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 September 30, 2008




OR




o
            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 ofincorporation
      or organization)
            (I.R.S.
      EmployerIdentification
      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 o
            Accelerated
      filer  ̈
            Non-accelerated
      filer x
            Smaller
      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 October 31,
2008 was 12,784,072.












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
                8Item
      3.
                Quantitative and Qualitative Disclosures about Market
      Risk
                19Item
      4T.
                Controls and Procedures
                19Part
      II.
                Other Information
                20Item
      1.
                Legal Proceedings
                20Item
      1A.
                Risk Factors
                20Item
      2.
                Unregistered Sales of Equity Securities and Use of
      Proceeds
                20Item
      3.
                Defaults Upon Senior Securities
                20Item
      4.
                Submission of Matters to a Vote of Security
      Holders
                20Item
      5.
                Other Information
                21Item
      6.
                Exhibits
                21Signatures
                22




Table of Contents


PART
I.   FINANCIAL INFORMATION





ITEM
1.    FINANCIAL
STATEMENTS


GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED BALANCE SHEETS


(In
thousands, except share data)


December
      31,
                                                                                                                                                      2007
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    September
      30,
                                                                                                                                                      2008(unaudited)AssetsCurrent
      assets:Cash
      and cash equivalents, net of restricted cash of $3,129
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    48,138
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    37,531Accounts
      receivable, net of allowance for doubtful accounts of $1,138 and
      $1,289
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    17,793
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    16,840Prepaid
      expenses and other current assets
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,867
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2,597Total
      current assets
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    67,798
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    56,968Property,
      plant and equipment, net of accumulated depreciation of $313,526 and
      $355,423
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    249,310
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    227,936Intangible
      assets, net of accumulated amortization of $1,417 and
    $1,600
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,398
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,215Debt
      issue costs, net
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    4,255
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    3,466Restricted
      cash
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    3,129
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    3,129Deposits
      and other long-term assets
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    353
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    593Total
      assets
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    326,243
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    293,307Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    13,809
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    14,058Accrued
      liabilities
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    15,328
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    16,022Accrued
      interest payable
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    6,755
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    13,510Deferred
      revenue and customer deposits
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    6,996
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    7,829Current
      portion of long-term debt
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,612
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    2,405Current
      portion of capital lease obligations
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    3,548
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,990Total
      current liabilities
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    48,048
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    55,814Deferred
      rent
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,228
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    1,194Deferred
      revenue
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    4,377
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    4,226Capital
      lease obligations, net of current portion
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    13,592
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    12,625Long
      term debt, net of current portion
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    189,994
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    188,958Total
      liabilities
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    257,239
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    262,817Stockholders’
      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; 786,835,883 shares authorized,
      13,175,940 and 13,284,072 shares issued, 12,675,940 and 12,784,072 shares
      outstanding, as of December 31, 2007 and September 30, 2008,
      respectively
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    13
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    13Additional
      paid-in capital
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    509,312
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    509,617Treasury
      stock, at cost
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (5
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (5
                                                                                                                                                    )Accumulated
      deficit
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (440,757
                                                                                                                                                    )
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    (479,576
                                                                                                                                                    )Total
      stockholders’ equity
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    69,004
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    30,490Total
      liabilities and stockholders’ equity
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    326,243
                                                                                                                                                    
                                                                                                                                                    
                                                                                                                                                    $
                                                                                                                                                    293,307




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


1
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS


(UNAUDITED)


(In
thousands, except per share data)





Three
      Months Ended
                                                                                September
      30,
                                                                              
                                                                              
                                                                              Nine
      Months Ended
                                                                                September
      30,2007
                                                                              
                                                                              
                                                                              2008
                                                                              
                                                                              
                                                                              2007
                                                                              
                                                                              
                                                                              2008Operating
      revenues
                                                                              
                                                                              $
                                                                              49,348
                                                                              
                                                                              
                                                                              $
                                                                              51,963
                                                                              
                                                                              
                                                                              $
                                                                              147,595
                                                                              
                                                                              
                                                                              $
                                                                              153,859Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
                                                                              
                                                                              
                                                                              16,948
                                                                              
                                                                              
                                                                              
                                                                              17,792
                                                                              
                                                                              
                                                                              
                                                                              50,981
                                                                              
                                                                              
                                                                              
                                                                              52,761Selling,
      general and administrative
                                                                              
                                                                              
                                                                              22,847
                                                                              
                                                                              
                                                                              
                                                                              24,679
                                                                              
                                                                              
                                                                              
                                                                              67,638
                                                                              
                                                                              
                                                                              
                                                                              70,486Provision
      for doubtful accounts
                                                                              
                                                                              
                                                                              911
                                                                              
                                                                              
                                                                              
                                                                              989
                                                                              
                                                                              
                                                                              
                                                                              2,185
                                                                              
                                                                              
                                                                              
                                                                              2,409Depreciation
      and amortization
                                                                              
                                                                              
                                                                              14,946
                                                                              
                                                                              
                                                                              
                                                                              15,683
                                                                              
                                                                              
                                                                              
                                                                              41,843
                                                                              
                                                                              
                                                                              
                                                                              44,221Total
      operating expenses
                                                                              
                                                                              
                                                                              55,652
                                                                              
                                                                              
                                                                              
                                                                              59,143
                                                                              
                                                                              
                                                                              
                                                                              162,647
                                                                              
                                                                              
                                                                              
                                                                              169,877Operating
      loss
                                                                              
                                                                              
                                                                              (6,304
                                                                              )
                                                                              
                                                                              
                                                                              (7,180
                                                                              )
                                                                              
                                                                              
                                                                              (15,052
                                                                              )
                                                                              
                                                                              
                                                                              (16,018
                                                                              )Other
      income (expense):Interest
      income
                                                                              
                                                                              
                                                                              539
                                                                              
                                                                              
                                                                              
                                                                              125
                                                                              
                                                                              
                                                                              
                                                                              1,244
                                                                              
                                                                              
                                                                              
                                                                              620Interest
      expense, net of capitalized interest
                                                                              
                                                                              
                                                                              (7,795
                                                                              )
                                                                              
                                                                              
                                                                              (7,738
                                                                              )
                                                                              
