UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 ____________________
  FORM
10-Q
 ____________________
  x
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934
  For the
Quarterly Period Ended June 30, 2008
  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 333-115602
 ____________________
  Grande
Communications Holdings, Inc.
 (Exact
name of registrant as specified in its charter)
 ____________________
  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, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
  Large
accelerated filer  ̈Accelerated
filer  ̈Non-accelerated
filer xSmaller reporting company  ̈
  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 July 31,
2008 was 12,785,072.




GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY




Index




Page No.Part
      I.
            Financial Information
            1Item 1.
            Financial Statements
            1Condensed Consolidated Balance Sheets
            1Condensed Consolidated Statements of
    Operations
            2Condensed Consolidated Statements of Cash
    Flows
            3Notes to Condensed Consolidated Financial
      Statements
            4Item 2.
            Management’s Discussion and Analysis of Financial Condition and
      Results of Operations
            7Item 3.
            Quantitative and Qualitative Disclosures about Market
      Risk
            18Item 4T.
            Controls and Procedures
            18Part
      II.
            Other Information
            19Item 1.
            Legal Proceedings
            19Item 1A.
            Risk Factors
            19Item 2.
            Unregistered Sales of Equity Securities and Use of
      Proceeds
            19Item 3.
            Defaults Upon Senior Securities
            19Item 4.
            Submission of Matters to a Vote of Security
      Holders
            19Item 5.
            Other Information
            19Item 6.
            Exhibits
            19Signatures
            21





Index





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,
              2007
            
            
            June
      30,
              2008(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents, net of restricted cash of $3,129
            
            $
            48,138
            
            
            $
            35,343Accounts
      receivable, net of allowance for doubtful accounts of $1,138 and
      $1,336
            
            
            17,793
            
            
            
            16,991Prepaid
      expenses and other current assets
            
            
            1,867
            
            
            
            2,613Total
      current assets
            
            
            67,798
            
            
            
            54,947Property,
      plant and equipment, net of accumulated depreciation of $313,526 and
      $340,764
            
            
            249,310
            
            
            
            236,669Intangible
      assets, net of accumulated amortization of $1,417 and
    $1,539
            
            
            1,398
            
            
            
            1,276Debt
      issue costs, net
            
            
            4,255
            
            
            
            3,729Restricted
      cash
            
            
            3,129
            
            
            
            3,129Deposits
            
            
            353
            
            
            
            596Total
      assets
            
            $
            326,243
            
            
            $
            300,346Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
            
            $
            13,809
            
            
            $
            15,152Accrued
      liabilities
            
            
            15,328
            
            
            
            13,273Accrued
      interest payable
            
            
            6,755
            
            
            
            6,755Deferred
      revenue and customer deposits
            
            
            6,996
            
            
            
            7,436Current
      portion of long-term debt
            
            
            1,612
            
            
            
            1,740Current
      portion of capital lease obligations
            
            
            3,548
            
            
            
            2,594Total
      current liabilities
            
            
            48,048
            
            
            
            46,950Deferred
      rent
            
            
            1,228
            
            
            
            1,211Deferred
      revenue
            
            
            4,377
            
            
            
            4,299Capital
      lease obligations, net of current portion
            
            
            13,592
            
            
            
            12,915Long
      term debt, net of current portion
            
            
            189,994
            
            
            
            189,712Total
      liabilities
            
            
            257,239
            
            
            
            255,087Stockholders’
      equity:Senior
      series preferred stock: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 $134,999,787
            
            
            35
            
            
            
            35Junior
      series preferred stock:Series
      A preferred stock, $0.001 par value per share; 232,617,839 shares
      authorized, 232,617,838 shares issued and outstanding; liquidation
      preference of $232,617,838
            
            
            233
            
            
            
            233Series
      B preferred stock, $0.001 par value per share; 20,833,333 shares
      authorized, issued and outstanding; liquidation preference of
      $25,000,000
            
            
            21
            
            
            
            21Series
      C preferred stock, $0.001 par value per share; 30,000,000 shares
      authorized, 17,005,191 shares issued and outstanding; liquidation
      preference of $20,406,229
            
            
            17
            
            
            
            17Series
      D preferred stock, $0.001 par value per share; 115,384,615 shares
      authorized, 114,698,442 shares issued and outstanding; liquidation
      preference of $149,107,975
            
            
            115
            
            
            
            115Series
      E preferred stock, $0.001 par value per share; 8,000,000 shares
      authorized, 7,999,099 shares issued and outstanding; liquidation
      preference of $19,997,748
            
            
            8
            
            
            
            8Series
      F preferred stock, $0.001 par value per share; 12,307,792 shares
      authorized, 11,758,278 shares issued and outstanding; liquidation
      preference of $15,285,761
            
            
            12
            
            
            
            12Series
      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; 828,835,883 shares authorized,
      13,175,940 and 13,272,072 shares issued, 12,675,940 and 12,772,072 shares
      outstanding, as of December 31, 2007 and June 30, 2008,
      respectively
            
            
            13
            
            
            
            13Additional
      paid-in capital
            
            
            509,312
            
            
            
            509,525Treasury
      stock, at cost
            
            
            (5
            )
            
            
            (5
            )Accumulated
      deficit
            
            
            (440,757
            )
            
            
            (464,715
            )Total
      stockholders’ equity
            
            
            69,004
            
            
            
            45,259Total
      liabilities and stockholders’ equity
            
            $
            326,243
            
            
            $
            300,346




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





1
 Index





GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(In
thousands, except per share data)




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2007
            
            
            2008
            
            
            2007
            
            
            2008Operating
      revenues
            
            $
            49,852
            
            
            $
            52,009
            
            
            $
            98,247
            
            
            $
            101,896Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
            
            
            17,506
            
            
            
            18,113
            
            
            
            34,034
            
            
            
            34,968Selling,
      general and administrative
            
            
            23,286
            
            
            
            23,017
            
            
            
            44,790
            
            
            
            45,807Provision
      for doubtful accounts
            
            
            760
            
            
            
            797
            
            
            
            1,274
            
            
            
            1,421Depreciation
      and amortization
            
            
            13,854
            
            
            
            13,869
            
            
            
            26,898
            
            
            
            28,539Total
      operating expenses
            
            
            55,406
            
            
            
            55,796
            
            
            
            106,996
            
            
            
            110,735Operating
      loss
            
            
            (5,554
            )
            
            
            (3,787
            )
            
            
            (8,749
            )
            
            
            (8,839
            )Other
      income (expense):Interest
      income
            
            
            272
            
            
            
            166
            
            
            
            705
            
            
            
            495Interest
      expense, net of capitalized interest
            
            
            (6,765
            )
            
            
            (7,770
            )
            
            
            (13,434
            )
            
            
            (15,562
            )Net
      gain on sale of assets
            
            
            269
            
            
            
            487
            
            
            
            244
            
            
            
            517Total
      other income (expense)
            
            
            (6,224
            )
            
