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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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

For the Quarterly Period Ended June 30, 2006

OR



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

For the transition period from              to

Commission file number 333-115602



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Grande Communications Holdings, Inc.

(Exact name of registrant as specified
in its charter)



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



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

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



---

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

Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer ̈Accelerated filer ̈Non-accelerated filer  x

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

The number of shares of the registrants Common Stock outstanding as of July 15, 2006 was 13,011,148.



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

Index



|           |  |                                                                                       |  |         
|---------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                                                                                       |  | Page No.
|Part I.    |  | Financial Information                                                                 |  | 3       
|           |  |                                                                                      
|Item 1.    |  | Financial Statements                                                                  |  | 3       
|           |  | Condensed Consolidated Balance Sheets                                                 |  | 3       
|           |  | Condensed Consolidated Statements of Operations                                       |  | 4       
|           |  | Condensed Consolidated Statements of Cash Flows                                       |  | 5       
|           |  | Notes to Condensed Consolidated Financial Statements                                  |  | 6       
|           |  |                                                                                      
|Item 2.    |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 10      
|           |  |                                                                                      
|Item 3.    |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 23      
|           |  |                                                                                      
|Item 4.    |  | Controls and Procedures                                                               |  | 23      
|           |  |                                                                                      
|Part II.   |  | Other Information                                                                     |  | 24      
|           |  |                                                                                      
|Item 1.    |  | Legal Proceedings                                                                     |  | 24      
|           |  |                                                                                      
|Item 1A.   |  | Risk Factors                                                                          |  | 24      
|           |  |                                                                                      
|Item 2.    |  | Unregistered Sales of Equity Securities and Use of Proceeds                           |  | 24      
|           |  |                                                                                      
|Item 3.    |  | Defaults Upon Senior Securities                                                       |  | 24      
|           |  |                                                                                      
|Item 4.    |  | Submission of Matters to a Vote of Security Holders                                   |  | 24      
|           |  |                                                                                      
|Item 5.    |  | Other Information                                                                     |  | 24      
|           |  |                                                                                      
|Item 6.    |  | Exhibits                                                                              |  | 24      
|           | 
|Signatures |  | 25                                                                                   



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##### Table of Contents

PART I

FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                                                                                                       |  | December 31,2005 |          |   | June 30, 2006 |  
|                                                                                                                                                                                                       |  |                  |          |   | (unaudited)   |  
|Assets                                                                                                                                                                                                 |  |                  |          |   |               |   |          |  
|Current assets:                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Cash and cash equivalents (net of restricted cash of $3,056 and $2,889 as of December 31, 2005 and June 30, 2006,
respectively)                                                                        |  | $                | 26,719   |   |               | $ | 49,207   |  
|Investments                                                                                                                                                                                            |  |                  | 350      |   |               |   |         |  
|Accounts receivable, net                                                                                                                                                                               |  |                  | 18,884   |   |               |   | 17,531   |  
|Prepaid expenses and other current assets                                                                                                                                                              |  |                  | 1,973    |   |               |   | 2,751    |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Total current assets                                                                                                                                                                                   |  |                  | 47,926   |   |               |   | 69,489   |  
|Property and equipment, net                                                                                                                                                                            |  |                  | 297,183  |   |               |   | 283,750  |  
|Goodwill                                                                                                                                                                                               |  |                  | 93,639   |   |               |   | 93,639   |  
|Other intangible assets, net                                                                                                                                                                           |  |                  | 1,963    |   |               |   | 1,855    |  
|Debt issue costs, net                                                                                                                                                                                  |  |                  | 5,970    |   |               |   | 5,618    |  
|Restricted cash and other assets                                                                                                                                                                       |  |                  | 3,857    |   |               |   | 3,346    |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Total assets                                                                                                                                                                                           |  | $                | 450,538  |   |               | $ | 457,697  |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Liabilities and stockholders equity                                                                                                                                                                   |  |                  |          |   |               |   |          |  
|                                                                                                                                                                                                       |  |                 
|Current liabilities:                                                                                                                                                                                   |  |                  |          |   |               |   |          |  
|Accounts payable                                                                                                                                                                                       |  | $                | 14,232   |   |               | $ | 13,626   |  
|Accrued expenses                                                                                                                                                                                       |  |                  | 20,333   |   |               |   | 20,090   |  
|Deferred revenue                                                                                                                                                                                       |  |                  | 6,006    |   |               |   | 5,987    |  
|Current portion of capital lease obligations and note payable                                                                                                                                          |  |                  | 981      |   |               |   | 948      |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Total current liabilities                                                                                                                                                                              |  |                  | 41,552   |   |               |   | 40,651   |  
|Deferred rent                                                                                                                                                                                          |  |                  | 984      |   |               |   | 1,300    |  
|Deferred revenue                                                                                                                                                                                       |  |                  | 4,374    |   |               |   | 4,092    |  
|Capital lease obligations, net of current portion                                                                                                                                                      |  |                  | 14,365   |   |               |   | 13,974   |  
|Long term debt                                                                                                                                                                                         |  |                  | 129,056  |   |               |   | 160,204  |  
|Commitments and contingencies (Note 5)                                                                                                                                                                 |  |                  |          |   |               |   |          |  
|Stockholders equity:                                                                                                                                                                                  |  |                  |          |   |               |   |          |  
|Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, issued and outstanding; liquidation preference of
$232,618                                                        |  |                  | 233      |   |               |   | 233      |  
|Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of
$25,000                                                          |  |                  | 21       |   |               |   | 21       |  
|Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued and outstanding; liquidation
preference of $20,406                                        |  |                  | 17       |   |               |   | 17       |  
|Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued and outstanding; liquidation
preference of $149,108                                     |  |                  | 115      |   |               |   | 115      |  
|Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued and outstanding; liquidation
preference of $19,998                                          |  |                  | 8        |   |               |   | 8        |  
|Series F preferred stock, $0.001 par value per share; 12,307,692 shares authorized, 11,758,278 shares issued and outstanding; liquidation
preference of $15,286                                        |  |                  | 12       |   |               |   | 12       |  
|Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation
preference of $135,000                                       |  |                  | 35       |   |               |   | 35       |  
|Series H preferred stock, $0.001 par value per share; 30,000,000 shares authorized, no shares issued and outstanding                                                                                   |  |                  |         |   |               |   |         |  
|Common stock, $0.001 par value per share; 786,835,883 and 828,835,883 shares authorized, 12,989,965 and 13,011,148 shares issued and
outstanding, at December 31, 2005 and June 30, 2006, respectively |  |                  | 13       |   |               |   | 13       |  
|Additional paid-in capital                                                                                                                                                                             |  |                  | 508,346  |   |               |   | 508,443  |  
|Treasury stock, at cost                                                                                                                                                                                |  |                  | (5       | ) |               |   | (5       | )
|Accumulated deficit                                                                                                                                                                                    |  |                  | (248,588 | ) |               |   | (271,416 | )
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Total stockholders equity                                                                                                                                                                             |  |                  | 260,207  |   |               |   | 237,476  |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                             |  | $                | 450,538  |   |               | $ | 457,697  |  
|                                                                                                                                                                                                       |  |                  |          |   |               |   |          |  

