##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended September 30, 2006

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
|- | -------------------------------------------------------------------------------

For the transition period from             to

Commission file number



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Grande Communications Holdings, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 74-3005133                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)
|                                                               | 
|401 Carlson Circle, San Marcos, TX                             |  | 78666                                  
|(Address of principal executive offices)                       |  | (Zip Code)                             

Registrants telephone number including area code: (512) 878-4000



---

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 large accelerated filer in Rule 12b-2 of the Exchange Act.

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

The number of shares of the registrants Common Stock outstanding as of October 15, 2006 was 13,048,640.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

Index



|         |  |                       |  |                                                                                       |  |         
|-------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|         |  |                       |  |                                                                                       |  | Page No.
|Part I.  |  | Financial Information |  |                                                                                      
|         |  |                       | 
|         |  | Item 1.               |  | Financial Statements                                                                  |  | 3       
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|         |  |                       | 
|         |  |                       |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|         |  |                       | 
|         |  |                       |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|         |  |                       | 
|         |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 11      
|         |  |                       | 
|         |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 27      
|         |  |                       | 
|         |  | Item 4.               |  | Controls and Procedures                                                               |  | 28      
|         |  |                      
|Part II. |  | Other Information     |  |                                                                                      
|         |  |                       | 
|         |  | Item 1.               |  | Legal Proceedings                                                                     |  | 29      
|         |  |                       | 
|         |  | Item 6.               |  | Exhibits                                                                              |  | 30      
|         |  |                      
|         |  | Signatures            |  | 31                                                                                   



2



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##### Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------ | - | -------- | -
|                                                                                                                                                                                                            |  | December 31, 2005 |          |   | September 30, 2006 |  
|                                                                                                                                                                                                            |  |                   |          |   | (unaudited)        |  
|Assets                                                                                                                                                                                                      |  |                   |          |   |                    |   |          |  
|Current assets:                                                                                                                                                                                             |  |                   |          |   |                    |   |          |  
|Cash and cash equivalents (net of restricted cash of $3,056 and $2,889 as of December 31, 2005 and September 30, 2006,
respectively)                                                                        |  | $                 | 26,719   |   |                    | $ | 57,571   |  
|Investments                                                                                                                                                                                                 |  |                   | 350      |   |                    |   |         |  
|Accounts receivable, net                                                                                                                                                                                    |  |                   | 18,884   |   |                    |   | 17,836   |  
|Prepaid expenses and other current assets                                                                                                                                                                   |  |                   | 1,973    |   |                    |   | 2,047    |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total current assets                                                                                                                                                                                        |  |                   | 47,926   |   |                    |   | 77,454   |  
|Property and equipment, net                                                                                                                                                                                 |  |                   | 297,183  |   |                    |   | 278,468  |  
|Goodwill                                                                                                                                                                                                    |  |                   | 93,639   |   |                    |   | 93,639   |  
|Other intangible assets, net                                                                                                                                                                                |  |                   | 1,963    |   |                    |   | 1,810    |  
|Debt issue costs, net                                                                                                                                                                                       |  |                   | 5,970    |   |                    |   | 5,366    |  
|Restricted cash and other assets                                                                                                                                                                            |  |                   | 3,857    |   |                    |   | 3,323    |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total assets                                                                                                                                                                                                |  | $                 | 450,538  |   |                    | $ | 460,060  |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                        |  |                   |          |   |                    |   |          |  
|Current liabilities:                                                                                                                                                                                        |  |                   |          |   |                    |   |          |  
|Accounts payable                                                                                                                                                                                            |  | $                 | 14,232   |   |                    | $ | 13,973   |  
|Accrued expenses                                                                                                                                                                                            |  |                   | 20,333   |   |                    |   | 29,508   |  
|Deferred revenue                                                                                                                                                                                            |  |                   | 6,006    |   |                    |   | 6,175    |  
|Current portion of capital lease obligations and note payable                                                                                                                                               |  |                   | 981      |   |                    |   | 3,147    |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total current liabilities                                                                                                                                                                                   |  |                   | 41,552   |   |                    |   | 52,803   |  
|Deferred rent                                                                                                                                                                                               |  |                   | 984      |   |                    |   | 1,264    |  
|Deferred revenue                                                                                                                                                                                            |  |                   | 4,374    |   |                    |   | 4,627    |  
|Capital lease obligations, net of current portion                                                                                                                                                           |  |                   | 14,365   |   |                    |   | 16,455   |  
|Long term debt                                                                                                                                                                                              |  |                   | 129,056  |   |                    |   | 160,491  |  
|Commitments and contingencies (Note 5)                                                                                                                                                                      |  |                   |          |   |                    |   |          |  
|Stockholders equity:                                                                                                                                                                                       |  |                   |          |   |                    |   |          |  
|Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, issued and outstanding; liquidation preference of
$232,618                                                             |  |                   | 233      |   |                    |   | 233      |  
|Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of
$25,000                                                               |  |                   | 21       |   |                    |   | 21       |  
|Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued and outstanding; liquidation
preference of $20,406                                             |  |                   | 17       |   |                    |   | 17       |  
|Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued and outstanding; liquidation
preference of $149,108                                          |  |                   | 115      |   |                    |   | 115      |  
|Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued and outstanding; liquidation
preference of $19,998                                               |  |                   | 8        |   |                    |   | 8        |  
|Series F preferred stock, $0.001 par value per share; 12,307,692 shares authorized, 11,758,278 shares issued and outstanding; liquidation
preference of $15,286                                             |  |                   | 12       |   |                    |   | 12       |  
|Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation
preference of $135,000                                            |  |                   | 35       |   |                    |   | 35       |  
|Series H preferred stock, $0.001 par value per share; 30,000,000 shares authorized, no shares issued and outstanding                                                                                        |  |                   |         |   |                    |   |         |  
|Common stock, $0.001 par value per share; 786,835,883 and 828,835,883 shares authorized, 12,989,965 and 13,048,640 shares issued and
outstanding, at December 31, 2005 and September 30, 2006, respectively |  |                   | 13       |   |                    |   | 13       |  
|Additional paid-in capital                                                                                                                                                                                  |  |                   | 508,346  |   |                    |   | 508,587  |  
|Treasury stock, at cost                                                                                                                                                                                     |  |                   | (5       | ) |                    |   | (5       | )
|Accumulated deficit                                                                                                                                                                                         |  |                   | (248,588 | ) |                    |   | (284,616 | )
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total stockholders equity                                                                                                                                                                                  |  |                   | 260,207  |   |                    |   | 224,420  |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                  |  | $                 | 450,538  |   |                    | $ | 460,060  |  
|                                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except
per share data)



|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                                             |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                                                                                                                                                             |  | 2005                             |         |   | 2006                            |   |         | 2005 |  |   | 2006    |  
|Operating revenues                                                                                                                                                           |  | $                                | 48,106  |   |                                 | $ | 47,483  |      |  | $ | 146,341 |   |  | $ | 142,675 |  
|Operating expenses:                                                                                                                                                          |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Cost of revenues (excluding depreciation and amortization)                                                                                                                   |  |                                  | 17,596  |   |                                 |   | 16,705  |      |  |   | 55,121  |   |  |   | 49,704  |  
|Selling, general and administrative (includes $143 and $231 of stock-based compensation expense for the three months and nine months ended
September 30, 2006, respectively) |  |                                  | 24,689  |   |                                 |   | 24,939  |      |  |   | 72,035  |   |  |   | 73,538  |  
|Depreciation and amortization                                                                                                                                                |  |                                  | 13,864  |   |                                 |   | 13,365  |      |  |   | 43,466  |   |  |   | 41,439  |  
|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                                                                                     |  |                                  | 56,149  |   |                                 |   | 55,009  |      |  |   | 170,622 |   |  |   | 164,681 |  
|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                                                                                                                                                               |  |                                  | (8,043  | ) |                                 |   | (7,526  | )    |  |   | (24,281 | ) |  |   | (22,006 | )
|Other income (expense):                                                                                                                                                      |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                                                                                                                              |  |                                  | 161     |   |                                 |   | 532     |      |  |   | 619     |   |  |   | 1,089   |  
|Interest expense                                                                                                                                                             |  |                                  | (4,609  | ) |                                 |   | (6,254  | )    |  |   | (13,964 | ) |  |   | (17,655 | )
|Other income                                                                                                                                                                 |  |                                  |        |   |                                 |   |        |      |  |   | 750     |   |  |   |        |  
|Gain on disposal of assets                                                                                                                                                   |  |                                  | 3       |   |                                 |   | 49      |      |  |   | 87      |   |  |   | 2,544   |  
|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                                                                                                                                 |  |                                  | (4,445  | ) |                                 |   | (5,673  | )    |  |   | (12,508 | ) |  |   | (14,022 | )
|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                                                                                                     |  | $                                | (12,488 | ) |                                 | $ | (13,199 | )    |  | $ | (36,789 | ) |  | $ | (36,028 | )
|                                                                                                                                                                             |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                                                                                                                         |  | $                                | (1.00   | ) |                                 | $ | (1.05   | )    |  | $ | (2.96   | ) |  | $ | (2.88   | )
|Basic and diluted weighted average number of common shares outstanding                                                                                                       |  |                                  | 12,476  |   |                                 |   | 12,534  |      |  |   | 12,447  |   |  |   | 12,512  |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                               |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                               |  | Nine Months Ended September 30, |        
|                                                                               |  | 2005                            |         |   | 2006 |  
|Cash flows from operating activities:                                          |  |                                 |         |   |      |   |         |  
|Net loss                                                                       |  | $                               | (36,789 | ) |      | $ | (36,028 | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation                                                                   |  |                                 | 41,194  |   |      |   | 41,240  |  
|Amortization of intangible assets                                              |  |                                 | 2,272   |   |      |   | 199     |  
|Amortization of deferred financing costs                                       |  |                                 | 733     |   |      |   | 748     |  
|Provision for bad debts                                                        |  |                                 | 3,638   |   |      |   | 2,566   |  
|Accretion of debt discount                                                     |  |                                 | 605     |   |      |   | 801     |  
|Non-cash stock-based compensation                                              |  |                                 | (1      | ) |      |   | 231     |  
|Gain on sale of assets                                                         |  |                                 | (87     | ) |      |   | (2,544  | )
|Changes in operating assets and liabilities, net of business acquisitions:     |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                            |  |                                 | (1,265  | ) |      |   | (1,495  | )
|Prepaid expenses and other current assets                                      |  |                                 | 523     |   |      |   | 461     |  
|Accounts payable                                                               |  |                                 | 1,385   |   |      |   | (345    | )
|Accrued expenses                                                               |  |                                 | 4,084   |   |      |   | 9,175   |  
|Deferred revenue                                                               |  |                                 | (42     | ) |      |   | (185    | )
|Deferred rent                                                                  |  |                                 | 198     |   |      |   | 280     |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                      |  |                                 | 16,448  |   |      |   | 15,104  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities:                                          |  |                                 |         |   |      |   |         |  
|Maturities of short term investments                                           |  |                                 | 20,000  |   |      |   | 350     |  
|Purchases of property and equipment                                            |  |                                 | (40,933 | ) |      |   | (23,626 | )
|Purchase price adjustments                                                     |  |                                 | (69     | ) |      |   |        |  
|Proceeds on sale of assets                                                     |  |                                 | 469     |   |      |   | 10,426  |  
|Purchase of franchise rights and other                                         |  |                                 | (877    | ) |      |   | (47     | )
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                          |  |                                 | (21,410 | ) |      |   | (12,897 | )
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities:                                          |  |                                 |         |   |      |   |         |  
|Proceeds from borrowings and promissory notes                                  |  |                                 |        |   |      |   | 30,581  |  
|Payments of long-term debt                                                     |  |                                 | (559    | ) |      |   | (2,007  | )
|Deferred financing costs                                                       |  |                                 | 6       |   |      |   | (86     | )
|Net borrowings (repayments) on zero-balance cash account                       |  |                                 | (533    | ) |      |   | 147     |  
|Proceeds from issuance of common stock                                         |  |                                 | 31      |   |      |   | 10      |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash (used in) provided by financing activities                            |  |                                 | (1,055  | ) |      |   | 28,645  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net change in cash and cash equivalents                                        |  |                                 | (6,017  | ) |      |   | 30,852  |  
|Cash and cash equivalents, beginning of period                                 |  |                                 | 41,195  |   |      |   | 26,719  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                       |  | $                               | 35,178  |   |      | $ | 57,571  |  
|                                                                               |  |                                 |         |   |      |   |         |  