                                                                              
                                                                              (21,229
                                                                              )
                                                                              
                                                                              
                                                                              (23,300
                                                                              )Net
      gain on sale of assets
                                                                              
                                                                              
                                                                              204
                                                                              
                                                                              
                                                                              
                                                                              209
                                                                              
                                                                              
                                                                              
                                                                              447
                                                                              
                                                                              
                                                                              
                                                                              726Total
      other income (expense)
                                                                              
                                                                              
                                                                              (7,052
                                                                              )
                                                                              
                                                                              
                                                                              (7,404
                                                                              )
                                                                              
                                                                              
                                                                              (19,538
                                                                              )
                                                                              
                                                                              
                                                                              (21,954
                                                                              )Loss
      before income tax expense
                                                                              
                                                                              
                                                                              (13,356
                                                                              )
                                                                              
                                                                              
                                                                              (14,584
                                                                              )
                                                                              
                                                                              
                                                                              (34,590
                                                                              )
                                                                              
                                                                              
                                                                              (37,972
                                                                              )Income
      tax expense
                                                                              
                                                                              
                                                                              (281
                                                                              )
                                                                              
                                                                              
                                                                              (277
                                                                              )
                                                                              
                                                                              
                                                                              (841
                                                                              )
                                                                              
                                                                              
                                                                              (847
                                                                              )Net
      loss
                                                                              
                                                                              $
                                                                              (13,637
                                                                              )
                                                                              
                                                                              $
                                                                              (14,861
                                                                              )
                                                                              
                                                                              $
                                                                              (35,431
                                                                              )
                                                                              
                                                                              $
                                                                              (38,819
                                                                              )Basic
      and diluted net loss per share
                                                                              
                                                                              $
                                                                              (1.08
                                                                              )
                                                                              
                                                                              $
                                                                              (1.16
                                                                              )
                                                                              
                                                                              $
                                                                              (2.81
                                                                              )
                                                                              
                                                                              $
                                                                              (3.04
                                                                              )Basic
      and diluted weighted average number of common shares
      outstanding
                                                                              
                                                                              
                                                                              12,611
                                                                              
                                                                              
                                                                              
                                                                              12,782
                                                                              
                                                                              
                                                                              
                                                                              12,601
                                                                              
                                                                              
                                                                              
                                                                              12,759




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


2
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS


(UNAUDITED)


(In
thousands)





Nine
      Months Ended
                                                          September
      30,2007
                                                        
                                                        
                                                        2008Cash
      flows from operating activities:Net
      loss
                                                        
                                                        $
                                                        (35,431
                                                        )
                                                        
                                                        $
                                                        (38,819
                                                        )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
                                                        
                                                        
                                                        41,654
                                                        
                                                        
                                                        
                                                        44,037Amortization
      of intangible assets
                                                        
                                                        
                                                        189
                                                        
                                                        
                                                        
                                                        184Amortization
      of deferred financing costs
                                                        
                                                        
                                                        762
                                                        
                                                        
                                                        
                                                        789Amortization
      of other assets
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        8Provision
      for doubtful accounts
                                                        
                                                        
                                                        2,185
                                                        
                                                        
                                                        
                                                        2,409Amortization
      of debt discounts/premiums
                                                        
                                                        
                                                        938
                                                        
                                                        
                                                        
                                                        942Non-cash
      compensation expense
                                                        
                                                        
                                                        499
                                                        
                                                        
                                                        
                                                        299Net
      gain on sale of assets
                                                        
                                                        
                                                        (447
                                                        )
                                                        
                                                        
                                                        (726
                                                        )Changes
      in operating assets and liabilities:Accounts
      receivable
                                                        
                                                        
                                                        (3,799
                                                        )
                                                        
                                                        
                                                        (1,378
                                                        )Prepaid
      expenses and other assets
                                                        
                                                        
                                                        (842
                                                        )
                                                        
                                                        
                                                        (970
                                                        )Accounts
      payable
                                                        
                                                        
                                                        690
                                                        
                                                        
                                                        
                                                        1,141Accrued
      liabilities and interest payable
                                                        
                                                        
                                                        7,684
                                                        
                                                        
                                                        
                                                        7,449Deferred
      revenue
                                                        
                                                        
                                                        129
                                                        
                                                        
                                                        
                                                        1,313Deferred
      rent
                                                        
                                                        
                                                        (28
                                                        )
                                                        
                                                        
                                                        (34
                                                        )Net
      cash provided by operating activities
                                                        
                                                        
                                                        14,183
                                                        
                                                        
                                                        
                                                        16,644Cash
      flows from investing activities:Purchases
      of property, plant and equipment
                                                        
                                                        
                                                        (27,174
                                                        )
                                                        
                                                        
                                                        (23,204
                                                        )Proceeds
      from sale of assets
                                                        
                                                        
                                                        590
                                                        
                                                        
                                                        
                                                        360Proceeds
      from sales tax refunds
                                                        
                                                        
                                                        1,130
                                                        
                                                        
                                                        
                                                        349Other
      investing activity
                                                        
                                                        
                                                        (45
                                                        )
                                                        
                                                        
                                                        —Net
      cash used in investing activities
                                                        
                                                        
                                                        (25,499
                                                        )
                                                        
                                                        
                                                        (22,495
                                                        )Cash
      flows from financing activities:Net
      proceeds from borrowings
                                                        
                                                        
                                                        30,054
                                                        
                                                        
                                                        
                                                        —Payments
      of long-term debt and capital lease obligations
                                                        
                                                        
                                                        (3,076
                                                        )
                                                        
                                                        
                                                        (3,870
                                                        )Net
      repayments on zero-balance cash account
                                                        
                                                        
                                                        (667
                                                        )
                                                        
                                                        
                                                        (892
                                                        )Deferred
      financing costs
                                                        
                                                        
                                                        (165
                                                        )
                                                        
                                                        
                                                        —Other
      financing activity
                                                        
                                                        
                                                        —
                                                        
                                                        
                                                        
                                                        6Net
      cash provided by (used in) financing activities
                                                        
                                                        
                                                        26,146
                                                        
                                                        
                                                        
                                                        (4,756
                                                        )Net
      change in cash and cash equivalents
                                                        