            
            (7,117
            )
            
            
            (12,485
            )
            
            
            (14,550
            )Loss
      before income tax expense
            
            
            (11,778
            )
            
            
            (10,904
            )
            
            
            (21,234
            )
            
            
            (23,389
            )Income
      tax expense
            
            
            (280
            )
            
            
            (290
            )
            
            
            (560
            )
            
            
            (569
            )Net
      loss
            
            $
            (12,058
            )
            
            $
            (11,194
            )
            
            $
            (21,794
            )
            
            $
            (23,958
            )Basic
      and diluted net loss per share
            
            $
            (0.96
            )
            
            $
            (0.88
            )
            
            $
            (1.73
            )
            
            $
            (1.88
            )Basic
      and diluted weighted average number of common shares
      outstanding
            
            
            12,600
            
            
            
            12,762
            
            
            
            12,596
            
            
            
            12,748




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





2
 Index





GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
thousands)




Six
      Months Ended
              June
      30,2007
            
            
            2008Cash
      flows from operating activities:Net
      loss
            
            $
            (21,794
            )
            
            $
            (23,958
            )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
            
            
            26,773
            
            
            
            28,416Amortization
      of intangible assets
            
            
            125
            
            
            
            123Amortization
      of deferred financing costs
            
            
            503
            
            
            
            526Provision
      for doubtful accounts
            
            
            1,274
            
            
            
            1,421Amortization
      of debt discounts/premiums
            
            
            639
            
            
            
            621Non-cash
      compensation expense
            
            
            370
            
            
            
            208Net
      gain on sale of assets
            
            
            (244
            )
            
            
            (517
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (2,055
            )
            
            
            (565
            )Prepaid
      expenses and other assets
            
            
            (922
            )
            
            
            (989
            )Accounts
      payable
            
            
            1,507
            
            
            
            2,074Accrued
      liabilities and interest payable
            
            
            (1,306
            )
            
            
            (2,055
            )Deferred
      revenue
            
            
            304
            
            
            
            858Deferred
      rent
            
            
            (14
            )
            
            
            (17
            )Net
      cash provided by operating activities
            
            
            5,160
            
            
            
            6,146Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (19,575
            )
            
            
            (16,241
            )Proceeds
      from sale of assets
            
            
            382
            
            
            
            244Proceeds
      from sales tax refunds
            
            
            1,130
            
            
            
            349Net
      cash used in investing activities
            
            
            (18,063
            )
            
            
            (15,648
            )Cash
      flows from financing activities:Net
      proceeds from borrowings
            
            
            3,826
            
            
            
            —Payments
      of long-term debt and capital lease obligations
            
            
            (2,118
            )
            
            
            (2,567
            )Net
      repayments on zero-balance cash account
            
            
            (160
            )
            
            
            (731
            )Other
      financing activity
            
            
            —
            
            
            
            5Net
      cash provided by (used in) financing activities
            
            
            1,548
            
            
            
            (3,293
            )Net
      change in cash and cash equivalents
            
            
            (11,355
            )
            
            
            (12,795
            )Cash
      and cash equivalents, beginning of period
            
            
            43,948
            
            
            
            48,138Cash
      and cash equivalents, end of period
            
            $
            32,593
            
            
            $
            35,343Non-cash
      investing and financing activity:Capital
      lease obligations
            
            $
            14
            
            
            $
            160




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


3
 Index




GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


(UNAUDITED)






1.
Background and Basis of Presentation




The
primary business of Grande Communications Holdings, Inc. and its consolidated
subsidiary, Grande Communications Networks, Inc. (collectively the “Company”) is
providing a bundled package of cable television (“video”), telephone (“voice”),
and broadband Internet (“HSD”) and other services to residential and small and
medium-sized business customers in Texas. The Company provides these services in
seven markets in the state of Texas using local broadband networks that the
Company constructed. In addition, the Company provides broadband transport
services to medium and large enterprises and communications
carriers.  The Company also provides network services by offering
telecommunications and HSD products to medium and large enterprises and
communications carriers within wholesale markets.




The
accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in conformity with U.S. generally accepted accounting
principles (“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, these condensed 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 June 30,
2007 and 2008, and for the three and six months ended June 30, 2007 and 2008.
Operating results for the three and six months ended June 30, 2008 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 2008. The December 31, 2007 balance sheet is derived from
the audited financial statements for the year ended December 31, 2007.
These interim financial statements should be read in conjunction with the
consolidated financial statements for the year ended December 31, 2007 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, 2007 on Form 10-K filed with the SEC on
March 31, 2008.




The
consolidated financial statements include the accounts of Grande Communications
Holdings, Inc.’s wholly owned subsidiary.  All inter-company
transactions and balances have been eliminated. Preparation of financial
statements in conformity with U.S. generally accepted accounting principles
requires management to make estimates and assumptions that affect the amounts
reported in the consolidated financial statements and accompanying disclosures.
These estimates are based on management’s best knowledge of current events and
actions the Company may undertake in the future. Actual results may ultimately
differ from these estimates.




2.
Reclassifications




Certain
reclassifications have been made to the condensed consolidated statements of
operations for the three and six months ended June 30, 2007 to conform to the
classifications used in the current period. In the condensed consolidated
statements of operations, for the three months ended June 30, 2007, Texas
franchise tax expense of $0.4 million previously recorded in the line item
“income tax expense” has been reclassified as “selling, general and
administrative.”  Additionally, in the condensed consolidated
statements of operations, for the three and six months ended June 30, 2007,
provision for doubtful accounts of $0.8 million and $1.3 million, respectively,
previously recorded in the line item “selling, general and administrative,” have
been reclassified as “provision for doubtful accounts” for such
periods.





4
 Index




GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)
 (UNAUDITED)





3.
Accrued Liabilities




Accrued liabilities consist of the
following:




December
      31,
              2007
            
            
            June
      30,
              2008(in
      thousands)Accrued
      property taxes
            
            $
            4,405
            
            
            $
            2,273Accrued
      compensation
            
            
            2,801
            
            
            
            3,014Accrued
      taxes—other
            
            
            2,662
            
            
            
            2,327Accrued
      programming
            
            
            2,587
            
            
            
            2,906Accrued
      other
            
            
            2,873
            
            
            
            2,753Accrued
      liabilities
            
            $
            15,328
            
            
            $
            13,273




4.
Income Taxes




The
Company utilizes the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse.




The
Company’s effective income tax rate for the interim periods presented is based
on management’s estimate of the Company’s effective tax rate for the applicable
year and differs from the federal statutory income tax rate primarily due to
nondeductible permanent differences, state income taxes and changes in the
valuation allowance for deferred income taxes. In assessing the realizability of
deferred tax assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of
future taxable income during the periods in which those temporary differences
become deductible.