The accompanying notes are an integral part of these condensed consolidated financial statements.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Organization & Nature of
the Business

Grande Communications Holdings, Inc. and its wholly owned subsidiary, Grande Communications Networks, Inc., (the
Company), provide communications services to residential and commercial customers in various areas of Texas and other portions of the United States. The Company delivers products such as cable television, local and long-distance
telephone, high-speed data, wireless security, broadband transport services, and other telephony network services.

2. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting
principles generally accepted in the United States (GAAP) for interim financial information and with the rules and regulations of the Securities and Exchange Commission (the SEC) that permit reduced disclosure for interim
periods. Accordingly, they do not include all of the information and notes required by GAAP 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. Operating results for the three months and nine months ended September 30, 2006 are not
necessarily indicative of the results that may be expected for the year ended December 31, 2006. The December 31, 2005 balance sheet is derived from the audited financial statements for the year ended December 31, 2005. These interim
financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2005 and notes thereto, together with managements discussion and analysis of financial condition and results of
operations contained in the Companys Annual Report for the year ended December 31, 2005 on Form 10-K filed with the SEC on March 31, 2006.

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 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.

In the opinion of management, these consolidated financial statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of the financial position of the Company as
of September 30, 2006 and 2005, and for the three months and nine months ended September 30, 2006 and September 30, 2005. Certain items related to 2005 have been reclassified to conform to the 2006 reporting format. The Company has
reclassified the operating and financing portion of the cash flows attributable to negative book cash balances related to our zero-balance accounts for the three month and nine month periods ended September 30, 2005. In prior periods these cash
flows were reported within the change in accounts payable in operating activities, and have been reclassified to cash flows from financing activities to conform with current year presentation. The effect on operating activities was $0.2 million and
$0.5 million, respectively, for the three and nine months ended September 30, 2005. This revision did not have any effect on the Companys cash balances, compliance with debt covenants, working capital, or operations.

3. Stock-Based Compensation

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement No. 123 (Revised 2004), Share-Based Payment (Statement No. 123R). This revised standard addresses the accounting for stock-based
payment transactions in which a company receives employee services in exchange for either equity instruments of the company, or other instruments that are based on the fair value of the companys equity



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies are no longer able to account for
stock-based compensation transactions using the intrinsic-value method in accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies are required to account for such transactions using a
fair-value method and recognize the related expense in the Consolidated Statement of Operations.

Adoption of Statement No. 123(R)

The Company adopted Statement No. 123R effective beginning January 1, 2006 using the prospective transition method. The prospective
transition method requires that companies recognize compensation expense on stock-based payment awards that are granted, modified or cancelled after January 1, 2006.

The adoption of Statement No. 123R resulted in an increase of $0.14 million and $0.23 million in selling, general and administrative expenses for the three months and nine months ended September 30, 2006,
respectively, and an increase of $0.14 million and of $0.23 million in loss from operations and net loss for the three months and nine months ended September 30, 2006, respectively. The adoption of Statement No. 123R had an impact of less
than $0.01 on basic and diluted net loss per share for the three months and nine months ended September 30, 2006, respectively.

Valuation
assumptions

The fair value of each award granted from the Companys stock option plan during the nine months ended September 30,
2006 was estimated at the date of grant using the Black-Scholes-Merton option pricing model, assuming no expected dividends and the following weighted average assumptions:



|                        |  |      |  
|----------------------- |  | ---- | -
|                        |  | 2006 |  
|Expected volatility     |  | 75   | %
|Expected life in years  |  | 6.25 |  
|Risk-free interest rate |  | 4.91 | %

Expected life of option: The Companys expected life of option represents the period
that the Companys stock-based awards are expected to be outstanding and was determined based on the simplified method provided in Staff Accounting Bulletin No. 107 (SAB 107) and historical experience of similar awards, giving
consideration to the contractual terms of the stock-based awards, vesting schedules and historical option exercise behavior and employee termination.

Risk free interest rate: The Company bases the risk-free interest rate used in the Black-Scholes-Merton valuation model on the U.S. Treasury yield curve in effect at the time of the grant.

Expected volatility of stock: The Company bases the expected volatility of stock used in the Black-Scholes-Merton valuation model on studies of
historical volatility of industry comparables and future expectations.

Dividends: The Black-Scholes-Merton valuation model includes
a single expected dividend yield as an input. The Company has not issued any dividends, and is prohibited to issue dividends under the indenture governing the 14% senior secured notes due 2011.

Estimated forfeitures: When estimating forfeitures, the Company considered historical forfeiture behavior, as well as other factors.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



Stock Option Plan

Under the Companys Amended and Restated 2000 Stock Incentive Plan (the Stock Option Plan), 82,000,000 shares of common stock and 30,000,000 shares of Series H Preferred Stock are reserved and
authorized for issuance upon the exercise of the options. Employees and key consultants of the Company are eligible to receive options under the Stock Option Plan. The Stock Option Plan is administered by the compensation committee of the Board of
Directors. Options granted under the Stock Option Plan may be either nonqualified stock options or incentive stock options under Section 422 of the Internal Revenue Code of 1986, as amended. The options granted under the
Stock Option Plan vest over a four-year term and expire 10 years from the date of grant.

A summary of option activity under the Stock
Option Plan during the period ended September 30, 2006 is presented in the following table:



|                                             |  |                      |   |                         |                              |      |                                         |     |                 |            |                              |   |                                         |  |    
|-------------------------------------------- |  | -------------------- | - | ----------------------- | ---------------------------- | ---- | --------------------------------------- | --- | --------------- | ---------- | ---------------------------- | - | --------------------------------------- |  | ---
|                                             |  | Common Stock Options |   | Preferred Stock Options
|                                             |  | Number ofShares      |   |                         | WeightedAverageExercisePrice |      | WeightedAverageRemainingContractualTerm |     | Number ofShares |            | WeightedAverageExercisePrice |   | WeightedAverageRemainingContractualTerm
|Outstanding at December 31, 2005             |  | 49,414,571           |   |                         | $                            | 0.32 |                                         |     |                 |           |                              | $ |                                        |  |    
|Granted                                      |  | 13,254,092           |   |                         |                              | 0.06 |                                         |     |                 | 26,200,000 |                              |   | 0.10                                    |  |    
|Exercised                                    |  | (63,675              | ) |                         |                              | 0.15 |                                         |     |                 |           |                              |   |                                        |  |    
|Forfeited or expired                         |  | (7,571,794           | ) |                         |                              | 0.14 |                                         |     |                 |           |                              |   |                                        |  |    
|                                             |  |                      |   |                         |                              |      |                                         |     |                 |            |                              |   |                                         |  |    
|Outstanding at September 30, 2006            |  | 55,033,194           |   |                         | $                            | 0.13 |                                         | 7.1 |                 | 26,200,000 |                              | $ | 0.10                                    |  | 9.6
|Exercisable/vested at September 30, 2006     |  | 27,978,788           |   |                         | $                            | 0.18 |                                         | 5.7 |                 |           |                              | $ |                                        |  |   
|Unexercisable/unvested at September 30, 2006 |  | 27,054,406           |   |                         | $                            | 0.09 |                                         | 8.6 |                 | 26,200,000 |                              | $ | 0.10                                    |  | 9.6



|                                                                                           |  |                      |   |                         |   |                   |  |   |     
|------------------------------------------------------------------------------------------ |  | -------------------- | - | ----------------------- | - | ----------------- |  | - | ----
|                                                                                           |  |                      |  
|                                                                                           |  | Common Stock Options |   | Preferred Stock Options |   | All Stock Options
|Weighted average fair value per option granted in the nine months ended September 30, 2006 |  | $                    |  |                         | $ | 0.07              |  | $ | 0.06

Compensation costs related to option grants are being amortized using the straight-line method. As
of September 30, 2006, $1.5 million of unrecognized compensation costs related to non-vested option grants are expected to be recognized over the course of the following four years. Cash received on exercise of stock options was $2,125 and
$9,874, respectively, for the three months and nine months ended September 30, 2006.