                                                        
                                                        14,830
                                                        
                                                        
                                                        
                                                        (10,607
                                                        )Cash
      and cash equivalents, beginning of period
                                                        
                                                        
                                                        43,948
                                                        
                                                        
                                                        
                                                        48,138Cash
      and cash equivalents, end of period
                                                        
                                                        $
                                                        58,778
                                                        
                                                        
                                                        $
                                                        37,531Non-cash
      investing and financing activity:Capital
      lease obligations
                                                        
                                                        $
                                                        437
                                                        
                                                        
                                                        $
                                                        160




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


3
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


NOTES
TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS


(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 September
30, 2008, and for the three and nine months ended September 30, 2007 and 2008.
Operating results for the three and nine months ended September 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 nine months ended September 30, 2007 to conform to
the classifications used in the current period. In the condensed consolidated
statements of operations, for the three and nine months ended September 30,
2007, provision for doubtful accounts of $0.9 million and $2.2 million,
respectively, previously recorded in the line item “selling, general and
administrative,” have been reclassified as “provision for doubtful accounts” for
such periods.


4
 Table of Contents




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
                                      
                                      
                                      September
      30,
                                        2008(in
      thousands)Accrued
      property taxes
                                      
                                      $
                                      4,405
                                      
                                      
                                      $
                                      3,322Accrued
      compensation
                                      
                                      
                                      2,801
                                      
                                      
                                      
                                      4,153Accrued
      taxes—other
                                      
                                      
                                      2,662
                                      
                                      
                                      
                                      2,582Accrued
      programming
                                      
                                      
                                      2,587
                                      
                                      
                                      
                                      2,976Accrued
      other
                                      
                                      
                                      2,873
                                      
                                      
                                      
                                      2,989Accrued
      liabilities
                                      
                                      $
                                      15,328
                                      
                                      
                                      $
                                      16,022




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. The Company has established a valuation allowance equal to
the net deferred tax asset due to uncertainties regarding the realization of the
deferred tax asset based on the Company’s lack of earnings history.




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
 Table of Contents


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 Guarantor’s property and
assets, including substantially all of its property, plant and
equipment.




The
senior notes may be redeemed, at the Company’s 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.





April
      1,
                          
                          Percentage2008
                          107.00%2009
                          103.50%2010
      and thereafter
                          100.00%




If the
Company experiences specific kinds of change of control events, each holder of
senior notes may require the Company 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 the Company’s
ability to:




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




•      create
liens on assets;




•      pay
dividends on, redeem or repurchase 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 restricted subsidiaries to pay dividends or make
other payments to the Company; and




•      engage
in certain business activities.




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 after giving effect to such expenditures.
This covenant could adversely affect the Company’s ability to make planned
capital expenditures.




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.




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.


6
 Table of Contents


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




Insurance




The
Company carries a broad range of insurance coverage, including property,
business, auto liability, general liability, directors and officers and workers’
compensation insurance 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.




7.
Subsequent Events




Interest
Payment




On
October 1, 2008, the Company paid $13.5 million of interest due on the senior
notes.  The Company’s cash and cash equivalents on October 1, 2008
subsequent to the interest payment on the senior notes was $21.8
million.




7
 Table of Contents


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 its subsidiary or our management are intended to identify these
forward-looking statements. All of the statements we make 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 Operations 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 its 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, apartment units and
condominium units, passed by our networks. 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 September 30, 2007 and 2008, we had the ability to market services to 339,678
and 340,048 distinct homes and businesses over our networks, respectively, and
had 144,889 and 146,513 residential and business customers, respectively. Our
operating revenues were $49.3 million and $51.9 million for the three months
ended September 30, 2007 and 2008, respectively, and $147.6 million and $153.9
million for the nine months ended September 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 $38.9 million and $42.2 million for the three months
ended September 30, 2007 and 2008, respectively, and $115.5 million and $125.3
million for the nine months ended September 30, 2007 and 2008,
respectively.  We have continued to grow our bundled services to
commercial business customers, which increased 26% to $6.3 million during the
three months ended September 30, 2008 from $5.0 million during the three months
ended September 30, 2007 and increased 22% to $17.6 million during the nine
months ended September 30, 2008 from $14.4 million during the nine months ended
September 30, 2007.
  8
 Table of Contents
   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, we believe we can continue to grow our business within the
markets in which we currently operate.
  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 $2.4 million and $3.9 million for the three months ended September 30, 2007
and 2008, respectively, and $7.2 million and $9.3 million for the nine months
ended September 30, 2007 and 2008, respectively.
  In July
2000, when our network construction was still in a very early stage, we acquired
substantially all of the assets of 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 is also the platform that provides
wholesale network services to medium and large enterprises and communications
carriers in the wholesale market. Operating revenues for network services were
$8.0 million and $5.8 million for the three months ended September 30, 2007 and
2008, respectively, and $24.9 million and $19.3 million for the nine months
ended September 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 nine months ended September 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:
  •
              general
      economic conditions, including 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,
  •
              our
      ability to compete effectively depends on our ability to keep pace with
      advances in technology and maintain high-quality services at prices
      generally equal to or below those charged by our competitors,
      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.
  9
 Table of Contents
   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.  If our cash position falls below the $20 million required by
the covenant set forth in the Indenture, we will be prohibited from making
certain capital expenditures.
  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, apartment units and condominium units, passed by
our networks. As of September 30, 2007 and 2008, our networks passed 339,678 and
340,048 marketable homes, respectively, and we had 144,889 and 146,513
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
September 30, 2007 and 2008, we had 306,070 and 317,751 connections,
respectively.
  Operating
Data —Bundled Services
 Quarter
      EndedSeptember
      30,
                                                    2007
                                                  
                                                  
                                                  December
      31,
                                                    2007
                                                  
                                                  
                                                  March31,
                                                    2008
                                                  
                                                  
                                                  June
      30,
                                                    2008
                                                  
                                                  
                                                  September
      30,
                                                    2008Operating
      Data:Marketable
      homes passed
                                                  
                                                  
                                                  339,678
                                                  
                                                  
                                                  
                                                  340,058
                                                  
                                                  
                                                  
