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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-Q



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



For the Quarterly Period Ended March 31, 2005



OR



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



For the transition period from             to



Commission file number



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Grande Communications Holdings, Inc.

(Exact name of registrant as specified in its charter)



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



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



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



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



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



|                              |  |                              
|----------------------------- |  | -----------------------------
|                              |  | Outstanding at March 31, 2005
|Common Stock, $.001 par value |  | 12,928,303                   



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.



Index



|           |  |                       |  |                                                                                       |  |         
|---------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | --------
|           |  |                       |  |                                                                                       |  | Page No.
|Part I.    |  | Financial Information |  | 1                                                                                    
|           |  |                       | 
|           |  | Item 1.               |  | Financial Statements                                                                  |  | 1       
|           |  |                       |  | Condensed Consolidated Balance Sheets                                                 |  | 1       
|           |  |                       |  | Condensed Consolidated Statements of Operations                                       |  | 2       
|           |  |                       |  | Condensed Consolidated Statements of Cash Flows                                       |  | 3       
|           |  |                       |  | Notes to Condensed Consolidated Financial Statements                                  |  | 4       
|           |  | Item 2.               |  | Managements Discussion and Analysis of Financial Condition and Results of Operations |  | 7       
|           |  | Item 3.               |  | Quantitative and Qualitative Disclosures about Market Risk                            |  | 18      
|           |  | Item 4.               |  | Controls and Procedures                                                               |  | 19      
|           |  |                      
|Part II    |  | Other Information     |  | 20                                                                                   
|           |  |                       | 
|           |  | Item 1.               |  | Legal Proceedings                                                                     |  | 20      
|           |  | Item 4.               |  | Submission of Matters to a Vote of Security Holders                                   |  | 20      
|           |  | Item 6.               |  | Exhibits                                                                              |  | 20      
|           | 
|Signatures |  | 21                   



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##### Table of Contents

PART I



FINANCIAL INFORMATION



ITEM 1.    FINANCIAL STATEMENTS



GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)



|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ------------- | - | -------- | -
|                                                                                                                                                                                        |  | December 31,2004 |          |   | March 31,2005 |  
|                                                                                                                                                                                        |  |                  |          |   | (unaudited)   |  
|Assets                                                                                                                                                                                  |  |                  |          |   |               |   |          |  
|Current assets:                                                                                                                                                                         |  |                  |          |   |               |   |          |  
|Cash and cash equivalents                                                                                                                                                               |  | $                | 41,195   |   |               | $ | 34,208   |  
|Investments                                                                                                                                                                             |  |                  | 20,000   |   |               |   | 15,000   |  
|Accounts receivable, net                                                                                                                                                                |  |                  | 20,951   |   |               |   | 20,284   |  
|Prepaid expenses and other current assets                                                                                                                                               |  |                  | 2,720    |   |               |   | 3,254    |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Total current assets                                                                                                                                                                    |  |                  | 84,866   |   |               |   | 72,746   |  
|Property and equipment, net                                                                                                                                                             |  |                  | 303,536  |   |               |   | 305,446  |  
|Goodwill                                                                                                                                                                                |  |                  | 133,145  |   |               |   | 133,220  |  
|Other intangible assets, net                                                                                                                                                            |  |                  | 5,355    |   |               |   | 4,747    |  
|Debt issue costs, net                                                                                                                                                                   |  |                  | 6,953    |   |               |   | 6,703    |  
|Other assets                                                                                                                                                                            |  |                  | 4,661    |   |               |   | 5,148    |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Total assets                                                                                                                                                                            |  | $                | 538,516  |   |               | $ | 528,010  |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Liabilities and stockholders equity                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Current liabilities:                                                                                                                                                                    |  |                  |          |   |               |   |          |  
|Accounts payable                                                                                                                                                                        |  | $                | 13,193   |   |               | $ | 14,531   |  
|Accrued expenses                                                                                                                                                                        |  |                  | 21,644   |   |               |   | 21,711   |  
|Note payable                                                                                                                                                                            |  |                  | 43       |   |               |   | 127      |  
|Deferred revenue                                                                                                                                                                        |  |                  | 5,218    |   |               |   | 5,298    |  
|Current portion of capital lease obligations                                                                                                                                            |  |                  | 636      |   |               |   | 655      |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Total current liabilities                                                                                                                                                               |  |                  | 40,734   |   |               |   | 42,322   |  
|Deferred rent                                                                                                                                                                           |  |                  | 753      |   |               |   | 857      |  
|Deferred revenue                                                                                                                                                                        |  |                  | 4,908    |   |               |   | 4,767    |  
|Capital lease obligations, net of current portion                                                                                                                                       |  |                  | 13,940   |   |               |   | 13,838   |  
|Long term debt                                                                                                                                                                          |  |                  | 128,237  |   |               |   | 128,427  |  
|Commitments and contingencies                                                                                                                                                           |  |                  |          |   |               |   |          |  
|Stockholders equity:                                                                                                                                                                   |  |                  |          |   |               |   |          |  
|Series A preferred stock, $0.001 par value per share; 232,617,839 shares authorized, issued and outstanding; liquidation preference of
$232,618                                         |  |                  | 233      |   |               |   | 233      |  
|Series B preferred stock, $0.001 par value per share; 20,833,333 shares authorized, issued and outstanding; liquidation preference of
$25,000                                           |  |                  | 21       |   |               |   | 21       |  
|Series C preferred stock, $0.001 par value per share; 30,000,000 shares authorized, 17,005,191 shares issued and outstanding; liquidation
preference of $20,406                         |  |                  | 17       |   |               |   | 17       |  
|Series D preferred stock, $0.001 par value per share; 115,384,615 shares authorized, 114,698,442 shares issued and outstanding; liquidation
preference of $149,108                      |  |                  | 115      |   |               |   | 115      |  
|Series E preferred stock, $0.001 par value per share; 8,000,000 shares authorized, 7,999,099 shares issued and outstanding; liquidation
preference of $19,998                           |  |                  | 8        |   |               |   | 8        |  
|Series F preferred stock, $0.001 par value per share; 12,307,692 shares authorized, 11,758,278 shares issued and outstanding; liquidation
preference of $15,286                         |  |                  | 12       |   |               |   | 12       |  
|Series G preferred stock, $0.001 par value per share; 34,615,384 shares authorized, 34,615,330 shares issued and outstanding; liquidation
preference of $135,000                        |  |                  | 35       |   |               |   | 35       |  
|Common stock, $0.001 par value per share; 786,835,883 shares authorized, 12,920,366 and 12,928,303 shares issued and outstanding, at December
31, 2004 and March 31, 2005, respectively |  |                  | 13       |   |               |   | 13       |  
|Additional paid-in capital                                                                                                                                                              |  |                  | 508,313  |   |               |   | 508,323  |  
|Treasury stock, at cost                                                                                                                                                                 |  |                  | (5       | ) |               |   | (5       | )
|Accumulated deficit                                                                                                                                                                     |  |                  | (158,818 | ) |               |   | (170,973 | )
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Total stockholders equity                                                                                                                                                              |  |                  | 349,944  |   |               |   | 337,799  |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  
|Total liabilities and stockholders equity                                                                                                                                              |  | $                | 538,516  |   |               | $ | 528,010  |  
|                                                                                                                                                                                        |  |                  |          |   |               |   |          |  



