superseding Accounting Principles Board Opinion No. 25 (APB No. 25)
Accounting for Stock Issued to Employees. SFAS No. 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values
at grant date, or the date of later modification, over the requisite service period. In addition, SFAS No. 123R requires unrecognized cost related to options vesting after the date of initial adoption to be recognized in the financial
statements over the remaining requisite service period. Using the modified prospective approach, requires the amount of compensation cost recognized include: (i) compensation cost for all share-based payments granted prior to, but not yet
vested as of January 1, 2006,



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##### Table of Contents

based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 and
(ii) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant. The Company had elected early adoption, in December 2002, of the recognition provisions of SFAS No. 123 and reported the
change in accounting principle using the prospective method in accordance with SFAS No. 148. As a result of the early adoption of the fair value recognition provisions of SFAS No. 123, effective January 1, 2002, the Companys
adoption of SFAS No. 123R as of January 1, 2006 did not have a material impact on its financial statements. The Company recorded $792 and $326 of non-cash stock option compensation expense for the three months ended March 31, 2006 and
2005, respectively. On January 26, 2006, the Company issued 210,990 shares of restricted common stock to certain employees under the 2002 Long Term Incentive Plan. These restricted common shares vested 50% upon issuance with the remaining
shares vesting 25% on each of the anniversary dates of January 2007 and 2008. The Company recorded non-cash compensation expense of $423 on these shares, which is included in the $792 non-cash compensation expense for the 2006 quarter, based on
the fair value of the stock as of January 26, 2006, and will record additional compensation expense over the remaining vesting period.

In February
2006, the FASB issued SFAS No. 155, Accounting for Certain Hybrid Financial Instruments-an Amendment of SFAS No. 133-Accounting for Derivative Instruments and Hedging Activities and SFAS No. 140-Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities (SFAS No. 155). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation, to be accounted
for as a whole on a fair value basis at the holders election. SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired
or issued in fiscal years beginning after September 15, 2006. The Company does not expect that the adoption of SFAS No. 155 will have a material impact on its results of operations or financial position.

In March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets-an Amendment of SFAS No. 140 (SFAS
No. 156). SFAS No. 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective
for all transactions in fiscal years beginning after September 15, 2006. The Company does not expect that the adoption of SFAS No. 156 will have a material impact on its results of operations or financial position.

4. CASH AND CASH EQUIVALENTS

Cash and cash equivalents are highly
liquid investments with a maturity of three months or less at the date of purchase and consist of time deposits, investment in money market funds with commercial banks and financial institutions, commercial paper and high-quality corporate and
municipal bonds.

As of March 31, 2006, the Company has $2,328 of cash that is restricted in use. Of this amount, $508 is in escrow in connection with
the sale of discontinued operations. Also, the Company has pledged $1,820 of cash as collateral for amounts potentially payable under certain insurance, lease and surety bond agreements.

5. GOODWILL AND INTANGIBLE ASSETS

The Company performs a goodwill impairment test in accordance with SFAS
No. 142, Goodwill and Other Intangible Assets, annually on January 1. There was no impairment identified as a result of the January 1, 2006 impairment test.

Intangible assets as of December 31, 2005 and March 31, 2006, respectively, were as follows:



|                                                                  |  |                  |        |               |   |                            |  |     
|----------------------------------------------------------------- |  | ---------------- | ------ | ------------- | - | -------------------------- |  | ----
|                                                                  |  | December 31,2005 |        | March 31,2006 |   | AmortizationPeriod (Years)
|Customer base                                                     |  | $                | 460    |               | $ | 460                        |  | 3   
|Other                                                             |  |                  | 632    |               |   | 637                        |  | 1-15
|                                                                  |  |                  |        |               |   |                            |  |     
|Gross carrying value of intangible assets subject to amortization |  |                  | 1,092  |               |   | 1,097                      |  |     
|Less accumulated amortization                                     |  |                  | 867    |               |   | 951                        |  |     
|                                                                  |  |                  |        |               |   |                            |  |     
|Net carrying value of intangible assets subject to amortization   |  | $                | 225    |               | $ | 146                        |  |     
|                                                                  |  |                  |        |               |   |                            |  |     
|Goodwill                                                          |  | $                | 40,834 |               | $ | 40,834                     |  |     
|                                                                  |  |                  |        |               |   |                            |  |     

Amortization expense related to intangible assets was $90 and $84 for the three months ended March 31, 2005
and 2006, respectively.

6. DEBT

On June 29,
2005, the Company entered into a first lien credit agreement and second lien credit agreement providing the Company with aggregate cash proceeds of $280,000. Credit Suisse acted as administrative agent and sole lead arranger. These proceeds,
together with cash on hand, were used to repay all amounts outstanding under our credit facilities with Wachovia Bank, National Association and Cobank, ACB and to redeem our 12% senior notes due 2009, which were redeemed on July 29, 2005. The
First Lien Credit Agreement also provides a five year senior secured revolving loan and letter of credit facility up to $25,000, of which no amount was outstanding as of March 31, 2006. The second lien was sold at a discount of 4% for $95
million, which accretes up to a face amount of $99 million on June 29, 2011.



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In 2005, we entered into an interest rate cap agreement on a notional amount of $280,000 to cap our adjustable rate debt
at 5%, mitigating interest rate risk on its first and second lien term loans. The cap agreement has a fair value of $2,264 as of March 31, 2006, resulting in a gain of $727, which was recorded as a separate line item in other income (expense).
Changes in fair value will continue to be recorded in earnings since the cap rate agreement was not designated as a hedge under SFAS No. 133 Accounting for Derivative Instruments and Hedging Activities.

Long-term debt at December 31, 2005 and March 31, 2006 consists of the following:



|                                                                                                                                                                                                                 |  |                  |         |               |   |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | ------------- | - | -------
|                                                                                                                                                                                                                 |  | December 31,2005 |         | March 31,2006
|First Lien term loan, at a rate of LIBOR plus 5.5%, with 1% annual principal amortization, interest payable quarterly with final principal and any unpaid interest due June 29,
2010.                            |  | $                | 173,675 |               | $ | 173,213
|                                                                                                                                                                                                                 |  |                 
|Second Lien term loan, with a face amount of $99,000, at a rate of LIBOR plus 10% (8.5% cash and 1.5% PIK, $769 for 2005), interest payable quarterly, with principal and any unpaid interest due
June 29, 2011. |  |                  | 96,100  |               |   | 96,639 
|                                                                                                                                                                                                                 |  |                 
|Capitalized lease obligation, at rates between 7% and 8%, with monthly principal and interest payments through December 2012.                                                                                    |  |                  | 3,348   |               |   | 3,273  
|                                                                                                                                                                                                                 |  |                  |         |               |   |        
|                                                                                                                                                                                                                 |  |                  | 273,123 |               |   | 273,125
|                                                                                                                                                                                                                 |  |                 
|Less current maturities                                                                                                                                                                                          |  |                  | 2,241   |               |   | 2,270  
|                                                                                                                                                                                                                 |  |                  |         |               |   |        
|                                                                                                                                                                                                                 |  | $                | 270,882 |               | $ | 270,855
|                                                                                                                                                                                                                 |  |                  |         |               |   |        

Both credit facilities are guaranteed by all of our subsidiaries. The credit facilities are also secured by first
and second liens on all of our assets and the assets of our guarantor subsidiaries. The parent company has no independent assets or operations, the guarantee are full and unconditional and joint and several and any subsidiaries of the parent company
other than the subsidiary guarantors are minor.