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



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In
thousands, except per share data)



|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                                                                     |  | Three Months Ended June 30, |         |   | Six Months Ended June 30, |  
|                                                                                                                                                                     |  | 2005                        |         |   | 2006                      |   |         | 2005 |  |   | 2006    |  
|Operating revenues                                                                                                                                                   |  | $                           | 49,775  |   |                           | $ | 47,557  |      |  | $ | 98,235  |   |  | $ | 95,192  |  
|Operating expenses:                                                                                                                                                  |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Cost of revenues (excluding depreciation and amortization)                                                                                                           |  |                             | 19,319  |   |                           |   | 16,475  |      |  |   | 37,525  |   |  |   | 33,000  |  
|Selling, general and administrative (includes $33 and $88 of stock-based compensation expense for the three months and six months ended
June 30, 2006, respectively) |  |                             | 23,821  |   |                           |   | 24,825  |      |  |   | 47,346  |   |  |   | 48,597  |  
|Depreciation and amortization                                                                                                                                        |  |                             | 15,075  |   |                           |   | 14,192  |      |  |   | 29,602  |   |  |   | 28,075  |  
|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                                                                                             |  |                             | 58,215  |   |                           |   | 55,492  |      |  |   | 114,473 |   |  |   | 109,672 |  
|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Operating loss                                                                                                                                                       |  |                             | (8,440  | ) |                           |   | (7,935  | )    |  |   | (16,238 | ) |  |   | (14,480 | )
|Other income (expense):                                                                                                                                              |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                                                                                                                      |  |                             | 143     |   |                           |   | 416     |      |  |   | 457     |   |  |   | 558     |  
|Interest expense                                                                                                                                                     |  |                             | (4,611  | ) |                           |   | (6,295  | )    |  |   | (9,354  | ) |  |   | (11,401 | )
|Other income                                                                                                                                                         |  |                             | 750     |   |                           |   |        |      |  |   | 750     |   |  |   |        |  
|Gain on disposal of assets                                                                                                                                           |  |                             | 12      |   |                           |   | 622     |      |  |   | 84      |   |  |   | 2,495   |  
|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Total other income (expense)                                                                                                                                         |  |                             | (3,706  | ) |                           |   | (5,257  | )    |  |   | (8,063  | ) |  |   | (8,348  | )
|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Net loss                                                                                                                                                             |  | $                           | (12,146 | ) |                           | $ | (13,192 | )    |  | $ | (24,301 | ) |  | $ | (22,828 | )
|                                                                                                                                                                     |  |                             |         |   |                           |   |         |      |  |   |         |   |  |   |         |  
|Basic and diluted net loss per share                                                                                                                                 |  | $                           | (0.98   | ) |                           | $ | (1.06   | )    |  | $ | (1.95   | ) |  | $ | (1.83   | )
|Basic and diluted weighted average number of common shares outstanding                                                                                               |  |                             | 12,440  |   |                           |   | 12,503  |      |  |   | 12,431  |   |  |   | 12,500  |  

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



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GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In
thousands)



|                                                                               |  |                          |         |   |      |   |         |  
|------------------------------------------------------------------------------ |  | ------------------------ | ------- | - | ---- | - | ------- | -
|                                                                               |  | Six Months EndedJune 30, |        
|                                                                               |  | 2005                     |         |   | 2006 |  
|Cash flows from operating activities:                                          |  |                          |         |   |      |   |         |  
|Net loss                                                                       |  | $                        | (24,301 | ) |      | $ | (22,828 | )
|Adjustment to reconcile net loss to net cash provided by operating activities: |  |                          |         |   |      |   |         |  
|Depreciation                                                                   |  |                          | 27,483  |   |      |   | 27,937  |  
|Amortization of intangible assets                                              |  |                          | 2,119   |   |      |   | 138     |  
|Amortization of deferred financing costs                                       |  |                          | 491     |   |      |   | 497     |  
|Provision for bad debts                                                        |  |                          | 2,414   |   |      |   | 1,792   |  
|Accretion of debt discount                                                     |  |                          | 399     |   |      |   | 512     |  
|Non-cash stock-based compensation                                              |  |                          | (5      | ) |      |   | 88      |  
|Gain on sale of assets                                                         |  |                          | (84     | ) |      |   | (2,495  | )
|Changes in operating assets and liabilities, net of business acquisitions:     |  |                          |         |   |      |   |         |  
|Accounts receivable                                                            |  |                          | (2,079  | ) |      |   | (439    | )
|Prepaid expenses and other current assets                                      |  |                          | (1,796  | ) |      |   | (267    | )
|Accounts payable                                                               |  |                          | 3,008   |   |      |   | (823    | )
|Accrued expenses                                                               |  |                          | (1,697  | ) |      |   | (243    | )
|Deferred revenue                                                               |  |                          | (114    | ) |      |   | (276    | )
|Deferred rent                                                                  |  |                          | 150     |   |      |   | 316     |  
|                                                                               |  |                          |         |   |      |   |         |  
|Net cash provided by operating activities                                      |  |                          | 5,988   |   |      |   | 3,909   |  
|                                                                               |  |                          |         |   |      |   |         |  
|Cash flows from investing activities:                                          |  |                          |         |   |      |   |         |  
|Maturities of short term investments                                           |  |                          | 20,000  |   |      |   | 350     |  
|Purchases of property, plant and equipment                                     |  |                          | (31,171 | ) |      |   | (15,122 | )
|Purchase price adjustments                                                     |  |                          | (69     | ) |      |   |        |  
|Proceeds on sale of assets                                                     |  |                          | 469     |   |      |   | 3,126   |  
|Purchase of franchise rights and other                                         |  |                          | (747    | ) |      |   | (29     | )
|                                                                               |  |                          |         |   |      |   |         |  
|Net cash used in investing activities                                          |  |                          | (11,518 | ) |      |   | (11,675 | )
|                                                                               |  |                          |         |   |      |   |         |  
|Cash flows from financing activities:                                          |  |                          |         |   |      |   |         |  
|Proceeds from borrowings and promissory notes                                  |  |                          |        |   |      |   | 30,581  |  
|Payments of long-term debt                                                     |  |                          | (300    | ) |      |   | (466    | )
|Deferred financing costs                                                       |  |                          | (8      | ) |      |   | (86     | )
|Net borrowings (repayments) on zero-balance cash account                       |  |                          | (313    | ) |      |   | 217     |  
|Proceeds from issuance of common stock                                         |  |                          | 13      |   |      |   | 8       |  
|                                                                               |  |                          |         |   |      |   |         |  
|Net cash (used in) financing activities                                        |  |                          | (608    | ) |      |   | 30,254  |  
|                                                                               |  |                          |         |   |      |   |         |  
|Net change in cash and cash equivalents                                        |  |                          | (6,138  | ) |      |   | 22,488  |  
|Cash and cash equivalents, beginning of period                                 |  |                          | 41,195  |   |      |   | 26,719  |  
|                                                                               |  |                          |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                       |  | $                        | 35,057  |   |      | $ | 49,207  |  
|                                                                               |  |                          |         |   |      |   |         |  

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



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GRANDE COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1.
Organization & Nature of the Business

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

2. Basis of Presentation

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Certain items related to 2005 have been reclassified to conform to the 2006 reporting format. In the opinion of management, these consolidated financial
statements contain all adjustments, consisting of normal, recurring adjustments, necessary for a fair presentation of the financial position of the Company as of June 30, 2006 and 2005, and for the three months and six months ended
June 30, 2006 and June 30, 2005. The Company has reclassified the operating and financing portion of the cash flows attributable to negative book cash balances related to our zero-balance accounts for the three month and six month periods
ended June 30, 2005. In prior periods these cash flows were reported within the change in accounts payable in operating activities, and have been reclassified to cash flows from financing activities to conform with current year presentation.
The effect on operating activities was $0.3 million for the six months ended June 30, 2005. This revision did not have any affect on the Companys cash balances, compliance with debt covenants, working capital, or operations.