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



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share data)



|                                                                       |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                       |  | Three Months EndedMarch 31, |        
|                                                                       |  | 2004                        |         |   | 2005 |  
|Operating revenues                                                     |  | $                           | 41,687  |   |      | $ | 48,460  |  
|Operating expenses:                                                    |  |                             |         |   |      |   |         |  
|Direct costs                                                           |  |                             | 16,430  |   |      |   | 18,207  |  
|Selling, general and administrative                                    |  |                             | 22,631  |   |      |   | 23,525  |  
|Depreciation and amortization                                          |  |                             | 12,715  |   |      |   | 14,527  |  
|                                                                       |  |                             |         |   |      |   |         |  
|Total operating expenses                                               |  |                             | 51,776  |   |      |   | 56,259  |  
|                                                                       |  |                             |         |   |      |   |         |  
|Operating loss                                                         |  |                             | (10,089 | ) |      |   | (7,799  | )
|Other income (expense):                                                |  |                             |         |   |      |   |         |  
|Interest income                                                        |  |                             | 65      |   |      |   | 315     |  
|Interest expense                                                       |  |                             | (1,277  | ) |      |   | (4,743  | )
|Gain on disposal of assets                                             |  |                             | 16      |   |      |   | 72      |  
|Loss on extinguishment of debt                                         |  |                             | (2,145  | ) |      |   |        |  
|                                                                       |  |                             |         |   |      |   |         |  
|Total other income (expense)                                           |  |                             | (3,341  | ) |      |   | (4,356  | )
|                                                                       |  |                             |         |   |      |   |         |  
|Net loss                                                               |  | $                           | (13,430 | ) |      | $ | (12,155 | )
|                                                                       |  |                             |         |   |      |   |         |  
|Basic and diluted net loss per share                                   |  | $                           | (1.12   | ) |      | $ | (0.98   | )
|Basic and diluted weighted average number of common shares outstanding |  |                             | 11,971  |   |      |   | 12,422  |  





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



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GRANDE COMMUNICATIONS HOLDINGS, INC.



CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)



|                                                                                         |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                         |  | 2004                        |         |   | 2005 |  
|Cash flows from operating activities:                                                    |  |                             |         |   |      |   |         |  
|Net loss                                                                                 |  | $                           | (13,430 | ) |      | $ | (12,155 | )
|Adjustment to reconcile net loss to net cash provided by (used in) operating activities: |  |                             |         |   |      |   |         |  
|Depreciation                                                                             |  |                             | 11,383  |   |      |   | 13,474  |  
|Amortization of intangible assets                                                        |  |                             | 1,332   |   |      |   | 1,053   |  
|Amortization of deferred financing costs                                                 |  |                             | 128     |   |      |   | 244     |  
|Provision for bad debts                                                                  |  |                             | 1,074   |   |      |   | 1,109   |  
|Accretion of debt discount                                                               |  |                             | 37      |   |      |   | 192     |  
|Non-qualified option expense                                                             |  |                             | 6       |   |      |   | 6       |  
|Gain on sale of assets                                                                   |  |                             | (16     | ) |      |   | (72     | )
|Extinguishment of debt                                                                   |  |                             | 2,145   |   |      |   |        |  
|Changes in operating assets and liabilities, net of business acquisitions:               |  |                             |         |   |      |   |         |  
|Accounts receivable, net                                                                 |  |                             | (775    | ) |      |   | (442    | )
|Prepaid expenses and other current assets                                                |  |                             | (928    | ) |      |   | (1,021  | )
|Accounts payable                                                                         |  |                             | (4,125  | ) |      |   | 1,338   |  
|Accrued expenses                                                                         |  |                             | (2,873  | ) |      |   | 68      |  
|Deferred revenue                                                                         |  |                             | (30     | ) |      |   | (47     | )
|Deferred rent                                                                            |  |                             |        |   |      |   | 103     |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                                      |  |                             | (6,072  | ) |      |   | 3,850   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Cash flows from investing activities:                                                    |  |                             |         |   |      |   |         |  
|Net maturities of short-term investments                                                 |  |                             |        |   |      |   | 5,000   |  
|Purchases of property, plant and equipment                                               |  |                             | (11,248 | ) |      |   | (15,629 | )
|Purchase price adjustments                                                               |  |                             | 38      |   |      |   | (75     | )
|Purchase of franchise rights and other                                                   |  |                             | (50     | ) |      |   | (445    | )
|Sale of fixed asset                                                                      |  |                             |        |   |      |   | 469     |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in investing activities                                                    |  |                             | (11,260 | ) |      |   | (10,680 | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                                    |  |                             |         |   |      |   |         |  
|Proceeds from borrowings and promissory notes                                            |  |                             | 132,502 |   |      |   |        |  
|Payments of long-term debt                                                               |  |                             | (64,960 | ) |      |   | (166    | )
|Deferred financing costs                                                                 |  |                             | (5,140  | ) |      |   | 6       |  
|Proceeds from issuance of common stock                                                   |  |                             | 137     |   |      |   | 3       |  
|Proceeds from issuance of preferred stock, net of related offering expenses              |  |                             | 11      |   |      |   |        |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                                      |  |                             | 62,550  |   |      |   | (157    | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Net change in cash and cash equivalents                                                  |  |                             | 45,218  |   |      |   | (6,987  | )
|Cash and cash equivalents, beginning of period                                           |  |                             | 42,246  |   |      |   | 41,195  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, end of period                                                 |  | $                           | 87,464  |   |      | $ | 34,208  |  
|                                                                                         |  |                             |         |   |      |   |         |  