The credit agreements both contain customary representations and warranties and various affirmative and
negative covenants, including:



| |  |  | limitations on the incurrence of additional debt;
| | - |  | -------------------------------------------------



| |  |  | limitations on the incurrence of liens;
| | - |  | ---------------------------------------



| |  |  | restrictions on investments;
| | - |  | ----------------------------



| |  |  | restrictions on the sale of assets;
| | - |  | -----------------------------------



| |  |  | restrictions on the payment of cash dividends on and the redemption or repurchase of capital stock;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | mandatory prepayment of amounts outstanding under the first lien facilities or second lien facility, as applicable, with excess cash flow, proceeds from asset sales, proceeds from
the issuance of debt obligations, proceeds from any equity offerings, and proceeds from casualty losses;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restrictions on mergers and acquisitions, sale/leaseback transactions and fundamental changes in the nature of our business;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------



| |  |  | limitations on capital expenditures; and
| | - |  | ----------------------------------------



| |  |  | maintenance of minimum ratios of first lien debt to EBITDA (as defined in the credit agreements), total debt to EBITDA and EBITDA to cash interest.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------

The credit agreements also include customary events of default, including but not limited to:



| |  |  | nonpayment of principal, interest or other fees or amounts;
| | - |  | -----------------------------------------------------------



8



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| |  |  | incorrectness of representations and warranties in any material respect;
| | - |  | ------------------------------------------------------------------------



| |  |  | violations of covenants;
| | - |  | ------------------------



| |  |  | cross defaults and cross acceleration;
| | - |  | --------------------------------------



| |  |  | bankruptcy;
| | - |  | -----------



| |  |  | material judgments;
| | - |  | -------------------



| |  |  | ERISA events;
| | - |  | -------------



| |  |  | actual or asserted invalidity of provisions of or liens created under guarantees or security documents;
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | change of control;
| | - |  | ------------------



| |  |  | material violations of environmental laws;
| | - |  | ------------------------------------------



| |  |  | defaults under material contractual obligations; and
| | - |  | ----------------------------------------------------



| |  |  | the failure to maintain our licenses and franchises if such failure would have a material adverse effect.
| | - |  | ---------------------------------------------------------------------------------------------------------

As of March 31, 2006, the Company was in compliance with all of its debt covenants.

The Company had outstanding warrants with a fair value of $507 at March 31, 2006. Knology adjusts the carrying value of the warrants based on the closing price of the Companys common stock at the end of
each reporting period. For the three month ended March 31, 2006 the Company recorded a loss of $222 as a separate line item in other income (expense).

7. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

We are subject to litigation in the normal course of our business. However, in our opinion, there is no legal proceeding pending against us which would have a material adverse effect on our financial position, results
of operations or liquidity. We are also a party to regulatory proceedings affecting the segments of the communications industry generally in which we engage in business.

8. DISPOSAL OF DISCONTINUED OPERATIONS

On September 12, 2005, the Company sold its cable assets in Cerritos,
California to WaveDivision Holdings, LLC for $10,000 in cash, subject to customary closing adjustments. At closing, $1,000 of cash proceeds was placed in escrow, of which $500 was paid out March 20, 2006 and the remaining $500 is expected to be
paid out September 12, 2006.

9. PREFERRED STOCK

On May 4, 2005, the Company entered into a Series AA Preferred Stock Purchase Agreement with certain existing and new investors. On May 26, 2005, the Company sold 920,000 shares of a newly authorized Series AA Convertible
Preferred Stock, par value $0.01 per share (the Preferred Stock), at a price of $10 per share or $920,000 in the aggregate, net of transaction costs. Dividends accrue daily on the Preferred Stock at an 8% annual rate. On March 31,
2006, the Company issued 39,090 shares of Preferred Stock for a total of $390,900 as payment for dividends accrued during the first quarter. The shares of the Preferred Stock are convertible into shares of the Common Stock at any time at the option
of the holder and automatically upon the earlier of (1) the date on which the volume of the weighted average sales price of the Common Stock has exceeded $8.00 per share for 20 consecutive trading days, and (2) the election of a majority
of the outstanding Preferred Stock. As of March 31, 2006, shareholders had converted 24,018 shares of Preferred Stock into 120,090 shares of Common Stock. Each share of the Preferred Stock is convertible into a number of shares of Common Stock
equal to the quotient of the Liquidation Value of the Preferred Stock divided by $2.00, subject to proportional anti-dilution adjustments for stock dividends, stock splits and similar transactions affecting the Common Stock as well as
institutional



9



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weighted average adjustments for issuances of Common Stock and Common Stock equivalents. The Company has the right
to redeem the outstanding Preferred Stock, in whole or in part, on one or more dates fixed by Knology occurring on or after December 31, 2011 at a redemption price equal to then-current Liquidation Value. In addition, the Company is required to
offer to redeem all of the outstanding shares of Preferred Stock on the earlier of December 31, 2011 or a change of control of the Company, as such term is defined in the certificate of designations for the Preferred Stock. The
Companys Preferred Stock is not classified as a liability since the redemption is contingent upon the holders not exercising its option to convert into a fixed number of shares, five shares of common for each share of preferred. The
Company follows the guidance in Accounting Series Release (ASR) 268, Presentation in Financial Statements of Redeemable Preferred Stocks. ASR 268 highlights the redemption obligation of the securities and the fact
that amounts attributable to these securities are not part of permanent capital. Accordingly, it has classified its preferred shares in the accompanying consolidated balance sheet between liabilities and permanent equity in the caption
Redeemable Convertible Preferred Stock.



