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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 SEPTEMBER 30, 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 October 31, 2006, Knology, Inc. had 34,772,184 shares of common stock outstanding.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

QUARTER ENDED SEPTEMBER 30, 2006

INDEX



|        |  |                       |  |                                                                                                                           |  |     
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------------------------------------------- |  | ----
|        |  |                       |  |                                                                                                                           |  | PAGE
|PART I  |  | FINANCIAL INFORMATION |  |                                                                                                                          
|        |  | ITEM 1                |  | FINANCIAL STATEMENTS                                                                                                      |  |     
|        |  |                       |  | Condensed Consolidated Balance Sheets as of December 31, 2005 and Unaudited September 30, 2006                            |  | 3   
|        |  |                       |  | Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2005 and 2006 |  | 4   
|        |  |                       |  | Unaudited Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 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                                     |  | 10  
|        |  |                       | 
|        |  | ITEM 3                |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                                |  | 21  
|        |  |                       | 
|        |  | ITEM 4                |  | CONTROLS AND PROCEDURES                                                                                                   |  | 21  
|        |  |                      
|PART II |  | OTHER INFORMATION     |  |                                                                                                                          
|        |  |                       | 
|        |  | ITEM 1                |  | LEGAL PROCEEDINGS                                                                                                         |  | 23  
|        |  |                       | 
|        |  | ITEM 1A               |  | RISK FACTORS                                                                                                              |  | 23  
|        |  |                       | 
|        |  | ITEM 2                |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                                               |  | 23  
|        |  |                       | 
|        |  | ITEM 3                |  | DEFAULTS UPON SENIOR SECURITIES                                                                                           |  | 23  
|        |  |                       | 
|        |  | ITEM 4                |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                                                       |  | 23  
|        |  |                       | 
|        |  | ITEM 5                |  | OTHER INFORMATION                                                                                                         |  | 23  
|        |  |                       | 
|        |  | ITEM 6                |  | EXHIBITS                                                                                                                  |  | 24  
|        |  |                       |  | SIGNATURES                                                                                                                |  | 25  
|        |  |                       |  | EXHIBIT INDEX                                                                                                             |  |     



2



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##### Table of Contents

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)



|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------------------- | - | -------- | -
|                                                                                                                                                                                         |  | December 31,2005 |          |   | September 30,2006(Unaudited) |  
|ASSETS                                                                                                                                                                                   |  |                  |          |   |                              |   |          |  
|CURRENT ASSETS:                                                                                                                                                                          |  |                  |          |   |                              |   |          |  
|Cash and cash equivalents                                                                                                                                                                |  | $                | 12,183   |   |                              | $ | 10,382   |  
|Restricted cash                                                                                                                                                                          |  |                  | 3,537    |   |                              |   | 1,820    |  
|Accounts receivable, net of allowance for doubtful accounts of $886 and $714 as of December 31, 2005 and September 30, 2006,
respectively                                                |  |                  | 19,283   |   |                              |   | 20,612   |  
|Prepaid expenses and other                                                                                                                                                               |  |                  | 1,767    |   |                              |   | 2,188    |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total current assets                                                                                                                                                                     |  |                  | 36,770   |   |                              |   | 35,002   |  
|                                                                                                                                                                                         |  |                 
|PROPERTY, PLANT AND EQUIPMENT, NET                                                                                                                                                       |  |                  | 285,638  |   |                              |   | 255,934  |  
|                                                                                                                                                                                         |  |                 
|GOODWILL                                                                                                                                                                                 |  |                  | 40,834   |   |                              |   | 40,834   |  
|                                                                                                                                                                                         |  |                 
|DEBT ISSUANCE COSTS, NET                                                                                                                                                                 |  |                  | 8,764    |   |                              |   | 10,611   |  
|                                                                                                                                                                                         |  |                 
|INTEREST RATE CAP AGREEMENT                                                                                                                                                              |  |                  | 1,537    |   |                              |   | 1,687    |  
|                                                                                                                                                                                         |  |                 
|INVESTMENTS                                                                                                                                                                              |  |                  | 1,243    |   |                              |   | 1,243    |  
|                                                                                                                                                                                         |  |                 
|INTANGIBLE AND OTHER ASSETS, NET                                                                                                                                                         |  |                  | 748      |   |                              |   | 1,050    |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total assets                                                                                                                                                                             |  | $                | 375,534  |   |                              | $ | 346,361  |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                     |  |                  |          |   |                              |   |          |  
|CURRENT LIABILITIES:                                                                                                                                                                     |  |                  |          |   |                              |   |          |  
|Current portion of notes payable                                                                                                                                                         |  | $                | 2,241    |   |                              | $ | 2,306    |  
|Accounts payable                                                                                                                                                                         |  |                  | 20,010   |   |                              |   | 20,422   |  
|Accrued liabilities                                                                                                                                                                      |  |                  | 18,620   |   |                              |   | 17,245   |  
|Unearned revenue                                                                                                                                                                         |  |                  | 10,134   |   |                              |   | 10,438   |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total current liabilities                                                                                                                                                                |  |                  | 51,005   |   |                              |   | 50,411   |  
|                                                                                                                                                                                         |  |                 
|NONCURRENT LIABILITIES:                                                                                                                                                                  |  |                  |          |   |                              |   |          |  
|Notes payable                                                                                                                                                                            |  |                  | 270,882  |   |                              |   | 270,797  |  
|Warrants                                                                                                                                                                                 |  |                  | 285      |   |                              |   | 550      |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total noncurrent liabilities                                                                                                                                                             |  |                  | 271,167  |   |                              |   | 271,347  |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total liabilities                                                                                                                                                                        |  |                  | 322,172  |   |                              |   | 321,758  |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|REDEEMABLE CONVERTIBLE PREFERRED STOCK                                                                                                                                                   |  |                  | 19,851   |   |                              |   | 0        |  
|                                                                                                                                                                                         |  |                 
|COMMITMENTS AND CONTINGENCIES (NOTE 7)                                                                                                                                                   |  |                  |          |   |                              |   |          |  
|                                                                                                                                                                                         |  |                 
|STOCKHOLDERS EQUITY:                                                                                                                                                                    |  |                  |          |   |                              |   |          |  
|Preferred stock, $.01 par value per share; 199,000,000 shares authorized, 1,985,081 and 0 shares issued and outstanding at December 31,
2005 and September 30, 2006, respectively        |  |                  | 0        |   |                              |   | 0        |  
|Non-voting common stock, $.01 par value per share; 25,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2005 and
September 30, 2006                             |  |                  | 0        |   |                              |   | 0        |  
|Common stock, $.01 par value per share; 200,000,000 shares authorized, 24,153,201 and 34,758,682 shares issued and outstanding at
December 31, 2005 and September 30, 2006, respectively |  |                  | 242      |   |                              |   | 348      |  
|Additional paid-in capital                                                                                                                                                               |  |                  | 561,503  |   |                              |   | 583,504  |  
|Accumulated deficit                                                                                                                                                                      |  |                  | (528,234 | ) |                              |   | (559,249 | )
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total stockholders equity                                                                                                                                                               |  |                  | 33,511   |   |                              |   | 24,603   |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  
|Total liabilities and stockholders equity                                                                                                                                               |  | $                | 375,534  |   |                              | $ | 346,361  |  
|                                                                                                                                                                                         |  |                  |          |   |                              |   |          |  