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



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##### Table of Contents

GRANDE COMMUNICATIONS HOLDINGS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)



1. Organization & Nature of the Business



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



2. Basis of Presentation



The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the rules
and regulations of the SEC that permit reduced disclosure for interim periods. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments considered necessary for the fair presentation of the financial statements have been included, and the financial statements present fairly the financial position and results of operations for the interim
periods presented. Operating results for the three months ended March 31, 2005 are not necessarily indicative of the results that may be expected for the year ended December 31, 2005. These financial statements should be read in conjunction with the
consolidated financial statements and notes thereto, together with managements discussion and analysis of financial condition and results of operations contained in the Companys financial statements for the year ended December 31, 2004
contained in the Companys Annual Report on Form 10-K filed with the SEC on March 30, 2005.



The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The results of
operations for the interim periods presented are not necessarily indicative of the results to be expected for the year ending December 31, 2005, or any other interim period.



Certain items related to 2004 have been reclassified to conform to the 2005 reporting format.



3. Stock-Based Compensation



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



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



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GRANDE COMMUNICATIONS HOLDINGS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



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



|                                  |  |         |   |  |         |  
|--------------------------------- |  | ------- | - |  | ------- | -
|                                  |  | 2004    |   |  | 2005    |  
|Risk-free interest rate           |  | 3.875   | % |  | 3.875   | %
|Expected dividend yield           |  | 0       | % |  | 0       | %
|Expected lives                    |  | 5 years |   |  | 5 years |  
|Volatility (Minimum Value Method) |  | 0       | % |  | 0       | %



If the Company had
accounted for these plans in accordance with SFAS 123, the Companys net loss for the three months ended March 31, 2004 and 2005, would have increased as follows:



|                                                                                                        |  |                                          |         |   |      |   |         |  
|------------------------------------------------------------------------------------------------------- |  | ---------------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                                        |  | Three Months EndedMarch 31,              |        
|                                                                                                        |  | 2004                                     |         |   | 2005 |  
|                                                                                                        |  | (in thousands, exceptfor per share data) |        
|Net loss, as reported                                                                                   |  | $                                        | (13,430 | ) |      | $ | (12,155 | )
|Total stock-based employee compensation expense determined under fair value based method for all awards |  |                                          | (227    | ) |      |   | (105    | )
|                                                                                                        |  |                                          |         |   |      |   |         |  
|Pro forma net loss                                                                                      |  | $                                        | (13,657 | ) |      | $ | (12,260 | )
|                                                                                                        |  |                                          |         |   |      |   |         |  
|Basic and diluted net loss per share, as reported                                                       |  | $                                        | (1.12   | ) |      | $ | (0.98   | )
|Basic and diluted net loss per share, pro forma                                                         |  | $                                        | (1.14   | ) |      | $ | (0.99   | )
|Basic and diluted weighted average number of common shares outstanding                                  |  |                                          | 11,971  |   |      |   | 12,422  |  



4. Recent Accounting Pronouncements



In December 2004, the FASB issued SFAS 123 (revised
2004), Share-Based payment, (SFAS 123R). SFAS 123R addresses the accounting for share-based payments to employees, including grants of employee stock options. Under the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees. Instead, companies will be required to account for such transactions using a
fair-value method and recognize the expense in the consolidated statement of operations. SFAS 123R will be effective for the first period beginning after December 15, 2005. We have not yet determined which fair-value method and transitional
provision we will follow. However, we expect that the adoption of SFAS 123R may have a significant impact on our results of operations. We do not expect that the adoption of SFAS 123R will impact our overall financial position. See Stock Based
Compensation in Note 2 for the pro forma impact on net income and net income per share from calculating stock-based compensation costs under the fair value alternative of SFAS 123. However, the calculation of compensation cost for share-based
payment transactions after the effective date of SFAS 123R may be different from the calculation of compensation cost under SFAS 123, but such differences have not yet been quantified.