5.
Long Term Debt




14%
Senior Secured Notes




Long-term Debt. In March
2004, the Company completed a private placement offering for 136,000 units, each
consisting of (1) $1,000 of senior notes due April 1, 2011 (“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. The
senior notes are governed by the indenture between the Company and U.S. Bank
National Association, as Indenture Trustee, dated March 23, 2004
(“Indenture”).




In March
2006 and July 2007, the Company raised net proceeds of approximately $30.5
million and $25.8 million, respectively, in a private placement of an additional
$32 million and $25 million, respectively, in aggregate principal amount of
senior notes. These additional senior notes were issued under the Indenture and
are part of the same series of senior notes as those issued in March
2004.




Grande
Communications Holdings, Inc.’s subsidiary, Grande Communications Networks,
Inc., (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. Grande
Communications Holdings, Inc. is a holding company with no independent assets
and conducts all of its operations through a subsidiary and is therefore
dependent on the receipt of funds from its subsidiary to pay the interest and
principal on the senior notes.  Limitations or restrictions contained
in the Indenture could adversely affect the Company’s ability to make such
payments on the senior notes.





5
 Index




GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (continued)


(UNAUDITED)




The
senior notes and the Subsidiary Guarantor’s guarantees thereof are secured by a
first priority perfected security interest, subject to certain permitted
encumbrances, in substantially all of the subsidiary’s property and assets,
including substantially all of its property, plant and equipment.




6.
Contingencies




Legal
Proceedings




The
Company is subject to litigation in the normal course of business. However,
there are no pending proceedings that are currently anticipated to have a
material adverse effect on the Company’s business, financial condition or
results of operations.




Insurance




The
Company carries a broad range of insurance coverage, including property,
business, auto liability, general liability, directors and officers, workers’
compensation and an umbrella policy. The Company has not incurred significant
claims or losses on any of these insurance policies.




The
Company utilizes self-insurance with respect to employee medical coverage. Such
self-insurance is provided in connection with a plan that includes certain
stop-loss coverage on a per employee basis. The Company estimates the liability
for claims based on Company experience. Additionally, the Company utilizes
self-insurance for its distribution line equipment. Management believes that the
risk of loss related to this equipment is not significant.





6
 Index





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, as
amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. 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,” “should,”
“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 “Item 1A Risk Factors” in our Annual Report on Form 10-K,
filed with the SEC on March 31, 2008. Any forward-looking statements
contained in this quarterly report reflect our current views with respect to
future events and are subject to these and other risks, uncertainties and
assumptions relating to our operations, results of operations, growth strategy
and liquidity. We have no intention, and disclaim any obligation, to update or
revise any forward-looking statements, whether as a result of new information,
future results or otherwise.




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 Consolidated Financial Statements and
Notes thereto for the three-year period ended December 31, 2007, included
in our Annual Report on Form 10-K filed with the SEC on March 31,
2008.




Unless
we indicate otherwise, references below to “we,” “us,” “our,” “the Company” and
“Grande” mean Grande Communications Holdings, Inc. and our consolidated
subsidiary, Grande Communications Networks, Inc., taken as a whole.




Overview




Grande’s
primary business is providing a bundled package of cable television (“video”),
telephone (“voice”), and broadband Internet (“HSD”) and other services to
residential and small and medium-sized business customers in
Texas.  We provide these services in seven markets in the state of
Texas using local broadband networks that we constructed. We refer to the homes
and businesses that our network is capable of providing services to as
“marketable homes passed.” We believe that an important measure of our growth
potential is the number of marketable homes passed by our networks and the
marketable homes we are able to pass in the future in the markets in which we
currently operate. Marketable homes passed are the number of residential and
business units, such as single residential 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. Since 2001,
we have grown our marketable homes passed through the construction of our
networks. The expansion of our networks has, in turn, allowed us to pursue a
retail strategy of offering bundled video, voice and HSD services to residential
and business customers. As of June 30, 2007 and 2008, we had the ability to
market services to 340,000 and 340,443 distinct homes and businesses over our
networks, respectively, and had 139,558 and 146,265 residential and business
customers, respectively. Our operating revenues were $49.9 million and $52.0
million for the three months ended June 30, 2007 and 2008, respectively, and
$98.2 million and $101.9 million for the six months ended June 30, 2007 and
2008, respectively.




Grande
was founded in November 1999 and was funded with $232 million of initial equity
capital to pursue a retail strategy of constructing broadband networks in order
to offer bundled video, voice, and HSD services to customers. Operating revenues
from bundled services were $38.8 million and $42.0 million for the three months
ended June 30, 2007 and 2008, respectively, and $76.6 million and $83.1 million
for the six months ended June 30, 2007 and 2008, respectively.  We
have continued to grow our bundled services to commercial business customers by
18% to $5.8 million during the three months ended June 30, 2008 compared to $4.9
million during the three months ended June 30, 2007 and increased 20% to $11.3
million during the six months ended June 30, 2008 compared to $9.4 million
during the six months ended June 30, 2007.





7
 Index




We have
derived an increasing percentage of our revenues from our bundled services and
we expect this trend to continue. Because of our local networks and existing
fixed infrastructure in the markets in which we currently operate, we believe we
can continue to grow our business without incurring the significant capital
investment required to launch operations in new markets.




In
addition, we have leveraged our retail metro network build-out with the 2003
acquisition of a long haul fiber optic network, primarily located in Texas, to
allow us to provide broadband transport services to medium and large enterprises
and communications carriers. Operating revenues for broadband transport services
were $2.3 million and $2.8 million for the three months ended June 30, 2007 and
2008, respectively, and $4.7 million and $5.4 million for the six months ended
June 30, 2007 and 2008, respectively.




In July
2000, when our network construction was still in a very early stage, we acquired
Thrifty Call, which had an established telephone and data network that served as
the platform for the provisioning of residential voice and HSD services and that
still provides wholesale network services to medium and large enterprises and
communications carriers in the wholesale market. Operating revenues for network
services were $8.8 million and $7.2 million for the three months ended June 30,
2007 and 2008, respectively, and $16.9 million and $13.4 million for the six
months ended June 30, 2007 and 2008, respectively.




Our
network services are primarily provided using our existing infrastructure and
personnel with minimal incremental operating costs and capital expenditures for
maintenance. By leveraging our brand, communications infrastructure, voice and
data volume, and personnel that predominately support our core retail business
and its products we have gained efficiencies of scale by offering
telecommunications and HSD products into wholesale markets.




We have
incurred net losses for the past five years and expect to continue to incur net
losses in the future. However, we had positive Adjusted EBITDA during the past
five years as well as for each of the three and six months ended June 30, 2007
and 2008. See “Non-GAAP Financial Measures” below for a discussion of this
non-GAAP measure of our operating performance as well as our use of Adjusted
EBITDA.




Our
financial results depend upon many factors that significantly affect our results
of operations including, without limitation:




•
            the
      availability of, and our ability to obtain additional funding, if
      necessary,




•
            our
      ability to obtain enough customers for our services to offset the costs of
      operating our networks, and




•
            increasing
      programming and other costs.




