##### Table of Contents

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the Quarterly Period Ended September 30, 2004



OR



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



For the transition period from             to



Commission file number



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Grande Communications
Holdings, Inc.

(Exact name of registrant as specified in its charter)



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|                                                               |  |                                        
|-------------------------------------------------------------- |  | ---------------------------------------
|Delaware                                                       |  | 74-3005133                             
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification Number)



|                                         |  |           
|---------------------------------------- |  | ----------
|401 Carlson Circle, San Marcos, TX       |  | 78666     
|(Address of principal executive offices) |  | (Zip Code)



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



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



Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



Indicate the number of shares outstanding of
each of the issuers classes of common stock, as of the latest practicable date.



|                              |  |                                  
|----------------------------- |  | ---------------------------------
|                              |  | Outstanding at September 30, 2004
|Common Stock, $.001 par value |  | 12,904,871                       



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##### Table of Contents

Grande Communications Holdings, Inc.



Index



|           |  |                                                                                               |  |         
|---------- |  | --------------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                              
|           |  |                                                                                               |  | Page No.
|Part I.    |  | Financial Information                                                                         |  |         
|           |  |                                                                                              
|           |  | Item 1. Financial Statements                                                                  |  | 2       
|           |  |                                                                                              
|           |  | Condensed Consolidated Balance Sheets                                                         |  | 2       
|           |  |                                                                                              
|           |  | Condensed Consolidated Statements of Operations                                               |  | 3       
|           |  |                                                                                              
|           |  | Condensed Consolidated Statements of Cash Flows                                               |  | 4       
|           |  |                                                                                              
|           |  | Notes to Condensed Consolidated Financial Statements                                          |  | 5       
|           |  |                                                                                              
|           |  | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7       
|           |  |                                                                                              
|           |  | Item 3. Quantitative and Qualitative Disclosures about Market Risk                            |  | 21      
|           |  |                                                                                              
|           |  | Item 4. Controls and Procedures                                                               |  | 22      
|           |  |                                                                                              
|Part II    |  | Other Information                                                                             |  |         
|           |  |                                                                                              
|           |  | Item 1. Legal Proceedings                                                                     |  | 23      
|           |  |                                                                                              
|           |  | Item 2. Changes in Securities and Use of Proceeds                                             |  | 23      
|           |  |                                                                                              
|           |  | Item 4. Submission of Matters to a Vote of Security Holders                                   |  | 24      
|           |  |                                                                                              
|           |  | Item 6. Exhibits and Reports on Form 8-K                                                      |  | 24      
|           |  |                                                                                              
|Signatures |  |                                                                                               |  | 26      



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##### Table of Contents

PART I



FINANCIAL INFORMATION



Item 1.
Financial Statements



GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- | -------- | - | ------------------ | - | -------- | -
|                                                                                                                                                                                            |  | December 31, 2003 |          |   | September 30, 2004 |  
|                                                                                                                                                                                            |  |                   |          |   | (unaudited)        |  
|Assets                                                                                                                                                                                      |  |                   |          |   |                    |   |          |  
|Current assets:                                                                                                                                                                             |  |                   |          |   |                    |   |          |  
|Cash and cash equivalents                                                                                                                                                                   |  | $                 | 42,246   |   |                    | $ | 75,353   |  
|Accounts receivable, net                                                                                                                                                                    |  |                   | 16,825   |   |                    |   | 19,929   |  
|Prepaid expenses and other current assets                                                                                                                                                   |  |                   | 5,967    |   |                    |   | 2,983    |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total current assets                                                                                                                                                                        |  |                   | 65,038   |   |                    |   | 98,265   |  
|Property and equipment, net                                                                                                                                                                 |  |                   | 298,197  |   |                    |   | 301,940  |  
|Goodwill                                                                                                                                                                                    |  |                   | 134,983  |   |                    |   | 135,612  |  
|Other intangible assets, net                                                                                                                                                                |  |                   | 10,463   |   |                    |   | 6,828    |  
|Other assets                                                                                                                                                                                |  |                   | 8,010    |   |                    |   | 13,580   |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total assets                                                                                                                                                                                |  | $                 | 516,691  |   |                    | $ | 556,225  |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Liabilities and stockholders equity                                                                                                                                                        |  |                   |          |   |                    |   |          |  
|Current liabilities:                                                                                                                                                                        |  |                   |          |   |                    |   |          |  
|Accounts payable                                                                                                                                                                            |  | $                 | 14,947   |   |                    | $ | 11,651   |  
|Accrued expenses                                                                                                                                                                            |  |                   | 15,794   |   |                    |   | 26,682   |  
|Note payable                                                                                                                                                                                |  |                   | 63       |   |                    |   | 0        |  
|Deferred revenue                                                                                                                                                                            |  |                   | 4,263    |   |                    |   | 5,166    |  
|Current portion of capital lease obligations                                                                                                                                                |  |                   | 429      |   |                    |   | 625      |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total current liabilities                                                                                                                                                                   |  |                   | 35,496   |   |                    |   | 44,124   |  
|Deferred revenue                                                                                                                                                                            |  |                   | 4,443    |   |                    |   | 5,029    |  
|Capital lease obligations, net of current portion                                                                                                                                           |  |                   | 12,723   |   |                    |   | 14,076   |  
|Long term debt                                                                                                                                                                              |  |                   | 61,859   |   |                    |   | 128,004  |  
|Commitments and contingencies                                                                                                                                                               |  |                   |          |   |                    |   |          |  
|Stockholders equity:                                                                                                                                                                       |  |                   |          |   |                    |   |          |  
|Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, issued and outstanding; liquidation preference of
$232,618                                             |  |                   | 233      |   |                    |   | 233      |  
|Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of
$25,000                                               |  |                   | 21       |   |                    |   | 21       |  
|Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued and outstanding; liquidation
preference of $20,406                             |  |                   | 17       |   |                    |   | 17       |  
|Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued and outstanding; liquidation
preference of $149,108                          |  |                   | 115      |   |                    |   | 115      |  
|Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued and outstanding; liquidation
preference of $19,998                               |  |                   | 8        |   |                    |   | 8        |  
|Series F preferred stock, $0.001 par value per share; 12,307,692 shares authorized, 11,758,278 shares issued and outstanding; liquidation
preference of $15,286                             |  |                   | 12       |   |                    |   | 12       |  
|Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation
preference of $135,000                            |  |                   | 35       |   |                    |   | 35       |  
|Common stock, $0.001 par value per share; 786,835,883 shares authorized, 12,309,087 and 12,904,871 shares issued and outstanding, at December
31, 2003 and September 30, 2004, respectively |  |                   | 12       |   |                    |   | 13       |  
|Additional paid-in capital                                                                                                                                                                  |  |                   | 505,497  |   |                    |   | 508,297  |  
|Treasury stock, at cost                                                                                                                                                                     |  |                   | (5       | ) |                    |   | (5       | )
|Accumulated deficit                                                                                                                                                                         |  |                   | (103,775 | ) |                    |   | (143,754 | )
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total stockholders equity                                                                                                                                                                  |  |                   | 402,170  |   |                    |   | 364,992  |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                  |  | $                 | 516,691  |   |                    | $ | 556,225  |  
|                                                                                                                                                                                            |  |                   |          |   |                    |   |          |  



The accompanying notes
are an integral part of these condensed consolidated balance sheets.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)



|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------------------------------ |  | -------------------------------- | ------ | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                         |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                         |  | 2003                             |        |   | 2004                            |   |         | 2003 |  |   | 2004    |  
|Operating revenues                                                       |  | $                                | 47,589 |   |                                 | $ | 45,104  |      |  | $ | 138,865 |   |  | $ | 132,606 |  
|Operating expenses:                                                      |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Direct costs                                                             |  |                                  | 22,240 |   |                                 |   | 16,703  |      |  |   | 66,068  |   |  |   | 49,233  |  
|Selling, general and administrative                                      |  |                                  | 20,859 |   |                                 |   | 23,587  |      |  |   | 59,261  |   |  |   | 70,367  |  
|Depreciation and amortization                                            |  |                                  | 11,678 |   |                                 |   | 14,720  |      |  |   | 38,983  |   |  |   | 41,145  |  
|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                 |  |                                  | 54,777 |   |                                 |   | 55,010  |      |  |   | 164,312 |   |  |   | 160,745 |  
|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                                                           |  |                                  | (7,188 | ) |                                 |   | (9,906  | )    |  |   | (25,447 | ) |  |   | (28,139 | )
|Other income (expense):                                                  |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                          |  |                                  | 36     |   |                                 |   | 207     |      |  |   | 95      |   |  |   | 558     |  
|Interest expense                                                         |  |                                  | (904   | ) |                                 |   | (4,475  | )    |  |   | (1,826  | ) |  |   | (10,301 | )
|Gain on disposal of assets                                               |  |                                  | 12     |   |                                 |   | 16      |      |  |   | 13      |   |  |   | 48      |  
|Loss on extinguishment of debt                                           |  |                                  | 0      |   |                                 |   | 0       |      |  |   | 0       |   |  |   | (2,145  | )
|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                             |  |                                  | (856   | ) |                                 |   | (4,252  | )    |  |   | (1,718  | ) |  |   | (11,840 | )
|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net loss attributable to common shareholders                             |  | $                                | (8,044 | ) |                                 | $ | (14,158 | )    |  | $ | (27,165 | ) |  | $ | (39,979 | )
|                                                                         |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share attributable to common shareholders |  | $                                | (0.69  | ) |                                 | $ | (1.14   | )    |  | $ | (2.32   | ) |  | $ | (3.27   | )
|Basic and diluted weighted average number of common shares outstanding   |  |                                  | 11,706 |   |                                 |   | 12,386  |      |  |   | 11,692  |   |  |   | 12,226  |  