3. Stock-Based Compensation

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement No. 123 (Revised 2004), Share-Based Payment (Statement No. 123R). This revised standard addresses the accounting for stock-based
payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the companys equity instruments or that may be settled by the
issuance of such equity instruments. Under the new standard, companies are no longer able to account for stock-based compensation transactions using the intrinsic-value method in accordance with APB Opinion No. 25, Accounting for Stock
Issued to Employees. Instead, companies are required to account for such transactions using a fair-value method and recognize the related expense in the Consolidated Statement of Operations.

Adoption of Statement No. 123(R)

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

The adoption of Statement No. 123R resulted in an increase of $0.06
million and $0.09 million in selling, general and administrative expenses for the three months and six months ended June 30, 2006, respectively, and an increase of $0.06 million and $0.09 million in loss from operations and net loss for the
three months and six months ended June 30, 2006, respectively. The adoption of Statement No. 123R had an impact of less than $0.01 on basic and diluted net loss per share for the three months and six months ended June 30, 2006,
respectively.



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Valuation assumptions

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



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

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

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

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

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

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

Stock Option Plan

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



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##### Table of Contents

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



|                                                                                     |  |                      |            |                         |                              |                   |                                         |  |                 |  |                              |  |                                         |        |                          |     |                                       |   |   |  |   |          
|------------------------------------------------------------------------------------ |  | -------------------- | ---------- | ----------------------- | ---------------------------- | ----------------- | --------------------------------------- |  | --------------- |  | ---------------------------- |  | --------------------------------------- | ------ | ------------------------ | --- | ------------------------------------- | - | - |  | - | ---------
|                                                                                     |  | Common Stock Options |            | Preferred Stock Options |                              | All Stock Options
|                                                                                     |  | Number ofShares      |            |                         | WeightedAverageExercisePrice |                   | WeightedAverageRemainingContractualTerm |  | Number ofShares |  | WeightedAverageExercisePrice |  | WeightedAverageRemainingContractualTerm |        | AggregateIntrinsic Value |     | AggregateUnrecognizedCompensationCost
|Outstanding at December 31, 2005                                                     |  |                      | 49,414,571 |                         |                              | $                 | 0.32                                    |  |                 |  |                             |  | $                                       |       |                          |     |                                       |   |   |  |   |          
|Granted                                                                              |  |                      | 7,862,000  |                         |                              |                   | 0.07                                    |  |                 |  | 11,000,000                   |  |                                         | 0.10   |                          |     |                                       |   |   |  |   |          
|Exercised                                                                            |  |                      | (12,850    | )                       |                              |                   | 0.21                                    |  |                 |  |                             |  |                                         |       |                          |     |                                       |   |   |  |   |          
|Forfeited or expired                                                                 |  |                      | (2,374,479 | )                       |                              |                   | 0.28                                    |  |                 |  |                             |  |                                         |       |                          |     |                                       |   |   |  |   |          
|                                                                                     |  |                      |            |                         |                              |                   |                                         |  |                 |  |                              |  |                                         |        |                          |     |                                       |   |   |  |   |          
|Outstanding at March 31, 2006                                                        |  |                      | 54,889,242 |                         |                              | $                 | 0.32                                    |  | 7.0             |  | 11,000,000                   |  | $                                       | 0.10   |                          | 9.9 |                                       |   |   |  |   |          
|Granted                                                                              |  |                      | 4,622,242  |                         |                              |                   | 0.05                                    |  |                 |  | 15,200,000                   |  |                                         | 0.10   |                          |     |                                       |   |   |  |   |          
|Exercised                                                                            |  |                      | (8,333     | )                       |                              |                   | 0.60                                    |  |                 |  |                             |  |                                         |       |                          |     |                                       |   |   |  |   |          
|Forfeited or expired                                                                 |  |                      | (4,053,320 | )                       |                              |                   | 0.36                                    |  |                 |  |                             |  |                                         |       |                          |     |                                       |   |   |  |   |          
|                                                                                     |  |                      |            |                         |                              |                   |                                         |  |                 |  |                              |  |                                         |        |                          |     |                                       |   |   |  |   |          
|Outstanding at June 30, 2006                                                         |  |                      | 55,449,831 |                         |                              | $                 | 0.13                                    |  | 7.3             |  | 26,200,000                   |  | $                                       | 0.10   |                          | 9.8 |                                       | $ |  |  | $ | 1,606,271
|                                                                                     |  |                      |            |                         |                              |                   |                                         |  |                 |  |                              |  |                                         |        |                          |     |                                       |   |   |  |   |          
|Exercisable/vested at June 30, 2006                                                  |  |                      | 27,840,574 |                         |                              | $                 | 0.18                                    |  | 5.9             |  |                             |  | $                                       |       |                          |    |                                       | $ |  |  | $ |         
|Unexercisable/unvested at June 30, 2006                                              |  |                      | 27,609,257 |                         |                              | $                 | 0.09                                    |  | 8.8             |  | 26,200,000                   |  | $                                       | 0.10   |                          | 9.8 |                                       | $ |  |  | $ | 1,606,271
|                                                                                     |  |                      |           
|                                                                                     |  | Common Stock Options |            | Preferred Stock Options |                              | All Stock Options
|Weighted average fair value per option granted in the six months ended June 30, 2006 |  | $                    |           |                         |                              |                   |                                         |  |                 |  | $ 0.07                       |  |                                         | $ 0.05

Compensation costs related to option grants are being amortized using the straight-line method. As
of June 30, 2006, $1.6 million of unrecognized compensation costs related to non-vested option grants is expected to be recognized over the course of the following four years.

On May 3, 2006, the Board of Directors approved the re-pricing of substantially all outstanding common stock options to $0.05 per share, and options
to purchase approximately 39 million common shares were re-priced. The Company recognized no additional compensation expense as a result of this modification due to the options having no fair value.

4. Recent Accounting Pronouncements

Statement No. 123R

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

Statement No. 155

In February 2006, the FASB
issued Statement No. 155, Accounting for Certain Hybrid Financial Instruments-an amendment of FASB Statements No. 133 and 140 (Statement No. 155). Statement No. 155 allows financial instruments that
contain an embedded derivative and that otherwise would require bifurcation, to be accounted for as a whole on a fair value basis at the holders election. Statement No. 155 also clarifies and amends certain other provisions of Statements
No. 133 and 140. This statement is effective for all financial instruments acquired or issued in fiscal years beginning after September 15, 2006. The Company does not expect that the adoption of Statement No. 155 will have a material
impact on its results of operations or financial position.

Statement No. 156

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets-an amendment of Statement
No. 140 (Statement No. 156). Statement No. 156 provides guidance on the accounting for servicing assets and liabilities when an entity undertakes an obligation to service a financial asset by entering into a
servicing contract. This statement is effective for all transactions in fiscal years beginning after September 15, 2006. The adoption of Statement No. 156 will not have a material impact on its results of operations or financial position.



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FASB Interpretation No. 48

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

EITF 06-3

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

5. Contingencies

In early September 2005, the Texas Cable and Telecommunications Association filed a lawsuit in U.S. District Court, Western District of
Texas, Austin division, to challenge SB 5, the legislation passed allowing for a state-wide cable franchise and obviating the need for individual municipal franchises. Named as defendants in the lawsuit, in their official capacities, are Governor
Rick Perry and Public Utility Commission of Texas Commissioners Chairman Paul Hudson, Julie Parsley and Barry Smitherman. The lawsuit contends that SB 5 discriminates in violation of the U.S. and Texas Constitutions, discriminates in violation of
the Federal Communications Act, violates the federal prohibition on exclusive franchises, and violates the federal duty to guard against redlining. In the event that the plaintiff prevails in the SB 5 litigation, the court may rule that the current
statewide franchises are unconstitutional. Grande joined Verizon, AT&T and some municipalities and intervened in the lawsuit in support of the Texas Attorney General.