4. Recent Accounting
Pronouncements

Statement No. 123R

Effective January 1, 2006, we adopted Statement of Financial Accounting Standards (SFAS) No. 123R, Share-Based Payment (Statement No. 123R) using the prospective transition method.
See Note 3 for further detail regarding the adoption of this standard.



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GRANDE COMMUNICATIONS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



Statement No. 157

In September 2006, the FASB issued SFAS Statement No. 157, Fair Value Measurements. This new standard provides enhanced guidance for using fair value to measure assets and liabilities, and
requires expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value, and the effect of fair value measurements on earnings. The new standard is effective for
financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is permitted. We are currently evaluating the requirements of SFAS No. 157 and the
impact this standard may have on our financial statements.

FASB Interpretation No. 48

In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income Taxesan interpretation of FASB Statement No. 109
(FIN 48). FIN 48 clarifies the recognition threshold and measurement of a tax position taken on a tax return. FIN 48 is effective for fiscal years beginning after December 15, 2006. FIN 48 also requires expanded disclosure with
respect to the uncertainty in income taxes. We are currently evaluating the requirements of FIN 48 and the impact this interpretation may have on our financial statements.

EITF 06-3

In June 2006, the Emerging Issues Task Force (EITF) reached a consensus
on EITF Issue No. 06-3, How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That is, Gross versus Net Presentation) (EITF No. 06-3) that,
for periods beginning after December 15, 2006, entities may adopt a policy of presenting taxes in the income statement on either a gross or net basis. Gross or net presentation may be elected for each different type of tax, but similar taxes
should be presented consistently. Taxes within the scope of EITF No. 06-3 would include taxes that are imposed concurrent with or subsequent to a revenue transaction between a seller and a customer. EITF No. 06-3 will not affect the method
that we employ to present sales taxes in our consolidated financial statements, as we currently present sales net of taxes, and we anticipate that we will continue to do so in the future.

5. Contingencies

In early September 2005, the Texas
Cable and Telecommunications Association (TCTA) filed a lawsuit in U.S. District Court, Western District of Texas, Austin division (Federal Court Lawsuit), to challenge SB 5, the legislation passed allowing for a state-issued
cable franchise and obviating the need for individual municipal franchises. Named as defendants in the lawsuit, in their official capacities, were Governor Rick Perry and Public Utility Commission of Texas Commissioners Chairman Paul Hudson, Julie
Parsley and Barry Smitherman. The Federal Court Lawsuit subsequently was amended to remove state law claims and to drop Governor Rick Perry as a defendant. Those removed claims were then incorporated in a state court lawsuit to which Grande is not a
party. If TCTA prevails in either litigation, the potential exists for approvals of current state-issued franchises to be ruled unconstitutional. The Federal Court Lawsuit contends that SB 5 discriminates in violation of the U.S. Constitution,
discriminates in violation of the Federal Communications Act, violates the federal prohibition on exclusive franchises, and violates the federal duty to guard against redlining. Grande joined Verizon, AT&T and some municipalities and intervened
in the Federal Court Lawsuit in support of the Texas Attorney General. The Federal Court Lawsuit was dismissed without prejudice in September 2006. A Notice of Appeal from the dismissal has been filed. The state court lawsuit remains pending.

In EpicRealm Licensing, LLC v. Autoflex, et al., and EpicRealm Licensing, LLC v. Franklin Covey, et al.; Case Nos. 2:05CV00163-DF, and
2:05CV00356-DF (consolidated); in the United States District Court for the



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GRANDE COMMUNICATIONS HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



Eastern District of Texas, Marshall Division, Grande Communications Networks, Inc. (and other defendants) have been sued for the alleged infringement of two
United States Patents that concern, among other things, systems and methods for managing dynamic web page generation requests. The Plaintiff alleges that Grande Communications Networks, Inc.s use of open source software to operate its
corporate web site infringes the patents. Discovery is ongoing. Grande Communications Networks, Inc. continues to defend the matter vigorously and has asserted a counterclaim seeking a declaration that the asserted patents are invalid, a declaration
that the company does not infringe such patents, and its attorneys fees. At this time, Grande is unable to predict the outcome of this litigation or to assess the amount of potential loss, if any, to Grande.

There are no other pending proceedings, which are currently anticipated to have a material adverse effect on our business, financial condition or results
of operations.

6. Subsequent Event

In
October 2006, we paid $11.8 million of interest due on our 14% senior secured notes due 2011, (referred to as senior notes).



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

This
managements discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend our forward-looking
statements to be covered by the safe harbor provisions for forward-looking statements in these sections. When used in this report, the words anticipate, believe, estimate, expect, intend,
plan and similar expressions as they relate to Grande Communications Holdings, Inc. or our management are intended to identify these forward-looking statements. All statements by us regarding our expected future financial position and
operating results, our business strategy, our financing plans, forecasted trends relating to the markets in which we operate and similar matters are forward-looking statements. We cannot assure you that our expectations expressed or implied in these
forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because of various factors, including those discussed below and under the caption BusinessRisk Factors
Relating to Our Business in our Annual Report on Form 10-K, filed with the SEC on March 31, 2006. The following managements discussion and analysis should be read in conjunction with our Condensed Consolidated Financial Statements
and Notes thereto included herewith and with our Managements Discussion and Analysis of Financial Condition and Results of Operation and Condensed Consolidated Financial Statements and Notes thereto for the three-year period ended
December 31, 2005, included in our Annual Report on Form 10-K filed with the SEC on March 31, 2006.

Unless we indicate
otherwise, references below to we, us, our and Grande mean Grande Communications Holdings, Inc. and its subsidiaries.

Overview

We provide communities in Texas with a bundled package of cable television, telephone and
broadband Internet and other services. We operate fully integrated advanced broadband networks in seven markets in the State of Texas. We constructed our local networks to enable us to sell advanced communication services to residential, and small
and medium sized business customers. We refer to the homes and businesses that our network is capable of providing services to as marketable homes passed. As of September 30, 2006, we had the ability to market services to 335,818
distinct homes and businesses over our network, and had 138,542 residential and business customers.

In July 2000, when our network
construction was still in a very early stage, we acquired an established telephone and data network that served as the platform for our provision of residential telephone and broadband Internet services and that still provides network services
revenues. This acquisition initially provided a significant portion of our revenues and became the foundation of our business while we moved forward with the construction of our broadband networks.

Beginning in 2001, we began to pursue a retail strategy by constructing our broadband networks in order to offer bundled services to marketable homes
passed by our network. The expansion of our networks has, in turn, allowed us to pursue a retail strategy of offering bundled cable television, telephone and broadband internet services to residential and business customers. Because of this retail
strategy, we have derived an increasing percentage of our revenues from our retail cable television, telephone and broadband Internet and other services and we expect this trend to continue. Because of our local networks, we believe we can cost
effectively grow our bundled services business without requiring significant additional capital investment.

In addition to our primary
business of offering bundled cable television, telephone and broadband Internet and other services to residential and business customers, we also offer broadband transport services and network services to medium and large enterprises and
communications carriers. These services are primarily provided using our existing infrastructure and personnel with minimal incremental operating costs and capital requirements. By leveraging our brand, communications infrastructure, volume and
personnel that predominately support our core business and its products, we have gained efficiencies of scale by offering telecommunications



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and data products into the wholesale markets. We have experienced slower than expected growth in this business due to increased competition and downward
pressure in our network services revenue primarily driven by regulatory rulings, particularly recent determinations by the FCC regarding reciprocal compensation.

Availability of Capital

As described more fully under Liquidity and Capital Resources below, our principal
sources of capital going forward will primarily be cash on hand and cash flow from operations. If we do not continue to increase our number of customers and the average prices received for our services, cash flow from operations will be adversely
effected and cash on hand will decline.

Since inception, we have been funded primarily with private equity investments and the issuance of
debt securities. Between February 2000 and October 2003, we completed a series of private placements of our preferred stock, raising aggregate gross proceeds of $338.2 million from the sale of our capital stock. The net proceeds from these private
placements have been used to fund our network build-out, operations, and our acquisitions. As a result of equity investments and mergers where stock was used as consideration, we now have $508 million of total invested equity capital and a base of
over 20 institutional private equity investors.

Since 2004, we have also raised net proceeds of approximately $155.0 million of senior
secured debt. On March 23, 2004, we raised net proceeds of approximately $124.5 million in a private placement of 136,000 units each consisting of a $1,000 principal amount of 14% senior secured note due 2011 (senior notes) and a
warrant to purchase 100.336 shares of our common stock. We used a portion of the net proceeds from the offering to repay all amounts outstanding under our then-existing senior credit facility. That facility was terminated upon repayment.

On March 24, 2006, we raised net proceeds of approximately $30.5 million in a private placement of an additional $32.0 million in aggregate
principal amount of senior notes. These additional notes were issued under the existing indenture and are part of the same series of notes as the notes issued in March 2004. We are using the proceeds for capital expenditures and working capital
purposes.

We have incurred net losses for the past six years and expect to continue to incur net losses for the next several years.
However, we had positive Adjusted EBITDA in 2003, 2004, and 2005 as well as for the nine months ended September 30, 2006. See EBITDA/Adjusted EBITDA below for a discussion of this non-GAAP measure of our operating performance as
well as our use of Adjusted EBITDA.

Marketable Homes Passed, Customers and Connections

We report marketable homes passed as the number of residential and business units, such as single residence homes, apartments and condominium units,
passed by our networks other than those we believe are covered by exclusive arrangements with other providers of competing services. As of September 30, 2006, our networks passed 335,818 marketable homes and we had 138,542 residential and
business customers.