10



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ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE MANAGEMENTS
DISCUSSION AND ANALYSIS AND OTHER PORTIONS OF THIS QUARTERLY REPORT INCLUDE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE FEDERAL SECURITIES LAWS, INCLUDING THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995, THAT ARE SUBJECT TO
FUTURE EVENTS, RISKS AND UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED OR IMPLIED. IMPORTANT FACTORS THAT EITHER INDIVIDUALLY OR IN THE AGGREGATE COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
EXPRESSED INCLUDE, WITHOUT LIMITATION, (1) THAT WE WILL NOT RETAIN OR GROW OUR CUSTOMER BASE, (2) THAT OUR SUPPLIERS AND CUSTOMERS MAY REFUSE TO CONTINUE DOING BUSINESS WITH US, (3) THAT WE WILL FAIL TO BE COMPETITIVE WITH EXISTING
AND NEW COMPETITORS, (4) THAT WE WILL NOT ADEQUATELY RESPOND TO TECHNOLOGICAL DEVELOPMENTS THAT IMPACT OUR INDUSTRY AND MARKETS, (5) THAT NEEDED FINANCING WILL NOT BE AVAILABLE TO US IF AND AS NEEDED, (6) THAT WE WILL NOT BE ABLE TO
COMPLETE A REPRICING TRANSACTION FOR OUR FIRST LIEN TERM LOAN OR THAT THE TERMS OF SUCH REPRICING WILL NOT RESULT IN THE COST SAVINGS THAT WE CURRENTLY ANTICIPATE, (7) THAT A SIGNIFICANT CHANGE IN THE GROWTH RATE OF THE OVERALL U.S. ECONOMY
WILL OCCUR SUCH THAT THERE IS A MATERIAL IMPACT ON CONSUMER AND CORPORATE SPENDING, (8) THAT WE WILL NOT BE ABLE TO COMPLETE FUTURE ACQUISITIONS, THAT WE MAY HAVE DIFFICULTIES INTEGRATING ACQUIRED BUSINESSES, OR THAT THE COST OF SUCH
INTEGRATION WILL BE GREATER THAN WE EXPECT, AND (9) THAT SOME OTHER UNFORESEEN DIFFICULTIES OCCUR, AS WELL AS THOSE RISKS SET FORTH IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2005, AND OUR OTHER FILINGS WITH THE SEC.
THIS LIST IS INTENDED TO IDENTIFY ONLY CERTAIN OF THE PRINCIPAL FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE DESCRIBED IN THE FORWARD-LOOKING STATEMENTS INCLUDED HEREIN. FORWARD-LOOKING STATEMENTS RELATING TO EXPECTATIONS
ABOUT FUTURE RESULTS OR EVENTS ARE BASED UPON INFORMATION AVAILABLE TO US AS OF TODAYS DATE, AND WE DO NOT ASSUME ANY OBLIGATION TO UPDATE ANY OF THESE STATEMENTS

For convenience in this quarterly report, Knology, we, us, and the Company refer to Knology, Inc. and our consolidated subsidiaries, taken as a whole.

Overview

We are a fully integrated provider of
video, voice, data and advanced communications services to residential and business customers in nine markets in the southeastern United States. We provide a full suite of video, voice and data services in Huntsville and Montgomery, Alabama; Panama
City and a portion of Pinellas County, Florida; Augusta, Columbus and West Point, Georgia; Charleston, South Carolina; and Knoxville, Tennessee. Our primary business is the delivery of bundled communication services over our own network. In addition
to our bundled package offerings, we sell these services on an unbundled basis.

We have built our business through:



| |  |  | acquisitions of cable systems;
| | - |  | ------------------------------



| |  |  | upgrades of acquired networks to introduce expanded broadband services including bundled video, voice and data services;
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | construction and expansion of our broadband network to offer integrated video, voice and data services; and
| | - |  | -----------------------------------------------------------------------------------------------------------



| |  |  | organic growth of connections through increased penetration of services to new marketable homes and our existing customer base.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------

The following is a discussion of our consolidated financial condition and results of operations for the three months ended March 31, 2006, and
certain factors that are expected to affect our prospective financial condition. The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Form 10-Q.

To date, we have experienced operating losses as a result of the expansion of our service territories and the construction of our network. We expect to
continue to focus on increasing our customer base and expanding our broadband operations. Our ability to generate profits will depend in large part on our ability to increase revenues to offset the costs of construction and operation of our
business.



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Highlights and Outlook

Highlights of the quarter ended March 31, 2006 include the following:



| |  |  | Achieved a net connection gain of 12,754;
| | - |  | -----------------------------------------



| |  |  | Revenue for the three months ended March 31, 2006, increased to $62.7 million, the highest in the companys history; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------



| |  |  | Continued to build on strong growth in our bundled customer base, with approximately 70% of our residential customer base taking one of our bundled offers.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------

Homes Passed and Connections

We report homes
passed as the number of residential and business units, such as single residence homes, apartments and condominium units, passed by our broadband network and listed in our database. Marketable homes passed are homes passed other than those we
believe are covered by exclusive arrangements with other providers of competing services. Because we deliver multiple services to our customers, we report the total number of connections for video, voice and data rather than the total number of
customers. We count each video, voice or data purchase as a separate connection. For example, a single customer who purchases cable television, local telephone and Internet access services would count as three connections. We do not record the
purchase of digital video services by an analog video customer as an additional connection. As we continue to sell bundled services, we expect more of our video customers to purchase voice, data and other enhanced services in addition to video
services. Accordingly, we expect that our number of voice and data connections will grow faster than our video connections and will represent a higher percentage of our total connections in the future.

The following table summarizes the number of marketable homes passed and connections as of March 31, 2005 and 2006.



|                           |  |                 |  |        
|-------------------------- |  | --------------- |  | -------
|                           |  | AS OF MARCH 31,
|                           |  | 2005            |  | 2006   
|Connections:(1)            |  |                 |  |        
|Video(2)                   |  | 172,966         |  | 177,546
|Voice:                     |  |                 |  |        
|On-net                     |  | 133,847         |  | 150,313
|Off-net                    |  | 6,079           |  | 6,268  
|Data                       |  | 93,522          |  | 111,476
|                           |  |                 |  |        
|Total connections          |  | 406,414         |  | 445,603
|                           |  |                 |  |        
|Residential connections    |  | 366,688         |  | 398,524
|Business connections       |  | 39,726          |  | 47,079 
|                           |  |                
|Homes passed(2)            |  | 950,696         |  | 960,034
|Marketable homes passed(2) |  | 742,812         |  | 751,574

---

|(1) | All of our video and data connections are provided over our networks. Our voice connections
consist of both On-net and Off-net connections. On-net refers to lines provided over our networks. It includes 23,611 and 23,139 lines as of March 31, 2005 and 2006, respectively, using traditional copper telephone
lines. Off-net refers to telephone connections provided over telephone lines leased from third parties.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The total number of video connections, total connections, residential connections, business
connections, homes passed and marketable homes passed as of March 31, 2005 excludes the Cerritos, California market which we sold prior to the end of the third quarter of 2005, and treated as discontinued operations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Critical Accounting Policies

Our consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States, which require us to make estimates and assumptions. We believe that, of our significant accounting policies described in Note 2 to
our audited consolidated financial statements included in Item 8 of our Annual Report on Form 10-K, the following may involve a higher degree of judgment and complexity.



