UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549


________________________


FORM
10-K


________________________


T
            Annual
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





for the
fiscal year ended 12/31/2007





£
            Transition
      Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
      1934





Commission
File No. 333-115602


________________________


Grande
Communications Holdings, Inc.


(Exact
name of Registrant as specified in its charter)


________________________





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




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


________________________


Securities
registered pursuant to Section 12(b) of the Act: None





Securities
registered pursuant to Section 12(g) of the Act: None





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.    Yes  £    No  T





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act. Yes £    No
T





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 T    No
£





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  £





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer £
              Accelerated
      filer £
              Non-accelerated
      filer T
              Smaller
      reporting company £


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





The
aggregate market value of the voting stock held by non-affiliates is not
applicable as no public market exists for the voting stock of the
registrant.





The
number of shares of the registrant’s Common Stock outstanding as of March 15,
2008 was 12,752,572.













GRANDE COMMUNICATIONSHOLDINGS, INC.


ANNUAL
REPORT ON FORM 10-K


YEAR
ENDED DECEMBER 31, 2007





TABLE
OF CONTENTS








PAGEPART
      IItem 1.
            Business
            1Item 1A.
            Risk Factors
            20Item 1B.
            Unresolved Staff Comments
            26Item 2.
            Properties
            26Item 3.
            Legal Proceedings
            26Item 4.
            Submission of Matters to a Vote of Security
      Holders
            27PART
      IIItem 5.
            Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
            28Item 6.
            Selected Financial Data
            28Item 7.
            Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
            30Item 7A.
            Quantitative and Qualitative Disclosures About Market
      Risk
            46Item 8.
            Financial Statements and Supplementary
    Data
            46Item 9.
            Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
            46Item 9A.
            Controls and Procedures
            46Item 9B.
            Other Information
            46PART
      IIIItem 10.
            Directors, Executive Officers and Corporate
      Governance
            47Item 11.
            Executive Compensation
            51Item 12.
            Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
            72Item 13.
            Certain Relationships and Related Transactions, and
      Director Independence
            82Item 14.
            Principal Accounting Fees and Services
            82PART
      IVItem 15.
            Exhibits, Financial Statement Schedules
            83Signatures
            85Financial Statement Index
            F-1





Table of Contents





FORWARD-LOOKING
INFORMATION





This
Annual Report on Form 10-K contains “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. When used in this
Report, the words “expects,” “anticipates,” “should,” and “estimates” and
similar expressions are intended to identify forward-looking statements. Such
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from those we expect or anticipate.
These risks and uncertainties include, without limitation, those discussed below
under “Risk Factors” and those discussed in “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.” We undertake no
obligation to publicly update or correct these forward-looking statements to
reflect events or circumstances that occur after the date this Report is filed
with the Securities and Exchange Commission.





PART
I





For
convenience in this annual report, “Grande,” “we,” “us,” and “the Company” refer
to Grande Communications Holdings, Inc. and our consolidated subsidiary, Grande
Communications Networks, Inc., taken as a whole.





ITEM 1.
            BUSINESS





Overview





Grande’s
primary business is providing a bundled package of cable television (“video”),
telephone (“voice”), and broadband Internet (“HSD”) and other services to
residential and small and medium sized business customers in Texas. We provide
these services in seven markets in the state of Texas using local broadband
networks that we constructed. We refer to the homes and businesses that our
network is capable of providing services to as “marketable homes passed”. As of
December 31, 2007, we had the ability to market services to 340,058 distinct
homes and businesses over our networks and had 145,675 residential and business
customers. Our operating revenues were $189.9 million in 2006 compared to $197.1
million for 2007.





Grande
was founded in October 1999 and was funded with $232 million of initial equity
capital to pursue a retail strategy of constructing broadband networks in order
to offer bundled video, voice and HSD services to customers. Operating revenues
from bundled services were $146.1 million in 2006 compared to $155.0 million for
2007.





We
believe that an important measure of our growth potential is the number of
marketable homes passed by our networks and the marketable homes we are able to
pass in the future in the markets in which we currently operate. Marketable
homes passed are the number of residential and business units, such as single
family residential homes, apartments and condominium units, passed by our
networks, other than those we believe are covered by exclusive arrangements with
other providers of competing services. Since 2001, we have grown our marketable
homes passed through the construction of our networks. The expansion of our
networks has, in turn, allowed us to pursue a retail strategy of offering
bundled video, voice and HSD services to residential and business customers. We
have derived an increasing percentage of our revenues from our bundled services
and we expect this trend to continue. Because of our local networks and existing
fixed infrastructure in the markets in which we currently operate, we believe we
can continue to grow our business without incurring the significant capital
investment required to launch operations in new markets.





In
addition, we have leveraged our retail metro network build-out with the 2003
acquisition of a long haul fiber optic network, primarily located in Texas, to
allow us to provide broadband transport services to medium and large enterprises
and communications carriers. Operating revenues for broadband transport services
were $8.6 million in 2006 compared to $9.4 million for 2007.





In July
2000, when our network construction was still in a very early stage, we acquired
Thrifty Call, Inc. (“Thrifty Call”), which had an established telephone and data
network that served as the platform for the provisioning of residential voice
and HSD services and that still provides network services to medium and large
enterprises and communications carriers in the wholesale market. Operating
revenues for network services were $35.2 million in 2006 compared to $32.7
million for 2007.





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





1
 Table of Contents





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





Grande
Competitive Advantages





We
believe we have been able to grow our customer base because of the following
competitive advantages:





•
            Competitively superior
      networks. We provide our services over our newly constructed, fully
      integrated, high-speed, high capacity networks. In 2005, we began taking
      fiber optic cable direct to our customers’ homes on new network passings
      in Austin and San Antonio with a technology known as fiber-to-the-home
      (“FTTH”). On all passings constructed prior to our launch of FTTH, our
      networks deploy fiber optic cable to nodes that can serve from 24 to 450
      marketable homes passed, depending on network configuration. Our networks
      generally utilize an 860Mhz signal, which can be upgraded to 1Ghz. Our
      networks are designed to have sufficient capacity to meet the growing
      demand for high bandwidth cable television, telephone and Internet
      services while providing additional capacity to enable us to offer planned
      and future products. The architecture of our networks allows us to offer
      superior services, such as dedicated Internet products at high bandwidth
      rates that we believe are superior to the shared bandwidth Internet
      products offered by our cable competitors. We already offer high
      definition television, digital video recording, and interactive
      television. Our networks are positioned to deliver new services, such as
      video on-demand cable television, switched digital, and other high
      bandwidth applications without requiring a significant additional capital
      investment.





•
            Flexible product offerings,
      attractively bundled and priced. We are able to deliver a wide
      range of products that allow our customers to select the services that
      meet their specific needs and preferences: from bundled product offerings
      that include over 300 channels, including product enhancements such as
      digital video recorders (“DVRs”) and high-definition television
      programming (“HDTV”), local and long distance voice services, and a full
      suite of HSD products with speeds from 384Kbps to 12.0Mbps (up to 15.0Mbps
      in the Company’s FTTH passings).  We believe we can offer a
      competitively priced package to virtually any marketable home passed by
      our networks. Because of operating efficiencies that result from providing
      multiple services to one customer, we are able to provide our customers
      additional savings when they purchase products as part of a bundle of two
      or more services. We believe that our ability to provide a single
      consolidated bill for multiple services is also an attractive feature for
      our customers.





•
            Strong local brand and
      customer service. We have chosen to serve customers in seven
      attractive and growing markets in Texas: Austin/San Marcos, San Antonio,
      suburban northwest Dallas, Waco, Corpus Christi, Midland/Odessa and, to a
      lesser extent, Houston. In each of these markets, we have established a
      strong local presence that we believe has positioned Grande as the
      hometown company, despite the fact that we are not the incumbent service
      provider in any of our markets. Our customer service and technical
      representatives, as well as our sales representatives, installation
      technicians and other employees who interact with our customers, know our
      markets and products, and are part of our customer-focused culture. We
      operate a virtual customer phone center system, with centers in Austin and
      San Marcos, that allows us to offer customer care 24 hours a day, seven
      days a week in an efficient, cost-effective manner. We believe our
      hometown brand, combined with local customer service and support, enables
      us to appeal to residential and business customers in our markets, as well
      as to local universities, utilities, hospitals and other
      institutions.





The
Grande Strategy





We seek
to take advantage of our market position by executing the following operating
strategy:





•
            Increase customer penetration
      in markets with demonstrated demand and operating metrics. We
      believe that each of our existing markets has demonstrated strong consumer
      demand and favorable operating metrics. As of December 31, 2007, we had
      145,675 customers taking an average of over two connections each. We have
      proven our ability to take market share from our competitors over time in
      the communities that we serve. We had a 6% growth in residential and
      business customers from 137,542 as of December 31, 2006 to 145,675 as of
      December 31, 2007. We believe that there is opportunity to further
      penetrate our existing markets, particularly in our newer
      passings.





•
            Expand commercial business
      offering over our retail footprint. We have extensive local deep
      fiber networks in each of our markets (excluding Houston) that enable us
      to pursue our commercial business. We have leveraged our local brand,
      network, and telecommunications infrastructure to grow this offering by
      18.2% to $15.3 million in revenue during 2007. We offer our commercial
      customers cable television, telephone, and broadband Intranet services at
      competitive rates. Because of our expansive and fiber rich local networks,
      we believe we can cost effectively grow this business without requiring
      significant additional capital investment. Our commercial business is part
      of our overall bundled services
business.





2
 Table of Contents





•
            Leverage our infrastructure by
      serving broader telecommunications market. In addition to our
      primary business of offering bundled services to residential and business
      customers, we also offer broadband transport services and network services
      to medium and large enterprises and communications carriers. These
      services are primarily provided using our existing infrastructure and
      personnel with minimal incremental operating costs and capital
      expenditures for maintenance. By leveraging our brand, communications
      infrastructure, voice and data volume, and personnel that predominately
      support our core retail business and its products; we have gained
      efficiencies of scale by offering telecommunications and HSD products into
      broader telecommunications markets.





Services





Bundled
Services





We
provide video, voice, HSD and other services to our residential and business
customers. We are able to deliver a wide range of products that allow our
existing and potential residential and business customers to select the services
that meet their specific needs and preferences, from products on an individual
basis to bundled product offerings. Our bundled packages offer the convenience
and cost-savings of having one bill and one company providing the services. We
believe we were the first company in many of our markets to offer one-stop
shopping for video, voice and HSD services to residential and business
customers. We price our products competitively in each of our target
markets.  When customers purchase our products as part of a bundle of
two or more services, they benefit from additional savings.





Our
bundled services encompass a broad range of services provided on an individual
basis or through a bundled product offering. These services
include:





•
            Video.We offer a wide variety of video programming and services. In
      addition to basic and digital video services, the Company offers numerous
      add-on services, such as pay-per-view, premium movie channels, digital
      video recorders and HDTV. Grande also offers interactive features, such as
      video games and local source guides. As of December 31, 2007, we provided
      video services to 99,453 connections. On average, during 2007, each of our
      video connections generated $55.28 in monthly
  revenues.





Our video
offerings include:





•
            Basic Cable. Our basic
      cable offering consists of approximately 25 analog channels, which
      generally consists of local broadcast television, local community
      programming (including governmental, public and education), limited
      satellite-delivered or non-broadcast
channels.





•
            Expanded
      Cable.  Includes Basic Cable plus approximately 55
      additional channels (approximately 80 total), including ESPN, Disney, CNN,
      Comedy Central and MTV.





•
            Digital Cable. Our
      digital cable offering consists of our expanded cable offering plus
      approximately 220 digital cable channels for a total of over 300
      channels.  Digital service includes an interactive program guide
      with features such as games and local guides and 48 channels of digital
      music. In addition, we have tailored our digital cable programming to
      include a large number of Spanish language channels to appeal to the large
      Spanish-speaking population in our markets. We offer this target-specific
      content in tiers. Digital service also includes advanced services such as
      Grande News & Info on Demand. Grande’s digital package includes access
      to multi-cast premium channels such as HBO, Showtime, Cinemax, and Starz!
      as well as specialty programming tiers featuring Spanish programming,
      sports, high-definition, and movie content. Digital Cable TV subscribers
      must have a digital set-top box to use the
  service.





•
            High-Definition
      Television. HDTV is offered to all digital cable subscribers. HDTV
      is a digital television service that displays enhanced picture quality
      that surpasses standard analog and digital television images. We currently
      offer 25 channels of HDTV
programming.





•
            Premium Movie Channels.
      These 31 additional channels provide commercial-free movies, foreign
      language programming and other programming including HBO, Cinemax,
      Showtime, The Movie Channel, Starz! and Encore, as well as
      others.





•
            Pay-Per-View. Premium
      content, such as movies, sports and concerts that are offered on a
      commercial-free basis for additional
fees.





•
            Digital Video Recorder.
      For an additional fee, Grande offers digital set-top boxes that allow
      customers to digitally record television programs and watch them on their
      own schedule. In addition to recording and replay, DVRs also allow
      customers to pause and rewind live programming. Grande offers dual-tuner
      DVRs that allow customers to record programs while watching other
      channels.





3
 Table of Contents





•
            Voice.We offer a variety of local and long distance calling plans as well
      as numerous advanced calling features. Grande’s voice plans generally
      include unlimited local calling, free calls to existing Grande customers,
      directory listing service options and bundles of local and long distance
      calling with a variety of calling features. Grande’s voice plans offer
      consumers superior service and value compared to other offerings in the
      market.
      As of December 31, 2007, we provided service to 114,303 telephone
      connections. On average, during 2007, each of our telephone connections
      generated $40.43 in monthly revenues, including local and long-distance
      service.





Our voice
offerings include:





•
            Local Service. Our
      local telephone services include standard dial tone access, 911 access,
      operator services and directory assistance, all over a powered network
      affording greater reliability. In addition, we offer a wide range of
      custom call services, including call waiting, call forwarding, call
      return, caller blocker, anonymous call rejection, auto redial, speed dial,
      three-way calling, priority-call and voice mail, each of which may be
      activated or deactivated by a customer, usually by dialing a simple
      activation code.





•
            Long Distance. Our
      long-distance services include traditional switched and dedicated long
      distance, toll-free calling, international, calling card and operator
      services. We offer our customers an option of a flat rate for
      long-distance calls all day, every day, with no minimum monthly usage
      fees, and several prepaid long distance plans by which the customer pays a
      monthly fee for a pre-determined number of long distance minutes and a
      flat rate for any additional minutes. We also offer flat rate direct-dial
      international calling with no additional fees, surcharges or minimum call
      times per call. Our customers also may purchase 800 number calling
      services and calling card services. We believe our long-distance telephone
      services are competitively priced. We offer our retail customers, as part
      of their subscription to our services, “free Grande-to-Grande,” which
      means there are no long-distance charges for calls between two of our
      phone subscribers in different
markets.





•
            HSD and
      Other.As of December 31, 2007, we had 95,125 HSD and other service
      connections. On average, during 2007, each of our HSD and other
      connections generated $31.88 in monthly revenues. HSD and other services
      include:





•
            HSD Service. We provide
      our HSD customers with a full suite of high-speed broadband Internet
      products through our networks, with speeds up to 12Mbps download (15Mbps
      to our FTTH customers) for residential customers. We offer multiple tiers
      of high-speed broadband access, including dedicated access and tiered
      bandwidth, with Ethernet speeds up to 100Mbps, to business customers. We
      also offer DSL and low-price dial-up Internet access, but most of our
      residential and business customers take advantage of the wide bandwidth
      and high data speeds available on our broadband networks. Our HSD
      customers have a choice of services with different download and upload
      speeds for different monthly charges. Grande HSD service provides
      unlimited dedicated access to the Internet without dialing in or logging
      on to a network and without a dedicated telephone line. Our higher speed
      service offers superior speeds to DSL and, we believe, appeals to the more
      sophisticated broadband Internet user. We also provide to our customers a
      specific number of free e-mail accounts and personal Web space. Customers
      have the option to purchase or rent a cable modem from us or purchase it
      directly from a retailer. We believe businesses and sophisticated users
      continue to require faster Internet access and more bandwidth as content
      is becoming more robust, and we intend to offer products that will meet
      that demand using our high capacity networks. We also offer web premiums,
      such as Internet security, sports and news, and family
      applications.





•
            Security Solutions. We
      discontinued actively marketing our security product in 2006. However, we
      continue to provide service to our existing customer base. Through our
      wireless security product, we installed leading wireless security systems
      in private residences. We use a third party for 24 hours a day, 7 days a
      week monitoring, and our trained technical staff is licensed by the
      Private Security Board under the Texas Department of Public
      Safety.





Broadband
Transport Services





We offer
access to our metro area and long-haul fiber networks in 16 cities in Texas, as
well as in Tulsa and Oklahoma City, Oklahoma, Little Rock, Arkansas and
Shreveport, Louisiana and provide our broadband transport customers with a full
range of network-related services. The Grande network provides intercity long
haul transport services between 20 cities in Texas, Oklahoma, Arkansas and
Louisiana with collocation facilities in 15 of those cities. These services can
include dark fiber leases and indefeasible rights of use, custom network
construction or lateral builds and access to the networks at various
wavelengths. We also provide private line services to enterprises, carriers and
Internet service providers which allow the customer to connect multiple sites
through dedicated point-to-point circuits, which carry voice and data traffic at
high-speeds. A metro area network is a high-speed data intra-city network,
usually including a fiber optic ring that links multiple locations within a
city. Each of our metro area networks connects to most carrier points of
presence, major incumbent local exchange carriers, or ILECs, and competitive
local exchange carriers, or CLECs, central offices, hotels, central and suburban
business centers, data centers and co-location facilities in these areas. We
also provide equipment co-location services that permit Internet service
providers to collocate modems, routers or network servers with our network
equipment.





4
 Table of Contents





Network
Services





We offer
network services to other communications service providers and carriers. Our
wholesale network services encompass a broad range of voice telephony products
including domestic and international terminations, originating and terminating
local access and national directory assistance. In addition, Grande provides
wholesale data services ranging from dial up to Gigabit Ethernet Internet
access. All of these services are provided using primarily the same personnel
and network infrastructure that we use to provide voice and HSD services to our
retail customers. This allows us to leverage our existing resources and
expertise to generate incremental revenues and cash flow, which we believe has
allowed us to support the early development of our core retail services while
amortizing the cost of our networks over a larger revenue base. Since our
networks pass or interconnect with these larger enterprises and carriers anyway,
our goal has been to serve these customers and earn a return from every mile of
network.





Our
wholesale network services primarily include:





•
            Carrier Voice.These
      services consist of our transmission services to carriers and other
      telecommunications companies. This primarily involves our selling access
      to and transporting minutes for long-distance telephone companies for
      intrastate, interstate and international long-distance traffic
      terminations.





•
            Data Services. We
      provide services to Internet service providers, which we call our managed
      modem services that allow the Internet service provider to deliver dial-up
      Internet service to customers in areas where our network is located. We
      provide the modems, offer dial-up and a variety of related services,
      including server hosting, direct access between our networks and the
      network of the Internet service provider, a customer-maintained user
      database, and end-user technical support services. We also offer various
      other data services, such as VoIP terminations, inbound local calling and
      toll-free calling. A portion of our data revenue is derived from
      reciprocal compensation, and the latest FCC order (described more
      thoroughly below under the caption “Regulation of Telecommunications
      Services”) regarding this revenue stream negatively impacted our revenue
      beginning in the latter half of
2005.





•
            Managed Services. We
      provide telephone services, as well as the infrastructure needed to offer
      local telephone service, to competitive local exchange carriers. This
      enables the carriers to offer telephone services to their customers using
      our networks, including a local dial tone, local telephone features,
      long-distance switching and calling cards. We also provide access to a
      comprehensive national directory assistance service, which includes local
      and long-distance directory assistance for listings in the United States.
      We also provide equipment co-location services that permit Internet
      service providers to collocate modems, routers or network servers with our
      network equipment.





Marketing
and Sales





Our sales
and marketing efforts focus on building loyalty with our customers and acquiring
new customers along our existing network footprint. We emphasize the
convenience, savings and improved service that can be obtained by subscribing to
bundled services.





Marketing





In each
of our markets, we have established a strong community presence that we believe
has positioned Grande as the hometown company, despite the fact that we are not
an incumbent service provider in any of our markets. We believe our hometown
image enables us to appeal to residential customers and small businesses in our
markets as well as to local universities, utilities, hospitals and other
institutions. A key part of our marketing strategy has been to support local
community organizations by sponsoring and participating in local charitable
events and other community activities. Our employees run our Passion and
Commitment Investment Club, which supports community organizations that provide
food, shelter, clothing and healthcare to persons in need in our markets, has
made significant donations to non-profit organizations across our markets in
Texas and has been recognized with numerous local and state-wide awards for its’
community service. We believe that our employees’ community participation
directly supports our direct sales force by creating a strong local brand to
which we believe potential customers are receptive. We believe that this helps
us to penetrate our target markets where the acquisition of new customers is
typically dependent upon customers switching to our services from their existing
providers.  We had a 6% growth in residential and business customers
from 137,542 as of December 31, 2006 to 145,675 as of December 31,
2007.





5
 Table of Contents





We focus
our marketing efforts on areas served by our networks through such means as
direct mail campaigns, outdoor space advertising, local event sponsorship and
media where we have more local scale. In newly constructed network areas, we
will undertake an extensive marketing campaign prior to activation of our
services, beginning with direct mailings and door-hangers. In established areas,
we focus on marketing additional services to those customers who have previously
subscribed to one or two of our products. For example, we run Grande television
advertisements on our own cable system which emphasize our voice and HSD
products that are available as part of a bundle. In both new and established
areas, we will, to a lesser extent, use traditional advertising outlets, such as
television, radio and local newspaper advertising, to reach potential
customers.





Sales





We have
separate sales teams in each of our markets dedicated to residential, multiple
family dwelling units (“MDUs”), and commercial customers. Each of these sales
teams reports to separate sales management that is responsible for all of the
sales in a particular product area. We also have a separate sales team dedicated
to broadband transport and network services.





A
standard residential sales team consists of direct sales, outbound and inbound
call center sales, counter sales and support personnel. A typical commercial
sales team consists of account executives and specialized business installation
coordinators. Our MDU sales team has developed relationships with owners and
management of the MDU properties in our target markets, which enables us to gain
access to new customers as soon as they move into their unit. Our network
services sales team focuses on making direct contact with communications
providers principally via sales calls, trade shows and our sales team’s existing
industry relationships. Our call center sales team handles substantially all
incoming and outgoing sales calls.





Our sales
teams are cross-trained on all our products to support our bundling strategy.
Our sales teams are compensated based on both revenues and connections and are
therefore motivated to sell more than one product to each customer. However, our
sales force is highly incentivized to sell the right services to a particular
customer without overselling. Our sales personnel do not get credit for selling
products that are later cancelled within a certain number of months after the
start of service. We believe that by providing the appropriate level of services
to each customer, we are more likely to retain that customer, which reduces our
overall customer turnover rate.





In
addition, we have different strategies for marketing to customers in newly
constructed network areas and to customers in established network areas. In new
areas, prior to activation of our services, we target customers with
door-to-door solicitations and outbound telemarketing as part of an extensive
marketing campaign in the area. In established areas, we assign territories to
individual direct sales representatives, allowing them to adjust sales
techniques to fit the profile of different buyers in particular areas. We have
also established relationships with certain strategic partners, such as local
grocery stores, to market through certain products and services.





We work
to gain customer referrals for additional sales by focusing on service and
customer satisfaction. We have implemented several retention and customer
referral tactics, including customer newsletters, personalized e-mail
communications and loyalty programs. These programs are designed to increase
loyalty, retention and up-sell among our current base of customers.





Customer
Care, Billing and Installation





Customer
Care





We
believe that the combination of bundled communications services on our own
networks and quality customer care are key drivers to effectively compete in the
residential and business markets. We believe that the quality of service and
responsiveness differentiates us from many of our competitors. We provide
customer service 24 hours a day, seven days a week. Our representatives are
cross-trained to handle customer service transactions for all of our products.
We operate a virtual customer phone center system, with centers in Austin and
San Marcos, that handle all customer service transactions other than network
trouble calls, which we handle through our technical service center also located
in San Marcos. In addition, we provide our business customers with a local
customer service representative, which we believe improves our responsiveness to
customer needs and distinguishes our products in the market. We believe it is a
competitive advantage to provide our customers with the convenience of a single
point of contact for all customer service issues for our video, voice and HSD
services and is consistent with our bundling strategy.





We
monitor our networks 24 hours a day, seven days a week through our network
operations and control center (“NOCC”) located in San Marcos. Typically, our
NOCC allows us to detect problems before or as soon as any service interruption
occurs. We strive to resolve service delivery problems prior to customer
awareness of any service interruptions.





6
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Billing





We have
invested significant resources in outsourced integrated provisioning and billing
systems that we believe are sufficiently scalable to support a full build-out in
our existing markets and beyond for our retail customer base. This system
greatly enhances our ability to address customer billing issues and also enables
us to send a single bill to our customers for video, voice and HSD services. We
have separate billing platforms for enterprise, broadband transport and network
services that we also believe meet our business needs for accuracy and
flexibility.





Installation





Within
each market, we have a single group of installers who install the equipment for
all our of our video, voice, and HSD offerings. This creates operating
efficiencies for us by reducing the number of necessary installation personnel
and allowing us to make one trip to the customer premises at the commencement of
service. Our dispatch, order taking and installation management processes are
coordinated for increased efficiency. We believe that this integrated and
streamlined installation process creates a positive experience for Grande’s
customers.





Industry





In recent
years, regulatory developments have led to changes and increased competition,
both intra-modal and inter-modal, in the communications industry. The
Telecommunications Act of 1996 and its implementation through Federal
Communications Commission (“FCC”) regulations have broken down barriers between
providers of different types of communications services. Companies that were
effectively limited to providing one telecommunications service can now provide
additional services with fewer regulatory restrictions or
requirements.





We
believe the industry is moving more towards an environment of inter-modal
competition where both the cable television providers and the local telephone
providers, and to some extent wireless service providers, will be competing head
to head for local telephone, long distance, cable television or other video, and
high speed data service. Advances in technology have furthered convergence in
the industry by enabling delivery of cable television or video services,
telephone services and broadband Internet services over different types of
networks and making the delivery of more than one service over one broadband
network, whether wireless or wireline, feasible and economical. The cable
companies have introduced telephone services via Voice over Internet Protocol
(“VoIP”) to residential customers, and the local telephone providers are
investing large amounts of capital into new networks to offer television or
video service using IP-enabled technologies in addition to their existing
telephone and DSL services. Verizon Communications Inc. (“Verizon”) is
constructing fiber-to-the-home networks and AT&T Inc. (“AT&T”) has begun
serving customers via a fiber-to-the-curb network, in an effort to sell
television over IP. Separately, advances in technology are enabling providers of
wireless service to accommodate the transmission of video and other broadband
applications.





Additionally,
consolidation is continuing in the industry. Verizon purchased MCI Inc. in
January 2006, and SBC Communications Inc. acquired AT&T in November 2005 and
BellSouth Corporation in December 2006 and has adopted the AT&T name. We
believe this consolidation trend will continue for the foreseeable future. As in
the past, we will have to compete against companies that have significant
competitive advantages over us, including more years of experience, greater
resources, significant mass marketing capabilities and broader name
recognition.





We also
anticipate having to compete with the growing availability of wireless
high-speed Internet access, or Wi-Fi service, principally when offered by
municipal authorities or authorized third parties in a particular geographic
region. Wi-Fi services, particularly when combined with VoIP or other advanced
IP-based applications, can enable users to communicate by phone, access the
Internet, or engage in other broadband activities, typically at a minimal
flat-rate charge. The development and deployment of municipal Wi-Fi networks is
still at an early stage, and it is difficult to predict the extent to which it
will affect the provision of similar services by commercial companies such as
ours.





We
believe as the market continues to converge across product and market segments,
communications providers will have to distinguish themselves from competitors by
offering: high quality products, services, and applications across all service
types; better pricing that reflects some of the operational efficiencies; and
convenience to the customer in the form of a single bill and unified customer
support. We believe that our ability to provide a tailored package of bundled
services developed from a wide range of service options at competitive prices
over one network system with a regional focus on Texas has been a key factor in
enabling us to penetrate our markets.





7
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Markets





The
following table sets forth, in each of our markets, the marketable homes we pass
as of December 31, 2007.








Market Areas
            
            Marketable homespassedAustin/San
      Marcos
            
            
            74,713San
      Antonio
            
            
            63,800Suburban
      Northwest Dallas
            
            
            57,317Waco
            
            
            44,909Corpus
      Christi
            
            
            49,332Midland/Odessa
            
            
            42,734Houston
            
            
            7,253Total
            
            
            340,058





Competition





The
broadband communications industry is highly competitive. We compete primarily on
the basis of the price, availability, reliability, variety, quality of our
offerings, our people, and on the quality of our customer service. Our ability
to compete effectively depends on our ability to maintain high-quality services
at prices generally equal to or below those charged by our competitors. Price
competition in the retail services and broadband transport services markets
generally has been intense and is expected to continue, although cable rates
increase annually and AT&T recently raised its DSL rates.





We are
not the first provider of any of our three principal bundled services in any of
our markets. We compete with numerous other companies that have provided
services for longer periods of time in each of our markets, and we often have to
convince people to switch from other companies to Grande. Some of our
competitors have significant competitive advantages over us, such as more years
of experience, greater resources, significant mass marketing capabilities and
broader name recognition. Our primary competitors include:





•
            for
      video services: Time Warner Cable, Cable One Inc. (“Cable One”),
      Suddenlink Communications, Comcast Corporation (“Comcast”), Charter
      Communications Inc. (“Charter Communications”), DIRECTV Holdings LLC
      (“DIRECTV”), DISH Network Corporation (“DISH Network”), AT&T, Verizon
      and others;





•
            for
      HSD services: AT&T, Time Warner Cable, Time Warner Telecom, Verizon,
      Comcast, Charter Communications, Cable One, Suddenlink Communications,
      CenturyTel Inc. (“CenturyTel”), Direct-PC and
  others;





•
            for
      long-distance telephone services: AT&T, Verizon, Sprint, Time Warner
      Cable, Time Warner Telecom, Suddenlink Communications (VoIP), Vonage
      Holdings Corp (“Vonage”) (VoIP) and
others;





•
            for
      local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom
      Inc. (“Birch Telecom”), Time Warner Cable, Time Warner Telecom, Suddenlink
      Communications (VoIP), Vonage (VoIP) and
others.





Advances
in communications technology as well as changes in the marketplace and the
regulatory and legislative environment are constantly occurring. In certain
areas of our markets, for example in Austin, we compete for local and long
distance services against the VoIP offerings of Vonage and Time Warner Cable. In
addition, the continuing trend toward business combinations and alliances in the
telecommunications industry will create significant new competitors. As a result
of these business combinations and the introduction of VoIP offerings, we
anticipate that the competitive environment will become increasingly intense. In
addition to terrestrial competition, we continue to see consumers choose to
eliminate a second line, their long distance, and/or their primary landline and
use wireless telephone service instead. This dynamic is more prevalent in
younger, more transient households such as MDUs in which students or young
adults tend to move every twelve to eighteen months. Advances in technology also
are leading to changes in video distribution platforms, making downloadable,
on-demand video content accessible in both traditional wireline and new wireless
mobile viewing devices. These and other developments are requiring traditional
communications providers such as us to regularly rethink the model for
successfully marketing and providing video, voice and HSD content and services
to consumers.





8
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Bundled
Services





We
believe that, among our existing competitors, incumbent cable providers, ILECs,
CLECs and satellite television providers represent our primary competitors in
the delivery of a bundle of two or more video, voice and HSD services.
Presently, Time Warner Cable and AT&T routinely offer a combination of two
or more of these services in our markets. In some of our markets, these
companies also are offering all three services. We expect the remaining ILECs
and incumbent cable providers that do not yet offer more than one service to
begin to offer combinations of these services in the near future, and we expect
that some providers will bundle these services with a fourth product, wireless
service. The introduction of bundled service offerings by our competitors could
have a significant adverse impact on our ability to market our bundled services
to customers, especially in areas where we currently are the only company
offering bundles of these services.





•
            Video.Our video service competes with the incumbent cable television
      provider in all of our markets except in certain private-development
      subdivisions and MDUs where we currently are the only cable provider. The
      incumbent cable providers in our markets, such as Time Warner Cable in
      Austin, San Antonio, Corpus Christi and Waco; Cable One in Odessa;
      Suddenlink Communications in Midland and Austin; and Comcast in northwest
      Dallas, have significantly greater resources and operating history than we
      do. We also compete with satellite television providers such as DIRECTV,
      as well as other cable television providers, broadcast television stations
      and wireless cable services. We face additional competition from private
      satellite master antenna television systems that serve condominiums,
      apartment and office complexes and private residential developments, and
      these systems generally are free of any regulation by state or local
      government authorities.





Legislative
and regulatory developments may lead to additional competition in the cable and
video market. The Cable Television Consumer Protection and Competition Act of
1992 contains provisions, which the FCC has implemented through regulations, to
enhance the ability of competitors to cable to purchase and make available to
consumers certain satellite-delivered cable programming at competitive costs.
The Telecommunications Act of 1996 eliminated many of the restrictions on local
telephone companies that offer cable programming, and we may face increased
competition from such companies. Major local telephone companies such as Verizon
and AT&T now provide cable television or similar video services to homes and
may compete with us to the extent they modify or overbuild their networks to
sell these services to the same homes we serve now or will serve in the future.
AT&T, for example, has launched an Internet Protocol-based video service to
some of its customers in Texas. Verizon has been overbuilding its own network
and extending it into greenfield communities, which require the construction of
new local loops, through a FTTH architecture (known commercially as FIOS) to
enable the delivery of its cable service. Verizon already has launched its cable
service in north Texas, and it currently passes approximately 3% of the homes in
our service region. Verizon also offers IP-enabled video offerings.





We obtain
our cable programming by entering into arrangements or contracts with cable
programming suppliers. Currently, a programming supplier that delivers its
programming terrestrially (as opposed to by satellite) may be able to enter into
an exclusive arrangement with one of our cable competitors for the delivery of
certain programming, creating a competitive disadvantage for us by restricting
our access to that programming. This generally involves local and regional
programming, such as news and sporting events.





Some of
our competitors may purchase programming at more advantageous rates due to their
size and the availability of volume discounts. We purchase a large portion of
our programming using the services of a national cooperative that seeks to
obtain more favorable pricing on behalf of smaller cable providers
nationwide.





The FCC
and Congress have adopted laws and policies that today provide, and may in the
future provide, in some cases a more favorable operating environment for new and
existing technologies that may compete with our various video distribution
systems. These technologies today include, among others, direct broadcast
satellite service in which signals are transmitted by satellite to receiving
facilities located on customer premises. In the future, these technologies could
include, among others, video distribution systems that provide service to mobile
phones or other hand-held devices.





•
            Voice.Our principal competitor for local services is the incumbent
      carrier in the particular market, which is AT&T in a large majority of
      our market areas. Incumbent carriers enjoy substantial competitive
      advantages arising from their historical monopoly position in the local
      telephone market, including pre-existing customer relationships with all
      or virtually all end-users. We also face competition from alternative
      service providers, including competitive providers and other CLECs, many
      of which already have established local operations in our markets. Cable
      service providers have also entered the voice communication market in some
      of our service areas. Time Warner Cable and Suddenlink Communications, for
      example, are offering a VoIP telephony product in their service areas,
      some of which overlap with ours. Other VoIP providers such as Vonage and
      Skype have also entered the telephony
market.





We expect
to continue to face significant competition for long-distance telephone services
from incumbent long-distance providers such as AT&T, Verizon and Sprint,
which together account for the majority of all U.S. long-distance revenues. The
major long-distance service providers benefit from established market share,
both in traditional direct-dial services as well as in prepaid and dial-around
products, and from established trade names through nationwide advertising. We
regard our long-distance service as a complementary service rather than a
principal source of revenues. However, certain incumbents, including AT&T,
Verizon and Sprint, also view their long-distance service in a similar way and
are able to offer local services in their markets using their existing network.
Additional new threats may present themselves if incumbent carriers continue to
acquire or merge with other large providers of telecommunications services. The
AT&T and Verizon acquisitions and others like them could provide incumbent
carriers with additional, considerable competitive resources, particularly in
the market for long distance, broadband transport and network services, thereby
strengthening their market position and their ability to compete with
us.





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We also
face competition in the local and long-distance telephone market from wireless
carriers. We believe that the assumption that wireless telephone service is
viewed primarily, although not entirely, by consumers as a supplement to, and
not a replacement for, traditional wireline telephone service is under
increasing pressure. Wireless service generally is more expensive than
traditional telephone service and is priced on a usage-sensitive basis. However,
the rate differential between wireless and traditional telephone service has
begun to decline and is expected to decline further and lead to more competition
between providers of wireline and wireless telephone services. Expansion of IP
technology in the wireless industry will be expected to further narrow the
historic price differential. Although customers generally continue to subscribe
to their landline telephone service, wireless service may become an even bigger
threat to the traditional telephone market as usage rates for wireless service
continue to decline and “buckets” of nationwide wireless telephone minutes are
offered for flat monthly rates. We also believe that younger consumers are
beginning to view wireless as a substitute, rather than a supplement to
terrestrial wireline services.





We also
increasingly face competition from businesses, including incumbent cable
providers, offering long-distance services through VoIP. These businesses could
enjoy a significant cost advantage because, at this time, they generally do not
pay carrier access charges although interconnect VoIP providers are now required
to pay federal universal service fees. As explained more fully below under the
caption “—Legislation and Regulation,” the regulatory status of VoIP service
continues to be considered by the FCC, various states and reviewing courts; and
while the FCC has made some preliminary determinations about VoIP already, a
number of important regulatory issues have not yet been resolved fully. The
conclusions reached by federal and state agencies and courts largely will
determine the viability and profitability of VoIP service, and, possibly, the
success of our competitors offering this service. Currently, AT&T, Time
Warner Cable, Suddenlink Communications, Cable One, Comcast and Vonage each
provide a VoIP offering in certain of our market areas.





•
            HSD
      Services.The Internet access market is extremely competitive and
      highly fragmented. Providing broadband Internet services is a rapidly
      growing business and competition is increasing in each of our markets.
      Some of our competitors benefit from stronger name recognition and greater
      resources, experience and marketing capabilities. For HSD services, we
      compete primarily with AT&T, Time Warner Cable, Verizon, Suddenlink
      Communications, Cable One, Comcast, Charter Communications, CenturyTel,
      Direct-PC, Earthlink and STIC.NET. Other competitors include traditional
      dial-up Internet service providers, providers of satellite-based Internet
      services, other local and long-distance telephone companies and cable
      television companies. We also expect to compete with providers of wireless
      high-speed Internet access, or Wi-Fi service, principally when offered by
      municipal authorities or authorized third parties in a particular
      geographic region. New technologies, such as Access Broadband over Power
      Line, continue to emerge as well.





Many
companies provide individuals and businesses with direct access to the Internet
and a variety of supporting services. In addition, many companies such as
Microsoft Corporation and AOL offer online services consisting of access to
closed, proprietary information networks with services similar to those
available on the Internet, in addition to direct access to the Internet. These
companies generally offer broadband Internet services over telephone lines using
computer modems. Some of these Internet service providers also offer high-speed
integrated services using digital network connections, cable modems or DSL
connections to the Internet, and their focus on delivering high-speed services
is expected to increase. Cable television companies also have entered the
high-speed Internet access market using cable modems and broadband
facilities.





Broadband
Transport Services





We have a
wide range of competitors in the provisioning of broadband transport services.
We generally compete with communications companies that have fiber in the
markets where we have our metro and long-haul facilities.