5. Contingencies



Both the FCC and the Department of Justice have been and may still be conducting investigations understood to involve billing practices by MCI and related
issues involving companies that terminated or



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GRANDE COMMUNICATIONS HOLDINGS, INC.



NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(UNAUDITED)



otherwise may have handled traffic on behalf of MCI, including those companies participating in MCIs Least Cost Routing Program. We believe we were a
substantial participant in the Least Cost Routing Program. The Department of Justice convened a grand jury in the Southern District of New York as part of its investigation. The grand jury issued document subpoenas to a number of companies in the
telecommunications industry, including us. We cooperated with the Department of Justice and produced responsive documents. The FCC issued a letter of inquiry to us and other companies seeking documents and requesting information relating to the
above described billing practices and the compliance by such companies, including us, with applicable law and regulations. We responded to the letter of inquiry and produced additional documentation to supplement our answers to certain questions.
The FCC may issue additional letters of inquiry in the future, to which we would intend to respond in the same manner. We cannot predict the outcome of these investigations or their duration. If these investigations result in current or prior
billing practices being identified as violative of applicable laws or regulations, result in penalties being imposed upon us, result in further proceedings against specific companies, including us, result in changes in the law or regulations that
would have an industry-wide effect, or lead to litigation among parties involved in terminating or otherwise routing traffic, the impact could have a material adverse effect on our business and financial condition. There have been no substantial
communications, of any kind, on this investigation between the Department of Justice or the FCC and Grande since January 2004.



As a telecommunications company, we are a party to regulatory proceedings in the ordinary course of our business at both the state and federal levels. For
example, we along with many other telecommunications companies in Texas are currently a party to a proceeding before the PUCT relating to the terms of SBC Communications standard interconnection agreement and an anticipated successor to this
interconnection agreement. The proceeding has progressed in two phases, with phase one completed with no changes to the interconnection agreement that materially impacted the company. Phase two issues will be decided in July 2005 are not issues that
could, individually, or in the aggregate with any other regulatory proceedings, have a material adverse effect on our business, financial condition or results of operations.



6. Subsequent Events



In April 2005 we paid $9.5 million of interest due on our senior notes.



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



This managements discussion and analysis includes forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934. We intend our forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. When used in this report, the words
anticipate, believe, estimate, expect, intend, plan and similar expressions as they relate to Grande Communications Holdings, Inc. or our management are intended to identify
these forward-looking statements. All statements by us regarding our expected future financial position and operating results, our business strategy, our financing plans, forecasted trends relating to the markets in which we operate and similar
matters are forward-looking statements. We cannot assure you that our expectations expressed or implied in these forward-looking statements will turn out to be correct. Our actual results could be materially different from our expectations because
of various factors, including those discussed below and under the caption BusinessRisk Factors Relating to Our Business in our Form 10-K, filed with the SEC on March 30, 2005. 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, 2004, included in our Form 10-K filed with the SEC on March 30, 2005.



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



Overview



We provide communities in Texas with a bundled package of cable television,
telephone and broadband Internet and other services. We operate fully integrated advanced broadband networks in six markets that passed approximately 319,717 out of approximately 1.4 million marketable homes and small businesses as of March 31,
2005. We expect that with existing cash on hand and our anticipated cash flow from operations, we will be fully funded to build-out our networks to pass all 1.4 million marketable homes and small businesses.



In July 2000, when our network construction was still in a very early stage,
we acquired an established telephone and data network that served as the platform to provision 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, as our network construction proceeded and the number of bundled services customers has grown, we
have derived an increasing percentage of our revenues from our retail cable television, telephone and broadband Internet and other services and we expect this trend to continue.



Since inception, we have been funded primarily with private equity investments and to a lesser extent, incurrence of debt.
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. In March 2004, we raised net proceeds of $124.5
million from the issuance of senior secured notes and warrants, and used a portion of the net proceeds to repay all amounts outstanding under our then-existing senior credit facility. The net proceeds from these private placements and incurrence of
debt have been used to fund our network buildout, operations, and our acquisitions, which are described below under the heading Acquisitions. As a result of equity investments and mergers where stock was used as consideration, we now
have $508 million of total invested equity capital and a base of over 20 institutional private equity investors.



We have incurred net losses for the past three years and expect to continue to incur net losses for the next several years. However, we did achieve
positive Adjusted EBITDA in 2003, 2004 and in the three months ended March 31, 2005. See EBITDA/Adjusted EBITDA below for a discussion of this non-GAAP measure of our operating performance as well as our use of Adjusted EBITDA in 2004.



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Acquisitions



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



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



We report marketable homes passed as the number of
residential and business units, such as single residence homes, apartments and condominium units, passed by our networks other than those we believe are covered by exclusive arrangements with other providers of competing services. As of March 31,
2005, our networks passed 319,717 marketable homes and we had 130,753 residential, small business and enterprise customers.



Because we deliver multiple services to our customers, we report our total number of connections for telephone, cable television and broadband Internet
and other services in addition to our total number of customers. We count each telephone, cable television and broadband Internet and other service purchase as a separate connection. For example, a single customer who purchases cable television,
telephone and broadband Internet service would count as three connections. Similarly, a single customer who purchases our broadband Internet service and our wireless security service would count as two connections. We do not record the purchase of
long distance telephone service by a local telephone customer or digital cable services by an analog cable customer as additional connections. However, we do record each purchase of an additional telephone line by a local telephone customer as an
additional connection. As March 31, 2005, we had 260,060 connections.