                                                  340,554
                                                  
                                                  
                                                  
                                                  340,443
                                                  
                                                  
                                                  
                                                  340,048Customers
                                                  
                                                  
                                                  144,889
                                                  
                                                  
                                                  
                                                  145,675
                                                  
                                                  
                                                  
                                                  147,267
                                                  
                                                  
                                                  
                                                  146,265
                                                  
                                                  
                                                  
                                                  146,513Number
      of connections:Video
                                                  
                                                  
                                                  98,047
                                                  
                                                  
                                                  
                                                  99,453
                                                  
                                                  
                                                  
                                                  101,481
                                                  
                                                  
                                                  
                                                  100,578
                                                  
                                                  
                                                  
                                                  101,673Voice
                                                  
                                                  
                                                  114,670
                                                  
                                                  
                                                  
                                                  114,303
                                                  
                                                  
                                                  
                                                  115,635
                                                  
                                                  
                                                  
                                                  115,095
                                                  
                                                  
                                                  
                                                  115,078HSD
      and other
                                                  
                                                  
                                                  93,353
                                                  
                                                  
                                                  
                                                  95,125
                                                  
                                                  
                                                  
                                                  98,367
                                                  
                                                  
                                                  
                                                  99,099
                                                  
                                                  
                                                  
                                                  101,000Total
      connections
                                                  
                                                  
                                                  306,070
                                                  
                                                  
                                                  
                                                  308,881
                                                  
                                                  
                                                  
                                                  315,483
                                                  
                                                  
                                                  
                                                  314,772
                                                  
                                                  
                                                  
                                                  317,751Average
      monthly revenue per:Customer
      – bundled services
                                                  
                                                  $
                                                  91.12
                                                  
                                                  
                                                  $
                                                  90.64
                                                  
                                                  
                                                  $
                                                  93.49
                                                  
                                                  
                                                  $
                                                  95.43
                                                  
                                                  
                                                  $
                                                  96.22Video
      connection
                                                  
                                                  
                                                  54.80
                                                  
                                                  
                                                  
                                                  55.78
                                                  
                                                  
                                                  
                                                  57.81
                                                  
                                                  
                                                  
                                                  58.31
                                                  
                                                  
                                                  
                                                  57.45Voice
      connection
                                                  
                                                  
                                                  40.88
                                                  
                                                  
                                                  
                                                  40.34
                                                  
                                                  
                                                  
                                                  40.60
                                                  
                                                  
                                                  
                                                  40.85
                                                  
                                                  
                                                  
                                                  41.38HSD
      and other connection
                                                  
                                                  
                                                  31.58
                                                  
                                                  
                                                  
                                                  32.27
                                                  
                                                  
                                                  
                                                  33.31
                                                  
                                                  
                                                  
                                                  34.46
                                                  
                                                  
                                                  
                                                  35.11
  
  10
 Table of Contents
  Results
of Operations (dollars in millions)
  Three Months Ended
                                                                  September 30,
                                                                
                                                                
                                                                Nine Months Ended
                                                                  September 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
                                                                
                                                                $
                                                                16.0
                                                                
                                                                
                                                                
                                                                32
                                                                %
                                                                
                                                                $
                                                                17.4
                                                                
                                                                
                                                                
                                                                33
                                                                %
                                                                
                                                                $
                                                                1.4
                                                                
                                                                
                                                                $
                                                                47.6
                                                                
                                                                
                                                                
                                                                32
                                                                %
                                                                
                                                                $
                                                                52.5
                                                                
                                                                
                                                                
                                                                34
                                                                %
                                                                
                                                                $
                                                                4.9Voice
                                                                
                                                                
                                                                14.2
                                                                
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                
                                                                14.3
                                                                
                                                                
                                                                
                                                                28
                                                                
                                                                
                                                                
                                                                0.1
                                                                
                                                                
                                                                
                                                                42.3
                                                                
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                
                                                                42.4
                                                                
                                                                
                                                                
                                                                27
                                                                
                                                                
                                                                
                                                                0.1HSD
      and other
                                                                
                                                                
                                                                8.7
                                                                
                                                                
                                                                
                                                                18
                                                                
                                                                
                                                                
                                                                10.5
                                                                
                                                                
                                                                
                                                                20
                                                                
                                                                
                                                                
                                                                1.8
                                                                
                                                                
                                                                
                                                                25.6
                                                                
                                                                
                                                                
                                                                17
                                                                
                                                                
                                                                
                                                                30.4
                                                                
                                                                
                                                                
                                                                20
                                                                
                                                                
                                                                
                                                                4.8Bundled
      services
                                                                
                                                                
                                                                38.9
                                                                
                                                                
                                                                
                                                                79
                                                                
                                                                
                                                                
                                                                42.2
                                                                
                                                                
                                                                
                                                                81
                                                                
                                                                
                                                                
                                                                3.3
                                                                
                                                                
                                                                
                                                                115.5
                                                                
                                                                
                                                                
                                                                78
                                                                
                                                                
                                                                
                                                                125.3
                                                                
                                                                
                                                                
                                                                81
                                                                
                                                                
                                                                
                                                                9.8Broadband
      transport services
                                                                
                                                                
                                                                2.4
                                                                
                                                                
                                                                
                                                                5
                                                                
                                                                
                                                                
                                                                3.9
                                                                
                                                                
                                                                
                                                                8
                                                                
                                                                
                                                                
                                                                1.5
                                                                
                                                                
                                                                
                                                                7.2
                                                                
                                                                
                                                                
                                                                5
                                                                
                                                                
                                                                
                                                                9.3
                                                                
                                                                
                                                                
                                                                6
                                                                
                                                                
                                                                
                                                                2.1Network
      services
                                                                
                                                                
                                                                8.0
                                                                
                                                                
                                                                
                                                                16
                                                                
                                                                
                                                                
                                                                5.8
                                                                
                                                                
                                                                
                                                                11
                                                                
                                                                
                                                                
                                                                (2.2
                                                                )
                                                                
                                                                
                                                                24.9
                                                                
                                                                
                                                                
                                                                17
                                                                
                                                                
                                                                
                                                                19.3
                                                                
                                                                
                                                                