12



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Revenue Recognition. We account for the revenue, costs and expense related to residential cable
services (including video, voice, data and other services) as the related services are performed in accordance with SFAS No. 51, Financial Reporting by Cable Television Companies. Installation revenue for residential cable services is
recognized to the extent of direct selling costs incurred. Direct selling costs have exceeded installation revenue in all reported periods. Credit risk is managed by disconnecting services to customers who are delinquent.

All other revenue is accounted for in accordance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition. In accordance with SAB
No. 104, revenue from advertising sales is recognized as the advertising is transmitted over Knologys broadband network. Revenue derived from other sources, including commercial data and other services, is recognized as services are
provided, as persuasive evidence of an arrangement exists, the price to the customer is fixed and determinable and collectability is reasonably assured.

We generate recurring revenues for our broadband offerings of video, voice and data and other services. Revenues generated from these services primarily consists of a fixed monthly fee for access to cable programming,
local phone services and enhanced services and access to the Internet. Additional fees are charged for services including pay-per-view movies, events such as boxing matches and concerts, long distance service and cable modem rental. Revenues are
recognized as services are provided and advance billings or cash payments received in advance of services performed are recorded as unearned revenue.

Allowance for Doubtful Accounts. We use estimates to determine our allowance for bad debts. These estimates are based on historical collection experience, current trends, credit policy and a percentage of our
delinquent customer accounts receivable.

Capitalization of labor and overhead costs. Our business is capital intensive, and a large
portion of the capital we have raised to date has been spent on activities associated with building, extending, upgrading and enhancing our network. As of March 31, 2006 and December 31, 2005, the net carrying amount of our property, plant
and equipment was approximately $275.0 million, 76% of total assets, and $285.6 million, 76% of total assets, respectively. Total capital expenditures for the three months ended March 31, 2006 and 2005 were approximately $6.7 million
and $8.8 million, respectively.

Costs associated with network construction, network enhancements and initial customer installation
are capitalized. Costs capitalized as part of the initial customer installation include materials, direct labor, and certain indirect costs. These indirect costs are associated with the activities of personnel who assist in connecting and activating
the new service and consist of compensation and overhead costs associated with these support functions. The costs of disconnecting service at a customers premise or reconnecting service to a previously installed premise are charged to
operating expense in the period incurred. Costs for repairs and maintenance are charged to operating expense as incurred, while equipment replacement and significant enhancements, including replacement of cable drops from the pole to the premise,
are capitalized.

We make judgments regarding the installation and construction activities to be capitalized. We capitalize direct labor
and certain indirect costs using operational data and estimations of capital activity. We calculate standards for items such as the labor rates, overhead rates and the actual amount of time required to perform a capitalizable activity. Overhead
rates are established based on an estimation of the nature of costs incurred in support of capitalizable activities and a determination of the portion of costs that is directly attributable to capitalizable activities.

Judgment is required to determine the extent to which overhead is incurred as a result of specific capital activities, and therefore should be
capitalized. The primary costs that are included in the determination of the overhead rate are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable
activities, consisting primarily of installation costs, (iii) the cost of support personnel that directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities.

While we believe our existing capitalization policies are reasonable, a significant change in the nature or extent of our system
activities could affect managements judgment about the extent to which we should capitalize direct labor or overhead in the future. We monitor the appropriateness of our capitalization policies, and perform updates to our internal studies on
an ongoing basis to determine whether facts or circumstances warrant a change to our capitalization policies.

Valuation of Long-Lived
and Intangible Assets and Goodwill. We assess the impairment of identifiable long-lived assets and related goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable in accordance with Statement
of Financial Accounting Standards and SFAS No. 144. Factors we consider important and that could trigger an impairment review include the following:



| |  |  | Significant underperformance of our assets relative to expected historical or projected future operating results;
| | - |  | -----------------------------------------------------------------------------------------------------------------



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| |  |  | Significant changes in the manner in which we use our assets or significant changes in our overall business strategy; and
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | Significant negative industry economic trends.
| | - |  | ----------------------------------------------

Significant and Subjective Estimates.The following discussion and analysis of our results of operations and financial condition is based upon our condensed consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States for interim financial information. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and contingent liabilities. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no
need for us to judge the application. We base our judgments on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making estimates about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. See our condensed consolidated financial statements and related notes
thereto included elsewhere in this quarterly report, which contain accounting policies and other disclosures required by accounting principles generally accepted in the United States.

The foregoing list of critical accounting policies in not intended to be a comprehensive list of all of our accounting policies. In many cases, the
accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for us to judge the application. There are also areas in which our judgment in selecting any
available alternative would not produce a materially different result. See our consolidated financial statements and related notes thereto contained in our Annual Report on Form 10-K, which contains accounting policies and other disclosures required
by accounting principles generally accepted in the United States.

Revenues

Our operating revenues are primarily derived from monthly charges for video, voice and Internet data services and other services to residential and
business customers. We provide these services over our network. Our products and services involve different types of charges and in some cases a different method of accounting for or recording revenues. Below is a description of our significant
sources of revenue:



| |  |  | Video revenues Our video revenues consist of fixed monthly fees for expanded basic, premium and digital cable television services, as well as fees from pay-per-view movies,
fees for video-on-demand and events such as boxing matches and concerts that involve a charge for each viewing. Video revenues accounted for approximately 44.2% of our consolidated revenues for the three months ended March 31, 2006, compared to
44.9% for the three months ended March 31, 2005. Video revenues as a percentage of our total revenues have decreased as we continue to bundle more of our customers and grow voice connections in Pinellas County, FL.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voice revenues. Our voice revenues consist primarily of fixed monthly fees for local service and enhanced services, such as call waiting, voice mail and measured and flat
rate long-distance service. Voice revenues accounted for approximately 32.6% of our consolidated revenues for the three months ended March 31, 2006, compared to 34.4% for the three months ended March 31, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data revenues and other revenues.Our data revenues consist primarily of fixed monthly fees for data service and rental of cable modems. Other revenues result principally
from broadband carrier services. These combined revenues accounted for approximately 23.2% of our consolidated revenues for the three months ended March 31, 2006, compared to 20.7% for the three months ended March 31, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Our ability to increase the number of our connections and, as a result, our revenues is directly affected by the level of competition we
face in each of our markets with respect to each of our service offerings:



| |  |  | In providing video services, we currently compete with BellSouth, Bright House, Charter, Comcast, Mediacom and Time Warner. We also compete with satellite television providers such
as DirecTV and Echostar. Our other competitors include broadcast television stations and other satellite television companies. We expect in the future to face additional competition from telephone companies providing video services within their
service areas.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In providing local and long-distance telephone services, we compete with the incumbent local phone company and various long-distance providers in each of our markets. BellSouth and
Verizon are the incumbent local phone companies in our markets. They offer both local and long-distance services in our markets and are
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