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



Operating Revenues



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



Bundled services revenuescable television, telephone, broadband Internet and other.We typically provide cable television, telephone and broadband Internet and other services on a bundled basis for fixed
monthly fees billed in advance, with the amount of the monthly fee varying significantly depending upon the particular bundle of services provided. We also charge usage-based fees for additional services, such as pay-per-view movies that involve a
charge for each viewing and long-distance services that involve charges by the number of minutes of use. We generally bill for these usage-based services monthly in arrears. We generate revenues from one-time charges for the installation of premises
equipment. Most of our bundled offerings include fees for equipment



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rental, although in some instance we sell modems to customers. 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 customers at installation. The security revenue is included in broadband Internet and other.



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



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



Costs and Expenses



Cost of Revenues



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



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



Our cost of revenues include the following:



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



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| |  |  | Telephone costs. Our cost of revenues associated with delivering telephone services to residential and small business customers consist primarily of transport costs, which
are comprised mostly of amounts needed for the operation, monitoring and maintenance of our networks, and also include access and other fees that we pay to other carriers to carry calls outside of our networks. Transport costs for these types of
customers are largely fixed so long as we do not need to procure additional equipment or lease additional capacity. 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 are expected to increase when new facilities for connecting to the Internet need to be obtained. Our security related costs are primarily related to system monitoring with a third party provider and the
costs associated with selling security premise equipment to customers.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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



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



Selling, general and administrative expenses



Our selling, general and administrative expenses include all of the expenses associated with operating and maintaining our networks that are not cost of
revenues. These expenses primarily include payroll and departmental costs incurred for network design, monitoring and maintenance. They also include payroll and departmental costs incurred for customer installation 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, professional fees, taxes, insurance and
facilities costs.



Depreciation and amortization



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



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Operating Data



|                             |  |               |         |              |   |                   |  |                  |         |               |   |         |  |   |        
|---------------------------- |  | ------------- | ------- | ------------ | - | ----------------- |  | ---------------- | ------- | ------------- | - | ------- |  | - | -------
|                             |  | Quarter Ended
|                             |  | March 31,2004 |         | June 30,2004 |   | September 30,2004 |  | December 31,2004 |         | March 31,2005
|Operating Data:              |  |               |         |              |   |                   |  |                  |         |               |   |         |  |   |        
|Marketable homes passed      |  |               | 280,959 |              |   | 288,258           |  |                  | 297,697 |               |   | 308,913 |  |   | 319,717
|Customers(1)                 |  |               | 110,790 |              |   | 115,275           |  |                  | 120,243 |               |   | 126,736 |  |   | 130,753
|Number of connections        |  |               |         |              |   |                   |  |                  |         |               |   |         |  |   |        
|Cable television             |  |               | 75,255  |              |   | 78,244            |  |                  | 81,642  |               |   | 83,098  |  |   | 84,483 
|Telephone(1)                 |  |               | 101,347 |              |   | 104,954           |  |                  | 108,418 |               |   | 110,360 |  |   | 114,809
|Broadband Internet and other |  |               | 43,142  |              |   | 47,440            |  |                  | 51,476  |               |   | 56,184  |  |   | 60,768 
|                             |  |               |         |              |   |                   |  |                  |         |               |   |         |  |   |        
|Total connections            |  |               | 219,744 |              |   | 230,638           |  |                  | 241,536 |               |   | 249,642 |  |   | 260,060
|Average monthly revenue per: |  |               |         |              |   |                   |  |                  |         |               |   |         |  |   |        
|Customer                     |  | $             | 87.14   |              | $ | 85.75             |  | $                | 85.32   |               | $ | 82.87   |  | $ | 84.75  
|Cable television             |  |               | 46.03   |              |   | 46.59             |  |                  | 46.00   |               |   | 45.63   |  |   | 47.89  
|Telephone                    |  |               | 44.12   |              |   | 43.86             |  |                  | 43.84   |               |   | 42.38   |  |   | 43.31  
|Broadband Internet and other |  |               | 35.94   |              |   | 35.49             |  |                  | 34.40   |               |   | 34.50   |  |   | 34.59  

---

|(1) | In the first quarter of 2005, we reclassified approximately 900 customers and 2,600 telephony connections to our operating data for our retail services that were previously
supported by our network services team, which now are supported by our retail team. These connections were not previously counted in operating data, as the customers from network services and broadband transport are not included in the operating
data.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Results of Operations



Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004



The following table sets forth financial data as a
percentage of operating revenues for the three months ended March 31, 2004 and 2005.



|                                    |  |                             |    |  |      |   
|----------------------------------- |  | --------------------------- | -- |  | ---- | --
|                                    |  | Three Months EndedMarch 31, |   
|                                    |  | 2004                        |    |  | 2005 |   
|Consolidated Financial Data:        |  |                             |    |  |      |   
|Operating revenues:                 |  |                             |    |  |      |   
|Cable television                    |  | 24                          | %  |  | 25   | % 
|Telephone                           |  | 31                          |    |  | 30   |   
|Broadband Internet and other        |  | 11                          |    |  | 13   |   
|Broadband transport services        |  | 7                           |    |  | 4    |   
|Network services                    |  | 27                          |    |  | 28   |   
|                                    |  |                             |    |  |      |   
|Total operating revenues            |  | 100                         |    |  | 100  |   
|Operating expenses:                 |  |                             |    |  |      |   
|Cost of revenues                    |  | 39                          |    |  | 38   |   
|Selling, general and administrative |  | 54                          |    |  | 48   |   
|Depreciation and amortization       |  | 30                          |    |  | 30   |   
|                                    |  |                             |    |  |      |   
|Total operating expenses            |  | 123                         |    |  | 116  |   
|                                    |  |                             |    |  |      |   
|Operating loss                      |  | (23                         | )  |  | (16  | ) 
|Other income (expense):             |  |                             |    |  |      |   
|Interest income                     |  |                            |    |  | 1    |   
|Interest expense                    |  | (3                          | )  |  | (10  | ) 
|Gain/loss on disposal of assets     |  |                            |    |  |     |   
|Loss on extinguishment of debt      |  | (5                          | )  |  |     |   
|                                    |  |                             |    |  |      |   
|Total other income (expense)        |  | (8                          | )  |  | (9   | ) 
|                                    |  |                             |    |  |      |   
|Net loss                            |  | (31                         | )% |  | (25  | )%
|                                    |  |                             |    |  |      |   