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



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

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

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

Overview

We provide communities in Texas with a
bundled package of cable television, telephone and broadband Internet and other services. We operate fully integrated advanced broadband networks in seven markets in the State of Texas. We constructed our local networks to enable us to sell advanced
communication services to residential, small business, and enterprise customers. We refer to these homes and small businesses as marketable homes passed. As of June 30, 2006, we had the ability to market services to 334,528 distinct
homes and small businesses over our network, and had 136,920 residential, small business, and enterprise customers.

In July 2000, when our
network construction was still in a very early stage, we acquired an established telephone and data network that served as the platform for our provision of residential telephone and broadband Internet services and that still provides network
services revenues. This acquisition initially provided a significant portion of our revenues and became the foundation of our business while we moved forward with the construction of our broadband networks. Since 2001, we grew our marketable homes
passed through the construction of our networks. Our retail strategy enabled us to grow our number of bundled services customers. Because of this retail strategy, we have derived an increasing percentage of our revenues from our retail cable
television, telephone and broadband Internet and other services and we expect this trend to continue.

Since inception, we have been funded
primarily with private equity investments and the issuance of debt securities. Between February 2000 and October 2003, we completed a series of private placements of our preferred stock, raising aggregate gross proceeds of $338.2 million from the
sale of our capital stock. The net proceeds from these private placements have been used to fund our network build-out, operations, and our acquisitions, 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.

On March 23, 2004, we raised net proceeds of approximately $124.5 million in a private placement of 136,000 units each consisting of a $1,000
principal amount of 14% senior secured note due 2011 and a warrant to purchase 100.336 shares of our common stock. We used a portion of the net proceeds from the offering to repay all amounts outstanding under our then-existing senior credit
facility. That facility was terminated upon repayment and we are not able to borrow any further amounts thereunder.

On March 24,
2006, we raised net proceeds of approximately $30.5 million in a private placement of an additional $32.0 million in aggregate principal amount of 14% senior secured notes due 2011. These additional notes were issued under the existing indenture and
are part of the same series of notes as the notes issued in March 2004. These notes have not been and will not be registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption
from registration requirements. We are using the proceeds for capital expenditures and working capital purposes.



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

During the third quarter of 2005, we experienced significant changes in management with the
resignation of our founder, Chief Executive Officer, and Vice Chairman, William E. Morrow; our President, Joe Ross; and our General Counsel and Secretary, Andy Kever. As a result of these resignations, our Board of Directors began a national search
for a new Chief Executive Officer and immediately appointed former Grande co-founder and Chief Operating Officer, W.K.L. Scott Ferguson, Jr., as our Interim Chief Executive Officer and President of the Company. Scott Ferguson held this
position until Roy H. Chestnutt joined Grande in February 2006 as the new Chief Executive Officer. Scott Ferguson transitioned to his current role of Chief Operating Officer after Mr. Chestnutts arrival. The overall bundling strategy of
the company remained largely the same during the transition, although the company shifted its primary focus from constructing new marketable homes passed to selling to existing marketable homes passed and improving overall company operations.

Marketable Homes Passed, Customers and Connections

We report marketable homes passed as the number of residential and business units, such as single residence homes, apartments and condominium units, passed by our networks other than those we believe are covered by
exclusive arrangements with other providers of competing services. As of June 30, 2006, our networks passed 334,528 marketable homes and we had 136,920 residential, small business and enterprise customers.

Because we deliver multiple services to our customers, we report our total number of connections for cable television, telephone and broadband Internet
and other services in addition to our total number of customers. We count each cable television, telephone and broadband Internet and other services purchased as a separate connection. For example, a single customer who purchases cable television,
telephone and broadband Internet service would count as three connections. Similarly, a single customer who purchases our broadband Internet service and our wireless security service would count as two connections. We do not record the purchase of
long distance telephone service by a local telephone customer or digital cable services by an analog cable customer as additional connections. However, we do record each purchase of an additional telephone line by a local telephone customer as an
additional connection. As June 30, 2006, we had 286,991 connections.

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 also
generate revenues from one-time charges for the installation of premises equipment. Most of our bundled offerings include fees for equipment rental, although in some instances we sell modems to customers. Revenue generated from equipment sales is an
insignificant portion of our total revenue. We also charge monthly or one-time fees for additional services, including advertising. We collect from our cable customers and include in our gross revenues the fees payable to cable franchise
authorities, which are usually 5% of our revenues from cable subscriptions. We began offering security services as part of our bundle in June 2004. We sell all wireless security premise equipment to new security service customers at installation.
The security revenue is included in broadband Internet and other.

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

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



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

Costs and Expenses

Cost of Revenues

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

Our cost of revenues include the following:



| |  |  | Cable costs. Programming costs historically have been the largest portion of the cost of providing our cable television services and we expect this trend to continue. We have
entered into contracts 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 are largely fixed so
long as we do not need to procure additional equipment or lease additional capacity. Transport costs are expected to increase when new facilities need to be obtained. The access fees are generally usage-based and, therefore, variable.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



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



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##### Table of Contents

Selling, general and administrative expenses

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

Depreciation and amortization

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

Operating Data



|                             |  |               |         |                   |   |                  |  |               |         |               |   |         |  |   |        
|---------------------------- |  | ------------- | ------- | ----------------- | - | ---------------- |  | ------------- | ------- | ------------- | - | ------- |  | - | -------
|                             |  | Quarter Ended
|                             |  | June 30,2005  |         | September 30,2005 |   | December 31,2005 |  | March 31,2006 |         | June 30, 2006
|Operating Data(1):           |  |               |         |                   |   |                  |  |               |         |               |   |         |  |   |        
|Marketable homes passed      |  |               | 325,581 |                   |   | 328,041          |  |               | 331,173 |               |   | 336,596 |  |   | 334,528
|Customers                    |  |               | 131,538 |                   |   | 134,919          |  |               | 136,109 |               |   | 138,793 |  |   | 136,920
|Number of connections        |  |               |         |                   |   |                  |  |               |         |               |   |         |  |   |        
|Cable television             |  |               | 85,440  |                   |   | 87,776           |  |               | 89,417  |               |   | 92,174  |  |   | 91,156 
|Telephone                    |  |               | 113,589 |                   |   | 113,700          |  |               | 114,621 |               |   | 116,789 |  |   | 116,463
|Broadband Internet and other |  |               | 63,241  |                   |   | 68,061           |  |               | 72,104  |               |   | 77,183  |  |   | 79,372 
|                             |  |               |         |                   |   |                  |  |               |         |               |   |         |  |   |        
|Total connections            |  |               | 262,270 |                   |   | 269,537          |  |               | 276,142 |               |   | 286,146 |  |   | 286,991
|Average monthly revenue per: |  |               |         |                   |   |                  |  |               |         |               |   |         |  |   |        
|Customer                     |  | $             | 85.79   |                   | $ | 85.18            |  | $             | 85.59   |               | $ | 87.15   |  | $ | 88.64  
|Cable television             |  |               | 49.04   |                   |   | 48.31            |  |               | 48.82   |               |   | 50.74   |  |   | 52.15  
|Telephone                    |  |               | 42.86   |                   |   | 43.09            |  |               | 42.93   |               |   | 42.23   |  |   | 41.72  
|Broadband Internet and other |  |               | 35.31   |                   |   | 34.54            |  |               | 33.85   |               |   | 33.31   |  |   | 32.87  