10
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Network
Services





We have a
wide range of competitors in the provisioning of network services. We compete
with virtually all communications companies that own their own network
equipment.





Legislation
and Regulation





The cable
television industry is primarily regulated by the FCC and local governments,
although in Texas, Grande currently is subject only to state rather than local
government franchising requirements. Telecommunications services are regulated
by the FCC and state public utility commissions, including the Public Utility
Commission of Texas (PUCT). Internet service, including high-speed access to the
Internet, generally is not subject to significant regulation although this may
change in the future. Legislative and regulatory proposals under consideration
by Congress, federal agencies and the Texas legislature may materially affect
the provision, cost and profitability of video, voice and HSD services. Set
forth below is a brief summary of significant federal laws and regulations
affecting the growth and operation of the cable television and
telecommunications industries and a description of certain state and local
laws.





Regulation
of Cable Services





Federal
Regulation of Cable Services





The FCC,
the principal federal regulatory agency with jurisdiction over cable television,
has promulgated regulations covering many aspects of cable television operations
pursuant to federal laws governing cable television. The FCC may enforce its
regulations through the imposition of fines, the issuance of cease and desist
orders and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses, permits and authorization. A brief summary of
certain federal regulations follows.





Rate Regulation. The Cable
Television Consumer Protection and Competition Act of 1992 authorized rate
regulation for certain cable communications services and equipment in
communities where the cable operator is not subject to effective competition.
Pursuant to the Telecommunications Act of 1996, as of April 1, 1999, only the
basic tier of cable television service, which does not include the expanded
basic tier of cable television service, and equipment used to receive the basic
tier of cable television service remain subject to rate regulation. Basic rates
of operators not subject to effective competition are subject to limited
regulation by local franchising authorities that choose to regulate these
rates.





The Cable
Television Consumer Protection and Competition Act of 1992 requires local
franchising authorities that choose to regulate basic service rates to certify
with the FCC before regulating such rates. The FCC’s rate regulations do not
apply where a cable operator demonstrates that it is subject to effective
competition. The Company meets the FCC definition of effective competition in
the areas that we currently serve. To the extent that any municipality attempts
to regulate our basic rates or equipment, we believe we could demonstrate to the
FCC that our systems all face effective competition and, therefore, should not
be subject to rate regulation. Further, in Texas, Grande’s cable service
operates under a state-issued franchise and is not subject to separate
regulation of rates by municipalities.





Carriage of Broadcast Television
Signals. The Cable Television Consumer Protection and Competition Act of
1992 established broadcast signal carriage requirements. These requirements
allow commercial television broadcast stations that are local to a cable system
to elect every three years whether to require the cable system to carry the
station (“must-carry”) or whether to require the cable system to negotiate for
consent to carry the station (“retransmission consent”). The most recent
must-carry/retransmission consent elections were made in December 2005. Stations
generally are considered local to a cable system where the system is located in
the station’s Nielsen designated market area. Cable systems must obtain
retransmission consent for the carriage of all distant commercial broadcast
stations, except for certain superstations, which are commercial
satellite-delivered independent stations such as WGN. We carry some stations
pursuant to retransmission consent agreements.





Local
non-commercial television stations also are given mandatory carriage rights,
subject to certain exceptions, within a limited radius. Non-commercial stations
are not given the option to negotiate for retransmission consent.





The FCC
has adopted rules for the carriage of digital broadcast signals, but has
declined to adopt rules that would require cable systems to carry both the
analog and digital signals of television stations entitled to must-carry rights
during those stations’ transition to full digital operations. The FCC also has
declined to adopt rules that would require cable television systems to carry
more than a single programming stream from any particular television broadcaster
that has converted to a digital format. If these decisions are modified in the
future and “dual carriage” and “multicasting” requirements are adopted, we, like
other cable operators, may have to discontinue or forego the opportunity to
transmit other channels of programming due to the capacity of our systems. The
Chairman of the FCC as well as some members of Congress have also recently
stated that they believe the FCC should consider whether consumers should be
permitted to purchase channels individually on an a-la-carte basis. The cable
industry is strongly opposed to this suggestion. If it were adopted, it could
materially and adversely impact the financial condition of all cable companies,
including Grande.





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As the
marketplace for the programming and distribution of broadcast television
evolves, so too may our rights and obligations as a provider of cable service,
particularly in connection with the programming we purchase from broadcast
television networks and other programmers. For instance, when the FCC consented
to the purchase of DIRECTV by News Corp., the owner of the Fox television
network, making News Corp. a vertically-integrated broadcast television network
and nationwide multi-channel video programming distributor, the FCC did so
subject to certain conditions. Some of these conditions could affect our ability
to carry or purchase programming. For instance, with respect to News Corp.’s Fox
television network:





•
            Cable
      operators may submit disputes with a News Corp. broadcast television
      station over the terms and conditions of a retransmission consent
      negotiation to commercial arbitration. While the arbitration is pending,
      the News Corp. station may not deny its continued carriage as long as it
      is not a first time request for carriage. An aggrieved cable operator may
      seek review of an arbitrator’s decision by the
  FCC.





•
            A
      cable operator with fewer than 400,000 total subscribers may appoint a
      bargaining agent to bargain collectively on its behalf in negotiating with
      News Corp.’s broadcast television stations for retransmission
      consent.





Nonduplication of Network
Programming. Cable television systems that have 1,000 or more subscribers
must, upon the appropriate request of a local television station, delete or
“black out” the simultaneous or non-simultaneous network programming of a
distant same-network station when the local station has contracted for such
programming on an exclusive basis.





Deletion of Syndicated
Programming. Cable television systems that have 1,000 or more subscribers
must, upon the appropriate request of a local television station, delete or
“black out” the simultaneous or non-simultaneous syndicated programming of a
distant station when the local station has contracted for such programming on an
exclusive basis.





Registration Procedures and
Reporting Requirements. Prior to commencing operation in a particular
community, all cable television systems must file a registration statement with
the FCC listing the broadcast signals they will carry and certain other
information. Additionally, cable operators periodically are required to file
various informational reports with the FCC.





Exclusive Service Agreements with
MDUs.  In November 2007, the FCC issued an order prohibiting
exclusive cable service arrangements between MDUs and cable
providers.  The order, which applies to all such agreements, existing
and future, was intended to bring more choice and competitive pricing for cable
services to MDU residents.  AT&T and Verizon would be allowed to
provide competing video service to all MDUs, if the order is upheld in the
courts.  Several legal actions to challenge the order have been filed,
focusing primarily on the retroactive application of the prohibition to existing
contracts, and resolution in the judicial system will take many months if not
years.  The Fifth Circuit Court of Appeals has denied a request to
stay the effect of the FCC’s order pending appeal.  Since Grande has
exclusive cable service agreements with several MDUs, its market share in those
properties could significantly drop if the order is upheld and other video/cable
providers enter the properties.  On the other hand, Grande is
prevented from competing in even more MDU properties that have exclusive
agreements with the incumbent cable provider, so it is also possible that Grande
would be able to acquire additional cable subscribers in these properties if the
order is upheld.  The limiting factor in such a scenario would be
availability of the capital required to extend Grande’s network into the MDUs
and the ability to successfully compete against companies that have significant
competitive advantages over us, including more years of experience, greater
resources, significant mass marketing capabilities and broader name
recognition.





Technical Requirements.
Historically, the FCC has imposed technical standards applicable to the cable
channels on which broadcast stations are carried and has prohibited franchising
authorities from adopting standards which were in conflict with or more
restrictive than those established by the FCC. The FCC has applied its standards
to all classes of channels that carry downstream National Television System
Committee video programming. The FCC also has adopted standards applicable to
cable television systems, including Grande, using frequencies in certain bands
in order to prevent harmful interference with aeronautical navigation and safety
radio services and also has established limits on cable system signal leakage.
Operators are required to conduct tests and to file with the FCC results of
those cumulative leakage-testing measurements. Operators that fail to make this
filing or exceed the FCC’s allowable cumulative leakage index risk being
prohibited from operating in those frequency bands and risk incurring monetary
fines or other sanctions.





The Cable
Television Consumer Protection and Competition Act of 1992 requires the FCC to
update periodically its technical standards. Pursuant to the Telecommunications
Act of 1996, the FCC adopted regulations to assure compatibility among
televisions, VCRs and cable systems, leaving all features, functions, protocols
and other product and service options for selection through open competition in
the market. The Telecommunications Act of 1996 also prohibits states or
franchising authorities from prohibiting, conditioning or restricting a cable
system’s use of any type of subscriber equipment or transmission technology. The
FCC also has adopted technical standards in connection with cable systems’
carriage of digital television signals.





12
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Franchise Authority. The
Cable Communications Policy Act of 1984 affirmed the right of franchising
authorities to award franchises within their jurisdictions and prohibited
non-grandfathered cable systems from operating without a franchise in such
jurisdictions. The Cable Television Consumer Protection and Competition Act of
1992 encouraged competition with existing cable systems in several areas,
including by:





•
            allowing
      municipalities to operate their own cable systems without
      franchises;





•
            preventing
      franchising authorities from granting exclusive franchises or from
      unreasonably refusing to award additional franchises covering an existing
      cable system’s service area; and





•
            prohibiting,
      with limited exceptions, the common ownership of cable systems and
      co-located multi-channel multipoint distribution or satellite master
      antenna television systems, which prohibition is limited by the
      Telecommunications Act of 1996 to cases in which the cable operator is not
      subject to effective competition.





The
Telecommunications Act of 1996 exempted telecommunications services provided by
a cable operator or its affiliate from cable franchise requirements, although
municipalities retain authority, subject to state law, to regulate the manner in
which a cable operator uses public rights-of-way to provide telecommunications
services.





Franchising
authorities also may not require a cable operator to provide telecommunications
service or facilities, other than institutional networks, as a condition of a
franchise grant, renewal, or transfer. Similarly, franchise authorities may not
impose any conditions on the provision of such service.





The State
of Texas passed a law in late 2005 allowing cable operators to file for a
state-issued certificate of franchise authority (SICFA) for the provision of
cable television and video services in any service area footprint within the
state of Texas rather than negotiate with each individual municipality for such
a right. On October 25, 2005, the Public Utility Commission of Texas (PUCT)
approved Grande’s application for a SICFA to provide cable television service in
twenty-seven municipalities and in eleven unincorporated areas of Texas. When
Grande’s SICFA was approved, all of Grande’s municipal cable television
franchises were terminated. Since that time, Grande has applied for and had
approved amendments to the SICFA adding to and modifying the footprint of its
service areas.





Under its
SICFA, Grande makes quarterly franchise fee payments to the Texas Comptroller
for the benefit of each municipality in which it provides cable television
service in the amount of five percent of gross cable service revenues, and
Grande reports its subscriber count in each municipality. In cities where the
incumbent cable TV provider is still subject to a municipal franchise, the
municipalities then notify Grande of its quarterly Public, Educational and
Government (PEG) obligation based on Grande’s share of total subscribers
multiplied by the total PEG contribution that the incumbent cable TV provider
made in the quarter. In cities where the incumbent provider’s municipal
franchise has expired and the incumbent has obtained a SICFA, Grande and the
incumbent pay the city a PEG fee equal to one percent of their gross cable
service revenues, or at the city’s option, a flat per subscriber monthly fee
that was required by the city before the incumbent’s franchise expired. Grande
also continues to provide free cable television service to public facilities and
INet fiber connectivity to cities that were in place when the SICFA was
approved. Under the SICFA, Grande continues to provide carriage of all PEG
channels that were carried prior to October 25, 2005, and all municipalities
retain control and police powers over their public rights of way.





Congress
separately is considering legislation that would create a national framework for
the issuance of cable television franchises. Various proposals for national
franchises have been introduced and are pending. Although these proposals would
not likely affect our operations given our regional focus, a national franchise
law could enable our competitors, principally AT&T and Verizon, who are
planning to deploy cable television or other video services in multiple
jurisdictions within their large service areas, to enter the market for video
services more quickly, much like they can today in Texas under their SICFA.
This, in turn, could enhance their ability to compete against us in our
markets.





Franchise Transfer. The
Telecommunications Act of 1996 repealed most of the anti-trafficking
restrictions imposed by the Cable Television Consumer Protection and Competition
Act of 1992, which prevented a cable operator from selling or transferring
ownership of a cable system within 36 months of acquisition. However, a local
franchise nevertheless may require the prior approval of the franchising
authority for a transfer or sale. The Cable Television Consumer Protection and
Competition Act of 1992 requires franchising authorities to act on a franchise
transfer request within 120 days after receipt of all information required by
FCC regulations and the franchising authority. Approval is deemed granted if the
franchising authority fails to act within such period. It is uncertain at this
time whether any of the national franchising proposals being considered in
Congress would affect such franchise transfer issues.





Program Access and
Exclusivity. The Cable Television Consumer Protection and Competition Act
of 1992 and the FCC’s rules generally prohibit cable operators and
vertically-integrated satellite programmers from entering into agreements that
have the purpose or effect of preventing or substantially hindering the ability
of multi-channel video programming distributors from providing satellite
programming to their subscribers. The rules specifically prohibit vertically
integrated cable operators from entering into exclusive distribution agreements
with satellite programmers in which they have an attributable interest. The
rules were set to expire in October 2007, but were extended by the FCC to
October 2012.





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The
program access rules currently do not restrict a vertically integrated cable
operator from offering terrestrially delivered programming on an exclusive
basis. If vertically integrated competitors obtain exclusive programming
agreements, they may gain competitive advantages that adversely affect the
ability to grow our business.





The FCC’s
Order consenting to the DIRECTV-News Corp. merger prohibits News Corp. from
offering any existing or future national and regional programming services on an
exclusive or discriminatory basis. News Corp. also is prohibited from unduly or
improperly influencing any of its affiliated programming services in the sale of
programming to unaffiliated cable operators. Additionally, as noted above, News
Corp. is subject to certain conditions regarding its ownership of numerous
regional sports programming networks.





Channel Set-Asides. The Cable
Communications Policy Act of 1984 permits local franchising authorities to
require cable operators to set aside certain channels for PEG access
programming. It also requires cable television systems with 36 or more activated
channels to designate a portion of their channel capacity for commercial leased
access by unaffiliated third parties. The Cable Television Consumer Protection
and Competition Act of 1992 requires leased access rates to be set according to
a FCC-prescribed formula.





Ownership. The
Telecommunications Act of 1996 eliminated the Cable Communications Policy Act of
1984’s general prohibition on the provision of video programming by local
exchange carriers to customers within their local exchange telephone service
areas. Under the Telecommunications Act of 1996, local exchange carriers may,
subject to certain restrictions described below, provide video programming by
radio-based systems, common carrier systems, open video systems, or cable
systems, subject to regulations applicable to each type of service.
Technological developments are expected to enable local exchange carriers to
provide video programming over broadband connections to the Internet as well.
The degree to which such carriers must comply with the rules governing cable
systems, including franchising requirements, has not yet been addressed by
regulators.





The
Telecommunications Act of 1996 prohibits a local telephone company or its
affiliate from acquiring more than a 10% financial or management interest in any
cable operator providing cable television service in its telephone service area.
It also prohibits a cable operator or its affiliate from acquiring more than a
10% financial or management interest in any local telephone company providing
telephone service in its franchise area. A local telephone company and cable
operator whose telephone service area and cable franchise area are in the same
market may not enter into a joint venture to provide telecommunications services
or video programming. There are exceptions to these limitations for rural
facilities, very small cable systems and small local telephone companies in
non-urban areas, and such restrictions do not apply to local exchange carriers
that were not providing local telephone service prior to January 1,
1993.





Internet Access via Cable Modem.The FCC has determined in the Cable Modem Access NOPR that cable modem
service is an information service and thus is not subject to local regulation as
a cable service and thus is not subject to the payment of franchise fees. This
regulatory classification has been upheld by the Supreme Court.





Pole Attachments. The
Telecommunications Act of 1996 requires utilities, defined to include all local
exchange telephone companies and public utilities except those owned by
municipalities and co-ops, to provide cable operators and telecommunications
carriers with nondiscriminatory access to poles, ducts, conduit and
rights-of-way. The right to mandatory access is beneficial to facilities-based
providers such as Grande. The Telecommunications Act of 1996 also establishes
principles to govern the pricing of such access. Telecommunications providers
are charged a higher rate than cable operators for pole attachments. Companies
that provide both cable and telecommunications services over the same
facilities, such as us, may be required to pay the higher telecommunications
rate; but the Supreme Court has confirmed that commingling high-speed Internet
access with cable or telecommunications attachments does not change the pole
attachment rate. At this time, we believe the rental rate at which utility pole
owners can charge cable operators offering VoIP services is
unclear.





Inside Wiring of Multiple Dwelling
Units. The FCC has adopted rules to promote competition among
multichannel video program distributors in multiple family dwelling units, or
MDUs. The rules provide generally that, in cases where the program distributor
owns the wiring inside an MDU but has no right of access to the premises, the
MDU owner may give the program distributor notice that it intends to permit
another program distributor to provide service there. The program distributor
then must elect whether to remove the inside wiring, sell the inside wiring to
the MDU owner at a price not to exceed the replacement cost of the wire on a
per-foot basis or abandon the inside wiring.





Privacy. The Cable
Communications Policy Act of 1984 imposes a number of restrictions on the manner
in which cable system operators can collect and disclose data about individual
system customers. The statute also requires that the system operator
periodically provide all customers with written information about its policies
regarding the collection and handling of data about customers, their privacy
rights under federal law and their enforcement rights. In the event that a cable
operator is found to have violated the customer privacy provisions of the Cable
Communications Policy Act of 1984, it could be required to pay damages,
attorneys’ fees and other costs. Under the Cable Television Consumer Protection
and Competition Act of 1992, the privacy requirements were strengthened to
require that cable operators take such actions as are necessary to prevent
unauthorized access to personally identifiable information. Congress and the FCC
are considering, and in the future may again consider, additional restrictions
intended to safeguard consumer privacy. The extent to which these laws and
regulations, if promulgated, will affect our cable television operations is not
clear at this time.





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Copyright. Cable television
systems are subject to federal compulsory copyright licensing covering carriage
of broadcast signals. In exchange for making semi-annual payments to a federal
copyright royalty pool and meeting certain other obligations, cable operators
obtain a statutory license to retransmit broadcast signals. The amount of the
royalty payment varies, depending on the amount of system revenues from certain
sources, the number of distant signals carried and the location of the cable
system with respect to over-the-air television stations. Adjustments in
copyright royalty rates are made through an arbitration process supervised by
the U.S. Copyright Office.





Various
bills have been introduced in Congress in the past several years that would
eliminate or modify the cable television compulsory license. Without the
compulsory license, cable operators might need to negotiate rights from the
copyright owners for each program carried on each broadcast station
retransmitted by the cable system.





Internet Service Providers. A
number of Internet service providers have requested that the FCC and state and
local officials adopt rules requiring cable operators to provide unaffiliated
Internet service providers with direct access to the operators’ broadband
facilities on the same terms as the operator makes those facilities available to
affiliated Internet service providers. To date, the FCC has rejected these equal
access proposals, but a number of local franchising authorities outside our
service territory have in the past sought to impose this type of requirement on
cable operators and may try to do so again in the future. Some cable operators,
including Grande, have agreed to open their systems to competing Internet
service providers or have been required to do so as a condition of a merger. The
FCC has more recently indicated that such requirements may no longer be
necessary so long as consumers are able to have unrestricted access to
alternative providers once the consumer accesses the Internet.





Regulatory Fees and Other
Matters. The FCC requires payment of annual regulatory fees by the
various industries it regulates, including the cable television industry. Fees
are also assessed for other FCC licenses often used by cable television
operators, including licenses for business radio, cable television relay systems
and earth stations.





FCC
regulations also address:





•
            political
      advertising;





•
            local
      sports programming;





•
            restrictions
      on origination and cablecasting by cable system
  operators;





•
            application
      of the rules governing political
broadcasts;





•
            customer
      service standards;





•
            limitations
      on advertising contained in non-broadcast children’s programming;
      and





•
            closed
      captioning.





Regulation
of Telecommunications Services





Our
telecommunications services are subject to varying degrees of federal, state and
local regulation. Pursuant to the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, the FCC generally exercises jurisdiction over
the facilities of, and the services offered by, telecommunications carriers that
provide interstate or international communications services. State regulatory
authorities generally retain jurisdiction over the same facilities and other
services to the extent that they are used to provide intrastate and local
communications services.





Federal
Regulation of Telecommunications Services





Tariffs and Licensing. The
Company is classified as a non-dominant long distance carrier and as a
competitive local exchange carrier by the FCC. The FCC requires non-dominant
long distance companies to detariff interstate long distance domestic and
international services. The FCC also permits competitive local exchange carriers
to either (1) detariff the interstate access services that they sell to long
distance companies or (2) maintain tariffs but comply with certain rate caps.
Prior to detariffing, we filed tariffs with the FCC to govern our relationship
with most long-distance customers and companies. The detariffing process
requires us to, among other things, post the rates, terms, and conditions
formerly in our tariffs on our website instead of filing them at the FCC.
Because detariffing precludes us from filing our tariffs at the FCC, we may no
longer be subject to the “filed rate doctrine,” which stands for the proposition
that the tariff controls all contractual disputes between a carrier and its
customers. This may expose us to certain legal liabilities and costs as we can
no longer rely on this doctrine to settle disputes with customers. The FCC still
requires companies such as us to obtain licenses under Section 214 of the
Communications Act of 1934, as amended, to provide international long-distance
calling service. We hold such international authority from the FCC.





15
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Interconnection. The
Telecommunications Act of 1996 establishes local telephone competition as a
national policy. This Act preempts laws that prohibit competition for local
telephone services and establishes uniform requirements and standards for local
network interconnection, unbundling and resale. Interconnection, unbundling and
resale standards were developed initially by the FCC and have been, and will
continue to be, implemented by both the FCC and the states in numerous
proceedings.





In August
1996, the FCC adopted a wide-ranging decision regarding the interconnection
obligations of local telephone carriers. This Interconnection Order specified,
among other things, which network elements (and combinations of elements)
incumbent carriers must unbundle and provide to competitive carriers on a
nondiscriminatory basis. The FCC’s initial list of network elements and
combinations was affirmed by the Supreme Court, but has since been subject to
further review by the FCC and, after several rounds of review by the courts, has
been pared significantly. In June 2006, the D.C. Circuit approved the FCC’s
fourth attempt to implement the unbundling provisions of the Telecommunications
Act of 1996.  Changes to the list of network elements and combinations
have had, and may continue to have, a significant impact on the industry and, to
a lesser extent, the Company.





The FCC’s
Interconnection Order also established pricing principles, for use by the
states, to determine rates for unbundled network elements and discounts. These
pricing principles also are undergoing further review by the FCC and may change,
which could have a significant impact on the industry and on the
Company.





The
Telecommunications Act of 1996 requires incumbent local telephone carriers to
enter into mutual compensation arrangements with other local telephone companies
for transport and termination of local calls on each other’s networks. In the
past, most state public utility commissions ruled that traffic to Internet
service providers is covered by this requirement. Thus, carriers that counted
traffic-generating Internet service providers as customers benefited from such
reciprocal compensation arrangements. In April 2001, the FCC changed the
compensation mechanism for traffic exchanged between telecommunications carriers
that is destined for Internet service providers. In doing so, the FCC prescribed
a new rate structure for such traffic and prescribed gradually reduced caps for
its compensation. In October 2004, the FCC adopted an order that forbears from
enforcing certain portions of its 2001 ISP-Bound Traffic Order. Under the 2001
order, the amount of ISP-bound traffic eligible for compensation was capped at
120% of eligible traffic for the first quarter of 2001 annualized; and no
compensation for ISP-bound traffic was permitted for new markets entered after
April 2001. The FCC has now determined that it is no longer in the public
interest to apply these rules. Reciprocal compensation revenue is an element of
data services revenue, and the FCC order impacted us negatively, causing a
decrease in revenue beginning in the latter half of 2005. There are several open
issues related to reciprocal compensation, and there is a potential that this
revenue stream could further decrease based on future FCC rulings.





The FCC
launched a new proceeding intended to examine comprehensively the “intercarrier
compensation” rates paid among carriers for exchanging various categories of
traffic, including but not limited to local calls. Several proposals for how the
FCC’s intercarrier compensation rules should be structured also have been
submitted to the FCC by industry groups and coalitions. We cannot predict how
the FCC will act in response to these proposals, or, more generally, in
connection with its intercarrier compensation proceeding. FCC rulings in this
area will affect a large number of carriers and could have a significant impact
on the industry and the Company.





The FCC
has also initiated an investigation of IP-Enabled Services intended to provide
comprehensive guidance on the appropriate regulatory treatment of a broad array
of services, including VoIP. The outcome of both the Intercarrier Compensation
and IP-Enabled Service dockets could have a material impact on our business. We
are not able to predict what that outcome may be or when such orders might be
issued.





Additional Requirements. The
FCC imposes additional obligations on all telecommunications carriers, including
obligations to:





•
            interconnect
      with other carriers and not to install equipment that cannot be connected
      with the facilities of other
carriers;





•
            ensure
      that their services are accessible and usable by persons with
      disabilities;





•
            comply
      with verification procedures in connection with changing a customer’s
      carrier;





•
            pay
      annual regulatory fees to the FCC;
and





•
            contribute
      to the Telecommunications Relay Services Fund, as well as funds to support
      universal service, telephone numbering administration and local number
      portability.





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Forbearance. The
Telecommunications Act of 1996 permits the FCC to forbear from requiring
telecommunications carriers to comply with certain regulations. Specifically,
the Act permits the FCC to forbear from applying statutory provisions or
regulations if the FCC determines that:





•
            enforcement
      is not necessary to protect
consumers;





•
            a
      carrier’s terms are reasonable and
  nondiscriminatory;





•
            forbearance
      is in the public interest; and





•
            forbearance
      will promote competition.





The FCC
has exempted certain carriers from reporting requirements pursuant to this
provision of the Telecommunications Act of 1996. The FCC may take similar action
in the future to reduce or eliminate other requirements. Such actions could free
us from regulatory burdens but also might increase the pricing and general
flexibility of our competitors.





Collocation. The FCC has
adopted rules designed to improve competitor access to incumbent local telephone
carriers’ collocation space and to reduce the delays and costs associated with
collocation, but we cannot be sure that these rules will not change or otherwise
inure to the advantage of incumbent carriers in the future.





Multiunit Premise
Access.In June 2007, the FCC released an order clarifying
that incumbent local exchange carriers are required to provide direct access at
the terminal block to permit a competitor’s technician to cross connect in order
to access the incumbent’s sub-loop to reach end user customers at multiunit
premises.  The ruling is based on an incumbent local exchange
carriers’ statutory obligation to permit interconnection at “any technically
feasible point.”  As a result of this clarification, Grande may have
opportunities to access multiunit premises in a more direct and less costly
manner assuming capital is available to extend its network facilities to reach
the minimum point of entry at these properties. The FCC recently issued an order
prohibiting exclusive telecommunications contracts in residential multi-tenant
environments and prohibiting enforcement of pre-existing agreements between
carriers and building owners.  This decision will have no impact on
Grande because Texas PUC regulations already prohibited such exclusive
arrangements.





Broadband Services.Section
706 of the Telecommunications Act of 1996 requires the FCC to encourage the
deployment of advanced telecommunications capabilities to all Americans through
the promotion of local telecommunications competition. The FCC had in the past
taken steps to facilitate competitors’ access to lines connecting customer
premises to the operator for purposes of digital subscriber line deployment. But
the FCC more recently has declined to take similar steps in connection with more
advanced, newly constructed transmission facilities such as fiber-to-the-home.
In the TRRO proceeding, the FCC held that incumbent local exchange carriers such
as AT&T need not make available to unaffiliated carriers access to most
high-capacity local loops and transport facilities; and the FCC has more
recently determined that facilities-based wireline broadband services such as
DSL are “information services” and thus are subject to minimal regulation.
Separately, Congress has periodically considered initiatives proposing to
deregulate the advanced services offerings of incumbent carriers. If one of
these initiatives becomes law, or if the FCC’s rulings are upheld on appeal, the
use of incumbent carrier facilities for the deployment of competing
high-capacity services by carriers such as Grande may be adversely affected.
This, however, is not a material part of our business since we typically provide
these services over our own network. Relying upon definitions in the
Communications Assistance for Law Enforcement Act (CALEA) rather than the
Telecommunications Act of 1996, the FCC now requires broadband networks to
cooperate with law enforcement as required by CALEA.





Voice-over-Internet Protocol.VoIP is an application that manages the delivery of voice information
across data networks, including the Internet, using Internet Protocol. VoIP
sends voice information in digital form using discrete packets that are routed
in the same manner as data packets. VoIP is widely viewed as a more
cost-effective, feature-rich alternative to traditional circuit-switched
telephone service. Because VoIP can be deployed by carriers in various
capacities, and because it is widely considered a next-generation communication
service, its regulatory classification—and, thus, its long-term revenue
potential—is unclear. Several petitions seeking guidance on the regulatory
classification of VoIP service have been filed at the FCC, and the FCC has
resolved only a few of them, either through the issuance of narrowly-tailored
declaratory rulings or through broader regulatory pronouncements, depending on
the issue.





In one
case, the FCC held that a computer-to-computer VoIP application provided by
Pulver.com is an unregulated information service, in part because it does not
include a transmission component, offers computing capabilities, and is free to
its users. In another case, the FCC reached a different conclusion, holding that
AT&T’s use of VoIP to transmit the long-haul portion of certain calls
constitutes a telecommunications service, thus subjecting it to regulation,
because the calls use ordinary customer premises equipment with no enhanced
functionality, originate and terminate on the public switched telephone network,
and undergo no net protocol conversion and provide no enhanced functionality to
end users. In a third case, the FCC ruled that certain prepaid calling card
services are telecommunications services rather than information services. An
earlier case, which involved the VoIP application of Vonage, the FCC preempted
the authority of the State of Minnesota (and presumably all other states) and
ruled that Vonage’s VoIP application, and others like it, was an interstate
service subject only to Federal regulation, thus preempting the authority of the
Minnesota commission to require Vonage to obtain state certification. The FCC,
however, refused to speak beyond prior rulings involving enhanced services as to
whether Vonage’s VoIP application is a telecommunications service or an
information service, thus leaving open the question of the extent to which the
service might be regulated. The Eighth Circuit Court of Appeals in March 2007
denied several petitions seeking review of the FCC’s decision to classify
Vonage’s VoIP application as interstate rather than intrastate in
nature.





17
 Table of Contents





On a
broader level, the FCC has held that providers of interconnected VoIP service
must provide law enforcement officials with access to their networks pursuant to
CALEA and, separately, that providers of interconnected VoIP service also must
comply with specific E-911 and other requirements to enable their customers to
access public safety officials. The FCC has also ruled as noted above that
interconnected VoIP providers must contribute to the federal universal service
fund.





The FCC
separately has initiated a more generic proceeding, the IP-Enabled Services NOPR
to address the many other regulatory issues raised by the development and growth
of IP services, including VoIP service and also including the extent to which
the governance of VoIP will reside at the Federal level. The FCC has expressly
reserved the right to reconsider some of its earlier rulings in the generic
proceeding.





Grande
filed its own petition at the FCC seeking a declaratory ruling regarding the
proper treatment of traffic terminated to end users of interconnected ILECs
through CLECs like Grande, which traffic wholesale customers of Grande have
certified as originating in VoIP format.  The petition asks the FCC to
rule that a CLEC properly may rely on its customer’s self-certification; that
the ILECs, receiving certified traffic over local interconnection trunks from
the CLEC, are to treat the traffic as local traffic for intercarrier
compensation purposes and may not assess access charges against certified
traffic unless the Commission decides otherwise in the IP-Enabled Services or
Intercarrier Compensation Rulemakings or in another proceeding. This petition is
still pending, and we cannot predict how or when it might be
decided.  In addition, two forbearance petitions relating to the
treatment of VoIP traffic for purposes of intercarrier compensation were filed
in 2007 by other companies.  These petitions are pending and we cannot
predict how or when they might be decided. Future rulings in connection with
VoIP likely will have a significant impact on us, our competitors and the
communications industry.





Consumer Privacy. The
Communications Act and the FCC’s rules specify the circumstances under which
carriers can share consumer call data, or Customer Proprietary Network
Information (CPNI), with their affiliates and unrelated third parties. Congress
and the FCC are in the process of reviewing these rules and may adopt further
restrictions to further prevent the disclosure of CPNI and related information
by carriers. This could affect our ability, and the ability of our competitors,
to market services.





State
Regulation of Telecommunications Services





Traditionally,
states have exercised jurisdiction over intrastate telecommunications services,
and the Telecommunications Act of 1996 largely upholds that traditional state
authority. The Telecommunications Act of 1996 does place limits on state
authority to the extent necessary to advance competition in the
telecommunications industry; for example, the statute contains provisions that
prohibit states and localities from adopting or imposing any legal requirement
that may prohibit, or have the effect of prohibiting, market entry by new
providers of interstate or intrastate telecommunications services. The FCC is
required to preempt any such state or local requirement to the extent necessary
to enforce the Telecommunications Act of 1996’s open market entry requirements.
States and localities may, however, continue to regulate the provision of
intrastate telecommunications services and require carriers to obtain
certificates or licenses before providing service.





We are
certified as a CLEC in Arkansas, Florida, Georgia, Indiana, Oklahoma and Texas
and as an interexchange service provider (IXC) in Arkansas, Florida, Georgia,
Indiana, North Carolina, Oklahoma, Washington and Texas. If we expand to provide
similar telecommunications services in new states, we will likely be required to
obtain certificates of authority to operate and be subject to ongoing regulatory
requirements in those states as well.





Although
we are authorized to provide telecommunications services in several states, the
majority of our telecommunications end user customers are located in Texas.
Since 1995, Texas law has provided a regulatory framework for competitive
carriers such as us to provide telecommunications services in the State. A major
revision to the State’s telecommunications law was adopted by the Texas
Legislature in 2005. These amendments to PURA require the PUCT to deregulate
markets that meet certain standards and to consider deregulating certain other
markets. The PUCT was also directed to undertake several important studies
including whether Universal Service Funds should be continued or whether the
program should be changed. The amendments also included additional competitive
market safeguards. Like the Federal Telecommunications Act of 1996, Texas law is
intended to promote competition in the local exchange market, as well as in the
intrastate interexchange market. The PUCT is responsible for an evolving
regulation of these markets, and the PUCT plays a key role in promulgating rules
and policies and by arbitrating interconnection agreements between carriers in
the local market. For example, the PUCT has adopted substantive rules that
permit any competing carrier to install its own telecommunications equipment at
an MDU or commercial property in order to provide telecommunications services to
a requesting tenant.  The PUCT also has adopted substantive rules
prohibiting exclusive arrangements to provide telecommunications services at
multiple dwelling units (MDUs) and at commercial properties.  The
rules, policies and decisions of the PUCT are influenced by a variety of
factors, and future regulatory and legislative developments in the State could
have a significant impact on us.





18
 Table of Contents





Among the
PUCT’s regulatory responsibilities is the review of AT&T’s performance in
its provision of wholesale telecommunications services to competitive carriers
such as us through a comprehensive set of performance measurements and a
performance remedy plan. This performance remedy plan is in the interconnection
agreement between Grande and AT&T and requires AT&T to pay certain fines
when it fails to meet its prescribed performance benchmarks. Although the
performance remedy plan is intended to provide AT&T with incentive to
provide timely wholesale service to competitive carriers on a nondiscriminatory
basis, AT&T holds considerable market power in Texas and may be able to use
that market power to the detriment of the competitive telecommunications market,
and, in turn, carriers such as us.





Telecommunications
carriers in Texas are subject to numerous state policies, the application of
which could affect our business. These policies include, but are not limited to,
the Texas Universal Service Fund, broadband initiatives such as the state’s DSL
and advanced services in rural areas initiatives, and the Texas Infrastructure
Fund, the fee for which was originally intended to promote the deployment of
equipment and infrastructure for distance learning library information sharing
programs and telemedicine services. Telecommunications carriers also are subject
to various consumer protection regulations, such as prohibitions relating to
slamming (changing an end user’s service provider without appropriate
authorization), cramming (adding charges to an end user’s account without
appropriate authorization) and telemarketing. All carriers are required to
comply with a Code of Conduct for marketing, which has been adopted by the PUCT.
Grande must comply with these and other regulations or risk significant fines
and penalties.





SB 5 also
contained an amendment to PURA, which requires municipally-owned utilities,
which are exempt from the federal pole attachment laws, to equalize pole
attachment fees as between telecom and cable service providers. This is intended
to eliminate any artificial competitive advantage that might arise from the
nature of the wires platform. This is a significant benefit to Grande since
Grande’s two largest markets are served by municipally-owned
utilities.





Texas has
long been involved in both federal and state initiatives relating to homeland
security, defense and disaster recovery. These initiatives sometimes require
telecommunications carriers to, among other things, maintain certain network
security procedures and monitoring systems. The growing emphasis on homeland
security at the federal and state level and the recent experience with hurricane
disasters on the Gulf Coast may cause us to incur unforeseen expenses relating
to the security and protection of telecommunications networks.





Local
Regulation





Occasionally,
we are required to obtain street use and construction permits to install and
expand our interactive broadband network using state, city, county or municipal
rights-of-way. The Telecommunications Act of 1996 and recently adopted Chapter
66 of PURA require municipalities to manage public rights-of-way in a
competitively neutral and non-discriminatory manner.





Employees





As of
December 31, 2007, we had 831 full-time employees, other than temporary
employees. None of our employees are subject to collective bargaining
agreements. We believe that our relations with our employees are
good.





WHERE
YOU CAN FIND MORE INFORMATION





We file
annual, quarterly and special reports, and other information with the SEC, in
accordance with the Exchange Act. You may read and copy any document we file
with the SEC at the following public reference room:





Public
Reference Room


100 F
Street, N.E.


Room
1580


Washington,
D.C. 20549


1-800-SEC-0330





Please
call the SEC at 1-800-SEC-0330 for further information about the public
reference room. Our reports and other information filed with the SEC are also
available to the public over the Internet at the SEC’s world wide web site at
http://www.sec.gov.





19
 Table of Contents





ITEM 1A.
            RISK
      FACTORS





RISKS
RELATING TO OUR BUSINESS





We
have a history of net losses and may not be profitable in the
future.





As of
December 31, 2007, we had an accumulated deficit of $440.8 million. We expect to
continue to incur net losses in the future. Our ability to generate profits and
positive cash flow from operating activities will depend in large part on our
ability to increase our revenues to offset the costs of operating our network
and providing services. If we cannot achieve operating profitability or positive
cash flow from operating activities, our business, financial condition and
operating results will be adversely affected.





We
may require additional funding to cover the costs to grow the business or to
cover shortfalls or unforeseen changes, for which funding may not be
available.





When we
expand our networks within our existing markets, introduce new products or
services or enter new markets, we project the capital expenditures that will be
required based in part on the amount of time necessary to complete the
construction of the networks or the introduction of the services and the
difficulty of such projects. We may need more funds to cover the costs
associated with delays or difficulties in connection with the build-out,
maintenance or technical upgrades of our networks or for other unanticipated
reasons. Such financing, if necessary, may not be available on favorable terms
or at all. If we cannot obtain additional funds when needed or if cash flow from
operations is less than expected, our business and financial condition may be
adversely affected.





Changes
in demand for our services could harm our business.





We could
be affected by changes in demand for the services we provide in our markets. Our
plan could be unsuccessful due to:





•
            competition,
      especially from incumbent telephone and cable providers, which offer
      bundled services and from new technologies such as VoIP
      service;





•
            pricing;





•
            regulatory
      uncertainties;





•
            downturns
      in economic conditions in our
markets;





•
            operating
      and technical difficulties; or





•
            unsuccessful
      sales and marketing.