On
January 18, 2008, we issued a press release announcing that our board of
directors had authorized the Company to explore all of its strategic
alternatives to enhance shareholder value.  The board of directors is
working with the Company’s management team and its legal and financial advisors
to evaluate the Company’s available alternatives.  We have engaged
Waller Capital Partners LLC to assist us in exploring strategic
alternatives.  There can be no assurance that the exploration of
strategic alternatives will result in the Company adopting or approving any
strategic alternative.  We undertake no obligation to make any further
announcements regarding the exploration of strategic alternatives unless and
until a final decision is made.




Availability
of Capital




As
described more fully under “Liquidity and Capital Resources” below, we expect
that current principal sources of capital going forward will primarily be cash
on hand and cash flow from operations. If we do not continue to increase the
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.





8
 Index




Marketable
Homes Passed, Customers and Connections




We report
marketable homes passed as the number of residential and business units, such as
single family 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 June 30, 2007 and 2008, our
networks passed 340,000 and 340,443 marketable homes, respectively, and we had
139,558 and 146,265 residential and business customers,
respectively.




Because
we deliver multiple services to our customers, we report our total number of
connections for video, voice, HSD and other services in addition to our total
number of customers. We count each video, voice, HSD and other service purchase
as a separate connection. For example, a single customer who purchases video,
voice and HSD service would count as three connections. Similarly, a single
customer who purchases our HSD service and our voice 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 of
June 30, 2007 and 2008, we had 303,517 and 314,772 connections,
respectively.




Operating
Data —Bundled Services




Quarter
      EndedJune 30,
              2007
            
            
            September 30,
              2007
            
            
            December 31,
              2007
            
            
            March 31,
              2008
            
            
            June
      30,
              2008Operating
      Data:Marketable
      homes passed
            
            
            340,000
            
            
            
            339,678
            
            
            
            340,058
            
            
            
            340,554
            
            
            
            340,443Customers
            
            
            139,558
            
            
            
            144,889
            
            
            
            145,675
            
            
            
            147,267
            
            
            
            146,265Number
      of connections:Video
            
            
            96,582
            
            
            
            98,047
            
            
            
            99,453
            
            
            
            101,481
            
            
            
            100,578Voice
            
            
            116,204
            
            
            
            114,670
            
            
            
            114,303
            
            
            
            115,635
            
            
            
            115,095HSD
      and other
            
            
            90,731
            
            
            
            93,353
            
            
            
            95,125
            
            
            
            98,367
            
            
            
            99,099Total
      connections
            
            
            303,517
            
            
            
            306,070
            
            
            
            308,881
            
            
            
            315,483
            
            
            
            314,772Average
      monthly revenue per:Customer
      – bundled services
            
            $
            92.80
            
            
            $
            91.12
            
            
            $
            90.64
            
            
            $
            93.49
            
            
            $
            95.43Video
      connection
            
            
            55.98
            
            
            
            54.80
            
            
            
            55.78
            
            
            
            57.81
            
            
            
            58.31Voice
      connection
            
            
            40.48
            
            
            
            40.88
            
            
            
            40.34
            
            
            
            40.60
            
            
            
            40.85HSD
      and other connection
            
            
            31.73
            
            
            
            31.58
            
            
            
            32.27
            
            
            
            33.31
            
            
            
            34.46





9
 Index




Results
of Operations (dollars in millions)




Three Months Ended
              June
      30,
            
            
            Six Months Ended
              June
      30,2007
            
            
            Percent
      of Operating Revenues
            
            
            2008
            
            
            Percent
      of Operating Revenues
            
            
            Variance
            
            
            2007
            
            
            Percent
      of Operating Revenues
            
            
            2008
            
            
            Percent
      of Operating Revenues
            
            
            VarianceConsolidated
      Financial Data:Operating
      revenues:Video
            
            $
            16.1
            
            
            
            32
            %
            
            $
            17.7
            
            
            
            34
            %
            
            $
            1.6
            
            
            $
            31.6
            
            
            
            32
            %
            
            $
            35.1
            
            
            
            34
            %
            
            $
            3.5Voice
            
            
            14.2
            
            
            
            28
            
            
            
            14.1
            
            
            
            27
            
            
            
            (0.1
            )
            
            
            28.1
            
            
            
            29
            
            
            
            28.1
            
            
            
            28
            
            
            
            —HSD
      and other
            
            
            8.5
            
            
            
            17
            
            
            
            10.2
            
            
            
            20
            
            
            
            1.7
            
            
            
            16.9
            
            
            
            17
            
            
            
            19.9
            
            
            
            20
            
            
            
            3.0Bundled
      services
            
            
            38.8
            
            
            
            77
            
            
            
            42.0
            
            
            
            81
            
            
            
            3.2
            
            
            
            76.6
            
            
            
            78
            
            
            
            83.1
            
            
            
            82
            
            
            
            6.5Broadband
      transport services
            
            
            2.3
            
            
            
            5
            
            
            
            2.8
            
            
            
            5
            
            
            
            0.5
            
            
            
            4.7
            
            
            
            5
            
            
            
            5.4
            
            
            
            5
            
            
            
            0.7Network
      services
            
            
            8.8
            
            
            
            18
            
            
            
            7.2
            
            
            
            14
            
            
            
            (1.6
            )
            
            
            16.9
            
            
            
            17
            
            
            
            13.4
            
            
            
            13
            
            
            
            (3.5
            )Total
      operating revenues
            
            
            49.9
            
            
            
            100
            
            
            
            52.0
            
            
            
            100
            
            
            
            2.1
            
            
            
            98.2
            
            
            
            100
            
            
            
            101.9
            
            
            
            100
            
            
            
            3.7Operating
      expenses:Cost
      of revenues
            
            
            17.5
            
            
            
            35
            
            
            
            18.1
            
            
            
            35
            
            
            
            (0.6
            )
            
            
            34.0
            
            
            
            35
            
            
            
            35.0
            
            
            
            35
            
            
            
            (1.0
            )Selling,
      general and administrative
            
            
            23.3
            
            
            
            47
            
            
            
            23.0
            
            
            
            44
            
            
            
            0.3
            
            
            
            44.8
            
            
            
            46
            
            
            
            45.8
            
            
            
            45
            
            
            
            (1.0
            )Provision
      for doubtful accounts
            
            
            0.8
            
            
            
            1
            
            
            
            0.8
            
            
            
            1
            
            
            
            —
            
            
            
            1.2
            
            
            
            1
            
            
            
            1.4
            
            
            
            1
            
            
            
            (0.2
            )Depreciation
      and amortization
            
            
            13.9
            
            
            
            28
            
            
            
            13.9
            
            
            
            27
            
            
            
            —
            
            
            
            26.9
            
            
            
            27
            
            
            
            28.5
            
            
            
            28
            
            
            
            (1.6
            )Total
      operating expenses
            
            
            55.5
            
            
            
            111
            
            
            
            55.8
            
            
            
            107
            
            
            