---

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



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



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##### Table of Contents

Results of Operations

Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

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



|                                    |  |                          |    |  |      |   
|----------------------------------- |  | ------------------------ | -- |  | ---- | --
|                                    |  | Six Months EndedJune 30, |   
|                                    |  | 2005                     |    |  | 2006 |   
|Consolidated Financial Data:        |  |                          |    |  |      |   
|Operating revenues:                 |  |                          |    |  |      |   
|Cable television                    |  | 25                       | %  |  | 30   | % 
|Telephone                           |  | 30                       |    |  | 31   |   
|Broadband Internet                  |  | 13                       |    |  | 16   |   
|Broadband transport services        |  | 4                        |    |  | 4    |   
|Network services                    |  | 28                       |    |  | 19   |   
|                                    |  |                          |    |  |      |   
|Total operating revenues            |  | 100                      |    |  | 100  |   
|Operating expenses:                 |  |                          |    |  |      |   
|Cost of revenues                    |  | 38                       |    |  | 35   |   
|Selling, general and administrative |  | 48                       |    |  | 51   |   
|Depreciation and amortization       |  | 30                       |    |  | 29   |   
|                                    |  |                          |    |  |      |   
|Total operating expenses            |  | 116                      |    |  | 115  |   
|                                    |  |                          |    |  |      |   
|Operating loss                      |  | (16                      | )  |  | (15  | ) 
|Other income (expense):             |  |                          |    |  |      |   
|Interest income                     |  |                         |    |  | 1    |   
|Interest expense                    |  | (10                      | )  |  | (12  | ) 
|Other income                        |  | 1                        |    |  |     |   
|Gain/loss on disposal of assets     |  |                         |    |  | 3    |   
|                                    |  |                          |    |  |      |   
|Total other income (expense)        |  | (9                       | )  |  | (8   | ) 
|                                    |  |                          |    |  |      |   
|Net loss                            |  | (25                      | )% |  | (23  | )%
|                                    |  |                          |    |  |      |   

Operating Revenues.Our operating revenues for the six months ended June 30, 2005 and
2006 were $98.2 million and $95.2 million, respectively, a decrease of $3.0 million, or 3%. This decrease was primarily driven by three components of network services. First, our decision to de-emphasize our international carrier switched service
business drove a decrease of $2.7 million. Second, we experienced a decrease in domestic carrier switched services revenue, which fell by $4.7 million. Finally, reciprocal compensation revenue decreased by $1.4 million from the six months ended
June 30, 2005 to the six months ended June 30, 2006 due to regulatory changes. Revenue from bundled services increased by $6.3 million, partially offsetting the decrease in revenue from network service.

Operating revenues for our cable television services for the six months ended June 30, 2005 and 2006 were $24.5 million and $28.2 million,
respectively, an increase of $3.7 million, or 15%. Approximately 31% of the $3.7 million increase in cable television services is due to our annual rate increase, which occurred in January 2006. Operating revenues for our telephone services for the
six months ended June 30, 2005 and 2006 remained relatively flat at $29.3 million, respectively. Operating revenues for our broadband Internet and other services for the six months ended June 30, 2005 and 2006 were $12.6 million and $15.2
million, respectively, an increase of $2.6 million, or 21%. The overall increased revenues for bundled services from $66.4 million to $72.7 million for the six months ended June 30, 2005 and 2006, respectively, is primarily due to growth in the
number of connections, from 262,270 as of June 30, 2005 to 286,991 as of June 30, 2006, and to a lesser extent from the aforementioned cable rate increase. The additional connections and revenues resulted primarily from continued
penetration growth of marketable homes in Grandes markets and selling to customers where we recently constructed new broadband networks.

Operating revenues for our broadband transport services for the six months ended June 30, 2005 and 2006 remained relatively flat at $4.3 million, respectively.

Operating revenue for our network services for the six months ended June 30, 2005 and 2006 was $27.5 million and $18.3 million, respectively, a
decrease of $9.2 million, or 33%, due to the components outlined above.



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##### Table of Contents

Cost of Revenues.Our cost of revenues for the six months ended June 30, 2005 and 2006 were
$37.5 million and $33.0 million, respectively, a decrease of $4.5 million, or 12%. The decrease in our cost of revenues was primarily due to the decrease in network services revenue, which, in turn, led to a decrease in the variable component of
network services costs. Cost of revenues decreased as a percentage of revenues from 38% for the six months ended June 30, 2005 to 35% for the six months ended June 30, 2006.

Selling, General and Administrative Expense. Our selling, general and administrative expense for the six months ended June 30, 2005 and 2006
was $47.3 million and $48.6 million, respectively, an increase of $1.3 million, or 3%, primarily due to the cost of growing the bundled services business and management changes that occurred during the second quarter of 2006. Selling, general and
administrative expense increased as a percentage of revenues from 48% to 51%, primarily, due to the 33% decrease in network service revenue.

Depreciation and Amortization Expense. Our depreciation and amortization expense for the six months ended June 30, 2005 and 2006 was $29.6 million and $28.1 million, respectively, a decrease of $1.5 million, or 5%. The decrease
was primarily due to certain intangible assets becoming fully amortized during 2005, as well as the write-off of franchise fees in the fourth quarter of 2005.

Interest Expense. For the six months ended June 30, 2005 and 2006, our interest expense, which includes interest incurred net of capitalized interest, was $9.4 million and $11.4 million, respectively, an
increase of $2.0 million, or 21%. Our interest expense increased primarily due to the private placement of an additional $32.0 million of senior notes in the first quarter of 2006, as well as a decrease in capitalized interest (and a corresponding
increase in interest expense) as the result of decreased network construction activity. For the six months ended June 30, 2005 and 2006, we had capitalized interest of $1.7 million and $1.1 million, respectively, a decrease of $0.6 million, or
35%.

Other income. Our other income for the six months ended June 30, 2005 and 2006 was $0.8 million and $0, respectively.
This decrease was due to the recognition of a one-time contractually negotiated fee for strategic business planning and development in June 2005. This fee is unrelated to our primary business product and therefore classified as other income.

Gain on Sale of Assets. For the six months ended June 30, 2005 and 2006, our gain/loss on sale of assets was $0.1 million and
$2.5 million, respectively, an increase of $2.4 million. The increase was primarily due to the sale of assets in Dallas. Net proceeds from the first closing, which occurred on March 31, 2006, were $1.9 million, and net proceeds from the second
closing, which occurred on June 19, 2006, were $0.6 million. These assets were non-strategic in nature and were originally acquired in our October 2003 purchase of Advantex.



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Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

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



|                                    |  |                            |    |  |      |   
|----------------------------------- |  | -------------------------- | -- |  | ---- | --
|                                    |  | Three Months EndedJune 30, |   
|                                    |  | 2005                       |    |  | 2006 |   
|Consolidated Financial Data:        |  |                            |    |  |      |   
|Operating revenues:                 |  |                            |    |  |      |   
|Cable television                    |  | 25                         | %  |  | 30   | % 
|Telephone                           |  | 30                         |    |  | 31   |   
|Broadband Internet                  |  | 13                         |    |  | 16   |   
|Broadband transport services        |  | 5                          |    |  | 4    |   
|Network services                    |  | 27                         |    |  | 19   |   
|                                    |  |                            |    |  |      |   
|Total operating revenues            |  | 100                        |    |  | 100  |   
|Operating expenses:                 |  |                            |    |  |      |   
|Cost of revenues                    |  | 39                         |    |  | 35   |   
|Selling, general and administrative |  | 48                         |    |  | 52   |   
|Depreciation and amortization       |  | 30                         |    |  | 30   |   
|                                    |  |                            |    |  |      |   
|Total operating expenses            |  | 117                        |    |  | 117  |   
|                                    |  |                            |    |  |      |   
|Operating loss                      |  | (17                        | )  |  | (17  | ) 
|Other income (expense):             |  |                            |    |  |      |   
|Interest income                     |  |                           |    |  | 1    |   
|Interest expense                    |  | (9                         | )  |  | (13  | ) 
|Other income                        |  | 2                          |    |  |     |   
|Gain/loss on disposal of assets     |  |                           |    |  | 1    |   
|                                    |  |                            |    |  |      |   
|Total income (expense)              |  | (7                         | )  |  | (11  | ) 
|                                    |  |                            |    |  |      |   
|Net loss                            |  | (24                        | )% |  | (28  | )%
|                                    |  |                            |    |  |      |   