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



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GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                               |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                               |  | Nine Months Ended September 30, |        
|                                                                               |  | 2003                            |         |   | 2004 |  
|Cash flows from operating activities:                                          |  |                                 |         |   |      |   |         |  
|Net loss                                                                       |  | $                               | (27,165 | ) |      | $ | (39,979 | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation                                                                   |  |                                 | 36,701  |   |      |   | 37,138  |  
|Amortization of intangible assets                                              |  |                                 | 2,282   |   |      |   | 4,007   |  
|Amortization of deferred financing costs                                       |  |                                 | 342     |   |      |   | 531     |  
|Provision for bad debts                                                        |  |                                 | 1,719   |   |      |   | 3,683   |  
|Accretion of debt discount                                                     |  |                                 | 120     |   |      |   | 431     |  
|Non-qualified option expense                                                   |  |                                 | 18      |   |      |   | 19      |  
|Gain on sale of assets                                                         |  |                                 | (13     | ) |      |   | (48     | )
|Extinguishment of debt                                                         |  |                                 | 0       |   |      |   | 2,145   |  
|Changes in operating assets and liabilities, net of business acquisitions:     |  |                                 |         |   |      |   |         |  
|Accounts receivable, net                                                       |  |                                 | (2,441  | ) |      |   | (7,128  | )
|Prepaid expenses and other current assets                                      |  |                                 | 228     |   |      |   | 1,361   |  
|Accounts payable                                                               |  |                                 | 5,500   |   |      |   | (3,259  | )
|Accrued expenses                                                               |  |                                 | 3,816   |   |      |   | 10,220  |  
|Deferred revenue                                                               |  |                                 | 289     |   |      |   | 1,523   |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by operating activities                                      |  |                                 | 21,396  |   |      |   | 10,644  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from investing activities:                                          |  |                                 |         |   |      |   |         |  
|Purchases of property, plant and equipment                                     |  |                                 | (36,698 | ) |      |   | (38,535 | )
|Purchase of C3, net of cash acquired                                           |  |                                 | (7,271  | ) |      |   | 0       |  
|Purchase of TXU                                                                |  |                                 | (950    | ) |      |   | 0       |  
|Purchase price adjustments                                                     |  |                                 | 10      |   |      |   | 222     |  
|Proceeds on sale of fixed assets                                               |  |                                 | 16      |   |      |   | 0       |  
|Purchase of franchise rights and other                                         |  |                                 | (755    | ) |      |   | (372    | )
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                          |  |                                 | (45,648 | ) |      |   | (38,685 | )
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash flows from financing activities:                                          |  |                                 |         |   |      |   |         |  
|Proceeds from sale-leaseback of buildings                                      |  |                                 | 11,906  |   |      |   | 0       |  
|Proceeds from borrowings and promissory notes                                  |  |                                 | 25,700  |   |      |   | 132,502 |  
|Payments of long-term debt                                                     |  |                                 | (3,033  | ) |      |   | (65,217 | )
|Deferred financing costs                                                       |  |                                 | (1,028  | ) |      |   | (6,326  | )
|Proceeds from issuance of common stock                                         |  |                                 | 17      |   |      |   | 183     |  
|Proceeds from issuance of preferred stock, net of related offering expenses    |  |                                 | 0       |   |      |   | 6       |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                      |  |                                 | 33,562  |   |      |   | 61,148  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Net change in cash and cash equivalents                                        |  |                                 | 9,310   |   |      |   | 33,107  |  
|Cash and cash equivalents, beginning of period                                 |  |                                 | 19,658  |   |      |   | 42,246  |  
|                                                                               |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                       |  | $                               | 28,968  |   |      | $ | 75,353  |  
|                                                                               |  |                                 |         |   |      |   |         |  



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



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GRANDE COMMUNICATIONS HOLDINGS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. Organization & Nature of the Business



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



2. Basis of Presentation



The accompanying unaudited condensed
consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules and regulations of the SEC that permit reduced
disclosure for interim periods. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered
necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim periods presented. Operating results for the nine months
ended September 30, 2004 are not necessarily indicative of the results that may be expected for the year ended December 31, 2004. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto,
together with managements discussion and analysis of financial condition and results of operations contained in the Companys financial statements for the year ended December 31, 2003 contained in the Companys Form S-1 Registration
Statement filed with the SEC on May 18, 2004.



The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the year
ending December 31, 2004, or any other interim period.



On May 18, 2004, the
Company filed a Form S-1 Registration Statement with the SEC to register the resale of the warrants and the underlying common stock originally issued in the Companys 136,000 units offering described below. Additionally, on May 18, 2004, the
Company filed a Form S-4 Registration Statement with the SEC to register the exchange offer relating to the 14% senior secured notes. The Form S-1 Registration Statement was declared effective July 27, 2004 and the Form S-4 Registration Statement
was declared effective June 14, 2004.



3. Long Term Debt



On March 23, 2004, the Company completed a private placement offering for 136,000 units each
consisting of (1) $1,000 of 14% senior secured notes due 2011 and (2) a warrant to purchase 100.336 shares of common stock. The units were issued with a discount to the face value of $5.8 million and the warrants were assigned a value of $2.6
million. Concurrent with the closing, we paid $64.8 million to extinguish the then existing senior credit facility. In conjunction with this repayment, we recognized a $2.1 million loss on debt extinguishment. Concurrent with the extinguishment of
the then existing senior credit facility, we reclassified $3.2 million of cash to other long term assets as collateral for our existing letters of credit.



4. Stock-Based Compensation



During 1995, the Financial Accounting Standards Board (FASB) issued SFAS No. 123, Accounting for Stock-Based Compensation, which defines fair value-based method of
accounting for an employee stock option or similar equity instrument and encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic value method, as prescribed by Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, as clarified by Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation.



Entities electing to remain
with the accounting methodology required by APB 25 must make pro forma disclosures of net income and, if presented, earnings per share as if the fair value based method of accounting defined in SFAS 123 had been applied.



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The Company has elected to account for its employee stock-based compensation plans using the intrinsic value method under
APB No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options for shares of the Companys common stock granted to employees of the Company using the Minimum Value pricing method and the following
weighted-average assumptions:



|                                  |  |         |   |  |         |  
|--------------------------------- |  | ------- | - |  | ------- | -
|                                  |  | 2003    |   |  | 2004    |  
|Risk-free interest rate           |  | 3.0     | % |  | 3.0     | %
|Expected dividend yield           |  | 0       | % |  | 0       | %
|Expected lives                    |  | 5 years |   |  | 5 years |  
|Volatility (Minimum Value Method) |  | 0       | % |  | 0       | %



If the Company had accounted for these
plans in accordance with SFAS 123, the Companys net loss for the nine months ended September 30, 2003 and 2004, would have increased as follows:



|                                                                                                        |  |                                           |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ----------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                        |  | Nine Months Ended September 30,           |        
|                                                                                                        |  | (in thousands, except for per share data) |        
|                                                                                                        |  | 2003                                      |         |   | 2004 |  
|Net loss, as reported                                                                                   |  | $                                         | (27,165 | ) |      | $ | (39,979 | )
|Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                           | (648    | ) |      |   | (565    | )
|                                                                                                        |  |                                           |         |   |      |   |         |  
|Pro forma net loss                                                                                      |  | $                                         | (27,813 | ) |      | $ | (40,544 | )
|                                                                                                        |  |                                           |         |   |      |   |         |  
|Basic and diluted net loss per share, as reported                                                       |  | $                                         | (2.32   | ) |      | $ | (3.27   | )
|Basic and diluted net loss per share, pro forma                                                         |  | $                                         | (2.38   | ) |      | $ | (3.32   | )
|Basic and diluted weighted average number of common shares outstanding                                  |  |                                           | 11,692  |   |      | $ | 12,226  |  



5. Contingencies



Both the FCC and the Department of Justice initiated investigations
understood to involve billing practices by MCI and related issues involving companies that terminated or otherwise may have handled traffic on behalf of MCI, including those companies participating in MCIs Least Cost Routing Program. We
believe we were a substantial participant in the Least Cost Routing Program. The Department of Justice convened a grand jury in the Southern District of New York as part of its investigation. The grand jury issued document subpoenas to a number of
companies in the telecommunications industry, including us. We cooperated with the Department of Justice and have produced responsive documents. The FCC issued letters of inquiry to us and other companies seeking documents and requesting information
relating to the above described billing practices and the compliance by such companies, including us, with applicable laws and regulations. We responded to the letters of inquiry. The FCC may issue additional letters of inquiry in the future, to
which we would intend to respond in the same manner. We cannot predict the outcome of these investigations or their duration. If these investigations result in current or prior billing practices being identified as violative of applicable laws or
regulations, result in penalties being imposed upon us, result in further proceedings against specific companies, including ours, result in changes in the law or regulations that would have an industry-wide effect, or lead to litigation among
parties involved in terminating or otherwise routing traffic, the impact could have a material adverse effect on our business and financial condition.