Because we deliver multiple services to our customers, we report our total number of connections for cable television,
telephone and broadband Internet and other services in addition to our total number of customers. We count each cable television, telephone and broadband Internet and other services purchased as a separate connection. For example, a single customer
who purchases cable television, telephone and broadband Internet service would count as three connections. Similarly, a single customer who purchases our broadband Internet service and our wireless security service would count as two connections. We
do not record the purchase of long distance telephone service by a local telephone customer or digital cable services by an analog cable customer as additional connections. However, we do record each purchase of an additional telephone line by a
local telephone customer as an additional connection. As September 30, 2006, we had 294,009 connections.



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Operating Revenues

We derive our operating revenues primarily from monthly charges for the provision of cable television, telephone and broadband Internet and other services to residential and small business customers, as well as the
provision of network services and broadband transport services to medium and large enterprises and communications carriers. These services are a single business provided over a unified network. However, since our different products and services
generally involve different types of charges and in some cases different methods of recording revenues, we have presented some information on our revenues from each major product line.

Bundled services revenuescable television, telephone, broadband Internet and other.We typically provide cable television, telephone and
broadband Internet and other services on a bundled basis for fixed monthly fees billed in advance, with the amount of the monthly fee varying significantly depending upon the particular bundle of services provided. We also charge usage-based fees
for additional services, such as pay-per-view movies that involve a charge for each viewing and long-distance services that involve charges by the number of minutes of use. We generally bill for these usage-based services monthly in arrears. We also
generate revenues from one-time charges for the installation of premises equipment. Most of our bundled offerings include fees for equipment rental, although in some instances we sell modems to customers. Revenue generated from equipment sales is an
insignificant portion of our total revenue. We also charge monthly or one-time fees for additional services, including advertising. We collect from our cable customers and include in our gross revenues the fees payable to cable franchise
authorities, which are usually 5% of our revenues from cable subscriptions. We began offering security services as part of our bundle in June 2004. We sell all wireless security premise equipment to new security service customers at installation.
The security revenue is included in broadband Internet and other.

Broadband transport services revenues.Our revenues from
broadband transport services, which consist of access to our metro area networks and point-to-point circuits on our long-haul network, involve fixed monthly fees billed in advance, where the amount charged varies with the amount of capacity, type of
service and whether any customized capacity or services are provided. Our revenues also include non-recurring charges for construction, installation and configuration services, which can range significantly depending upon the customers needs.

Network services revenues.Our revenues from network services consist primarily of revenues from switched carrier services and
managed modem services. We bill for most of our network services monthly in arrears based on actual usage. However, some network services, particularly our managed modem services, involve fixed monthly charges billed in advance. Some network
services include non-recurring fees for installation or other work needed to connect the customer to our networks. There are monthly charges or negotiated fees for other services such as directory assistance, web hosting, database, collocation,
technical support and billing services.

Costs and Expenses

Cost of Revenues

Cost of revenues includes those expenses that are directly related to the
generation of operating revenues and has fixed and variable components, however it does not include depreciation or amortization. Our network supports the products and services that we provide to customers, and due to a common network infrastructure
and many of the same resources and personnel being used to generate revenues from the various product and service categories it is difficult to determine cost of revenues by product.

Our cost of revenues include the following:



| |  |  | Cable costs. Programming costs historically have been the largest portion of the cost of providing our cable television services and we expect this trend to
continue. We have entered into contracts for cable
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| | programming through the National Cable Television Cooperative and directly with programming providers to provide programming to be aired on our networks. We
pay a monthly fee for these programming services 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 or the system penetration percentage. Since
programming cost is based on numbers of subscribers, it will increase as we add more subscribers. It will also increase to the extent costs per channel increase over time, and may change depending upon the mix of channels we offer in each market
from time to time. Our cable costs also include the fees payable to cable franchise authorities, which are usually 5% of our revenues from cable subscriptions.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Telephone costs. Our cost of revenues associated with delivering telephone services to residential and small business customers consist primarily of transport costs, which
are comprised mostly of amounts needed for the operation, monitoring and maintenance of our networks, and also include access and other fees that we pay to other carriers to carry calls outside of our networks. Transport costs are largely fixed so
long as we do not need to procure additional equipment or lease additional capacity. Transport costs are expected to increase when new network facilities need to be obtained. The access fees are generally usage-based and, therefore, variable.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Broadband Internet and other costs. Our cost of revenues associated with delivering broadband Internet and other services to residential and small business customers consists
primarily of transport costs and fees associated with peering arrangements we have with other carriers. Transport costs and peering fees for this service are largely fixed so long as we do not need to procure additional equipment or lease additional
capacity, but transport costs and peering fees may increase when new facilities for connecting to the Internet need to be obtained. Our security-related costs are primarily related to system monitoring with a third-party provider and the costs
associated with selling security premise equipment to customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Broadband transport services costs. Our cost of revenues associated with delivering broadband traffic consists primarily of fixed transport costs, which are comprised mostly
of amounts needed for the operation, monitoring and maintenance of our networks, and also include access and other fees that we pay to other carriers to carry traffic outside of our networks. These costs are mostly fixed in nature. There are some
variable costs associated with external maintenance and with private line services, which can have a component that requires us to pay other carriers for a portion of the private line.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Network services costs. Our cost of revenues associated with delivering traffic consists primarily of transport costs, mostly amounts needed for the operation, monitoring and
maintenance of our networks, and access and other fees that we pay to other carriers to carry traffic outside of our networks. These costs are primarily fixed with respect to the monitoring of the traffic we carry on our networks, although there are
variable components associated with external maintenance costs and other items. The access and other carrier fees are variable and usage-based.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Selling, general and administrative expenses

Our selling, general and administrative expenses
include all of the expenses associated with operating and maintaining our networks that are not cost of revenues. These expenses primarily include payroll and departmental costs incurred for network design, monitoring and maintenance. They also
include payroll and departmental costs incurred for customer disconnection and reconnection and service personnel, customer service representatives and management and sales and marketing personnel. Other included items are advertising expenses,
promotional expenses, corporate and subsidiary management, administrative costs, bad debt expense, professional fees, taxes, insurance and facilities costs.

Depreciation and amortization

Depreciation and amortization expenses include depreciation of
our broadband networks and equipment and intangible assets related to acquisitions.



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Operating Data



|                                        |  |                    |         |                   |   |                |  |              |         |                    |   |         |  |   |        
|--------------------------------------- |  | ------------------ | ------- | ----------------- | - | -------------- |  | ------------ | ------- | ------------------ | - | ------- |  | - | -------
|                                        |  | Quarter Ended     
|                                        |  | September 30, 2005 |         | December 31, 2005 |   | March 31, 2006 |  | June 30,2006 |         | September 30, 2006
|Operating Data(1):                      |  |                    |         |                   |   |                |  |              |         |                    |   |         |  |   |        
|Marketable homes passed                 |  |                    | 328,041 |                   |   | 331,173        |  |              | 336,596 |                    |   | 334,528 |  |   | 335,818
|Customers                               |  |                    | 134,919 |                   |   | 136,109        |  |              | 138,793 |                    |   | 136,920 |  |   | 138,542
|Number of connections                   |  |                    |         |                   |   |                |  |              |         |                    |   |         |  |   |        
|Cable television                        |  |                    | 87,776  |                   |   | 89,417         |  |              | 92,174  |                    |   | 91,156  |  |   | 93,709 
|Telephone                               |  |                    | 113,700 |                   |   | 114,621        |  |              | 116,789 |                    |   | 116,463 |  |   | 117,071
|Broadband Internet and other            |  |                    | 68,061  |                   |   | 72,104         |  |              | 77,183  |                    |   | 79,372  |  |   | 83,229 
|                                        |  |                    |         |                   |   |                |  |              |         |                    |   |         |  |   |        
|Total connections                       |  |                    | 269,537 |                   |   | 276,142        |  |              | 286,146 |                    |   | 286,991 |  |   | 294,009
|Average monthly revenue per:            |  |                    |         |                   |   |                |  |              |         |                    |   |         |  |   |        
|Customer                                |  | $                  | 85.18   |                   | $ | 85.59          |  | $            | 87.15   |                    | $ | 88.64   |  | $ | 88.61  
|Cable television connection             |  |                    | 48.31   |                   |   | 48.82          |  |              | 50.74   |                    |   | 52.15   |  |   | 52.18  
|Telephone connection                    |  |                    | 43.09   |                   |   | 42.93          |  |              | 42.23   |                    |   | 41.72   |  |   | 40.73  
|Broadband Internet and other connection |  |                    | 34.54   |                   |   | 33.85          |  |              | 33.31   |                    |   | 32.87   |  |   | 32.30  

---

|(1) | Grande sold certain off-net MDU assets in Dallas for net proceeds of $2.5 million in two closings. The first closing occurred on March 31, 2006 with net proceeds of $1.9
million, and the second closing occurred on June 19, 2006 with net proceeds of $0.6 million. The operating data for the quarter ended June 30, 2006 is adjusted to reflect the impact of the sale. The effect of the asset sale on operating
data for the quarter ended June 30, 2006 is shown in the table below:
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                             |  |                                                     
|---------------------------- |  | ----------------------------------------------------
|                             |  | Reduction in operating data resultingfrom asset sale
|Operating Data:              |  |                                                     
|Marketable homes passed      |  | 3,811                                               
|Customers                    |  | 1,623                                               
|Number of connections        |  |                                                     
|Cable television             |  | 1,623                                               
|Telephone                    |  |                                                    
|Broadband Internet and other |  |                                                    
|                             |  |                                                     
|Total connections            |  | 1,623                                               