Operating Revenues.Our operating revenues for the three months ended June 30, 2005
and 2006 were $49.8 million and $47.6 million, respectively, a decrease of $2.2 million, or 4%. This decrease was primarily driven by three components of network services. First, our decision to de-emphasize our international carrier switched
service business drove a decrease of $1.0 million. Second, we experienced a decrease in domestic carrier switched services revenue, which fell by $3.0 million. Finally, reciprocal compensation revenue decreased by $0.6 million from the three months
ended June 30, 2005 to the three months ended June 30, 2006 due to regulatory changes. Revenue from bundled services increased by $2.8 million, partially offsetting the decrease in revenue from network service.

Operating revenues for our cable television services for the three months ended June 30, 2005 and 2006 were $12.5 million and $14.3 million,
respectively, an increase of $1.8 million, or 14%. Approximately 27% of the $1.8 million increase in cable television services is due to our annual rate increase, which occurred in January 2006. Operating revenues for our telephone services for the
three months ended June 30, 2005 and 2006 were $14.7 million and $14.6 million, respectively, a decrease of $0.1 million, or 1%. Operating revenues for our broadband Internet and other services for the three months ended June 30, 2005 and
2006 were $6.6 million and $7.7 million, respectively, an increase of $1.1 million, or 17%. The overall increased revenues for bundled services from $33.8 million to $36.6 million for the three months ended June 30, 2005 and 2006, respectively,
is primarily due to growth in the number of connections, from 262,270 as of June 30, 2005 to 286,991 as of June 30, 2006, and to a lesser extent from the aforementioned cable rate increase. The additional connections and revenues resulted
primarily from continued penetration growth of marketable homes in Grandes markets and selling to customers where we recently constructed new broadband networks.

Operating revenues for our broadband transport services for the three months ended June 30, 2005 and 2006 were $2.2 million and $1.9 million, respectively, a decrease of $0.3 million, or 14%.

Operating revenue for our network services for the three months ended June 30, 2005 and 2006 was $13.8 million and $9.0 million, respectively, a
decrease of $4.8 million, or 35%, due to the components outlined above.



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##### Table of Contents

Cost of Revenues.Our cost of revenues for the three months ended June 30, 2005 and 2006 were
$19.3 million and $16.5 million, respectively, a decrease of $2.8 million, or 15%. The decrease in our cost of revenues was primarily due to the decrease in network services revenue, which, in turn, led to a decrease in the variable component of
network services costs. Cost of revenues decreased as a percentage of revenues from 39% for the three months ended June 30, 2005 to 35% for the three months ended June 30, 2006.

Selling, General and Administrative Expense. Our selling, general and administrative expense for the three months ended June 30, 2005 and
2006 was $23.8 million and $24.8 million, respectively, an increase of $1.0 million, or 4%, primarily due to the costs of growing the bundled services business and management changes that occurred during the second quarter of 2006. Selling, general
and administrative expense increased as a percentage of revenues from 48% to 52%, primarily due to the 35% decrease in network service revenue.

Depreciation and Amortization Expense. Our depreciation and amortization expense for the three months ended June 30, 2005 and 2006 was $15.1 million and $14.2 million, respectively, a decrease of $0.9 million, or 6%. The
decrease was primarily due to certain intangible assets becoming fully amortized during 2005, as well as the write-off of franchise fees in the fourth quarter of 2005.

Interest Expense. For the three months ended June 30, 2005 and 2006, our interest expense, which includes interest incurred net of capitalized interest, was $4.6 million and $6.3 million, respectively, an
increase of $1.7 million, or 37%. Our interest expense increased primarily due to the private placement of an additional $32.0 million of senior notes in the first quarter of 2006, as well as a decrease in capitalized interest (an a corresponding
increase in interest expense). For the three months ended June 30, 2005 and 2006, we had capitalized interest of $0.9 million and $0.5 million, respectively, a decrease of $0.4 million or 44%.

Other income. Our other income for the three months ended June 30, 2005 and 2006 was $0.8 million and $0, respectively. This increase is due
to the recognition of a one-time contractually negotiated fee for strategic business planning and development in June 2005. This fee is unrelated to our primary business product and therefore classified as other income.

Gain on Sale of Assets. For the three months ended June 30, 2005 and 2006, our gain/loss on sale of assets was $0.01 million and $0.6
million, respectively, an increase of approximately $0.6 million. The increase was primarily due to the sale of assets in Dallas. Net proceeds from this closing, which occurred on June 19, 2006, were $0.6 million. This was the second closing of
the sale of assets in Dallas, which were non-strategic in nature and were originally acquired in our October 2003 purchase of Advantex.

EBITDA/Adjusted
EBITDA

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

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

In the first quarter of 2004, Grande wrote
off debt issuance costs of approximately $2.1 million associated with the repayment of its senior credit facility following the completion of its senior notes offering. In the fourth quarter of 2005, Grande recognized a goodwill impairment loss of
$39.6 million associated with the results of Grandes annual impairment test. In the first quarter of 2006, Grande began recognizing compensation expense for stock-based compensation in accordance with FASB Statement No. 123R, which is a
non-cash item. The company believes debt issuance costs, goodwill impairments, and non-cash stock-based compensation to be analogous to amortization or interest expense, and therefore believes it is more useful to show EBITDA net of these amounts
because Grande believes it is a better measure of operating



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##### Table of Contents

performance and is more comparable to prior periods. However, because of the nature of these charges, the company is
referring to EBITDA, net of debt issuance costs, goodwill impairments, and non-cash stock-based compensation charges, as Adjusted EBITDA.

Adjusted EBITDA was $7.4 million and $7.0 million for the quarters ended June 30, 2005 and 2006, respectively, a decrease of $0.4 million, or 5%. The decrease was primarily due to the 35% decrease in network
services revenue partially offset by bundled services growth.

Adjusted EBITDA was $14.3 million and $16.3 million for the six months ended
June 30, 2005 and 2006, respectively, an increase of $2.0 million, or 14%. The increase was primarily due to a $2.4 million increase in gain on sale of assets and the addition of new customers, added through the penetration of Grandes
network passings over such periods, offset by the decrease in other income.