Any
downturn in demand for our services will harm our business and our prospects for
growth and profitability.





Competition
from other cable television, telephone and broadband Internet service providers
could have an adverse effect on our growth and revenues.





We are
not the first provider of any of our three principal bundled services in any of
our markets. We compete with numerous other companies that have long-standing
customer relationships with the residents in these markets, and we typically
have to convince people to switch from other companies to Grande. Some of our
competitors have significant competitive advantages over us, including greater
experience, resources, marketing capabilities and name recognition.





•
            for
      video services: Time Warner Cable, Cable One, Suddenlink Communications,
      Comcast, Charter Communications, DIRECTV, EchoStar Communications (DISH
      Network), AT&T, Verizon and
others;





•
            for
      HSD services: AT&T, Time Warner Cable, Time Warner Telecom, Verizon,
      Comcast, Charter Communications, Cable One, Suddenlink Communications,
      CenturyTel, Direct-PC and others;





•
            for
      long-distance telephone services: AT&T, Verizon, Sprint, Time Warner
      Cable, Time Warner Telecom, Suddenlink Communications (VoIP), Vonage
      (VoIP) and others;





•
            for
      local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom,
      Time Warner Cable, Time Warner Telecom, Suddenlink Communications (VoIP),
      Vonage (VoIP) and others.





As the
incumbent local telephone company, and a major provider of long-distance
telephone services, AT&T is a particularly strong competitor in telephone
and data services and competes for video services as well. With respect to cable
television services, Time Warner Cable is the incumbent provider in the majority
of our markets. Several of these competitors offer more than one service, such
as telephone companies and cable providers offering broadband Internet services.
A few have begun to offer all three services; in particular, Time Warner Cable
and other cable operators have begun providing digital phone services through
VoIP technology. We expect AT&T and Verizon, which are upgrading their
networks and providing video services, to be able to provide all three services
as well and each also control a nationwide wireless service provider. We can
expect that competition at MDUs also will increase if the FCC’s November 2007
order prohibiting exclusive cable service arrangements between MDUs and cable
providers is upheld in the courts.  We also compete with wireless
telephone carriers for both local and long distance services. Many of our
competitors are larger than we are, and we anticipate that the trend toward
business combinations and alliances in the telecommunications industry will
continue, making some of our competitors even larger. We expect these business
combinations and the level of competition to continue to increase in the future.
If we fail to compete successfully in our markets and grow our customer base,
our business and financial condition will be harmed.





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Restrictive
covenants under our indebtedness may limit our ability to grow and operate our
business.





The
indenture governing our 14% senior secured notes due April 1, 2011 (“senior
notes”), by and between Grande and U.S. Bank National Association, as Indenture
Trustee, dated March 23, 2004, contains, among other things, covenants imposing
significant financial and operating restrictions on our business. These
restrictions may affect our ability to manage and operate our business, may
limit our ability to take advantage of potential business opportunities as they
arise and may adversely affect the conduct or management of our current
business. These restrictions limit our ability to, among other
things:





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





•
            create
      liens on our assets;





•
            pay
      dividends on, redeem or repurchase our capital stock or make other
      restricted payments;





•
            make
      investments in other companies;





•
            enter
      into transactions with affiliates;





•
            enter
      into sale and leaseback
transactions;





•
            sell
      or make dispositions of assets;





•
            place
      restrictions on the ability of our restricted subsidiaries to pay
      dividends or make other payments to
us;





•
            engage
      in certain business activities;





•
            merge
      or consolidate with other entities;
and





•
            spend
      growth capital in the event our cash falls below $20
    million.





These
limitations may affect our ability to finance our future operations or to engage
in other business activities that may be in our best interest. Also, since we
are a holding company with no assets other than our ownership of our subsidiary,
we will be dependent on the receipt of funds from our subsidiary to pay the
interest and principal on the senior notes, and these limitations could
adversely affect our ability to make such payment on the senior
notes.





The
amount of debt we have could harm our business.





As of
December 31, 2007, we had approximately $208.7 million of indebtedness and
capital lease obligations outstanding, including the carrying value of our
senior notes of $188.0 million, all of which was secured. Further, the Indenture
allows us to incur additional indebtedness under certain circumstances. Our
significant indebtedness could adversely affect our business in a number of
ways, including the risks that:





•
            we
      will use a substantial portion of our cash flow from operations to pay
      principal and interest on our debt, thereby reducing the funds available
      for acquisitions, working capital, capital expenditures and other general
      corporate purposes;





•
            our
      degree of leverage may limit our ability to obtain additional capital,
      through equity offerings or debt financings, for working capital
      expenditures or refinancing of
indebtedness;





•
            our
      degree of leverage limits our ability to withstand competitive pressure
      and reduces our flexibility in responding to changes in business and
      economic conditions; and





•
            our
      degree of leverage may hinder our ability to adjust rapidly to changing
      market conditions and could make us more vulnerable to downturns in the
      economy or in our industry.





If we
cannot generate sufficient cash flow from operations to meet our obligations, we
may be forced to reduce or delay capital expenditures, sell assets, restructure
our debt, or seek additional equity capital. We cannot assure you that these
remedies would be available or satisfactory. Our cash flow from operations will
be affected by prevailing economic conditions, financial, business and other
factors, which may be beyond our control.





21
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The
costs associated with the provision of our services may increase and we may not
be able to pass any cost increases on to our customers.





In recent
years, the cable industry has experienced increases in the cost of programming,
which is one of the most significant costs of operating a cable system, and we
expect these increases to continue. Because we have a relatively small base of
subscribers, we cannot obtain programming costs comparable to those of the
larger cable providers with which we compete despite using the services of a
national cooperative that seeks to obtain better pricing on behalf of smaller
cable providers nationwide. We may also see increases over time in other costs,
such as the fees we pay utility companies for space on their utility poles. If
we are unable to pass any programming or other cost increases on to our
customers, our results of operations could be adversely affected.





Future
technologies and capital deployment from competitors may hurt our business or
increase our cost of operations.





The
development of future technologies may result in new competition in one or more
of the services we offer. Other developments may give our competitors a cost
advantage or other features we cannot readily match, or require us to make
expensive and time-consuming upgrades to our networks to remain competitive. In
addition, we may select one technology or one technology provider over another,
while our competitors may select different technologies or providers. If we do
not choose the technology that turns out to be the most efficient, economic or
appealing to customers, our business could be adversely affected.





Failure
to maintain existing state cable television franchises could adversely affect
our ability to grow our business.





We
provide video service over our networks generally pursuant to a statewide cable
franchise in Texas. Our ability to grow our business depends on the terms of our
cable franchise, including payment obligations. Litigation over the
constitutionality of the Texas statewide franchise law is pending. In early
September 2005, the Texas Cable and Telecommunications Association, or TCTA,
filed a lawsuit in U.S. District Court, Western District of Texas, Austin
division, to challenge the legislation passed allowing for a state cable
franchise and implementing a transition process to end the need for individual
municipal franchises. The lawsuit contends that the new state law discriminates
against incumbent cable operators in violation of the U.S. and Texas
Constitutions, discriminates against incumbent cable operators in violation of
the Federal Communications Act, violates the federal prohibition on exclusive
franchises, and violates the Cable Act prohibition against redlining. In
September 2006, U.S. Federal District Judge Yeakel dismissed TCTA’s complaint
against the PUC commissioners and the governor, without prejudice. TCTA
subsequently filed an appeal of the dismissal in the Fifth Circuit Court of
Appeals. The Fifth Circuit granted the appeal, overturned the dismissal of
TCTA’s challenge and remanded the case to the district court for further
proceedings.  Both AT&T and Verizon filed petitions for rehearing,
which remain pending at the Fifth Circuit Court of Appeals. We cannot predict
the outcome of the litigation. Several outcomes are possible which could raise
various levels of uncertainty about the nature of franchise authority. Certain
outcomes could harm our business.





Our cable
franchises are required by federal law to be non-exclusive. Our market areas
currently are served by at least one incumbent provider. In addition, under
federal law, municipal entities can operate cable television systems without
franchises. New competitors in our existing markets or changes to franchise
terms could adversely affect our business and financial condition.





If
we are not able to manage our growth, our business will be harmed.





Our
ability to grow will depend, in part, upon our ability to:





•
            successfully
      implement our strategy for offering bundled broadband
      services;





•
            construct
      network facilities;





•
            market
      our services;





•
            obtain
      and maintain on favorable terms any required government authorizations and
      interconnection agreements;





•
            secure
      any needed financing; and





•
            hire
      and retain qualified personnel.





In
addition, as we increase our service offerings and expand within our targeted
markets, we will have additional demands on our customer support, sales and
marketing, administrative resources and network infrastructure. If we cannot
effectively manage our growth, our business and results of operations will be
harmed.





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Our
business could be hurt in the event of a network outage.





Our
success depends on the efficient and uninterrupted operation of our
communications services. Our networks are attached to poles and other structures
in our service areas. A natural disaster, including tornado, hurricane, flood or
other natural catastrophe, or things unforeseen as our network gets older in one
of these areas could damage our networks, interrupt our service and harm our
business in the affected area.





We
could be hurt by future regulation of our industry.





Legislation
and implementing regulations in the telecommunications and cable areas continue
to be quite complex, and regulation of carrier and Internet services may
increase. Future actions by the United States Congress, the FCC, the Federal
Trade Commission, state legislatures, state utility commissions, local
municipalities and other regulators may adversely impact our business. For
example, if a regulation or interpretative ruling increases the costs associated
with a particular service, such as an increase in the cost of terminating
telecommunications traffic, our business may be adversely
impacted.   Additionally, if the FCC order prohibiting exclusive
cable service arrangements between MDUs and cable providers were upheld in the
courts, our competitors, some of who have significant competitive advantages
over us, would be allowed to provide competing video service to all
MDUs.





Expanding
into additional markets, either through internal growth or acquisitions, will
require additional funding and numerous approvals.





Although
currently we do not intend to enter any new markets, we may expand into other
attractive markets if the right opportunities arise. However, expansion into
additional markets will require significant additional capital, as well as
numerous authorizations and approvals, which could include franchises,
construction permits, pole attachment agreements, interconnection agreements and
others. Expansion markets may not have the same economics or operating metrics
as we have experienced in our existing markets, and may involve more difficult
competitive situations or other hurdles.





RISKS
RELATING TO OUR SENIOR NOTES





Rights
of holders of the senior notes in the collateral may be adversely affected by
the failure to create or perfect security interests in certain collateral on a
timely basis or at all, or by the failure of our existing subsidiary or any
future subsidiary guarantors to guarantee the senior notes.





We have
agreed to secure the senior notes and the guarantees by granting first priority
liens on substantially all of our property and our existing subsidiary’s and any
future subsidiary guarantor’s property, subject to certain exceptions, and to
take other steps to assist in perfecting the security interests granted in the
collateral.  Certain property will be excluded from the collateral
secured for the benefit of the noteholders.





Not all
of the security interests in the collateral attached on the issue date of the
outstanding senior notes.  If we or our subsidiary guarantor or future
subsidiary guarantors were to become subject to a bankruptcy proceeding, any
liens recorded or perfected after the issue date would face a greater risk of
being invalidated than if they had been recorded or perfected on the issue
date.  Liens recorded or perfected after the issue date, may be
treated under bankruptcy law as if they were delivered to secure previously
existing indebtedness.  In bankruptcy proceedings commenced within 90
days of lien perfection, a lien given to secure previously existing debt is
materially more likely to be avoided as a preference by the bankruptcy court
than if delivered and promptly recorded on the issue
date.  Accordingly, if we or our subsidiary guarantor or any future
subsidiary guarantor were to file for bankruptcy protection and the liens had
been perfected less than 90 days before commencement of such bankruptcy
proceeding, the liens securing the senior notes may be especially subject to
challenge as a result of having been delivered after the issue
date.  To the extent that such challenge succeeded, senior noteholders
would lose the benefit of the security that the collateral was intended to
provide. In the unlikely event that a senior noteholder is determined to be an
“insider” of Grande Communications Holdings, Inc., the preference look-back
period is one year, rather than 90 days, for the purposes of the risks described
in this paragraph.





Because
certain of the outstanding senior notes were issued with original issue
discount, U.S. holders of such senior notes will be required to include such
discount in gross income for U.S. federal income tax purposes before such
amounts are received in cash.





Certain
of the outstanding senior notes were issued at a discount from their stated
principal amount.  As a result, the discount on such senior notes is
subject to the special tax rules applicable to original issue
discount.  Under these rules, the original issue discount generally
must be included in the gross income of U.S. holders for U.S. federal income tax
purposes in advance of the receipt of the cash payments on the senior notes to
which such income is attributable.





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Due
to events that are beyond our control, we may not be able to generate sufficient
cash flow to make interest payments under the senior notes.





Our
ability to make payments on and to refinance our indebtedness, including the
senior notes, and to fund planned capital expenditures will depend on our
ability to generate cash in the future.  This, to a certain extent, is
subject to general economic, financial, competitive, legislative, regulatory and
other factors that are beyond our control.  We cannot provide any
assurances that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
enable us to pay our indebtedness or to fund our other liquidity
needs.  A significant reduction in operating cash flow would likely
increase the need for alternative sources of liquidity.  If we are
unable to generate sufficient cash flow to make payments on the senior notes or
our other indebtedness, we will have to pursue one or more alternatives, such as
reducing or delaying capital expenditures, refinancing the senior notes or such
other indebtedness, selling assets or raising equity.  We cannot
provide any assurances that any of these alternatives could be accomplished on
satisfactory terms or that they would yield sufficient funds to repay the senior
notes and our other indebtedness.





If
a change of control occurs, we may not have sufficient funds to repurchase
senior notes.





Upon
specified change of control events, senior noteholders may require us to
repurchase all or a portion of their senior notes.  However, if a
change of control occurs, we may not be able to pay the price for all of the
senior notes submitted for repurchase.  Future credit agreements or
other agreements relating to debt may contain provisions prohibiting us from
purchasing any senior notes until we have repaid all of such debt.  We
may not be able to secure the consent of such future lenders to repurchase the
senior notes or refinance the borrowings that prohibit us from repurchasing the
senior notes.  In addition, certain significant corporate events would
not constitute a change of control under the indenture for the senior
notes.





We
depend upon dividends from our subsidiary to meet our debt service
obligations.





Grande
Communications Holdings, Inc. is a holding company and conducts all of its
operations through a subsidiary.  Our ability to meet our debt service
obligations depends upon our receipt of dividends from our
subsidiary.  Subject to the restrictions contained in the indenture
governing the senior notes and our other outstanding debt, future borrowings by
our subsidiary could contain restrictions or prohibitions on the payment of
dividends by our subsidiary to us.  In addition, under applicable law,
our existing subsidiary and any future subsidiary guarantors could be limited in
the amounts that they are permitted to pay us as dividends on their capital
stock.





Federal
and state statutes may allow courts to void or subordinate
guarantees.





The
senior notes will be guaranteed by our existing subsidiary and certain of our
future subsidiary guarantors, if any.  If a bankruptcy case or lawsuit
is initiated with respect to a guarantor, the debt represented by the guarantee
entered into by that guarantor may be reviewed under federal bankruptcy law and
comparable provisions of state fraudulent transfer laws.  Under these
laws, a guarantee could be voided, or claims in respect of a guarantee could be
subordinated to certain obligations of a guarantor, if, among other things, such
guarantor, at the time it entered into the guarantee, received less than fair
consideration for entering into the guarantee and either it was insolvent or
rendered insolvent by reason of entering into the guarantee, it was engaged in a
business or transaction for which the guarantor’s remaining assets constituted
unreasonably small capital or it intended to incur, or believed that it would
incur, debts or contingent liabilities beyond its ability to pay such debts or
contingent liabilities as they became due.  If one or more of the
guarantees is voided, holders of the senior notes would be solely creditors of
ours and of the guarantors that have validly guaranteed the senior notes; if one
or more guarantees is subordinated, the other creditors of such guarantor would
be entitled to be paid in full before any payment could be made on the senior
notes.  We cannot assure senior noteholders that after providing for
all prior claims there would be sufficient guarantor assets remaining to satisfy
the claims of the holders of the senior notes.





Bankruptcy
laws may limit the ability of the senior noteholders to realize value from the
collateral.





The right
of the collateral agent to repossess and dispose of the collateral upon the
occurrence of an event of default under the indenture governing the senior notes
is likely to be significantly impaired by applicable bankruptcy law if a
bankruptcy case were to be commenced by or against us before the collateral
agent repossessed and disposed of the collateral. Upon the commencement of a
case for relief under Title 11 of the United States Code, a secured creditor,
such as the collateral agent, is prohibited from repossessing its security from
a debtor in a bankruptcy case, or from disposing of security repossessed from
such debtor, without bankruptcy court approval.  Moreover, the
bankruptcy code permits the debtor to continue to retain and use collateral even
though the debtor is in default under the applicable debt instruments, provided
that the secured creditor is given “adequate protection.”  The meaning
of the term “adequate protection” may vary according to circumstances, but it is
intended in general to protect the value of the secured creditor’s interest in
the collateral and may include cash payments or the granting of additional
security if and at such times as the court in its discretion determines that the
value of the secured creditor’s interest in the collateral is declining during
the pendency of the bankruptcy case.  A bankruptcy court may determine
that a secured creditor may not require compensation for a diminution in the
value of its collateral if the value of the collateral exceeds the debt it
secures.





24
 Table of Contents





In view
of the lack of a precise definition of the term “adequate protection” and the
broad discretionary powers of a bankruptcy court, it is impossible to
predict:





•
              how
      long payments under the senior notes could be delayed following
      commencement of a bankruptcy
case;





•
              whether
      or when the collateral agent could repossess or dispose of the
      collateral;





•
              the
      value of the collateral at the time of the bankruptcy petition;
      or





•
              whether
      or to what extent holders of the senior notes would be compensated for any
      delay in payment or loss of value of the collateral through the
      requirement of “adequate
protection.”





In
addition, the indenture requires that, in the event of a bankruptcy, the trustee
and the collateral agent not object to a number of important matters following
the filing of a bankruptcy petition.  After such filing, the value of
the collateral could materially deteriorate and senior noteholders would be
unable to raise an objection.  The right of the holders of obligations
secured by first priority liens on the collateral to foreclose upon and sell the
collateral upon the occurrence of an event of default also would be subject to
limitations under applicable bankruptcy laws if we or our existing subsidiary or
any of our future subsidiaries become subject to a bankruptcy
proceeding.  Any disposition of the collateral during a bankruptcy
case would also require permission from the bankruptcy
court.  Furthermore, in the event a bankruptcy court determines the
value of the collateral is not sufficient to repay all amounts due on the senior
notes, the holders of the senior notes would hold secured claims to the extent
of the value of the collateral to which the holders of the senior notes are
entitled and unsecured claims with respect to such shortfall.  The
majority of bankruptcy courts have found that the bankruptcy code only permits
the payment and accrual of post-petition interest, costs and attorney’s fees to
a secured creditor during a debtor’s bankruptcy case to the extent the value of
its collateral is determined by the bankruptcy court to exceed the aggregate
outstanding principal amount of the obligations secured by the
collateral.





There
is no established trading market for the senior notes, which could make it more
difficult for senior noteholders to sell their senior notes and could affect
adversely the price of their senior notes.





If the
senior notes are traded after their initial issuance, the liquidity of the
trading market in the senior notes, and the market price quoted for the senior
notes, may be affected adversely by changes in the overall market for high yield
securities and by changes in our financial performance or prospects or in the
prospects for companies in the telecommunications industry
generally.  As a result, a senior noteholder cannot be sure that an
active trading market will develop for the senior notes.





The
initial purchasers of the outstanding senior notes have informed us that they
intend to make a market in the senior notes.  However, the initial
purchasers have no obligation to do so, and may discontinue any market-making
activities at any time without notice.  We will not list the senior
notes on any securities exchange.  We cannot assure senior noteholders
of the development of any market or of the liquidity of any market that may
develop for the senior notes.





The
indenture permits the formation of a holding company that would be permitted to
take actions that may not be consistent with the best interests of the senior
noteholders.





The
indenture governing the senior notes permits the formation of a separate holding
company that would be the parent company of Grande Communications Holdings, Inc.
and its existing subsidiary and any future subsidiary.  If such a
holding company were formed, some of the restrictive covenants contained in the
indenture would apply only to Grande Communications Holdings, Inc. and its
existing subsidiary and any future subsidiary and not to the holding
company.  As a result, the holding company could take actions, such as
using cash for purposes unrelated to debt service, which may not be consistent
with the best interests of the senior noteholders.





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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
annual report contains statements about future events, including without
limitation, information relating to business development activities, as well as
capital spending, financing sources and the effects of regulation and increased
competition. All statements other than statements of historical fact are, or may
be deemed to be, 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. These statements can sometimes be identified by our use of forward-looking
words such as “expect,” “should,” “may,” “will,” “anticipate,” “estimate,” or
“intend” and other similar words or phrases. Similarly, statements that describe
our objectives, plans or goals are or may be forward-looking statements. These
statements involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be different
from any future results, performance or achievements expressed or implied by
these statements. You should review carefully all of the information, in this
annual report, including the financial statements.





In
addition to the risk factors described under the heading “Risk Factors,” the
following important factors could affect future results, causing actual results
to differ materially from those expressed in the forward-looking
statements:





•
            our
      dependence on existing management;





•
            the
      local, regional, national or global economic
  climate;





•
            an
      act of terrorism in the United States of America;
  and





•
            changes
      in federal or state telecommunications laws or the administration of such
      laws.





These
factors and the other risk factors discussed in this annual report are not
necessarily all of the important factors that could cause our actual results to
differ materially from those expressed in any of the forward-looking statements.
Other unknown or unpredictable factors also could have material adverse effects
on our future results. The forward-looking statements included in this annual
report are made only as of the date of this annual report. We cannot ensure that
any projected results or events will be achieved. We do not have and do not
undertake any obligation to publicly update any forward-looking statements to
reflect subsequent events or circumstances.





ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS





None.





ITEM 2.
            PROPERTIES





We lease
our corporate headquarters and network operations center in San Marcos, Texas,
which consists of approximately 67,278 square feet of office space, as well as
11 other office sites in Texas, of approximately 184,094 square feet of office
space collectively. We primarily lease the real property sites in each of our
markets upon which our network equipment is located, including sites for our
head-ends where programming is received via satellite, hubs, network equipment
and points of presence. We have rights of way, licenses or other access rights
to the real property over which our network fiber crosses, generally under our
franchise agreements or contractual agreements with third parties. With respect
to our long-haul network, we lease the real property sites where our switches,
network equipment including collocation facilities and points of presence are
situated.





ITEM 3.
            LEGAL
      PROCEEDINGS





We are
subject to litigation in the normal course of our business. However, there are
no pending proceedings, which are currently anticipated to have a material
adverse effect on our business, financial condition or results of
operations.





26
 Table of Contents





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





In July
2007, we submitted a consent solicitation statement to the holders of the
Company’s senior notes.  The consent solicitation requested consent to
amend the indenture governing the senior notes to permit the issuance of
$25,000,000 of additional senior notes.  The holders of $86,000,000 in
aggregate principal amount of the senior notes, which constituted a majority of
the outstanding principal balance of the senior notes as of the record date,
consented to amend the indenture to allow the Company to complete the
issuance.  The holders of $84,000,000 in aggregate principal amount
did not respond to the consent solicitation before it terminated.  The
Company entered into a Supplemental Indenture to reflect this amendment on July
18, 2007.





The
re-election of James M. Mansour, Duncan T. Butler, Jr. and William Laverack, Jr.
as Class III directors to serve on the Company’s board of directors for a
three-year term expiring in 2010 was submitted to a vote of and approved by the
stockholders at the annual meeting of stockholders on December 12,
2007.  The directors whose terms of office as directors continued
after the meeting were: Roy H. Chestnutt, Lawrence M. Schmeltekopf, Richard W.
Orchard, John C. Hockin and David C. Hull, Jr.  There were no other
matters voted upon at the 2007 annual meeting of shareholders.  The
following votes were cast at the 2007 annual meeting regarding the election of
nominated directors:




Nominee name:
            
            Votes for:
            
            
            Votes against or withheld:
            
            
            Abstentions and broker
      non-votes:James
      M. Mansour
            
            
            371,858,231
            
            
            
            —
            
            
            
            80,786,620Duncan
      T. Butler, Jr.
            
            
            371,858,231
            
            
            
            —
            
            
            
            80,786,620William
      Laverack, Jr.
            
            
            371,858,231
            
            
            
            —
            
            
            
            80,786,620




27
 Table of Contents





PART
II





ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES





Price
Range for Common Stock





Our stock
is not traded on any stock exchange or quoted on any established trading market.
No market makers currently make a market in our stock and we do not plan to
engage a market maker. Therefore, there is no established public trading market
and no high and low bid information or quotations available. As of December 31,
2007, we had 12,675,940 shares of common stock outstanding held by 193 holders
of record.





Dividend
Policy





We have
never declared or paid any cash dividends on our capital stock and do not
anticipate paying cash dividends on our capital stock in the foreseeable future.
It is the current policy of our board of directors to retain earnings to finance
the expansion of our operations. Future declaration and payment of dividends, if
any, will be determined based on the then-current conditions, including our
earnings, operations, capital requirements, financial condition, and other
factors the board of directors deems relevant. In addition, our ability to pay
dividends is limited by the terms of the Indenture.





Issuance
of Unregistered Securities





During
2007, the Company issued 83,800 shares of common stock in connection with the
exercise of options with a weighted average exercise price of $0.05 per share,
and grants were awarded for options to purchase 2,948,000 shares of common stock
and 2,000,000 shares of Series H preferred stock with an exercise price of $0.05
per share and $0.10 per share, respectively. We relied on the exemption set
forth in Section 4(2) of the Securities Act of 1933 in issuing these
securities.





In July
2007, we issued an additional $25.0 million of principal amount of our senior
notes. We relied upon the exemption set forth in Rule 144A promulgated under the
Securities Act of 1933 in issuing these securities. The additional senior notes
were purchased by existing noteholders. For more information, see “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations—Availability of Capital”.





ITEM 6.
            SELECTED
      FINANCIAL DATA





The data
set forth below should be read in conjunction with our consolidated financial
statements and related notes, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations”, and other financial information appearing
elsewhere in this annual report.





For the Year Ended
      December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007(in
      thousands, except per share data)Statement
      of operations data:Operating
      revenues
            
            $
            181,515
            
            
            $
            179,045
            
            
            $
            194,731
            
            
            $
            189,867
            
            
            $
            197,146Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
            
            
            81,900
            
            
            
            66,754
            
            
            
            72,515
            
            
            
            63,931
            
            
            
            68,348Selling,
      general and administrative
            
            
            82,050
            
            
            
            93,533
            
            
            
            95,992
            
            
            
            97,826
            
            
            
            93,717Depreciation
      and amortization
            
            
            51,990
            
            
            
            57,292
            
            
            
            59,507
            
            
            
            56,037
            
            
            
            56,752Total
      operating expenses
            
            
            215,940
            
            
            
            217,579
            
            
            
            228,014
            
            
            
            217,794
            
            
            
            218,817Operating
      loss
            
            
            (34,425
            )
            
            
            (38,534
            )
            
            
            (33,283
            )
            
            
            (27,927
            )
            
            
            (21,671
            )Other
      income (expense):Interest
      income
            
            
            154
            
            
            
            762
            
            
            
            709
            
            
            
            1,546
            
            
            
            1,670Interest
      expense, net of capitalized interest
            
            
            (2,887
            )
            
            
            (15,189
            )
            
            
            (18,801
            )
            
            
            (23,970
            )
            
            
            (29,012
            )Other
      income (expense)
            
            
            —
            
            
            
            —
            
            
            
            750
            
            
            
            —
            
            
            
            (472
            )Gain
      (loss) on disposal of assets
            
            
            (312
            )
            
            
            64
            
            
            
            431
            
            
            
            2,353
            
            
            
            76Loss
      on extinguishment of debt
            
            
            —
            
            
            
            (2,145
            )
            
            
            —
            
            
            
            —
            
            
            
            —Goodwill
      impairment
            
            
            —
            
            
            
            —
            
            
            
            (39,576
            )
            
            
            (93,639
            )
            
            
            —Total
      other income (expense)
            
            
            (3,045
            )
            
            
            (16,508
            )
            
            
            (56,487
            )
            
            
            (113,710
            )
            
            
            (27,738
            )Loss
      before income tax expense
            
            
            (37,470
            )
            
            
            (55,042
            )
            
            
            (89,770
            )
            
            
            (141,637
            )
            
            
            (49,409
            )Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,123
            )Net
      loss
            
            $
            (37,470
            )
            
            $
            (55,042
            )
            
            $
            (89,770
            )
            
            $
            (141,637
            )
            
            $
            (50,532
            )Basic
      and diluted net loss per share
            
            $
            (3.20
            )
            
            $
            (4.49
            )
            
            $
            (7.21
            )
            
            $
            (11.30
            )
            
            $
            (4.01
            )





28
 Table of Contents




For the Year Ended
      December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007(in
      thousands)Other
      financial data:Net
      cash provided by operating activities (1)
            
            $
            15,939
            
            
            $
            9,957
            
            
            $
            14,795
            
            
            $
            9,687
            
            
            $
            11,741Net
      cash used in investing activities
            
            
            (78,453
            )
            
            
            (71,161
            )
            
            
            (28,389
            )
            
            
            (26,387
            )
            
            
            (33,589
            )Net
      cash provided by (used in) financing activities(1)
            
            
            85,102
            
            
            
            60,153
            
            
            
            (882
            )
            
            
            33,929
            
            
            
            26,038Cash
      and cash equivalents, end of year
            
            
            42,246
            
            
            
            41,195
            
            
            
            26,719
            
            
            
            43,948
            
            
            
            48,138





December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007Other
      operating data:Marketable
      homes passed (2)
            
            
            277,399
            
            
            
            308,913
            
            
            
            331,173
            
            
            
            337,025
            
            
            
            340,058Customers
            
            
            102,740
            
            
            
            126,736
            
            
            
            136,109
            
            
            
            137,542
            
            
            
            145,675Connections(3):Video
            
            
            71,855
            
            
            
            83,098
            
            
            
            89,417
            
            
            
            93,778
            
            
            
            99,453Voice
            
            
            97,288
            
            
            
            110,360
            
            
            
            114,621
            
            
            
            116,229
            
            
            
            114,303HSD
      and other
            
            
            38,450
            
            
            
            56,184
            
            
            
            72,104
            
            
            
            85,117
            
            
            
            95,125Total
      connections
            
            
            207,593
            
            
            
            249,642
            
            
            
            276,142
            
            
            
            295,124
            
            
            
            308,881





December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007(in
      thousands)Selected
      balance sheet data:Current
      assets
            
            $
            65,037
            
            
            $
            84,866
            
            
            $
            47,926
            
            
            $
            63,012
            
            
            $
            67,798Property,
      plant and equipment, net
            
            
            298,197
            
            
            
            303,536
            
            
            
            297,183
            
            
            
            271,939
            
            
            
            249,310Total
      assets
            
            
            516,691
            
            
            
            538,516
            
            
            
            450,538
            
            
            
            345,041
            
            
            
            326,243Current
      liabilities
            
            
            35,496
            
            
            
            40,734
            
            
            
            41,552
            
            
            
            42,831
            
            
            
            48,048Capital
      lease obligations, net of current portion
            
            
            12,723
            
            
            
            13,940
            
            
            
            14,365
            
            
            
            16,634
            
            
            
            13,592Long
      term debt, net of current portion
            
            
            61,860
            
            
            
            128,237
            
            
            
            129,056
            
            
            
            160,797
            
            
            
            189,994Stockholders’
      equity
            
            
            402,170
            
            
            
            349,944
            
            
            
            260,207
            
            
            
            118,960
            
            
            
            69,004





(1)
            The
      Company has reclassified the operating and financing portion of the cash
      flows attributable to negative book cash balances related to our
      zero-balance accounts for the annual periods ended December 31, 2003 and
      2004. In prior periods, these cash flows were reported within the change
      in accounts payable in cash flows from operating activities, and have been
      reclassified to cash flows from financing activities. The effect on cash
      flows from operating activities was $(3.0) million and $0.8 million for
      the years ended December 31, 2003 and 2004, respectively. This revision
      did not have any affect on the Company’s cash balances, compliance with
      debt covenants, working capital, or
operations.





(2)
            Marketable
      homes passed are 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.





(3)
            Because
      we deliver multiple services to our customers, we report the total number
      of connections for video, voice and HSD service in addition to the total
      number of customers. We count each video, voice and HSD service purchase
      as a separate connection. For example, a single customer who purchases
      video, voice and HSD services would count as three connections. We do not
      record the purchase of long distance telephone service by a local
      telephone customer or the purchase of 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. More detailed information is discussed in
      “Management’s Discussion and Analysis of Financial Condition and Results
      of Operations” under the caption “Marketable Homes Passed, Customers and
      Connections.”





Non-GAAP
Financial Measures





Income
before interest income, interest expense, income taxes, depreciation and
amortization is commonly referred to in our business as “EBITDA.” EBITDA is not
a measure of financial performance under U.S. 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 and completed 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. EBITDA is
frequently used as one of the bases for comparing businesses in our industry,
although our measure of Adjusted 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, liquidity or ability to service debt obligations. The Company
believes loss on extinguishment of debt, goodwill impairments, non-cash
stock-based compensation and other non-cash expense are similar to amortization
and interest expense in that it is more useful to report EBITDA net of these
amounts to better measure operating performance in comparison to prior periods.
However, because of the nature of these charges, the Company is referring to
EBITDA, net of loss on early extinguishment of debt, goodwill impairments,
non-cash stock-based compensation charges, and other non-cash expense as
“Adjusted EBITDA”.





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 Table of Contents




For the Year Ended
      December 31,2003
            
            
            2004
            
            
            2005
            
            
            2006
            
            
            2007(in
      thousands)Reconciliation
      of EBITDA/Adjusted EBITDA:Net
      loss, as reported
            
            $
            (37,470
            )
            
            $
            (55,042
            )
            
            $
            (89,770
            )
            
            $
            (141,637
            )
            
            $
            (50,532
            )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
            
            
            (154
            )
            
            
            (762
            )
            
            
            (709
            )
            
            
            (1,546
            )
            
            
            (1,670
            )Interest
      expense, net of capitalized interest
            
            
            2,887
            
            
            
            15,189
            
            
            
            18,801
            
            
            
            23,970
            
            
            
            29,012Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,123Franchise
      tax expense (benefit)
            
            
            384
            
            
            
            221
            
            
            
            125
            
            
            
            300
            
            
            
            (268
            )Depreciation
      and amortization
            
            
            51,990
            
            
            
            57,292
            
            
            
            59,507
            
            
            
            56,037
            
            
            
            56,752EBITDA
            
            
            17,637
            
            
            
            16,898
            
            
            
            (12,046
            )
            
            
            (62,876
            )
            
            
            34,417Stock
      based compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            377
            
            
            
            573Other
      expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            489Loss
      on extinguishment of debt
            
            
            —
            
            
            
            2,145
            
            
            
            —
            
            
            
            —
            
            
            
            —Goodwill
      impairment
            
            
            —
            
            
            
            —
            
            
            
            39,576
            
            
            
            93,639
            
            
            
            —Adjusted
      EBITDA
            
            $
            17,637
            
            
            $
            19,043
            
            
            $
            27,530
            
            
            $
            31,140
            
            
            $
            35,479





ITEM 7.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





The
following is a discussion of our consolidated financial condition and results of
operations for the years ended December 31, 2005, 2006, and 2007 and other
factors that are expected to affect our prospective financial condition. The
following discussion and analysis should be read together with our consolidated
financial statements and related notes beginning on page F-1 of this annual
report.





Overview





Grande’s
primary business is providing a bundled package of cable television (“video”),
telephone (“voice”), and broadband Internet (“HSD”) other services to
residential and small and medium sized business customers in Texas. We provide
these services in seven markets in the state of Texas using local broadband
networks that we constructed. We refer to the homes and businesses that our
network is capable of providing services to as “marketable homes passed”. As of
December 31, 2007, we had the ability to market services to 340,058 distinct
homes and businesses over our networks and had 145,675 residential and business
customers. Our operating revenues were $189.9 million in 2006 compared to $197.1
million for 2007.





Grande
was founded in October 1999 and was funded with $232 million of initial equity
capital to pursue a retail strategy of constructing broadband networks in order
to offer bundled video, voice and HSD services to customers. Operating revenues
from bundled services were $146.1 million in 2006 compared to $155.0 million for
2007.





We
believe that an important measure of our growth potential is the number of
marketable homes passed by our networks and the marketable homes we are able to
pass in the future in the markets in which we currently operate. Marketable
homes passed are the number of residential and business units, such as single
residential homes, apartments and condominium units, passed by our networks,
other than those we believe are covered by exclusive arrangements with other
providers of competing services. Since 2001, we have grown our marketable homes
passed through the construction of our networks. The expansion of our networks
has, in turn, allowed us to pursue a retail strategy of offering bundled video,
voice and HSD services to residential and business customers. We have derived an
increasing percentage of our revenues from our bundled services and we expect
this trend to continue. Because of our local networks and existing fixed
infrastructure in the markets in which we currently operate, we believe we can
continue to grow our business without incurring the significant capital
investment required to launch operations in new markets.





30
 Table of Contents





In
addition, we have leveraged our retail metro network build-out with the 2003
acquisition of a long haul fiber optic network, primarily located in Texas, to
allow us to provide broadband transport services to medium and large enterprises
and communications carriers. Operating revenues for broadband transport services
were $8.6 million in 2006 compared to $9.4 million for 2007.





In July
2000, when our network construction was still in a very early stage, we acquired
Thrifty Call, which had an established telephone and data network that served as
the platform for the provisioning of residential voice and HSD services and that
still provides wholesale network services to medium and large enterprises and
communications carriers in the wholesale market. Operating revenues for network
services were $35.2 million in 2006 compared to $32.7 million for
2007.





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





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





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





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





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





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





•
            increasing
      programming and other costs.





Availability
of Capital





As
described more fully under “Liquidity and Capital Resources” below, our
principal sources of capital going forward will primarily be cash on hand and
cash flow from operations. If we do not continue to increase the number of
customers and the average prices received for our services, cash flow from
operations will be adversely effected and cash on hand will
decline.





Since
inception, we have been funded primarily with private equity investments and the
issuance of debt securities. Between February 2000 and October 2003, we
completed a series of private placements of our preferred stock, raising
aggregate gross proceeds of $338.2 million. The net proceeds from these private
placements have been used to fund our network build-out, operations, and our
acquisitions. As a result of these equity investments and our merger with
ClearSource in 2002, where stock was used as consideration, we now have $509
million of total invested equity capital and a base of over 20 institutional
private equity investors.





We have
also raised net proceeds of approximately $180.1 million of senior secured debt,
including premiums and net of discounts and financing costs. During March 2004,
we raised net proceeds of approximately $123.8 million in a private placement of
136,000 units, with each unit consisting of a $1,000 principal amount of 14%
senior secured note due 2011 (“senior notes”) and a warrant to purchase 100.336
shares of our common stock. The senior notes are governed by the indenture
between Grande and U.S. Bank National Association, as Indenture Trustee, dated
March 23, 2004 (“Indenture”). We used a portion of the net proceeds from the
offering to repay all amounts outstanding under our then-existing senior credit
facility, which was terminated upon repayment.





31
 Table of Contents





In March
2006, we raised net proceeds of approximately $30.5 million in a private
placement of an additional $32.0 million in aggregate principal amount of senior
notes. These additional senior notes were issued under the Indenture. We are
using the proceeds for capital expenditures and working capital
purposes.