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Operating Revenues.Our operating revenues for the three months ended March 31, 2004 and 2005 were
$41.7 million and $48.5 million, respectively, an increase of $6.8 million, or 16%. This increase is a result of growth in bundled services and network services. Operating revenues for our cable television services for the three months ended March
31, 2004 and 2005 were $10.1 million and $12.0 million, respectively, an increase of $1.9 million, or 19%. Operating revenues for our telephone services for the three months ended March 31, 2004 and 2005 were $13.1 million and $14.6 million,
respectively, an increase of $1.5 million, or 11%. Operating revenues for our broadband Internet and other services for the three months ended March 31, 2004 and 2005 were $4.4 million and $6.1 million, respectively, an increase of $1.7 million, or
39%. The increased revenues for cable television, telephone and broadband Internet and other are primarily due to growth in the number of connections, from 219,744 as of March 31, 2004 to 260,060 as of March 31, 2005, and to a lesser extent from
rate increases. The additional connections and revenues resulted primarily from the continued construction of our broadband networks and continued penetration growth of marketable homes in our markets.



Operating revenues for our broadband transport services for the three months
ended March 31, 2004 and 2005 were $2.9 million and $2.0 million, respectively, a decrease of $0.9 million, or 31%, primarily due to a large construction project in the first quarter of 2004. This product line is experiencing pricing compression as
well, which outpaced our customer growth. Revenue from network services was $11.1 million and $13.7 million, respectively, an increase of $2.6 million, or 23% due to customer growth.



Cost of Revenues.Our cost of revenues for the three months ended March 31, 2004 and 2005 were $16.4 million and
$18.2 million, respectively, an increase of $1.8 million, or 11%. The increase in our cost of revenues is primarily due to the growth of costs related to increased connections in our bundled services offerings. Cost of revenues were relatively flat
as a percentage of revenues at 39% for the three months ended March 31, 2004, compared with 38% for the three months ended March 31, 2005.



Our gross margin for the three months ended March 31, 2005 for our bundled cable television, telephone and broadband Internet and other services was
relatively flat at 72%, compared with 73% for the three months ended March 31, 2004. We added connections at a consistent mix quarter to quarter. Both telephone and broadband Internet and other service products carry a somewhat higher gross margin
than the cable television product due to the programming costs associated with cable television. For broadband transport services, our gross margin for the three months ended March 31, 2005 was 87%, compared with 76% for the three months ended March
31, 2004. This increase is due to lower margin third-party construction projects in the first quarter of 2004, as well as an increased usage of excess capacity on the fixed cost portions of our network. For network services, our gross margin for the
three months ended March 31, 2005 was 35%, compared with 26% for the three months ended March 31, 2004. This increase is due to lower margins in 2004 due to lower utilization of the network after losing the MCI contract in October 2003. Since then
we have been adjusting our network capacity to demand, resulting in greater utilization rates.



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



Selling, General and Administrative Expense. Our selling, general and
administrative expense for the three months ended March 31, 2004 and 2005 was $22.6 million and $23.5 million, respectively, an increase of $0.9 million, or 4%. The increase is primarily due to the expenses related to supporting the growth in
revenues. Selling, general and administrative expense decreased as a percentage of revenues from 54% to 48%. We expect our selling, general and administrative expense to increase as a result of the growth of our business and customer base, and
decrease over time as a percentage of revenue.



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Depreciation and Amortization Expense. Our depreciation and amortization expense for the three
months ended March 31, 2004 and 2005 was $12.7 million and $14.5 million, respectively, an increase of $1.8 million, or 14%. The increase is due to the expansion of our constructed and acquired network. We expect depreciation and amortization
expense to continue to increase as we make additional capital expenditures to construct and expand our networks in our existing markets.



Interest Expense. For the three months ended March 31, 2004 and 2005, our interest expense, which includes interest incurred net of capitalized
interest, was $1.3 million and $4.7 million, respectively, and increase of $3.4 million, or 262%. Our interest expense increased due to interest accrued on the senior secured notes issued in March of 2004. For the three months ended March 31, 2004
and 2005, we had capitalized interest of $0.4 million and $0.8 million, respectively, and increase of $0.4 million, or 100%.



Write-Off Due to Repayment of Credit Facility. During the three months ended March 31, 2004, we completed a private placement of our senior notes.
Concurrent with this offering we repaid $64.8 million to extinguish our senior credit facility. We wrote off debt issuance costs of approximately $2.1 million associated with this repayment.



EBITDA/Adjusted EBITDA



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



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



Adjusted EBITDA was $2.8 million and $6.9 million for the quarters ended March 31, 2004 and 2005, respectively, an increase of $4.1 million, or 146%. The increase is primarily due to the addition of new customers, added both through
acquisitions and the build-out of our networks over such periods, and the loss of approximately $2.1 million associated with repayment of our senior credit facility in March 2004.