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

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



|                                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|--------------------------------------------------------------- |  | -------------------------- | ------- | - | ------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                |  | Three Months EndedJune 30, |         |   | Six Months EndedJune 30, |  
|                                                                |  | 2005                       |         |   | 2006                     |   |         | 2005 |  |   | 2006    |  
|                                                                |  | (Dollars in thousands)     |         |   | (Dollars in thousands)   |  
|Net loss as reported                                            |  | $                          | (12,146 | ) |                          | $ | (13,192 | )    |  | $ | (24,301 | ) |  | $ | (22,828 | )
|Add back non-EBITDA/Adjusted EBITDA items included in net loss: |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Interest income                                                 |  |                            | (143    | ) |                          |   | (416    | )    |  |   | (457    | ) |  |   | (558    | )
|Interest expense                                                |  |                            | 4,611   |   |                          |   | 6,295   |      |  |   | 9,354   |   |  |   | 11,401  |  
|Taxes                                                           |  |                            | 50      |   |                          |   | 75      |      |  |   | 125     |   |  |   | 150     |  
|Depreciation and amortization                                   |  |                            | 15,075  |   |                          |   | 14,192  |      |  |   | 29,602  |   |  |   | 28,075  |  
|                                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|EBITDA                                                          |  |                            | 7,447   |   |                          |   | 6,954   |      |  |   | 14,323  |   |  |   | 16,240  |  
|Stock-based compensation expense                                |  |                            |        |   |                          |   | 55      |      |  |   |        |   |  |   | 88      |  
|Goodwill impairment                                             |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|Loss on extinguishment of debt                                  |  |                            |        |   |                          |   |        |      |  |   |        |   |  |   |        |  
|                                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  
|Adjusted EBITDA                                                 |  | $                          | 7,447   |   |                          | $ | 7,009   |      |  | $ | 14,323  |   |  | $ | 16,328  |  
|                                                                |  |                            |         |   |                          |   |         |      |  |   |         |   |  |   |         |  

Liquidity and Capital Resources

Sources and Uses of Funds

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

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 senior notes. Interest on the senior notes is payable semi-annually each April 1 and October 1. We used a portion of the net proceeds from the sale of the senior notes 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.

On March 24, 2006, we raised net proceeds of approximately $30.5 million in a private placement of an additional $32.0 million in aggregate
principal amount of 14% senior secured notes due 2011. These additional notes were issued under the existing indenture and are part of the same series of notes as the notes issued in March 2004. These notes have not been and will not be registered
under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements. We are using the net proceeds for capital expenditures and working capital purposes.



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At June 30, 2006, we had total cash and cash equivalents of $49.2 million and $174.2 million of
long-term debt outstanding.

As of June 30, 2006, we had net working capital of $28.8 million, compared to net working capital of $6.4
million as of December 31, 2005. The increase in working capital resulted primarily from the net proceeds from the private placement of an additional $32 million in aggregate principal amount of 14% senior secured notes due 2011.

Provided that we meet the our cash flow projections in our current business plan, we expect that we will not require additional financing and that we
will manage our cash position above $20 million in accordance with the covenant set forth in the indenture governing the senior notes. This covenant prohibits our making capital expenditures relating to the build-out of new or additional parts of
our network if such expenditures would result in us having less than $20 million in cash and cash equivalents. Our business plan is based on estimates regarding expected future costs and expected revenues. Our costs may exceed or our revenues may
fall short of our estimates, our estimates may change, and future developments may affect our estimates. Any of these factors may increase our need for funds to complete construction in our markets, which would require us to seek additional
financing.

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

Cash Flows from Operating Activities

Net cash provided by operations totaled $6.0 million and $3.9 million for the six months ended June 30, 2005 and 2006, respectively. The net cash
flow activity related to operations consisting primarily of changes in operating assets and liabilities and adjustments to net loss for non-cash transactions including:



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



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



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



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



| |  |  | stock-based compensation.
| | - |  | -------------------------

Depreciation and amortization
for the six months ended June 30, 2005 and 2006 was $29.6 million and $28.1 million, respectively. Gains on the sale of fixed assets for the six months ended June 30, 2005 and 2006 were $0.1 million and $2.5 million, respectively. Other
non-cash charges for the six months ended June 30, 2005 and 2006 were $3.3 million and $2.9 million, respectively.

As of
June 30, 2006 we had a $6.0 million balance of accrued interest in accrued liabilities related to our senior notes, which will be paid on October 2, 2006.

Cash Flows from Investing Activities

Our net cash used in investing activities for the six
months ended June 30, 2005 and 2006 was $11.5 million and $11.7 million, respectively. These net cash outflows are primarily due to the build-out of our network in both 2005 and 2006. Cash flows used in investing activities in 2006 consisted
primarily of $15.1 million in property, plant and equipment purchases, offset by $3.1 million in asset sales.

Cash Flows from
Financing Activities

Our net cash (used in) provided by financing activities for the six months ended June 30, 2005 and 2006
was $(0.6) million and $30.3 million, respectively. Cash flows from financing activities in the six months ended June 30, 2006 consisted primarily of the net proceeds from the private placement of an additional $32 million in aggregate
principal amount of senior notes, which is described above.



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Capital Expenditures

We spent approximately $31.2 million and $15.1 million in capital expenditures, including capitalized interest, during the three months ended June 30, 2005 and 2006, respectively. The decrease of $16.1 million is
primarily due to a slow down in constructing new marketable homes passed beginning in the third quarter of 2005. The indenture governing the senior notes prohibits us from making capital expenditures when the aggregate amount of cash and cash
equivalents held by us (after giving effect to such planned capital expenditure) would be less than $20 million. The capital expenditures amounts described above relate to network construction; initial installation costs; the purchase of customer
premise equipment, such as cable set-top boxes and cable modems; and corporate and network equipment, such as switching and transport equipment; and billing and information systems.

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

Contractual Obligations and Commercial Commitments

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

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

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

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

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

Purchase Agreements.We may be required to purchase a minimum of $37.5 million of
equipment from some of our suppliers between April 2006 and December 2010. We entered into these agreements based upon estimates of equipment we expect to need over this five-year period. The majority of these purchase commitments are contingent
upon delivery of technical and functional next generation requirements. If we do not actually need the estimated amount and type of equipment, our financial condition could be adversely affected because we would be obligated to spend money on
equipment we do not need, rather than applying it to help grow and develop our business.

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



|                                                |  |                        |        |       |   |        |  |      |        |      |   |              |  |   |        |  |   |         |  |   |        
|----------------------------------------------- |  | ---------------------- | ------ | ----- | - | ------ |  | ---- | ------ | ---- | - | ------------ |  | - | ------ |  | - | ------- |  | - | -------
|                                                |  | Payments Due by Period |        | Total
|Contractual Obligations                         |  | 2006                   |        | 2007  |   | 2008   |  | 2009 |        | 2010 |   | 2011 &Beyond | 
|                                                |  | (In thousands)        
|Long-term debt and related interest obligations |  | $                      | 11,766 |       | $ | 23,532 |  | $    | 23,532 |      | $ | 23,532       |  | $ | 23,524 |  | $ | 179,760 |  | $ | 285,646
|Capital lease obligations                       |  |                        | 1,099  |       |   | 2,038  |  |      | 1,972  |      |   | 1,921        |  |   | 1,643  |  |   | 20,333  |  |   | 29,006 
|Operating lease obligations                     |  |                        | 2,216  |       |   | 3,761  |  |      | 3,007  |      |   | 2,529        |  |   | 1,719  |  |   | 11,512  |  |   | 24,744 
|Maintenance obligations                         |  |                        | 626    |       |   | 1,033  |  |      | 1,033  |      |   | 1,033        |  |   | 1,015  |  |   | 10,041  |  |   | 14,781 
|Purchase obligations                            |  |                        | 164    |       |   |       |  |      | 3,068  |      |   |             |  |   | 34,305 |  |   |        |  |   | 37,537 
|                                                |  |                        |        |       |   |        |  |      |        |      |   |              |  |   |        |  |   |         |  |   |        
|Total                                           |  | $                      | 15,871 |       | $ | 30,364 |  | $    | 32,612 |      | $ | 29,015       |  | $ | 62,206 |  | $ | 221,646 |  | $ | 391,714
|                                                |  |                        |        |       |   |        |  |      |        |      |   |              |  |   |        |  |   |         |  |   |        



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

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

Critical Accounting Policies and Estimates

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

Revenue Recognition

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

The Companys policy for revenue recognition
in instances where multiple deliverables are sold contemporaneously to the same counter-party is in accordance with EITF Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and SEC Staff Accounting Bulletin No. 104,
Revenue Recognition. Specifically, if the Company enters into sales contracts for the sale of multiple products or services, then the Company evaluates whether it has objective fair value evidence for each deliverable in the transaction.
If the Company has objective fair value evidence for each deliverable of the transaction, then it accounts for each deliverable in the transaction separately, based on the relevant revenue recognition accounting policies. For arrangements that
include installation services, the Company recognizes installation revenue using the residual method. For example, this would occur when the Company enters into an agreement for service that includes the Company providing equipment in connection
with the service and the subscriber paying an installation fee as well as monthly charges. Because the Company is providing both a product and a service, revenue is allocated to the product and monthly subscription service based on relative fair
value and revenue is allocated to installation services using the residual method. To date, our product revenues have not been significant. In accordance with FASB Statement No. 51, Financial Reporting by Cable Television Companies,
installation revenues are recognized in the period of installation since they do not exceed the direct selling costs.