On July
18, 2007, we completed a private placement offering of an additional $25 million
in aggregate principal amount of senior notes for gross proceeds of
approximately $26.0 million including a premium on issuance of $1.0
million.  Debt issuance costs were approximately $0.2
million.  We are using the net proceeds for capital expenditures and
working capital purposes. These additional senior notes were issued under the
Indenture and are part of the same series of senior notes as those issued in
March 2004 and March 2006.  The holders of a majority of the
outstanding principal balance of the senior notes consented to the amendment of
the Indenture to allow the Company to complete this issuance and we entered into
a Supplemental Indenture to reflect this amendment on July 18,
2007.





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





Marketable
Homes Passed, Customers and Connections





We report
marketable homes passed as the number of residential and business units, such as
single family residence homes, apartments and condominium units, passed by our
networks other than those we believe are covered by exclusive arrangements with
other providers of competing services. As of December 31, 2007, our networks
passed 340,058 marketable homes and we had 145,675 residential and business
customers.





Because
we deliver multiple services to our customers, we report our total number of
connections for video, voice, HSD and other services in addition to our total
number of customers. We count each video, voice, HSD and other service purchase
as a separate connection. For example, a single customer who purchases video,
voice, and HSD service would count as three connections. Similarly, a single
customer who purchases our HSD service and our voice service would count as two
connections. We do not record the purchase of long distance telephone service by
a local telephone customer or digital cable services by an analog cable customer
as additional connections. However, we do record each purchase of an additional
telephone line by a local telephone customer as an additional connection. As of
December 31, 2007, we had 308,881 connections.





Competition





The
broadband communications industry is highly competitive. We compete primarily on
the basis of the price, availability, reliability, variety, quality of our
offerings, our people, and on the quality of our customer service. Our ability
to compete effectively depends on our ability to maintain high-quality services
at prices generally equal to or below those charged by our competitors. Price
competition in the retail services and broadband transport services markets
generally has been intense and is expected to continue, although cable rates
increase annually and AT&T recently raised DSL rates.  The
continuing trend toward business combinations and alliances in the
telecommunications industry will create significant new competitors. As a result
of these business combinations and the introduction of VoIP offerings, we
anticipate that the competitive environment will become increasingly intense. In
addition to terrestrial competition, we continue to see consumers choose to
eliminate a second line, their long distance, and/or their primary landline and
use wireless telephone service instead. This dynamic is more prevalent in
younger, more transient households such as MDUs in which students or young
adults tend to move every twelve to eighteen months. Advances in technology also
are leading to changes in video distribution platforms, making downloadable,
on-demand video content accessible in both traditional wireline and new wireless
mobile viewing devices. These and other developments are requiring traditional
communications providers such as us to regularly rethink the model for
successfully marketing and providing video, voice and HSD content and services
to consumers.





Operating
Revenues





We derive
our operating revenues primarily from monthly charges for the provision of
video, voice, HSD and other services to residential and business customers. In
addition, we derive operating revenues by providing broadband transport services
to medium and large enterprises and communications carriers as well as providing
network services by offering telecommunications and HSD products to medium and
large enterprises and communications carriers within wholesale markets. 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 billing methods, we have presented information on
our revenues from each major product line.





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Bundled services revenues—video,
voice, HSD and other.We typically provide video, voice, HSD and other
services on a bundled basis for fixed monthly fees billed in advance, with the
amount of the monthly fee varying significantly depending upon the particular
bundle of services provided. We also charge usage-based fees for additional
services, such as pay-per-view movies that involve a charge for each viewing and
long-distance services that involve charges by the number of minutes of use. We
generally bill for these usage-based services monthly in arrears. We also
generate revenues from one-time charges for the installation of premises
equipment. Most of our bundled offerings include fees for equipment rental,
although in some instances we sell modems to customers. Revenue generated from
equipment sales is an insignificant portion of our total revenues. 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 approximately 5% of
our revenues from cable subscriptions. We began offering security services as
part of our bundle in June 2004. We discontinued actively marketing our security
services in 2006. However, we continue to provide service to our existing
customer base. The security revenue is included in HSD 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 fiber 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 VoIP
terminations, directory assistance, web hosting, database, collocation, and
technical support.





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, however it does not
include depreciation or amortization. Our network supports the products and
services that we provide to customers, and due to a common network
infrastructure and many of the same resources and personnel being used to
generate revenues from the various product and service categories it is
difficult to determine cost of revenues by product.





Our cost
of revenues include the following:





•
            Video costs.
      Programming costs historically have been the largest portion of the cost
      of providing our video services and we expect this trend to continue. We
      have entered into contracts for cable programming through the National
      Cable Television Cooperative and directly with programming providers to
      provide programming to be aired on our networks. We pay a monthly fee for
      these programming services 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 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 retransmission fees for local programming and fees payable to
      cable franchise authorities, which are usually approximately 5% of our
      revenues from cable subscriptions.





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





•
            HSD and other costs.
      Our cost of revenues associated with delivering HSD and other services to
      residential and 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 as
      long as we do not need to procure additional equipment or lease additional
      capacity, but transport costs and peering fees may increase when new
      facilities for connecting to the Internet need to be obtained. Our
      security-related costs are primarily related to system monitoring with a
      third-party provider.





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•
            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.  Broadband transport services costs also include
      non-recurring costs for construction, installation and configuration
      services, which can vary significantly depending upon the customer’s
      needs.





•
            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 employee compensation and
departmental costs incurred for network design, monitoring and maintenance. They
also include employee compensation and departmental costs incurred for customer
disconnection and reconnection and service personnel, customer service
representatives and management and sales and marketing personnel. Other included
items are advertising expenses, promotional expenses, corporate and subsidiary
management, administrative costs, bad debt expense, professional fees, taxes,
insurance and facilities costs.





Depreciation
and amortization





Depreciation
and amortization expenses include depreciation of our broadband networks and
equipment and other intangible assets.





Operating
Data —Bundled Services





Quarter EndedDecember 31,
2006
            
            
            March 31, 2007
            
            
            June 30,2007
            
            
            September 30,
    2007
            
            
            December 31,
2007Operating
      Data:Marketable
      homes passed
            
            
            337,025
            
            
            
            338,852
            
            
            
            340,000
            
            
            
            339,678
            
            
            
            340,058Customers
            
            
            137,542
            
            
            
            139,226
            
            
            
            139,558
            
            
            
            144,889
            
            
            
            145,675Number
      of connections:Video
            
            
            93,778
            
            
            
            95,585
            
            
            
            96,582
            
            
            
            98,047
            
            
            
            99,453Voice
            
            
            116,229
            
            
            
            116,679
            
            
            
            116,204
            
            
            
            114,670
            
            
            
            114,303HSD
      and other
            
            
            85,117
            
            
            
            88,526
            
            
            
            90,731
            
            
            
            93,353
            
            
            
            95,125Total
      connections
            
            
            295,124
            
            
            
            300,790
            
            
            
            303,517
            
            
            
            306,070
            
            
            
            308,881Average
      monthly revenue per:Customer
      – bundled services
            
            $
            89.00
            
            
            $
            91.07
            
            
            $
            92.80
            
            
            $
            91.12
            
            
            $
            90.64Video
      connection
            
            
            52.40
            
            
            
            54.56
            
            
            
            55.98
            
            
            
            54.80
            
            
            
            55.78Voice
      connection
            
            
            40.18
            
            
            
            40.04
            
            
            
            40.48
            
            
            
            40.88
            
            
            
            40.34HSD
      and other connection
            
            
            31.90
            
            
            
            31.95
            
            
            
            31.73
            
            
            
            31.58
            
            
            
            32.27





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Results
of Operations





The
following table sets forth financial data as a percentage of operating
revenues.





Years ended
      December 31,2005
            
            
            2006
            
            
            2007Consolidated
      Financial Data:Operating
      revenues:Video
            
            
            26
            %
            
            
            30
            %
            
            
            32
            %Voice
            
            
            30
            
            
            
            30
            
            
            
            28HSD
      and other
            
            
            14
            
            
            
            16
            
            
            
            18Bundled
      services
            
            
            70
            
            
            
            76
            
            
            
            78Broadband
      transport services
            
            
            4
            
            
            
            5
            
            
            
            5Network
      services
            
            
            26
            
            
            
            19
            
            
            
            17Total
      operating revenues
            
            
            100
            
            
            
            100
            
            
            
            100Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
            
            
            37
            
            
            
            34
            
            
            
            35Selling,
      general and administrative
            
            
            49
            
            
            
            52
            
            
            
            47Depreciation
      and amortization
            
            
            31
            
            
            
            30
            
            
            
            29Total
      operating expenses
            
            
            117
            
            
            
            116
            
            
            
            111Operating
      loss
            
            
            (17
            )
            
            
            (16
            )
            
            
            (11
            )Other
      income (expense):Interest
      income
            
            
            —
            
            
            
            1
            
            
            
            1Interest
      expense, net of capitalized interest
            
            
            (10
            )
            
            
            (13
            )
            
            
            (15
            )Other
      income (expense)
            
            
            —
            
            
            
            —
            
            
            
            —Gain
      on disposal of assets
            
            
            —
            
            
            
            1
            
            
            
            —Goodwill
      impairment
            
            
            (20
            )
            
            
            (49
            )
            
            
            —Total
      other income (expense)
            
            
            (30
            )
            
            
            (60
            )
            
            
            (14
            )Loss
      before income tax expense
            
            
            (47
            )
            
            
            (76
            )
            
            
            (25
            )Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            (1
            )Net
      loss
            
            
            (47
            )%
            
            
            (76
            )%
            
            
            (26
            )%





Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006





Operating Revenues.Our
operating revenues for 2006 and 2007 were $189.9 million and $197.1 million,
respectively, an increase of $7.2 million, or 4%.  This increase was
driven primarily by a $8.9 million and $0.9 million increase in bundled services
revenues and broadband transport services revenues, respectively, partially
offset by a $2.5 million decrease in revenues from network
services.





Operating
revenues for our bundled services for 2006 and 2007 were $146.1 million and
$155.0 million, respectively, an increase of $8.9 million, or 6%. The increased
revenues from bundled services were primarily due to a 5% growth in the number
of connections, from 295,124 as of December 31, 2006 to 308,881 as of December
31, 2007, and, to a lesser extent, from the cable rate increases described
below. The additional connections and revenues resulted primarily from the
continued increase in penetration of existing marketable homes, the growth of
our commercial business revenue, and to a lesser extent, sales to new marketable
homes built during 2007.





Operating
revenues for our video services for 2006 and 2007 were $57.4 million and $64.2
million, respectively, an increase of $6.8 million, or 12%. Approximately 59% of
the $6.8 million increase was due to our annual cable rate increase that
occurred in January 2007, with the remainder due to increased connections and an
increased number of customers adding premium services and advanced services,
such as HD and DVR.





Operating
revenues for our voice services for 2006 and 2007 were $57.6 million and $56.1
million, respectively, a decrease of $1.5 million, or 3%, due to a 2% decrease
in average monthly revenue per telephone connection during 2007 compared to 2006
coupled with a 2% decrease in the number of connections during 2007 compared to
2006. Telephone connections decreased due to competitive pressures and changing
consumer preferences, as more customers choose to adopt VoIP products or use
their wireless phones as their primary phone line.





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Operating
revenues for our HSD and other services for 2006 and 2007 were $31.1 million and
$34.7 million, respectively, an increase of $3.6 million, or 12%, primarily due
to a 12% increase in connections related to residential high speed service and
business Ethernet service.





Operating
revenues for our broadband transport services for 2006 and 2007 were $8.6
million and $9.4 million, respectively, an increase of $0.8 million, or 9% as a
result of an increase in construction as well as moderate customer
growth.





Operating
revenues for our network services for 2006 and 2007 were $35.2 million and $32.7
million, respectively, a decrease of $2.5 million, or 7%. This decrease
consisted of a $1.3 million decrease in revenues from data services as the
result of a $0.9 million decrease in reciprocal compensation revenue partially
due to a regulatory mandated reduction in such compensation as well as a
decrease in volume from customers.  In addition, there was a $0.8
million and $0.6 million decrease in revenues from national directory assistance
service and carrier switched services, respectively, due to decreases in
customer volume.





Cost of Revenues.Our cost of
revenues for 2006 and 2007 were $63.9 million and $68.3 million, respectively,
an increase of $4.4 million, or 7%. Cost of revenues as a percentage of revenues
increased from 34% of revenues in 2006 to 35% of revenues in 2007. The increase
in our cost of revenues was primarily due to an increase in bundled services
video costs of approximately $5.8 million and an increase of $0.1 million in
wholesale and bundled services voice and HSD costs that was partially offset by
a $1.4 million decrease in other wholesale services costs.





Selling, General and Administrative
Expense. Our selling, general and administrative expense for 2006 and
2007 was $97.8 million and $93.7 million, respectively, a decrease of $4.1
million, or 4%. Selling, general and administrative expense decreased as a
percentage of revenues from 52% to 47%. Decreases in property tax, a 2006
nonrecurring early termination expense related to a property lease, reductions
in contract labor charges as sales and customer service positions were brought
in-house, as well as decreases in legal fees, provision for doubtful accounts,
employee relocation, utilities and other administrative expenses totaled
approximately $6.4 million, but such decreases were partially offset by
increases related to compensation and employee benefits primarily related to the
new sales and customer service positions described above, stock based
compensation, and other miscellaneous expenses that totaled approximately $2.3
million. We expect our selling, general and administrative expense to continue
to decrease in 2008 as we continue to focus on cost reductions and gain
efficiencies.





Depreciation and Amortization
Expense. Our depreciation and amortization expense for 2006 and 2007 was
$56.0 million and $56.8 million, respectively, an increase of $0.7 million, or
1%. The increase in depreciation expense was primarily related to property,
plant and equipment additions during the year ended December 31, 2007, primarily
for customer premise equipment, network construction and capitalized labor
expenses. During both 2006 and 2007, we received sales tax refunds as a result
of a review of vendor invoices in the years 2004 and 2005.  Because a
portion of the sales taxes associated with those invoices were capitalized as
property and equipment and were partially depreciated, $0.9 million and $0.7
million of the refund was applied as a reduction of depreciation expense during
2006 and 2007, respectively. The increases in depreciation expense were
partially offset by a decrease in depreciation expense related to sales and
dispositions as well as certain assets that became fully depreciated during the
year ended December 31, 2007.





Interest Expense. For 2006
and 2007, our interest expense, which includes interest incurred net of
capitalized interest, was $24.0 million and $29.0 million, respectively. Our
interest expense increased primarily due to the private placement of an
additional $25.0 million of senior notes in the third quarter of 2007. For 2006
and 2007, we had capitalized interest of $2.2 million and $0.6 million,
respectively, a decrease of $1.6 million, or 73%.





Gain on Disposal of Assets.
Our gain on disposal of assets for 2006 and 2007 was $2.4 million and $0.1
million, respectively, a decrease of $2.3 million. The 2006 net gain was
primarily due to the sale of certain off-net MDU assets during the first half of
2006 for net proceeds of $2.5 million. These assets were non-strategic in nature
and were originally acquired in our October 2003 acquisition of Advantex. The
net gain recognized during 2007 related primarily to amortization of deferred
gains related to the sale and leaseback of Company land and buildings and
customer premise equipment of approximately $0.4 million partially offset by the
net loss on sale or disposal of certain communications plant, vehicles, network
and other equipment.





Goodwill impairment. We
performed our annual process to test the carrying value of goodwill as of
October 1, 2005 and 2006 on our wholesale and retail reporting units, as
determined in accordance with Statement of Financial Accounting Standards
(“SFAS”) No. 142—Goodwill and
Other Intangible Assets(“SFAS 142”). In 2006, the goodwill impairment
test resulted in an impairment of $93.6 million, the entire amount of goodwill
associated with the retail reporting unit. The retail reporting unit primarily
included the assets, including a portion of the goodwill from the Thrifty Call
acquisition and all of the goodwill associated with the ClearSource merger,
liabilities and cash flows from bundled services and our broadband transport
services. During 2006, management set projections in line with the current
competitive environment and our liquidity position resulting in a downward
revision to the future cash flow projections and a lower fair value of the
retail reporting unit.





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Income tax
Expense.For the year ended December 31, 2007, our income tax
expense was $1.1 million.  Effective January 1, 2007, the state of
Texas changed its method of taxation from a franchise tax, which was based on taxable capital,to a tax based on gross margin.  This change resulted in a
different financial statement presentation of the tax to the state of
Texas.  Prior to January 1, 2007, the Texas franchise tax expense was
included as a component of selling, general and administrative expense in the
accompanying condensed consolidated statements of operations.  The
gross margin tax is presented as income tax expense during the year ended
December 31, 2007.





Year
Ended December 31, 2006 Compared to Year Ended December 31, 2005





Operating Revenues.Our
operating revenues for 2005 and 2006 were $194.7 million and $189.9 million,
respectively, a decrease of $4.8 million, or 2% primarily as a result of a $15.6
million decrease in operating revenues from network services, partially offset
by growth in bundled services revenue of $10.8 million.





Operating
revenues for our bundled services for 2005 and 2006 were $135.3 million and
$146.1 million, respectively, an increase of $10.8 million, or 8%. The increased
revenues from bundled services were primarily due to growth in the number of
connections, from 276,142 as of December 31, 2005 to 295,124 as of December 31,
2006, and, to a lesser extent, from the cable rate increases described below.
The additional connections and revenues resulted primarily from the continued
increase in penetration of existing marketable homes and to a lesser extent,
sales to new marketable homes built in 2006.





Operating
revenues for our video services for 2005 and 2006 were $50.1 million and $57.4
million, respectively, an increase of $7.3 million, or 15%. Approximately 34% of
the $7.3 million increase was due to our annual cable rate increase that
occurred in January 2006, with the remainder due to increased connections and an
increased number of customers adding premium services and advanced services,
such as HD and DVR.





Operating
revenues for our voice services for 2005 and 2006 were $58.7 million and $57.6
million, respectively, a decrease of $1.1 million, or 2%, due to a 6% decrease
in average monthly revenue per unit, offset by a 1% growth in telephone
connections. Approximately 41% of the decrease in average monthly revenue per
unit was due to a regulatory mandated reduction in meet point billing access
rates.





Operating
revenues for our HSD and other services for 2005 and 2006 were $26.6 million and
$31.1 million, respectively, an increase of $4.5 million, or 17%, primarily as a
result of growth in broadband connections which increased approximately 18% in
2006 over 2005.





Operating
revenues for our broadband transport services for 2005 and 2006 were flat at
$8.6 million. These services have experienced circuit attrition and pricing
compression, which has outpaced our customer growth in 2004, 2005, and the first
half of 2006. Our revenue for broadband transport services increased during the
second half of 2006 compared to the second half of 2005 due to moderate customer
growth.





Operating
revenues for our network services for 2005 and 2006 were $50.8 million and $35.2
million, respectively, a decrease of $15.6 million, or 31%. This decrease was
driven by three factors. First, we experienced a decrease in domestic carrier
switched services revenue, which fell by $9.6 million, as a result of a decrease
in volume. Second, our decision to de-emphasize our international carrier
switched services business, which historically was marginally profitable,
resulted in a decrease of $3.9 million. Finally, reciprocal compensation revenue
decreased by $2.0 million from 2005 to 2006 due to a regulatory mandated
reduction.





Cost of Revenues.Our cost of
revenues for 2005 and 2006 were $72.5 million and $63.9 million, respectively, a
decrease of $8.6 million, or 12%. The decrease in our overall cost of revenues
was primarily due to the decrease in network services revenue, which resulted in
a decrease in the variable component of network services costs. Cost of revenues
as a percentage of revenues decreased from 37% of revenues in 2005 to 34% of
revenues in 2006.





Selling, General and Administrative
Expense. Our selling, general and administrative expense for 2005 and
2006 was $96.0 million and $97.8 million, respectively, an increase of $1.8
million, or 2%. The increase was primarily due to the cost of growing the
bundled services business, increased focus on customer service, and management
changes that occurred during 2006. As the bundled service business grew, we
increased our expenditures on sales and marketing, installing new customers, and
billing. We also increased our investment in our call centers in order to
improve the customer experience and drive sales from this sales channel.
Finally, we integrated new individuals into our senior management team who
replaced former members of the team. Selling, general and administrative expense
increased as a percentage of revenues from 49% to 52% primarily due to the 31%
decrease in network service revenue relative to the fixed cost components
included in selling, general and administrative expense as well as the growth in
selling, general and administrative costs described above.





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 Table of Contents





Depreciation and Amortization
Expense. Our depreciation and amortization expense for 2005 and 2006 was
$59.5 million and $56.0 million, respectively, a decrease of $3.5 million, or
6%. The decrease was primarily due to certain intangible assets becoming fully
amortized during 2005, a $1.8 million impairment recorded in the fourth quarter
of 2005 on the franchise agreement intangible asset as a result of the SICFA
approval, which eliminated the need for individual city franchise agreements,
and a $0.9 million reduction in depreciation in the third quarter of 2006
relating to a sales tax refund. We received a refund in the amount of $2.0
million and incurred professional fees, interest and use tax of $1.1 million as
a result of the conclusion of a sales tax audit and review of vendor invoices
for the years 2000 through 2003. Because the sales taxes associated with those
invoices were capitalized as property and equipment and were fully depreciated,
the net refund of $0.9 million was applied as a reduction of depreciation
expense.





Interest Expense. For 2005
and 2006, our interest expense, which includes interest incurred net of
capitalized interest, was $18.8 million and $24.0 million, respectively. Our
interest expense increased primarily due to the private placement of an
additional $32.0 million of senior notes in the first quarter of 2006. For 2005
and 2006, we had capitalized interest of $3.3 million and $2.2 million,
respectively, a decrease of $1.1 million, or 33%. The decrease in capitalized
interest was primarily due to decreased network construction activity and
decreased capital expenditures.





Goodwill impairment. We
performed our annual process to test the carrying value of goodwill as of
October 1, 2005 and 2006 on our wholesale and retail reporting units, as
determined in accordance with SFAS 142. For the 2005 annual impairment test, we
determined the fair values of our reporting units based on a combination of (i)
estimated discounted future cash flow projections, as well as assumptions of
terminal value and (ii) market multiples for comparable companies. During the
2006 annual impairment test, we engaged a third-party appraisal firm to assist
us in the determination of the fair value of the reporting units, based in part
by estimates developed by management based on a combination of (i) estimated
discounted future cash flow projections, as well as assumptions of terminal
value and (ii) market multiples for comparable companies.





In 2005,
the goodwill impairment test resulted in an impairment of $39.6 million, the
entire amount of goodwill associated with the wholesale reporting unit. The
wholesale reporting unit includes the assets, including a portion of the
goodwill associated with the Thrifty Call acquisition, liabilities, and cash
flows from network services. During the last half of 2005, we revised
projections downward for our network services line of service based on our
revised business strategy, trends in the industry and management’s analysis of
the competitive environment, which negatively impacted the wholesale reporting
unit’s future cash flow projections.





In
2006, the goodwill impairment test resulted in an impairment of $93.6 million,
the entire amount of goodwill associated with the retail reporting unit. We also
used a third-party appraisal firm to assist us in the determination of the value
of the significant tangible and intangible long-lived assets of the reporting
unit as part of this impairment calculation. The retail reporting unit primarily
included the assets, including a portion of the goodwill from the Thrifty Call
acquisition and all of the goodwill associated with the ClearSource merger,
liabilities and cash flows from bundled services and our broadband transport
services. During 2006, management set projections in line with the current
competitive environment and our liquidity position resulting in a downward
revision to the future cash flow projections and a lower fair value of the
retail reporting unit.





Non-GAAP
Financial Measures





We
measure our operating performance on earnings before interest income, interest
expense, income taxes, depreciation and amortization, referred to as “EBITDA.”
EBITDA is not a measure of financial performance under GAAP. 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 manage all areas of our business to generate positive EBITDA, and
when we have choices about the market or area in which to best deploy our
resources we generally direct our resources towards the network construction
that is expected to generate the most EBITDA. EBITDA is frequently used as a
basis for comparing businesses in our industry, although our measure of EBITDA
may not be comparable to similarly titled measures of other companies. EBITDA
does not purport to represent operating loss or cash flow from operating
activities, as those terms are defined under GAAP, and should not be considered
as an alternative to those measurements as an indicator of our
performance.





In the
fourth quarter of 2005 and 2006, we recognized a goodwill impairment of $39.6
million and $93.6 million, respectively, associated with the results of our
annual impairment test. In the first quarter of 2006, Grande began recognizing
compensation expense for stock-based compensation in accordance with SFAS No.
123(R), Share-Based
Payment (“SFAS 123(R)”), which is a non-cash item. The Company believes
goodwill impairments, non-cash stock-based compensation, and other non-cash
expense are similar to amortization and interest expense, in that it is more
useful to report EBITDA net of these amounts to better measure operating
performance in comparison to prior periods. However, because of the nature of
these charges, the Company is referring to EBITDA, net of goodwill impairments,
non-cash stock-based compensation charges, and other non-cash expense as
“Adjusted EBITDA”.





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Adjusted
EBITDA was $31.1 million and $35.5 million during the years ended December 31,
2006 and 2007, respectively, an increase of $4.4 million, or 14%. The increase
was primarily due to a $7.3 million increase in revenues as well as a $3.8
million decrease in selling, general and administrative expenses, excluding
stock-based compensation and franchise tax expense, partially offset by a $4.4
million increase in costs of revenues and a $2.3 million decrease in net gain on
sale of assets.





Adjusted
EBITDA was $27.5 million and $31.1 million during the years ended December 31,
2005 and 2006, respectively, an increase of $3.6 million, or 13%. The increase
was primarily due to a $8.6 million decrease in costs of revenues as well as a
$1.9 million increase in net gain on sale of assets, partially offset by a $5.6
million decrease in revenues and other income and a $1.3 million increase in
selling, general and administrative expenses, excluding stock-based compensation
and franchise tax expense.





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





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





Year Ended
      December 31,2005
            
            
            2006
            
            
            2007(in
      thousands)Net
      loss, as reported
            
            $
            (89,770
            )
            
            $
            (141,637
            )
            
            $
            (50,532
            )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
            
            
            (709
            )
            
            
            (1,546
            )
            
            
            (1,670
            )Interest
      expense, net of capitalized interest
            
            
            18,801
            
            
            
            23,970
            
            
            
            29,012Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            1,123Franchise
      tax expense
            
            
            125
            
            
            
            300
            
            
            
            (268
            )Depreciation
      and amortization
            
            
            59,507
            
            
            
            56,037
            
            
            
            56,752EBITDA
            
            
            (12,046
            )
            
            
            (62,876
            )
            
            
            34,417Stock-based
      compensation expense
            
            
            —
            
            
            
            377
            
            
            
            573Other
      expense
            
            
            —
            
            
            
            —
            
            
            
            489Goodwill
      impairment
            
            
            39,576
            
            
            
            93,639
            
            
            
            —Adjusted
      EBITDA(1)
            
            $
            27,530
            
            
            $
            31,140
            
            
            $
            35,479


____________________________


(1)
            Adjusted
      EBITDA includes gain on sale of assets of $0.4 million in 2005, $2.4
      million in 2006 and $0.1 million in
2007.





Liquidity
and Capital Resources





Sources
and Uses of Funds





Since
inception, we have been funded primarily with private equity investments and
issuance of debt securities. Between February 2000 and October 2003, we
completed a series of private placements of our preferred stock, raising
aggregate gross proceeds of $338.2 million from the sale of our capital stock.
The net proceeds from these private placements were used to fund our network
build-out, operations, and our acquisitions. As a result of equity investments
and our stock-for-stock merger with ClearSource in 2002, where stock was used as
consideration, we now have $509 million of total invested equity capital and a
base of over 20 institutional private equity investors.





We have
also raised net proceeds of approximately $180.1 million from the sale of our
senior notes including premiums and net of discounts and financing costs. In
March 2004, we issued $136.0 million principal amount at maturity of senior
notes with net proceeds of approximately $123.8 million and in March 2006, we
raised net proceeds of approximately $30.5 million in a private placement of an
additional $32 million in aggregate principal amount of senior notes. Interest
on the senior notes is payable semi-annually each April 1 and October 1. We used
a portion of the net proceeds from the issuance of the senior notes in 2004 to
repay all amounts outstanding under our then-existing senior credit facility. We
used the net proceeds from the sale of the additional senior notes in March 2006
for capital expenditures and working capital purposes.





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In March
2006, we raised net proceeds of approximately $30.5 million in a private
placement of an additional $32.0 million in aggregate principal amount of senior
notes. These additional senior notes were issued under the Indenture. We used
the net proceeds for capital expenditures and working capital
purposes.





On July
18, 2007, we completed a private placement offering of an additional $25 million
in aggregate principal amount of senior notes for gross proceeds of
approximately $26.0 million including a premium on issuance of $1.0
million.  Debt issuance costs were approximately $0.2
million.  We are using the net proceeds for capital expenditures and
working capital purposes. These additional senior notes were issued under the
Indenture and are part of the same series of senior notes as those issued in
March 2004 and March 2006.  The holders of a majority of the
outstanding principal balance of the senior notes consented to the amendment of
the Indenture to allow the Company to complete this issuance and we entered into
a Supplemental Indenture to reflect this amendment on July 18,
2007.





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





As of
December 31, 2007, we had total cash and cash equivalents of $48.1 million and
$203.6 million of long-term debt and capital lease obligations outstanding, net
of current portion, and net of discounts and premiums of $5.0
million.





As of
December 31, 2007, we had net working capital of $19.8 million, compared to net
working capital of $20.2 million as of December 31, 2006.  The $0.4
million decrease in working capital resulted primarily from a $5.2 million
increase in current liabilities as a result of a $3.5 million increase in
accrued payables and accrued expenses as well as a $1.6 million increase in the
current portion of long-term debt related to the network equipment purchases
financed during 2007.  The $5.2 million increase in current
liabilities was partially offset by a $4.8 million increase in current assets
primarily related to the $4.2 million increase in cash.





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





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





Cash
Flows from Operating Activities





Net cash
provided by operations totaled $14.8 million, $9.7 million and $11.7 million for
2005, 2006 and 2007, respectively. The net cash flow activity related to
operations consists primarily of our operating results adjusted by changes in
operating assets and liabilities and non-cash transactions
including:





•
            depreciation,
      amortization and accretion expense;





•
            non-cash
      compensation expense;





•
            non-cash
      interest expense;





40
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•
            provision
      for bad debt;





•
            goodwill
      impairments; and





•
            gain
      on sale of assets.





Depreciation
and amortization for 2005, 2006 and 2007 was $59.5 million, $56.0 million and
$56.8 million, respectively. Goodwill impairment for 2005 and 2006 was $39.6
million and $93.6 million, respectively. There were no goodwill impairments in
2007.  Other non-cash charges for 2005, 2006 and 2007 were $6.7
million, $3.6 million and $6.1 million, respectively.





As of
December 31, 2007, we had a $6.8 million balance in accrued interest payable
related to interest due on our senior notes, which will be paid on April 1,
2008.





Cash
Flows from Investing Activities





Our net
cash used in investing activities for 2005, 2006 and 2007 was $28.4 million,
$26.4 million and $33.6 million, respectively. During 2005, these net cash
outflows were primarily due to the build-out of our network. Cash flows used in
investing activities in 2006 consisted primarily of $30.9 million in property,
plant and equipment purchases, partially offset by $4.2 million proceeds on
sales tax refunds and asset sales. During 2007, cash flows used in investing
activities consisted primarily of $35.3 million in property, plant and equipment
purchases, partially offset by $1.8 million proceeds on sales tax refunds and
asset sales.





Cash
Flows from Financing Activities





Our net
cash provided by (used in) financing activities for 2005, 2006 and 2007 was
$(0.9) million, $33.9 million and $26.0 million, respectively. Cash flows from
financing activities in 2006 consisted primarily of the net proceeds from the
private placement of an additional $32 million in aggregate principal amount of
senior notes and net proceeds of $7.4 million primarily related to the sales
leaseback arrangement for customer premise equipment partially offset by $3.2
million payments on long-term debt. During 2007, cash flows from financing
activities consisted primarily of the net proceeds from borrowings of $30.1
million related to a private placement of $25 million in aggregate principal
amount of senior notes and a loan obligation used to finance equipment
purchases, offset by $4.3 million payments on long-term debt.





Capital
Expenditures





We had
capital expenditures of approximately $48.2 million, $30.9 million and $35.3
million, including capitalized interest, in 2005, 2006 and 2007, respectively.
These capital expenditures relate to: network construction; initial installation
costs; the purchase of customer premise equipment, such as cable set-top boxes
and cable modems; corporate and network equipment, such as switching and
transport equipment; and billing and information systems. The increase in
capital expenditures during 2007 was primarily due to capital equipment
purchases related to our long haul fiber optic network upgrade. The Indenture
prohibits us from making capital expenditures when the aggregate amount of cash
and cash equivalents held by us (after giving effect to such planned capital
expenditure) would be less than $20 million.





During
the year ending December 31, 2008, the Company intends to manage its capital
expenditures in accordance with the covenant set forth in the Indenture to
ensure that cash is not less than $20 million.





Contractual
Obligations and Commercial Commitments





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





Long-term Debt and Equipment
Financing. In March 2004, the Company completed a private placement
offering for 136,000 units, with each unit consisting of (1) $1,000 of senior
notes and (2) a warrant to purchase 100.336 shares of common stock. The senior
notes mature on April 1, 2011 and accrue interest at the rate of 14% per annum
with the interest payable semi-annually in cash in arrears on April 1 and
October 1.  In March 2006, we raised net proceeds of approximately
$30.5 million in a private placement of an additional $32.0 million in aggregate
principal amount of senior notes. These additional senior notes were issued
under the Indenture and are part of the same series of senior notes as those
issued in March 2004.





On July
18, 2007, we completed a private placement offering of an additional $25 million
in aggregate principal amount of senior notes for gross proceeds of
approximately $26.0 million including a premium on issuance of $1.0
million.  Debt issuance costs were approximately $0.2
million.  These additional senior notes were issued under the
Indenture and are part of the same series of senior notes as those issued in
March 2004 and March 2006.  The holders of a majority of the
outstanding principal balance of the senior notes consented to the amendment of
the Indenture to allow the Company to complete this issuance and we entered into
a Supplemental Indenture to reflect this amendment on July 18,
2007.





41
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Our
subsidiary, Grande Communications Networks, Inc., (the “Subsidiary Guarantor”),
has unconditionally guaranteed, jointly and severally, the payment of the
principal, premium and interest (including any additional interest on the senior
notes) on a senior secured basis.





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





The
senior notes may be redeemed, at our election, as a whole or from time to time
in part, at any time after April 1, 2008, upon not less than 10 nor more than 60
days’ notice to each holder of senior notes to be redeemed, subject to the
conditions and at the redemption prices (expressed as percentages of principal
amount) set forth below, together with accrued and unpaid interest and
Liquidating Damages (as defined in the Indenture), if any, to the applicable
redemption date.





Year
            
            Percentage2008
            
            
            107.00
            %2009
            
            
            103.50
            %2010
      and thereafter
            
            
            100.00
            %





If we
experience specific kinds of change of control events, each holder of senior
notes may require us to repurchase all or any portion of such holder’s senior
notes at a purchase price equal to 101% of the principal amount of the senior
notes, plus accrued and unpaid interest to the date of repurchase.





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





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





•
            create
      liens on our assets;





•
            pay
      dividends on, redeem or repurchase our capital stock or make other
      restricted payments;





•
            make
      investments in other companies;





•
            enter
      into transactions with affiliates;





•
            enter
      into sale and leaseback
transactions;





•
            sell
      or make dispositions of assets;





•
            place
      restrictions on the ability of our restricted subsidiaries to pay
      dividends or make other payments to us;
and





•
            engage
      in certain business activities.





In
addition, the Indenture contains a covenant restricting our capital expenditures
relating to the build-out of new or additional parts of our network if such
expenditures would result in us having less than $20 million in cash and cash
equivalents.





The
Indenture also contains customary events of default, including nonpayment of
principal or interest, violations of covenants, cross default and cross
acceleration to certain other indebtedness and material judgments and
liabilities.





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





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





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





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





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Purchase Commitments:During
January 2005, we entered into a minimum purchase agreement with a vendor for the
purchase of $5.6 million of fiber optic equipment and installation and
maintenance services through January 2008. During March 2008, we entered into
Amendment No. 1 to the minimum purchase agreement extending the term of the
purchase commitment through December 31, 2008. If we do not make the minimum
purchases through the expiration or termination of this agreement, we will be
required to pay a fee of 30% of the remaining unfulfilled amount. Purchases
under this agreement were $1.0 million and $0.5 million during the years ended
December 31, 2006 and 2007, respectively.





The
following table represents the contractual obligations described above as of
December 31, 2007:





Payments Due by
Period2008
            
            
            2009
            
            
            2010
            
            
            2011
            
            
            2012
            
            
            2013 & Beyond
            
            
            Total(In
      thousands)Long-term
      debt and related interest obligations
            
            $
            29,075
            
            
            $
            29,152
            
            
            $
            27,024
            
            
            $
            206,510
            
            
            $
            —
            
            
            $
            —
            
            
            $
            291,761Capital
      lease obligations
            
            
            5,061
            
            
            
            2,574
            
            
            
            1,810
            
            
            
            1,697
            
            
            
            1,697
            
            
            
            17,976
            
            
            
            30,815Operating
      lease obligations
            
            
            3,888
            
            
            
            3,339
            
            
            
            2,259
            
            
            
            1,926
            
            
            
            1,900
            
            
            
            8,630
            
            
            
            21,942Maintenance
      obligations
            
            
            1,053
            
            
            
            1,054
            
            
            
            1,035
            
            
            
            1,035
            
            
            
            1,035
            
            
            
            8,210
            
            
            
            13,422Purchase
      obligations
            
            
            2,429
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2,429Total
            
            $
            41,506
            
            
            $
            36,119
            
            
            $
            32,128
            
            
            $
            211,168
            
            
            $
            4,632
            
            
            $
            34,816
            
            
            $
            360,369





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





We have
also entered into several employment agreements with key executives of the
Company. For a discussion surrounding the terms of these agreements, please
refer to “Executive Compensation” under the caption “Employment Agreements,
Severance Benefits and Change in Control Provisions”.





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 residential and small and medium sized business customers is principally
derived from bundled packages of video, voice, HSD and other
services.  Bundled services revenue consists of fixed monthly fees and
usage based fees for long distance service and is recorded as revenue in the
period the service is provided.  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.  Installation revenues obtained from bundled service
connections are recognized in accordance with SFAS No. 51, Financial Reporting by Television
Cable Companies, as the connections are completed since installation
revenues recognized are less than the related direct selling
costs.  Installation costs are included in property, plant, and
equipment and depreciated over the estimated life of communications
plant.  Local governmental authorities impose franchise fees on the
majority of our franchises of 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 of
approximately $2.2 million, $2.5 million, and $2.9 million during the years
ended December 31, 2005, 2006, and 2007, respectively, are reported as revenues
and cost of revenues, respectively. The Federal Communications Commissions
imposes a tax on long distance calls to fund telephone service for the poor, and
to support telecommunications services for libraries, schools, and rural health
care providers.  Such taxes are collected on a monthly basis from our
customers and periodically remitted to the Universal Service Fund
(“USF”).  Sales and other taxes imposed by governmental authorities
are also collected on a monthly basis from our customers and periodically
remitted to governmental authorities. Revenue is presented net of the applicable
USF, sales and other taxes.