As a telecommunications company, we are a party to regulatory proceedings in the ordinary course of our business at both the state and federal levels.
These include proceedings before both the FCC and the PUCT that will potentially impact such issues as inter-carrier compensation. For example, we along with many other telecommunications companies in Texas are currently a party to a proceeding
before the Public Utility Commission of Texas, or PUCT, relating to the terms of SBC Communications standard interconnection agreement and an anticipated successor to this interconnection agreement. The regulatory proceeding concerning the
terms of SBC Communications standard interconnection agreement and anticipated successor thereto is ongoing and is not expected to conclude until either late this year or early next year. We cannot anticipate the outcome of this regulatory
proceeding at this time but do not believe that the outcome will, individually, or in the aggregate, with any other regulatory proceedings, have a material adverse effect on our business, financial condition or results of operations.



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6. Settlement



In April 2004 MCI emerged from bankruptcy proceedings. The Company recorded $2.5 million of revenue in final settlement of our unsecured claim in the second quarter of
2004. Additionally, the Company recorded approximately $0.4 million in legal expenses related to the settlement of this claim.



7. Subsequent Events



In October 2004 we paid $9.9 million of interest due in conjunction with our senior notes.



Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations



This managements discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. When used in this report, the words
anticipate, believe, estimate, expect, intend, plan and similar expressions as they relate to Grande Communications Holdings, Inc. or our management are intended to identify
these forward-looking statements. All statements by us regarding our expected future financial position and operating results, our business strategy, our financing plans, forecasted trends relating to the markets in which we operate and similar
matters are forward-looking statements. We cannot assure you that our expectations expressed or implied in these forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because
of various factors, including those discussed below and under the caption BusinessRisk Factors Relating to Our Business in our Form S-1, filed with the SEC on May 18, 2004. The following managements discussion and analysis
should be read in conjunction with our Condensed Consolidated Financial Statements and Notes thereto included herewith and with our Managements Discussion and Analysis of Financial Condition and Results of Operation and Condensed Consolidated
Financial Statements and Notes thereto for the three-year period ended December 31, 2003, included in our Form S-1 filed with the SEC on May 18, 2004.



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



Overview



We provide communities in Texas with a bundled package of cable television,
telephone and broadband Internet and other services. We operate fully integrated advanced broadband networks in six markets that passed approximately 297,697 out of approximately 1.4 million marketable homes and small businesses as of September 30,
2004. We have achieved 40% customer penetration of the marketable homes and small businesses that our networks pass. We expect that with existing cash on hand and our anticipated cash flow from operations, we will be fully funded to build-out our
networks to pass all 1.4 million marketable homes and small businesses.



In July 2000, when our network construction was still in a very early stage, we acquired an established telephone and data network that served as the platform for our provision of residential services and that still provides network
services revenues. This acquisition provided a significant portion of our revenues and became the foundation of our business while we moved forward with the construction of our broadband networks, although revenues from the acquired assets and our
other network services has declined as a percentage of total revenues in each year since that time. Since 2001, as our network construction proceeded and the number of bundled services customers has grown, we have derived an increasing percentage of
our revenues from our retail cable television, telephone and broadband Internet and other services and we expect this trend to continue. We expect that our retail cable television, telephone and broadband Internet and other services will represent a
majority of our total revenues in 2004.



Since inception, we
have been funded primarily with private equity investments. Between February 2000 and October 2003, we completed a series of private placements of our preferred stock, raising aggregate gross proceeds of $338.2 million from the sale of our capital
stock. The net proceeds from these private placements have been used to fund our network buildout, operations, and our acquisitions, which are described below under the heading Acquisitions. As a result of equity investments and mergers
where stock was used as consideration, we now have $508 million of total invested equity capital and a base of over 20 institutional private equity investors. We have incurred net losses for the past three years and expect to continue to incur net
losses for the next several years. However, we did achieve positive EBITDA in 2002 and 2003 and positive Adjusted EBITDA in the nine months ended September 30, 2004. See EBITDA/Adjusted EBITDA below for a discussion of this non-GAAP
measure of our operating performance as well as our use of Adjusted EBITDA in 2004.



On March 23, 2004, we raised net proceeds of $124.5 million in connection with the sale of 136,000 units each consisting of 14% senior secured notes due 2011 and a warrant to purchase 100.336 shares of our common
stock. We sold the units in a private placement to Bear, Stearns & Co., Inc. and Deutsche Bank Securities Inc. We used a portion of the net proceeds from the offering to repay all amounts outstanding under our then-existing senior credit
facility. That facility was terminated upon repayment and we are not able to borrow any further amounts thereunder.



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Recent Developments



Over the last two quarters, we have begun providing a wireless security solution to our residential customers, which we refer to as Grande Security
Solutions. We now offer this service as part of our bundle to residential and small business customers in all of our markets in Texas. We design and install wireless security systems and offer 24/7 monitoring. We have obtained the requisite licenses
from the Texas Commission on Private Security necessary to provide these services. We report results of our wireless security services as part of our bundled services under the heading broadband Internet and other.



Acquisitions



The following is a summary of the six acquisitions that we have completed since inception. Each of our acquisitions has been
strategic in nature, either enhancing our capabilities, expanding our network coverage or reducing our anticipated future capital expenditures. We include the operating results of each of our acquisitions in our financial statements beginning on the
date of consummation of the acquisition.



Thrifty
Call



In July 2000, we acquired the assets of
Thrifty Call, a communications service provider, for approximately $69.2 million in cash and $50.0 million in assumed liabilities. The acquisition provided us with corporate overhead structure and an established telephone and data network that
served as the platform for our provision of residential telephone and broadband Internet services. In addition, Thrifty Call was the primary provider of telephone services to ClearSource, which we subsequently acquired in June 2002, as discussed
below.



US OnLine



Between December 2001 and October 2002, we completed a series of
transactions in which we purchased certain assets from US OnLine consisting of certain right of entry agreements, property and equipment located in Texas for approximately $13.2 million in cash. These transactions provided us with an established
customer base of approximately 15,000 connections and exclusive long-term service rights to multiple dwelling units, or MDUs, in Austin and San Antonio. US OnLine was a provider of bundled cable television, telephone and broadband Internet services.



ClearSource



In June 2002, we acquired ClearSource in a stock-for-stock transaction in
which we issued to former ClearSource stockholders 114,698,442 shares of Series D preferred stock and 7,999,099 shares of Series E preferred stock valued at $1.30 per share and $2.50 per share, respectively. Our CEO, William Morrow, was one of the
founders of ClearSource, and at the time of the acquisition we shared most of the same major investors with ClearSource and a number of ClearSources directors were members of our board of directors. ClearSource provided bundled services
similar to ours to residential and small business customers over a broadband network in the Waco, Corpus Christi and Midland/Odessa markets and was the largest customer of our local telephone services. This acquisition provided us with approximately
51,000 connections.



TXU Communications



In March 2003, we acquired certain
telecommunications equipment assets and customers of TXU Communications Ventures for approximately $1.0 million in cash and assumed leasehold obligations. In this transaction we acquired a DMS-500 switch in Round Rock, Texas, a small number of
unbundled network element platform lines in Texas, MDU customers in Austin and customers in single dwelling units and MDUs in the Houston area. The acquisition provided us with growth capacity for telephone and Internet traffic in Austin/San Marcos.



C3 Communications



In March 2003, we acquired the long-haul network assets and customers of C3
Communications and certain of its affiliates for approximately $7.3 million in cash, which provided us with access to 3,000 route miles of fiber optic cable in Texas, Oklahoma, Arkansas and Louisiana. These assets serve as a backbone connecting each
of our markets except Midland/Odessa and, along with our metro area networks, constitute the core infrastructure for our provision of broadband transport and network services.



Advantex Communications



In late October 2003, we acquired Advantex Communications for a purchase price (net of cash received) of $26.8 million in
cash. Advantex provided bundled services similar to ours to residential and small business customers primarily in suburban northwest Dallas. This acquisition provided us with approximately 30,000 customers and approximately 400 route miles of fiber
optic cable in suburban northwest Dallas.



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Marketable Homes Passed, Penetration, Customers, Connections and Market Level Cash Flow



We report marketable homes passed as the number of
residential and business units, such as single residence homes, apartments and condominium units, passed by our networks other than those we believe are covered by exclusive arrangements with other providers of competing services. As of September
30, 2004, our networks passed 297,697 marketable homes and we had 120,243 residential and small business customers.