14



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##### Table of Contents

| | particularly strong competitors. We also compete with providers of long-distance telephone services, such as AT&T, MCI and Sprint. We also expect an
increase in the deployment of VoIP services and to compete in the near future with providers such as Vonage Holding Company and Comcast.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | In providing data services, we compete with traditional dial-up Internet service providers; incumbent local exchange carriers that provide dial-up and DSL services; providers of
satellite-based Internet access services; cable television companies; and providers of wireless high-speed data services. Providing data services is a rapidly growing business and competition is increasing in each of our markets. Some of our
competitors have competitive advantages such as greater experience, resources, marketing capabilities and stronger name recognition.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Costs and Expenses

Our operating expenses include cost of services, selling, operations and administrative expenses and
depreciation and amortization.

Costs of services includes:



| |  |  | Video cost of services. Video cost of services consists primarily of monthly fees to the National Cable Television Cooperative and other programming providers. Programming
costs are our largest single cost and we expect this trend to continue. Video costs as a percentage of video revenue were approximately 49.4% for the three months ended March 31, 2006, compared to 50.9% for the three months ended March 31,
2005. We have entered into contracts with various entities to provide programming to be aired on our network. We pay a monthly fee for these programming services, generally based on the average number of subscribers to the program, although some
fees are adjusted based on the total number of subscribers to the system and/or the system penetration percentage. Since programming cost is partially based on numbers of subscribers, it will increase as we add more subscribers. It will also
increase as costs per channel increase over time.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voice cost of services. Voice cost of services consists primarily of transport cost and network access fees. The voice cost of services as a percentage of voice revenues was
approximately 16.0% for the three months ended March 31, 2006, compared to 16.5% for the three months ended March 31, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data and other costs of services. Data and other costs of services consist primarily of transport cost and network access fees. The data and other costs of services as a
percentage of data and other revenue were approximately 3.8% for the three months ended March 31, 2006, compared to 3.4% for the three months ended March 31, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Relative to our current product mix, we expect voice and data revenue will become larger percentages of our overall revenue, and potentially will provide
higher gross profits. Based on the anticipated changes in our revenue mix, we expect that our consolidated cost of services as a percentage of our consolidated revenues will decrease.

Selling, operations and administrative expenses include:



| |  |  | Sales and marketing expenses. Sales and marketing expenses include the cost of sales and marketing personnel and advertising and promotional expenses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Network operations and maintenance expenses. Network operations and maintenance expenses include payroll, pole attachment rents and departmental costs incurred for network
design, 24/7 maintenance monitoring and plant maintenance activity.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Service and installation expenses. Service and installation expenses include payroll and departmental costs incurred for customer installation and service technicians.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Customer service expenses. Customer service expenses include payroll and departmental costs incurred for customer service representatives and customer service management,
primarily at our centralized call center.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | General and administrative expenses. General and administrative expenses consist of corporate and subsidiary management and administrative costs.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

Depreciation and amortization expenses include depreciation of our interactive broadband networks and equipment and amortization of costs in excess of
net assets and other intangible assets related to acquisitions.



15



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##### Table of Contents

As our sales and marketing efforts continue and our networks expand, we expect to add customer
connections resulting in increased revenue. We also expect our cost of services and operating expenses to increase as we add connections and grow our business.

Results of Operations

Three months ended March 31, 2006 compared to three months ended March 31, 2005

The following table sets forth financial data as a percentage of operating revenues for the three months ended March 31, 2005 and 2006.



|                                                                               |  |                              |   |  |      |  
|------------------------------------------------------------------------------ |  | ---------------------------- | - |  | ---- | -
|                                                                               |  | Three months ended March 31, |  
|                                                                               |  | 2005                         |   |  | 2006 |  
|Operating revenues:                                                            |  |                              |   |  |      |  
|Video                                                                          |  | 45                           | % |  | 44   | %
|Voice                                                                          |  | 34                           |   |  | 33   |  
|Data                                                                           |  | 21                           |   |  | 23   |  
|                                                                               |  |                              |   |  |      |  
|Total                                                                          |  | 100                          |   |  | 100  |  
|Operating expenses:                                                            |  |                              |   |  |      |  
|Cost of services                                                               |  | 29                           |   |  | 28   |  
|Selling, operating and administrative                                          |  | 54                           |   |  | 48   |  
|Depreciation and amortization                                                  |  | 34                           |   |  | 28   |  
|                                                                               |  |                              |   |  |      |  
|Total                                                                          |  | 117                          |   |  | 104  |  
|                                                                               |  |                              |   |  |      |  
|Operating loss                                                                 |  | (17                          | ) |  | (4   | )
|                                                                               |  |                             
|Interest income                                                                |  | 0                            |   |  | 0    |  
|Interest expense                                                               |  | (14                          | ) |  | (14  | )
|Gain in interest rate cap agreement                                            |  | 0                            |   |  | 1    |  
|Gain (loss) on adjustment of warrants to market agreement                      |  | 0                            |   |  | (0   | )
|Other income (expenses), net                                                   |  | 0                            |   |  | (0   | )
|                                                                               |  |                              |   |  |      |  
|Total other income and (expense)                                               |  | (14                          | ) |  | (13  | )
|                                                                               |  |                              |   |  |      |  
|Loss before income taxes, discontinued operations and preferred stock dividend |  | (31                          | ) |  | (17  | )
|Income tax benefit (provision)                                                 |  | 0                            |   |  | 0    |  
|Income from discontinued operations                                            |  | 0                            |   |  | 0    |  
|Preferred stock dividends                                                      |  | 0                            |   |  | (1   | )
|                                                                               |  |                              |   |  |      |  
|Net loss                                                                       |  | (31                          | ) |  | (18  | )

Revenues. Operating revenues increased 13.9% from $55.0 million for the three months ended
March 31, 2005, to $62.7 million for three months ended March 31, 2006. Operating revenues from video services increased 12.0% from $24.7 million for the three months ended March 31, 2005, to $27.7 million for the same period in 2006.
Operating revenues from voice services increased 8.1% from $18.9 million for the three months ended March 31, 2005, to $20.4 million for the same period in 2006. Operating revenues from data and other services increased 27.9% from $11.4 million
for the three months ended March 31, 2005, to $14.6 million for the same period in 2006.