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Revenue
from broadband transport services is principally derived from providing medium
and large enterprises and communication carriers with access to our metro area
networks and point-to-point circuits on our long-haul fiber optic
network.  Revenue from network services is principally derived from
switched carrier services and managed modem services.  Broadband
transport and network services revenue consists of fixed monthly fees and usage
based fees and is recorded as revenue in the period the service is
provided.  Amounts billed in advance are reflected in the balance
sheet as deferred revenue and are deferred until the service is
provided.  Revenue also includes upfront non-recurring fees for
construction, installation and configuration services that are deferred and
recognized over the related service contract period.





In
instances where multiple deliverables are sold contemporaneously to the same
counterparty, we follow the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition.
Specifically, if the Company enters into sales contracts for the sale of
multiple products or services, then the Company evaluates whether it has
objective fair value evidence for each deliverable in the transaction. If the
Company has objective fair value evidence for each deliverable of the
transaction, then it accounts for each deliverable in the transaction
separately, based on the revenue recognition policies outlined above. The
residual method is used when no fair value is available for the deliverable. For
example, this would occur when the Company enters into an agreement for service
that includes the Company providing equipment in connection with the service and
the subscriber paying an installation fee as well as monthly charges. Because
the Company is providing both a product and a service, revenue is allocated to
the product and monthly subscription service based on relative fair value and
revenue is allocated to installation services using the residual method. To
date, product revenues have not been significant.





Classification
of Various Direct Labor and Other Overhead Costs





Our
business is capital intensive, and large portions of our financial resources are
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, based on an
actual rate, applied to the amount of direct labor capitalized based upon our
analysis of the nature of costs incurred in support of capitalizable activities.
The primary costs that are included in the determination of overhead rates are
(i) employee benefits and payroll taxes associated with capitalized direct
labor, (ii) direct variable costs associated with capitalizable activities,
consisting primarily of installation and construction vehicle operating 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 2005, 2006 and 2007, $10.6
million, $8.3 million and $8.5 million of labor and overhead costs were
capitalized, respectively. Capitalized costs are depreciated along with the
physical assets to which they relate, which have lives of three to ten years
depending on the type of asset.





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.





Allowance
for Doubtful Accounts





Accounts
receivable are recorded at their net realizable values. The Company uses
estimates to determine the allowance for doubtful accounts and records an
accounts receivable reserve for known collectibility issues, as such issues
relate to specific transactions or customer balances. These estimates are based
on historical collection experience, current trends, credit policy and a
percentage of the Company’s customer accounts receivable. In determining these
percentages, the Company looks at historical write-offs of the receivables. The
Company writes off accounts receivable when it becomes apparent based upon age
or customer circumstances that such amounts will not be collected.





44
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Stock
Based Compensation





Prior to
the adoption of SFAS 123(R), on January 1, 2006 we measured compensation costs
for options issued or modified under our stock-based compensation plans using
the intrinsic-value method of accounting. Under the intrinsic-value method, we
recorded deferred compensation expense for stock options awarded to employees
and directors to the extent that the option exercise price was less than the
fair market value of common stock on the date of grant.





On
January 1, 2006 we adopted the fair value recognition provisions of SFAS 123(R).
We apply the provisions of SFAS 123(R) to new stock option grants and to stock
option grants that are modified, repurchased or cancelled subsequent to January
1, 2006 using the prospective method of transition. Compensation expense
calculated under SFAS 123(R) is amortized to compensation expense on a
straight-line basis over the vesting period of the underlying stock option
grants. We will continue to apply the intrinsic-value method to determine
compensation expense for stock options granted prior to the adoption of SFAS
123(R).





Determining
the appropriate fair value model and calculating the fair value of share-based
payment awards requires the input of highly subjective assumptions, including
the expected life of the share-based payment awards and stock price volatility.
We use the Black-Scholes-Merton model to value our stock option awards. The
assumptions used in calculating the fair value of share-based payment awards
represent management’s best estimates, but these estimates involve inherent
uncertainties and the application of management judgment. As a result, if
factors change and management uses different assumptions, share-based
compensation expense could be materially different in the future. Because our
shares are not traded on a public market, we use comparable companies as a basis
for our expected volatility. This may materially impact the fair value of stock
option grants. In addition, we are required to estimate the expected term and
forfeiture rate and only recognize expense for those shares expected to vest. If
the actual forfeiture rate is materially different from the estimate,
share-based compensation expense could be significantly different from what has
been recorded in the current period.





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





Recent
Accounting Pronouncements





Business
Combinations





In
December 2007, the Financial Accounting Standards Board (“FASB”) issued SFAS No.
141 (Revised 2007), Business
Combinations (“SFAS 141(R)”). SFAS 141(R) will significantly change the
accounting for business combinations. Under SFAS 141(R), an acquiring entity
will be required to recognize all the assets acquired and liabilities assumed in
a transaction at the acquisition-date fair value with limited exceptions. SFAS
141(R) will change the accounting treatment for certain specific acquisition
related items including: (1) expensing acquisition related costs as incurred;
(2) valuing noncontrolling interests at fair value at the acquisition date; and
(3) expensing restructuring costs associated with an acquired business. SFAS
141(R) also includes a substantial number of new disclosure requirements. SFAS
141(R) is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. We expect SFAS 141(R) will have
an impact on our accounting for future business combinations once adopted but
the effect is dependent upon the acquisitions that are made in the
future.





Fair
Value Measurements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in applying generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies whenever an entity
is measuring fair value under other accounting pronouncements that require or
permit fair value measurement. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, however the FASB
provided a one year deferral for implementation of the standard for
non-financial assets and liabilities. We do not expect the adoption of SFAS 157
to have a material impact on our consolidated financial statements.





In
February 2006, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115(“SFAS 159”). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
SFAS 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. SFAS 159 was
effective for us on January 1, 2008. We did not apply the fair value option
therefore; SFAS 159 did not have an impact on our consolidated financial
statements.





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 Table of Contents





ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





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





ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





Item 8 is
incorporated by reference to pages F-1 through F-22 herein.





ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





None.





ITEM 9A.
            CONTROLS
      AND PROCEDURES





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





Our
management, with the participation of our Chief Executive Officer, who is our
principal executive officer, and our Chief Financial Officer, who is our
principal financial officer, have evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e), as
applicable, under the Securities Exchange Act of 1934) as of December 31, 2007.
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 subsidiary, required to be included in this report and the
other reports that we file or submit under the Securities Exchange Act of
1934.





During
2007, there was no change in our internal controls over financial reporting that
has materially affected, or is likely to materially affect, our internal
controls over financial reporting.





In
designing and evaluating the disclosure controls and procedures, our management
recognized that any controls and procedures, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance of achieving the
desired control objectives, and management necessarily was required to apply its
judgment in evaluating the cost-benefit relationship of possible controls and
procedures.  Based upon the above evaluation, we believe that our
controls provide such reasonable assurances.





Management’s
Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15(f) and 15d-15(f). Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
we conducted an evaluation of the effectiveness of our internal control over
financial reporting as of December 31, 2007 based on the framework in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). Based on that evaluation, our management
concluded that our internal control over financial reporting was effective as of
December 31, 2007.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to financial
statement preparation and presentation.





This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial
reporting.  Management’s report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management’s report in
this annual report.





ITEM 9B.
            OTHER
      INFORMATION





None




46
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PART
III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Directors





The
following table sets forth the name and age of each director, indicating all
positions and offices with our Company currently held by the director as well as
the term of office for each director (1):





Name
            
            Age
            
            Year Joined Board
            
            Class
            
            PositionRoy
      H. Chestnutt
            
            48
            
            2006
            
            I
      (8)
            
            President,
      Chief Executive Officer and Chairman of the board of
    directorsLawrence
      M. Schmeltekopf (4)(6)(7)
            
            44
            
            2006
            
            I
      (8)
            
            Member,
      board of directorsRichard
      W. Orchard (2)(5)
            
            54
            
            2006
            
            I
      (8)
            
            Member,
      board of directorsJohn
      C. Hockin
            
            37
            
            2002
            
            II
      (9)
            
            Member,
      board of directorsDavid
      C. Hull, Jr. (2)(3)(5)(6)
            
            63
            
            2000
            
            II
      (9)
            
            Member,
      board of directorsDuncan
      T. Butler, Jr. (3)(4)
            
            45
            
            2000
            
            III
      (10)
            
            Member,
      board of directorsWilliam
      Laverack, Jr. (3)(4)(5)
            
            51
            
            2001
            
            III
      (10)
            
            Member,
      board of directors


____________________________


(1)
            James
      M. Mansour served as Chairman of the board of directors from January 2005
      until his resignation in January
2008.





(2)
            Member
      of the audit committee.





(3)
            Member
      of the compensation committee.





(4)
            Member
      of the finance committee.





(5)
            Member
      of the nominating committee.





(6)
            Audit
      committee financial expert.





(7)
            Chairman
      of the audit committee.





(8)
            Term
      expires at 2008 shareholders’
meeting.





(9)
            Term
      expires at 2009 shareholders’
meeting.





(10)
            Term
      expires at 2010 shareholders’
meeting.





Set forth
below are descriptions of the backgrounds of each of our directors.





Roy H. Chestnuttjoined
Grande as our Chief Executive Officer in February 2006 and has served as a
member of our board of directors since February 2006. In June 2006, Mr.
Chestnutt was appointed President of the Company in addition to his role as
Chief Executive Officer. In January 2008, Mr. Chestnutt was appointed Chairman
of the board of directors upon James Mansour’s resignation.  Prior to
joining Grande, Mr. Chestnutt was the Senior Vice President of National Field
Sales and General Business for Sprint-Nextel. He was responsible for the General
Business segment, which focuses on nationwide wireline and wireless operations
of direct sales channels, value-added resellers (VARs), business solutions
partners, sales operations and pre-sale support. Before Nextel merged with
Sprint, Mr. Chestnutt held positions at Nextel Communications as Regional Vice
President of the Southwest in Austin and of the West in the San Francisco Bay
Area from 2002 to 2006. He also served as President of the Texas/Oklahoma area
from its Austin offices. Mr. Chestnutt also has general management experience
with PrimeCo Personal Communications and AirTouch Cellular. Mr. Chestnutt earned
an MBA from the University of San Francisco with an emphasis in General
Management and International Business and a BS in Business Administration from
San Jose State University with a focus in marketing.





Lawrence M. Schmeltekopf was
appointed as a member of our board of directors and as Chairman of the audit
committee of the board of directors in June 2006. Mr. Schmeltekopf currently
serves as Assistant Controller—Accounting and Internal Reporting at Valero
Energy Corporation, a Fortune 500 energy company based in San Antonio, Texas,
and has held this position for five years. Prior to working for Valero, from
2000 to 2002, Mr. Schmeltekopf was an audit partner in the Austin office of
Arthur Andersen LLP and was the audit engagement partner on the Company’s audit
by Arthur Andersen in 2000 and 2001. Mr. Schmeltekopf received his BBA from
Texas State University and is a Certified Public Accountant.





Richard W. Orchard was
appointed as a member of our board of directors in October 2006. From November
2004 to September 2006, Mr. Orchard served as Chief Transition Officer for
Sprint-Nextel where he managed all aspects of the $36 billion dollar merger
between Sprint and Nextel. Prior to the Sprint-Nextel merger, he was with Nextel
for over ten years, serving as Eastern Regional President and during his last
four years as a Senior Vice President and Chief Service Officer. Prior to
joining Nextel in 1994, Mr. Orchard spent over 10 years with PacTel/Airtouch and
5 years with Motorola Communications. Mr. Orchard also currently serves on the
board of directors of Peco II, a telecom power equipment manufacturer and
National Safeplace, a nationwide outreach for at-risk kids. Mr. Orchard received
a BA in Political Science from the University of California, Santa
Barbara.





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John C. Hockin has served as
a member of our board of directors since November 2002. Mr. Hockin has been a
Portfolio Manager (and co-founder) of Whitney Green River Fund, L.P. since
November 2004.  Prior to that, he was an investment professional at
J.H. Whitney & Co. since 1999. Mr. Hockin received his BA from Yale and his
MBA from the Stanford Business School.





David C. Hull, Jr. has served
as a member of our board of directors since February 2000. Since 1993, Mr. Hull
has been a managing director of Centennial Ventures. From 1986 to 1993, Mr. Hull
served as general partner, during which time he was promoted to managing general
partner, of Criterion Venture Partners, the venture arm of TransAmerica. Prior
to joining Criterion, from 1976 to 1985 he was senior vice president of finance,
treasurer and director of General Leisure Corporation, a restaurant and hotel
operating company, and a vice president of Texas Capital Corporation, a small
business investment company. Mr. Hull currently serves on the board of directors
of Centennial Holdings I, LLC, Augmentix Corporation and ExteNet Systems, Inc.
Mr. Hull received his BS in Chemical Engineering and his MBA from The University
of Texas at Austin.





Duncan T. Butler, Jr. has
served as a member of our board of directors since February 2000. Since April
2000, Mr. Butler has served as a managing director of Centennial Ventures and he
has served as a managing director of Prime New Ventures since October 1994. Mr.
Butler currently also serves on the board of directors of Masergy
Communications, Inc., a global network service provider and Hoak Media, a
television and radio broadcasting company. Mr. Butler received his BBA and his
MBA from The University of Texas at Austin and his JD from The University of
Texas School of Law.





William Laverack, Jr. has
served as a member of our board of directors since May 2001. Mr. Laverack is a
managing director of J. H. Whitney & Co., which he joined in 1993, and
managing partner of Laverack Capital Partners, LLC, which he founded in 2005.
Mr. Laverack received his BA and MBA from Harvard University.





Executive
Officers





The
following table sets forth the name and age of each named executive officer,
indicating all positions and offices with our Company currently held by the
executive officer (1):





Name
            
            Age
            
            PositionRoy
      H. Chestnutt
            
            48
            
            President
      and Chief Executive Officer and Chairman of the board of
      directorsMichael
      L. Wilfley
            
            52
            
            Chief
      Financial OfficerW.K.L.
      “Scott” Ferguson, Jr.
            
            49
            
            Chief
      Operating OfficerJeffrey
      A. Brennan
            
            53
            
            Senior
      Vice President of Business Services


____________________________





(1)
            William
      C. “Chad” Jones, Jr. served as Chief Service Officer until January
      2008.





Set forth
below are descriptions of the backgrounds of each of our executive officers,
other than Mr. Chestnutt, whose position and background is described
above.





Michael L. Wilfleyhas served
as our Chief Financial Officer since July 2000. Mr. Wilfley has over 20 years
experience as a chief financial officer, including seven years as a chief
financial officer in the telecommunications industry. Previously, from 1998 to
2000, Mr. Wilfley was the chief financial officer of Thrifty Call, Inc., a
telecommunications company, where he was responsible for the capital markets and
mergers and acquisitions efforts that led to our eventual acquisition of Thrifty
Call. Prior to working for Thrifty Call, from 1993 to 1997, Mr. Wilfley served
as the chief financial officer for Littlefield Real Estate Co., a private
investment company. Mr. Wilfley serves on the board of directors of Littlefield
Corporation. Mr. Wilfley is a certified public accountant and a graduate of The
University of Texas at Austin.





W.K.L. “Scott” Ferguson, Jr.has served as our Chief Operating Officer since February 2006. Prior to
that, from July 2005 to February 2006, he served as Interim Chief Executive
Officer and President, and from June 2002 to January 2005, Executive Vice
President, Retail Services and from February 2000 to June 2002 as Chief
Operating Officer. Previously, from 1997 to 1999, Mr. Ferguson was a founding
partner and senior vice president of PrimeOne, L.P., a broadband video services
company. At PrimeOne, Mr. Ferguson was involved with operating, sales and
customer service strategy for BellSouth, SBC Communications, Inc. and Southern
New England Telephone Corporation broadband trials and businesses. Prior to
working at PrimeOne, Mr. Ferguson served in various capacities at Prime Cable, a
cable multiple systems operator based in Austin, Texas, including vice president
of administrative services and vice president of operations. Prior to Prime
Cable, Mr. Ferguson worked for Tenneco, Inc. in the corporate finance and
investor relations groups as well as Arthur Young & Co. where he focused in
tax practice. He is a certified public accountant and a graduate of The
University of Texas at Austin, where he earned his BBA degree in Finance and an
MBA in Accounting and Finance.





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Jeffrey A. Brennan has served
as our Senior Vice President of Business Services since April 2006. Mr. Brennan
is responsible for leading Grande’s network services and enterprise sales
departments, and engineering and network operations. Prior to joining Grande,
Mr. Brennan served as Vice President of Sprint’s Public Sector for the West
Region from 2005 to 2006 and was Area Vice President for Nextel’s Pacific
Northwest, from 2002 to 2005. He has worked for several companies in the
telecommunications industry including Primeco, US West and Verizon/GTE. He began
his career at Verizon/GTE as a telephone traffic engineer and then held
positions in network planning, sales operations, product management and national
account sales. At Verizon/GTE, Mr. Brennan was responsible for marketing and
planning for sales of private line and switched services for a national fiber
optic and satellite network serving the North American and Caribbean markets.
Mr. Brennan earned a MBA and a BBA in Management from Angelo State University.
He also holds a Radio Communication Technology degree from the Community College
of the Air Force.





Contractual
Provisions Relating to Grande’s Board of Directors





In
November 2005, certain stockholders and Grande entered into an investor rights
agreement under which those stockholders agreed to vote all of their Grande
capital stock in favor of certain designees to the board of directors. The board
of directors currently consists of seven members and, under the investor rights
agreement, may consist of no more than ten directors. Currently, six of our
directors were elected in accordance with designations made under the terms of
the investor rights agreement. Under the terms of the investor rights agreement,
Robert Hughes, representing the Robert W. Hughes Charitable Remainder Trust No.
1, has the right to designate one member of the board as designated by the
common stockholders. The holders of our Series A preferred stock have the right
to designate five representatives to Grande’s board of directors, with two of
the five to be designated by Centennial Fund VI, L.P., on behalf of itself and
the other Centennial entities that are Grande stockholders, and two of the five
to be designated by J. H. Whitney IV, L.P. and its affiliates that are Grande
stockholders. The holders of our Series D preferred stock and Series E preferred
stock together as a single class have the right to designate one representative
to Grande’s board of directors. The nominating committee has the right to select
a representative to Grande’s board of directors, who must be approved by the
board of directors and the holders of a majority of Grande’s capital stock,
other than the stock held by the founders of Grande identified in an exhibit to
the investor rights agreement. The person serving as Grande’s president or chief
executive officer will also serve on Grande’s board of directors.





Centennial
has designated one of our current directors, Mr. Hull, and Whitney has
designated two of our current directors, Messrs. Laverack and Hockin. Mr.
Schmeltekopf is the director designated by the holders of the Series A preferred
stock; Mr. Butler is the director designated by the holders of the outstanding
Series D preferred stock and the Series E preferred stock; until his resignation
in January 2008, Mr. Mansour served as the director selected by the nominating
committee of the board of directors; Mr. Chestnutt is our president and chief
executive officer; and Mr. Orchard holds a seat on the board of directors that
is not required to be designated in accordance with the investor rights
agreement. The right of Centennial and Whitney each to continue to designate one
of their two designees to the board of directors is subject to these entities
continuing to maintain certain minimum ownership percentages in our Company. If
Centennial and Whitney fail to maintain such investment, then the holders of a
majority of Series A preferred stock, voting together as a single class, will
have the right to designate the two designees, resulting in their having the
right to designate a total of three designees to the board of
directors.





Pursuant
to the investor rights agreement, to the extent that a holder of at least 15
million shares of preferred stock does not have a representative on our board of
directors, such holder has the right to designate a non-voting observer to
attend meetings of the board of directors. The right of observers to attend
meetings of the board of directors is subject to exclusion required to protect
confidential information or to preserve and protect the attorney-client
privilege. We require all board observers to execute a confidentiality agreement
on customary terms with respect to all non-public information that they receive
or are given access to as a result of their attendance at board
meetings.





Under the
investor rights agreement, our board of directors must meet at least six times a
year and must maintain nominating, audit and compensation committees. The audit
committee may not include any representatives of our management. The nominating
and compensation committees must include at least one of Centennial’s directors
and at least one of Whitney’s directors, and the directors designated by the
holders of Series A preferred stock must comprise a majority of the members of
such committees.





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Director
Independence





Although
we have no formal written director independence standards, in February 2008, our
board of directors analyzed the independence of all members of the board at that
time and determined that all six members who are not officers of the Company
were deemed to be independent as that term is defined under the listing
standards of the NASDAQ Global Select Market. The board of directors also
determined that all members of the audit committee met the additional
independence requirements of the applicable SEC rules regarding audit committee
membership. In addition, the board of directors determined that all members of
the compensation committee and the nominating committee met the independence
requirements of the NASDAQ Global Select Market. We believe that the Company’s
ratio of independent directors represents a commitment to the independence of
the board and a focus on matters of importance to our stockholders.





Board
Committees





Grande’s
board of directors has established and maintains audit, compensation, nominating
and finance committees.





The audit
committee, currently consisting of Messrs. Schmeltekopf, Hull and Orchard, all
of whom are independent directors, is responsible for appointing the firm to
serve as independent accountants to audit Grande’s financial statements. The
audit committee then discusses the scope and results of the audit with the
independent accountants and reviews with the independent accountants and
management Grande’s interim and year-end operating results. In addition to these
activities, the audit committee considers the adequacy of internal accounting
controls and audit procedures and approves all audit and non-audit services to
be performed by the independent accountants. Mr. Schmeltekopf serves as the
Chairman of the audit committee and is the “audit committee financial expert” as
defined by SEC rules. The committee charter is available on our website at
www.grandecom.com/about_Grande/investor_relations/corporate_governance.php.





The
compensation committee oversees the establishment of the compensation policies
applicable to management and administers Grande’s stock option plan. The
compensation committee currently consists of Messrs. Butler, Hull and Laverack.
The committee charter is available on our website at
www.grandecom.com/about_Grande/investor_relations/corporate_governance.php.





Although
no formal written policies and procedures are in place other than the
compensation committee charter, the compensation committee is responsible, among
other things, for:





•
            establishing
      the salary scale of officers and employees of the
  Company;





•
            examining
      periodically the compensation structure of the
  Company;





•
            monitoring
      the health and welfare benefit and compensation plans of the
      Company;





•
            determining
      the Annual Cash Incentive Plan; and





•
            approval
      of equity incentive awards.





The
compensation committee has the sole authority to discharge its responsibilities,
including, requesting appropriate funding from the Company to compensate any
advisor retained by the compensation committee. The compensation committee may
delegate all or a portion of its duties and responsibilities to a board of
director subcommittee. Additionally, the compensation committee may direct
management to assist the committee in any of its duties. The compensation
committee has not engaged any compensation consultants in setting executive
compensation.





The
nominating committee recommends individuals to serve on the board of directors.
The nominating committee currently consists of Messrs. Hull, Laverack and
Orchard. The nominating committee does not have a policy with regard to the
consideration of any director candidates recommended by security holders because
that process is governed by the terms of the investor rights agreement described
above under “Contractual Provisions Relating to Grande’s Board of
Directors.”





The
finance committee makes recommendations to the board of directors regarding
plans for expenditures by the Company. The finance committee also recommends an
annual budget to the board of directors, advises the board of directors
regarding the need for financing and makes recommendations regarding the terms
of such financing and asset management in connection with the raising of funds.
The finance committee currently consists of Messrs. Butler, Laverack and
Schmeltekopf.





Compensation
Committee Interlocks and Insider Participation





No member
of the compensation committee was at any time during 2007 an officer or employee
of Grande and no member had any relationship with Grande requiring disclosure as
a related-party transaction in the section entitled “Certain Relationships and
Related Transactions, and Director Independence.” No executive officer of Grande
has served on the board of directors or compensation committee of any other
entity that has or has had one or more executive officers who served as a member
of the board of directors or the compensation committee during
2007.





50
 Table of Contents





Code
of Ethics





We have
adopted a code of ethics that applies to all of our employees including our
executives, chief executive officer and chief financial officer. For a copy of
our code of ethics contained in our corporate compliance policy, please visit
our website at
www.grandecom.com/about_Grande/investor_relations/corporate_governance.php.  We
will disclose changes to or waivers of the code of ethics on this
website.





ITEM 11.
            EXECUTIVE
      COMPENSATION





Compensation
Discussion and Analysis





We
provide a total compensation program that we believe will be perceived by both
our employees and our stockholders as fair and equitable. In addition to
conducting analyses of market pay levels and considering individual
circumstances related to each executive officer, we also consider the pay of
each executive officer relative to our other executive officers and with respect
to the role and responsibilities of the position held. We have designed the
total compensation program to be consistent for our executive management team
and, primarily, without regard to level of employment.





The
purpose of our compensation program is to reward and sustain exceptional
organizational and individual performance. This Compensation Discussion and
Analysis explains our compensation philosophy and objectives, compensation
policies and practices, and elements of our compensation program with respect to
our chief executive officer, chief financial officer, and the other three most
highly compensated executive officers, collectively referred to as the named
executive officers (“NEOs”).





Compensation
Philosophy and Objectives





Grande’s
compensation philosophy is to provide an attractive, flexible, and market
competitive total compensation program tied to performance and aligned with
stockholder interests. We believe that total compensation includes everything
the employee perceives to be of value resulting from the employment relationship
and that will motivate the employee to perform.





We
consider the following objectives in setting the compensation components for our
executive officers:





•
            design
      competitive total compensation and rewards programs to enhance our ability
      to attract and retain experienced executives, whose knowledge, skills and
      performance are critical to our
success;





•
            set
      compensation and incentive levels that are competitive with our peer
      group, as described below;





•
            drive
      and reward performance that supports the Company’s financial and strategic
      goals;





•
            provide
      a significant percentage of total compensation that is “at-risk”, or
      variable, based on predetermined performance
  criteria;





•
            align
      the interests of our executive officers and stockholders by motivating
      executive officers to increase stockholder value through equity incentives
      in the form of stock options;





•
            ensure
      fairness among the executive management team by recognizing the
      contributions each executive makes to our success;
  and





•
            foster
      a shared commitment among executives by coordinating the Company, their
      team and individual goals.





In
establishing compensation that we believe is competitive, we review the
compensation practices and market data of companies with revenue and company
size similar to ours both within our industry and as applicable to general
industry groups, which we refer to as our “peer group”. We have chosen to
benchmark our compensation against our peer group to ensure internal equity and
consistency with external market practices. To identify our peer group, we
participate in salary surveys from time to time to gain access to various survey
data. We utilize two different compensation analysis tools to assist us in this
process for our executive positions: The Thobe Group survey and Salary.com’s
Executive Compensation Database.





51
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The Thobe
Group survey is a national telecom industry specific survey tool. Companies
participating in this survey include:





Broadwing
      Communications
            Citizens
      Communications
            Integra
      Telecom CLECCablevision
            HickoryTech
            Mpower
      CommunicationsCharter
      Communications
            Integra
      Telecom ILEC
            Pac-West
      Telecomm, Inc.Covad
            QWEST
            RCN
      CorporationCox
      Communications, Inc.
            AT&T
      Inc.
            TDS
      MetrocomGlobal
      Crossing, Inc.
            TDS
      Telecommunications, Inc.
            TelCoveALLTEL
      Corporate
            Verizon
      Communications
            Time
      Warner TelecomALLTEL
      Wireline
            Birch
      Telecom
            PAETECCenturyTel,
      Inc.
            Enventis
      Telecom
            XO
      CommunicationsCincinnati
      Bell
            IBasis
            Williams
      Communications Group





Salary.com
is a national compensation benchmark subscription service with over 7,000
subscribers consisting of over 10 million employees that offer real time survey
information on general industry positions that can be searched by revenue and
company size. Salary.com combines one of the largest databases of U.S. public
company executives with on-demand software to create a leading source of
executive and director compensation information. Because survey participation is
confidential, specific companies in our peer group are not
identifiable.





The
comparative peer group data is used to help determine fair and equitable base
salary adjustments each year when budgeting for merit increases and salary
adjustments, as necessary.  The peer group comparison is taken into
consideration along with individual and company performance to determine the
final merit and/or salary adjustment, if any.   Although the peer
group data is used to determine base pay changes as defined above, ultimately
discretion is used by the compensation committee and Grande’s chief executive
officer for the final determination of a salary change, based on the benchmark
data, company and individual performance.  The peer group benchmarks
chosen for consideration are those relative to our industry and size, and are
primarily used for base pay considerations, but also serve to assess the
continued competitiveness of the NEOs’ total cash compensation
package.





Executive
Compensation Policies and Practices





Our
compensation committee, which is composed of three non-management independent
directors, oversees the establishment and the administration of the compensation
policies applicable to our NEOs and administers our stock incentive plan.
Annually, the compensation committee reviews recommendations and approves base
pay changes and bonus distributions for Grande’s chief executive
officer.  Benchmark data, as well as individual and company
performance is taken into consideration at this time.  Additionally,
the compensation committee will review base pay changes and bonus distribution
recommendations made by Grande’s chief executive officer for the other NEO’s,
when it is outside the scope of the NEO’s employment agreement, where applicable
(not all NEO’s have an employment agreement).  For NEO’s who have
written contracts, any changes or amendments to the agreement will be ratified
by the compensation committee.  For more information on our
compensation committee, including information on the scope of its authority,
please see “Board Committees” above. The compensation committee has adopted the
material policies described below related to executive compensation, as
documented in the Company’s total compensation program for all employees, to
provide consistency in the application of compensation across all grades levels
and to help maintain internal and external equity. These policies and practices
are evaluated by management and reviewed by the compensation committee on an
annual basis for effectiveness through benchmark survey participation and data
analysis, employee retention results and internal survey findings.





Allocation between currently paid
out and long term compensation. The compensation we currently pay
consists of base pay and annual cash incentive compensation pursuant to our
Annual Cash Incentive Plan. Long-term compensation consists entirely of awards
of stock options pursuant to our stock incentive plan. We grant stock options as
a long-term incentive and retention tool. The allocation between long-term and
currently paid out compensation is based on consideration of how our peer group
uses long-term and currently paid compensation to pay their executive officers
as well as internal equity between established pay grades.





Allocation between cash and non-cash
compensation. It is our policy to allocate all currently paid
compensation in the form of cash and all long-term compensation in the form of
awards of options to purchase our common stock and Series H preferred stock to
provide a long-term retention incentive. We consider competitive market
practices and internal equity considerations when determining the allocation
between cash and non-cash compensation.





Health and Welfare Programs.
It is our policy that there shall be no material difference in the health and
welfare benefit offerings made to our executive management and those that are
offered to all employees of the Company.





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Elements
of Executive Compensation





We
provide what we believe is a competitive total compensation package to our NEOs
through a combination of base salary, an annual cash incentive plan, an equity
incentive plan and broad-based benefits programs.




Overall,
our compensation programs are designed to be consistent with the philosophy and
objectives set forth above. The basic elements of our compensation programs are
summarized in the table below, followed by a more detailed discussion of each
total compensation component.





Element
            
            Characteristics
            
            ObjectivesBase
      salary
            
            Fixed
      annual cash compensation; all members of management are eligible for
      periodic increases in base salary based on performance; targeted at or
      around the median market base salary level.
            
            Keep
      our base compensation competitive with our peer group for skills and
      experience necessary to meet the requirements of the employee’s role with
      the Company and enhance our ability to attract and retain executive talent
      critical to the success of the business.Annual
      cash incentive plan
            
            Performance-based
      annual cash incentive earned based on the Company and individual’s
      performance against target performance level; incentive pay out percent is
      targeted at the median market incentive level for our peer
      group.
            
            Motivate
      and reward for the achievement and over-performance of our critical
      financial and strategic goals. Amounts earned for achievement of target
      performance levels are based on our annual budget and are designed to
      provide a market-competitive pay package at median performance; potential
      for lesser or greater amounts is intended to motivate participants to
      exceed our financial performance goals and to not reward if performance
      goals are not met.Equity
      incentive plans (stock options)
            
            Long-term
      equity incentive awards, which have value only to the extent the Company’s
      value increases over time with consideration given to competitive
      practices with our peer group.
            
            Align
      interest of management with stockholders; motivate and reward management
      to increase the stockholder value of the Company over the long term.
      Vesting based on continued employment will facilitate retention; amount
      realized from exercise of stock options rewards increased stockholder
      value of the Company; provides change in control protection for executive
      options.Health
      & welfare benefits
            
            Fixed
      component. The same health & welfare benefits (medical, dental,
      vision, disability insurance and life insurance) are available for all
      full-time employees.
            
            Provides
      benefits to meet the health and welfare needs of employees and their
      families.Retirement
      savings opportunity (401(k) Plan)
            
            Tax-deferred
      plan in which all employees can choose to defer up to 100% of compensation
      for retirement, subject to annual statutory limitations. We provide
      matching contributions comparable to peer companies.
            
            Provide
      employees the opportunity to save for their retirement. Account balances
      are affected by continued contributions, the Company’s matching
      contributions and investment choices made by the
  employee.





All pay
elements are cash-based except for the equity incentive program, which is an
equity-based (stock options) award. We consider market pay practices and
practices of our peer group in determining the amounts to be paid, what
components should be paid in cash versus equity, and how much of a NEO’s
compensation should be short-term versus long-term. Our goal is to be at or
around the 50th
percentile of our peer group for cash compensation. All benchmark goals are
discretionary.





Our
executive officers, including the NEOs, are assigned to pay grades, determined
by comparing position-specific roles and responsibilities with the market pay
data and our internal structure. Each pay grade has a base salary range with
corresponding cash and equity incentive award opportunities. We believe this is
the most transparent and flexible approach to achieve the objectives of our
executive compensation program.





53
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In
general, compensation or amounts received by executives from prior compensation
from us are not taken into account in setting other elements of compensation,
such as base pay, cash incentive plan payments, or awards of stock options under
our equity incentive program. With respect to new executive officers, we take
into account their prior base salary and annual cash incentive, as well as the
contribution expected to be made by the new executive officer, our business
needs and the role of the executive officer with the Company. As with all of our
employees, we believe that our executive officers should be fairly compensated,
which we believe includes the 50th
percentile of our peer group, each year relative to market pay levels of the
external peer group and internal equity among executive officers.





There are
no differences in how targets are set or the compensation philosophy and
objectives among the NEOs.  The elements of the compensation package
are different among the NEOs, including Grande’s chief executive officer, based
on the existence of an individual employment agreement for certain
NEOs.   The primary difference between NEOs with an employment
agreement and those without an employment agreement is the severance benefit
guarantee and the level of benefit within the specific compensation element
(i.e. cash incentive percentage).   Additionally, the level of
approval required for compensation changes is different for Grande’s chief
executive officer and other NEOs.





The
decision to award changes in one element, for instance, base salary, did not
affect any changes that may have been made in another, for instance stock option
incentives.  Awarding a base salary increase and equity incentives are
the most likely scenario where one decision may impact the other, however, that
has not yet been the case at Grande.  Health and welfare plans and
401(k) matching are administered evenly to all employees, without regard to
level, across the Company.





Base
Salary





We review
salary ranges and individual salaries for all employees, including our NEOs, on
an annual basis. We review the base salary for each executive officer based on
consideration of median pay levels of our peer group and internal factors such
as the individual’s performance and experience, the position’s scope and
responsibilities, and the pay of other officers.





We
consider market median pay levels (the 50th
percentile) among individuals in comparable positions with transferable skills
within our peer group as described above.





We also
consider the following when establishing or adjusting the base salary of any
executive officer:





•
            Our
      business need for the executive officer’s
  skills;





•
            The
      contributions that the executive officer has made or we believe will make
      to our success;





•
            The
      transferability of the executive officer’s managerial skills to other
      potential employers;





•
            The
      relevance of the executive officer’s experience to other potential
      employers, particularly in the telecommunications industry;
      and





•
            The
      readiness of the executive officer to assume a more significant role with
      another potential employer.





We
believe a competitive base salary is necessary to attract and retain an
executive management team with the appropriate abilities and experience required
to lead us. Specifically, we target the market median (50th
percentile) of our peer group base salary, while total compensation is targeted
at or around the 75th
percentile of our peer group, considering individual performance and experience,
in order to ensure that each executive is appropriately compensated. The 50th and
75th
percentiles are determined by assessing market competitive compensation data as
described above.





The base
salaries earned by our NEOs are set forth below in the Summary Compensation
Table. During the year ended December 31, 2007, total compensation earned by our
NEOs was approximately $1.9 million, with our chief executive officer earning
approximately $0.7 million of that amount. We believe that the base salary
earned by our executive officers during 2007 achieved our executive compensation
objectives, compares favorably to published survey data of peers within our
industry and general industry, and are within our target of providing a base
salary at or around the market median for our company size.





In 2007,
adjustments to our NEOs’ compensation were made based on a review of current
market pay levels benchmarked in the published surveys described above. In
addition to the benchmark survey data, factors taken into account in making any
changes for 2007 included the performance of the NEO, as identified by our
company results, the role and responsibilities of the executive officer, and the
relationship of the NEO’s base salary to the base salary of our other
executives.





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Annual
Cash Incentive Plan





We have
established a written Annual Cash Incentive Plan pursuant to which our executive
officers, including our NEOs, are eligible to receive an annual cash incentive
payment based upon our performance against annual established performance
targets, including financial measures and other factors such as individual
performance. We believe that the Annual Cash Incentive Plan helps focus our
executive officers’ efforts and reward NEOs for annual operating results that
help create value for our stockholders. The Annual Cash Incentive Plan is
presented to the compensation committee for review, and ultimately to the board
of directors for their approval with such modifications deemed appropriate by
the board of directors. For 2007, the Annual Cash Incentive Plan was based on a
percentage of base salary subject to the Company’s performance exceeding the
Adjusted EBITDA goal. The incentive plan targets for the Annual Cash Incentive
Plan are determined during our annual planning process, which generally begins
in October preceding the following fiscal year for which targets for the Annual
Cash Incentive Plan are set. We have chosen Adjusted EBITDA as the goal because
we believe that achieving our Adjusted EBITDA goal each year requires the
concerted effort and teamwork of many different functions within Grande under
the oversight of the NEOs.  It is also heavily impacted by the
dynamic, highly competitive and regulated nature of our industry and the markets
within which we operate.  To achieve our annual company goal is,
therefore, a stretch goal for our executive team. See “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations” under the
heading “EBITDA/Adjusted EBITDA” for a discussion of this non-GAAP measure of
our operating performance as well as our use of Adjusted EBITDA. When our
performance exceeds the Adjusted EBITDA threshold, funds are set-aside into a
bonus pool for distribution to our NEOs and other eligible employees. Funds
continue to accumulate in the bonus pool until the maximum potential performance
payout for all NEOs and other eligible employees is met. The compensation
committee may exercise discretion by adjusting awards based on its consideration
of each NEO’s individual performance, and for each NEO other than the chief
executive officer, based on a review of such NEO’s performance as communicated
to the compensation committee by the chief executive officer. Executive
performance is reviewed against the budgeted financial goals as well as internal
goals set in support of the financial goals such as operational efficiency goals
or employee retention goals.  The goals are mutually agreed upon by
and between the chief executive officer, the individual executive and the
executive team. The chief executive officer’s performance is evaluated by the
compensation committee based on overall company performance against the budgeted
financial goals as approved by the board of directors. The Annual Cash Incentive
Plan awards for all executive officers, including the NEOs, must be reviewed and
recommended by the compensation committee for approval and ultimately must be
approved by the board of directors before being paid. The compensation committee
and the board of directors may modify the Annual Cash Incentive Plan awards
prior to their payment.