Because we deliver multiple services to our customers, we report our total number of connections for telephone, cable television and broadband Internet
and other services in addition to our total number of customers. We count each telephone, cable television and broadband Internet and other service purchase as a separate connection. For example, a single customer who purchases cable television,
telephone and broadband Internet service would count as three connections. Similarly, a single customer who purchases our broadband Internet service and our wireless security service would count as two connections. We do not record the purchase of
long distance telephone service by a local telephone customer or digital cable services by an analog cable customer as additional connections. However, we do record each purchase of an additional telephone line by a local telephone customer as an
additional connection. As of September 30, 2004, we had approximately 241,536 connections. We compute penetration of our markets both with respect to the number of customers and the number of connections as a percentage of marketable homes passed.
Since each customer could receive one or more connections for each of our three principal services, the connections percentage may exceed 100%. As of September 30, 2004, our customer penetration was 40%, and our penetration with respect to
connections was 81%.



Operating cash flow at the market level
reflects revenue, cost of revenue and some expenses that we are able to specifically identify as directly related to the operation of that market. We follow the same approach in allocating cost of revenue at the market level as we do for cost of
revenue allocation in general, as described below under the caption -Costs and Expenses-Cost of Revenues. In addition, we do not include centralized customer service expenses or corporate general and administrative expenses in
determining market level operating cash flow. Because we provide services in all markets and to network service customers using a common network infrastructure, we do not track assets or liabilities at the market level. Our method of determining
operating cash flow at the market level may not be comparable to approaches of other companies. Use of a different method of determining operating cash flow at the market level could change the operating cash flow at the market level, but not our
overall operating cash flow. Based upon this method of allocating cost of revenue and excluding certain corporate expenses, we believe that each of our markets has achieved positive operating cash flow.



Operating Revenues



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



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



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



Network services revenues.Our revenues from network services consist primarily of revenues from switched carrier services and managed modem services. We bill for most of our network services monthly in arrears
based on actual usage. However, some



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network services, particularly our managed modem services, involve fixed monthly charges billed in advance. Some network
services include non-recurring fees for installation or other work needed to connect the customer to our networks. There are monthly charges or negotiated fees for other services such as directory assistance, web hosting, database, collocation,
technical support and billing services.



Expected Changes in Revenues



MCI Contract.From July 2000 to October 2003, a
significant portion of our revenues was generated under a network services contract pursuant to which we provided carrier services to MCI. This contract generated approximately $66.7 million, $73.3 million and $65.0 million, or 70%, 50% and 36%, of
our consolidated revenues for the years ended December 31, 2001, 2002 and 2003, respectively. The agreement with MCI was terminated in the fourth quarter of 2003 as part of MCIs bankruptcy proceedings. MCI emerged from bankruptcy proceedings
in April of 2004. We received a settlement from MCI during these proceedings as a result of minimum purchase requirements under this agreement. We recorded approximately $2.5 million of revenue in the second quarter of 2004. We do not expect to
receive any further revenue from MCI under this agreement



Costs and
Expenses



Cost of Revenues



Cost of revenues includes those expenses that are
directly related to the generation of operating revenues and has fixed and variable components. Our network supports all of the products and services that we provide to customers, and due to a common network infrastructure and many of the same
resources and personnel being used to generate revenues from the various product and service categories it is difficult to determine cost of revenues by product. Commencing with costs incurred in 2003 we allocate network and related costs among our
products based upon the following approach:



We are able to
specifically identify the costs related to cable television and security, so no allocation is needed for these products. We allocate each cost that relates to only one of our retail telephone, broadband Internet, broadband transport and network
services products entirely to that product. For example, private line costs relate entirely to our broadband transport product and are allocated to it. Other costs, such as interconnect costs, generally are allocated among the various benefited
products based upon the use of minutes or bandwidth or other appropriate metrics. These allocation formulas are reviewed for appropriateness every six months. Our method of allocating network and related costs among products may not be comparable to
approaches of other companies. Use of a different method of allocation could change the cost of revenues and margin associated with each product. Our overall cost of revenues and gross margin is not affected by this allocation method.



Our cost of revenues include the following:



| |  | Cable costs. Programming costs historically have been the largest cost of providing our cable television services and we expect this trend to continue. We have entered into
contracts with the National Cable Television Cooperative and other programming providers to provide programming to be aired on our networks. We pay a monthly fee for these programming services, generally based on the average number of subscribers to
the program, although some fees are adjusted based on the total number of subscribers to the system or the system penetration percentage. Since programming cost is partially based on numbers of subscribers, it will increase as we add more
subscribers. It will also increase to the extent costs per channel increase over time, and may change depending upon the mix of channels we offer in each market from time to time. Our cable costs also include the fees payable to cable franchise
authorities, which are usually 5% of our revenues from cable subscriptions.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  | Broadband Internet and other costs. Our cost of revenues associated with delivering broadband Internet and other services to residential and small business customers consist
primarily of transport costs and fees associated with peering arrangements we have with other carriers. Transport costs and peering fees for this service are largely fixed so long as we
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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do not need to procure additional equipment or lease additional capacity, but increase when new
facilities for connecting to the Internet need to be obtained. Our security related costs are primarily related to system monitoring with a third party provider and the costs associated with selling security premise equipment to customers.



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



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



Selling, general and administrative expenses



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



Depreciation and
amortization



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



Operating Data



|                                        |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|--------------------------------------- |  | ------------------ | ------- | - | ----------------- | - | ------- | -------------- |  | - | ------------- | - |  | ------------------ | ------- | - |  | - | ------- | -
|                                        |  | Quarter Ended      |        
|                                        |  | September 30, 2003 |         |   | December 31, 2003 |   |         | March 31, 2004 |  |   | June 30, 2004 |   |  | September 30, 2004 |        
|Operating Data:                         |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Marketable homes passed(1)              |  |                    | 212,983 |   |                   |   | 277,399 |                |  |   | 280,959       |   |  |                    | 288,258 |   |  |   | 297,697 |  
|Customers(2)                            |  |                    | 69,085  |   |                   |   | 102,740 |                |  |   | 110,790       |   |  |                    | 115,275 |   |  |   | 120,243 |  
|Customer penetration                    |  |                    | 32.4    | % |                   |   | 37.0    | %              |  |   | 39.4          | % |  |                    | 40.0    | % |  |   | 40.4    | %
|Average monthly revenue per customer(3) |  | $                  | 78.41   |   |                   | $ | 84.60   |                |  | $ | 87.14         |   |  | $                  | 85.75   |   |  | $ | 85.32   |  
|Number of connections                   |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Cable television                        |  |                    | 53,970  |   |                   |   | 71,855  |                |  |   | 75,255        |   |  |                    | 78,244  |   |  |   | 81,642  |  
|Telephone                               |  |                    | 58,795  |   |                   |   | 97,288  |                |  |   | 101,347       |   |  |                    | 104,954 |   |  |   | 108,418 |  
|Broadband Internet and other            |  |                    | 27,732  |   |                   |   | 38,450  |                |  |   | 43,142        |   |  |                    | 47,440  |   |  |   | 51,476  |  
|                                        |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Total connections(4)                    |  |                    | 140,497 |   |                   |   | 207,593 |                |  |   | 219,744       |   |  |                    | 230,638 |   |  |   | 241,536 |  
|Connection penetration                  |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Cable television                        |  |                    | 25.3    | % |                   |   | 25.9    | %              |  |   | 26.8          | % |  |                    | 27.1    | % |  |   | 27.4    | %
|Telephone                               |  |                    | 27.6    | % |                   |   | 35.1    | %              |  |   | 36.1          | % |  |                    | 36.4    | % |  |   | 36.4    | %
|Broadband Internet and other            |  |                    | 13.0    | % |                   |   | 13.9    | %              |  |   | 15.4          | % |  |                    | 16.5    | % |  |   | 17.3    | %
|                                        |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Total connection penetration            |  |                    | 66.0    | % |                   |   | 74.8    | %              |  |   | 78.2          | % |  |                    | 80.0    | % |  |   | 81.1    | %
|Average monthly revenue per connection  |  |                    |         |   |                   |   |         |                |  |   |               |   |  |                    |         |   |  |   |         |  
|Cable television                        |  | $                  | 45.16   |   |                   | $ | 44.20   |                |  | $ | 46.03         |   |  | $                  | 46.59   |   |  | $ | 46.00   |  
|Telephone                               |  |                    | 36.41   |   |                   |   | 41.66   |                |  |   | 44.12         |   |  |                    | 43.86   |   |  |   | 43.84   |  
|Broadband Internet and other            |  |                    | 33.30   |   |                   |   | 37.49   |                |  |   | 35.94         |   |  |                    | 35.49   |   |  |   | 34.40   |  

---

|(1) | Marketable homes passed increased by 3,560 from December 31, 2003 to March 31, 2004, although the company constructed 5,914 new marketable homes in the same period. The 2,354
difference arose from a first quarter 2004 database clean-up on legacy information from acquisitions completed in 2003.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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|(2) | Grande acquired Advantex on October 27, 2003, which had approximately 30,000 customers. Customers increased by 8,050 from December 31, 2003 to March 31, 2004, although the company
completed a database clean-up on legacy information from acquisitions completed in 2003 that resulted in an upward adjustment in the customer count resulting in 1,900 additional previously uncounted customers in the quarter ending March 31, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | If the 1,900 customer adjustment discussed in footnote (2) had occurred in December 2003 the average monthly revenue per connection would have been $85.50 for the quarter ended
March 31, 2004.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Total connections include a decrease of approximately 1,500 connections in the Advantex market that occurred in the first quarter related to database clean-up.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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Results of Operations