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 EndedSeptember 30, |            |   | Nine Months EndedSeptember 30, |  
|                                                                                  |  | 2005                            |            |   | 2006                           |   |            | 2005 |  |   | 2006       |  
|OPERATING REVENUES:                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Video                                                                             |  | $                               | 25,980     |   |                                | $ | 29,067     |      |  | $ | 76,316     |   |  | $ | 85,296     |  
|Voice                                                                             |  |                                 | 19,467     |   |                                |   | 20,426     |      |  |   | 57,767     |   |  |   | 61,446     |  
|Data                                                                              |  |                                 | 12,482     |   |                                |   | 14,862     |      |  |   | 35,421     |   |  |   | 43,065     |  
|Other                                                                             |  |                                 | 687        |   |                                |   | 895        |      |  |   | 1,413      |   |  |   | 2,255      |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating revenues                                                          |  |                                 | 58,616     |   |                                |   | 65,250     |      |  |   | 170,917    |   |  |   | 192,062    |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|OPERATING EXPENSES:                                                               |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Costs of services (excluding depreciation and amortization)                       |  |                                 | 16,578     |   |                                |   | 17,959     |      |  |   | 49,257     |   |  |   | 53,402     |  
|Selling, general and administrative expenses                                      |  |                                 | 29,999     |   |                                |   | 30,437     |      |  |   | 88,989     |   |  |   | 90,954     |  
|Depreciation and amortization                                                     |  |                                 | 18,977     |   |                                |   | 17,316     |      |  |   | 56,273     |   |  |   | 51,165     |  
|Capital markets activity                                                          |  |                                 | 0          |   |                                |   | 105        |      |  |   | 62         |   |  |   | 1,623      |  
|Loss on early extinguishment of debt                                              |  |                                 | 0          |   |                                |   | 0          |      |  |   | 544        |   |  |   | 0          |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total operating expenses                                                          |  |                                 | 65,554     |   |                                |   | 65,817     |      |  |   | 195,125    |   |  |   | 197,144    |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|OPERATING LOSS                                                                    |  |                                 | (6,938     | ) |                                |   | (567       | )    |  |   | (24,208    | ) |  |   | (5,082     | )
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|OTHER INCOME (EXPENSE):                                                           |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Interest income                                                                   |  |                                 | 669        |   |                                |   | 69         |      |  |   | 961        |   |  |   | 258        |  
|Interest expense                                                                  |  |                                 | (10,283    | ) |                                |   | (8,258     | )    |  |   | (26,087    | ) |  |   | (25,925    | )
|(Loss) gain on interest rate cap agreement                                        |  |                                 | 257        |   |                                |   | (1,718     | )    |  |   | 257        |   |  |   | 150        |  
|(Loss) gain on adjustment of warrants to market                                   |  |                                 | (53        | ) |                                |   | (34        | )    |  |   | 127        |   |  |   | (425       | )
|Other income (expense), net                                                       |  |                                 | (129       | ) |                                |   | 13         |      |  |   | 12         |   |  |   | 8          |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|Total other expense                                                               |  |                                 | (9,539     | ) |                                |   | (9,928     | )    |  |   | (24,730    | ) |  |   | (25,934    | )
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS BEFORE DISCONTINUED OPERATIONS                    |  |                                 | (16,477    | ) |                                |   | (10,495    | )    |  |   | (48,938    | ) |  |   | (31,016    | )
|INCOME FROM DISCONTINUED OPERATIONS (includes gain on disposal of $8,511 in 2005) |  |                                 | 8,507      |   |                                |   | 0          |      |  |   | 8,599      |   |  |   | 0          |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|NET LOSS                                                                          |  |                                 | (7,970     | ) |                                |   | (10,495    | )    |  |   | (40,339    | ) |  |   | (31,016    | )
|PREFERRED STOCK DIVIDENDS                                                         |  |                                 | (187       | ) |                                |   | 0          |      |  |   | (258       | ) |  |   | (747       | )
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS                                      |  | $                               | (8,157     | ) |                                | $ | (10,495    | )    |  | $ | (40,597    | ) |  | $ | (31,763    | )
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|LOSS FROM CONTINUING OPERATIONS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS     |  | $                               | (0.70      | ) |                                | $ | (0.30      | )    |  | $ | (2.07      | ) |  | $ | (1.19      | )
|                                                                                  |  |                                 |            |  
|INCOME FROM DISCONTINUED OPERATIONS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS |  |                                 | 0.36       |   |                                |   | 0.00       |      |  |   | 0.36       |   |  |   | 0.00       |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|BASIC AND DILUTED NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS          |  | $                               | (0.34      | ) |                                | $ | (0.30      | )    |  | $ | (1.71      | ) |  | $ | (1.19      | )
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  
|BASIC AND DILUTED WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING            |  |                                 | 23,706,392 |   |                                |   | 34,728,452 |      |  |   | 23,703,028 |   |  |   | 26,641,451 |  
|                                                                                  |  |                                 |            |   |                                |   |            |      |  |   |            |   |  |   |            |  

See notes to condensed consolidated financial statements.