            (0.3
            )
            
            
            106.9
            
            
            
            109
            
            
            
            110.7
            
            
            
            109
            
            
            
            (3.8
            )Operating
      loss
            
            
            (5.6
            )
            
            
            (11
            )
            
            
            (3.8
            )
            
            
            (7
            )
            
            
            1.8
            
            
            
            (8.7
            )
            
            
            (9
            )
            
            
            (8.8
            )
            
            
            (9
            )
            
            
            (0.1
            )Other
      income (expense):Interest
      income
            
            
            0.3
            
            
            
            1
            
            
            
            0.2
            
            
            
            —
            
            
            
            (0.1
            )
            
            
            0.7
            
            
            
            1
            
            
            
            0.5
            
            
            
            0.5
            
            
            
            (0.2
            )Interest
      expense, net of capitalized interest
            
            
            (6.8
            )
            
            
            (14
            )
            
            
            (7.8
            )
            
            
            (15
            )
            
            
            (1.0
            )
            
            
            (13.4
            )
            
            
            (14
            )
            
            
            (15.6
            )
            
            
            (15
            )
            
            
            (2.2
            )Net
      gain on sale of assets
            
            
            0.3
            
            
            
            1
            
            
            
            0.5
            
            
            
            1
            
            
            
            0.2
            
            
            
            0.2
            
            
            
            —
            
            
            
            0.5
            
            
            
            0.5
            
            
            
            0.3Total
      other income (expense)
            
            
            (6.2
            )
            
            
            (12
            )
            
            
            (7.1
            )
            
            
            (14
            )
            
            
            (0.9
            )
            
            
            (12.5
            )
            
            
            (13
            )
            
            
            (14.6
            )
            
            
            (14
            )
            
            
            (2.1
            )Loss
      before income tax expense
            
            
            (11.8
            )
            
            
            (23
            )
            
            
            (10.9
            )
            
            
            (21
            )
            
            
            0.9
            
            
            
            (21.2
            )
            
            
            (22
            )
            
            
            (23.4
            )
            
            
            (23
            )
            
            
            (2.2
            )Income
      tax expense
            
            
            (0.3
            )
            
            
            (1
            )
            
            
            (0.3
            )
            
            
            (1
            )
            
            
            —
            
            
            
            (0.6
            )
            
            
            —
            
            
            
            (0.6
            )
            
            
            (1
            )
            
            
            —Net
      loss
            
            $
            (12.1
            )
            
            
            (24
            )%
            
            $
            (11.2
            )
            
            
            (22
            )%
            
            $
            0.9
            
            
            $
            (21.8
            )
            
            
            (22
            )%
            
            $
            (24.0
            )
            
            
            (24
            )%
            
            $
            (2.2
            )





10
 Index





Operating Revenues.Operating
revenues increased $2.1 million, or 4%, during the three months ended June 30,
2008 and increased $3.7 million, or 4%, during the six months ended June 30,
2008. The increase during the three months ended June 30, 2008 was driven
primarily by a $3.2 million increase in bundled services revenue and a $0.5
million increase in broadband transport services revenue, partially offset by a
$1.6 million decrease in our revenues from network services.




The
increase during the six months ended June 30, 2008 was driven primarily by a
$6.5 million increase in bundled services revenue and a $0.7 million increase in
broadband transport services revenue, partially offset by a $3.5 million
decrease in our revenues from network services.




Operating
revenues for our bundled services increased $3.2 million, or 8%, during the
three months ended June 30, 2008 and increased $6.5 million, or 8%, during the
six months ended June 30, 2008. The increased revenues from bundled services for
both the reporting periods were primarily due to a 4% growth in the number of
connections, from 303,517 as of June 30, 2007 to 314,772 as of June 30, 2008,
and from the cable rate increases described below.  The additional
connections and revenues resulted primarily from the continued increase in
penetration of existing marketable homes and businesses and to a lesser extent,
sales to new marketable homes built during the period from July 1, 2007 through
June 30, 2008.




Operating
revenues for our video services increased $1.6 million, or 10%, during the three
months ended June 30, 2008 and increased $3.5 million, or 11%, during the six
months ended June 30, 2008. During the three and six months ended June 30, 2008,
approximately 32% of the $1.6 million increase and approximately 27% of the $3.5
million increase, respectively, in video revenues was due to our annual rate
increase, which occurred in January 2008, with the remainder due to increased
connections and an increased number of customers adding premium services and
advanced services, such as HD and DVR. Video services to our commercial business
customers remained flat at $0.3 million during both the three months ended June
30, 2007 and 2008 and increased 50% from $0.4 million to $0.6 million, during
the six months ended June 30, 2007 and 2008, respectively.




Operating
revenues for our voice services decreased $0.1 million, or 1%, during the three
months ended June 30, 2008 and remained flat at $28.1 million of revenue during
both the six months ended June 30, 2007 and 2008. During the three and six
months ended June 30, 2008, we have experienced a decrease in voice services to
residential customers due to competitive pressures and changing consumer
preferences, as more customers choose to adopt VoIP products or use their
wireless phones as their primary phone line.  However, our voice
services to commercial business customers increased 9% during both the three and
six months ended June 30, 2008, from $3.5 million to $3.8 million, during the
three months ended June 30, 2007 and 2008, respectively, and from $6.8 million
to $7.4 million, during the six months ended June 30, 2007 and 2008,
respectively.




Operating
revenues for our HSD and other services increased $1.7 million, or 20%, during
the three months ended June 30, 2008 and increased $3.0 million, or 18%, during
the six months ended June 30, 2008.   During the three and six
months ended June 30, 2008, the increases in HSD and other services were
primarily due to a 9% and 8% increase in average monthly revenue per connection,
respectively, as customers choose higher speed service
offerings.  Operating revenues for our HSD and other services for both
reporting periods also increased due to a 9% growth in the number of
connections, from 90,731 as of June 30, 2007 to 99,099 as of June 30,
2008.  HSD services to our commercial business customers increased 42%
from $1.2 million to $1.7 million, during the three months ended June 30, 2007
and 2008, respectively, and increased 50% from $2.2 million to $3.3 million,
during the six months ended June 30, 2007 and 2008, respectively.




Operating
revenues for our broadband transport services increased $0.5 million, or 22%,
during the three months ended June 30, 2008 and increased $0.7 million, or 15%,
during the six months ended June 30, 2008.  The increased revenues
from broadband transport services for both the reporting periods were the result
of an increase in construction and dark fiber leases as well as moderate
customer growth.




Operating
revenues for our network services decreased $1.6 million, or 18%, during the
three months ended June 30, 2008 and decreased $3.5 million, or 21%, during the
six months ended June 30, 2008.   The decrease during both
reporting periods was primarily related to a decrease in volume from
transmission services to carriers and other telecommunications
companies.  Common carrier traffic routed to us for termination is
largely dependent on traffic routed to our common carrier customers by their
customers. Competitive pricing pressures, business consolidations, and changing
consumer preferences for voice services continue to evolve in the markets served
by our other common carrier customers. If, as a result, our customers’ traffic
is reduced, or if their competitors’ costs to terminate or originate traffic are
reduced, our traffic will also likely be reduced.