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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 Ended September 30, |   
|                                    |  | 2005                             |    |  | 2006 |   
|Consolidated Financial Data:        |  |                                  |    |  |      |   
|Operating revenues:                 |  |                                  |    |  |      |   
|Cable television                    |  | 26                               | %  |  | 30   | % 
|Telephone                           |  | 31                               |    |  | 30   |   
|Broadband Internet and other        |  | 14                               |    |  | 17   |   
|Broadband transport services        |  | 4                                |    |  | 5    |   
|Network services                    |  | 25                               |    |  | 18   |   
|                                    |  |                                  |    |  |      |   
|Total operating revenues            |  | 100                              |    |  | 100  |   
|Operating expenses:                 |  |                                  |    |  |      |   
|Cost of revenues                    |  | 37                               |    |  | 35   |   
|Selling, general and administrative |  | 51                               |    |  | 53   |   
|Depreciation and amortization       |  | 29                               |    |  | 28   |   
|                                    |  |                                  |    |  |      |   
|Total operating expenses            |  | 117                              |    |  | 116  |   
|                                    |  |                                  |    |  |      |   
|Operating loss                      |  | (17                              | )  |  | (16  | ) 
|Other income (expense):             |  |                                  |    |  |      |   
|Interest income                     |  |                                 |    |  | 1    |   
|Interest expense                    |  | (10                              | )  |  | (13  | ) 
|Other income                        |  |                                 |    |  |     |   
|Gain/loss on disposal of assets     |  |                                 |    |  |     |   
|                                    |  |                                  |    |  |      |   
|Total income (expense)              |  | (10                              | )  |  | (12  | ) 
|                                    |  |                                  |    |  |      |   
|Net loss                            |  | (27                              | )% |  | (28  | )%
|                                    |  |                                  |    |  |      |   

Operating Revenues.Our operating revenues for the three months ended September 30,
2005 and 2006 were $48.1 million and $47.5 million, respectively, a decrease of $0.6 million, or 1%, primarily as a result of a decrease in operating revenues from network services. The decrease was primarily driven by three components of network
services. First, our decision to de-emphasize our international carrier switched services business, which has historically been marginally profitable, resulted in a decrease of $3.4 million. Second, we experienced a decrease in domestic carrier
switched services revenue, which fell by $2.4 million as a result of a decrease in operating revenues from network services. Finally, reciprocal compensation revenue decreased by $0.5 million from the three months ended September 30, 2005 to
the three months ended September 30, 2006 due to regulatory changes.

Revenue from bundled services increased by $2.6 million,
partially offsetting the decrease in revenue from network service. The overall increased revenues for bundled services from $34.0 million to $36.6 million for the three months ended September 30, 2005 and 2006, respectively, is primarily due to
growth in the number of connections, from 269,537 as of September 30, 2005 to 294,009 as of September 30, 2006, and to a lesser extent from the cable rate increase described below. The additional connections and revenues resulted primarily
from continued penetration growth of marketable homes in Grandes markets.

Operating revenues for our cable television services for
the three months ended September 30, 2005 and 2006 were $12.6 million and $14.5 million, respectively, an increase of $1.9 million, or 15%. Approximately



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34% of the $1.9 million increase in cable television services was due to our annual rate increase, which occurred in January 2006, with the remainder due to
increased connections and an increased take rate on premium services.

Operating revenues for our telephone services remained relatively
constant for the three months ended September 30, 2005 and 2006 at $14.7 million and $14.3 million, respectively, a decrease of $0.4 million.

Operating revenues for our broadband Internet and other services for the three months ended September 30, 2005 and 2006 were $6.8 million and $7.9 million, respectively, an increase of $1.1 million, or 16%, primarily as a result of our
22% increase in connections.

Operating revenues for our broadband transport services remained relatively constant for the three months
ended September 30, 2005 and 2006 at $2.0 million and $2.1 million, respectively, an increase of $0.1 million.

Operating revenue for
our network services for the three months ended September 30, 2005 and 2006 was $12.1 million and $8.7 million, respectively, a decrease of $3.4 million, or 28%, due to the components outlined above.

Cost of Revenues.Our cost of revenues for the three months ended September 30, 2005 and 2006 were $17.6 million and $16.7 million,
respectively, a decrease of $0.9 million, or 5%. The decrease in our cost of revenues was primarily due to the decrease in network services revenue, which, in turn, led to a decrease in the variable component of network services costs. Cost of
revenues decreased as a percentage of revenues from 37% to 35% for the three months ended September 30, 2005 and 2006, respectively.

Selling, General and Administrative Expense. Our selling, general and administrative expense for the three months ended September 30, 2005 and 2006 was $24.7 million and $24.9 million, respectively. Selling, general and
administrative expense increased as a percentage of revenues from 51% to 53%, primarily due to the decrease in network services revenue.

Depreciation and Amortization Expense. Our depreciation and amortization expense for the three months ended September 30, 2005 and 2006 was $13.9 million and $13.4 million, respectively, a decrease of $.5 million, or 4%. The
decrease was primarily due to a $0.9 million reduction in depreciation in the 3rdquarter of 2006 relating to the
sales tax refund discussed below, partially offset by additional capitalized construction costs and other capital purchases in 2006.

During the 3rdquarter of 2006, the Company received cash in the amount of $2.0 million resulting from the
conclusion of a sales tax audit of subscriber material invoices for the years 2000 through 2003. Sales taxes associated with those invoices were capitalized as property and equipment. After application of professional fees, interest and use tax of
$1.1 million, the remainder of the refund was applied towards the cost of fully depreciated assets, which resulted in a decrease in depreciation expense of $0.9 million.

Interest Expense. For the three months ended September 30, 2005 and 2006, our interest expense, which includes interest incurred net of capitalized interest, was $4.6 million and $6.3 million,
respectively, an increase of $1.7 million, or 37%. Our interest expense increased primarily due to the private placement of an additional $32.0 million of senior notes in the first quarter of 2006, as well as a decrease in capitalized interest (a
corresponding increase in interest expense). For the three months ended September 30, 2005 and 2006, we capitalized interest of $0.9 million and $0.5 million, respectively.



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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 Ended September 30, |   
|                                    |  | 2005                            |    |  | 2006 |   
|Consolidated Financial Data:        |  |                                 |    |  |      |   
|Operating revenues:                 |  |                                 |    |  |      |   
|Cable television                    |  | 25                              | %  |  | 30   | % 
|Telephone                           |  | 30                              |    |  | 31   |   
|Broadband Internet and other        |  | 13                              |    |  | 16   |   
|Broadband transport services        |  | 4                               |    |  | 4    |   
|Network services                    |  | 28                              |    |  | 19   |   
|                                    |  |                                 |    |  |      |   
|Total operating revenues            |  | 100                             |    |  | 100  |   
|Operating expenses:                 |  |                                 |    |  |      |   
|Cost of revenues                    |  | 38                              |    |  | 35   |   
|Selling, general and administrative |  | 49                              |    |  | 52   |   
|Depreciation and amortization       |  | 30                              |    |  | 29   |   
|                                    |  |                                 |    |  |      |   
|Total operating expenses            |  | 117                             |    |  | 116  |   
|                                    |  |                                 |    |  |      |   
|Operating loss                      |  | (17                             | )  |  | (16  | ) 
|Other income (expense):             |  |                                 |    |  |      |   
|Interest income                     |  |                                |    |  | 1    |   
|Interest expense                    |  | (10                             | )  |  | (12  | ) 
|Other income                        |  | 1                               |    |  |     |   
|Gain/loss on disposal of assets     |  |                                |    |  | 2    |   
|                                    |  |                                 |    |  |      |   
|Total other income (expense)        |  | (9                              | )  |  | (9   | ) 
|                                    |  |                                 |    |  |      |   
|Net loss                            |  | (26                             | )% |  | (25  | )%
|                                    |  |                                 |    |  |      |   

Operating Revenues.Our operating revenues for the nine months ended September 30,
2005 and 2006 were $146.3 million and $142.7 million, respectively, a decrease of $3.6 million, or 2%, primarily as a result of a decrease in operating revenues from network services. This decrease was primarily driven by three components of network
services. First, our decision to de-emphasize our international carrier switched services business, which has historically been marginally profitable, resulted in a decrease of $3.4 million. Second, we experienced a decrease in domestic carrier
switched services revenue, which fell by $7.1 million, as a result of a decrease in volume. Finally, reciprocal compensation revenue decreased by $2.0 million from the nine months ended September 30, 2005 to the nine months ended
September 30, 2006 due to regulatory changes.

Revenue from bundled services increased by $8.7 million, partially offsetting the
decrease in revenue from network service. The overall increased revenues for bundled services from $100.5 million to $109.2 million for the nine months ended September 30, 2005 and 2006, respectively, was primarily due to growth in the number
of connections, from 269,537 as of September 30, 2005 to 294,009 as of September 30, 2006, and to a lesser extent from the cable rate increase described below. The additional connections and revenues resulted primarily from continued
penetration growth of marketable homes in Grandes markets.

Operating revenues for our cable television services for the nine months
ended September 30, 2005 and 2006 were $37.1 million and $42.6 million, respectively, an increase of $5.5 million, or 15%. Approximately 33% of the $5.5 million increase in cable television services is due to our annual rate increase, which
occurred in January 2006, with the remainder due to increased connections and an increased take rate on premium services.



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##### Table of Contents

Operating revenues for our telephone services remained relatively constant for the nine months ended
September 30, 2005 and 2006 at $44.0 million and $43.5 million, respectively, a decrease of $.5 million.

Operating revenues for our
broadband Internet and other services for the nine months ended September 30, 2005 and 2006 were $19.4 million and $23.1 million, respectively, an increase of $3.7 million, or 19%, primarily as a result of growth in connections.

Operating revenues for our broadband transport services remained relatively constant for the nine months ended September 30, 2005 and 2006 at $6.2
million and $6.4 million, respectively, an increase of $0.2 million.

Operating revenues for our network services for the nine months ended
September 30, 2005 and 2006 were $39.6 million and $27.1 million, respectively, a decrease of $12.5 million, or 32%, due to the components outlined above.

Cost of Revenues.Our cost of revenues for the nine months ended September 30, 2005 and 2006 were $55.1 million and $49.7 million, respectively, a decrease of $5.4 million, or 10%. The decrease in our cost
of revenues was primarily due to the decrease in network services revenue, which, in turn, led to a decrease in the variable component of network services costs. Cost of revenues decreased as a percentage of revenues from 38% for the nine months
ended September 30, 2005, to 35% for the nine months ended September 30, 2006.