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(DOLLARS IN THOUSANDS)



|                                                                                |  |                                |          |   |      |   |         |  
|------------------------------------------------------------------------------- |  | ------------------------------ | -------- | - | ---- | - | ------- | -
|                                                                                |  | Nine Months EndedSeptember 30, |         
|                                                                                |  | 2005                           |          |   | 2006 |  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                           |  |                                |          |   |      |   |         |  
|Net loss                                                                        |  | $                              | (40,339  | ) |      | $ | (31,015 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                                |          |   |      |   |         |  
|Depreciation and amortization                                                   |  |                                | 56,273   |   |      |   | 51,165  |  
|Non-cash stock option compensation                                              |  |                                | 1,398    |   |      |   | 1,617   |  
|Accretion of second lien term loan                                              |  |                                | 167      |   |      |   | 495     |  
|Non-cash bank loan interest expense                                             |  |                                | 388      |   |      |   | 2,756   |  
|Gain on interest rate cap agreement                                             |  |                                | (257     | ) |      |   | (150    | )
|Provision for bad debt                                                          |  |                                | 2,700    |   |      |   | 2,431   |  
|Income and gain on discontinued operations                                      |  |                                | (8,599   | ) |      |   | 0       |  
|Gain on disposition of assets                                                   |  |                                | (3       | ) |      |   | (2      | )
|(Gain) loss on adjustment of warrants to market                                 |  |                                | (127     | ) |      |   | 425     |  
|Loss on early extinguishment of debt                                            |  |                                | 544      |   |      |   | 0       |  
|Changes in operating assets and liabilities:                                    |  |                                |          |   |      |   |         |  
|Accounts receivable                                                             |  |                                | (2,977   | ) |      |   | (3,762  | )
|Prepaid expenses and other                                                      |  |                                | 165      |   |      |   | (326    | )
|Accounts payable                                                                |  |                                | (6,168   | ) |      |   | 412     |  
|Accrued liabilities                                                             |  |                                | 6,216    |   |      |   | (1,374  | )
|Unearned revenue                                                                |  |                                | 1,256    |   |      |   | 304     |  
|                                                                                |  |                                |          |   |      |   |         |  
|Total adjustments                                                               |  |                                | 50,976   |   |      |   | 53,991  |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash provided by operating activities from continuing operations            |  |                                | 10,637   |   |      |   | 22,976  |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash used in operating activities from discontinued operations              |  |                                | (401     | ) |      |   | 0       |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash provided by operating activities                                       |  |                                | 10,236   |   |      |   | 22,976  |  
|                                                                                |  |                                |          |   |      |   |         |  
|CASH FLOWS FROM INVESTING ACTIVITIES:                                           |  |                                |          |   |      |   |         |  
|Capital expenditures                                                            |  |                                | (21,300  | ) |      |   | (21,754 | )
|Purchase of short term investments                                              |  |                                | (4,000   | ) |      |   | 0       |  
|Proceeds from sale of short term investments                                    |  |                                | 16,625   |   |      |   | 0       |  
|Franchise and other intangible expenditures                                     |  |                                | (245     | ) |      |   | (189    | )
|Proceeds from sale of property                                                  |  |                                | 150      |   |      |   | 101     |  
|Cash returned as security                                                       |  |                                | 3,809    |   |      |   | 1,718   |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash used in investing activities by continuing operations                  |  |                                | (4,961   | ) |      |   | (20,124 | )
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash provided by investing activities from discontinued operations          |  |                                | 9,458    |   |      |   | 0       |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash provided by (used in) operating activities                             |  |                                | 4,497    |   |      |   | (20,124 | )
|                                                                                |  |                                |          |   |      |   |         |  
|CASH FLOWS FROM FINANCING ACTIVITIES:                                           |  |                                |          |   |      |   |         |  
|Principal payments on debt and short-term borrowings                            |  |                                | (285,046 | ) |      |   | (1,669  | )
|Proceeds from issuance of convertible preferred stock                           |  |                                | 9,200    |   |      |   | 0       |  
|Expenditures related to issuance of long term debt                              |  |                                | (9,661   | ) |      |   | (3,464  | )
|Proceeds from long term debt                                                    |  |                                | 280,000  |   |      |   | 0       |  
|Purchase of interest rate cap                                                   |  |                                | (1,270   | ) |      |   | 0       |  
|Proceeds from exercised warrants                                                |  |                                | 2        |   |      |   | 2       |  
|Stock options exercised                                                         |  |                                | 4        |   |      |   | 478     |  
|                                                                                |  |                                |          |   |      |   |         |  
|Net cash used in financing activities                                           |  |                                | (6,771   | ) |      |   | (4,653  | )
|                                                                                |  |                                |          |   |      |   |         |  
|NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                            |  |                                | 7,962    |   |      |   | (1,801  | )
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                  |  |                                | 6,082    |   |      |   | 12,183  |  
|                                                                                |  |                                |          |   |      |   |         |  
|CASH AND CASH EQUIVALENTS AT END OF PERIOD                                      |  | $                              | 14,044   |   |      | $ | 10,382  |  
|                                                                                |  |                                |          |   |      |   |         |  
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                              |  |                                |          |   |      |   |         |  
|Cash paid during the year for interest                                          |  | $                              | 23,225   |   |      | $ | 23,333  |  
|                                                                                |  |                                |          |   |      |   |         |  
|Non-cash financing activities:                                                  |  |                                |          |   |      |   |         |  
|Debt acquired in capital lease transactions                                     |  | $                              | 1,285    |   |      | $ | 14      |  
|                                                                                |  |                                |          |   |      |   |         |  
|Preferred stock dividend paid in kind                                           |  | $                              | 258      |   |      | $ | 747     |  
|                                                                                |  |                                |          |   |      |   |         |  
|Preferred stock conversion to common                                            |  | $                              | 0        |   |      | $ | 19,285  |  
|                                                                                |  |                                |          |   |      |   |         |  

See notes to condensed consolidated financial statements



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##### Table of Contents

KNOLOGY, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of and for the Nine Months Ended SEPTEMBER 30, 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.

The telephone operations group, consisting of Interstate Telephone Company, Globe Telecommunications, Inc., ITC Globe, Inc., and Valley Telephone Co., LLC (the
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.

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. The modified prospective approach requires the amount of compensation cost recognized to 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.
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



6



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##### Table of Contents

financial statements. The Company recorded $1,617 and $1,398 of non-cash stock option compensation expense for the nine
months ended September 30, 2006 and 2005, respectively. On January 26, 2006, the Company issued 210,990 shares of restricted common stock to 12 officers 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 $472 on these shares, which is included in selling, general and administrative
expenses, 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.

In June 2006, the FASB issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109 (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial statements in accordance with SFAS No. 109, and recommends a recognition threshold and measurement characteristic for financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. The differences between a tax position taken in a tax return and amounts recognized in the financial statements may result in an increase in a liability for
income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset or an increase in a deferred tax liability. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim
periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 16, 2006, with early adoption encouraged. The Company does not expect that the adoption of FIN 48 will have a material impact on its results of
operations or financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS
No. 157). SFAS No. 157, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements providing a single definition of fair value, which should
result in increased consistency and comparability in fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The
Company does not expect that the adoption of SFAS No. 157 will have a material impact on its results of operations or financial position.