11
 Index




Cost of Revenues.Our cost of
revenues increased $0.6 million, or 3%, during the three months ended June 30,
2008 and increased $1.0 million, or 3%, during the six months ended June 30,
2008.  Cost of revenues related to video services increased
approximately $1.2 million during the three months ended June 30, 2008 and
increased $2.5 million during the six months ended June 30, 2008. Other costs
supporting broadband transport services, voice services, HSD and other services,
and certain network services such as access fees and other fees that we pay to
other carriers to carry calls outside our networks and HSD transport costs
increased $0.8 million during the three months ended June 30, 2008 and increased
$1.5 million during the six months ended June 30, 2008.  These
increases in costs of revenues were partially offset by decreases in costs
associated with transmission services to carriers and other telecommunications
companies and national directory assistance fees, which decreased $1.4 million
during the three months ended June 30, 2008 and decreased $3.0 million during
the six months ended June 30, 2008.   The increase in direct
costs of video services is primarily due to programming costs increases, which
have been increasing on an aggregate basis due to an increase in connections and
on a per connection basis due to an increase in costs per channel.  We
expect this trend to continue and may not be able to pass these higher costs on
to customers because of competitive factors, which could adversely affect our
operations.  The decrease or increase in access and other carrier fees
related to costs that are variable usage-based costs that decrease or increase
as customer usage varies.




Selling, General and Administrative
Expense. Our selling, general and administrative expense decreased $0.3
million, or 1%, from $23.3 million to $23.0 million, during the three months
ended June 30, 2007 and 2008, respectively, and increased $1.0 million, or 2%,
from $44.8 million to $45.8 million, during the six months ended June 30, 2007
and 2008, respectively.




Decreases
in selling, general and administrative expense during the three months ended
June 30, 2008 related to sales and marketing, non-cash compensation expense,
network repairs and maintenance, and other miscellaneous expenses that totaled
approximately $1.2 million but such decreases were partially offset by increases
in legal and other professional services incurred in association with the
exploration of strategic alternatives to enhance shareholder value as well as a
reduction in the amount of indirect overhead costs capitalized to construction
projects, increases in property taxes and other miscellaneous expenses that
totaled approximately $0.9 million.




Increases
in selling, general and administrative expense during the six months ended June
30, 2008 related to increases in legal and other professional services incurred
in association with the exploration of strategic alternatives to enhance
shareholder value, employee healthcare costs, network repairs and maintenance,
software licensing and warranty fees, as well as a reduction in the amount of
indirect overhead costs capitalized to construction projects, and other
miscellaneous expenses that totaled approximately $2.3 million but such
increases were partially offset by decreases in sales and marketing, non-cash
compensation expense, employee travel, general insurance, property taxes and
other miscellaneous expenses that totaled approximately $1.3
million.




For the
year ending December 31, 2008, we expect our selling, general and administrative
expense to decrease as a percentage of revenue as compared to the year ended
December 31, 2007 as we continue to focus on cost reductions and gain
efficiencies.




Depreciation and Amortization
Expense.Our depreciation and amortization expense remained flat at $13.9
million during both the three months ended June 30, 2007 and 2008 and increased
$1.6 million, or 6%, during the six months ended June 30, 2008. The increase
during the six months ended June 30, 2008 related to property, plant and
equipment additions during the period from July 1, 2007 through June 30, 2008,
primarily for customer premise equipment, long haul fiber optic network upgrades
and capitalized labor expenses.  Partially offsetting the increases
related to these additions were decreases in depreciation expense related to
sales and dispositions as well as certain assets that became fully depreciated
during the period from July 1, 2007 through June 30, 2008.





12
 Index




During
the first quarter of 2007 and the second quarter of 2008, we received sales tax
refunds as a result of a review of vendor invoices in the years 2004, 2005 and
2006.  Because a portion of the sales taxes associated with those
invoices were capitalized as property and equipment and were partially
depreciated, $0.7 million and $0.2 million of the refund was applied as a
reduction of depreciation expense, during the first quarter of 2007 and the
second quarter of 2008, respectively.




Interest Expense. Interest
expense, which includes interest incurred net of capitalized interest, increased
$1.0 million, or 15%, during the three months ended June 30, 2008 and increased
$2.2 million, or 16%, during the six months ended June 30, 2008.  Our
interest expense increased primarily due to the private placement of an
additional $25.0 million of senior notes in the third quarter of
2007.




Non-GAAP
Financial Measures




We use
EBITDA and Adjusted EBITDA to measure our operating performance on net income
(loss), the most directly comparable GAAP financial measure, before interest
income, interest expense, income taxes, franchise taxes, depreciation and
amortization, referred to as “EBITDA.” Adjusted EBITDA is equal to EBITDA plus
non-cash compensation expense. EBITDA and Adjusted EBITDA are not measures of
financial performance under GAAP. We believe EBITDA and Adjusted EBITDA are
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. A limitation of this measure, however, is that it does not reflect
the periodic costs of certain capitalized tangible and intangible assets used in
generating revenues in our businesses. We manage all areas of our business to
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 and Adjusted EBITDA do not purport to represent
operating loss or cash flow from operating activities, as those terms are
defined under GAAP, and should not be considered as an alternative to those
measurements as an indicator of our performance.




We
believe non-cash stock-based compensation is similar to amortization and
interest expense, in that it is more useful to report EBITDA net of this amount
to better measure operating performance in comparison to prior periods. However,
because of the nature of these charges, we refer to EBITDA, net of non-cash
stock-based compensation charges as “Adjusted EBITDA.”




Adjusted
EBITDA increased $1.7 million, or 19%, during the three months ended June 30,
2008 and increased $1.9 million, or 10%, during the six months ended June 30,
2008.




The
increase in Adjusted EBITDA during the three months ended June 30, 2008 was
primarily due to a $2.1 million increase in revenues as well as a $0.2 million
increase in net gain on sale of assets, partially offset by a $0.6 million
increase in costs of revenues.




The
increase in Adjusted EBITDA during the six months ended June 30, 2008 was
primarily due to a $3.7 million increase in revenues as well as a $0.3 million
increase in net gain on sale of assets, partially offset by a $1.1 million
increase in selling, general and administrative expenses, excluding stock-based
compensation and franchise tax expense and a $1.0 million increase in costs of
revenues.




Because 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 the result of adding
residential and 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.