Nine Months Ended September 30, 2004 Compared to Nine Months Ended September 30, 2003



The following table sets forth financial data as a percentage of operating revenues for the nine months ended September 30,
2003 and 2004.



|                                    |  |                                 |    |  |      |   
|----------------------------------- |  | ------------------------------- | -- |  | ---- | --
|                                    |  | Nine Months Ended September 30, |   
|                                    |  | 2003                            |    |  | 2004 |   
|Consolidated Financial Data:        |  |                                 |    |  |      |   
|Operating revenues:                 |  |                                 |    |  |      |   
|Cable television                    |  | 14                              | %  |  | 24   | % 
|Telephone                           |  | 12                              |    |  | 31   |   
|Broadband Internet and other        |  | 5                               |    |  | 11   |   
|Broadband transport services        |  | 4                               |    |  | 6    |   
|Network services                    |  | 65                              |    |  | 28   |   
|                                    |  |                                 |    |  |      |   
|Total operating revenues            |  | 100                             |    |  | 100  |   
|Operating expenses:                 |  |                                 |    |  |      |   
|Cost of revenues                    |  | 48                              |    |  | 37   |   
|Selling, general and administrative |  | 43                              |    |  | 53   |   
|Depreciation and amortization       |  | 28                              |    |  | 31   |   
|                                    |  |                                 |    |  |      |   
|Total operating expenses            |  | 119                             |    |  | 121  |   
|                                    |  |                                 |    |  |      |   
|Operating loss                      |  | (19                             | )  |  | (21  | ) 
|Other income (expense):             |  |                                 |    |  |      |   
|Interest income                     |  | 0                               |    |  | 0    |   
|Interest expense                    |  | (1                              | )  |  | (8   | ) 
|Gain/loss on disposal of assets     |  | 0                               |    |  | 0    |   
|Loss on extinguishment of debt      |  | 0                               |    |  | (2   | ) 
|                                    |  |                                 |    |  |      |   
|Total other income (expense)        |  | (1                              | )  |  | (10  | ) 
|                                    |  |                                 |    |  |      |   
|Net loss                            |  | (20                             | )% |  | (31  | )%
|                                    |  |                                 |    |  |      |   



Operating Revenues.Our operating revenues for the nine months ended September 30, 2003 and 2004 were $138.9 million and $132.6 million respectively, a decrease of $6.3 million, or 5%. This decrease is a result of the loss of the MCI agreement, partially offset by
growth in bundled services, broadband transport, and non-MCI network services as well as the acquisition of Advantex. Operating revenues for our cable television services for the nine months ended September 30, 2003 and 2004 were $19.4 million and
$31.9 million, respectively, an increase of $12.5 million, or 64%. Operating revenues for our telephone services for the nine months ended September 30, 2003 and 2004 were $16.7 million and $40.7 million, respectively, an increase of $24.0 million,
or 144%. Operating revenues for our broadband Internet and other services for the nine months ended September 30, 2003 and 2004 were $6.8 million and $14.3 million, respectively, an increase of $7.5 million, or 110%. The increased revenues for cable
television, telephone and broadband Internet and other are primarily due to growth in the number of connections, from 140,497 as of September 30, 2003 to 241,536 as of September 30, 2004 and to a much lesser extent from rate increases. The
additional connections and revenues resulted primarily from the continued construction of our broadband networks and continued penetration growth of marketable homes in our markets and from our acquisitions of TXU assets and Advantex. Our
acquisition of TXU assets was completed in March 2003 and added approximately 5,000 connections. Our acquisition of Advantex was completed in October 2003 and added approximately 58,000 connections.



Operating revenues for our broadband transport services for the nine months
ended September 30, 2003 and 2004 were $5.2 million and $7.9 million, respectively, due to our acquisition of C3 Communications in March 2003 and new customer growth. The increase in operating revenues from cable television, telephone, broadband
Internet and other and broadband transport services was partially offset by a decline in the revenues from network services, which were $90.8 million and $37.8 million, respectively, a decrease of $53.0 million, or 58%. This decrease is due to a
loss of revenue generated from our agreement with MCI, which terminated in the fourth quarter of 2003. Included in revenue for the nine months ended September 30, 2004 is $2.5 million related to the second quarter settlement of the MCI agreement. We
do not expect to receive any further revenue from MCI under that agreement. See Expected Changes in Revenues and Critical Accounting Policies and EstimatesRevenue Recognition.



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Cost of Revenues.Our cost of revenues for the nine months ended September 30, 2003 and 2004 were
$66.1 million and $49.2 million, respectively, a decrease of $16.9 million, or 26%. The decrease in our cost of revenues is primarily due to the decline in revenues from network services, offset by the growth of costs related to increased
connections in our bundled services offerings. Cost of revenues decreased as a percentage of revenues from 48% in the nine months ended September 30, 2003 to 37% in the nine months ended September 30, 2004, reflecting the increasing percentage of
our total revenues derived from our bundled service offerings. Cost of revenues associated with our cable television, telephone, broadband Internet and other services generally are significantly lower as a percentage of revenues than those
associated with network services.



Our gross margin for the
nine months ended September 30, 2004 for our bundled cable television, telephone and broadband Internet and other services was 73%, compared with 67% for the nine months ended September 30, 2003. The increase is due primarily to a change in the mix
of connections, as we added more telephone and broadband Internet and other service connections versus cable television connections. Both telephone and broadband Internet and other service products carry a somewhat higher gross margin than the cable
television product because of the programming costs associated with cable television. For broadband transport services, our gross margin for the nine months ended September 30, 2004 was 83%, compared with 78% for the nine months ended September 30,
2003. This increase is due to increased usage of excess capacity on the fixed cost portions of our network, which is partially offset by an increase in lower margin third-party construction projects in 2004. For network services, our gross margin
for the nine months ended September 30, 2004 was 36%, compared with 44% for the nine months ended September 30, 2003. In the fourth quarter of 2003 our contract with MCI was terminated. The resulting loss of traffic left us with excess capacity on
the network as well as changing the mix of services provided, both of which decreased network services gross margin. Without the effect of the MCI settlement, revenue network services gross margin for the nine months ended September 30, 2004 was
31%.



We expect that our overall gross margin will rise as the
percentage of revenues derived from our cable television, telephone, broadband Internet and other services and our broadband transport services, which are higher-margin services, increases in accordance with our business plan. Our margins are
determined based on an allocation of cost of revenues among our products. Our method of allocating costs and therefore, of computing margin, may not be comparable to approaches of other companies. Use of a different method of allocation could change
the margin associated with each product, although the overall gross margin would not be affected.



Selling, General and Administrative Expense. Our selling, general and administrative expense for the nine months ended September 30, 2003 and 2004
was $59.3 million and $70.4 million, respectively, an increase of $11.1 million, or 19%. The increase is primarily due to the expenses associated with the increase in the number of employees as a result of the acquisition of Advantex in October
2003. Selling, general and administrative expense increased as a percentage of revenues to 53% primarily as a result of the Advantex acquisition. We expect our selling, general and administrative expense to increase as a result of the growth of our
business and customer base, and decrease over time as a percentage of revenue.



Depreciation and Amortization Expense. Our depreciation and amortization expense for the nine months ended September 30, 2003 and 2004 was $39.0 million and $41.1 million, respectively, an increase of $2.1
million, or 5%. The increase is principally due to increased depreciation due to the expansion of our constructed and acquired network. We expect depreciation and amortization expense to continue to increase as we make additional capital
expenditures to construct and expand our networks in our existing markets.



Interest Expense. For the nine months ended September 30, 2003 and 2004, our interest expense, which includes interest incurred net of capitalized interest, was $1.8 million and $10.3 million, respectively. Our
interest expense increased as a result of borrowings in 2003 under the then existing senior credit facility, as well as interest accrued related to the senior secured notes issued in March of 2004. For the nine months ended September 30, 2003 and
2004, we had capitalized interest of $1.8 million and $2.3 million, respectively.



Write-Off Due to Repayment of Credit Facility. During the nine months ended September 30, 2004, we completed a private placement of our senior notes. Concurrent with this offering we repaid $64.8 million to
extinguish our senior credit facility. We wrote off debt issuance costs of approximately $2.1 million associated with this repayment.