In
September 2006, the FASB issued SFAS No. 158, Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS
No. 158). SFAS No. 158 improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its
statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This
Statement is effective for financial statements issued for fiscal years beginning after December 16, 2006. The adoption of SFAS No. 158 will not have a material impact on the Companys 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 September 30, 2006, the Company has $1,820 of cash that is restricted in use, all of which the
Company has pledged as collateral for amounts potentially payable under certain insurance 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 September 30, 2006, respectively, were as follows:



|                                                                  |  |                  |        |                   |   |                             |  |     
|----------------------------------------------------------------- |  | ---------------- | ------ | ----------------- | - | --------------------------- |  | ----
|                                                                  |  | December 31,2005 |        | September 30,2006 |   | Amortization Period (Years)
|Customer base                                                     |  | $                | 460    |                   | $ | 460                         |  | 3   
|Other                                                             |  |                  | 632    |                   |   | 858                         |  | 1-15
|                                                                  |  |                  |        |                   |   |                             |  |     
|Gross carrying value of intangible assets subject to amortization |  |                  | 1,092  |                   |   | 1,318                       |  |     
|Less accumulated amortization                                     |  |                  | 867    |                   |   | 695                         |  |     
|                                                                  |  |                  |        |                   |   |                             |  |     
|Net carrying value of intangible assets subject to amortization   |  | $                | 225    |                   | $ | 623                         |  |     
|                                                                  |  |                  |        |                   |   |                             |  |     
|Goodwill                                                          |  | $                | 40,834 |                   | $ | 40,834                      |  |     
|                                                                  |  |                  |        |                   |   |                             |  |     



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##### Table of Contents

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 the Companys credit facilities with Wachovia Bank, National Association and Cobank, ACB and to redeem its 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 September 30, 2006. The second lien was purchased
at a discount of 4% for $95 million, which accretes up to a face amount of $99 million on June 29, 2011.

In 2005, the Company entered into an
interest rate cap agreement with Credit Suisse on a notional amount of $280,000 to cap its variable LIBOR rate at 5%, mitigating interest rate risk on its first and second lien term loans. The cap agreement has a fair value of $1,687 as of
September 30, 2006, resulting in a gain of $150 for the nine months ended September 30, 2006. The changes in the fair value of the cap agreement are recorded as a Gain (loss) on interest rate cap agreement 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.

On June 30, 2006, Amendment No. 1 to the first lien credit agreement became effective. The Amendment reduces the interest rate on the Companys first lien
term loan from LIBOR plus 5.5 percent to LIBOR plus 2.5 percent. The provisions of the first lien credit agreement required a 2% pre-payment premium of $3,455 with the amendment. The decrease in the interest rate will reduce annual interest expense
by approximately $5,000.

Long-term debt at December 31, 2005 and September 30, 2006 consists of the following:



|                                                                                                                                                                                                                                                       |  |                  |         |                   |   |        
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ------- | ----------------- | - | -------
|                                                                                                                                                                                                                                                       |  | December 31,2005 |         | September 30,2006
|First Lien term loan, at a rate of LIBOR plus 2.5%, with $1,850 annual principal amortization, interest payable quarterly with final principal
and any unpaid interest due June 29, 2010.                                                              |  | $                | 173,675 |                   | $ | 172,288
|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, $1,136 for the nine months ended
September 30, 2006), interest payable quarterly, with principal and any unpaid interest due June 29, 2011. |  |                  | 96,100  |                   |   | 97,734 
|Capitalized lease obligation, at rates between 7% and 8%, with monthly principal and interest payments through December 2012.                                                                                                                          |  |                  | 3,348   |                   |   | 3,081  
|                                                                                                                                                                                                                                                       |  |                  |         |                   |   |        
|                                                                                                                                                                                                                                                       |  |                  | 273,123 |                   |   | 273,103
|Less current maturities                                                                                                                                                                                                                                |  |                  | 2,241   |                   |   | 2,306  
|                                                                                                                                                                                                                                                       |  |                  |         |                   |   |        
|                                                                                                                                                                                                                                                       |  | $                | 270,882 |                   | $ | 270,797
|                                                                                                                                                                                                                                                       |  |                  |         |                   |   |        

Both credit facilities are guaranteed by all of the Companys subsidiaries. The credit
facilities are also secured by first and second liens on all of the Companys assets and the assets of its guarantor subsidiaries. The parent company has no independent assets or operations, the guarantees 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 the Companys 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;
| | - |  | -----------------------------------------------------------



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



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



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



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

As of September 30, 2006, the Company was in compliance with all of its debt covenants.

The Company had outstanding
warrants (issued in connection with the 1997 high-yield debt offering) with a fair value of $550 at September 30, 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 nine months ended September 30, 2006, the Company recorded a loss of $425 as a (Loss) gain on adjustment of warrants to market in other (expense) income.

7. COMMITMENTS AND CONTINGENCIES

LEGAL PROCEEDINGS

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

UNUSED LETTERS OF CREDIT

The
Companys unused letters of credit for vendors and suppliers was $317 as of September 30, 2006, which reduces the funds available under the $25,000 five year senior secured revolving loan and letter of credit facility.

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 was 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 $9,200 in the aggregate, net of transaction costs. Dividends accrued daily
on the Preferred Stock at an 8% annual rate. On October 27, 2005, the Company received gross offering proceeds of $10,800 and certain selling stockholders received proceeds of $1,900 for the resale of a portion of their shares issued in
May 2005. The shares of the Preferred Stock were: (i) immediately convertible upon the request of the stockholder of record, (ii) mandatorily convertible at a future date when the common stock is traded at a quoted price of $8.00 or higher
for a certain period of time, and (iii) redeemable beginning December 31, 2011. Each share of the Preferred Stock was 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 weighted average adjustments for issuances of Common Stock
and Common Stock equivalents.

On June 22, 2006, the volume weighted average sales price of the Companys Common Stock exceeded $8.00 for the
20thconsecutive trading day, and the outstanding 1,928,538 shares of the Preferred Stock, each mandatorily
converted into, including accrued dividends, 5.0921 shares of the Companys common stock without any further action by the holders. The Company paid cash in lieu of issuing fractional shares based on the closing price of $8.94.