Incentive
award opportunities are targeted to result in Cash Incentive Plan payments
comparable to the market median (50th
percentile) of the external peer group assuming our target business objectives
are achieved. If the target level for the performance goals is exceeded,
executives and other eligible employees have an opportunity to earn cash
incentive awards above the median of the market of our peer group. We have
chosen the 50th percentile because we believe that it allows us to attract and
retain executives, and we have chosen the 75th percentile as a target for
exceptional performance because we believe it will provide an appropriate
incentive for striving to earn better than average cash compensation. If the
target level for the performance goal is not achieved, executives and other
eligible employees earn no cash incentive plan payments. In 2007, our NEOs did
not meet the target performance goal, which resulted in no cash incentive
payment under the Cash Incentive Plan. However, a reward in the form of a
discretionary cash incentive payment, outside the Cash Incentive Plan, and as
authorized by the compensation committee and approved by the board of directors,
was made to all eligible employees including the NEOs.





Equity
Incentive Plans (Stock Options)





We
believe that equity incentive awards are the best way to create incentives and
reward the performance of our employees, including our NEOs, which improves the
Company’s performance and increases shareholder value thereby strengthening the
mutual interests between NEOs and shareholders. By providing equity awards to
our NEOs, they are not only rewarded for past performance but also have
long-term incentive to continue to promote the Company’s success.





We have
utilized stock options as the form of our equity incentives. We chose stock
options because we believe that stock options align employee incentives with the
interests of our stockholders because options have value only if the value of
our stock increases over time. The compensation committee makes discretionary
stock option grants to NEOs of the Company based on a number of factors
including each NEO’s personal performance ; the importance of the individual to
the future success of the Company; and overall contribution to the Company’s
success, all as determined by the chief executive officer. The compensation
committee also grants equity awards to newly hired executive officers as a way
of promoting long-term incentive in the Company as the stock awards are earned
over a long-term period. Typically, the size of grants are set at a level that
is deemed appropriate to create a meaningful opportunity for stock ownership
based upon the NEO’s performance, position, potential for future responsibility
and promotion, and overall expected contribution to the Company’s success. The
compensation committee also considers other factors in determining the size of
the grant such as the amount of unvested options held by the individual from
prior grants, the length of time that the employee has been with the Company and
the amount of other compensation earned by the NEO. The relative weight given to
each of these factors varies from individual to individual. Peer group practices
play a minimal role in the determination of individual awards.  We
believe that the fact that we offer equity awards makes our compensation
practices competitive with our peer group.  However, the amounts of
the awards are determined by internal factors only, such as performance and
equity as compared to other executives.





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 Table of Contents





Stock
option grants are triggered by new hire and at the time of internal promotion to
a higher grade level associated with an increased grant award or at the
discretion of the compensation committee for reward or retention purposes. All
new hires are assigned a stock option grant amount based on their grade level at
the time of hire. New hire stock option awards as well as stock option awards
associated with an internal promotion are subject to board approval and the
grant dates associated with all option grants is the date the option awards are
approved by the board.





On May 2,
2007, the compensation committee granted options to the NEOs to purchase a total
of 1.1 million shares of Series H preferred stock. No restricted stock awards
were made to any NEO during 2007.





2000
Stock Incentive Plan Summary





On
October 25, 2006, the board of directors of the Company approved and adopted the
Grande Communications Holdings, Inc. Second Amended and Restated 2000 Stock
Incentive Plan (the “2000 Stock Incentive Plan”). The stockholders approved the
2000 Stock Incentive Plan at the annual stockholders meeting on December 6,
2006.





•
            Administration.Our
      board of directors or a committee designated by the board of directors,
      such as the compensation committee (in either case, we refer to such body
      as the board of directors).





•
            Stock Subject to the Plan.The number of shares of common stock available for issuance under
      the Plan is the lesser of (i) 10% of all of the shares of capital stock on
      a fully diluted basis, as if all such shares of capital stock were
      converted to common stock or (ii) 82,000,000 shares of common stock. Of
      the shares available for issuance under the Plan, 30,000,000 shares of
      Series H preferred stock and 12,000,000 shares of common stock are
      designated as “Executive Compensation Shares”. The maximum number of
      shares that may be reserved for issue pursuant to incentive stock options
      under the 2000 Stock Incentive Plan may not exceed 82,000,000 shares of
      stock.





As of
December 31, 2007, the number of shares that are reserved for issuance upon
exercise of outstanding option agreements are 41.5 million shares of common
stock that are not Executive Compensation Shares, 9.7 million shares of common
stock that are Executive Compensation Shares and 27.8 million shares of Series H
preferred stock (all shares of Series H preferred stock are Executive
Compensation Shares). As of December 31, 2007, the number of shares that remain
available for future issuance under the 2000 Incentive Stock Plan are 26.8
million shares of common stock that are not Executive Compensation Shares, 2.3
million shares of common stock that are Executive Compensation Shares, and 2.2
million shares of Series H preferred stock.





•
            Eligibility.Officers,
      employees, directors, consultants or advisers to the Company are eligible
      to participate in the plan. The 2000 Stock Incentive Plan provides that
      the Executive Compensation Shares may only be issued to directors,
      officers or key employees, as approved by the board of directors from time
      to time.





•
            Awards Under the 2000 Stock
      Incentive Plan.We may award “incentive stock options” and
      “non-statutory stock options” under the 2000 Stock Incentive Plan (in
      either case we refer to such awards as the
  options(s)).





Incentive Stock Options.Incentive stock options
awarded under the 2000 Stock Incentive Plan must have an exercise price of at
least 100% of the fair market of our stock on the date of grant. In the case of
an employee who owns more than 10% of our voting power, the exercise price will
be the greater of the aggregate par value of the stock and at least 110% of the
fair market value of the stock on the date of grant.





Non-Statutory Stock Options.We can award non-statutory stock options to any person eligible under the
2000 Stock Incentive Plan. The minimum exercise price for non-statutory stock
options under the 2000 Stock Incentive Plan is 85% of the fair market value of
our stock on the date of grant, provided, however, that (i) if the grantee owns
more than 10% of our voting power, the exercise price will be the greater of the
aggregate par value of the stock and at least 110% of the fair market value of
the stock on the date of grant, (ii) to the extent that the option is intended
to comply with Section 409A of the Internal Revenue Code of 1986, as amended,
the exercise price will be the greater of the aggregate par value of the stock
and at least 100% of the fair market value of the stock on the date of
grant.





•
            Restricted Stock.
      Restricted stock may be granted under the 2000 Stock Incentive Plan and
      may be subject to vesting conditions that may be prescribed by the board
      of directors, including the satisfaction of corporate or individual
      performance objectives or continued service to the Company. In making an
      award of restricted stock, the board of directors will determine the
      restrictions that will apply, the period during which the award will be
      subject to such restrictions, and the price, if any, payable by a
      recipient. The restricted stock may not be sold, transferred, assigned,
      pledged or otherwise encumbered or disposed of during the restriction
      period or prior to the satisfaction of any other conditions prescribed by
      the board of directors. A recipient of a restricted stock award must
      purchase the restricted stock from the Company at a purchase price equal
      to the greater of the aggregate par value of the stock and at least 85% of
      the fair market value of the stock on the date of grant, or if the
      recipient owns more than 10% of our voting power, then the purchase price
      will be the greater of the aggregate par value of the stock and at least
      100% of the fair market of the stock on the date of grant. The purchase
      price for the restricted stock shall be payable in cash or cash
      equivalents or, if the board of directors determines, payable in
      consideration for past services rendered to the Company. Unless the board
      of directors otherwise provides in an award agreement, holders of
      restricted stock shall have the right to vote such stock and to receive
      any dividends and distributions declared or paid with respect to such
      stock. Restricted stock is also subject to a right of first refusal of the
      Company that the Company may assign to any of its stockholders or
      affiliates. The right of first refusal will not apply to transfers of
      restricted stock that occurs as a result of the death of the participant,
      but will apply to the executor, administrator, personal representative,
      estate and legatees, beneficiaries and
assigns.





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 Table of Contents





•
            Vesting.Options and
      restricted stock awards vest as determined by the board of directors and
      as stated in the individual’s Award Agreement. Vesting is subject to a
      participant’s continued employment or service with the Company. Vesting of
      such options and restricted stock awards are subject to acceleration upon
      a Change of Control unless the board of directors exercises the right to
      cancel vested options or the option agreement provides otherwise.
      Generally, unless a specific award agreement provides otherwise, the
      options with respect to shares of stock that are not Executive
      Compensation Shares provide for a vesting of the total number of option
      shares over a four year period, commencing with vesting of 25% of the
      option shares on the first anniversary of the vesting start date, and an
      additional 25% for each of the three following anniversaries of that date.
      Generally, unless a specific award agreement provides otherwise, the
      options for Executive Compensation Shares and Series H preferred stock
      vest as follows: (i) 25% of the total option shares on the first
      anniversary of the vesting start date, (ii) 2.1% of the option shares on
      the last day of each of the first 35 months after such first anniversary,
      and (iii) 1.5% of the option shares on the last day of the 36th
      month after such first anniversary.





For newly
hired employees, including NEOs, and newly elected directors, the vesting start
date is based on the first day of employment or of service. In no case is the
option grant date or exercise price backdated. The Company entered into an
employment agreement with Mr. Chestnutt in December 31, 2005 (the "Original
Employment Agreement") whereby, among other things, the Company agreed to grant
to Mr. Chestnutt certain options to acquire shares of Series H preferred stock
and common stock designated as Executive Compensation Stock. The options were
not immediately granted to Mr. Chestnutt in order for the Company to amend the
original 2000 Incentive Stock Plan (the "Original Plan") to comply with Section
409A of the Internal Revenue Code of 1986, as amended and to add the Series H
preferred stock and Executive Compensation Stock to the shares available for
issuance under the Original Plan, among other things. On June 28, 2006, the
Board approved the amendment and restatement of the Original Plan. Also on that
date, the Board approved the grant of certain stock options to Mr. Chestnutt and
also an amendment to Mr. Chestnutt’s employment agreement that provided such
options would be in lieu of the stock options that the Company previously agreed
to grant to Mr. Chestnutt under the Original Employment Agreement. For more
information on the vesting schedule of certain options for the NEOs and certain
directors, see the tables of Outstanding Equity Awards at Fiscal Year End and
Directors Outstanding Equity Awards at Year End.





•
            Other Terms Applicable to
      Options.Option agreements may contain other provisions that the
      board of directors determines are appropriate relating to when the options
      will become exercisable, the times at which and circumstances under which
      the options may be exercised and the methods by which the exercise price
      may be paid. Options that become exercisable will expire no later than ten
      years from the date the options were granted; however, in certain cases
      the Options will expire five years from the date they were granted (i.e.,
      in the case of options granted to an employee who owns stock representing
      more than 10% of our voting power). Also, non-qualified options granted
      with respect to the right to purchase shares of Series H preferred stock
      include certain restrictions on the timing of when the options may be
      exercised. The exercise price is payable in cash or in cash equivalents
      and, for so long as the Company’s stock is not publicly traded, through a
      cashless exercise paid in Company stock held by the participant, provided
      that the option agreement does not prohibit cashless exercises. If the
      Company stock becomes publicly traded, then, to the extent permitted by
      the Company or as provided in an option agreement, a participant may pay
      the exercise price of an option as a cashless exercise in Company
      stock.





57
 Table of Contents





•
            Adjustments Upon Changes in
      Capitalization, Recapitalization or
  Reorganization





Changes in Capitalization.The number of shares of stock subject to the 2000 Stock Incentive Plan
(whether awarded or reserved but not awarded) as well as the price per share of
stock subject to the 2000 Stock Incentive Plan (whether awarded or reserved but
not awarded) shall be proportionately adjusted for a different number of kind of
shares or other securities of the Company due to any recapitalization,
reclassification, stock split, reverse split, combination of shares, exchange of
shares, stock dividend or other distribution payable in capital stock or other
increase or decrease in such shares effected without receipt of consideration by
the Company.





Reorganization in which the Company
is the Surviving Entity and in which No change of Control Occurs. If the
Company is the surviving entity in any reorganization, merger or consolidation
of the Company with one or more other entities and in which no change of control
occurs, any option granted under the 2000 Incentive Stock Option Plan , the
number of shares of stock subject to an option granted prior to such
reorganization, merger or consolidation will be adjusted to the number of shares
that a holder of the number of shares of stock subject to the option would have
been entitled immediately following such reorganization, merger or
consolidation. The exercise price subject to an option granted prior to such
reorganization, merger or consolidation will be proportionately adjusted so that
the aggregate exercise price after such reorganization, merger or consolidation
will be the same as the aggregate exercise price was prior to such
reorganization, merger or consolidation.





•
            Change of
      Control.





Acceleration of Vesting.In
the event of a change of control, vesting will be accelerated under the
restricted stock award agreements awarded under the 2000 Stock Incentive Plan,
unless a particular award agreement provides otherwise. In the event of a change
of control, vesting will be accelerated under the option agreements awarded
under the 2000 Stock Incentive Plan, unless (i) a particular option agreement
provides otherwise or (ii) an express provision is made in writing in connection
with the change of control that vesting will not be accelerated.





Cancellation of Vested Options.In the event of a change of control, the board of directors may elect to
cancel the vested options (including the options which become vested by reason
of acceleration), if the cancellation date is no earlier than the last to occur
of (a) the 15th day following delivery of the cancellation notice and (b) the
60th day prior to the proposed date for the consummation of the change of
control. Unless the participant elects in writing to waive the right to a
conditional exercise, any option exercise due to a cancellation related to a
change of control will be conditional, meaning that if the transaction does not
occur within 180 days of the proposed date for the consummation of the change of
control, the exercising participant will be refunded all amounts paid to
exercise his option, the exercise of the option will be void, and the option
will be reissued.





Change of Control under the Option
Agreements for the Purchase of Shares that are Not Executive Compensation
Shares.Generally, under the option agreements regarding rights to
purchase Company shares that are not Executive Compensation Shares, a change of
control means:





(i) a
change in ownership of the Company such that an individual or corporation or a
group of persons acting in concert, excluding stockholders or affiliates of the
Company (we refer to such a person, corporation or group as a Person) acquires
more than 50% of the combined voting power of our stock, but it will not be a
change of control if the Person already owns more than 50% of the total fair
market value or combined voting power of our stock; or





(ii) a
change in the effective control of the Company such that a Person acquires or
has within the preceding 12 month period acquired, directly or indirectly,
ownership of a number of shares of our stock which constitutes 50% of the
combined voting power of our stock, provided, however, that if a Person already
owns 50% or more of the combined voting power of our stock, the acquisition of
additional shares of our stock by such Person is not a change of control;
or





(iii) a
change in the ownership of the assets of the Company such that a Person acquires
or has within the preceding 12 month period acquired assets of the Company that
has a total gross fair market value of all of the assets of the Company as
determined by the board of directors (which will not be less than a minimum
percentage required to comply with Section 409A of the Internal Revenue Code of
1986, as amended); provided that it will not be a change of control if (a)
assets are transferred to an entity that is controlled by the stockholders of
the Company immediately after the transfer, (b) the Company transfers assets to
a Person that is a stockholder of the Company immediately before the asset
transfer in exchange for the stockholder’s stock in the Company, (c) the Company
transfers assets to an entity of which 50% or more of the total value or voting
control is owned, directly, or indirectly, by the Company, (d) the Company
transfers assets to a Person that owns, directly or indirectly, 50% or more of
the total value or voting power of all of our stock, or (e) the Company
transfers assets to an entity, at least 50% of the total value or voting power
of which is owned, directly or indirectly, by a Person that owns, directly or
indirectly, 50% or more of the total value or voting power of all of our
stock.





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Some of
the NEOs and directors have option agreements for the purchase of shares of
common stock that are not Executive Compensation Shares. For more information,
see the tables of Outstanding Equity Awards at Fiscal Year End and Directors
Outstanding Equity Awards at Year End.





Change of Control under the Option
Agreements for the Purchase of Executive Compensation Shares. Under the
existing option agreements regarding rights to purchase Company shares that are
Executive Compensation Shares, the definition of a change of control includes
all of the events described in the immediately preceding subparagraphs (i) –
(iii) and also includes:





(A) a
change in the ownership of the assets of the Company such that a Person acquires
or has within the preceding 12 month period acquired assets of the Company that
has a total gross fair market value of 50% or more of the assets of the Company
as determined by the board of directors, rather than of all of the assets of the
Company (as required in the immediately preceding subparagraph (iii) with
respect to options to acquire shares that are not Executive Compensation
Shares), subject to the same exceptions to a change of control outlined in
(a)-(e) of such subparagraph (iii); or





(B) a
change in the effective control of the Company such that as a result of any
tender offer, merger or other business combination, sale of assets or contested
election, or any combination of the foregoing transactions, a majority of the
persons who were members of the board of directors is, within a 12 month period,
replaced by individuals whose appointment or election to the board of directors
is not endorsed by a majority of the board of directors prior to such
appointment or election.





All of
the NEOs and some of the directors have option agreements for the purchase of
Series H preferred stock (all shares of Series H preferred stock available for
issuance under the 2000 Stock Incentive Plan are Executive Compensation Shares)
and some of the NEOs and directors have options for the purchase of shares of
common stock that are Executive Compensation Shares. For more information on the
option agreements to acquire shares of Executive Compensation Shares for the
NEOs and directors, see the tables of Outstanding Equity Awards at Fiscal Year
End and Directors Outstanding Equity Awards at Year End.





•
            Rights of First Refusal of the
      Company and Repurchase Rights. Under the terms of the 2000 Stock
      Incentive Plan, Company stock acquired through the exercise of an option
      agreement is subject to transfer restrictions and to a right of first
      refusal of the Company. The right of first refusal will not apply to
      transfers of restricted stock that occurs as a result of the death of the
      participant, but will apply to the executor, administrator, personal
      representative, estate and legatees, beneficiaries and assigns. The
      Company may assign any of its rights of first refusal to any of its
      stockholders or affiliates. Unless otherwise provided in an option
      agreement, upon termination of a participant’s service or employment with
      the Company, the Company will have the right to purchase all of the stock
      acquired under or that will be acquired under the option agreement at the
      fair market value of the stock.





•
            Termination, Amendment or
      Suspension.The board of directors may terminate, amend or suspend
      the 2000 Stock Incentive Plan as to any shares of stock as to which grants
      have not been made at any time, subject to the stockholder approval
      required under applicable law. No termination, amendment or suspension of
      the 2000 Stock Incentive Plan may, without the consent of the participant,
      alter or impair the rights or obligations under any grant awarded prior to
      such termination, amendment or
suspension.





However,
the plan and each restricted stock award and option granted under the 2000 Stock
Incentive Plan may be amended, modified or supplement either with the
participant’s consent for any reason or without the participant’s consent, as
necessary or desirable, by the board of directors to cause the 2000 Stock
Incentive Plan and all grants to satisfy Section 409A of the Internal Revenue
Code of 1986, as amended, or other applicable law.





•
            Regulatory
      Considerations:





Section 162(m). The 2000
Stock Incentive Plan is designed to meet the requirements of Section 162(m) of
the Internal Revenue Code. Our intention is to structure compensation
arrangements to maximize the Company’s available deductions consistent with
Section 162(m) unless the compensation committee reasonably believes that the
best interests of the Company and its shareholders will be served by structuring
compensation for a given executive officer, or executive officers, differently.
The maximum number of shares of capital stock that may be granted under an
option under the 2000 Stock Incentive Plan in any fiscal year to an employee
cannot exceed 82,000,000 shares of Common Stock and 30,000,000 shares of Series
H preferred stock.





59
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Nonqualified Deferred
Compensation. On October 22, 2004, the American Jobs Creation Act of 2004
was signed into law and established Internal Revenue Code Section 409A, which
changed the tax rules applicable to nonqualified deferred compensation
arrangements. While the amendment and modification of nonqualified deferred
compensation plans and agreement to comply with the final regulations issued
under Section 409A is not required until December 31, 2008, we believe that we
are and have been operating in good faith compliance with the statutory
provisions of Section 409A that were effective January 1, 2005, and the relevant
regulations and other guidance relating to Section 409A that has been issued by
the Department of Treasury and the Internal Revenue Service.





Accounting for Stock-Based
Compensation. Effective January 1, 2006, the Company adopted the fair
value recognition provisions of SFAS 123(R).





Health
and Welfare Benefits Plan





We
provide a competitive benefits package to all full-time employees, which
includes health and welfare benefits, such as medical, dental, vision care,
disability insurance, life insurance benefits, and a 401(k) savings plan (see
below). We have no structured executive perquisite benefits (e.g., club
memberships or company vehicles) for any executive officer, including the NEOs,
and we currently do not provide any deferred compensation programs or
supplemental pensions to any executive officer, including the NEOs.





Retirement
Savings Opportunity (401(k) Plan )





We
maintain a 401(k) retirement and savings plan for all of our employees. The
401(k) plan is intended to qualify under section 401(k) of the Internal Revenue
Code, so that contributions and the income earned on those contributions are not
taxable to our employees until they make withdrawals from the plan. Subject to
statutory limits, participants in the 401(k) plan may elect to contribute up to
100% of their current compensation. All of the contributions to the 401(k) plan
made by our employees are fully vested at all times. Additionally, we offer a
matching contribution of $0.50 per dollar contributed by the employee, up to a
maximum of 6% of the employee’s salary. Employees earn vesting credits for these
matching contribution based upon years of service at a rate of 33% per year, for
the first three years of service. Benefits under the 401(k) plan are paid upon a
participant’s retirement, death, disability or termination of employment, and
are based on the amount of a participant’s contributions plus vested employer
contributions, as adjusted for gains, losses and earnings. The 401(k) plan is
comparable in all area of plan design to companies within our peer
group.





Pension
Benefits





We do not
have any plan that provides for payments or other benefits at, following, or in
connection with, retirement.





Non-Qualified
Deferred Compensation





We do not
have any plan that provides for the deferral of compensation on a basis that is
not tax-qualified.





Policy
on Recovery of Compensation





Our chief
executive officer and chief financial officer are required to repay certain
bonuses and equity-based compensation they receive if we are required to restate
our financial statements as a result of misconduct, as required by Section 304
of the Sarbanes-Oxley Act of 2002.





Compensation
Committee Report





The
compensation committee has reviewed and discussed the Compensation Discussion
and Analysis with management. Based upon such review, the related discussions
and such other matters deemed relevant and appropriate by the compensation
committee, the compensation committee has recommended to the board of directors
that the Compensation Discussion and Analysis be included in the Company’s
Annual Report on Form 10-K.





Duncan
      T. Butler, Jr. (Chairman)David
      C. Hull, Jr.William
      Laverack, Jr.




60
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Summary
Compensation Table





The
following table summarizes the compensation paid to or earned by our Chief
Executive Officer, our Chief Financial Officer and to each of our three most
highly compensated executive officers other than the Chief Executive Officer and
Chief Financial Officer who were serving as executive officers at the end of our
last fiscal year.





Name and Principal Position
            
            Year
            
            Salary
            
            
            Bonus (1)
            
            
            Option
              Awards (2)
            
            
            All Other Compensation (3)
            
            
            TotalRoy
      H. Chestnutt (4)
            
            2007
            
            $
            391,346
            
            
            $
            88,000
            
            
            $
            237,477
            
            
            $
            11,859
            
            
            $
            728,682President,
      Chief Executive Officer and Chairman of the Board
            
            2006
            
            
            324,519
            
            
            
            162,260
            
            
            
            183,687
            
            
            
            50,856
            
            
            
            721,322Michael
      Wilfley
            
            2007
            
            
            243,302
            
            
            
            26,763
            
            
            
            40,329
            
            
            
            7,651
            
            
            
            318,045Chief
      Financial Officer
            
            2006
            
            
            226,999
            
            
            
            10,000
            
            
            
            31,519
            
            
            
            9,582
            
            
            
            278,100W.K.L.
      “Scott” Ferguson, Jr.
            
            2007
            
            
            208,195
            
            
            
            22,901
            
            
            
            40,329
            
            
            
            10,367
            
            
            
            281,792Chief
      Operating Officer
            
            2006
            
            
            200,140
            
            
            
            10,000
            
            
            
            31,519
            
            
            
            7,820
            
            
            
            249,479Jeffrey
      A. Brennan (4)
            
            2007
            
            
            199,017
            
            
            
            15,324
            
            
            
            27,951
            
            
            
            9,493
            
            
            
            251,785Vice
      President Enterprise Services
            
            2006
            
            
            131,250
            
            
            
            8,033
            
            
            
            16,124
            
            
            
            39,747
            
            
            
            195,154William
      C. “Chad” Jones Jr. (4)(5)
            
            2007
            
            
            215,653
            
            
            
            23,722
            
            
            
            28,729
            
            
            
            11,119
            
            
            
            279,223Chief
      Service Officer
            
            2006
            
            
            137,309
            
            
            
            8,142
            
            
            
            15,759
            
            
            
            60,064
            
            
            
            221,274


____________________________


(1)
            Bonus
      column includes an accrued discretionary bonus for Mr. Chestnutt, which
      was paid by the Company in January 2008. Bonuses to all other NEOs were
      discretionary bonuses awarded by the board of directors and paid in 2007.
      No bonuses were paid under our Annual Cash Incentive
  Plan.





(2)
            Compensation
      cost for all option awards was based on the grant-date fair value
      estimated in accordance with the provisions of SFAS 123(R). Compensation
      cost calculated under SFAS 123(R) is amortized to compensation expense on
      a straight-line basis over the vesting period of the underlying stock
      option grants. See footnote No. 9, “Stockholder’s Equity” in the Notes to
      our Consolidated Financial Statements included in this annual report for
      the valuation assumptions used in determining the fair value of option
      grants.





(3)
            All
      Other Compensation includes car allowance and 401(k) employer match. The
      following table presents the incremental cost of the components of All
      Other Compensation for the NEOs.





Year
            
            Other Annual
    CompensationRoy H. Chestnutt
            
            
            Michael L. Wilfley
            
            
            W.K.L. “Scott” Ferguson,
      Jr.
            
            
            Jeffrey A. Brennan
            
            
            William C. “Chad” Jones,
      Jr.Car
      Allowance
            2007
            
            $
            4,800
            
            
            $
            4,800
            
            
            $
            4,800
            
            
            $
            4,800
            
            
            $
            4,800401(k)
      match
            2007
            
            
            7,059
            
            
            
            2,851
            
            
            
            5,567
            
            
            
            4,693
            
            
            
            6,319Total
      Other Compensation
            2007
            
            $
            11,859
            
            
            $
            7,651
            
            
            $
            10,367
            
            
            $
            9,493
            
            
            $
            11,119Car
      Allowance
            2006
            
            $
            4,154
            
            
            $
            4,800
            
            
            $
            4,800
            
            
            $
            3,231
            
            
            $
            3,139401(k)
      match
            2006
            
            
            —
            
            
            
            4,782
            
            
            
            3,020
            
            
            
            4,160
            
            
            
            4,195Relocation
            2006
            
            
            22,031
            
            
            
            —
            
            
            
            —
            
            
            
            13,400
            
            
            
            31,939Tax
      Reimbursements
            2006
            
            
            24,671
            
            
            
            —
            
            
            
            —
            
            
            
            18,956
            
            
            
            20,791Total
      Other Compensation
            2006
            
            $
            50,856
            
            
            $
            9,582
            
            
            $
            7,820
            
            
            $
            39,747
            
            
            $
            60,064





(4)
            Mr.
      Chestnutt, Mr. Jones, and Mr. Brennan joined Grande in February 2006, May
      2006, and April 2006, respectively; therefore, 2006 compensation included
      in this table represents a partial
year.





(5)
            Mr.
      Jones voluntarily resigned as Chief Service Officer in January 2008. There
      were no severance payments associated with his voluntary
      resignation.





61
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Grants
of Plan-Based Awards





The
following table sets forth information with respect to grants of plan-based
awards for the year ended December 31, 2007 to the NEOs.





Estimated Possible Payouts Under-Non-Equity
      Incentive Plan AwardsName
            
            Gran Date (including repricing
      date)
            
            Threshold
            
            
            Target (1)
            
            
            Maximum (1)
            
            
            All Other Option Awards: Number of Securities
      Underlying Options
            
            
            Exercise Price of Option Awards(per share)
      (2)
            
            
            Grant Date Fair Value of Option Awards
      (3)Roy
      H. Chestnutt
            
            
            
            $
            —
            
            
            $
            200,000
            
            
            $
            400,000Michael
      L. Wilfley
            
            
            
            
            —
            
            
            
            62,500
            
            
            
            125,000(4)
            
            05/02/07
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200,000
            
            
            
            0.10
            
            
            
            16,000W.K.L.
      “Scott” Ferguson, Jr
            
            
            
            
            —
            
            
            
            52,460
            
            
            
            104,920(4)
            
            05/02/07
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200,000
            
            
            
            0.10
            
            
            
            16,000Jeffrey
      A. Brennan
            
            
            
            
            —
            
            
            
            35,087
            
            
            
            70,174(4)
            
            05/02/07
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            200,000
            
            
            
            0.10
            
            
            
            16,000William
      C. “Chad” Jones Jr.
            
            
            
            
            —
            
            
            
            —
            
            
            
            —(4)(5)
            
            05/02/07
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            500,000
            
            
            
            0.10
            
            
            
            40,000


____________________________


(1)
            The
      Annual Cash Incentive Plan provides for a single payment that is awarded
      based upon a pro-rata share of the Company’s performance in excess of a
      pre-determined threshold as determined by the board of directors (see
      “Annual Cash Incentive Plan”). The amounts reflected in the table
      represent amounts that were possible if the target had been met during
      2007. As noted in the Summary Compensation Table above, there were no
      payments made to NEOs under the Annual Cash Incentive Plan during 2007,
      however, the board of directors approved a discretionary
      bonus.





(2)
            Our
      stock is not traded on any stock exchange or quoted on any established
      trading market.  The exercise price of options granted is
      determined by the compensation committee of our board of directors and is
      based on the business judgment of management of the Company and the
      compensation committee as well as the provisions under our 2000 Stock
      Incentive Plan as discussed above in “Awards Under the 2000 Stock
      Incentive Plan.” The exercise price shall meet or exceed the estimated
      fair value of the underlying stock on the date of
  grant.





(3)
            Reflects
      option awards granted during 2007 under the 2000 Stock Incentive
      Plan.  Grant-date fair value was estimated in accordance with
      the provisions of SFAS 123(R). See footnote No. 9, “Stockholder’s Equity “
      in the Notes to our Consolidated Financial Statements included in this
      annual report for the valuation assumptions used in determining the fair
      value of option grants. Estimates of forfeitures related to
      service-related vesting conditions are disregarded in computing the value
      shown in this column.





(4)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      February 2, 2008, 2.1% on the last day of each of the first 35 months
      after February 2, 2008, and 1.5% on the last day of the 36th month after
      February 2, 2008.





(5)
            Mr.
      Jones voluntarily resigned as Chief Service Officer in January 2008 and
      these options were forfeited.





Material
Terms of Option Repricing





On May 3,
2006, the compensation committee of the board of directors approved the
repricing of all common stock options outstanding to current employees to an
exercise price of $0.05 per share. Repricing of non-employee common stock
options are made at the discretion of the compensation committee. Stock options
that are outstanding under the 2000 Stock Incentive Plan, subject to the
repricing, were originally issued with exercise prices ranging from $0.10 per
share to $0.80 per share. The Company recognized no additional compensation
expense as a result of this modification due to the options having no fair
value.





62
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Outstanding
Equity Awards at Fiscal Year End





The
following table sets forth certain information relating to outstanding equity
awards to the NEOs as of December 31, 2007.





Named Executive
    Officer
              
              Option Grant Date
              
              Number of Securities Underlying Unexercised
      Options (#)Exercisable(1)
              
              
              Number of Securities Underlying Unexercised
      Options (#) Unexercisable
              
              
              Option Exercise Price
    (2)
              
              
              
              Option Expiration
  DateRoy
      H. Chestnutt (3)
              
              06/28/06
              
              
              2,000,000
              
              
              
              2,000,000
              
              
              $
              0.10
              
              
              
              06/28/16Roy
      H. Chestnutt (4)
              
              06/28/06
              
              
              —
              
              
              
              1,750,000
              
              
              $
              0.10
              
              
              
              06/28/16Roy
      H. Chestnutt (5)
              
              06/28/06
              
              
              —
              
              
              
              1,750,000
              
              
              $
              0.10
              
              
              
              06/28/16Roy
      H. Chestnutt (6)
              
              06/28/06
              
              
              —
              
              
              
              1,750,000
              
              
              $
              0.10
              
              
              
              06/28/16Roy
      H. Chestnutt (7)
              
              06/28/06
              
              
              —
              
              
              
              1,750,000
              
              
              $
              0.10
              
              
              
              06/28/16Roy
      H. Chestnutt (8)
              
              06/28/06
              
              
              3,208,333
              
              
              
              3,791,667
              
              
              $
              0.05
              
              
              
              06/28/16Michael
      L. Wilfley
              
              06/13/00
              
              
              1,000,000
              
              
              
              —
              
              
              $
              0.05
              
              (16)
              
              06/13/10Michael
      L. Wilfley
              
              04/05/02
              
              
              64,386
              
              
              
              —
              
              
              $
              0.05
              
              (17)
              
              04/05/12Michael
      L. Wilfley
              
              05/07/02
              
              
              200,000
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              05/07/12Michael
      L. Wilfley
              
              02/25/03
              
              
              55,287
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              02/25/13Michael
      L. Wilfley
              
              05/20/03
              
              
              250,000
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              05/20/13Michael
      L. Wilfley
              
              12/09/03
              
              
              1,600,000
              
              
              
              —
              
              
              $
              0.05
              
              (19)
              
              12/09/13Michael
      L. Wilfley
              
              02/09/04
              
              
              78,693
              
              
              
              26,232
              
              
              $
              0.05
              
              (19)
              
              02/09/14Michael
      L. Wilfley
              
              02/15/05
              
              
              105,510
              
              
              
              105,511
              
              
              $
              0.05
              
              (19)
              
              02/15/15Michael
      L. Wilfley (9)
              
              06/28/06
              
              
              1,031,250
              
              
              
              1,218,750
              
              
              $
              0.10
              
              
              
              06/28/16Michael
      L. Wilfley (10)
              
              05/02/07
              
              
              —
              
              
              
              200,000
              
              
              $
              0.10
              
              
              
              05/02/17W.K.L.
      “Scott” Ferguson, Jr.
              
              04/04/00
              
              
              500,000
              
              
              
              —
              
              
              $
              0.05
              
              (16)
              
              04/04/10W.K.L.
      “Scott” Ferguson, Jr.
              
              12/05/00
              
              
              100,000
              
              
              
              —
              
              
              $
              0.05
              
              (20)
              
              12/05/10W.K.L.
      “Scott” Ferguson, Jr.
              
              04/05/02
              
              
              52,582
              
              
              
              —
              
              
              $
              0.05
              
              (17)
              
              04/05/12W.K.L.
      “Scott” Ferguson, Jr.
              
              05/07/02
              
              
              250,000
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              05/07/12W.K.L.
      “Scott” Ferguson, Jr.
              
              02/25/03
              
              
              52,531
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              02/25/13W.K.L.
      “Scott” Ferguson, Jr.
              
              05/20/03
              
              
              250,000
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              05/20/13W.K.L.
      “Scott” Ferguson, Jr.
              
              12/09/03
              
              
              1,200,000
              
              
              
              —
              
              
              $
              0.05
              
              (18)
              
              12/09/13W.K.L.
      “Scott” Ferguson, Jr. (9)
              
              06/28/06
              
              
              1,031,250
              
              
              
              1,218,750
              
              
              $
              0.10
              
              
              
              06/28/16W.K.L.
      “Scott” Ferguson, Jr. (10)
              
              05/02/07
              
              
              —
              
              
              
              200,000
              
              
              $
              0.10
              
              
              
              05/02/17Jeffrey
      A. Brennan (11)
              
              06/28/06
              
              
              625,000
              
              
              
              875,000
              
              
              $
              0.10
              
              
              
              06/28/16Jeffrey
      A. Brennan (12)
              
              06/28/06
              
              
              416,666
              
              
              
              583,334
              
              
              $
              0.05
              
              
              
              06/28/16Jeffrey
      A. Brennan (10)
              
              05/02/07
              
              
              —
              
              
              
              200,000
              
              
              $
              0.10
              
              
              
              05/02/17William
      C. “Chad” Jones Jr. (13)(14)
              
              06/28/06
              
              
              593,750
              
              
              
              906,250
              
              
              $
              0.10
              
              
              
              06/28/16William
      C. “Chad” Jones Jr. (13)(15)
              
              06/28/06
              
              
              494,791
              
              
              
              755,209
              
              
              $
              0.05
              
              
              
              06/28/16William
      C. “Chad” Jones Jr. (10)(13)
              
              05/02/07
              
              
              —
              
              
              
              200,000
              
              
              $
              0.10
              
              
              
              05/02/17


____________________________


(1)
            Unless
      otherwise noted, all stock option grants vest ratably over a four-year
      term from the Option Grant Date.





(2)
            All
      options shown in the above table granted before May 3, 2006 were repriced
      to $0.05 per share on May 3, 2006. See “Material Terms of Option
      Repricing”.





(3)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      December 31, 2006, 2.083% on the last day of each of the first 36 months
      after December 31, 2006, and the remainder on January 1,
    2010.





(4)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 100% on
      February 13, 2007. Vested Series H Preferred Stock Options are only
      exercisable within the applicable exercise period, which shall commence on
      the first to occur of (i) March 16, 2009, (ii) the date of a Change of
      Control, and (iii) the date of termination of Mr. Chestnutt’s service with
      the Company or any of its affiliates. If March 16, 2009 occurs first, then
      the vested Series H Preferred Stock Options will only be exercisable in
      the period beginning on March 16, 2009 and ending on March 15, 2010. If a
      Change of Control is the first to occur, then the vested Series H
      Preferred Stock Options will only be exercisable in the period beginning
      90 days prior to the Change of Control and ending on the 75th day after
      the Change of Control. If Mr. Chestnutt’s service is terminated first (for
      any reason other than for Cause), then the vested Series H Preferred Stock
      Options are only exercisable: (i) within the period commencing on the date
      of the termination of service and ending on the later of (x) December 31
      of the calendar year in which the service termination occurred and (y)
      March 15 following the service termination date, if such termination of
      service is other than by reason of Voluntary Termination or for Cause, or
      (ii) within the period beginning on the service termination date and
      ending on the 90th day after the service termination date, if such
      termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s
      service is terminated first and such termination is for Cause, then there
      will not be any applicable exercise period and the Series H Preferred
      Stock Options will terminate and become null and void on the service
      termination date.





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(5)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 100% on
      February 13, 2008. Vested Series H Preferred Stock Options are only
      exercisable within the applicable exercise period, which shall commence on
      the first to occur of (i) March 16, 2010, (ii) the date of a Change of
      Control, and (iii) the date of termination of Mr. Chestnutt’s service with
      the Company or any of its affiliates. If March 16, 2010 occurs first, then
      the vested Series H Preferred Stock Options will only be exercisable in
      the period beginning on March 16, 2010 and ending on March 15, 2011. If a
      Change of Control is the first to occur, then the vested Series H
      Preferred Stock Options will only be exercisable in the period beginning
      90 days prior to the Change of Control and ending on the 75th day after
      the Change of Control. If Mr. Chestnutt’s service is terminated first (for
      any reason other than for Cause), then the vested Series H Preferred Stock
      Options are only exercisable: (i) within the period commencing on the date
      of the termination of service and ending on the later of (x) December 31
      of the calendar year in which the service termination occurred and (y)
      March 15 following the service termination date, if such termination of
      service is other than by reason of Voluntary Termination or for Cause, or
      (ii) within the period beginning on the service termination date and
      ending on the 90th day after the service termination date, if such
      termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s
      service is terminated first and such termination is for Cause, then there
      will not be any applicable exercise period and the Series H Preferred
      Stock Options will terminate and become null and void on the service
      termination date.