                                                                13
                                                                
                                                                
                                                                
                                                                (5.6
                                                                )Total
      operating revenues
                                                                
                                                                
                                                                49.3
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                51.9
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                2.6
                                                                
                                                                
                                                                
                                                                147.6
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                153.9
                                                                
                                                                
                                                                
                                                                100
                                                                
                                                                
                                                                
                                                                6.3Operating
      expenses:Cost
      of revenues
                                                                
                                                                
                                                                16.9
                                                                
                                                                
                                                                
                                                                34
                                                                
                                                                
                                                                
                                                                17.8
                                                                
                                                                
                                                                
                                                                34
                                                                
                                                                
                                                                
                                                                0.9
                                                                
                                                                
                                                                
                                                                51.0
                                                                
                                                                
                                                                
                                                                35
                                                                
                                                                
                                                                
                                                                52.8
                                                                
                                                                
                                                                
                                                                34
                                                                
                                                                
                                                                
                                                                1.8Selling,
      general and administrative
                                                                
                                                                
                                                                22.9
                                                                
                                                                
                                                                
                                                                47
                                                                
                                                                
                                                                
                                                                24.7
                                                                
                                                                
                                                                
                                                                48
                                                                
                                                                
                                                                
                                                                1.8
                                                                
                                                                
                                                                
                                                                67.6
                                                                
                                                                
                                                                
                                                                46
                                                                
                                                                
                                                                
                                                                70.5
                                                                
                                                                
                                                                
                                                                46
                                                                
                                                                
                                                                
                                                                2.9Provision
      for doubtful accounts
                                                                
                                                                
                                                                0.9
                                                                
                                                                
                                                                
                                                                2
                                                                
                                                                
                                                                
                                                                0.9
                                                                
                                                                
                                                                
                                                                2
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                2.2
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                2.4
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                0.2Depreciation
      and amortization
                                                                
                                                                
                                                                14.9
                                                                
                                                                
                                                                
                                                                30
                                                                
                                                                
                                                                
                                                                15.7
                                                                
                                                                
                                                                
                                                                30
                                                                
                                                                
                                                                
                                                                0.8
                                                                
                                                                
                                                                
                                                                41.9
                                                                
                                                                
                                                                
                                                                28
                                                                
                                                                
                                                                
                                                                44.2
                                                                
                                                                
                                                                
                                                                29
                                                                
                                                                
                                                                
                                                                2.3Total
      operating expenses
                                                                
                                                                
                                                                55.6
                                                                
                                                                
                                                                
                                                                113
                                                                
                                                                
                                                                
                                                                59.1
                                                                
                                                                
                                                                
                                                                114
                                                                
                                                                
                                                                
                                                                3.5
                                                                
                                                                
                                                                
                                                                162.7
                                                                
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                169.9
                                                                
                                                                
                                                                
                                                                110
                                                                
                                                                
                                                                
                                                                7.2Operating
      loss
                                                                
                                                                
                                                                (6.3
                                                                )
                                                                
                                                                
                                                                (13
                                                                )
                                                                
                                                                
                                                                (7.2
                                                                )
                                                                
                                                                
                                                                (14
                                                                )
                                                                
                                                                
                                                                (0.9
                                                                )
                                                                
                                                                
                                                                (15.1
                                                                )
                                                                
                                                                
                                                                (10
                                                                )
                                                                
                                                                
                                                                (16.0
                                                                )
                                                                
                                                                
                                                                (10
                                                                )
                                                                
                                                                
                                                                (0.9
                                                                )Other
      income (expense):Interest
      income
                                                                
                                                                
                                                                0.5
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                0.1
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (0.4
                                                                )
                                                                
                                                                
                                                                1.2
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                0.6
                                                                
                                                                
                                                                
                                                                0.5
                                                                
                                                                
                                                                
                                                                (0.6
                                                                )Interest
      expense, net of capitalized interest
                                                                
                                                                
                                                                (7.7
                                                                )
                                                                
                                                                
                                                                (16
                                                                )
                                                                
                                                                
                                                                (7.7
                                                                )
                                                                
                                                                
                                                                (15
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (21.2
                                                                )
                                                                
                                                                
                                                                (14
                                                                )
                                                                
                                                                
                                                                (23.3
                                                                )
                                                                
                                                                
                                                                (15
                                                                )
                                                                
                                                                
                                                                (2.1
                                                                )Net
      gain on sale of assets
                                                                
                                                                
                                                                0.2
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                0.2
                                                                
                                                                
                                                                
                                                                1
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                0.5
                                                                
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                0.7
                                                                
                                                                
                                                                
                                                                0.5
                                                                
                                                                
                                                                
                                                                0.2Total
      other income (expense)
                                                                
                                                                
                                                                (7.0
                                                                )
                                                                
                                                                
                                                                (14
                                                                )
                                                                
                                                                
                                                                (7.4
                                                                )
                                                                
                                                                
                                                                (14
                                                                )
                                                                
                                                                
                                                                (0.4
                                                                )
                                                                
                                                                
                                                                (19.5
                                                                )
                                                                
                                                                
                                                                (13
                                                                )
                                                                
                                                                
                                                                (22.0
                                                                )
                                                                
                                                                
                                                                (14
                                                                )
                                                                
                                                                
                                                                (2.5
                                                                )Loss
      before income tax expense
                                                                
                                                                
                                                                (13.3
                                                                )
                                                                
                                                                
                                                                (27
                                                                )
                                                                
                                                                
                                                                (14.6
                                                                )
                                                                
                                                                
                                                                (28
                                                                )
                                                                
                                                                
                                                                (1.3
                                                                )
                                                                
                                                                
                                                                (34.6
                                                                )
                                                                
                                                                
                                                                (23
                                                                )
                                                                
                                                                
                                                                (38.0
                                                                )
                                                                
                                                                
                                                                (24
                                                                )
                                                                
                                                                
                                                                (3.4
                                                                )Income
      tax expense
                                                                
                                                                
                                                                (0.3
                                                                )
                                                                
                                                                
                                                                (1
                                                                )
                                                                
                                                                
                                                                (0.3
                                                                )
                                                                
                                                                
                                                                (1
                                                                )
                                                                