As of September 30, 2006, the Company had dividend expense of $747 as payment for dividends incurred during the first and second quarter.



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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 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, (7) 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 (8) 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 and nine months ended September 30,
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 September 30, 2006 include the following:



| |  |  | Achieved a net connection gain of 8,391; and
| | - |  | --------------------------------------------



| |  |  | Revenue for the three months ended September 30, 2006, increased to $65.3 million, the highest in the companys history.
| | - |  | ------------------------------------------------------------------------------------------------------------------------

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 September 30, 2005 and 2006.



|                        |  |                     |  |        
|----------------------- |  | ------------------- |  | -------
|                        |  | AS OF SEPTEMBER 30,
|                        |  | 2005                |  | 2006   
|Connections:(1)         |  |                     |  |        
|Video                   |  | 175,294             |  | 178,708
|Voice:                  |  |                     |  |        
|On-net                  |  | 142,161             |  | 154,198
|Off-net                 |  | 6,224               |  | 6,164  
|Data                    |  | 102,555             |  | 119,397
|                        |  |                     |  |        
|Total connections(2)    |  | 426,234             |  | 458,467
|                        |  |                     |  |        
|Residential connections |  | 383,294             |  | 408,995
|Business connections    |  | 42,940              |  | 49,472 
|                        |  |                    
|Homes passed            |  | 955,497             |  | 965,678
|Marketable homes passed |  | 747,776             |  | 755,568

---

|(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 23,192 and 20,973 lines as of September, 2005 and 2006, respectively, using traditional copper telephone lines.
Off-net refers to telephone connections provided over telephone lines leased from third parties.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | YTD 2006 we have added 25,618 net connections. We previously reported 12,754 net connections for the first quarter 2006, which included 1,244 business voice
connections that were not active. The adjusted connection gain for the first quarter is 11,510. This adjustment had no impact on reported financial results.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.

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.



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##### Table of Contents

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 September 30, 2006 and December 31, 2005, the net carrying amount of our property, plant and equipment was approximately $255.9 million, 74% of total assets, and $285.6 million, 76% of total assets, respectively. Total
capital expenditures for the nine months ended September 30, 2006 and 2005 were approximately $21.8 million and $21.3 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | 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 is 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



12



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##### Table of Contents

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 44.5% and 44.4% of our consolidated revenues for the three and nine months ended
September 30, 2006, compared to 44.3% and 44.7% for the three and nine months ended September 30, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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 31.3% and 32.0% of our consolidated revenues for the three and nine months ended September 30, 2006, compared to 33.2% and 33.8% for the three and nine months ended
September 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data revenues. Our data revenues consist primarily of fixed monthly fees for data service and rental of cable modems. Data revenues accounted for approximately 22.8% and
22.4% of our consolidated revenues for the three and nine months ended September 30, 2006, compared to 21.3% and 20.7% for the three and nine months ended September 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other revenues. Other revenues result principally from broadband carrier services. Other revenues accounted for approximately 1.4% and 1.2% of our consolidated revenues for
the three and nine months ended September 30, 2006, compared to 1.2% and 0.8% for the three and nine months ended September 30, 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 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.



13



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##### Table of Contents

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 48.6% and 49.1% for the three and nine months ended September 30, 2006, compared to 49.2% and 50.2% for the
three and nine months ended September 30, 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 15.8% and 15.9% for the three and nine months ended September 30, 2006, compared to 16.6% and 16.4% for the three and nine months ended September 30, 2005.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Data cost of services. Data cost of services consists primarily of transport cost and network access fees. The data cost of services as a percentage of data revenue was
approximately 3.0% and 3.1% for the three and nine months ended September 30, 2006, compared to 4.0% and 3.8% for the three and nine months ended September 30, 2005.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Other cost of services. Other cost of services consists primarily of transport cost and network access fees. The other cost of services as a percentage of other revenue was
approximately 17.2% and 18.2% for the three and nine months ended September 30, 2006, compared to 8.7% and 9.3% for the three and nine months ended September 30, 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 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 cost 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.

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.



14



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##### Table of Contents

Results of Operations

Three months ended September 30, 2006 compared to three months ended September 30, 2005

The following table sets
forth financial data as a percentage of operating revenues for the three months ended September 30, 2005 and 2006.



|                                                               |  |                                 |   |  |      |  
|-------------------------------------------------------------- |  | ------------------------------- | - |  | ---- | -
|                                                               |  | Three months endedSeptember 30, |  
|                                                               |  | 2005                            |   |  | 2006 |  
|Operating revenues:                                            |  |                                 |   |  |      |  
|Video.                                                         |  | 45                              | % |  | 45   | %
|Voice.                                                         |  | 33                              |   |  | 31   |  
|Data                                                           |  | 21                              |   |  | 23   |  
|Other                                                          |  | 1                               |   |  | 1    |  
|                                                               |  |                                 |   |  |      |  
|Total.                                                         |  | 100                             |   |  | 100  |  
|Operating expenses:                                            |  |                                 |   |  |      |  
|Cost of services                                               |  | 28                              |   |  | 28   |  
|Selling, operating and administrative.                         |  | 52                              |   |  | 47   |  
|Depreciation and amortization                                  |  | 32                              |   |  | 26   |  
|Capital market activities                                      |  | 0                               |   |  | 0    |  
|Loss on early extinguishment of debt                           |  | 0                               |   |  | 0    |  
|                                                               |  |                                 |   |  |      |  
|Total.                                                         |  | 112                             |   |  | 101  |  
|                                                               |  |                                 |   |  |      |  
|Operating loss                                                 |  | (12                             | ) |  | (1   | )
|                                                               |  |                                
|Interest income                                                |  | 1                               |   |  | 0    |  
|Interest expense                                               |  | (17                             | ) |  | (13  | )
|Gain (loss) on interest rate cap agreement                     |  | 0                               |   |  | (2   | )
|Gain (loss) on adjustment of warrants to market agreement      |  | 0                               |   |  | (0   | )
|Other income (expenses), net                                   |  | 0                               |   |  | 0    |  
|                                                               |  |                                 |   |  |      |  
|Total other income and (expense)                               |  | (16                             | ) |  | (15  | )
|                                                               |  |                                 |   |  |      |  
|Loss from continuing operations before discontinued operations |  | (28                             | ) |  | (16  | )
|Income from discontinued operations                            |  | 14                              |   |  | 0    |  
|                                                               |  |                                 |   |  |      |  
|Net loss                                                       |  | (14                             | ) |  | (16  | )
|Preferred stock dividends                                      |  | (0                              | ) |  | (0   | )
|                                                               |  |                                 |   |  |      |  
|Net loss attributable to common stockholders                   |  | (14                             | ) |  | (16  | )
|                                                               |  |                                 |   |  |      |  

Revenues. Operating revenues increased 11.3% from $58.6 million for the three months ended
September 30, 2005, to $65.3 million for three months ended September 30, 2006. Operating revenues from video services increased 11.9% from $26.0 million for the three months ended September 30, 2005, to $29.1 million for the same
period in 2006. Operating revenues from voice services increased 4.9% from $19.5 million for the three months ended September 30, 2005, to $20.4 million for the same period in 2006. Operating revenues from data services increased 19.1% from
$12.5 million for the three months ended September 30, 2005, to $14.9 million for the same period in 2006. Operating revenues from other services increased from $687,000 for the three months ended September 30, 2005, to $895,000 for the
same period in 2006.