Selling, General and Administrative
Expense. Our selling, general and administrative expense for the nine months ended September 30, 2005 and 2006 was $72.0 million and $73.5 million, respectively, an increase of $1.5 million, or 2%, primarily due to the cost of growing the
bundled services business and management changes that occurred during 2006. Selling, general and administrative expense increased as a percentage of revenues from 49% to 52%, primarily, due to the 32% decrease in network service revenue and the
growth in costs described above.

Depreciation and Amortization Expense. Our depreciation and amortization expense for the nine
months ended September 30, 2005 and 2006 was $43.5 million and $41.4 million, respectively, a decrease of $2.1 million, or 5%. The decrease was primarily due to certain intangible assets becoming fully amortized during 2005, the write-off of
franchise fees in the fourth quarter of 2005, and a $0.9 million reduction in depreciation in the 3rdquarter of
2006 relating to the sales tax refund discussed below.

During the 3rdquarter of 2006, the Company received cash in the amount of $2.0 million resulting from the conclusion of a sales tax audit of subscriber material invoices
for the years 2000 through 2003. Sales taxes associated with those invoices were capitalized as property and equipment. After application of professional fees, interest and use tax of $1.1 million, the remainder of the refund was applied towards the
cost of fully depreciated assets, which resulted in a decrease in depreciation expense of $0.9 million.

Interest Expense. For the
nine months ended September 30, 2005 and 2006, our interest expense, which includes interest incurred net of capitalized interest, was $14.0 million and $17.7 million, respectively, an increase of $3.7 million, or 26%. Our interest expense
increased primarily due to the private placement of an additional $32.0 million of senior notes in the first quarter of 2006, as well as a decrease in capitalized interest (and a corresponding increase in interest expense) as the result of decreased
network construction activity. For the nine months ended September 30, 2005 and 2006, we capitalized interest of $2.6 million and $1.6 million, respectively, a decrease of $1.0 million, or 38%.

Other income. Our other income for the nine months ended September 30, 2005 and 2006 was $0.8 million and $0.0 million, respectively, a
decrease of $0.8 million or 100%. This decrease was due to the recognition of a one-time contractually negotiated fee for strategic business planning and development in June 2005. This fee is unrelated to our primary business product and therefore
classified as other income.



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##### Table of Contents

Gain on Disposal of Assets. Our gain on disposal of assets for the nine months ended
September 30, 2005 and 2006 was $0.1 and $2.5 million, respectively, an increase of $2.4 million. The increase was primarily due to the sale of certain off-net MDU assets during the first 6 months of 2006 for net proceeds of $2.5 million.

EBITDA/Adjusted EBITDA

We measure our
operating performance on net income (loss) before interest income, interest expense, taxes, depreciation and amortization, referred to as EBITDA. EBITDA is not a measure of financial performance under generally accepted accounting
principles. We believe EBITDA is often a useful measure of a companys operating performance, and is a significant basis used by our management to measure the operating performance of our business.

Because we have funded the build-out of our networks by raising and expending large amounts of capital, our results of operations reflect significant
charges for depreciation, amortization, and interest expense. EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or
capital structure. We try to make each area of our business generate positive EBITDA, and when we have choices about the market or area in which to best deploy our resources we generally direct our resources towards the network construction that is
expected to generate the most EBITDA. EBITDA is frequently used as a basis for comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly-titled measures of other companies. EBITDA does not purport to
represent operating loss or cash flow from operating activities, as those terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance.

In the first quarter of 2006, Grande began recognizing compensation expense for stock-based compensation in accordance with FASB Statement
No. 123R, which is a non-cash item. The company believes debt issuance costs, goodwill impairments, and non-cash stock-based compensation to be analogous to amortization or interest expense, and therefore believes it is more useful to report
EBITDA net of these amounts because Grande believes it is a better measure of operating performance and is more comparable to prior periods. However, because of the nature of these charges, the company is referring to EBITDA, net of debt issuance
costs, goodwill impairments, and non-cash stock-based compensation charges, as Adjusted EBITDA.

Adjusted EBITDA was $5.8
million and $6.1 million for the quarters ended September 30, 2005 and 2006, respectively, an increase of $0.3 million, or 5%. The increase was primarily due to bundled services growth, partially offset by the 28% decrease in network services
revenue.

Adjusted EBITDA was $20.1 million and $22.4 million for the nine month periods ended September 30, 2005 and 2006,
respectively, an increase of $2.3 million, or 11%. The increase was primarily due to a $2.4 million increase in gain on sale of assets and the addition of new customers added through the penetration of Grandes network passings over such
periods, offset by the decrease in other income.

Since a significant portion of our cost of revenues and overhead expenses are generally
fixed in nature, increasing revenue should result in further increases in EBITDA/Adjusted EBITDA and in EBITDA/Adjusted EBITDA as a percentage of revenues. To the extent the increased revenues are from adding residential and small business customers
for our bundled services, which have higher gross margins than network services, EBITDA/Adjusted EBITDA should increase more quickly on a percentage basis.



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##### Table of Contents

The reconciliation of EBITDA/Adjusted EBITDA to net loss is as follows:



|                                                                |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                                                |  | 2005                             |         |   | 2006                            |   |         | 2005 |  |   | 2006    |  
|                                                                |  | (Dollars in thousands)           |         |   | (Dollars in thousands)          |  
|Net loss as reported                                            |  | $                                | (12,488 | ) |                                 | $ | (13,199 | )    |  | $ | (36,789 | ) |  | $ | (36,028 | )
|Add back non-EBITDA/Adjusted EBITDA items included in net loss: |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                 |  |                                  | (161    | ) |                                 |   | (532    | )    |  |   | (619    | ) |  |   | (1,089  | )
|Interest expense                                                |  |                                  | 4,609   |   |                                 |   | 6,254   |      |  |   | 13,964  |   |  |   | 17,655  |  
|Taxes                                                           |  |                                  |        |   |                                 |   | 75      |      |  |   | 125     |   |  |   | 225     |  
|Depreciation and amortization                                   |  |                                  | 13,864  |   |                                 |   | 13,365  |      |  |   | 43,466  |   |  |   | 41,439  |  
|                                                                |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|EBITDA                                                          |  |                                  | 5,824   |   |                                 |   | 5,963   |      |  |   | 20,147  |   |  |   | 22,202  |  
|Stock-based compensation expense                                |  |                                  |        |   |                                 |   | 143     |      |  |   |        |   |  |   | 231     |  
|                                                                |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA (1)                                             |  | $                                | 5,824   |   |                                 | $ | 6,106   |      |  | $ | 20,147  |   |  | $ | 22,433  |  
|                                                                |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  

---

|(1) | Adjusted EBITDA includes gain on sale of assets of $1.9 million in the 1stquarter of 2006 and $0.6 million in the 2ndquarter of 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------

Liquidity and Capital Resources

Sources and
Uses of Funds

Since inception, we have raised an aggregate of $338 million in equity funding from institutional private equity
investors and others to pursue our business plan. As a result of such stock issuances and our merger with ClearSource, Inc., we have a total of $508 million of total invested equity capital. Funds raised have been used to construct our networks, to
make acquisitions, to launch services in our existing seven markets and for working capital and operating expenses.

We have also raised
net proceeds of approximately $155.0 million from the sale of our senior notes since March 2004. On March 23, 2004, we issued $136.0 million principal amount at maturity of senior notes and in March 2006, we raised net proceeds of approximately
$30.5 million in a private placement of an additional $32 million in aggregate principal amount of senior notes. Interest on the senior notes is payable semi-annually each April 1 and October 1. We used a portion of the net proceeds from
the sale of the senior notes in 2004 to repay all amounts outstanding under our then-existing senior credit facility. The senior credit facility was terminated upon repayment and we are not able to borrow any further amounts thereunder. We are using
the net proceeds from the sale of the additional senior notes in March 2006 for capital expenditures and working capital purposes.

At
September 30, 2006, we had total cash and cash equivalents of $57.6 million and $176.9 million of long-term debt outstanding.

As of
September 30, 2006, we had net working capital of $24.6 million, compared to net working capital of $6.4 million as of December 31, 2005. The increase in working capital resulted primarily from the net proceeds from the private placement
of an additional $32 million in aggregate principal amount of senior notes in March 2006.

Provided that we meet our cash flow projections
in our current business plan, we expect that we will not require additional financing and that we will manage our cash position above $20 million in accordance with the covenant set forth in the indenture governing the senior notes. This covenant
prohibits our making capital expenditures relating to the build-out of new or additional parts of our network if such expenditures would result



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in us having less than $20 million in cash and cash equivalents. Our business plan is based on estimates regarding expected future costs and expected
revenues. Our costs may exceed or our revenues may fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds to complete construction in our markets,
which would require us to seek additional financing.

We may need additional financing to fund our operations or to undertake initiatives
not contemplated by our business plan or obtain additional cushion against possible shortfalls. We also may pursue additional financing as opportunities arise. Future financings may include a range of different sizes or types of financing, including
the sale of additional debt or equity securities. However, we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions; our
success or lack of success in penetrating our markets and growing our overall income; our future creditworthiness; and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the indenture
governing the senior notes. These financings could increase our level of indebtedness or result in dilution to our equity holders. Additionally, we currently cannot call our existing bonds until April 2008, which prohibits our ability to refinance
our bonds in the event better pricing and terms are available to us in the market.

Cash Flows from Operating Activities

Net cash provided by operations totaled $16.4 million and $15.1 million for the nine months ended September 30, 2005 and 2006,
respectively. The net cash flow activity related to operations consisting primarily of our operating results adjusted by changes in operating assets and liabilities and non-cash transactions including:



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



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



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



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



| |  |  | gain on disposal of assets
| | - |  | --------------------------

Depreciation and amortization
for the nine months ended September 30, 2005 and 2006 was $43.5 million and $41.4 million, respectively. Other non-cash charges for the nine months ended September 30, 2005 and 2006 were $4.9 million and $1.8 million, respectively.