(6)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 100% on
      February 13, 2009. Vested Series H Preferred Stock Options are only
      exercisable within the applicable exercise period, which shall commence on
      the first to occur of (i) March 16, 2011, (ii) the date of a Change of
      Control, and (iii) the date of termination of Mr. Chestnutt’s service with
      the Company or any of its affiliates. If March 16, 2011 occurs first, then
      the vested Series H Preferred Stock Options will only be exercisable in
      the period beginning on March 16, 2011 and ending on March 15, 2012. If a
      Change of Control is the first to occur, then the vested Series H
      Preferred Stock Options (Executive Compensation Shares) will only be
      exercisable in the period beginning 90 days prior to the Change of Control
      and ending on the 75th day after the Change of Control. If Mr. Chestnutt’s
      service is terminated first (for any reason other than for Cause), then
      the vested Series H Preferred Stock Options (Executive Compensation
      Shares) are only exercisable: (i) within the period commencing on the date
      of the termination of service and ending on the later of (x) December 31
      of the calendar year in which the service termination occurred and (y)
      March 15 following the service termination date, if such termination of
      service is other than by reason of Voluntary Termination or for Cause, or
      (ii) within the period beginning on the service termination date and
      ending on the 90th day after the service termination date, if such
      termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s
      service is terminated first and such termination is for Cause, then there
      will not be any applicable exercise period and the Series H Preferred
      Stock Options (Executive Compensation Shares) will terminate and become
      null and void on the service termination
date.





(7)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 100% on
      February 13, 2010. Vested Series H Preferred Stock Options are only
      exercisable within the applicable exercise period, which shall commence on
      the first to occur of (i) March 16, 2012, (ii) the date of a Change of
      Control, and (iii) the date of termination of Mr. Chestnutt’s service with
      the Company or any of its affiliates. If March 16, 2009 occurs first, then
      the vested Series H Preferred Stock Options will only be exercisable in
      the period beginning on March 16, 2012 and ending on March 15, 2013. If a
      Change of Control is the first to occur, then the vested Series H
      Preferred Stock Options will only be exercisable in the period beginning
      90 days prior to the Change of Control and ending on the 75th day after
      the Change of Control. If Mr. Chestnutt’s service is terminated first (for
      any reason other than for Cause), then the vested Series H Preferred Stock
      Options are only exercisable: (i) within the period commencing on the date
      of the termination of service and ending on the later of (x) December 31
      of the calendar year in which the service termination occurred and (y)
      March 15 following the service termination date, if such termination of
      service is other than by reason of Voluntary Termination or for Cause, or
      (ii) within the period beginning on the service termination date and
      ending on the 90th day after the service termination date, if such
      termination is by reason of a Voluntary Termination. If Mr. Chestnutt’s
      service is terminated first and such termination is for Cause, then there
      will not be any applicable exercise period and the Series H Preferred
      Stock Options will terminate and become null and void on the service
      termination date.





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(8)
            Common
      Stock Options (Executive Compensation Shares) vest 25% on February 13,
      2007, 2.1% on the last day of each of the first 35 months after February
      13, 2007, and 1.5% on the last day of the 36th month after February 13,
      2007.





(9)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      February 13, 2007, 2.1% on the last day of each of the first 35 months
      after February 13, 2007, and 1.5% on the last day of the 36th month after
      February 13, 2007.





(10)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      February 2, 2008, 2.1% on the last day of each of the first 35 months
      after February 2, 2008, and 1.5% on the last day of the 36th month after
      February 2, 2008.





(11)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      April 24, 2007, 2.1% on the last day of each of the first 35 months after
      April 24, 2007, and 1.5% on the last day of the 36th month after April 24,
      2007.





(12)
            Common
      Stock Options (Executive Compensation Shares) vest 25% on April 24, 2007,
      2.1% on the last day of each of the first 35 months after April 24, 2007,
      and 1.5% on the last day of the 36th month after April 24,
      2007.





(13)
            Mr.
      Jones voluntarily resigned as Chief Service Officer in January 2008 and
      all unvested options were forfeited upon his resignation
    date.





(14)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on May
      1, 2007, 2.1% on the last day of each of the first 35 months after May 1,
      2007, and 1.5% on the last day of the 36th month after May 1,
      2007.





(15)
            Common
      Stock Options (Executive Compensation Shares) vest 25% on May 1, 2007,
      2.1% on the last day of each of the first 35 months after May 1, 2007, and
      1.5% on the last day of the 36th month after May 1,
  2007.





(16)
            Common
      Stock Options (not Executive Compensation Shares) were repriced from $0.25
      to $0.05. See “Material Terms of Option
  Repricing”.





(17)
            Common
      Stock Options (not Executive Compensation Shares) were repriced from $0.60
      to $0.05. See “Material Terms of Option
  Repricing”.





(18)
            Common
      Stock Options (not Executive Compensation Shares) were repriced from $0.80
      to $0.05. See “Material Terms of Option
  Repricing”.





(19)
            Common
      Stock Options (not Executive Compensation Shares) were repriced from $0.20
      to $0.05. See “Material Terms of Option
  Repricing”.





(20)
            Common
      Stock Options (not Executive Compensation Shares) were repriced from $0.50
      to $0.05. See “Material Terms of Option
  Repricing”.





Option
Exercises





There
were no options exercised by any of the NEOs or directors during the year ended
December 31, 2007.





Compensation
of Directors





Compensation
of directors is the responsibility of the compensation committee of the board of
directors. There are no formal standard compensation arrangements for directors
that have been adopted by the Company or the board of directors. Certain
directors are compensated with a combination of cash and stock options to
compensate for their contributions to the oversight of the Company. Stock option
pricing and practices are governed by the terms and conditions of the 2000 Stock
Incentive Plan and the option agreements.





The
following table sets forth the compensation paid to our directors in 2007. The
directors named are the only directors who received compensation during
2007.





Name
            
            Year
            
            Fees Earned or Paid in Cash
      (1)
            
            
            Option
                Awards (2)
            
            
            Total Other
    Compensation
            
            
            Total CompensationJames
      M. Mansour
            
            2007
            
            $
            75,000
            
            
            $
            —
            
            
            $
            —
            
            
            $
            75,000Lawrence
      M. Schmeltekopf
            
            2007
            
            
            20,000
            
            
            
            4,298
            
            
            
            —
            
            
            
            24,298Richard
      W. Orchard
            
            2007
            
            
            20,000
            
            
            
            3,438
            
            
            
            —
            
            
            
            23,438


____________________________


(1)
            Mr.
      Mansour resigned in January 2008.  For 2007, he received monthly
      compensation of $6,250 for his service as the Chairman of the board of
      directors. Mr. Schmeltekopf receives monthly compensation of $1,666 for
      his service as Chairman of the audit committee. Mr. Orchard receives
      monthly compensation of $1,666 for his service as a director. Directors
      are reimbursed for their reasonable out-of-pocket expenses incurred in
      attending meetings. Other than the above, directors do not receive cash
      compensation for serving on the board of directors or any of its
      committees.





(2)
            Compensation
      cost for all option awards was based on the grant-date fair value
      estimated in accordance with the provisions of SFAS 123(R). Compensation
      cost calculated under SFAS 123(R) is amortized to compensation expense on
      a straight-line basis over the vesting period of the underlying stock
      option grants. See footnote No. 9, “Stockholder’s Equity” in the Notes to
      our Consolidated Financial Statements included in this annual report for
      the valuation assumptions used in determining the fair value of option
      grants.





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Grant
of Plan Based Awards to Directors





No
options were granted to board members during the year ended December 31,
2007.





Directors
Outstanding Equity Awards at Year End





The
following table sets forth certain information relating to outstanding equity
awards to directors as of December 31, 2007.





Name and Principal Position
            
            Option
              Grant Date
            
            Number of Securities Underlying Unexercised
      Options (#)Exercisable
            
            
            Number of Securities Underlying Unexercised
      Options (#)Unexercisable
            
            
            Option
              ExercisePrice
            
            Option ExpirationDateJames
      M. Mansour (1)(2)
            
            02/09/04
            
            
            1,000,000
            
            
            
            —
            
            
            $
            0.05
            
            02/09/14James
      M. Mansour (3)
            
            02/25/03
            
            
            200,000
            
            
            
            —
            
            
            
            0.05
            
            02/25/13James
      M. Mansour (4)
            
            06/13/00
            
            
            200,000
            
            
            
            —
            
            
            
            0.05
            
            06/13/10Lawrence
      M. Schmeltekopf (5)
            
            10/25/06
            
            
            91,666
            
            
            
            108,334
            
            
            
            0.10
            
            06/28/16Lawrence
      M. Schmeltekopf (6)
            
            06/28/06
            
            
            75,000
            
            
            
            225,000
            
            
            
            0.05
            
            06/28/16Richard
      W. Orchard (7)
            
            10/25/06
            
            
            58,333
            
            
            
            141,667
            
            
            
            0.10
            
            10/25/16Richard
      W. Orchard (8)
            
            10/25/06
            
            
            75,000
            
            
            
            225,000
            
            
            
            0.05
            
            10/25/16


____________________________


(1)
            Mr.
      Mansour resigned in January 2008.


(2)
            Common
      stock options (not Executive Compensation Shares) were repriced from $0.20
      to $0.05. Options vest ratably over four years from the Option Grant
      Date.


(3)
            Common
      stock options (not Executive Compensation Shares) were repriced from $0.80
      to $0.05. Options vest ratably over four years from the Option Grant
      Date.


(4)
            Common
      stock options (not Executive Compensation Shares) were repriced from $0.25
      to $0.05. Options vest ratably over four years from the Option Grant
      Date.


(5)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on June
      20, 2007, 2.1% on the last day of each of the first 35 months after June
      20, 2007, and 1.5% on the last day of the 36th month after June 20, 2007.
      Vested Series H Preferred Stock Options are only exercisable within the
      applicable exercise period, which shall commence on the first to occur of
      (i) June 27, 2016, (ii) the date of a Change of Control, and (iii) the
      date of termination of Mr. Schmeltekopf’s service with the Company or any
      of its affiliates. If June 27, 2016 occurs first, then the vested Series H
      Preferred Stock Options will only be exercisable in the period beginning
      on June 27, 2016 and ending on June 28, 2016. If a Change of Control is
      the first to occur, then the vested Series H Preferred Stock Options will
      only be exercisable in the period beginning 90 days prior to the Change of
      Control and ending on the 75th day after the Change of Control. If Mr.
      Schmeltekopf’s service is terminated first (for any reason other than for
      Cause), then the vested Series H Preferred Stock Options are only
      exercisable: (i) within the period commencing on the date of the
      termination of service and ending on the later of (x) December 31 of the
      calendar year in which the service termination occurred and (y) March 15
      following the service termination date, if such termination of service is
      other than by reason of Voluntary Termination or for Cause, or (ii) within
      the period beginning on the service termination date and ending on the
      90th day after the service termination date, if such termination is by
      reason of a Voluntary Termination. If Mr. Schmeltekopf’s service is
      terminated first and such termination is for Cause, then there will not be
      any applicable exercise period and the Series H Preferred Stock Options
      will terminate and become null and void on the service termination
      date.


(6)
            Common
      stock options (not Executive Compensation Shares) vest 25% on June 20,
      2007, 25% on June 20, 2008, 25% on June 20, 2009 and 25% on June 20,
      2010.


(7)
            Series
      H Preferred Stock Options (Executive Compensation Shares) vest 25% on
      October 25, 2007, 2.1% on the last day of each of the first 35 months
      after October 25, 2007, and 1.5% on the last day of the 36th
      month after October 25, 2007. Vested Series H Preferred Stock Options are
      only exercisable within the applicable exercise period, which shall
      commence on the first to occur of (i) October 24, 2016, (ii) the date of a
      Change of Control, and (iii) the date of termination of Mr. Orchard’s
      service with the Company or any of its affiliates. If October 24, 2016
      occurs first, then the vested Series H Preferred Stock Options will only
      be exercisable in the period beginning on October 24, 2016 and ending on
      October 25, 2016. If a Change of Control is the first to occur, then the
      vested Series H Preferred Stock Options will only be exercisable in the
      period beginning 90 days prior to the Change of Control and ending on the
      75th day after the Change of Control. If Mr. Orchard’s service is
      terminated first (for any reason other than for Cause), then the vested
      Series H Preferred Stock Options are only exercisable: (i) within the
      period commencing on the date of the termination of service and ending on
      the later of (x) December 31 of the calendar year in which the service
      termination occurred and (y) March 15 following the service termination
      date, if such termination of service is other than by reason of Voluntary
      Termination or for Cause, or (ii) within the period beginning on the
      service termination date and ending on the 90th day after the service
      termination date, if such termination is by reason of a Voluntary
      Termination. If Mr. Orchard’s service is terminated first and such
      termination is for Cause, then there will not be any applicable exercise
      period and the Series H Preferred Stock Options will terminate and become
      null and void on the service termination
date.





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(8)
            Common
      stock options (not Executive Compensation Shares) vest 25% on October 25,
      2007, 25% on October 25, 2008, 25% on October 25, 2009 and 25% on October
      25, 2010.





Employment
Agreements, Severance Benefits and Change in Control Provisions





The
inclusion of a severance arrangement serves to bridge the gap between the
executive officer’s employment with Grande to his or her next employment
engagement.  The adoption of the change in control arrangements serves
to motivate and reward the executive for returning the investment to the
stockholder.  Neither arrangement has materially influenced other
compensation awards.





Employment
Agreements





Roy H. Chestnutt entered an
employment agreement (the “Chestnutt Agreement”) with Grande Communications
Networks, Inc. (“Networks”) on December 31, 2005 with an effective date of
January 26, 2006. Under the terms of the Employment Agreement, Mr. Chestnutt’s
employment with Networks is at will. Mr. Chestnutt will be paid his current base
salary of $400,000 per annum with such increases as may be determined by the
board of directors, and Mr. Chestnutt is eligible to earn an annual bonus during
each fiscal year during which he remains an executive employee of Networks of
100% of his then current base salary if the written annual performance goals
adopted by both the board of directors and Mr. Chestnutt are achieved for that
fiscal year. If only certain of the annual goals are achieved or if the annual
goals are achieved only in part, then any bonus will be at the sole discretion
of the board of directors. The Chestnutt Agreement provided that Mr. Chestnutt
would receive an annual bonus for 2006 of at least 50% of the salary he earned
in 2006, regardless of whether the annual goals were achieved for that year. The
Chestnutt Agreement also provided for the reimbursement of relocation expenses
incurred by Mr. Chestnutt. On June 28, 2006, Mr. Chestnutt and Networks entered
into an Amendment (the “Amendment”) to the Chestnutt Agreement, whereby, among
other things, Networks agreed to grant new stock options to Mr. Chestnutt that
were in lieu of the stock options that Networks previously agreed to grant to
Mr. Chestnutt under the Chestnutt Agreement. The options that were described in
the Chestnutt Agreement could not be granted to Mr. Chestnutt under the 2000
Stock Incentive Plan because at that time, shares of common stock designated as
Executive Compensation Shares and shares of Series H preferred stock could not
be granted under such Plan. The Board amended the 2000 Stock Incentive Plan to
comply with Section 409A of the Internal Revenue Code of 1986, as amended, and
to add the Series H preferred stock and Executive Compensation Shares to the
shares available for issuance under such Plan. The options that were granted to
Mr. Chestnutt pursuant to the Amendment were issued at the same exercise price
and were with regard to the right to purchase the same number and class of
shares as had been described in the Chestnutt Agreement.





The
Chestnutt Agreement, as amended to date, also provides certain benefits
payable upon the occurrence of the following triggering events:





•
            If
      Networks terminates the Agreement without cause or Mr. Chestnutt
      terminates the Agreement for good reason upon 60 days prior written
      notice, then Networks must pay Mr. Chestnutt severance in the amount of
      twelve months salary at his then current base salary and Networks will
      continue Mr. Chestnutt’s then current insurance and health care coverage
      until the first anniversary of the date of such termination, provided that
      Networks may cease providing such insurance and health care coverage at an
      earlier date if Mr. Chestnutt receives equivalent benefits from his next
      full time employer. Payment of the severance amount will be made by
      Networks in equal monthly installments over 12 months. To the extent this
      severance pay exceeds certain amounts, as set forth in applicable Treasury
      Regulations, the excess amount of severance pay will not begin sooner than
      6 months following the employment termination date.  The payment
      of the severance is conditioned upon Mr. Chestnutt’s delivery to Networks
      of a release of claims in a form satisfactory to the Board of Directors.
      The Chestnutt Agreement defines “cause” as (i) the commission by Mr.
      Chestnutt of a felony or a crime involving moral turpitude or the
      commission of any other act involving dishonesty, disloyalty or fraud,
      (ii) conduct by Mr. Chestnutt tending to bring Networks into substantial
      public disgrace or disrepute, (iii) the failure by Mr. Chestnutt to cure
      within 30 days of notice of his failure perform in any material respect
      his obligations under the Chestnutt Agreement or the reasonable directives
      of the Board of Directors, (iv) gross negligence or willful misconduct of
      Mr. Chestnutt in providing the services required by the Chestnutt
      Agreement or (v) the habitual use of alcohol or drugs. The Chestnutt
      Agreement defines “good reason termination” as any of the following
      actions by the Board of Directors: (i) material diminishment of Mr.
      Chestnutt’s duties and responsibilities; (ii) material relocation of the
      office where Mr. Chestnutt is to work to an area outside of the Austin/San
      Antonio corridor, Texas; (iii) removal of Mr. Chestnutt from the Board of
      Directors without cause; (iv) stripping Mr. Chestnutt of the title of
      Chief Executive Officer without cause, provided such action either causes
      Mr. Chestnutt to report to someone other than the Board or materially
      reduces the budget over which he has control; or (v) material reduction of
      Mr. Chestnutt’s base salary without cause. A termination will only be
      considered a “good reason termination” if Mr. Chestnutt provides the Board
      with written notice of an event giving rise to such termination within 90
      days of its occurrence, the Board fails to remedy the event within 30 days
      of such notice, and Mr. Chestnutt provides 60 days notice of his intent to
      terminate the contract (such notice provided no later than 1 year
      following the occurrence of the
event).





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•
            In
      the event of a voluntary termination by Mr. Chestnutt upon 60 days written
      notice, Mr. Chestnutt will be entitled to the amount of base pay accrued
      and unpaid through the effective date of
  termination.





W.K.L. “Scott” Ferguson, Jr.
entered into an Employment Agreement (the “Ferguson Agreement”) with Networks on
June 28, 2006. Under the terms of the Ferguson Agreement, as amended to date,
Mr. Ferguson’s employment is at will. Networks will pay Mr. Ferguson his current
bi-weekly salary of $8,070.77 (annualized equates to $209,840) with such
increases from time to time as may be determined by the Chief Executive Officer
and an annual incentive bonus each fiscal year equal to 50% of his annual salary
if annual performance goals adopted by both Mr. Ferguson and the Chief Executive
Officer are met for that fiscal year. If only certain or a portion of the annual
goals are met during a fiscal year, Mr. Ferguson may earn a bonus in an amount
determined by and at the discretion of the Chief Executive Officer and approved
by the board of directors. Additional bonuses may be awarded to Mr. Ferguson
based on achievement of the Company’s objectives with such bonuses being at the
sole discretion of the board of directors. In addition, the Ferguson Agreement
also provided for the grant of options to acquire shares of Series H preferred
stock. The Ferguson Agreement also provides certain benefits payable upon the
occurrence of the following triggering events:





•
            If
      Networks terminates the Agreement without cause or Mr. Ferguson terminates
      the Agreement for good reason upon 60 days prior written notice, Networks
      must (i) pay Mr. Ferguson severance in the amount equal to his then
      current bi-weekly base salary multiplied by 26, provided that if Mr.
      Ferguson receives any W-2 wages (during the severance period of 52 weeks)
      as an employee of an employer other than Networks, then the amount of any
      severance pay payable to Mr. Ferguson by Networks shall be reduced by an
      amount equal to such wages, and (ii) continue Mr. Ferguson’s then current
      insurance and health care coverage until the first anniversary of the date
      of such termination, provided that Networks may cease providing such
      insurance and health care coverage at an earlier date if Mr. Ferguson
      receives equivalent benefits from his next full time employer. Payment of
      the severance amount will be made by Networks in equal bi-weekly
      installments over 52 weeks. To the extent this severance pay exceeds
      certain amounts, as set forth in applicable Treasury Regulations, the
      excess amount of severance pay will not begin sooner than 6 months
      following the employment termination date.  The payment of the
      severance is conditioned upon Mr. Ferguson’s delivery to Networks of a
      release of claims in a form satisfactory to the Board of Directors. The
      Ferguson Agreement defines “cause” as (i) the commission by Mr. Ferguson
      of a felony or a crime involving moral turpitude or the commission of any
      other act involving dishonesty, disloyalty or fraud, (ii) conduct by Mr.
      Ferguson tending to bring Networks into substantial public disgrace or
      disrepute, (iii) the failure by Mr. Ferguson to cure within 30 days of
      notice of his failure perform in any material respect his obligations
      under the Ferguson Agreement, his obligations under the Employee
      Confidentiality Information and Invention Assignment Agreement between Mr.
      Ferguson and Networks dated as of May 23, 2000, or the reasonable
      directives of the Chief Executive Officer or the Board of Directors, (iv)
      gross negligence or willful misconduct of Mr. Ferguson in providing the
      services required by the Ferguson Agreement or (v) any substance abuse of
      Mr. Ferguson in any manner interferes with the performance of his duties
      under the Ferguson Agreement. The Ferguson Agreement defines “good reason
      termination” as any of the following actions by Networks: (i) material
      diminishment of Mr. Ferguson’s duties and responsibilities; (ii) material
      relocation of the office where Mr. Ferguson is to work to an area outside
      of the Austin/San Antonio corridor, Texas; (iii) stripping Mr. Ferguson of
      the title of Chief Operating Officer without cause, provided such action
      either materially changes the authority, duties and responsibilities of
      the supervisor to which he reports or materially decreases the budget over
      which he has control; or (v) material reduction of Mr. Ferguson’s base
      salary without cause. A termination will only be considered a “good reason
      termination” if Mr. Ferguson provides Networks with written notice of an
      event giving rise to such termination within 90 days of its occurrence,
      Networks fails to remedy the event within 30 days of such notice, and Mr.
      Ferguson provides 60 days notice of his intent to terminate the contract
      (such notice provided no later than 1 year following the occurrence of the
      event).





•
            In
      the event of a “voluntary termination” by Mr. Ferguson upon 60 days
      written notice, Mr. Ferguson will be entitled to the amount of base pay
      accrued and unpaid through the effective date of
    termination.





Michael Wilfley entered into
an Employment Agreement (the “Wilfley Agreement”) with Networks on June 28,
2006. Under the terms of the Wilfley Agreement, as amended to date, Mr.
Wilfley’s employment is at will. Networks will pay Mr. Wilfley his current
bi-weekly salary of $9,615.38 (annualized equates to $250,000) and an annual
bonus each fiscal year equal to 50% of his annual salary if annual performance
goals adopted by both Mr. Wilfley and the Chief Executive Officer are met for
that fiscal year. If only certain or a portion of the annual goals are met
during a fiscal year, Mr. Wilfley may earn a bonus in an amount determined by
and at the discretion of the Chief Executive Officer and approved by the Board
of Directors. Additional bonuses may be awarded to Mr. Wilfley based on
achievement of Networks’ objectives with such bonuses being at the sole
discretion of the Board of Directors. In addition, the Wilfley Agreement
provided for the grant of options to acquire shares of Series H preferred stock.
The Wilfley Agreement also provides certain benefits payable upon the occurrence
of the following triggering events:





68
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•
            If
      Networks terminates the Agreement without cause or Mr. Wilfley terminates
      the Agreement for good reason upon 60 days prior written notice, then
      Networks must (i) pay Mr. Wilfley severance in the amount equal to his
      then current bi-weekly base salary multiplied by 26, provided that if Mr.
      Wilfley receives any W-2 wages (during the severance period of 52 weeks)
      as an employee of an employer other than Networks, then the amount of any
      severance pay payable to Mr. Wilfley by Networks shall be reduced by an
      amount equal to such wages, and (ii) continue Mr. Wilfley’s then current
      insurance and health care coverage until the first anniversary of the date
      of such termination, provided that Networks may cease providing such
      insurance and health care coverage at an earlier date if Mr. Wilfley
      receives equivalent benefits from his next full time employer. Payment of
      the severance amount will be made by Networks in equal bi-weekly
      installments over 52 weeks. To the extent this severance pay exceeds
      certain amounts, as set forth in applicable Treasury Regulations, the
      excess amount of severance pay will not begin sooner than 6 months
      following the employment termination date.  The payment of the
      severance is conditioned upon Mr. Wilfley’s delivery to Networks of a
      release of claims in a form satisfactory to the Board of Directors. The
      Wilfley Agreement defines “cause” as (i) the commission by Mr. Wilfley of
      a felony or a crime involving moral turpitude or the commission of any
      other act involving dishonesty, disloyalty or fraud, (ii) conduct by Mr.
      Wilfley tending to bring Networks into substantial public disgrace or
      disrepute, (iii) the failure by Mr. Wilfley to cure within 30 days of
      notice of his failure perform in any material respect his obligations
      under the Wilfley Agreement, his obligations under the Employee
      Confidentiality Information and Invention Assignment Agreement between Mr.
      Wilfley and Networks dated as of July 12, 2000, or the reasonable
      directives of the Chief Executive Officer or the Board of Directors, (iv)
      gross negligence or willful misconduct of Mr. Wilfley in providing the
      services required by the Wilfley Agreement or (v) any substance abuse of
      Mr. Wilfley in any manner interferes with the performance of his duties
      under the Wilfley Agreement. The Wilfley Agreement defines “good reason
      termination” as any of the following actions by Networks: (i) material
      diminishment of Mr. Wilfley’s duties and responsibilities; (ii) material
      relocation of the office where Mr. Wilfley is to work to an area outside
      of the Austin/San Antonio corridor, Texas; (iii) stripping Mr. Wilfley of
      the title of Chief Financial Officer without cause, provided such action
      either materially changes the authority, duties and responsibilities of
      the supervisor to which he reports or materially decreases the budget over
      which he has control; or (v) material reduction of Mr. Wilfley’s base
      salary without cause. A termination will only be considered a “good reason
      termination” if Mr. Wilfley provides Networks with written notice of an
      event giving rise to such termination within 90 days of its occurrence,
      Networks fails to remedy the event within 30 days of such notice, and Mr.
      Wilfley provides 60 days notice of his intent to terminate the contract
      (such notice provided no later than 1 year following the occurrence of the
      event).





•
            In
      the event of a “voluntary termination” by Mr. Wilfley upon 60 days written
      notice, Mr. Wilfley will be entitled to the amount of base pay accrued and
      unpaid through the effective date of
  termination.





William C. “Chad” Jones, Jr.
entered into an Employment Agreement (the “Jones Agreement”) with Networks on
May 2, 2007. Under the terms of the Jones Agreement, Mr. Jones’ employment was
at will. As of December 31, 2007, Networks paid Mr. Jones a bi-weekly salary of
$8,374.42 (annualized equates to $217,735) and an annual bonus each fiscal year
equal to 50% of his annual salary if annual performance goals adopted by both
Mr. Jones and the Chief Executive Officer were met for that fiscal year. If only
certain or a portion of the annual goals were met during a fiscal year, Mr.
Jones may earn a bonus in an amount determined by and at the discretion of the
Chief Executive Officer and approved by the Board of Directors. Additional
bonuses may be awarded to Mr. Jones based on achievement of Networks’ objectives
with such bonuses being at the sole discretion of the Board of Directors. The
Jones Agreement also provided certain benefits payable upon the occurrence of
the following triggering events:





•
            If
      Networks terminates the Agreement without cause or Mr. Jones terminates
      the Agreement for good reason upon 60 days prior written notice, then
      Networks must (i) pay Mr. Jones severance in the amount equal to his then
      current bi-weekly base salary multiplied by 26, provided that if Mr. Jones
      receives any W-2 wages (during the severance period of 52 weeks) as an
      employee of an employer other than Networks, then the amount of any
      severance pay payable to Mr. Jones by Networks shall be reduced by an
      amount equal to such wages, and (ii) continue Mr. Jones’ then current
      insurance and health care coverage until the first anniversary of the date
      of such termination, provided that Networks may cease providing such
      insurance and health care coverage at an earlier date if Mr. Jones
      receives equivalent benefits from his next full time employer. Payment of
      the severance amount will be made by Networks in equal bi-weekly
      installments over 52 weeks. The payment of the severance is conditioned
      upon Mr. Jones’ delivery to Networks of a release of claims in a form
      satisfactory to the Board of Directors. The Jones Agreement defines
      “cause” as (i) the commission by Mr. Jones of a felony or a crime
      involving moral turpitude or the commission of any other act involving
      dishonesty, disloyalty or fraud, (ii) conduct by Mr. Jones tending to
      bring Networks into substantial public disgrace or disrepute, (iii) the
      failure by Mr. Jones to cure within 30 days of notice of his failure
      perform in any material respect his obligations under the Jones Agreement,
      his obligations under the Employee Confidentiality Information and
      Invention Assignment Agreement between Mr. Jones and Networks dated as of
      May 3, 2006, or the reasonable directives of the Chief Executive Officer
      or the Board of Directors, (iv) gross negligence or willful misconduct of
      Mr. Jones in providing the services required by the Jones Agreement or (v)
      any substance abuse of Mr. Jones in any manner interferes with the
      performance of his duties under the Jones Agreement. The Jones Agreement
      defines “good reason” as any of the following actions by Networks: (i)
      diminishment of Mr. Jones’ duties and responsibilities; (ii) relocation of
      the office where Mr. Jones is to work to an area outside of the Austin/San
      Antonio corridor, Texas; (iii) removal of Mr. Jones from the office of
      Chief Service Officer without cause; or (v) reduction of Mr. Jones’ base
      salary without cause.





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•
            In
      the event of a “voluntary termination” by Mr. Jones upon 60 days written
      notice, Mr. Jones will be entitled to the amount of base pay accrued and
      unpaid through the effective date of termination. In January 2008, this
      provision of the Jones Agreement was amended to provide that the notice
      period for a “voluntary termination” was shortened from 60 days to 13
      days.





Severance
Benefits





Severance Practices: While we
have no formal severance plan for our executives, other than as set forth in the
employment agreements described above, and have no obligation to pay severance
unless it is covered in a written agreement, our practice has been to offer
severance benefits to terminated executives (including NEOs that do not have an
employment agreement) based on the position held and the length of service with
the Company. We generally offer our executives severance benefits, subject to
certain restrictive covenants described below, up to nine months of the then
current base salary and health insurance benefits based upon length of service
with the Company. Severance payments are generally payable on a bi-weekly basis
in equal installments over the severance period.





Restrictive Covenants:In
order to be eligible for severance benefits, all executives (including the NEOs)
are required to enter into a Separation Agreement and Full and Final Release of
Claims in a form satisfactory to the Company that includes certain restrictive
covenants regarding, among other things, the following:





•
            Confidentiality
      of information;





•
            Continued
      adherence to company policies;





•
            Noncompete
      covenants;





•
            Nonsolicitation
      of customers; and





•
            Other
      reasonable restrictions.





Death or Total Disability:Employment with the Company shall terminate upon death or total
disability of the NEO. After such termination, the Company shall have no
obligation or liability other than payment of earned compensation to the NEO, or
the NEO’s estate, the amount of base salary accrued but unpaid at the date of
death or total disability, as the case may be.





Change
in Control Provisions





Reorganization, Sale of Assets or
Sale of Stock which Involves a Change of Control. Except as provided by
the board of directors pursuant to the authority described below or expressly
provided in the stock option agreement, upon the occurrence of a change of
control, as described below, all common and Series H Preferred stock options
outstanding shall become immediately vested. For additional information
regarding the definitions of change of control that apply to option agreements
awarded to the NEOs, see “2000 Stock Incentive Plan Summary – Change of
Control.”





Unless
otherwise expressly provided in the individual’s stock option agreement, the
board of directors may in its sole discretion, deliver a written notice
canceling the unexercised vested portion (including the portion which becomes
vested by reason of acceleration). If the common and Series H Preferred stock
options outstanding are not canceled, express provision may be made in writing
in connection with such change of control for the assumption or continuation of
the common and Series H Preferred stock options outstanding, or for the
substitution for such options of new options covering the stock of a successor
entity, or a parent or subsidiary thereof, with appropriate adjustments as to
the number and kinds of shares and exercise prices, in which event the 2000
Stock Incentive Plan and options theretofore granted shall continue in the
manner and under the terms so provided and no acceleration shall
occur.





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Potential
Payments upon Termination or Change in Control





The
following table sets forth the estimated benefits that would have been payable
to our NEOs as of December 31, 2007 if an event triggering a termination without
cause by the Company or for good reason by the NEO or a change in control had
occurred on that date.  In determining the benefits payable upon
certain terminations of employment, we have assumed in all cases that the NEO
does not become employed by a new employer or return to work for
us.





Name (1) (2)
            
            Severance
            
            
            Continued Medical Benefits
      (3)
            
            
            Total
      ValueRoy
      H. Chestnutt (4)
            
            $
            400,000
            
            
            $
            16,720
            
            
            $
            416,720Michael
      L. Wilfley (4)
            
            
            250,000
            
            
            
            16,720
            
            
            
            266,720W.K.L.
      “Scott” Ferguson, Jr. (4)
            
            
            209,840
            
            
            
            16,720
            
            
            
            226,560Jeffrey
      A. Brennan (5)
            
            
            150,373
            
            
            
            12,540
            
            
            
            162,913William
      C. “Chad” Jones Jr. (4)(6).
            
            
            217,735
            
            
            
            —
            
            
            
            217,735


____________________________


(1)
            In
      general, in the event of (i) death or total disability, (ii) a voluntary
      termination of employment without good reason and (iii) termination with
      cause by the Company, the NEOs would receive compensation and benefits
      accrued but unpaid. This would include accrued but unpaid salary and any
      balance under the 401(k) plan as well as any amounts due under any
      insurance plan in the case of death or total
  disability.





(2)
            As
      of December 31, 2007, the exercise price for all stock options held by the
      NEOs exceeded the estimated fair market value attributed to the common and
      Series H preferred stock options at such date; therefore, no value has
      been placed on the options in the table above. Vesting of stock options
      upon a change of control (as defined in the option agreements) would be
      governed under the terms of the 2000 Stock Incentive Plan. Under the terms
      of the 2000 Stock Incentive Plan, the Company may repurchase any shares
      acquired by exercise of such stock options if the NEO’s employment is
      terminated, at a purchase price equal to the fair market value for such
      shares, as determined by the board of directors of the Company. See
      “Change in Control Provisions”
above.





(3)
            Continued
      medical benefits represent Cobra payments for medical and dental coverage
      that would be paid by the Company during the severance period for each
      NEO.





(4)
            Represents
      payments to which the NEO would be entitled pursuant to his
      employment agreement with the Company. Actual amounts that would be paid
      out and the assumptions used in arriving at such amounts can only be
      determined at the time of such NEO’s termination and may differ materially
      from the amounts set forth in the table.  Upon a change in
      control, other than accelerated vesting of stock options, the NEO is
      not entitled to any other benefits unless termination without cause by the
      Company or for good reason by the NEO also occurs at the time of the
      change in control.





(5)
            Mr.
      Brennan does not have an employment agreement with the Company, therefore,
      severance and continued medical benefits is estimated based upon the
      Company’s historical practices for executive severance. See “Severance
      Practices” above. Upon a change in control, other than accelerated vesting
      of stock options, Mr. Brennan is not entitled to any other
      benefits.





(6)
            Mr.
      Jones voluntarily resigned as Chief Service Officer in January 2008. There
      was no severance payments or continued medical benefits associated with
      his voluntary resignation.





71
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ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS





Our
outstanding voting securities consist of our common stock and seven series of
preferred stock, Series A through Series G. Stockholders are entitled to one
vote for each share of common stock held or issuable upon conversion of
preferred stock. Except as otherwise provided in Grande Communications Holdings,
Inc.’s  restated certificate of incorporation or as required under
Delaware law, the holders of the preferred stock are entitled to vote on an
as-converted basis with the holders of our common stock as a single class on all
matters presented for a vote to the holders of our common stock.





As of
March 15, 2008, our outstanding capital stock consisted of 12,752,572 shares of
common stock, 232,617,838 shares of Series A preferred stock, 20,833,333 shares
of Series B preferred stock, 17,005,191 shares of Series C preferred stock,
114,698,442 shares of Series D preferred stock, 7,999,099 shares of Series E
preferred stock, 11,758,278 shares of Series F preferred stock and 34,615,330
shares of Series G preferred stock. The total number of votes that could have
been cast as of such date equaled 452,280,083. The Company has authorized
30,000,000 shares of Series H Preferred Stock, of which no shares are issued or
outstanding.   As of March 15, 2008, there were 152,107,016
outstanding warrants to purchase common stock, all exerciseable as of such
date.