The increased revenues are due primarily to
an increase in the number of connections, from 406,414 as of March 31, 2005, to 445,603 as of March 31, 2006. The additional connections resulted primarily from:



| |  |  | Growth in our bundled customers;
| | - |  | --------------------------------



| |  |  | Reduction in the churn as a greater portion of our customer base is bundled;
| | - |  | ----------------------------------------------------------------------------



| |  |  | Voice service offerings rolled out to approximately 60% of the marketable homes passed in Pinellas County, Florida;
| | - |  | -------------------------------------------------------------------------------------------------------------------



| |  |  | Strong growth in sales to business customers; and
| | - |  | -------------------------------------------------



| |  |  | Continued penetration in our existing markets.
| | - |  | ----------------------------------------------



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##### Table of Contents

Cost of services. Cost of services increased 8.7% from $16.1 million for the three months ended
March 31, 2005, to $17.5 million for the three months ended March 31, 2006. Cost of services for video services increased 8.7% from $12.6 million for the three months ended March 31, 2005, to $13.7 million for the same period in 2006.
Cost of services for voice services increased 4.3% from $3.1 million for the three months ended March 31, 2005, to $3.3 million for the same period in 2006. Cost of services for data and other services increased 44.1% from $387,000 for the
three months ended March 31, 2005, to $557,000 for the same period in 2006. We expect our cost of services to increase as we add more connections. The increase in video cost of service are primarily due to programming costs increases, which
have been increasing over the last several years on an aggregate basis due to an increase in subscribers and on a per subscriber basis due to an increase in costs per program channel. We expect this trend to continue and may not be able to pass
these higher costs on to customers because of competitive factors, which could adversely affect our cash flow and gross profit. Increases in voice and data costs of services are primarily a result of the additions of leased facilities used to
backhaul our traffic to our switching facilities, the increase in connections and the need for more data capacity.

Gross profit.
Gross profit increased 16.1% from $38.9 million for the three months ended March 31, 2005, to $45.2 million for the three months ended March 31, 2006. Gross profit for video services increased 15.4% from 12.1 million for the three
months ended March 31, 2005, to $14.0 million for the same period in 2006. Gross profit for voice services increased 8.9% from $15.8 million for the three months ended March 31, 2005, to $17.2 million for the same period in 2006. Gross
profit for data and other services increased 27.3% from $11.0 million for the three months ended March 31, 2005, to $14.0 million for the same period in 2006. The increase in gross profit is primarily a result of the changes in revenues and
cost of services as described above.

Selling, general and administrative.Our selling, general and administrative increased 2.5%
from $29.7 million for the three months ended March 31, 2005, to $30.4 for the three months ended March 31, 2006. The increase in our operating costs, included in selling, general and administrative, is consistent with our growth in
connections and customers in 2006, and included increases in personnel cost, pole attachment rents, bad debt expense, cost of billing our customers and general office expenses, that were partially offset by reductions in outside or contract labor
and sales and marketing expenses. Our capital market activities, included in selling, general and administrative, were $62,000 for the three months ended March 31, 2005. Our litigation fees, included in selling, general and administrative, were
$15,000 for the three months ended March 31, 2005. Our non-cash stock option compensation expense, included in selling, general and administrative, increased from $326,000 for the three months ended March 31, 2005, to $792,000 for the
three months ended March 31, 2006.

Depreciation and amortization.Our depreciation and amortization decreased from
$18.6 million for the three months ended March 31, 2005, to $17.4 million for the three months ended March 31, 2006. We expect depreciation and amortization expense to decrease as our overall capital expenditures decrease and
existing long-lived assets become fully depreciated.

Interest income.Interest income was $204,000 for the three months ended
March 31, 2005, compared to $88,000 for the same period in 2006. The decrease in interest income primarily reflects a lower average cash and cash equivalent balance during the three months ended March 31, 2006.

Interest expense.Interest expense increased from $7.8 million for the three months ended March 31, 2005, to $8.6 million for the three
months ended March 31, 2006. The increase in interest expense for 2006 is primarily a result a higher average index rate on our variable rate debt. In 2005, we entered into an interest rate cap agreement, covering the first and second liens, to
cap our adjustable LIBOR rate at 5%, mitigating interest rate risk on the loans.

Gain on interest rate cap agreement.We paid $1.3
million for this cap agreement, which became effective July 29, 2005 and terminates July 29, 2008. The cap agreement had a fair value of $1.5 million as of December 31, 2005, and $2.3 million as of March 31, 2006, resulting in a
derivative gain of $727,000.

Gain (loss) on the adjustment of warrants to market. During the three months ended March 31,
2005, we adjusted the carrying value of the outstanding warrants to purchase our common stock to market value based on the published market per share value of our common stock. The published market per share value of our common stock on
March 31, 2005 was $2.37 resulting in a $139,000 gain on the adjustment of warrants to market value. During the three months ended March 31, 2006, we adjusted the carrying value of the outstanding warrants to purchase our common stock to
market value based on the published market per share value of our common stock. The published market per share value of our common stock on December 31, 2005 was $6.83 resulting in a $222,000 loss on the adjustment of warrants to market.

Other income (expense), net.Other income (expense), net decreased from income of $3,000 for the three months ended March 31,
2005, to an expense of $20,000 for the three months ended March 31, 2006.

Income tax provision.We recorded no income tax
benefit for the three months ended March 31, 2005 and 2006, respectively, as our net operating losses are fully offset by a valuation allowance.



17



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##### Table of Contents

Loss before discontinued operations.We incurred a loss before discontinued operations of
$16.9 million for the three months ended March 31, 2005, compared to a loss before discontinued operations of $10.7 million for the three months ended March 31, 2006.

Income from discontinued operations.Following the guidance of SFAS No. 144 Accounting for the Impairment or Disposal of Long-Lived
Assets, we deemed the Cerritos, California cable system to be a long-lived asset to be disposed of based on our actions taken to sell the property. We recorded income from discontinued operations of $45,000 for the three months ended
March 31, 2005.

Preferred stock dividends.We issued 39,090 additional shares of the Series AA preferred stock in during the
three months ended March 31, 2006, as a stock dividend, and recognized an expense of $391,000 for the three months ended March 31, 2006.

Net loss attributable to common stockholders.We incurred a net loss attributable to common stockholders of $16.9 million and $11.1 million for the three months ended March 31, 2005, and 2006, respectively. We expect
net losses to decrease as our business matures.

Liquidity and Capital Resources

Overview.