The increased revenues are due primarily to an increase in the number of connections, from 426,234 as of
September 30, 2005, to 458,467 as of September 30, 2006, and rate increases effective in the first and second quarter of 2006 . The additional connections resulted primarily from:



| |  |  | Continued growth in our bundled customers;
| | - |  | ------------------------------------------



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



| |  |  | Continued strong growth in business sales; and,
| | - |  | -----------------------------------------------



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

Cost of
services. Cost of services increased 8.3% from $16.6 million for the three months ended September 30, 2005, to $18.0 million for the three months ended September 30, 2006. Cost of services for video services increased 10.5% from $12.8
million for the three months ended September 30, 2005, to $14.1 million for the same period in 2006. Cost of services for voice services decreased 0.1%, with $3.1 million for the three months ended September 30, 2005 and 2006. Cost of services
for data services decreased 10.6% from $496,000 for the three months ended September 30, 2005, to $443,000 for the same period in 2006. Cost of services for other services increased from $60,000 for the three months ended September 30,
2005, to $154,000 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 services 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. We expect increases in voice and data costs of services with the additions of leased facilities used to backhaul our traffic to our switching facilities as
connections and data capacity requirements increase.

Gross profit. Gross profit increased 12.5% from $42.0 million for the three
months ended September 30, 2005, to $47.3 million for the three months ended September 30, 2006. Gross profit for video services increased 13.2% from $13.2 million for the three



15



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##### Table of Contents

months ended September 30, 2005, to $14.9 million for the same period in 2006. Gross profit for voice services
increased 5.9% from $16.2 million for the three months ended September 30, 2005, to $17.2 million for the same period in 2006. Gross profit for data services increased 20.3% from $12.0 million for the three months ended September 30, 2005,
to $14.4 million for the same period in 2006. Gross profit for other services increased from $627,000 for the three months ended September 30, 2005, to $741,000 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 1.5% from $30.0 million for the three months ended September 30, 2005, to $30.4 for the three months ended September 30, 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 litigation fees, included in selling, general and administrative, were $20,000 for the three months ended September 30, 2005. Our non-cash stock option
compensation expense, included in selling, general and administrative, decreased from $467,000 for the three months ended September 30, 2005, to $413,000 for the three months ended September 30, 2006.

Depreciation and amortization. Our depreciation and amortization decreased from $19.0 million for the three months ended September 30,
2005, to $17.3 million for the three months ended September 30, 2006. We expect depreciation and amortization expense to decrease as our overall capital expenditures decrease and existing long-lived assets become fully depreciated.

Capital markets activity. We incurred one time charges related to our outstanding debt of $105,000 for the three months ended
September 30, 2006.

Interest income. Interest income was $669,000 for the three months ended September 30, 2005, compared
to $69,000 for the same period in 2006. The decrease in interest income for the three months ended September 30, 2006 compared to the same period in 2005, primarily reflects interest earned on cash held in escrow during the three months ended
September 30, 2005.

Interest expense. Interest expense decreased from $10.0 million for the three months ended
September 30, 2005, to $8.3 million for the three months ended September 30, 2006. The decrease in interest expense for 2006 is primarily a result of the amendment of our first lien term loan reducing the effective interest rate to LIBOR
plus 2.5 percent from LIBOR plus 5.5 percent. 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.

Loss 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 $3.4 million as of June 30, 2006, and $1.7 million as of September 30, 2006, resulting in a derivative loss of $1.7 million.

(Loss) gain on the adjustment of warrants to market. During the three months ended September 30, 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 September 30, 2005 was $2.63 resulting in a $53,000
loss on the adjustment of warrants to market value. During the three months ended September 30, 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 September 30, 2006 was $9.92 resulting in a $34,000 loss on the adjustment of warrants to market.

Other(expense) income, net. Other (expense) income, net increased from an expense of $129,000 for the three months ended September 30, 2005,
to income of $13,000 for the three months ended September 30, 2006.

Income tax provision. We recorded no income tax benefit
for the three months ended September 30, 2005 and 2006, respectively, as our net operating losses are fully offset by a valuation allowance.

Loss from continuing operations before discontinued operations. We incurred a loss from continuing operations before discontinued operations of $16.5 million for the three months ended September 30, 2005, compared to a loss
from continuing operations before discontinued operations of $10.5 million for the three months ended September 30, 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 $8.5 million, including the gain from disposal of the asset, for the three months ended September 30, 2005.

Preferred stock dividends. We issued 18,687 additional shares of the Series AA preferred stock during the three months ended September 30,
2005, as a stock dividend, and recognized an expense of $187,000 for the three months ended September 30, 2005.

Net loss
attributable to common stockholders. We incurred a net loss attributable to common stockholders of $8.2 million and $10.5 million for the three months ended September 30, 2005, and 2006, respectively. We expect net losses to
decrease as our business matures.