As of September 30, 2006 we had an $11.8 million balance in accrued expenses related to interest due on our senior notes, which we
paid on October 2, 2006.

Cash Flows from Investing Activities

Our net cash used in investing activities for the nine months ended September 30, 2005 and 2006 was $21.4 million and $12.9 million, respectively.
These net cash outflows are primarily due to the build-out of our network in both 2005 and 2006. Cash flows used in investing activities in the nine months ended September 30, 2006 consisted primarily of $23.6 million in property and equipment
purchases, offset by $.4 million in maturities of short term investments and $10.4 million in asset sales.

Cash Flows from Financing
Activities

Our net cash provided by (used in) financing activities for the nine months ended September 30, 2005 and 2006 was
$(1.1) million and $28.6 million, respectively. Cash flows from financing activities in the nine months ended September 30, 2006 consisted primarily of the net proceeds from the private placement of an additional $32 million in aggregate
principal amount of senior notes, which is described above.



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Capital Expenditures

We spent approximately $40.9 million and $23.6 million in capital expenditures, including capitalized interest, during the nine months ended September 30, 2005 and 2006, respectively. The indenture governing the
senior notes prohibits us from making capital expenditures when the aggregate amount of cash and cash equivalents held by us (after giving effect to such planned capital expenditure) would be less than $20 million. The capital expenditures amounts
described above relate to network construction; initial installation costs; the purchase of customer premise equipment, such as cable set-top boxes and cable modems; corporate and network equipment, such as switching and transport equipment; and
billing and information systems.

We anticipate spending approximately $28 million to $30 million, excluding capitalized interest, in
capital expenditures during the year ended December 31, 2006. The company intends to manage its capital expenditures in accordance with the covenant set forth in the indenture to ensure that cash is not less than $20 million.

Contractual Obligations and Commercial Commitments

We are obligated to make payments under a variety of contracts and other commercial arrangements, including the following:

Long-term Debt. On March 23, 2004, the Company completed a private placement offering for 136,000 units each consisting of (1) $1,000 of senior notes and (2) a warrant to purchase 100.336 shares of common stock. The
senior notes accrue interest at the rate of 14% per annum with the interest payable semi-annually in cash in arrears on April 1 and October 1. On March 24, 2006, we raised net proceeds of approximately $30.5 million in a private
placement of an additional $32.0 million in aggregate principal amount of senior notes. These additional notes were issued under the existing indenture and are part of the same series of senior notes as those issued in March 2004.

Capital Leases.We lease office and facilities space under leasing arrangements. We also have certain immaterial capital leases for office
equipment.

Operating Leases.We lease office space, vehicles and other assets for varying periods. Leases that expire are generally
expected to be renewed or replaced by other leases.

Maintenance Agreements.We have numerous agreements for the maintenance of
leased fiber optic capacity.

Purchase Agreement.We may be required to purchase a minimum of $37.3 million of equipment from some
of our suppliers between October 2006 and December 2010. We entered into these agreements based upon estimates of equipment we expect to need over this six-year period. The majority of these purchase commitments are contingent upon delivery of
technical and functional next-generation requirements. If we do not actually need the estimated amount and type of equipment, our financial condition could be adversely affected because we would be obligated to spend money on equipment we do not
need, rather than applying it to help grow and develop our business.

The following table represents our contractual obligations as of
September 30, 2006:



|                                                |  |                        |        |       |   |        |  |      |        |      |   |               |  |   |        |  |   |         |  |   |        
|----------------------------------------------- |  | ---------------------- | ------ | ----- | - | ------ |  | ---- | ------ | ---- | - | ------------- |  | - | ------ |  | - | ------- |  | - | -------
|                                                |  | Payments Due by Period |        | Total
|                                                |  | 2006                   |        | 2007  |   | 2008   |  | 2009 |        | 2010 |   | 2011 & Beyond | 
|                                                |  | (In thousands)        
|Long-term debt and related interest obligations |  | $                      | 11,763 |       | $ | 23,532 |  | $    | 23,532 |      | $ | 23,532        |  | $ | 23,524 |  | $ | 179,760 |  | $ | 285,643
|Capital lease obligations                       |  |                        | 1,403  |       |   | 4,261  |  |      | 4,146  |      |   | 2,162         |  |   | 1,692  |  |   | 20,943  |  |   | 34,607 
|Operating lease obligations                     |  |                        | 1,136  |       |   | 4,057  |  |      | 3,315  |      |   | 2,744         |  |   | 1,823  |  |   | 11,530  |  |   | 24,605 
|Maintenance obligations                         |  |                        | 400    |       |   | 1,042  |  |      | 1,042  |      |   | 1,042         |  |   | 1,023  |  |   | 10,143  |  |   | 14,692 
|Purchase obligations                            |  |                        | 164    |       |   |       |  |      | 3,068  |      |   |              |  |   | 34,029 |  |   |        |  |   | 37,261 
|                                                |  |                        |        |       |   |        |  |      |        |      |   |               |  |   |        |  |   |         |  |   |        
|Total                                           |  | $                      | 14,866 |       | $ | 32,892 |  | $    | 35,103 |      | $ | 29,480        |  | $ | 62,091 |  | $ | 222,376 |  | $ | 396,808
|                                                |  |                        |        |       |   |        |  |      |        |      |   |               |  |   |        |  |   |         |  |   |        



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Our plans with respect to network construction and other capital expenditures are discussed above under
the caption Capital Expenditures. We believe those planned expenditures do not constitute contractual obligations or binding commitments since, in general, we have the ability to accelerate or postpone construction of our networks
depending upon cash availability, subject to the need to eventually complete the network in accordance with our single-family residential development agreements.

We have entered into contracts with various entities to provide us with video programming services. We pay a monthly fee for those services, generally based on the average number of video subscribers to that service
during the service period. We estimate programming fees to be approximately $30 million in 2006.

In March 2004, we issued $136.0
million in aggregate principal amount of senior notes and in March 2006 we issued an additional $32.0 million in principal amount of the senior notes. The senior notes will mature on April 1, 2011 and began accruing interest from the date of
issuance, March 23, 2004, at a rate of 14% per annum. Interest is payable semi-annually in cash in arrears on April and October 1 of each year.

Our subsidiary, (the Subsidiary Guarantor), has unconditionally guaranteed, jointly and severally, the payment of the principal, premium and interest (including any additional interest on the senior notes)
on a senior secured basis.

The senior notes and the Subsidiary Guarantors guarantees thereof are secured by a first priority
perfected security interest, subject to certain permitted encumbrances, in substantially all of our and each of our restricted subsidiaries property and assets, including substantially all of our and their property, plant and equipment
(collectively, the Collateral).

The senior notes may be redeemed, at our election, as a whole or from time to time in part, at
any time after April 1, 2008, upon not less than 10 nor more that 60 days notice to each holder of notes to be redeemed, subject to the conditions and at the redemption prices (expressed as percentages of principal amount) set forth
below, together with accrued and unpaid interest and Liquidating Damages (as defined in the indenture), if any, to the applicable redemption date.



|                    |  |           
|------------------- |  | ----------
|Year                |  | Percentage
|2008                |  | 107.00%   
|2009                |  | 103.50%   
|2010 and thereafter |  | 100.00%   

At any time prior to April 1, 2007, Grande may on any one or more occasions redeem senior
notes issued under the indenture at a redemption price of 114% of the principal amount, plus accrued and unpaid interest and Liquidated Damages, if any, to the redemption date, with the net cash proceeds of one or more equity offerings;
provided that:

(1) at least 65% of the aggregate principal amount of senior notes originally issued under the
indenture on the issue date (excluding notes held by Grande and its Subsidiaries) remains outstanding immediately after the occurrence of such redemption; and

(2) the redemption occurs within 90 days of the date of the closing of such Equity Offering.

If we experience specific kinds of change of control events, each holder of senior notes may require us to repurchase all or any portion of such
holders senior notes at a purchase price equal to 101% of the principal amount of the senior notes, plus accrued and unpaid interest to the date of repurchase.

The indenture governing the senior notes contains covenants that, among other things, limit our ability to:



| |  |  | incur additional indebtedness, issue disqualified capital stock and, in the case of our restricted subsidiaries, issue preferred stock;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



| |  |  | create liens on our assets;
| | - |  | ---------------------------



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| |  |  | pay dividends on, redeem or repurchase our capital stock or make other restricted payments;
| | - |  | -------------------------------------------------------------------------------------------



| |  |  | make investments in other companies;
| | - |  | ------------------------------------



| |  |  | enter into transactions with affiliates;
| | - |  | ----------------------------------------



| |  |  | enter into sale and leaseback transactions;
| | - |  | -------------------------------------------



| |  |  | sell or make dispositions of assets;
| | - |  | ------------------------------------



| |  |  | place restrictions on the ability of our subsidiaries to pay dividends or make other payments to us; and
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | engage in certain business activities
| | - |  | -------------------------------------

In addition, the indenture
contains a covenant restricting our capital expenditures relating to the build-out of new or additional parts of our network if such expenditures would result in us having less than $20 million in cash and cash equivalents.

The indenture also contains customary events of default, including nonpayment of principal or interest, violations of covenants, cross default and cross
acceleration to certain other indebtedness and material judgments and liabilities.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles that are generally accepted in the United States. To prepare
these financial statements, we must make estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and
expenses as well as the disclosure of contingent assets and liabilities. We periodically evaluate our estimates and assumptions and base our estimates and assumptions on our best knowledge of current events and actions we may undertake in the
future. Actual results may ultimately differ from these estimates. We believe that of our significant accounting policies, the following may involve a higher degree of judgment and complexity:

Revenue Recognition

Revenue
from customers consists of fixed monthly fees for bundled services and certain network services, and usage based fees for long distance services in certain bundles and the majority of our network services. We pay local municipalities where we
provide cable service, the federally-mandated maximum of 5% of gross revenues derived from the operation of the cable television system, to provide cable television services. Such fees are collected monthly from our customers and remitted quarterly
to the local municipalities. Franchise fees collected and paid are reported as revenues and expenses, respectively. Our revenues are recognized when services are provided, regardless of the period in which they are billed. Amounts billed in advance
are reflected in the balance sheet as deferred revenue and are deferred until the service is provided.