                                                                
                                                                —
                                                                
                                                                
                                                                
                                                                (0.8
                                                                )
                                                                
                                                                
                                                                (1
                                                                )
                                                                
                                                                
                                                                (0.8
                                                                )
                                                                
                                                                
                                                                (1
                                                                )
                                                                
                                                                
                                                                —Net
      loss
                                                                
                                                                $
                                                                (13.6
                                                                )
                                                                
                                                                
                                                                (28
                                                                )%
                                                                
                                                                $
                                                                (14.9
                                                                )
                                                                
                                                                
                                                                (29
                                                                )%
                                                                
                                                                $
                                                                (1.3
                                                                )
                                                                
                                                                $
                                                                (35.4
                                                                )
                                                                
                                                                
                                                                (24
                                                                )%
                                                                
                                                                $
                                                                (38.8
                                                                )
                                                                
                                                                
                                                                (25
                                                                )%
                                                                
                                                                $
                                                                (3.4
                                                                )
 11
 Table of Contents
  Operating Revenues.Operating
revenues increased $2.6 million, or 5%, during the three months ended September
30, 2008 and increased $6.3 million, or 4%, during the nine months ended
September 30, 2008. The increase during the three months ended September 30,
2008 was driven primarily by a $3.3 million increase in bundled services revenue
and a $1.5 million increase in broadband transport services revenue, partially
offset by a $2.2 million decrease in our revenues from network
services.
  The
increase during the nine months ended September 30, 2008 was driven primarily by
a $9.8 million increase in bundled services revenue and a $2.1 million increase
in broadband transport services revenue, partially offset by a $5.6 million
decrease in our revenues from network services.
  Operating
revenues for our bundled services increased $3.3 million, or 8%, during the
three months ended September 30, 2008 and increased $9.8 million, or 8%, during
the nine months ended September 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 306,070 as of September 30, 2007 to 317,751 as of
September 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 October 1, 2007 through September 30, 2008.
  Operating
revenues for our video services increased $1.4 million, or 9%, during the three
months ended September 30, 2008 and increased $4.9 million, or 10%, during the
nine months ended September 30, 2008. During the three and nine months ended
September 30, 2008, approximately 35% of the $1.4 million increase and
approximately 29% of the $4.9 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 increased 50% to $0.3 million
during the three months ended September 30, 2008 from $0.2 million during the
three months ended September 30, 2007 and increased 50% to $0.9 million during
the nine months ended September 30, 2008 from $0.6 million during the nine
months ended September 30, 2007.
  Operating
revenues for our voice services increased $0.1 million during the three months
ended September 30, 2008 and increased $0.1 million during the nine months ended
September 30, 2008. During the three and nine months ended September 30, 2008,
we have experienced a $0.4 million and $1.1 million decrease, respectively, 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 14% to $4.0
million during the three months ended September 30, 2008 from $3.5 million
during the three months ended September 30, 2007 and increased 12% to $11.5
million during the nine months ended September 30, 2008 from $10.3 million
during the nine months ended September 30, 2007.
  Operating
revenues for our HSD and other services increased $1.8 million, or 21%, during
the three months ended September 30, 2008 and increased $4.8 million, or 19%,
during the nine months ended September 30, 2008.   During the
three and nine months ended September 30, 2008, the increases in HSD and other
services were primarily due to a 11% and 9% increase in average monthly revenue
per connection, respectively, as customers chose higher speed service
offerings.  Operating revenues for our HSD and other services for both
reporting periods also increased due to an 8% growth in the number of
connections, from 93,353 as of September 30, 2007 to 101,000 as of September 30,
2008.  HSD and other services to our commercial business customers
increased 54% to $2.0 million during the three months ended September 30, 2008
from $1.3 million during the three months ended September 30, 2007 and increased
49% to $5.2 million during the nine months ended September 30, 2007 from $3.5
million during the nine months ended September 30, 2007.
  Operating
revenues for our broadband transport services increased $1.5 million, or 63%,
during the three months ended September 30, 2008 and increased $2.1 million, or
29%, during the nine months ended September 30, 2008.  The increased
revenues from broadband transport services for both the reporting periods were
the result of an increase in construction revenue as well as moderate customer
growth.
  12
 Table of Contents
  Operating
revenues for our network services decreased $2.2 million, or 28%, during the
three months ended September 30, 2008 and decreased $5.6 million, or 22%, during
the nine months ended September 30, 2008.   The decrease during
the three and nine months ended September 30, 2008 was primarily related to a
$1.7 million and $4.5 million, respectively, decrease in revenue from
transmission services to carriers and other telecommunications companies due to
a decrease in volume, partially offset by an increase in rates per
minute.  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.  In addition, during
the three and nine months ended September 30, 2008 we’ve also experienced a
decrease of $0.4 million and $1.1 million, respectively, in revenue from data
services and a decrease of $0.1 million and $0.3 million, respectively, in
revenue from national directory assistance service.  Decreases in both
data services and national directory assistance are the result of a decrease in
customer volume.  The decreases in network services were partially
offset by an increase of $0.3 million in managed services during the nine months
ended September 30, 2008 due to an increase in customer volume.
  Cost of Revenues.Our cost of
revenues increased $0.9 million, or 5%, during the three months ended September
30, 2008 and increased $1.8 million, or 4%, during the nine months ended
September 30, 2008.  Cost of revenues related to video services
increased approximately $1.4 million during the three months ended September 30,
2008 and increased $3.9 million during the nine months ended September 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 $1.0 million during the three months ended September
30, 2008 and increased $2.4 million during the nine months ended September 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 $1.5 million during the three months ended September 30, 2008 and
decreased $4.5 million during the nine months ended September 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 increased $1.8
million, or 8%, during the three months ended September 30, 2007 and 2008,
respectively, and increased $2.9 million, or 4%, during the nine months ended
September 30, 2007 and 2008, respectively. Included in selling, general and
administrative expenses during the three and nine months ended September 30,
2008 are non-recurring expenses of $0.7 million and $1.5 million, respectively,
incurred in association with the exploration of strategic alternatives to
enhance shareholder value.  Other increases in selling, general and
administrative expense during the three months ended September 30, 2008 related
to sales and marketing, as well as a reduction in the amount of indirect
overhead costs capitalized to construction projects, increases in employee
commissions related to revenue initiatives, employee health care costs, and
other miscellaneous expenses that totaled approximately $2.2 million but such
increases were partially offset by decreases in network repairs and maintenance,
legal and other professional services, excluding the strategic exploration costs
discussed above, and other miscellaneous expenses that totaled approximately
$1.1 million. Other increases in selling, general and administrative expense
during the nine months ended September 30, 2008 related to increases in employee
commissions related to revenue initiatives, employee healthcare costs, 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 $3.2 million but such increases were
partially offset by decreases in legal and other professional services,
excluding the strategic exploration costs discussed above, network repairs and
maintenance, sales and marketing, non-cash compensation expense, employee
travel, general insurance, property taxes and other miscellaneous expenses that
totaled approximately $1.8 million.
  13
 Table of Contents
   For the
year ending December 31, 2008, we expect our selling, general and administrative
expense, excluding the strategic exploration costs discussed above, 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 increased $0.8
million, or 5%, during the three months ended September 30, 2008 and increased
$2.3 million, or 5%, during the nine months ended September 30, 2008. The
increase during the three and nine months ended September 30, 2008 related to
property, plant and equipment additions during the period from October 1, 2007
through September 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 October 1, 2007 through September 30, 2008.
  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, remained
flat at $7.7 million during both the three months ended September 30, 2007 and
2008 and increased $2.1 million, or 10%, during the nine months ended September
30, 2008 as compared to the nine months ended September 30, 2007.  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. 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 decreased $0.2 million, or 2%, during the three months ended September
30, 2008 and increased $1.5 million, or 5%, during the nine months ended
September 30, 2008.  The decrease in Adjusted EBITDA during the three
months ended September 30, 2008 was primarily due to $0.7 million of
non-recurring expenses incurred in association with the exploration of strategic
alternatives to enhance shareholder value, a $1.2 million increase in selling,
general and administrative expenses, excluding stock-based compensation and
strategic exploration costs, as well as a $0.9 million increase in costs of
revenue, partially offset by a $2.6 million increase in operating revenues. The
increase in Adjusted EBITDA during the nine months ended September 30, 2008 was
primarily due to a $6.3 million increase in operating revenues as well as a $0.2
million increase in net gain on sale of assets, partially offset by $1.5 million
of non-recurring expenses incurred in association with the exploration of
strategic alternatives to enhance shareholder value, a $1.7 million increase in
selling, general and administrative expenses, excluding stock-based compensation
and strategic exploration costs, and a $1.8 million increase in costs of
revenues.
  14
 Table of Contents
  The
reconciliation of EBITDA/Adjusted EBITDA to net loss is as follows:
 