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

Classification of Various Direct Labor and Other Overhead Costs

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



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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. Capitalized costs are depreciated along with the physical assets to which they relate, which have lives of three to ten years
depending on the type of asset. For the six months ended June 30, 2005 and 2006, $5.9 million and $4.2 million of labor and overhead costs were capitalized, respectively.

Valuation of Long-Lived Assets and Intangible Assets

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

We performed our annual
goodwill impairment test as of October 1, 2005. This test was performed in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142Goodwill and Other Intangible Assets, which we adopted effective
January 1, 2002. SFAS No. 142 recognizes that since goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. We
have two reporting units, retail and wholesale, for purposes of evaluating goodwill impairment. Our retail reporting unit includes the business of providing bundled communication services (cable, phone and data) to customers within 1stand 2ndtier cities in Texas. Our wholesale reporting unit includes the business of providing network products and services for wholesale carriers and Internet service providers on our switch network. The estimated fair value was determined
based on a discounted cash flow analysis and review of multiples for comparable companies. The assumptions used in the valuation testing have subjective components, including anticipated future operating results and cash flows based on our business
plan and overall expectations as to market and economic considerations. During the last half of 2005, we revised projections downward for our network services line of service based on our new managements revised business strategy, current
trends in the industry and managements analysis of the competitive environment in this line of service. We performed our annual impairment test as of October 1, 2005, which indicated carrying value exceeded estimated fair value for a
portion of the Thrifty Call goodwill. Based on the results of this test, we recorded an impairment loss of $39.6 million in 2005 related to the Thrifty Call acquisition in 2000.

Allowance for Doubtful Accounts

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

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

Share-Based Payment

In December 2004, the Financial Accounting Standards Board (FASB) issued Statement No. 123 (revised 2004), Share-Based
Payment, (Statement No. 123R). Statement No. 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for
share-based compensation transactions using the intrinsic method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such



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transactions using a fair-value method and recognize the expense in the consolidated statement of operations. SFAS 123R
will be effective for the first period beginning after December 15, 2005. We adopted SFAS 123R on January 1, 2006 using the prospective method and did not restate prior periods. SFAS 123R will apply to awards granted, modified or
settled on or after January 1, 2006. Under SFAS 123R we use a Black-Scholes-Merton model to value these stock awards. Awards outstanding as of December 31, 2005 will continue to be accounted for under the previous accounting model, the
intrinsic value method under APB Opinion No. 25, whereby no compensation was recognized for most stock option awards.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4. CONTROLS AND PROCEDURES

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

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



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PART II

OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Legal Proceedings

In early September 2005, the Texas Cable and Telecommunications Association filed a lawsuit in U.S. District Court, Western District of Texas, Austin
division, to challenge SB 5, the legislation passed allowing for a state-wide cable franchise and obviating the need for individual municipal franchises. Named as defendants in the lawsuit, in their official capacities, are Governor Rick Perry and
Public Utility Commission of Texas Commissioners Chairman Paul Hudson, Julie Parsley and Barry Smitherman. The lawsuit contends that SB 5 discriminates in violation of the U.S. and Texas Constitutions, discriminates in violation of the Federal
Communications Act, violates the federal prohibition on exclusive franchises, and violates the federal duty to guard against redlining. In the event that the plaintiff prevails in the SB 5 litigation, the court may rule that the current statewide
franchises are unconstitutional. Grande joined Verizon, AT&T and some municipalities and intervened in the lawsuit in support of the Texas Attorney General.

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

ITEM 1A. RISK FACTORS

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

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

None.

ITEM 3. DEFAULTS UNDER SENIOR SECURITIES

None.

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

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

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

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



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SIGNATURES

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



|                      |  |                                                   |  |                                                                                  
|--------------------- |  | ------------------------------------------------- |  | ---------------------------------------------------------------------------------
|                      |  | Grande Communications Holdings, Inc. (Registrant)
|                      |  |                                                  
|Date: August 11, 2005 |  | By:                                               |  | /s/ MICHAEL L. WILFLEY                                                           
|                      |  |                                                   |  | Michael L. Wilfley                                                               
|                      |  |                                                   |  | Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)



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Exhibit Index



|            |  |                                                                                                                                                             
|----------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                 
|10.1(1)     |  | Grande Communications Holdings, Inc. Amended and Restated 2000 Stock Incentive Plan.                                                                        
|            | 
|            |  | Form of Incentive Stock Option Agreement (Common Stock  Regular)                                                                                           
|            | 
|            |  | Form of Incentive Stock Option Agreement                                                                                                                    
|            | 
|            |  | Form of Incentive Stock Option Agreement (Series H Preferred Stock)                                                                                         
|            | 
|            |  | Form of Nonqualified Stock Option Agreement (Common Stock  Regular)                                                                                        
|            | 
|            |  | Form of Nonqualified Stock Option Agreement                                                                                                                 
|            | 
|            |  | Form of Nonqualified Stock Option Agreement (Series H Preferred Stock)                                                                                      
|            | 
|10.2(2)     |  | Employment Agreement, dated January 26, 2006 by and between Grande Communications Holdings, Inc. and Roy H. Chestnutt.                                      
|            | 
|10.2.1(3)   |  | Amendment to the Employment Agreement dated January 26, 2006 by and between Grande Communications Holdings, Inc. and Roy H. Chestnutt.                      
|            | 
|10.3(4)     |  | Employment Agreement between Grande Communications Holdings, Inc. and W.K.L. Scott Ferguson, Jr.                                                          
|            | 
|10.4(5)     |  | Employment Agreement between Grande Communications Holdings, Inc. and Michael Wilfley.                                                                      
|            | 
|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).

---

|(1) | Incorporated by reference to Grandes Form 8-K filed with the SEC on July 5, 2006, Exhibit Numbers 10.3 through 10.9.
|--- | ---------------------------------------------------------------------------------------------------------------------



|(2) | Incorporated by reference to Grandes Annual Report on Form 10-K filed with the SEC on March 31, 2006.
|--- | ------------------------------------------------------------------------------------------------------



|(3) | Incorporated by reference to Grandes Form 8-K filed with the SEC on July 3, 2006, Exhibit Number 10.1.
|--- | -------------------------------------------------------------------------------------------------------



|(4) | Incorporated by reference to Grandes Form 8-K filed with the SEC on July 5, 2006, Exhibit Number 10.1.
|--- | -------------------------------------------------------------------------------------------------------



|(5) | Incorporated by reference to Grandes Form 8-K filed with the SEC on July 5, 2006, Exhibit Number 10.2.
|--- | -------------------------------------------------------------------------------------------------------



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