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



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



|                                                                |  |                             |         |   |      |   |         |  
|--------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                |  | Three Months EndedMarch 31, |        
|                                                                |  | 2004                        |         |   | 2005 |  
|                                                                |  | (Dollars in thousands)      |        
|Net loss as reported                                            |  | $                           | (13,430 | ) |      | $ | (12,155 | )
|Add back non-EBITDA/Adjusted EBITDA items included in net loss: |  |                             |         |   |      |   |         |  
|Interest income                                                 |  |                             | (65     | ) |      |   | (315    | )
|Interest expense                                                |  |                             | 1,277   |   |      |   | 4,743   |  
|Taxes                                                           |  |                             | 197     |   |      |   | 75      |  
|Depreciation and amortization                                   |  |                             | 12,715  |   |      |   | 14,527  |  
|                                                                |  |                             |         |   |      |   |         |  
|EBITDA                                                          |  |                             | 694     |   |      |   | 6,875   |  
|Loss on extinguishment of debt                                  |  |                             | 2,145   |   |      |   |        |  
|                                                                |  |                             |         |   |      |   |         |  
|Adjusted EBITDA                                                 |  | $                           | 2,839   |   |      | $ | 6,875   |  
|                                                                |  |                             |         |   |      |   |         |  



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 six markets and for working capital and operating expenses.



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



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



At March 31, 2005, we had total cash and cash equivalents of $34.2 million, investments of $15 million and $142.3 million of
long-term debt outstanding.



As of March 31, 2005, we had net
working capital of $30.4 million, compared to net working capital of $44.1 million as of December 31, 2004. The decrease in working capital resulted primarily from the net loss for the most recent quarter, and was reflected as follows:



| |  |  | a decrease of $7.0 million in cash and cash equivalents;
| | - |  | --------------------------------------------------------



| |  |  | a decrease of $5.0 million in investments; and
| | - |  | ----------------------------------------------



| |  |  | an increase of $1.3 million in accounts payable.
| | - |  | ------------------------------------------------



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



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



Cash Flows from Operating Activities



Net cash provided by (used in) operations totaled
$(6.1) million and $3.9 million for the three months ended March 31, 2004 and 2005, 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 option compensation;
| | - |  | -----------------------------



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



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



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



| |  |  | loss on extinguishment of debt.
| | - |  | -------------------------------



Depreciation and amortization for the three months ended March 31, 2004 and 2005 was $12.7 million and $14.5 million, respectively. Other non-cash charges
for the three months ended March 31, 2004 and 2005 were $3.4 million and $1.5 million, respectively.



As of March 31, 2005 we had a $9.5 million balance in accrued liabilities related to our senior notes, which was subsequently paid on April 1, 2005.



Cash Flows from Investing Activities



Our net cash used in investing activities for the three months ended
March 31, 2004 and 2005 was $11.3 million and $10.7 million, respectively. These net cash outflows are primarily due to the build-out of our network in both 2004 and 2005.



Cash Flows from Financing Activities



Our net cash provided by (used in) financing activities for the three months ended March 31, 2004 and 2005 was $62.6 million
and $(0.2) million, respectively. Cash flows from financing activities in the three months ended March 31, 2004 consisted primarily of borrowings on our senior credit facility. We paid the outstanding amount of $64.8 million on our senior credit
facility with a portion of the net proceeds of $123.8 million received from our 14% senior notes offering in March of 2004.



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Capital Expenditures



We spent approximately $11.2 million and $15.6 million in capital expenditures, including capitalized interest, during the three months ended March 31,
2004 and 2005, respectively. The indenture governing the notes prohibits us from making capital expenditures when the aggregate amount of the 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, 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 $48 million in capital expenditures in the year ended December 31, 2005.



Contractual Obligations and Commercial Commitments



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



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



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



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



Purchase
Agreement.We may be required to purchase a minimum of $41.8 million of equipment from some of our suppliers between April 2005 and December 2010. We entered into these agreements based upon estimates of equipment we expect to need over this
six-year period. The majority of these purchase commitments are contingent upon delivery of technical and functional next generation requirements. If we do not actually need the estimated amount and type of equipment, our financial condition could
be adversely affected because we would be obligated to spend money on equipment we do not need, rather than applying it to help grow and develop our business.



The following table represents our contractual obligations as of March 31, 2005:



|                            |  |                        |       |       |   |       |  |      |       |      |   |              |  |   |       |  |   |        |  |   |        
|--------------------------- |  | ---------------------- | ----- | ----- | - | ----- |  | ---- | ----- | ---- | - | ------------ |  | - | ----- |  | - | ------ |  | - | -------
|                            |  | Payments Due by Period |       | Total
|Contractual Obligations     |  | 2005                   |       | 2006  |   | 2007  |  | 2008 |       | 2009 |   | 2010 &Beyond | 
|                            |  | (In thousands)        
|Capital lease obligations   |  | $                      | 1,356 |       | $ | 1,780 |  | $    | 1,627 |      | $ | 1,570        |  | $ | 1,570 |  | $ | 21,310 |  | $ | 29,213 
|Operating lease obligations |  |                        | 3,262 |       |   | 3,834 |  |      | 3,319 |      |   | 2,698        |  |   | 2,286 |  |   | 13,090 |  |   | 28,489 
|Maintenance obligations     |  |                        | 851   |       |   | 1,033 |  |      | 1,033 |      |   | 1,033        |  |   | 1,033 |  |   | 11,068 |  |   | 16,051 
|Purchase obligations        |  |                        | 576   |       |   |      |  |      |      |      |   | 5,268        |  |   |      |  |   | 35,914 |  |   | 41,758 
|                            |  |                        |       |       |   |       |  |      |       |      |   |              |  |   |       |  |   |        |  |   |        
|Total                       |  | $                      | 6,045 |       | $ | 6,647 |  | $    | 5,979 |      | $ | 10,569       |  | $ | 4,889 |  | $ | 81,382 |  | $ | 115,511
|                            |  |                        |       |       |   |       |  |      |       |      |   |              |  |   |       |  |   |        |  |   |        



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



We have entered into contracts with various
entities to provide us with video programming services. We pay a monthly fee for those services, generally based on the average number of video subscribers to that service during the service period. We estimate programming fees to be approximately
$28 million in 2005.