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Three Months Ended September 30, 2004 Compared to Three Months Ended September 30, 2003



The following table sets forth financial data as a percentage of operating
revenues for the quarters ended September 30, 2003, and 2004.



|                                    |  |                                  |    |  |      |   
|----------------------------------- |  | -------------------------------- | -- |  | ---- | --
|                                    |  | Three Months Ended September 30, |   
|                                    |  | 2003                             |    |  | 2004 |   
|Consolidated Financial Data:        |  |                                  |    |  |      |   
|Operating revenues:                 |  |                                  |    |  |      |   
|Cable television                    |  | 15                               | %  |  | 24   | % 
|Telephone                           |  | 13                               |    |  | 31   |   
|Broadband Internet and other        |  | 5                                |    |  | 11   |   
|Broadband transport services        |  | 5                                |    |  | 6    |   
|Network services                    |  | 62                               |    |  | 28   |   
|                                    |  |                                  |    |  |      |   
|Total operating revenues            |  | 100                              |    |  | 100  |   
|Operating expenses:                 |  |                                  |    |  |      |   
|Cost of revenues                    |  | 47                               |    |  | 37   |   
|Selling, general and administrative |  | 44                               |    |  | 52   |   
|Depreciation and amortization       |  | 25                               |    |  | 33   |   
|                                    |  |                                  |    |  |      |   
|Total operating expenses            |  | 116                              |    |  | 122  |   
|                                    |  |                                  |    |  |      |   
|Operating loss                      |  | (16                              | )  |  | (22  | ) 
|Other income (expense):             |  |                                  |    |  |      |   
|Interest income                     |  | 0                                |    |  | 0    |   
|Interest expense                    |  | (2                               | )  |  | (10  | ) 
|Gain/loss on disposal of assets     |  | 0                                |    |  | 0    |   
|Loss on extinguishment of debt      |  | 0                                |    |  | 0    |   
|                                    |  |                                  |    |  |      |   
|Total income (expense)              |  | (2                               | )  |  | (10  | ) 
|                                    |  |                                  |    |  |      |   
|Net loss                            |  | (18                              | )% |  | (32  | )%
|                                    |  |                                  |    |  |      |   



Operating Revenues.Our operating revenues for the quarter ended September 30, 2003 and 2004 were $47.6 million and $45.1 million, respectively, a decrease of $2.5 million, or 5%. This decrease is a result of the loss of the MCI agreement, partially offset by
growth in bundled services, broadband transport, and non-MCI network services as well as the acquisition of Advantex. Operating revenues for our cable television services for the quarter ended September 30, 2003 and 2004 were $7.0 million and $11.0
million, respectively, an increase of $4.0 million, or 57%. Operating revenues for our telephone services for the quarter ended September 30, 2003 and 2004 were $6.2 million and $14.0 million, respectively, an increase of $7.8 million, or 126%.
Operating revenues for our broadband Internet and other services for the quarter ended September 30, 2003 and 2004 were $2.5 million and $5.1 million, respectively, an increase of $2.6 million, or 104%. The increased revenues for cable television,
telephone and broadband Internet and other are primarily due to growth in the number of connections, from 140,497 as of September 30, 2003 to 241,536 as of September 30, 2004 and to a much lesser extent from rate increases. The additional
connections and revenues resulted primarily from the continued construction of our broadband networks and continued penetration growth of marketable homes in our markets and our acquisition of Advantex, which was completed in October 2003 and added
approximately 58,000 connections.



Operating revenues for our
broadband transport services for the quarter ended September 30, 2003 and 2004 were $2.3 million and $2.6 million, respectively. The increase in operating revenues from cable television, telephone, broadband Internet and other and broadband
transport services was partially offset by a decline in the revenues from network services, which were $29.6 million and $12.4 million, respectively, a decrease of $17.2 million, or 58%. This decrease is due to a loss of revenue generated from our
agreement with MCI, which terminated in the fourth quarter of 2003. We do not expect to receive any further revenue from MCI under that agreement. See Expected Changes in Revenues and Critical Accounting Policies and
EstimatesRevenue Recognition.



Cost of Revenues.Our cost of revenues for the quarter ended September 30, 2003 and 2004 were $22.2 million and $16.7 million, respectively, a decrease of $5.5 million, or 25%. The decrease in our cost of revenues is primarily due to the decline in



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revenues from network services, offset by the growth of costs related to increased connections in our bundled services
offerings. Cost of revenues decreased as a percentage of revenues from 47% in the quarter ended September 30, 2003 to 37% in the quarter ended September 30, 2004, reflecting the increasing percentage of our total revenues derived from our bundled
service offerings. Cost of revenues associated with our cable television, telephone and broadband Internet and other services generally are significantly lower as a percentage of revenues than those associated with network services.



Our gross margin for the quarter ended September 30, 2004 for our bundled
cable television, telephone and broadband Internet and other services was 73%, compared with 67% for the quarter ended September 30, 2003. The increase is due primarily to a change in the mix of connections, as we added more telephone and broadband
Internet and other service connections versus cable television connections. Both telephone and broadband Internet and other service products carry a somewhat higher gross margin than the cable television product because of the programming costs
associated with cable television. For broadband transport services, our gross margin for the quarter ended September 30, 2004 was 89%, compared with 77% for the quarter ended September 30, 2003. This increase is due to increased usage of excess
capacity on the fixed cost portions of our network. For network services, our gross margin for the quarter ended September 30, 2004 was 34%, compared with 44% for the quarter ended September 30, 2003. In the fourth quarter of 2003 our contract with
MCI was terminated. The resulting loss of traffic left us with excess capacity on the network as well as changing the mix of services provided, both of which decreased network services gross margin.



We expect that our overall gross margin will rise as the percentage of
revenues derived from our cable television, telephone and broadband Internet and other services and our broadband transport services, which are higher-margin services, increases in accordance with our business plan. Our margins are determined based
on an allocation of cost of revenues among our products. Our method of allocating costs and therefore, of computing margin, may not be comparable to approaches of other companies. Use of a different method of allocation could change the margin
associated with each product, although the overall gross margin would not be affected.



Selling, General and Administrative Expense. Our selling, general and administrative expense for the quarter ended September 30, 2003 and 2004 was $20.9 million and $23.6 million, respectively, an increase of
$2.7 million, or 13%. The increase is primarily due to the expenses associated with the increase in the number of employees as a result of the acquisition of Advantex in October 2003. Selling, general and administrative expense increased as a
percentage of revenues to 52% primarily as a result of the Advantex acquisition. We expect our selling, general and administrative expense to increase as a result of the growth of our business and customer base, and decrease over time as a
percentage of revenue.



Depreciation and Amortization
Expense. Our depreciation and amortization expense for the quarter ended September 30, 2003 and 2004 was $11.7 million and $14.7 million, respectively, an increase of $3.0 million, or 26%. The increase is principally due to increased
depreciation due to the expansion of our constructed network. We expect depreciation and amortization expense to continue to increase as we make additional capital expenditures to construct and expand our networks in our existing markets.



Interest Expense. For the quarter ended September 30,
2003 and 2004, our interest expense, which includes interest incurred net of capitalized interest, was $0.9 million and $4.5 million, respectively. Our interest expense increased as a result of borrowings in 2003 under the then existing senior
credit facility as well as interest accrued related to the senior secured notes issued in March of 2004. For the quarter ended September 30, 2003 and 2004, we had capitalized interest of $0.6 million and $1.0 million, respectively.



EBITDA/Adjusted EBITDA



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



Because we have funded the build-out of our networks by raising and expending large amounts of capital, our results of operations reflect significant charges for depreciation, amortization, and interest expense,
EBITDA, which excludes this information, provides helpful information about the operating performance of our business, apart from the expenses associated with our physical plant or capital structure. We try to make each area of our business generate
positive EBITDA, and when we have choices about the market or area in which to best deploy our resources we generally direct our resources towards the network construction that is expected to generate the most EBITDA. EBITDA is frequently used as a
basis comparing businesses in our industry, although our measure of EBITDA may not be comparable to similarly titled measures of other companies. EBITDA does not purport to represent operating loss or cash flow from operating activities, as those
terms are defined under generally accepted accounting principles, and should not be considered as an alternative to those measurements as an indicator of our performance. In the first quarter of 2004, we wrote off debt issuance costs of
approximately $2.1 million associated with the repayment of our senior credit facility following the completion of our senior notes offering. We believe this expense is analogous to amortization and interest expense, and therefore we believe it is
more useful to show EBITDA net of this one-time amount because we believe it is a better measure of our operating performance and is more comparable to prior periods. However, because of the nature of the charge, we are referring to our EBITDA in
2004 net of the charge as Adjusted EBITDA.



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Adjusted EBITDA was $4.7 million and $5.0 million for the quarters ended September 30, 2003 and 2004,
respectively. The increase is primarily due to the addition of new customers, added both through acquisitions and the build-out of our networks over such periods, offset by the decline in MCI revenues due to the loss of the MCI contract.



Adjusted EBITDA was $14.1 million and $13.6 million for the nine month
periods ended September 30, 2003 and 2004, respectively. The decrease is primarily due to the decline in MCI revenues due to the loss of the MCI contract, offset by the addition of new customers, added both through acquisitions and the build-out of
our networks over such periods.