The Companys policy for
revenue recognition in instances where multiple deliverables are sold contemporaneously to the same counter-party is in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting
Bulletin No. 104, Revenue Recognition. Specifically, if the Company enters into sales contracts for the sale of multiple products or services, then the Company evaluates whether it has objective fair value evidence for each
deliverable in the transaction. If the Company has objective fair value evidence for each deliverable of the transaction, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition accounting
policies. For arrangements that include installation services, the Company recognizes installation revenue using the residual method. For example, this would occur when the Company enters into an agreement for service that includes the Company
providing equipment in connection with the service and the subscriber paying an installation fee as well as monthly charges. Because the Company is providing both a product and a service, revenue is allocated to



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the product and monthly subscription service based on relative fair value and revenue is allocated to installation services using the residual method. To
date, our product revenues have not been significant. In accordance with FASB Statement No. 51, Financial Reporting by Cable Television Companies, installation revenues are recognized in the period of installation since they do not
exceed the direct selling costs.

We receive some revenues for construction performed for customers in connection with network service
arrangements. These revenues, which are a small percentage of total revenues, are recognized under the percentage of completion method.

Classification of Various Direct Labor and Other Overhead Costs

Our business is capital intensive, and a large
portion of our financial resources is spent on capital activities associated with building our networks. We capitalize costs associated with network construction, initial customer installations, installation refurbishments and the addition of
network equipment necessary to enable provision of bundled or network services. Capitalized costs include materials, direct labor costs and certain indirect costs. We capitalize direct labor costs associated with our personnel based upon the
specific time devoted to construction and customer installation activities. Capitalized indirect costs are those relating to the activities of construction and installation personnel and overhead costs associated with the relevant support functions.
Costs for repairs and maintenance, and disconnection and reconnection, are charged to operating expense as incurred, while equipment replacement is capitalized.

Judgment is required to determine the extent to which indirect costs, or overhead, are incurred as a result of specific capital activities, and therefore should be capitalized. We allocate overhead based upon the
portion of indirect costs that contribute to capitalizable activities using an overhead rate applied to the amount of direct labor capitalized based upon our analysis of the nature of costs incurred in support of capitalizable activities. The
primary costs that are included in the determination of overhead rates are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting
primarily of installation and construction vehicle operating costs, (iii) the cost of support personnel, such as personnel who directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to
capitalizable activities. Capitalized costs are depreciated along with the physical assets to which they relate, which have lives of three to ten years depending on the type of asset. For the nine months ended September 30, 2005 and 2006, $8.5
million and $6.2 million of labor and overhead costs were capitalized, respectively.

Valuation of Long-Lived Assets and Intangible
Assets

We evaluate the recoverability of property, plant and equipment for impairment when events or changes in circumstances
indicate that the net book value of an asset may not be recoverable. Such events or changes in circumstances could include such factors as loss of customers accounting for a high percentage of revenues from particular network assets, changes in
technology, fluctuations in the fair value of assets, adverse changes in market conditions or poor operating results. When such factors and circumstances exist, we compare the projected undiscounted future cash flows associated with the related
asset or group of assets over their estimated useful lives against their respective carrying amounts. Impairment, if any, is based on the excess of the carrying amount over the fair value of those assets and is recorded in the period in which the
determination was made. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluation of asset recoverability.

We performed our annual goodwill impairment test as of October 1, 2005. This test was performed in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 142Goodwill and Other Intangible Assets, which we adopted effective January 1, 2002. SFAS No. 142 recognizes that since goodwill and certain intangible assets may have indefinite useful lives,
these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. We have two reporting units, retail and wholesale, for



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purposes of evaluating goodwill impairment. Our retail reporting unit includes the business of providing bundled communication services (cable, phone and
data) to customers within 1stand 2ndtier cities in Texas. Our wholesale reporting unit includes the business of providing network products and services for wholesale carriers and Internet
service providers on our switch network. The estimated fair value was determined based on a discounted cash flow analysis and review of multiples for comparable companies. The assumptions used in the valuation testing have subjective components,
including anticipated future operating results and cash flows based on our business plan and overall expectations as to market and economic considerations. During the last half of 2005, we revised projections downward for our network services line
of service based on our new managements revised business strategy, current trends in the industry and managements analysis of the competitive environment in this line of service. We performed our annual impairment test as of
October 1, 2005, which indicated carrying value exceeded estimated fair value for a portion of the Thrifty Call goodwill. Based on the results of this test, we recorded an impairment loss of $39.6 million in 2005 related to the Thrifty Call
acquisition in 2000.

Allowance for Doubtful Accounts

We use estimates to determine our provision for bad debts. These estimates are based on historical collection experience, current trends, credit policy
and a percentage of our customer accounts receivable, as well as specific identification for larger customers. In determining these percentages, we look at historical write-offs of our receivables. Judgment is required both to identify customer
accounts where collectibility is a concern, and to determine the amount of the reserve to be established for those customer accounts.

The
foregoing list 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 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.

Share-Based Payment

In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based Payment, (Statement No. 123R). Statement No. 123R addresses the accounting for
share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of
operations. SFAS 123R will be effective for the first period beginning after December 15, 2005. We adopted SFAS 123R on January 1, 2006 using the prospective method and did not restate prior periods. SFAS 123R will apply to
awards granted, modified or settled on or after January 1, 2006. Under SFAS 123R we use a Black-Scholes-Merton model to value these stock awards. Awards outstanding as of December 31, 2005 will continue to be accounted for under the
previous accounting model, the intrinsic value method under APB Opinion No. 25, whereby no compensation was recognized for most stock option awards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our exposure to market risk relates
primarily to changes in interest rates on our investment portfolio. Our marketable investments consist primarily of short-term fixed income securities. We invest only with high credit quality issuers and we do not use derivative financial
instruments in our investment portfolio. We do not believe that a significant increase or decrease in interest rates would have a material impact on the fair value of our investment portfolio.



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ITEM 4. CONTROLS AND PROCEDURES

Our management, with the participation of our Chief Executive Officer, who
is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e), as applicable,
under the Securities Exchange Act of 1934) as of September 30, 2006. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting
them to material information relating to Grande, including its consolidated subsidiaries, required to be included in this report and the other reports that we file or submit under the Securities Exchange Act of 1934.

During the third fiscal quarter, there were no changes in our internal control over financial reporting that have materially affected, or that are
reasonably likely to materially affect, our internal control over financial reporting.



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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

In early September 2005, the Texas Cable and Telecommunications Association
(TCTA) filed a lawsuit in U.S. District Court, Western District of Texas, Austin division (Federal Court Lawsuit), to challenge SB 5, the legislation passed allowing for a state-issued cable franchise and obviating the need
for individual municipal franchises. Named as defendants in the lawsuit, in their official capacities, were Governor Rick Perry and Public Utility Commission of Texas Commissioners Chairman Paul Hudson, Julie Parsley and Barry Smitherman. The
Federal Court Lawsuit subsequently was amended to remove state law claims and to drop Governor Rick Perry as a defendant. Those removed claims were then incorporated in a state court lawsuit to which Grande is not a party. If TCTA prevails in either
litigation, the potential exists for approvals of current state-issued franchises to be ruled unconstitutional. The Federal Court Lawsuit contends that SB 5 discriminates in violation of the U.S. Constitution, discriminates in violation of the
Federal Communications Act, violates the federal prohibition on exclusive franchises, and violates the federal duty to guard against redlining. Grande joined Verizon, AT&T and some municipalities and intervened in the Federal Court Lawsuit in
support of the Texas Attorney General. The Federal Court Lawsuit was dismissed without prejudice in September 2006. A Notice of Appeal from the dismissal has been filed. The state court lawsuit remains pending.

In EpicRealm Licensing, LLC v. Autoflex, et al., and EpicRealm Licensing, LLC v. Franklin Covey, et al.; Case Nos. 2:05CV00163-DF, and 2:05CV00356-DF
(consolidated); in the United States District Court for the Eastern District of Texas, Marshall Division, Grande Communications Networks, Inc. (and other defendants) have been sued for the alleged infringement of two United States Patents that
concern, among other things, systems and methods for managing dynamic web page generation requests. The Plaintiff alleges that Grande Communications Networks, Inc.s use of open source software to operate its corporate web site infringes the
patents. Discovery is ongoing. Grande Communications Networks, Inc. continues to defend the matter vigorously and has asserted a counterclaim seeking a declaration that the asserted patents are invalid, a declaration that the company does not
infringe such patents, and its attorneys fees. At this time, Grande is unable to predict the outcome of this litigation or to assess the amount of potential loss, if any, to Grande.

There are no other pending proceedings, which are currently anticipated to have a material adverse effect on our business, financial condition or results
of operations.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors previously described ini Part I, Item 1A included in Grandes Annual Report on Form 10-K for the year ended December 31, 2005.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS

There were no matters submitted to a vote of security holders of Grande during the quarter ended September 30,
2006.



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ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

See Exhibit Index (which is incorporated herein by reference):



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SIGNATURES

Pursuant to the requirements 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.



|                        |  |  |  |     |  |                                                   |  |                                                                                                     
|----------------------- |  |  |  | --- |  | ------------------------------------------------- |  | ----------------------------------------------------------------------------------------------------
|                        |  |  |  |     |  | GRANDE COMMUNICATIONS HOLDINGS, INC. (Registrant)
|                        |  |  | 
|Date: November 13, 2006 |  |  |  | By: |  | /s/    MICHAEL L.
WILFLEY                        
|                        |  |  |  |     |  |                                                   |  | Michael L. Wilfley Chief Financial Officer (Duly Authorized Officer and Principal Financial
Officer)



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Exhibit Index



|            |  |                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                 
|            | 
|31.1        |  | Certification pursuant to Section 302 of the Sabanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                            
|            | 
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                           
|            | 
|32.1        |  | Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).



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