 Three
      Months Ended
                                  September
      30,
                                
                                
                                Nine
      Months Ended
                                  September
      30,2007
                                
                                
                                2008
                                
                                
                                2007
                                
                                
                                2008(in
      thousands)
                                
                                
                                (in
      thousands)Net
      loss as reported
                                
                                $
                                (13,637
                                )
                                
                                $
                                (14,861
                                )
                                
                                $
                                (35,431
                                )
                                
                                $
                                (38,819
                                )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
                                
                                
                                (539
                                )
                                
                                
                                (125
                                )
                                
                                
                                (1,244
                                )
                                
                                
                                (620
                                )Interest
      expense, net of capitalized interest
                                
                                
                                7,795
                                
                                
                                
                                7,738
                                
                                
                                
                                21,229
                                
                                
                                
                                23,300Income
      tax expense
                                
                                
                                281
                                
                                
                                
                                277
                                
                                
                                
                                841
                                
                                
                                
                                847Depreciation
      and amortization
                                
                                
                                14,946
                                
                                
                                
                                15,683
                                
                                
                                
                                41,843
                                
                                
                                
                                44,221EBITDA
      (1)
                                
                                
                                8,846
                                
                                
                                
                                8,712
                                
                                
                                
                                27,238
                                
                                
                                
                                28,929Non-cash
      compensation expense
                                
                                
                                129
                                
                                
                                
                                92
                                
                                
                                
                                499
                                
                                
                                
                                299Adjusted
      EBITDA (1)
                                