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##### Table of Contents

Nine months ended September 30, 2006 compared to nine months ended September 30, 2005

The following table sets forth financial data as a percentage of operating revenues for the nine months ended September 30, 2005 and 2006.



|                                                               |  |                                |   |  |      |  
|-------------------------------------------------------------- |  | ------------------------------ | - |  | ---- | -
|                                                               |  | Nine months endedSeptember 30, |  
|                                                               |  | 2005                           |   |  | 2006 |  
|Operating revenues:                                            |  |                                |   |  |      |  
|Video                                                          |  | 45                             | % |  | 44   | %
|Voice                                                          |  | 34                             |   |  | 32   |  
|Data                                                           |  | 20                             |   |  | 23   |  
|Other                                                          |  | 1                              |   |  | 1    |  
|                                                               |  |                                |   |  |      |  
|Total                                                          |  | 100                            |   |  | 100  |  
|Operating expenses:                                            |  |                                |   |  |      |  
|Cost of services                                               |  | 29                             |   |  | 28   |  
|Selling, operating and administrative                          |  | 52                             |   |  | 47   |  
|Depreciation and amortization                                  |  | 33                             |   |  | 27   |  
|Capital market activities                                      |  | 0                              |   |  | 1    |  
|Loss on early extinguishment of debt                           |  | 0                              |   |  | 0    |  
|                                                               |  |                                |   |  |      |  
|Total                                                          |  | 114                            |   |  | 103  |  
|                                                               |  |                                |   |  |      |  
|Operating loss                                                 |  | (14                            | ) |  | (3   | )
|Interest income                                                |  | 1                              |   |  | 0    |  
|Interest expense                                               |  | (16                            | ) |  | (13  | )
|Gain (loss) on interest rate cap agreement                     |  | 0                              |   |  | 0    |  
|Gain (loss) on adjustment of warrants to market agreement      |  | 0                              |   |  | (0   | )
|Other income (expenses), net                                   |  | 0                              |   |  | 0    |  
|                                                               |  |                                |   |  |      |  
|Total other income and (expense)                               |  | (15                            | ) |  | (13  | )
|                                                               |  |                                |   |  |      |  
|Loss from continuing operations before discontinued operations |  | (29                            | ) |  | (16  | )
|Income from discontinued operations                            |  | 5                              |   |  | 0    |  
|                                                               |  |                                |   |  |      |  
|Net loss                                                       |  | (24                            | ) |  | (16  | )
|Preferred stock dividends                                      |  | (0                             | ) |  | (1   | )
|                                                               |  |                                |   |  |      |  
|Net loss attributable to common stockholders                   |  | (24                            | ) |  | (17  | )
|                                                               |  |                                |   |  |      |  

Revenues. Operating revenues increased 12.4% from $170.9 million for the nine months ended
September 30, 2005, to $192.1 million for nine months ended September 30, 2006. Operating revenues from video services increased 11.8% from $76.3 million for the nine months ended September 30, 2005, to $85.3 million for the same
period in 2006. Operating revenues from voice services increased 6.4% from $57.8 million for the nine months ended September 30, 2005, to $61.4 million for the same period in 2006. Operating revenues from data services increased 21.6% from
$35.4 million for the nine months ended September 30, 2005, to $43.1 million for the same period in 2006. Operating revenues from other services increased 59.6% from $1.4 million for the nine months ended September 30, 2005, to $2.3
million for the same period in 2006.

Cost of services. Cost of services increased 8.4% from $49.3 million for the nine months ended
September 30, 2005, to $53.4 million for the nine months ended September 30, 2006. Cost of services for video services increased 9.5% from $38.3 million for the nine months ended September 30, 2005, to $41.9 million for the same
period in 2006. Cost of services for voice services increased 2.9% from $9.5 million for the nine months ended September, 2005, to $9.8 million for the same period in 2006. Cost of services for data services decreased 2.5% from $1.4 million for the
nine months ended September 30, 2005, to $1.3 million for the same period in 2006. Cost of services for other services increased from $131,000 for the nine months ended September 30, 2005, to $410,000 for the same period in 2006.

Gross profit. Gross profit increased 14.0% from $121.7 million for the nine months ended September 30, 2005, to $138.7 million
for the nine months ended September 30, 2006. Gross profit for video services increased 14.1% from $38.0 million for the



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##### Table of Contents

nine months ended September 30, 2005, to $43.4 million for the same period in 2006. Gross profit for voice services
increased 7.0% from $48.3 million for the nine months ended September 30, 2005, to $51.7 million for the same period in 2006. Gross profit for data services increased 22.5% from $34.1 million for the nine months ended September 30, 2005,
to $41.8 million for the same period in 2006. Gross profit for other services increased from $1.3 million for the nine months ended September 30, 2005, to $1.8 million for the same period in 2006.

Selling, general and administrative. Our selling, general and administrative increased 2.2% from $89.0 million for the nine months ended
September 30, 2005, to $91.0 for the nine months ended September 30, 2006. We incurred one time charges related to a workforce reduction and asset impairment, included in selling, general and administrative, of $303,000 for the nine months
ended September 30, 2005. Our litigation fees, included in selling, general and administrative, were $46,000 for the nine months ended September 30, 2005. Our non-cash stock option compensation expense, included in selling, general and
administrative, increased from $1.4 million for the nine months ended September 30, 2005, to $1.6 million for the nine months ended September 30, 2006.

Depreciation and amortization. Our depreciation and amortization decreased from $56.3 million for the nine months ended September 30, 2005, to $51.2 million for the nine months ended
September 30, 2006.

Capital market activities. Our capital market activities expense was $62,000 for the nine months ended
September 30, 2005, and we incurred a one-time charge related to the amendment of our first lien credit facility and other expenses related to capital market activity of $1.6 million for the nine months ended September 30, 2006.

Loss on early extinguishment of debt.We recorded a loss of $544,000 on the early extinguishment of debt for the nine months ended
September 30, 2005.

Interest income. Interest income was $961,000 for the nine months ended September 30, 2005, compared
to $258,000 for the same period in 2006. The decrease in interest income primarily reflects interest earned on cash held in escrow during the nine months ended September 30, 2005

Interest expense. Interest expense increased from $26.1 million for the nine months ended September 30, 2005, to $25.9 million for the
nine months ended September 30, 2006. The increase in interest expense for 2006 is primarily a result a higher average index rate on our variable rate debt.

Gain on interest rate cap agreement. Our interest rate cap agreement had a fair value of $1.5 million as of December 31, 2005, and $1.7 million as of September 30, 2006, resulting in a derivative gain
of $150,000, and reducing our cash interest requirements.

Gain (loss) on the adjustment of warrants to market. During the nine
months ended September 30, 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 September 30, 2005 was $2.63 resulting in a $127,000 gain on the adjustment of warrants to market value. During the nine months ended September 30, 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 September 30, 2006 was $9.92 resulting in a $425,000 loss on the adjustment
of warrants to market.

Other income (expense), net. Other income (expense), net decreased from income of $12,000 for the nine
months ended September 30, 2005, to income of $8,000 for the nine months ended September 30, 2006.