In 2005, we entered into first and second lien agreements, as arranged by Credit Suisse,
to repay all amounts outstanding under our previous credit facilities.

The first lien credit agreement provides for a five-year senior
secured $185 million term loan facility, of which $173.2 million is currently outstanding, and a $25 million revolving loan and letter of credit facility of which no funds have been drawn. The first lien term facility bears interest at a LIBOR base
rate plus 5.5%. The unused portion of the first lien revolving facility is subject to an annual fee of between .375% and .75%, depending on usage of the facility. Interest on the first lien facility is payable quarterly. The first lien term facility
amortizes at a rate of 1.0% per annum, payable quarterly, and matures on June 29, 2010. We may prepay amounts outstanding under the first lien term facility prior to maturity, but we must pay a premium if we prepay prior to June 29,
2008, except for prepayments made with the proceeds from the sale of our equity securities.

The second lien credit agreement provides for
a six-year senior secured term loan facility with an aggregate principal amount at maturity of approximately $99 million. On June 29, 2005, we received proceeds of $95 million, of which $96.1 million is currently outstanding. Borrowings under
the second lien term facility bear interest at a LIBOR base rate plus 10.0%. This facility does not amortize and the entire unpaid principal amount is due in full on the maturity date of June 29, 2011. We may not prepay any amount outstanding
prior to June 29, 2008, except for prepayments made with the proceeds from the sale of our equity securities. If we prepay any amounts after June 29, 2008 but prior to June 29, 2011, we are required to pay a premium.

Both credit facilities are guaranteed by all of our subsidiaries. The credit facilities are also secured by first and second liens on all of our assets
and the assets of our guarantor subsidiaries. Both credit agreements contain customary representations, warranties, various affirmative and negative covenants and customary events of default.

As discussed above, the borrowings under our credit facilities bear interest at variable rates and expose us to interest rate risk. If interest rates
increase, our debt service obligations on our variable rate debt would also increase even though the amount borrowed remained the same. We have entered into hedging arrangements to mitigate our risk with respect to our variable rate debt. For the
three months ended March 31, 2006 we recognized a gain on our interest rate cap agreement of $727,000.

We believe there is adequate
liquidity from cash on hand, cash provided from operations and funds available under a $25.0 million revolver to meet our capital spending requirements and to execute our current business plan.

As of March 31, 2006 we are in compliance with all of our debt covenants.

Operating, Investing and Financing Activities.

As of March 31, 2006, we had a net working
capital deficit of $13.3 million, compared to a net working capital deficit of $14.2 million as of December 31, 2005.

Net cash
provided by operating activities from continuing operations totaled $10.5 million and $7.4 million for the three months ended March 31, 2005 and 2006, respectively, and operating activities from discontinued operations used $45,000 for the
three months ended March 31, 2005. The net cash flow activity related to operations consists primarily of changes in operating assets and liabilities and adjustments to net income for non-cash transactions including:



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##### Table of Contents

| |  |  | depreciation and amortization;
| | - |  | ------------------------------



| |  |  | non-cash stock option compensation;
| | - |  | -----------------------------------



| |  |  | accretion of term loan
| | - |  | ----------------------



| |  |  | non-cash bank loan interest expense;
| | - |  | ------------------------------------



| |  |  | non-cash gain on interest rate cap agreement
| | - |  | --------------------------------------------



| |  |  | provision for bad debt;
| | - |  | -----------------------



| |  |  | gain on disposition of assets;
| | - |  | ------------------------------



| |  |  | loss (gain) on adjustment of warrants to market; and
| | - |  | ----------------------------------------------------



| |  |  | income from discontinued operations
| | - |  | -----------------------------------

Net cash provided by
investing activities was $4.1 million for the three months ended March 31, 2005, and investing activities used $5.4 million for the three months ended March 31, 2006. Our investing activities for the three months ended March 31, 2005,
consisted of $8.8 million of capital expenditures, $4.0 million for the purchase of short term investments and $43,000 of organizational and franchise expenditures, partially offset by $16.6 million from the sale of short term investments and
$17,000 of proceeds from the sale of property and $340,000 of cash returned as security. Investing activities for the three months ended March 31, 2006 consisted of $6.7 million of capital expenditures and $5,000 of organizational and franchise
expenditures, partially offset by $1.2 million of cash returned as security and $27,000 of proceeds from the sale of property.

Net cash
used by our financing activities was $24,000 for the three months ended March 31, 2005, and financing activities used $532,000 for the three months ended March 31, 2006. Financing activities for the three months ended March 31, 2005
consisted of $24,000 in principal payments on debt. For the three months ended March 31, 2006, financing activities primarily consisted of $551,000 in principal payment on debt and $9,000 of expenditures relate to the issuance of debt partially
offset by $28,000 from the exercise of stock options.

Capital Expenditures

We spent approximately $6.7 million in capital expenditures during the three months ended March 31, 2006, of which approximately $ 5.0 million
related to related to the purchase of success based capital, or capital directly related to the acquisition of customers, with the remaining capital spent on network, billing, information systems and other capital needs.

We expect to spend approximately $25 million in capital expenditures during 2006. The credit agreements and covenants on our new debt limit the amount of
our capital expenditures on an annual basis.

We do not intend to expand into other markets until the required funding is available. We
estimate the cost of constructing our network and funding initial customer premise equipment in new markets to be approximately $750 to $1,000 per home passed. The actual costs of each new market may vary significantly from this range and will
depend on the number of miles of network to be constructed, the geographic and demographic characteristics of the city, population density, costs associated with the cable franchise in each city, the number of customers in each city, the mix of
services purchased, the cost of customer premise equipment we pay for or finance, utility requirements and other factors.



19



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Recent Accounting Pronouncements

Effective January 1, 2006, we adopted Statement of Financial Accounting Standard No. 123R (SFAS No. 123R) Share-Based Payment, transitioning to the modified prospective approach.
The Financial Accounting Standards Board (FASB) issued SFAS No. 123R, in December 2004, revising SFAS No. 123, Accounting for Stock-Based Compensation and superseding Accounting Principles Board Opinion No. 25
(APB No. 25) Accounting for Stock Issued to Employees. SFAS No. 123R requires the cost of all share-based payments to employees, including grants of employee stock options, to be recognized in the financial
statements based on their fair values at grant date, or the date of later modification, over the requisite service period. In addition, SFAS No. 123R requires unrecognized cost related to options vesting after the date of initial adoption to be
recognized in the financial statements over the remaining requisite service period. Using the modified prospective approach, requires the amount of compensation cost recognized include: (i) compensation cost for all share-based payments granted
prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123 and (ii) compensation cost for all share-based payments granted subsequent to
January 1, 2006, based on the grant. We elected an early adoption, in December 2002, of the recognition provisions of SFAS No. 123 and reported the change in accounting principle using the prospective method in accordance with SFAS
No. 148. As a result of the early adoption of the fair value recognition provisions of SFAS No. 123, effective January 1, 2002, our of SFAS No. 123R, as of January 1, 2006, did not have a material impact on our financial
statements. We recorded $792,000 and $326,000 of non-cash stock option compensation expense for the three months ended March 31, 2006 and 2005, respectively. On January 26, 2006, we issued 210,990 shares of restricted common stock to
certian employees under the 2002 Long Term Incentive Plan. These restricted common shares vested 50% upon issuance with the remaining shares vesting 25% on each of the anniversary dates in January 2007 and 2008. We recorded a non-cash compensation
expense of $423,000 on these shares, which is included in the $792,000 of non-cash compensation expense for the quarter ended March 31, 2006, based on the fair value of the stock as of January 26, 2006, and will record additional
compensation expense over the remaining vesting period.