                                $
                                8,975
                                
                                
                                $
                                8,804
                                
                                
                                $
                                27,737
                                
                                
                                $
                                29,228
  (1)EBITDA andAdjusted EBITDA includes
a net gain on sale of assets of $0.2 million during both the three months ended
September 30, 2007 and 2008 and $0.5 million and $0.7 million during the nine
months ended September 30, 2007 and 2008, respectively.  Also included
are non-recurring expenses of $0.7 million and $1.5 million during the three and
nine months ended September 30, 2008, respectively, incurred in association with
the exploration of strategic alternatives to enhance shareholder
value.
  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
September 30, 2008, we had total cash and cash equivalents of $37.5 million and
$206 million of long-term debt and capital lease obligations outstanding,
including the current portion, and net of discounts and premiums of $4.0
million.  In October 2008, we paid $13.5 million of interest due on
our senior notes.
  As of
September 30, 2008, we had net working capital of $1.2 million, compared to net
working capital of $19.8 million as of December 31, 2007.  The $18.6
million decrease in working capital resulted primarily from a $10.8 million
decrease in current assets primarily due to the $13.5 million interest payment
in April 2008 on our senior notes as well as a $7.8 million net increase in
current liabilities, including the $6.8 million increase in accrued interest
payable.
  Provided
that we meet our cash flow projections in our current business plan and current
economic market conditions do not continue to deteriorate as described under
Part II, Item 1A. “Risk Factors” below, 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 through September 30, 2009. 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 through September 30, 2009. As described under “Contractual
Obligations and Commercial Commitments” below, 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 after giving effect to
such expenditures. If our cash and cash equivalents fall below $20 million, we
would not be permitted to make certain capital expenditures until such time as
our cash and cash equivalents, including such proposed certain capital
expenditures, increase above $20 million.  If we made certain capital
expenditures that would cause our cash and cash equivalents to fall below $20
million, we would be required to notify the Trustee of such
default.  If we receive notification from the Trustee or holders of at
least 25% in aggregate principal amount of the then outstanding senior notes, we
would have 60 days to comply with the covenant.   If after 60
days, we have not complied with the covenant, the senior notes may be declared
due and payable immediately by notice from the Trustee or holders of at least
25% in aggregate principal amount of the then outstanding senior notes. This
covenant could adversely affect our ability to make planned capital
expenditures.
  15
 Table of Contents
   Our
current 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 consider asset sales or seek additional financing to fund our
operations, to undertake initiatives not contemplated by our business plan or
obtain additional cushion against possible shortfalls. Future financings may
include a range of different sizes or types of financing, including capital
lease transactions and the sale of additional debt or equity securities. 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. 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 and the state of the credit markets; 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.
  Cash
Flows from Operating Activities
  Net cash
provided by operating activities totaled $14.2 million and $16.6 million for the
nine months ended September 30, 2007 and 2008, respectively. The $2.4 million
increase in net cash provided by operating activities primarily reflects a $9.4
million increase in cash collected from customers as well as a $0.5 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 $3.8 million increase in payments to
vendors and employees, a $1.9 million increase in interest expense paid, a $1.1
million increase in income taxes paid, as well as a $0.7 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 nine months ended September 30, 2007
and 2008 was $25.5 million and $22.5 million, respectively, and consisted
primarily of $27.2 million and $23.2 million in property, plant and equipment
purchases, respectively, discussed below, partially offset by $1.1 million and
$0.3 million of proceeds, respectively, from sales tax refunds applicable to
capital assets and $0.6 million and $0.3 million of proceeds from sale of
assets, respectively.
  16
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   Cash
Flows from Financing Activities
  Our cash
flows from financing activities for the nine months ended September 30, 2007 and
2008 was $26.1 million cash provided by financing activities and $4.8 million
cash used in financing activities, respectively.  Cash provided by
financing activities consisted of $30.1 million proceeds from borrowings during
the nine months ended September 30, 2007.  Cash used in financing
activities for the nine months ended September 30, 2007 and 2008 consisted
of  $3.1 million and $3.9 million in payments on long-term debt and
capital leases, respectively, as well as $0.7 million and $0.9 million net
repayments, respectively, on zero-balance bank cash accounts.
  Capital
Expenditures
  We had
capital expenditures of approximately $27.2 million and $23.2 million, including
capitalized interest, during the nine months ended September 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.  As described under “Liquidity and Capital Resources—Sources
and Uses of Funds”, 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 after giving effect to such
expenditures. We anticipate spending approximately $31 million, excluding
capitalized interest, in capital expenditures during the year ending December
31, 2008.
  Contractual
Obligations and Commercial Commitments
  During
the nine months ended September 30, 2008, our aggregate contractual obligations
decreased approximately $20.9 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 $8.9 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 $1.5 million
primarily related to new vehicle operating leases, office equipment operating
leases and computer capital leases.
  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.
  17
 Table of Contents
  
 April
      1,
                        
                        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.
  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 after giving effect to such expenditures.
This covenant could adversely affect our ability to make planned capital
expenditures.
  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 evaluated for renewal based on operational necessity.
  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.
  18
 Table of Contents
  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.
  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 September 30, 2008.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that as of September 30, 2008, our disclosure controls
and procedures are effective in timely alerting them to material information
relating to Grande 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 September 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.
  19
 Table of Contents
  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
  Except
for the risk factor set forth below, 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.
  The current turmoil in the credit
markets and poor economic conditions could negatively impact our
business by squeezing demand for our products and the availability of capital
and increasing our cost of credit.
  The
current turmoil in the credit markets could limit demand for our products, and
affect the overall availability and cost of credit. Our operations are affected
by local and national economic conditions, which have recently deteriorated
significantly and may remain depressed for the foreseeable future. The
consequences of a prolonged recession may include a lower level of economic
activity and changes in demand for the services we provide in our markets, which
may adversely affect our revenues, liquidity and future
growth.  Current economic conditions may be exacerbated by
insufficient financial sector liquidity leading to potential increased
unemployment, which may impact our customers’ ability to pay timely, increase
customer bankruptcies, and may lead to increased bad debt.   It
is expected that commercial and wholesale customers will be impacted first with
residential customers following, if such circumstances occur. Customer
collections are our primary source of cash.  While we believe we have
a diversified customer base and no concentration of credit risk with any single
customer, if the current market conditions continue to deteriorate we may
experience increased churn in our customer base, which could also have a
material adverse effect on our liquidity.
  Instability
in the financial markets, as a result of recession or otherwise, also may affect
the cost of capital and our ability to raise capital, which are discussed in
greater detail in the Risks Relating to Our Business risk section in our Annual
Report on Form 10-K for the year ended December 31, 2007. At this time, it is
unclear whether and to what extent the actions taken by the U.S. government,
including, without limitation, the passage of the Emergency Economic
Stabilization Act of 2008 and other measures currently being implemented or
contemplated, will mitigate the effects of the crisis.  While we have
no immediate need to access the credit markets, the impact of the current crisis
on our ability to obtain financing in the future, and the cost and terms of
same, is unclear. No assurances can be given that the effects of the current
crisis will not have a material adverse effect on our business, financial
condition and results of operations.
  ITEM
      2.
              UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS
  During
the three months ended September 30, 2008, we issued 12,000 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 249,000 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.
              DEFAULTSUPONSENIOR
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 September 30, 2008.
  20
 Table of Contents
  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.
  Exhibit
                                                                                                                            No.
                                                                                                                          
                                                                                                                          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).4.3
                                                                                                                          
                                                                                                                          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).10.1*
                                                                                                                          
                                                                                                                          Separation
      Agreement and Full and Final Release of Claims between Grande
      Communications Networks, Inc. and Jeffrey A. Brennan dated August 15,
      2008.31.1*
                                                                                                                          
                                                                                                                          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.
  21
 Table of Contents
  SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
 
 Grande
      Communications Holdings, Inc.(Registrant)Date:
      November 10, 2008
                              
                              By:
                              /s/    MICHAEL L. WILFLEYMichael
      L. WilfleyChief
      Financial Officer(Duly
      Authorized Officer and Principal Financial
  Officer)