13
 Index





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




Three
      Months Ended
              June
      30,
            
            
            Six
      Months Ended
              June
      30,2007
            
            
            2008
            
            
            2007
            
            
            2008(in
      thousands)
            
            
            (in
      thousands)Net
      loss as reported
            
            $
            (12,058
            )
            
            $
            (11,194
            )
            
            $
            (21,794
            )
            
            $
            (23,958
            )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
            
            
            (272
            )
            
            
            (166
            )
            
            
            (705
            )
            
            
            (495
            )Interest
      expense, net of capitalized interest
            
            
            6,765
            
            
            
            7,770
            
            
            
            13,434
            
            
            
            15,562Income
      tax expense
            
            
            280
            
            
            
            290
            
            
            
            560
            
            
            
            569Franchise
      tax expense (benefit)
            
            
            143
            
            
            
            —
            
            
            
            (268
            )
            
            
            —Depreciation
      and amortization
            
            
            13,854
            
            
            
            13,869
            
            
            
            26,898
            
            
            
            28,539EBITDA
      (1)
            
            
            8,712
            
            
            
            10,569
            
            
            
            18,125
            
            
            
            20,217Non-cash
      compensation expense
            
            
            254
            
            
            
            94
            
            
            
            370
            
            
            
            208Adjusted
      EBITDA (1)
            
            $
            8,966
            
            
            $
            10,663
            
            
            $
            18,495
            
            
            $
            20,425




(1)EBITDA andAdjusted EBITDA includes
a net gain on sale of assets of $0.3 million and $0.5 million during the three
months ended June 30, 2007 and 2008, respectively and $0.2 million and $0.5
million during the six months ended June 30, 2007 and 2008,
respectively.




Liquidity
and Capital Resources




Sources
and Uses of Funds




Since
inception, we have been funded primarily with private equity investments and
issuances of debt securities. Our current primary sources of liquidity are cash
on hand and cash flows from operating activities.




As of
June 30, 2008, we had total cash and cash equivalents of $35.3 million and $207
million of long-term debt and capital lease obligations outstanding, including
the current portion, and net of discounts and premiums of $4.4
million.  In April 2008, we paid $13.5 million of interest due on our
senior notes.




As of
June 30, 2008, we had net working capital of $8.0 million, compared to net
working capital of $19.8 million as of December 31, 2007.  The
$11.8 million decrease in working capital resulted primarily from a $12.9
million decrease in current assets primarily due to the $13.5 million interest
payment on our senior notes partially offset by a $1.1 million net decrease in
current liabilities.




Provided
that we meet our cash flow projections in our current business plan, we expect
that our available cash and cash equivalents and cash generated from operations
will be sufficient to fund our existing operations, planned capital spending and
other commitments over the next twelve months. We believe 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 over the next
twelve months. This covenant prohibits our making certain capital expenditures
if such expenditures would result in us having less than $20 million in cash and
cash equivalents. Our business plan is based on our 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,
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. These financings could increase our
level of indebtedness or result in dilution to our equity holders. Additionally,
we can call our existing senior notes at any time giving us the near term
ability to refinance our bonds in the event better pricing and terms were
available to us in the market.





14
 Index




Cash
Flows from Operating Activities




Net cash
provided by operating activities totaled $5.2 million and $6.1 million for the
six months ended June 30, 2007 and 2008, respectively. The $0.9 million increase
in net cash provided by operating activities primarily reflects a $5.3 million
increase in cash collected from customers as well as a $0.4 million increase in
proceeds from sales tax refunds attributed to operating
activities.  These increases in net cash provided by operating
activities were partially offset by a $1.4 million increase in payments to
vendors and employees, a $2.1 million increase in interest expense paid, a $1.0
million increase in income taxes paid, as well as a $0.3 million decrease in
interest income received. The net cash flow activity related to operations
consisted primarily of our operating results adjusted by changes in operating
assets and liabilities and non-cash transactions including:




•
            depreciation,
      amortization and accretion expense;




•
            non-cash
      compensation expense;




•
            non-cash
      interest expense;




•
            provision
      for doubtful accounts; and




•
            (gain)
      loss on sale/disposal of assets.




Cash
Flows from Investing Activities




Our net
cash used in investing activities for the six months ended June 30, 2007 and
2008 was $18.1 million and $15.6 million, respectively, and consisted primarily
of $19.6 million and $16.2 million in property, plant and equipment purchases,
respectively, discussed below partially offset by $1.1 million and $0.3 million
proceeds, respectively, from sales tax refunds applicable to capital assets and
$0.4 million and $0.2 million proceeds from sale of assets,
respectively.




Cash
Flows from Financing Activities




Our cash
flows from financing activities for the six months ended June 30, 2007 and 2008
was $1.5 million cash provided by financing activities and $3.3 million cash
used in financing activities, respectively.  Cash provided by
financing activities consisted of $3.8 million proceeds from equipment financing
during the six months ended June 30, 2007.  Cash used in financing
activities for the six months ended June 30, 2007 and 2008 consisted
of  $2.1 million and $2.6 million in payments on long-term debt and
capital leases, respectively, as well as $0.2 million and $0.7 million net
repayments, respectively, on zero-balance bank cash accounts.




Capital
Expenditures




We had
capital expenditures of approximately $19.6 million and $16.2 million, including
capitalized interest, during the six months ended June 30, 2007 and 2008,
respectively. These capital expenditures 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.  The Indenture governing our senior notes prohibits us from
making certain 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.  We intend to manage our capital
expenditures in accordance with the covenant set forth in the Indenture to
ensure that cash and cash equivalents are not less than $20
million.




Contractual
Obligations and Commercial Commitments




During
the six months ended June 30, 2008, our aggregate contractual obligations
decreased approximately $18.5 million compared to those previously described in
Part II, Item 7 included in Grande’s Annual Report on Form 10-K for the year
ended December 31, 2007, primarily as a result of $13.5 million interest payment
on the senior notes and $6.3 million in payments on equipment financing, capital
and operating leases and maintenance and purchase obligations.  These
payments are partially offset by increases in obligations of $1.3 million
primarily related to new vehicle operating leases, office equipment operating
leases and computer capital leases.





15
 Index




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




Long-term Debt and Equipment
Financing. In March 2004, the Company completed a private placement
offering for 136,000 units, with each unit consisting of (1) $1,000 of
senior notes and (2) a warrant to purchase 100.336 shares of common stock.
The senior notes mature on April 1, 2011 and 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.  In March 2006 and July 2007, we
raised net proceeds of approximately $30.5 million and $25.8 million,
respectively, in a private placement of an additional $32 million and $25
million, respectively, in aggregate principal amount of senior notes. These
additional senior notes were issued under the Indenture and are part of the same
series of senior notes as those issued in March 2004.




Our
subsidiary, Grande Communications Networks, Inc., (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
Guarantor’s guarantees thereof are secured by a first priority perfected
security interest, subject to certain permitted encumbrances, in substantially
all of our subsidiary’s property and assets, including substantially all of its
property, plant and equipment.