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We have entered into numerous franchise agreements with municipalities in Texas. These agreements provide
for, among other items: payment of a stated percentage of revenue, typically 5%, on a quarterly basis, the maintenance of deposits and corporate surety bonds up to $1 million, and the contribution of funds by us of up to $4 million to provide
facilities and equipment related to public access channels. These agreements have various terms, ranging between 5 and 9 years, with additional renewal periods. We anticipate making significant payments with respect to these franchise agreements and
the build-out of our networks during 2005 and beyond.



Critical Accounting
Policies and Estimates



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



Revenue Recognition



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



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



Classification of Various Direct Labor and Other Overhead Costs



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



Judgment is required to determine the extent to which indirect costs, or overhead, are incurred as a result of specific capital activities, and therefore
should be capitalized. We allocate overhead based upon the portion of indirect costs that contribute to capitalizable activities using an overhead rate applied to the amount of direct labor capitalized based upon our analysis of the nature of costs
incurred in support of capitalizable activities. The primary costs that are included in the determination of overhead rates are (i) employee benefits and payroll taxes associated with capitalized direct labor, (ii) direct variable costs associated
with capitalizable activities,



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consisting primarily of installation and construction vehicle costs, (iii) the cost of support personnel, such as personnel who directly assist with
capitalizable installation activities, and (iv) indirect costs directly attributable to capitalizable activities. For the three months ended March 31, 2004 and 2005, $2.5 million and $3.0 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 a
goodwill impairment test as of October 1, 2004. This test was performed in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142Goodwill and Other Intangible Assets, which we adopted effective January 1, 2002.
SFAS No. 142 recognizes that since goodwill and certain intangible assets may have indefinite useful lives, these assets are no longer required to be amortized but are to be evaluated at least annually for impairment. An independent appraisal firm
was used for this analysis. The analysis reached the conclusion that the estimated fair value exceeded the carrying value, so no impairment existed. The estimated fair value was determined based on a discounted cash flow analysis and review of
multiples for comparable companies. The assumptions used in the valuation testing have subjective components, including anticipated future operating results and cash flows based on our business plan and overall expectations as to market and economic
considerations. Based on the results of this test we recorded no impairment loss for 2004.



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.



ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



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



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ITEM 4.    CONTROLS AND PROCEDURES



Our management, with the participation of our Chief Executive Officer, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial officer, has evaluated the effectiveness
of our disclosure controls and procedures as of March 31, 2005. 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 first fiscal quarter, there have been no changes in our internal
control over financial reporting that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.



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PART II



OTHER INFORMATION



ITEM 1.    LEGAL PROCEEDINGS



Legal Proceedings



Both the FCC and the
Department of Justice have been and may still be conducting investigations understood to involve billing practices by MCI and related issues involving companies that terminated or otherwise may have handled traffic on behalf of MCI, including those
companies participating in MCIs Least Cost Routing Program. We believe we were a substantial participant in the Least Cost Routing Program. The Department of Justice convened a grand jury in the Southern District of New York as part of its
investigation. The grand jury issued document subpoenas to a number of companies in the telecommunications industry, including us. We cooperated with the Department of Justice and produced responsive documents. The FCC issued a letter of inquiry to
us and other companies seeking documents and requesting information relating to the above described billing practices and the compliance by such companies, including us, with applicable law and regulations. We responded to the letter of inquiry and
produced additional documentation to supplement our answers to certain questions. The FCC may issue additional letters of inquiry in the future, to which we would intend to respond in the same manner. We cannot predict the outcome of these
investigations or their duration. If these investigations result in current or prior billing practices being identified as violative of applicable laws or regulations, result in penalties being imposed upon us, result in further proceedings against
specific companies, including us, result in changes in the law or regulations that would have an industry-wide effect, or lead to litigation among parties involved in terminating or otherwise routing traffic, the impact could have a material adverse
effect on our business and financial condition. There have been no substantial communications, of any kind, on this investigation between the Department of Justice or the FCC and Grande since January 2004.



As a telecommunications company, we are a party to regulatory proceedings in
the ordinary course of our business at both the state and federal levels. For example, we along with many other telecommunications companies in Texas are currently a party to a proceeding before the PUCT relating to the terms of SBC
Communications standard interconnection agreement and an anticipated successor to this interconnection agreement. The proceeding has progressed in two phases, with phase one completed with no changes to the interconnection agreement that
materially impacted the company. Phase two issues will be decided in July 2005 are not issues that could, individually, or in the aggregate with any other regulatory proceedings, have a material adverse effect on our business, financial condition or
results of operations.



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



There were no matters submitted to a vote of security holders of Grande during the quarter ending March 31, 2005.



ITEM 6.    EXHIBITS



Exhibits



Grande files herewith the following
exhibits:



|           |  |                                                                                                                                                             
|---------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|ExhibitNo. |  | Description                                                                                                                                                 
|           | 
|31.1       |  | Certification pursuant to Section 302 of the Sabanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                            
|           | 
|31.2       |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).                                                           
|           | 
|32.1       |  | Written Statement of Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350).



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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: May 12, 2005 |  | By:                                               |  | /s/    MICHAEL L.
WILFLEY                                                                           
|                   |  |                                                   |  | Michael L. Wilfley Chief Financial Officer (Duly Authorized Officer and Principal Financial
Officer)



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