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



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



|                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------------- | ------ | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Three Months Ended September 30, |        |   | Nine Months Ended September 30, |  
|                                                                |  | 2003                             |        |   | 2004                            |   |         | 2003 |  |   | 2004    |  
|                                                                |  | (Dollars in thousands)           |        |   | (Dollars in thousands)          |  
|Net loss as reported                                            |  | $                                | (8,044 | ) |                                 | $ | (14,158 | )    |  | $ | (27,165 | ) |  | $ | (39,979 | )
|Add back non-EBITDA/Adjusted EBITDA items included in net loss: |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                 |  |                                  | (36    | ) |                                 |   | (207    | )    |  |   | (95     | ) |  |   | (558    | )
|Interest expense                                                |  |                                  | 904    |   |                                 |   | 4,475   |      |  |   | 1,826   |   |  |   | 10,301  |  
|Taxes                                                           |  |                                  | 195    |   |                                 |   | 195     |      |  |   | 585     |   |  |   | 587     |  
|Depreciation and amortization                                   |  |                                  | 11,678 |   |                                 |   | 14,720  |      |  |   | 38,983  |   |  |   | 41,145  |  
|                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|EBITDA                                                          |  |                                  | 4,697  |   |                                 |   | 5,025   |      |  |   | 14,134  |   |  |   | 11,496  |  
|Loss on extinguishment of debt                                  |  |                                  | 0      |   |                                 |   | 0       |      |  |   | 0       |   |  |   | 2,145   |  
|                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA                                                 |  | $                                | 4,697  |   |                                 | $ | 5,025   |      |  | $ | 14,134  |   |  | $ | 13,641  |  
|                                                                |  |                                  |        |   |                                 |   |         |      |  |   |         |   |  |   |         |  



Liquidity and Capital Resources



Sources and Uses of Funds



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



On March 23, 2004, we issued $136.0 million principal amount at maturity of senior secured notes with fixed interest payable
at a rate of 14% per annum. We refer to these notes as the outstanding notes. Interest on the senior notes is payable semi-annually each April 1 and October 1 beginning October 1, 2004. We used a portion of the net proceeds from the sale of the
senior notes to repay all amounts outstanding under our then-existing senior credit facility. The senior credit facility was terminated upon repayment and we are not able to borrow any further amounts thereunder. In connection with the payment and
termination of the senior credit facility, we recorded $2.1 million of debt extinguishment expenses, including accelerated amortization of debt issuance costs and other expenses of $1.5 million.



We conducted the offering of the senior notes in order to accelerate the
build-out of our networks and to improve our liquidity position. Accelerating the build-out is expected to result in increased revenues and EBITDA/Adjusted EBITDA over the near term. We have the ability to accelerate or postpone construction of
extensions to our networks depending upon future cash availability, subject only to the need to eventually complete the build-out of our networks in accordance with the requirements of our franchise agreements.



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At September 30, 2004, we had total cash and cash equivalents of $75.4 million and we had $142.1 million
of long-term debt outstanding.



Provided that we meet the
revenue, expense and cash flow projections in our current business plan, we expect that with existing cash on hand and cash flow from operations, we will be fully funded to build-out our networks to pass all 1.4 million franchised marketable homes
and small businesses in our existing markets over the next several years. Our business plan is based on estimates regarding expected future costs and expected revenues. Our costs may exceed or our revenues may fall short of our estimates, our
estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds to complete construction in our markets, which would require us to seek additional financing.



We may seek additional financing to undertake initiatives not contemplated by
our business plan or obtain additional cushion against possible shortfalls. We also may pursue additional financing as opportunities arise. Future financings may include a range of different sizes or types of financing, including the sale of
additional debt or equity securities. However, we may not be able to raise additional funds on favorable terms or at all. Our ability to obtain additional financing depends on several factors, including future market conditions; our success or lack
of success in penetrating our markets; our future creditworthiness; and restrictions contained in agreements with our investors or lenders, including the restrictions contained in the indenture governing the senior notes. These financings could
increase our level of indebtedness or result in dilution to our equity holders.



Cash Flows from Operating Activities



Our net cash provided by operating activities for the nine months ended September 30, 2003 and 2004 was $21.4 million and $10.6 million, respectively.
Overall, the decrease in cash flow is primarily due to the loss of the MCI contract as well as the cash used to satisfy the related working capital liabilities associated with providing service under that contract. On September 30, 2004, we had a
$9.9 million balance in accrued liabilities related to our senior notes, which was subsequently paid on October 1, 2004.



Cash Flows from Investing Activities



Our net cash used in investing activities for the nine months ended September 30, 2003 and 2004 was $45.6 million and $38.7
million, respectively. These net cash outflows are primarily due to the build-out of our network in both 2003 and 2004 as well as the acquisitions of assets from TXU and C3 Communications in March 2003.



Cash Flows from Financing Activities



Our net cash provided by financing activities for the nine months ended September 30,
2003 and 2004 was $33.6 million and $61.1 million, respectively. Cash flows from financing activities in the nine months ended September 30, 2003 consisted primarily of borrowings on our senior credit facility. We paid the outstanding amount of
$64.8 million on our senior credit facility with the proceeds of our 14% Senior Secured Notes offering in March of 2004. We received proceeds of $130.2 million, less $6.3 million of related issuance costs as of September 30, 2004.



Capital Expenditures



We spent approximately $36.7 million in capital expenditures, including capitalized interest, during the nine-month period
ended September 30, 2003 versus approximately $38.5 million for the nine month period ended September 30, 2004. This amount relates to network construction, installation costs, the purchase of customer premise equipment, such as cable set-top boxes
and cable modems, and corporate and network equipment, such as switching and transport equipment, and billing and information systems. As discussed above, we expect that assuming we meet the revenue, expense and cash flow projections in our current
business plan, we will be able to fund all capital expenditures needed to build-out our networks to pass all 1.4 million marketable homes and small businesses in our existing markets over the next several years. If we decide to build broadband
networks in additional cities or desire to further accelerate the build-out of our networks, we could require additional funding to operate and for the capital expenditures necessary to finance the construction of our networks and purchase of
customer premise equipment.



The indenture governing our
outstanding notes prohibits us from exceeding $50.0 million of capital expenditures, defined to exclude capitalized interest and the capital lease on our headquarters, in 2004. We expect to spend approximately $49.0 million in capital expenditures
in 2004, as such term is defined in our indenture. We expect to spend a total of approximately $52.3 million in capital expenditures in 2004, including capitalized interest. We expect to spend approximately half of this amount for network
construction and asset purchases, and the remainder principally for installation costs, the purchase of customer premise equipment and corporate and network equipment, including capitalized labor costs. We have completed substantially all of the
design, planning and engineering work for our anticipated network construction in 2004 and much of this work for network construction in 2005. We expect that with this amount of expected capital expenditures for network construction, that our
build-out of our networks in 2004 will pass approximately 36,000 additional marketable homes. We believe we are capable of supporting network construction at this rate of spending based on the fact that we have done equal or greater amounts of
construction in prior years. The actual costs may vary significantly from this range and will depend on the number of miles of network to be



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constructed, the geographic and demographic characteristics of the city and neighborhood, population density, whether the
homes passed are multiple dwelling units, costs associated with the cable franchise in that market, the number of customers in each city, the cost of customer premise equipment we pay for or finance, utility requirements and other factors.



Contractual Obligations and Commercial Commitments



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



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



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



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



Purchase Agreement.In October 2001, in connection with our previous senior credit facility, we entered into a purchase agreement with Marconi Communications, Inc., predecessor-in-interest to Advanced Fibre
Corporation. Based upon the delay in delivering a particular product under the agreement, the purchase agreement was amended in August of 2004, waiving the 2004 minimum purchase obligation and extended the agreement by one year.



The following table represents our contractual obligations as of September
30, 2004 on an as adjusted basis, which gives effect to the completion of this offering and the repayment of our existing senior credit facility:



|                            |  |                        |       |      |   |        |  |      |        |      |   |              |  |       |        |  |   |        |  |   |        
|--------------------------- |  | ---------------------- | ----- | ---- | - | ------ |  | ---- | ------ | ---- | - | ------------ |  | ----- | ------ |  | - | ------ |  | - | -------
|                            |  | Payments Due by Period |       |     
|Contractual Obligations     |  | 2004                   |       | 2005 |   | 2006   |  | 2007 |        | 2008 |   | 2009 &Beyond |  | Total
|                            |  | (In thousands)        
|Capital lease obligations   |  | $                      | 439   |      | $ | 1,758  |  | $    | 1,730  |      | $ | 1,577        |  | $     | 1,520  |  | $ | 22,291 |  | $ | 29,315 
|Operating lease obligations |  |                        | 1,155 |      |   | 4,642  |  |      | 4,106  |      |   | 3,525        |  |       | 2,941  |  |   | 16,720 |  |   | 33,089 
|Maintenance obligations     |  |                        | 297   |      |   | 1,189  |  |      | 1,189  |      |   | 1,189        |  |       | 1,189  |  |   | 15,163 |  |   | 20,216 
|Purchase obligations(1)     |  |                        | N/A   |      |   | 5,650  |  |      | 10,475 |      |   | 11,600       |  |       | 8,350  |  |   | 0      |  |   | 36,075 
|                            |  |                        |       |      |   |        |  |      |        |      |   |              |  |       |        |  |   |        |  |   |        
|Total                       |  | $                      | 1,891 |      | $ | 13,239 |  | $    | 17,500 |      | $ | 17,891       |  | $     | 14,000 |  | $ | 54,174 |  | $ | 118,695
|                            |  |                        |       |      |   |        |  |      |        |      |   |              |  |       |        |  |   |        |  |   |        

---

|(1) | Refer to Exhibit 10.1.
|--- | ----------------------



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



We have entered into contracts with various entities to provide us with video programming services. We pay a monthly fee for those services, generally
based on the average number of video subscribers to that service during the service period. We estimate programming fees to be approximately $22.5 million in 2004.