In February 2006, the FASB issued SFAS No. 155, Accounting for Certain
Hybrid Financial Instruments-an Amendment of SFAS No. 133-Accounting for Derivative Instruments and Hedging Activities and SFAS no. 140-Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
(SFAS No. 155). SFAS No. 155 allows financial instruments that contain an embedded derivative and that otherwise would require bifurcation, to be accounted for as a whole on a fair value basis at the holders election.
SFAS No. 155 also clarifies and amends certain other provisions of SFAS No. 133 and SFAS No. 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. We
do not expect that the adoption of SFAS No. 155 will have a material impact on our results of operations or financial position.

In
March 2006, the FASB issued SFAS No. 156, Accounting for Servicing of Financial Assets-an Amendment of SFAS No. 140 (SFAS No. 156). SFAS No. 156 provides guidance on the accounting for servicing assets and
liabilities when an entity undertakes an obligation to service a financial asset by entering into a servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. We do not expect that
the adoption of SFAS No. 156 will have a material impact on our results of operations or financial position.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk from
changes in interest rates. We manage our exposure to this market risk through our regular operating and financing activities. Derivative instruments, if used, are employed as risk management tools and not for trading purposes.

We have adopted FASB Statement No. 133 (subsequently amended by SFAS Nos. 137 and 138), Accounting for Derivative Instruments and Hedging
Activities (SFAS No. 133). This statement requires that all derivatives be recorded in the balance sheet as either an asset or liability measured at fair value, and that changes in fair value be recognized currently in
earnings unless specific hedge accounting criteria are met. During the third quarter of 2005, we entered into a hedging agreement to cap our adjustable LIBOR rate at 5%, mitigating interest rate risk on the first and second lien term loans. We
did not designate the cap agreement as an accounting hedge under SFAS No. 133, accordingly changes in fair value of the cap agreement are recorded through earnings as derivative gains/(losses) and are classified within interest expense.



20



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##### Table of Contents

The determination of the estimated fair value of our variable-rate debt is subject to the effects of
interest rate risk. The estimated fair value of our variable-rate debt instruments at March 31, 2006 was $286.6 million, compared to a carrying amount of $269.9 million. The estimated fair value of our debt is based on quoted market prices.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.The
Companys management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934, as amended) as of March 31, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of March 31, 2006, the Companys disclosure
controls and procedures are effective.

Changes in Internal Control Over Financial Reporting.There have been no changes in our
internal control over financial reporting that occurred during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



21



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##### Table of Contents

PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

We are subject to other litigation in the normal course of our business.
However, in our opinion, there is no legal proceeding pending against us which would have a material adverse effect on our financial position, results of operations or liquidity. We are also a party to regulatory proceedings affecting the segments
of the communications industry generally in which we engage in business.

ITEM 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K are not the
only risks facing our company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

ITEM 2. Unregistered Sales Of Equity Securities And Use Of Proceeds

None

ITEM 3. Default Upon Senior Securities

None

ITEM 4. Submission Of Matters To A Vote Of Security Holders

None

ITEM 5. Other Information

None



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##### Table of Contents

ITEM 6. Exhibits



|              |  |                                                                                                                                                                                                                                                                                                                                           
|------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNumber |  | Exhibit Description                                                                                                                                                                                                                                                                                                                       
|3.1           |  | Amended and Restated Certificate of Incorporation of Knology, Inc. (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.s Quarterly Report Form 10-Q for the period ended
June 30, 2004).                                                                                                                                    
|              | 
|3.2           |  | Certificate of Designations defining the rights of the Series AA Convertible Preferred Stock (Incorporated herein by reference to Exhibit 3.1 to Knology, Inc.s Current Report on Form
8-K filed on May 27, 2005).                                                                                                                       
|              | 
|3.3           |  | Certificate of Designations of Powers, Preferences, Rights, Qualifications, Limitations and Restrictions of Series X Junior Participating Preferred Stock of Knology, Inc. (Incorporated herein
by reference to Exhibit 3.1 to Knology, Inc.s Current Report on Form 8-K filed July 29, 2005).                                           
|              | 
|3.4           |  | Bylaws of Knology, Inc. (Incorporated herein by reference to Exhibit 3.2 to Knology Inc.s Registration Statement on Form S-1 (File No. 333-89179)).                                                                                                                                                                                      
|              | 
|4.1           |  | Shareholder Protection Rights Agreement, dated as of July 27, 2005, by and between Knology, Inc. and Wachovia Bank, N.A., acting as Rights Agent (which includes as Exhibit A thereto the Form
of Rights Certificate) (Incorporated herein by reference to Exhibit 4.1 to Knology, Inc.s Current Report on Form 8-K filed July 29, 2005).
|              | 
|31.1          |  | Certification of Chief Executive Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                                                                                               
|              | 
|31.2          |  | Certification of Chief Financial Officer of Knology, Inc. pursuant to Securities Exchange Act Rules 13a-14.                                                                                                                                                                                                                               
|              | 
|32.1          |  | Statement of the Chief Executive Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                                                                                                   
|              | 
|32.2          |  | Statement of the Chief Financial Officer of Knology, Inc. pursuant to 18 U.S.C. § 1350.                                                                                                                                                                                                                                                   



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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|             |  |     |  |                                      
|------------ |  | --- |  | -------------------------------------
|             |  |     |  | KNOLOGY, INC.                        
|             |  |    
|May 12, 2006 |  | By: |  | /s/ Rodger L. Johnson                
|             |  |     |  | Rodger L. Johnson                    
|             |  |     |  | President and Chief Executive Officer
|             |  |    
|May 12, 2006 |  | By: |  | /s/ M. Todd Holt                     
|             |  |     |  | M. Todd Holt                         
|             |  |     |  | Chief Financial Officer              



24