The
senior notes may be redeemed, at our election, as a whole or from time to time
in part at any time upon not less than 10 nor more than 60 days’ notice to each
holder of senior 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
            
            Percentage2008
            107.00%2009
            103.50%2010
      and thereafter
            100.00%




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 contains covenants that, among other things, limit our ability
to:




•
            incur
      additional indebtedness, issue disqualified capital stock (as defined in
      the Indenture) and, in the case of our restricted subsidiaries, issue
      preferred stock;




•
            create
      liens on our assets;




•
            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 restricted subsidiaries to pay
      dividends or make other payments to us;
and




•
            engage
      in certain business activities.





16
 Index




In
addition, the Indenture contains a covenant restricting certain capital
expenditures 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.




During
2007, we completed equipment financing of $4.1 million with a term of 24 months,
which was utilized for the purchase of network equipment.  The
financing is secured by the network equipment purchased with the proceeds of the
borrowing and bears interest at an effective annual rate of approximately 15.3%
with monthly payments equal to 4.2% multiplied by the total amount
borrowed.  This financing is permitted under the Indenture governing
the senior notes.




Capital Leases.We lease
office and facilities space under leasing arrangements. We also have certain
capital leases for customer premise equipment, telecom switching equipment,
software, computers and 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 Commitments:During
January 2005, we entered into a minimum purchase agreement with a vendor for the
purchase of fiber optic equipment and installation and maintenance services
through January 2008. During March 2008, we entered into Amendment No. 1 to the
minimum purchase agreement extending the term of the purchase commitment through
December 31, 2008. If we do not make the minimum purchases through the
expiration or termination of this agreement, we will be required to pay a fee of
30% of the remaining unfulfilled amount.




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 because, 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
also entered into several employment agreements with key executives of the
Company. For a discussion surrounding the terms of these agreements, please
refer to “Executive Compensation” under the caption “Employment Agreements,
Severance Benefits and Change in Control Provisions” included in Grande’s Annual
Report on Form 10-K for the year ended December 31, 2007.




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.




There
have been no material changes to the critical accounting policies and estimates
previously described in Part II, Item 7 included in Grande’s Annual Report on
Form 10-K for the year ended December 31, 2007.





17
 Index




Recent
Accounting Pronouncements




Refer to
“Recent Accounting Pronouncements” included in Management’s Discussion and
Analysis of Financial Condition and Results of Operation in our Annual Report on
Form 10-K for the year ended December 31, 2007.




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.




ITEM 4T.  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 June 30, 2008.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that as of June 30, 2008, our disclosure controls and
procedures are effective in timely alerting them to material information
relating to Grande, including its consolidated subsidiary, 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 three months ended June 30, 2008, 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.




In
designing and evaluating the disclosure controls and procedures and internal
controls over financial reporting, our management recognized that any controls
and procedures, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance of achieving the desired control objectives,
and management necessarily was required to apply its judgment in evaluating the
cost-benefit relationship of possible controls and
procedures.





18
 Index





PART II.  OTHER INFORMATION




ITEM 1.   LEGAL PROCEEDINGS




We are
subject to litigation in the normal course of our business. However, there are
no pending proceedings that 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 in Part
I, Item 1A included in Grande’s Annual Report on Form 10-K for the year ended
December 31, 2007.




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




During
the three months ended June 30, 2008, we issued 19,500 shares of common stock in
connection with the exercise of options with a weighted average exercise price
of $0.05 per share and awarded options to purchase 280,000 shares of common
stock with an exercise price of $0.05 per share. We relied on the exemption set
forth in Section 4(2) of the Securities Act of 1933 in issuing these
securities.




ITEM 3.   DEFAULTS UPON 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
three months ended June 30, 2008.




ITEM 5.   OTHER INFORMATION




None




ITEM 6.   EXHIBITS




Unless designated by an asterisk
indicating that such document has been filed herewith, the Exhibits listed below
have been heretofore filed by the Company pursuant to Section 13 or 15(d)
of the Exchange Act and are hereby incorporated herein by reference to the
pertinent prior filing.




ExhibitNo.
            
            Description3.1
            
            Restated
      Certificate of Incorporation of Grande Communications Holdings, Inc.
      (previously filed as exhibit 3.1 to Form 10-K dated March 31,
      2006).3.2
            
            Bylaws
      of Grande Communications Holdings, Inc. (previously filed as exhibit 3.2
      to Form S-1 dated May 18, 2004).3.3
            
            Amendment
      No. 1 to Bylaws of Grande Communications Holdings, Inc. (previously filed
      as exhibit 3.3 to Form 10-Q dated November 5,
  2004).3.4
            
            Amendment
      No. 2 to Bylaws of Grande Communications Holdings, Inc. (previously filed
      as exhibit 3.4 to Form 10-K dated March 30, 2006).4.1
            
            Indenture,
      dated as of March 23, 2004, by and among Grande Communications Holdings,
      Inc., the Guarantors named therein and U.S. Bank National Association
      (previously filed as exhibit 4.1 to Form S-1 dated May 18,
      2004).4.2
            
            Registration
      Rights Agreement, dated as of March 23, 2004, by and among Grande
      Communications Holdings, Inc., the Guarantors named therein, Bear, Stearns
      & Co. Inc. and Deutsche Bank Securities Inc. (previously filed as
      exhibit 4.2 to Form S-1 dated May 18,
  2004).




19
 Index




ExhibitNo.
            
            Description4.3
            
            Form
      of 14% Senior Secured Note due 2011 issued in connection with March 2004
      offering (previously filed as exhibit 4.3 to Form S-1 dated May 18,
      2004).4.4
            
            Pledge
      and Security Agreement, dated March 23, 2004, by and among Grande
      Communications Holdings, Inc., Grande Communications Networks, Inc.,
      Grande Communications ClearSource, Inc., Grande Communications, Inc.,
      Grande Communications Houston, Inc., Denton Telecom Holdings I, L.L.C.,
      Denton Telecom Investors I, L.L.C, Denton Telecom Partners I, L.P., and
      U.S. Bank National Association (previously filed as exhibit 4.4 to Form
      S-1 dated May 18, 2004).4.5
            
            Form
      of 14% Senior Secured Notes due 2011 issued in connection with March 2006
      private placement (previously filed as exhibit 4.5 to Form 10-K dated
      March 31, 2006).4.6
            
            Supplemental
      Indenture, dated as of July 18, 2007, by and among Grande Communications
      Holdings, Inc., the Guarantor named therein and U.S. Bank National
      Association (previously filed as exhibit 10.1 to Form 8-K dated July 18,
      2007).31.1*
            
            Certification
      of Chief Executive Officer pursuant to Rule 13a – 14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.31.2*
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a – 14(a) promulgated under
      the Securities Exchange Act of 1934, as amended.32.1*
            
            Certification
      pursuant to Rule 13a – 14(b) promulgated under the Securities Exchange Act
      of 1934, as amended, and 18 U.S.C. Section
1350.





*
            Filed
      herewith.





20
 Index





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:
      August 8, 2008
            By:
            /s/    Michael
      L. WilfleyMichael
      L. WilfleyChief
      Financial Officer(Duly
      Authorized Officer and Principal Financial
  Officer)






21