We have entered into numerous franchise agreements with municipalities in Texas. These agreements provide for, among other
items: payment of a stated percentage of revenue, typically 5%, on a quarterly basis, the maintenance of deposits and corporate surety bonds up to $1 million, and the contribution of funds by us of up to $4 million to provide facilities and
equipment related to public access channels. These agreements have various terms, ranging between 5 and 9 years, with additional renewal periods. We anticipate making significant payments with respect to these franchise agreements and the build-out
of our networks during 2004 and beyond.



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Critical Accounting Policies and Estimates



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



Revenue Recognition



Revenue from customers consists of fixed monthly fees for bundled services
and certain network services, and usage based fees for long distance services in certain bundles and the majority of our network services. Local governmental authorities impose franchise fees on the majority of our franchises ranging up to a
federally mandated maximum of 5% of annual gross revenues derived from the operation of the cable television system, to provide cable television services, as provided in the franchise agreements. Such fees are collected on a monthly basis from our
customers and periodically remitted to local franchise authorities. Franchise fees collected and paid are reported as revenues and expenses, respectively. Our revenues are recognized when services are provided, regardless of the period in which they
are billed. Amounts billed in advance are reflected in the balance sheet as deferred revenue and are deferred until the service is provided.



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



Classification of Various Direct Labor and Other Overhead Costs



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



Judgment
is required to determine the extent to which indirect costs, or overhead, are incurred as a result of specific capital activities, and therefore should be capitalized. We allocate overhead based upon the portion of indirect costs that contribute to
capitalizable activities using an overhead rate applied to the amount of direct labor capitalized based upon our analysis of the nature of costs incurred in support of capitalizable activities. The primary costs that are included in the
determination of overhead rates are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated with capitalizable activities, consisting primarily of installation and construction vehicle
costs, (iii) the cost of support personnel, such as personnel who directly assist with capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities. For the nine months ended September 30, 2003 and
2004, $7.1 million and $7.5 million of labor and overhead costs were capitalized, respectively.



Valuation of Long-Lived Assets and Intangible Assets



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



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We performed a goodwill impairment test as of October 1, 2003, which coincided with the termination of
the MCI contract. This test was performed in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142Goodwill and Other Intangible Assets, which we adopted effective January 1, 2002. SFAS No. 142 recognizes that
since goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. An independent appraisal firm was used for this analysis.
The analysis reached the conclusion that the estimated fair value exceeded the carrying value, so no impairment existed. The estimated fair value was determined based on a discounted cash flow analysis and review of multiples for comparable
companies. The assumptions used in the valuation testing have subjective components, including anticipated future operating results and cash flows based on our business plan and overall expectations as to market and economic considerations. Based on
the results of this test we recorded no impairment loss for 2003.



Allowance for Doubtful Accounts



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



The foregoing list is
not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need
for us to judge the application. There are also areas in which our judgment in selecting any available alternative would not produce a materially different result.



Recent Accounting Pronouncements



In May 2003, the FASB issued SFAS No. 150Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.
SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a
liability or an asset in some circumstances. We do not expect SFAS No. 150 to have a material impact on our financial position or statement of operations.



Item 3.
Quantitative and Qualitative Disclosures about Market Risk



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



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Item 4.
Controls and Procedures



Our
management, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, has evaluated the effectiveness of our disclosure controls and
procedures as of September 30, 2004. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are effective in timely alerting them to material information
relating to Grande, including its consolidated subsidiaries, required to be included in this report and the other reports that we file or submit under the Securities Exchange Act of 1934.



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



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PART II



OTHER INFORMATION



Item 1.
Legal Proceedings



Legal Proceedings



Both the FCC and the Department of Justice initiated
investigations understood to involve billing practices by MCI and related issues involving companies that terminated or otherwise may have handled traffic on behalf of MCI, including those companies participating in MCIs Least Cost Routing
Program. We believe we were a substantial participant in the Least Cost Routing Program. The Department of Justice convened a grand jury in the Southern District of New York as part of its investigation. The grand jury issued document subpoenas to a
number of companies in the telecommunications industry, including us. We cooperated with the Department of Justice and have produced responsive documents. The FCC issued letters of inquiry to us and other companies seeking documents and requesting
information relating to the above described billing practices and the compliance by such companies, including us, with applicable laws and regulations. We responded to the letters of inquiry. The FCC may issue additional letters of inquiry in the
future, to which we would intend to respond in the same manner. We cannot predict the outcome of these investigations or their duration. If these investigations result in current or prior billing practices being identified as violative of applicable
laws or regulations, result in penalties being imposed upon us, result in further proceedings against specific companies, including ours, result in changes in the law or regulations that would have an industry-wide effect, or lead to litigation
among parties involved in terminating or otherwise routing traffic, the impact could have a material adverse effect on our business and financial condition.



As a telecommunications company, we are a party to regulatory proceedings in the ordinary course of our business at both the state and federal levels.
These include proceedings before both the FCC and the PUCT that will potentially impact such issues as inter-carrier compensation. For example, we along with many other telecommunications companies in Texas are currently a party to a proceeding
before the Public Utility Commission of Texas, or PUCT, relating to the terms of SBC Communications standard interconnection agreement and an anticipated successor to this interconnection agreement. The regulatory proceeding concerning the
terms of SBC Communications standard interconnection agreement and anticipated successor thereto is ongoing and is not expected to conclude until either late this year or early next year. We cannot anticipate the outcome of this regulatory
proceeding at this time but do not believe that the outcome will, individually, or in the aggregate, with any other regulatory proceedings, have a material adverse effect on our business, financial condition or results of operations.



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Item 4.
Submission of Matters to a Vote of Security Holders



There were no matters submitted to a vote of security holders of Grande during the quarter ending September 30, 2004.



Item 6.
Exhibits and Reports on Form 8-K



(a) Exhibits



Grande files herewith the following
exhibits:



|            |  |                                                                                                                                                                                                                                                                                                                                                                                                    
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                                                                                                                                                                                                                        
|3.1*        |  | Restated Certificate of Incorporation of Grande Communications Holdings, Inc.                                                                                                                                                                                                                                                                                                                      
|            | 
|3.2*        |  | By-Laws of Grande Communications Holdings, Inc.                                                                                                                                                                                                                                                                                                                                                    
|            | 
|3.3         |  | Amendment # 1 to By-Laws of Grande Communications Holding, Inc.                                                                                                                                                                                                                                                                                                                                    
|            | 
|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.                                                                                                                                                                                                                                         
|            | 
|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.                                                                                                                                                                                             
|            | 
|4.3*        |  | Form of 14% Senior Secured Note due 2011.                                                                                                                                                                                                                                                                                                                                                          
|            | 
|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.
|            | 
|10.1**      |  | System Purchase Agreement by and between Grande Communications, Inc. and Marconi Communications, Inc., dated October 29, 2001, as amended.                                                                                                                                                                                                                                                         
|            | 
|10.2*       |  | Grande Communications Holdings, Inc. 2000 Stock Option Plan                                                                                                                                                                                                                                                                                                                                        
|            | 
|10.3*       |  | Employment Agreement, dated February 2, 2004 by and between Grande Communications Holdings, Inc. and William E. Morrow.                                                                                                                                                                                                                                                                            
|            | 
|10.4*       |  | Fourth Amended and Restated Investor Rights Agreement, dated October 27, 2003 by and among Grande Communications Holdings, Inc., Current Investors, Founders and New
Investors.                                                                                                                                                                                                                    
|            | 
|10.5*       |  | Lease Agreement between Grande Communications Networks, Inc. and GRC (TX) Limited Partnership, dated August 7, 2003.                                                                                                                                                                                                                                                                               
|            | 
|31.1        |  | Certification pursuant to Section 302 of the Sabanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                                                                                                   
|            | 
|31.2        |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                                                                                                  
|            | 
|32.1        |  | Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                                                                                                                                                                                                       

---

|* | Incorporated by reference to Grandes Registration Statement on Form S-1 filed with the SEC on May 18, 2004.
|- | ------------------------------------------------------------------------------------------------------------

|** | Incorporated by reference to Grandes Quarterly Report on Form 10-Q filed with the SEC on August 13, 2004.
|-- | ----------------------------------------------------------------------------------------------------------



(b) Reports on Form 8-K



On August 12, 2004, Grande filed a Form 8-K reporting under Items 7 & 12
a press release announcing operating results for the second quarter of 2004.



On September 23, 2004, Grande filed a Form 8-K reporting under Item 8.01 a press release announcing the delivery of its Company presentation at the Jefferies Second Annual Communications and Media Conference.



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SIGNATURES



Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                       |  |     |  |                                                                                                     
|---------------------- |  | --- |  | ----------------------------------------------------------------------------------------------------
|                       |  |     |  | Grande Communications Holdings, Inc. (Registrant)                                                   
|                       |  |    
|Date: November 5, 2004 |  | By: |  | /s/ Michael L. Wilfley                                                                              
|                       |  |     |  | Michael L. Wilfley Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)



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