Income tax provision.
We recorded no income tax benefit for the nine months ended September 30, 2005 and 2006, respectively, as our net operating losses are fully offset by a valuation allowance.

Loss from continuing operations before discontinued operations. We incurred a loss from continuing operations before discontinued operations of
$48.9 million for the nine months ended September 30, 2005, compared to a loss from continuing operations before discontinued operations of $31.0 million for the nine months ended September 30, 2006.

Income from discontinued operations. We recorded income from discontinued operations of $8.6 million, including the gain from disposal of the
asset, for the nine months ended September 30, 2005.

Preferred stock dividends. We issued 25,738 and 74,596 additional shares
of the Series AA preferred stock during the nine months ended September 30, 2005 and 2006, respectively, as a stock dividend, and recognized an expense of $258,000 and $747,000 for the nine months ended September 30, 2005 and 2006,
respectively.

Net loss attributable to common stockholders. We incurred a net loss attributable to common stockholders of
$40.6 million and $31.8 million for the nine months ended September 30, 2005, and 2006, respectively. We expect net losses to decrease as our business matures.



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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 $172.3 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, as amended, bears interest at
a LIBOR base rate plus 2.5%. 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 $97.7 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
nine months ended September 30, 2006 we recognized a gain on our interest rate cap agreement of $150,000.

On June 30, 2006, we
entered into Amendment No. 1 dated as of June 30, 2006 (the Amendment) to the first lien credit agreement dated as of June 29, 2005. The Amendment reduces the interest rate on our first lien term loan to LIBOR plus 2.5
percent from LIBOR plus 5.5 percent. The amendment also amends certain operating covenants contained in the first lien credit agreement so that they are consistent with those contained in the second lien credit agreement. In accordance with the
provisions of the first lien credit agreement, a 2% pre-payment premium, of approximately $3.5 million, was required with this amendment. The decrease in the interest rate will reduce our annual interest expense by approximately $5.0 million.

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 September 30, 2006 we are in compliance
with all of our debt covenants.

Operating, Investing and Financing Activities.

As of September 30, 2006, we had a net working capital deficit of $15.4 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 $10.6 million and $23.0 million for
the nine months ended September 30, 2005 and 2006, respectively, and operating activities from discontinued operations used cash of $401,000 for the nine months ended September 30, 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:



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



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



| |  |  | accretion of second term lien loan;
| | - |  | -----------------------------------



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



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



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



| |  |  | income and gain from discontinued operations;
| | - |  | ---------------------------------------------



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



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



| |  |  | loss on early extinguishment of debt.
| | - |  | -------------------------------------

Net cash used by
investing activities from continuing operations was $5.0 million and $20.1 million for the nine months ended September 30, 2005 and 2006, respectively, and discontinued operations provided cash of $9.5 million for the nine months ended
September 30, 2005. Our investing activities for the nine months ended September 30, 2005, consisted of $21.3 million of capital expenditures, $4.0 million for the purchase of short term investments and $245,000 of organizational and
franchise expenditures, partially offset by $16.6 million from the sale of short term investments, $150,000 of proceeds from the sale of property and $3.8 million of cash returned as security. Investing activities for the nine months ended
September 31, 2006 consisted of $21.8 million of capital expenditures and $189,000 of organizational and franchise expenditures, partially offset by $101,000 of proceeds from the sale of property and $1.7 million of cash returned as security.

Net cash used by our financing activities was $6.8 million and $4.6 million for the nine months ended September 30, 2005 and
2006, respectively. Financing activities for the nine months ended September 30, 2005 consisted $285.0 million of principal payments on debt, $9.6 million of expenditures related to the issuance of long-term debt and $1.3 million for the
purchase of an interest rate cap agreement, partially offset by $9.2 million of proceeds from the issuance of our Series AA convertible preferred stock, $280.0 million of proceeds from long-term debt and $6,000 of proceeds from the exercise of
warrants and stock options. For the nine months ended September 30, 2006, financing activities primarily consisted of $1.7 million in principal payment on debt and $3.5 million of expenditures relate to the issuance of long-term debt partially
offset by $480,000 from the exercise of warrants and stock options.

Capital Expenditures

We spent approximately $21.7 million in capital expenditures during the nine months ended September 30, 2006, of which approximately $
15.7 million 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 $28 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 or make acquisitions 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.

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 $467,000 and $413,000 of non-cash stock option compensation expense for the three months ended
September 30, 2005 and 2006, respectively, and $1.4 million and $1.6 million of non-cash stock option compensation expense for the nine months ended September 30, 2005 and 2006, respectively. On January 26, 2006, we 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 in January 2007 and 2008.
We recorded a non-cash compensation expense of $423,000 on these shares, which is included in the non-cash compensation expense recorded through September 30, 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.



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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.

In June 2006, the FASB
issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes-an interpretation of SFAS No. 109 (FIN 48). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in financial
statements in accordance with SFAS No. 109, and recommends a recognition threshold and measurement characteristic for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The
differences between a tax position taken in a tax return and amounts recognized in the financial statements may result in an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred
tax asset or an increase in a deferred tax liability. FIN 48 also provides guidance on classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after
December 16, 2006, with early adoption encouraged. We do not expect that the adoption of FIN 48 will have a material impact on our results of operations or financial position.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157, establishes
a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements providing a single definition of fair value, which should result in increased consistency and comparability in
fair value measurements. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We do not expect that the adoption of SFAS No. 157 will
have a material impact on our results of operations or financial position.

In September 2006, the FASB issued SFAS No. 158,
Employers Accounting for Defined Benefit Pension and Other Postretirement Plansan amendment of FASB Statements No. 87, 88, 106, and 132(R) (SFAS No. 158). SFAS No. 158 improves financial reporting
by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that
funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement is effective for financial statements issued for fiscal
years beginning after December 16, 2006. The adoption of SFAS No. 158 will not 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.

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 September 30, 2006 was $287.9 million, compared to a carrying amount of $270.0 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 September 30, 2006. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2006, the Companys disclosure
controls and procedures are effective.



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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 September 30, 2006 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.



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PART II. OTHER INFORMATION

ITEM 1. 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.

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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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.
|                  |  |              
|November 14, 2006 |  | By:           |  | /s/ Rodger L. Johnson                
|                  |  |               |  | Rodger L. Johnson                    
|                  |  |               |  | President and Chief Executive Officer
|                  |  |              
|November 14, 2006 |  | By:           |  | /s/ M. Todd Holt                     
|                  |  |               |  | M. Todd Holt                         
|                  |  |               |  | Chief Financial Officer              



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