Principal
Stockholders





The
following table presents, as of March 15, 2008, information based upon our
records and, to the extent described in the footnotes following the table,
disclosures provided by representatives of the applicable holders, regarding
each person known to us to be the beneficial owner of more than 5% of any class
of our voting stock:




Common Stock
            
            
            Preferred StockName (1)
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial
                Ownership Percentage(2)
            
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial Ownership Percentage(2)
            
            
            Total Voting Power
(3)Whitney
      & Co. affiliated funds (the “Whitney Funds”)(4)
            
            
            105,660,232
            
            
            
            89.23
            %
            
            
            72,178,132
            
            
            
            16.42
            %
            
            
            21.75
            %Centennial
      Holdings VI, LLC (5)
            
            
            79,920,563
            
            
            
            86.24
            %
            
            
            53,564,579
            
            
            
            12.19
            %
            
            
            16.70
            %Austin
      Ventures VII, L.P. (6)
            
            
            30,996,152
            
            
            
            70.85
            %
            
            
            23,570,796
            
            
            
            5.36
            %
            
            
            6.74
            %HarbourVest
      Partners VI—Direct Fund, L.P. (7)
            
            
            30,652,654
            
            
            
            70.62
            %
            
            
            23,309,586
            
            
            
            5.30
            %
            
            
            6.67
            %Alta
      Communications (8)
            
            
            30,650,514
            
            
            
            70.62
            %
            
            
            23,309,158
            
            
            
            5.30
            %
            
            
            6.67
            %CIBC
      (9)
            
            
            28,244,166
            
            
            
            68.89
            %
            
            
            21,478,074
            
            
            
            4.89
            %
            
            
            6.15
            %Trinity
      Ventures (10)
            
            
            22,989,490
            
            
            
            64.32
            %
            
            
            17,482,190
            
            
            
            3.98
            %
            
            
            5.02
            %Reliant
      Energy Broadband, Inc. (11)
            
            
            22,368,560
            
            
            
            63.69
            %
            
            
            22,368,560
            
            
            
            5.09
            %
            
            
            4.95
            %Nautic
      Funds (12)
            
            
            22,087,122
            
            
            
            63.40
            %
            
            
            22,087,122
            
            
            
            5.03
            %
            
            
            4.88
            %BancBoston
      Ventures, Inc. (13)
            
            
            20,581,010
            
            
            
            61.74
            %
            
            
            15,650,678
            
            
            
            3.56
            %
            
            
            4.50
            %Centennial
      Holdings V, L.P. (5)
            
            
            20,101,025
            
            
            
            61.18
            %
            
            
            13,472,165
            
            
            
            3.07
            %
            
            
            4.38
            %Prime
      VIII, L.P. (14)
            
            
            17,891,342
            
            
            
            58.38
            %
            
            
            12,740,246
            
            
            
            2.90
            %
            
            
            3.91
            %South
      Atlantic Private Equity Funds (15)
            
            
            15,758,220
            
            
            
            55.27
            %
            
            
            11,983,224
            
            
            
            2.73
            %
            
            
            3.46
            %Lightspeed
      (16)
            
            
            15,326,320
            
            
            
            54.58
            %
            
            
            11,654,792
            
            
            
            2.65
            %
            
            
            3.36
            %Opus
      Capital (17)
            
            
            15,326,308
            
            
            
            54.58
            %
            
            
            11,654,788
            
            
            
            2.65
            %
            
            
            3.36
            %Knology
      (18)
            
            
            14,237,464
            
            
            
            53.75
            %
            
            
            10,446,556
            
            
            
            2.38
            %
            
            
            3.13
            %Kinetic
      Ventures (19)
            
            
            12,872,952
            
            
            
            50.23
            %
            
            
            9,789,144
            
            
            
            2.23
            %
            
            
            2.83
            %Toronto
      Dominion Investments, Inc. (20)
            
            
            10,736,909
            
            
            
            45.71
            %
            
            
            10,736,909
            
            
            
            2.44
            %
            
            
            2.37
            %GPSF
      Securities Inc. (21)
            
            
            9,200,806
            
            
            
            41.91
            %
            
            
            6,996,686
            
            
            
            1.59
            %
            
            
            2.02
            %PNC
      Equity (22)
            
            
            8,404,687
            
            
            
            39.72
            %
            
            
            6,391,287
            
            
            
            1.45
            %
            
            
            1.85
            %Private
      Equity Investment Fund IV, L.P. (23)
            
            
            8,084,586
            
            
            
            38.80
            %
            
            
            6,147,866
            
            
            
            1.40
            %
            
            
            1.78
            %William
      E. Morrow (24)
            
            
            6,781,443
            
            
            
            40.65
            %
            
            
            45,119
            
            
            
            *
            
            
            
            1.49
            %Norwest
      Equity Partners VII, L.P. (25)
            
            
            5,254,681
            
            
            
            29.18
            %
            
            
            3,995,885
            
            
            
            *
            
            
            
            1.16
            %Morgan
      Stanley Dean Witter (26)
            
            
            5,000,000
            
            
            
            28.16
            %
            
            
            5,000,000
            
            
            
            1.14
            %
            
            
            1.11
            %Dupont/Conoco
      Private Market Group Trust (27)
            
            
            4,463,039
            
            
            
            25.92
            %
            
            
            4,463,039
            
            
            
            1.02
            %
            
            
            *Martha
      E. Smiley (28)
            
            
            3,809,987
            
            
            
            24.50
            %
            
            
            145,683
            
            
            
            *
            
            
            
            *Andy
      Kever  (29)
            
            
            2,410,163
            
            
            
            15.90
            %
            
            
            —
            
            
            
            —
            
            
            
            *Tipton
      Ross (30)
            
            
            2,362,002
            
            
            
            17.59
            %
            
            
            514,822
            
            
            
            *
            
            
            
            *





72
 Table of Contents




Common Stock
            
            
            Preferred StockName (1)
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial Ownership Percentage
      (2)
            
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial Ownership Percentage
      (2)
            
            
            Total Voting Power
(3)Boeing
      Co. Employee Retirement Plans Master Trust (31)
            
            
            2,231,519
            
            
            
            14.89
            %
            
            
            2,231,519
            
            
            
            *
            
            
            
            *Jerry
      L. James (32)
            
            
            1,844,250
            
            
            
            14.41
            %
            
            
            33,650
            
            
            
            *
            
            
            
            *James
      M. Hoak, Jr. (33)
            
            
            1,730,551
            
            
            
            11.95
            %
            
            
            1,358,751
            
            
            
            *
            
            
            
            *Convergent
      Investors V, L.L.C. (34)
            
            
            1,532,630
            
            
            
            10.73
            %
            
            
            1,165,478
            
            
            
            *
            
            
            
            *Centennial
      Holdings I, LLC (5)
            
            
            1,507,853
            
            
            
            10.57
            %
            
            
            1,010,597
            
            
            
            *
            
            
            
            *J
      Lyn Findley (35)
            
            
            1,480,645
            
            
            
            10.40
            %
            
            
            541,666
            
            
            
            *
            
            
            
            *HC
      Crown Corporation (36)
            
            
            1,338,911
            
            
            
            9.50
            %
            
            
            1,338,911
            
            
            
            *
            
            
            
            *Richard
      Robuck (37)
            
            
            1,300,621
            
            
            
            9.25
            %
            
            
            541,666
            
            
            
            *
            
            
            
            *Kay
      Stroman (38)
            
            
            1,257,960
            
            
            
            8.98
            %
            
            
            591,666
            
            
            
            *
            
            
            
            *Mark
      Machen (39)
            
            
            1,256,248
            
            
            
            8.97
            %
            
            
            541,666
            
            
            
            *
            
            
            
            *Robert
      W. Hughes (40)
            
            
            1,120,059
            
            
            
            8.13
            %
            
            
            775,699
            
            
            
            *
            
            
            
            *John
      M. Saenz (41)
            
            
            1,100,000
            
            
            
            8.43
            %
            
            
            300,000
            
            
            
            *
            
            
            
            *Jared
      P. Benson (42)
            
            
            927,943
            
            
            
            6.78
            %
            
            
            187,500
            
            
            
            *
            
            
            
            *Citicorp
      North America, Inc. (43)
            
            
            892,608
            
            
            
            6.54
            %
            
            
            892,608
            
            
            
            *
            
            
            
            *Brady
      Adams (44)
            
            
            885,856
            
            
            
            6.50
            %
            
            
            541,666
            
            
            
            *
            
            
            
            *Eileen
      Kret  (45)
            
            
            862,790
            
            
            
            6.34
            %
            
            
            —
            
            
            
            —
            
            
            
            *Douglas
      T. Brannagan  (46)
            
            
            796,528
            
            
            
            5.88
            %
            
            
            270,833
            
            
            
            *
            
            
            
            *SKA
      Management, Inc. (47)
            
            
            750,000
            
            
            
            5.88
            %
            
            
            —
            
            
            
            —
            
            
            
            *Joe
      C. Ross (48)
            
            
            735,685
            
            
            
            5.75
            %
            
            
            27,137
            
            
            
            *
            
            
            
            *


____________________________


*
            Less
      than 1%.





(1)
            The
      address of all principal stockholders is c/o Grande Communications
      Holdings, Inc., 401 Carlson Circle, San Marcos, Texas
    78666.





(2)
            Beneficial
      ownership is calculated in accordance with SEC rules and regulations. For
      the purpose of computing the percentage ownership of each beneficial
      owner, any securities which were not outstanding but which were subject to
      options, warrants, rights or conversion privileges held by such beneficial
      owner exercisable within 60 days were deemed to be outstanding in
      determining the percentage owned by such person, but were not deemed
      outstanding in determining the percentage owned by any other
      person.





(3)
            Reflects
      the beneficial ownership percentage of such person or entity when both
      common stock and preferred stock vote together as a single class. Total
      voting power as of a particular date is calculated by dividing the number
      of common shares beneficially owned by such person by the sum of (i) the
      total number of shares of common stock outstanding, (ii) the total number
      of shares of preferred stock outstanding, and (iii) the number of
      securities which were not outstanding but which were subject to options,
      warrants, rights or conversion privileges held by such beneficial owner
      exercisable within 60 days of such
date.





(4)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsJ.H.
      Whitney IV, L.P.
            
            
            32,000,000
            
            
            
            1,315,178
            
            
            
            13,078,716
            
            
            
            1,199,067
            
            
            
            1,489,837
            
            
            
            6,438,869
            
            
            
            25,755,476J.H.
      Whitney III, L.P.
            
            
            —
            
            
            
            —
            
            
            
            12,775,028
            
            
            
            1,171,224
            
            
            
            436,569
            
            
            
            1,886,793
            
            
            
            7,547,172Whitney
      Strategic Partners III, L.P.
            
            
            —
            
            
            
            —
            
            
            
            303,687
            
            
            
            27,842
            
            
            
            10,459
            
            
            
            44,863
            
            
            
            179,452





73
 Table of Contents





(5)
            Based
      upon our records and information provided by representatives of the
      various Centennial Ventures funds:





The
following shares are beneficially owned by Centennial Holdings VI,
LLC:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsCentennial
      Fund VI, L.P.
            
            
            26,391,856
            
            
            
            1,426,107
            
            
            
            12,163,206
            
            
            
            1,115,132
            
            
            
            1,213,042
            
            
            
            5,934,491
            
            
            
            23,737,964Centennial
      Strategic Partners VI, L.P.
            
            
            2,375,267
            
            
            
            85,567
            
            
            
            915,510
            
            
            
            83,934
            
            
            
            84,913
            
            
            
            497,263
            
            
            
            1,989,052Centennial
      Entrepreneurs Fund VI, L.P.
            
            
            684,932
            
            
            
            42,783
            
            
            
            326,967
            
            
            
            29,976
            
            
            
            36,391
            
            
            
            157,242
            
            
            
            628,968





The
following shares are beneficially owned by Centennial Holdings V,
L.P.:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsCentennial
      Entrepreneurs Fund V, L.P.
            
            
            —
            
            
            
            —
            
            
            
            328,547
            
            
            
            12,390
            
            
            
            13,586
            
            
            
            49,726
            
            
            
            198,904Centennial
      Fund V, L.P.
            
            
            —
            
            
            
            —
            
            
            
            10,620,713
            
            
            
            400,431
            
            
            
            439,283
            
            
            
            1,607,489
            
            
            
            6,429,956





The
following shares are beneficially owned by Centennial Holdings I,
LLC:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsCentennial
      Holdings I, LLC
            
            
            547,945
            
            
            
            28,522
            
            
            
            261,574
            
            
            
            23,981
            
            
            
            24,261
            
            
            
            124,314
            
            
            
            497,256





Centennial
Holdings VI, LLC (“Holdings VI”) is the general partner of each of Centennial
Fund VI, L.P. and Centennial Entrepreneurs Fund VI, L.P., and is the managing
member of CSP VI Management, LLC (“Strategic Management”), which is the general
partner of Centennial Strategic Partners VI, L.P. (“Strategic
Partners”).  Accordingly, Holdings VI may be deemed to share
beneficial ownership of all of the shares and warrants to purchase shares of
capital stock of the issuer beneficially owned directly by them, and Strategic
Management may be deemed to share beneficial ownership of the shares and
warrants to purchase shares of capital stock of the issuer beneficially owned
directly by Strategic Partners.  Centennial Holdings V, L.P.
(“Holdings V”) is the general partner of each of Centennial Entrepreneurs Fund
V, L.P. (“Entrepreneurs V”) and Centennial Fund V, L.P. (“Fund V”). Accordingly,
Holdings V may be deemed to share beneficial ownership of such shares and
warrants to purchase shares of capital stock of the issuer.  See
footnote (11) to the Directors and Executive Officers beneficial ownership table
below for a discussion of the relationships of Messrs. Butler and Hull to the
Centennial Venture funds.





(6)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common
      Stock WarrantsAustin
      Ventures VII, L.P.
            
            
            20,000,000
            
            
            
            1,055,320
            
            
            
            659,137
            
            
            
            1,856,339
            
            
            
            7,425,356





(7)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsHarbourVest
      Partners VI—Direct Fund, L.P.
            
            
            20,000,000
            
            
            
            821,986
            
            
            
            651,833
            
            
            
            1,835,767
            
            
            
            7,343,068





(8)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsAlta
      Communications VIII, L.P.
            
            
            18,648,405
            
            
            
            766,628
            
            
            
            607,934
            
            
            
            1,711,735
            
            
            
            6,846,940Alta
      Communications VIII-B, L.P.
            
            
            1,038,238
            
            
            
            42,682
            
            
            
            33,847
            
            
            
            95,300
            
            
            
            381,200Alta
      VIII Associates, LLC
            
            
            5,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Alta
      Comm VIII S by S, LLC
            
            
            308,357
            
            
            
            12,676
            
            
            
            10,052
            
            
            
            28,304
            
            
            
            113,216





74
 Table of Contents





(9)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsCIBC
      WMV, Inc.
            
            
            11,250,000
            
            
            
            616,490
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —CIBC
      WMC, Inc .
            
            
            —
            
            
            
            —
            
            
            
            3,269,679
            
            
            
            299,766
            
            
            
            600,616
            
            
            
            1,370,941
            
            
            
            5,483,764CIBC
      Employee Private Equity Fund Partners
            
            
            3,750,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            320,582
            
            
            
            1,282,328





(10)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsTrinity
      Ventures VII, L.P.
            
            
            14,260,593
            
            
            
            586,101
            
            
            
            466,876
            
            
            
            1,314,868
            
            
            
            5,259,472Trinity
      VII Side-By-Side Fund, L.P
            
            
            739,407
            
            
            
            30,389
            
            
            
            21,999
            
            
            
            61,957
            
            
            
            247,828





(11)
            Includes
      the following shares:





Series B Shares
            
            
            Series C Shares
            
            
            Series F SharesReliant
      Energy Broadband, Inc.
            
            
            20,833,333
            
            
            
            856,235
            
            
            
            678,992





(12)
            Includes
      the following shares:





Series D Shares
            
            
            Series E Shares
            
            
            Series F SharesChisholm
      Partners IV, L.P.
            
            
            10,466,243
            
            
            
            959,553
            
            
            
            357,685Fleet
      Venture Resources, Inc.
            
            
            6,179,693
            
            
            
            566,559
            
            
            
            211,191Fleet
      Equity Partners VI, L.P.
            
            
            2,648,440
            
            
            
            242,811
            
            
            
            90,511Kennedy
      Plaza Partners II, LLC
            
            
            323,698
            
            
            
            29,676
            
            
            
            11,062





(13)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsBancBoston
      Ventures, Inc.
            
            
            10,000,000
            
            
            
            410,993
            
            
            
            3,269,679
            
            
            
            299,766
            
            
            
            437,657
            
            
            
            1,232,583
            
            
            
            4,930,332





(14)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsPrime
      VIII, L.P.
            
            
            5,000,000
            
            
            
            205,497
            
            
            
            5,697,566
            
            
            
            201,772
            
            
            
            347,637
            
            
            
            1,287,774
            
            
            
            5,151,096





(15)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsSouth
      Atlantic Private Equity Fund IV (QP), LP
            
            
            2,715,000
            
            
            
            119,188
            
            
            
            3,033,530
            
            
            
            88,300
            
            
            
            194,359
            
            
            
            547,374
            
            
            
            2,189,496South
      Atlantic Private Equity Fund IV, LP
            
            
            2,285,000
            
            
            
            86,309
            
            
            
            2,263,577
            
            
            
            113,470
            
            
            
            140,742
            
            
            
            396,375
            
            
            
            1,585,500





75
 Table of Contents





(16)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsLightspeed
      Venture Partners VI-A, L.P.
            
            
            65,900
            
            
            
            2,708
            
            
            
            2,148
            
            
            
            6,049
            
            
            
            24,196Lightspeed
      Venture Partners VI, L.P.
            
            
            8,797,500
            
            
            
            361,572
            
            
            
            286,726
            
            
            
            807,507
            
            
            
            3,230,028Lightspeed
      Venture Partners VI Cayman, L.P.
            
            
            788,000
            
            
            
            32,386
            
            
            
            25,682
            
            
            
            72,329
            
            
            
            289,316Lightspeed
      Venture Partners Entrepreneur VI-A, L.P.
            
            
            40,900
            
            
            
            1,681
            
            
            
            1,333
            
            
            
            3,754
            
            
            
            15,016Lightspeed
      Venture Partners Entrepreneur VI, L.P.
            
            
            307,700
            
            
            
            12,646
            
            
            
            10,028
            
            
            
            28,243
            
            
            
            112,972





(17)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsWPG
      Information Sciences Entrepreneur Fund II-A, L.L.C.
            
            
            111,000
            
            
            
            4,562
            
            
            
            3,618
            
            
            
            10,188
            
            
            
            40,752WPG
      Information Sciences Entrepreneur Fund II, L.L.C.
            
            
            180,000
            
            
            
            7,398
            
            
            
            5,866
            
            
            
            16,521
            
            
            
            66,084Weiss,
      Peck & Greer Venture Associates V-A, L.L.C.
            
            
            67,000
            
            
            
            2,754
            
            
            
            2,184
            
            
            
            6,149
            
            
            
            24,596Weiss,
      Peck & Greer Venture Associates V, L.L.C.
            
            
            8,000,000
            
            
            
            328,794
            
            
            
            260,733
            
            
            
            734,306
            
            
            
            2,937,224Weiss,
      Peck & Greer Venture Associates V Cayman, L.P.
            
            
            1,641,999
            
            
            
            67,485
            
            
            
            53,515
            
            
            
            150,716
            
            
            
            602,864





(18)
            Includes
      the following shares:





Common Stock
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsKnology
      Holdings, Inc.
            
            
            500,000
            
            
            
            4,219,676
            
            
            
            51,889
            
            
            
            365,170
            
            
            
            1,460,680Valley
      Telephone, Inc.
            
            
            —
            
            
            
            5,150,492
            
            
            
            201,772
            
            
            
            457,557
            
            
            
            1,830,228





(19)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsKinetic
      Ventures VI, LLC
            
            
            3,000,000
            
            
            
            123,298
            
            
            
            2,387,167
            
            
            
            110,685
            
            
            
            175,970
            
            
            
            495,587
            
            
            
            1,982,348Kinetic
      Ventures VII, LLC
            
            
            3,000,000
            
            
            
            123,298
            
            
            
            —
            
            
            
            —
            
            
            
            97,774
            
            
            
            275,365
            
            
            
            1,101,460





(20)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F SharesToronto
      Dominion Investments, Inc..
            
            
            10,000,000
            
            
            
            410,993
            
            
            
            325,916





(21)
            Includes
      the following shares:





Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsGPSF
      Securities Inc.
            
            
            6,250,000
            
            
            
            195,656
            
            
            
            551,030
            
            
            
            2,204,120





(22)
            Includes
      the following shares:





Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsPAGIC
      Equity, LLC
            
            
            2,940,848
            
            
            
            43,405
            
            
            
            93,440
            
            
            
            263,107
            
            
            
            1,052,428PNC
      Venture Corporation.
            
            
            2,536,616
            
            
            
            188,342
            
            
            
            85,286
            
            
            
            240,243
            
            
            
            960,972





76
 Table of Contents





(23)
            Includes
      the following shares:





Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsPrivate
      Equity Investment Fund IV, L.P.
            
            
            5,289,774
            
            
            
            201,770
            
            
            
            172,142
            
            
            
            484,180
            
            
            
            1,936,720





(24)
            Includes
      the following shares:





Common Stock
            
            
            Common Stock Options
            
            
            Series A Shares
            
            
            Series C Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsWilliam
      E. Morrow
            
            
            2,850,100
            
            
            
            3,872,012
            
            
            
            25,000
            
            
            
            1,027
            
            
            
            13,079
            
            
            
            1,199
            
            
            
            1,261
            
            
            
            3,553
            
            
            
            14,212





(25)
            Includes
      the following shares:





Series D Shares
            
            
            Series E Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsNorwest
      Equity Partners VII, L.P.
            
            
            3,269,679
            
            
            
            299,766
            
            
            
            111,741
            
            
            
            314,699
            
            
            
            1,258,796





(26)
            Includes
      the following shares:





Series A SharesMorgan
      Stanley Dean Witter Equity Funding, Inc.
            
            
            4,750,000Originators
      Investment Plan, L.P.
            
            
            250,000





(27)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F SharesState
      Street Bank and Trust, Trustee of Dupont/Conoco Private Market Group
      Trust
            
            
            4,315,577
            
            
            
            11,987
            
            
            
            135,475





(28)
            Includes
      the following shares:





Common Stock
            
            
            Common Stock Options
            
            
            Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsMartha
      E. Smiley
            
            
            1,010,000
            
            
            
            2,608,412
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Martha
      Smiley Ventures, Ltd.
            
            
            —
            
            
            
            —
            
            
            
            125,000
            
            
            
            5,137
            
            
            
            4,073
            
            
            
            11,473
            
            
            
            45,892





(29)
            Includes
      the following shares:





Common Stock OptionsAndy
      Kever
            
            
            2,410,163





(30)
            Includes
      the following shares:





Common Stock
            
            
            Series A Shares
            
            
            Series D Shares
            
            
            Series E Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsTipton
      Ross
            
            
            1,685,000
            
            
            
            460,000
            
            
            
            13,078
            
            
            
            1,199
            
            
            
            40,545
            
            
            
            162,180





(31)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F SharesBoeing
      Co. Employee Retirement Plans Master Trust
            
            
            2,157,788
            
            
            
            5,994
            
            
            
            67,737





77
 Table of Contents





(32)
            Includes
      the following shares:




Common Stock
              
              
              Series A Shares
              
              
              Series G Shares
              
              
              Common Stock WarrantsJerry
      L. James
              
              
              1,800,000
              
              
              
              31,000
              
              
              
              2,650
              
              
              
              10,600


(33)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsJames
      M. Hoak, Jr.
            
            
            1,022,463
            
            
            
            2,841
            
            
            
            32,097
            
            
            
            —
            
            
            
            —Hoak
      Ventures, Ltd.
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            92,950
            
            
            
            371,800James
      M. Hoak, Jr. Rollover IRA
            
            
            172,623
            
            
            
            480
            
            
            
            5,419
            
            
            
            —
            
            
            
            —James
      M. Hoak & Co.
            
            
            28,892
            
            
            
            80
            
            
            
            906
            
            
            
            —
            
            
            
            —





(34)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsConvergent
      Investors V, L.L.C.
            
            
            1,000,000
            
            
            
            41,099
            
            
            
            32,591
            
            
            
            91,788
            
            
            
            367,152





(35)
            Includes
      the following shares:





Common Stock Options
            
            
            Series H Preferred Stock
      OptionsJ
      Lyn Findley.
            
            
            938,979
            
            
            
            541,666





(36)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F SharesHC
      Crown Corp.
            
            
            1,294,673
            
            
            
            3,596
            
            
            
            40,642





(37)
            Includes
      the following shares:





Common Stock Options
            
            
            Series H Preferred Stock
      OptionsRichard
      R. Robuck.
            
            
            758,955
            
            
            
            541,666





(38)
            Includes
      the following shares:





Common Stock Options
            
            
            Series H Preferred Stock
      OptionsKay
      Stroman.
            
            
            666,294
            
            
            
            591,666





(39)
            Includes
      the following shares:





Common Stock Options
            
            
            Series H Preferred Stock
      OptionsMark
      Machen.
            
            
            714,582
            
            
            
            541,666





78
 Table of Contents





(40)
            Includes
      the following shares:





Common Stock
            
            
            Series A Shares
            
            
            Series C Shares
            
            
            Series F Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsRobert
      W. Hughes
            
            
            100,000
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Hughes
      Family Partnership
            
            
            —
            
            
            
            150,000
            
            
            
            83,333
            
            
            
            —
            
            
            
            19,947
            
            
            
            79,788Robert
      W. & M. Gail Hughes Living Trust
            
            
            —
            
            
            
            300,000
            
            
            
            166,667
            
            
            
            14,609
            
            
            
            41,143
            
            
            
            164,572





(41)
            Includes
      the following shares:





Common Stock
            
            
            Series A SharesJohn
      M. Saenz.
            
            
            800,000
            
            
            
            300,000





(42)
            Includes
      the following shares:





Common Stock Options
            
            
            Series H Preferred Stock
      OptionsJared
      P. Benson.
            
            
            740,443
            
            
            
            187,500





(43)
            Includes
      the following shares:





Series A Shares
            
            
            Series C Shares
            
            
            Series F SharesCiticorp
      North America, Inc.
            
            
            863,115
            
            
            
            2,397
            
            
            
            27,096





(44)
            Includes
      the following shares:





Common Stock
            
            
            Common Stock Options
            
            
            Series H Preferred Stock
      OptionsBrady
      Adams
            
            
            20,000
            
            
            
            324,190
            
            
            
            541,666





(45)
            Includes
      the following shares:





Common Stock OptionsEileen
      Kret
            
            
            862,790





(46)
            Includes
      the following shares:





Common Stock
            
            
            Common Stock Options
            
            
            Series H Preferred Stock
      OptionsDouglas
      T. Brannagan
            
            
            5,000
            
            
            
            520,695
            
            
            
            270,833





(47)
            Includes
      the following shares:





Common StockSKA
      Management, Inc.
            
            
            750,000





(48)
            Includes
      the following shares:





Common Stock
            
            
            Series A Shares
            
            
            Series G Shares
            
            
            Common Stock WarrantsJoe
      C. Ross
            
            
            700,000
            
            
            
            25,000
            
            
            
            2,137
            
            
            
            8,548





79
 Table of Contents





Directors
and Executive Officers





The
following table presents, as of March 15, 2008, information regarding the
beneficial ownership of our common stock and preferred stock by each of our
directors and NEOs and all of our directors and NEOs as a group:




Common Stock
            
            
            Preferred StockName (1)
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial Ownership Percentage
      (2)
            
            
            Number of Shares Beneficially
      Owned
            
            
            Beneficial Ownership Percentage
      (2)
            
            
            Total Voting Power
(3)Roy
      H. Chestnutt (4)
            
            
            6,124,999
            
            
            
            32.45
            %
            
            
            2,333,333
            
            
            
            *
            
            
            
            1.34
            %Michael
      Wilfley (5)
            
            
            4,847,824
            
            
            
            27.54
            %
            
            
            1,379,697
            
            
            
            *
            
            
            
            1.06
            %W.K.L.
      “Scott” Ferguson, Jr. (6)
            
            
            4,389,185
            
            
            
            26.70
            %
            
            
            1,280,404
            
            
            
            *
            
            
            
            *Jeffrey
      A. Brennan (7)
            
            
            1,300,000
            
            
            
            9.25
            %
            
            
            800,000
            
            
            
            *
            
            
            
            *Lawrence
      M. Schmeltekopf (8)
            
            
            183,333
            
            
            
            1.42
            %
            
            
            108,333
            
            
            
            *
            
            
            
            *Richard
      W. Orchard (9)
            
            
            150,000
            
            
            
            1.16
            %
            
            
            75,000
            
            
            
            *
            
            
            
            *Duncan
      Butler (10)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            *David
      Hull, Jr. (10)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            *John
      Hockin (11)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            *William
      Laverack (12)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            *All
      directors and NEOs as a group (10 persons)
            
            
            16,995,341
            
            
            
            58.51
            %
            
            
            5,976,767
            
            
            
            1.34
            %
            
            
            3.63
            %


____________________________


*
            Less
      than 1%.





(1)
            The
      address of all directors and officers is c/o Grande Communications
      Holdings, Inc., 401 Carlson Circle, San Marcos, Texas
    78666.





(2)
            Beneficial
      ownership is calculated in accordance with SEC rules and regulations. For
      the purpose of computing the percentage ownership of each beneficial
      owner, any securities which were not outstanding but which were subject to
      options, warrants, rights or conversion privileges held by such beneficial
      owner exercisable within 60 days were deemed to be outstanding in
      determining the percentage owned by such person, but were not deemed
      outstanding in determining the percentage owned by any other
      person.





(3)
            Reflects
      the beneficial ownership percentage of such person or group when both
      common stock and preferred stock vote together as a single class. Total
      voting power as of a particular date is calculated by dividing the number
      of common shares beneficially owned by such person by the sum of (i) the
      total number of shares of common stock outstanding, (ii) the total number
      of shares of preferred stock outstanding, and (iii) the number of
      securities which were not outstanding but which were subject to options,
      warrants, rights or conversion privileges held by such beneficial owner
      exercisable within 60 days of such
date.





(4)
            Includes
      3,791,666 shares of common stock issuable upon exercise of common stock
      options and 2,333,333 shares of common stock issuable upon conversion of
      Series H preferred stock issuable upon exercise of Series H preferred
      stock options. All stock options are exercisable within 60 days of March
      15, 2008.





(5)
            Includes
      3,432,863 shares of common stock issuable upon exercise of common stock
      options, 35,264 shares of common stock issuable upon exercise of common
      stock warrants, 110,947 shares of common stock issuable upon conversion of
      preferred stock and 1,268,750 shares of common stock issuable upon
      conversion of Series H preferred stock issuable upon exercise of Series H
      preferred stock options. All stock options and warrants are exercisable
      within 60 days of March 15, 2008.





(6)
            Includes
      700,000 shares of common stock, 2,405,113 shares of common stock issuable
      upon exercise of common stock options, 3,668 shares of common stock
      issuable upon exercise of common stock warrants, 11,654 shares of common
      stock issuable upon conversion of preferred stock and 1,268,750 shares of
      common stock issuable upon conversion of Series H preferred stock issuable
      upon exercise of Series H preferred stock options. All stock options and
      warrants are exercisable within 60 days of March 15,
  2008.





(7)
            Includes
      500,000 shares of common stock issuable upon exercise of common stock
      options and 800,000 shares of common stock issuable upon conversion of
      Series H preferred stock issuable upon exercise of Series H preferred
      stock options. All stock options are exercisable within 60 days of March
      15, 2008.





(8)
            Includes
      75,000 shares of common stock issuable upon exercise of common stock
      options and 108,333 shares of common stock issuable upon conversion of
      Series H preferred stock issuable upon exercise of Series H preferred
      stock options. All stock options are exercisable within 60 days of March
      15, 2008.





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(9)
            Includes
      75,000 shares of common stock issuable upon exercise of common stock
      options and 75,000 shares of common stock issuable upon conversion of
      Series H preferred stock issuable upon exercise of Series H preferred
      stock options. All stock options are exercisable within 60 days of March
      15, 2008.





(10)
            Each
      of Messrs. Butler and Hull is a managing director and on the investment
      committee of Holdings VI, Mr. Hull is a managing director and one of three
      general partners of Holdings V and is the Chief Executive Officer of
      Centennial Holdings I, L.L.C. (“Holdings I”), and Mr. Butler is a Senior
      Vice President of Holdings I.  Because all decisions of the
      various Centennial Ventures funds with respect to voting and disposing of
      the issuer’s shares are made by more than three persons acting by majority
      vote, neither Messrs. Butler and Hull should be deemed to have direct or
      indirect beneficial ownership over any of the shares or warrants to
      purchase shares of capital stock of the issuer beneficially owned by the
      various Centennial Ventures funds and each of them expressly disclaims any
      such beneficial ownership.





(11)
            Shares
      are owned by the Whitney Funds.  Mr. Hockin is a former partner
      of Whitney & Co., an affiliate of the Whitney Funds. Mr. Hockin
      disclaims beneficial ownership of shares of our capital stock owned by the
      Whitney Funds.





(12)
            Shares
      are owned by the Whitney Funds. Mr. Laverack is a managing member of the
      general partner of each of the Whitney Funds. Mr. Laverack may be deemed
      to share voting and dispositive power with respect to such shares. Mr.
      Laverack disclaims beneficial ownership of such shares except to the
      extent of his proportionate
interest.





Investor
Rights Agreement





We have
entered into an amended and restated investor rights agreement with our
preferred stockholders and certain of our common stockholders. This investor
rights agreement sets forth certain preemptive rights, registration rights,
transfer restrictions and covenants. See footnote No. 9, “Stockholder’s Equity”
in the Notes to our Consolidated Financial Statements included in this annual
report for a description of our investor rights agreement.





Securities
Authorized for Issuance Under Equity Compensation Plan





The
Company maintains the 2000 Stock Incentive Plan. The table below sets forth the
following information as of December 31, 2007 for (i) all compensation plans
previously approved by the Company’s shareholders and (ii) all compensation
plans not previously approved by the Company’s shareholders:





(1)
            the
      number of securities to be issued upon the exercise of outstanding
      options;





(2)
            the
      weighted-average exercise price of such outstanding options;
      and





(3)
            the
      number of securities remaining available for future issuance under the
      plans, other than securities to be issued upon the exercise of such
      outstanding options.





Plan Category
            
            Number of Securities to be Issued Upon Exercise of
      Outstanding Options
            
            
            Weighted Average Exercise Price of Outstanding
      Options
            
            
            Number of Securities Remaining Available for
      Future Issuance Under Equity Compensation Plans (Excludes Securities
      Reflected in First Column)Equity
      compensation plan approved by stockholders—common stock
(1)
            
            
            51,228,618
            
            
            $
            0.08
            
            
            
            29,005,542Equity
      compensation plan not approved by stockholders—common
stock
            
            
            —
            
            
            
            —
            
            
            
            —Equity
      compensation plan approved by stockholders – Series H preferred stock
      (2)
            
            
            27,775,000
            
            
            
            0.10
            
            
            
            2,225,000Equity
      compensation plan not approved by stockholders – Series H preferred
      stock
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            79,003,618
            
            
            
            
            
            
            
            31,230,542





____________________________


(1)
            Outstanding
      common stock options and common stock options available for future
      issuance that are designated as Executive Compensation Shares under the
      2000 Stock Incentive Plan were 9,750,000 common stock options and
      2,250,000 common stock options,
respectively.





(2)
            All
      Series H preferred stock options are designated as Executive Compensation
      Shares under the 2000 Stock Incentive
Plan.





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 Table of Contents





ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Related
Person Transaction Approval





Although
no formal written policy is in place, our board of directors reviews and
approves all related person transactions where the amount exceeds $120,000. For
these purposes, a “related person” is a director, nominee for director,
executive officer, or holder of more than 5% of any series of our voting stock,
or any immediate family member of any of the foregoing. This policy applies to
any financial transaction, arrangement or relationship or any series of similar
financial transactions, arrangements or relationships in which the Company is a
participant and in which a related person has a direct or indirect
interest.





Our board
of directors will analyze the following factors, in addition to any other
factors the members of the board deem appropriate, in determining whether to
approve a related person transaction:





•
            whether
      the terms are fair to Grande;





•
            whether
      the transaction is material to
Grande;





•
            the
      role the related person has played in arranging the related person
      transaction;





•
            the
      structure of the related person transaction;
and





•
            the
      interests of all related persons in the related person
      transaction.





Our board
of directors may, in its sole discretion, approve or deny any related person
transaction. Approval of a related person transaction may be conditioned upon
Grande and the related person following certain procedures designated by the
board.





Transaction
with Robert Hughes





Hughes
Family Partnership, L.P. has invested in a real estate purchase and leaseback
transaction between Hill Partners, Inc. and Grande Communications, Inc. pursuant
to which Grande Communications, Inc. pays approximately $67,000 per month to
Hill Partners. Robert Hughes, a stockholder and a former member of our board of
directors, is the managing general partner of Hughes Family Partnership,
L.P.





Director
Independence





For
information on the independence of our directors, please see “Directors,
Executive Officers and Corporate Governance-Director Independence.”





ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





Audit
fees include amounts billed for our annual audit, quarterly reviews and
consultations related to the audit. Audit related fees include amounts billed
for services rendered during the year ended December 31, 2006 and 2007 related
to the debt filing and benefit plan audits. Tax services fees include amounts
billed for services rendered during the year ended December 31, 2006 and 2007
for tax consulting and compliance. Other fees include amounts paid for research
software.





2006
            
            
            2007Audit
      Fees
            
            $
            288,000
            
            
            $
            280,000Audit
      Related Fees
            
            
            24,000
            
            
            
            —Tax
      Fees
            
            
            29,500
            
            
            
            26,000$
            341,500
            
            
            $
            306,000





Policy
on Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors





Under the
terms of our audit committee charter, all audit and permitted non-audit services
to be performed by our independent auditors must be pre-approved in advance by
our audit committee. Our audit committee approved all of the permitted non-audit
services performed by our independent auditors in 2006 and 2007. For a copy of
our audit committee charter, please visit our website at
www.grandecom.com/about_Grande/investor_relations/corporate_governance.php.




82
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PART
IV





ITEM 15.
            EXHIBITS,
      FINANCIAL STATEMENT SCHEDULES





The
following documents are filed as part of this Form 10-K:





(1)
            Financial
      Statements





(2)
            Financial
      Statement Schedule





(3)
            Exhibits





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





Exhibit
      No.
            
            Description3.1
            
            Restated
      Certificate of Incorporation of Grande Communications Holdings, Inc.
      (previously filed as exhibit 3.1 to Form 10-K dated March 31,
      2006).3.2
            
            Bylaws
      of Grande Communications Holdings, Inc. (previously filed as exhibit 3.2
      to Form S-1 dated May 18, 2004).3.3
            
            Amendment
      No. 1 to Bylaws of Grande Communications Holdings, Inc. (previously filed
      as exhibit 3.3 to Form 10-Q dated November 5, 2004).3.4
            
            Amendment
      No. 2 to Bylaws of Grande Communications Holdings, Inc. (previously filed
      as exhibit 3.4 to Form 10-K dated March 31, 2006).4.1
            
            Indenture,
      dated as of March 23, 2004, by and among Grande Communications Holdings,
      Inc., the Guarantors named therein and U.S. Bank National Association
      (previously filed as exhibit 4.1 to Form S-1 dated May 18,
      2004).4.2
            
            Registration
      Rights Agreement, dated as of March 23, 2004, by and among Grande
      Communications Holdings, Inc., the Guarantors named therein, Bear, Stearns
      & Co. Inc. and Deutsche Bank Securities Inc. (previously filed as
      exhibit 4.2 to Form S-1 dated May 18, 2004).4.3
            
            Form
      of 14% Senior Secured Note due 2011 issued in connection with March 2004
      offering (previously filed as exhibit 4.3 to Form S-1 dated May 18,
      2004).4.4
            
            Pledge
      and Security Agreement, dated March 23, 2004, by and among Grande
      Communications Holdings, Inc., Grande Communications Networks, Inc.,
      Grande Communications ClearSource, Inc., Grande Communications, Inc.,
      Grande Communications Houston, Inc., Denton Telecom Holdings I, L.L.C.,
      Denton Telecom Investors I, L.L.C, Denton Telecom Partners I, L.P., and
      U.S. Bank National Association (previously filed as exhibit 4.4 to Form
      S-1 dated May 18, 2004).4.5
            
            Form
      of 14% Senior Secured Notes due 2011 issued in connection with March 2007
      private placement (previously filed as exhibit 4.5 to Form 10-K dated
      March 31, 2006).4.6
            
            Supplemental
      Indenture, dated as of July 18, 2007, by and among Grande Communications
      Holdings, Inc., the Guarantor named therein and U.S. Bank National
      Association (previously filed as exhibit 10.1 to Form 8-K dated July 18,
      2007).10.1
            
            Grande
      Communications Holdings, Inc. Second Amended and Restated 2000 Stock
      Incentive Plan (previously filed as exhibit 10.1 to Form 8-K dated October
      30, 2006).10.2+
            
            Employment
      Agreement dated January 26, 2006 by and between Grande Communications
      Networks, Inc. and Roy H. Chestnutt (previously filed as exhibit 10.3 to
      Form 10-K dated March 31, 2006).10.3
            
            Fifth
      Amended and Restated Investor Rights Agreement dated December 12, 2005 by
      and among Grande Communications Holdings, Inc., Current Investors,
      Founders and New Investors (previously filed as exhibit 10.4 to Form 10-K
      dated March 31, 2006).10.4
            
            Lease
      Agreement between Grande Communications Networks, Inc. and GRC (TX)
      Limited Partnership, dated August 7, 2003 (previously filed as exhibit
      10.5 to Form S-1 dated May 18,
2004).





83
 Table of Contents




Exhibit
      No.
            
            Description10.5+
            
            Amendment
      to Employment Agreement, entered into as of June 28, 2006, by and between
      Grande Communications Networks, Inc. and Roy H. Chestnutt (previously
      filed as exhibit 10.1 to Form 8-K dated July 3, 2006).10.6+
            
            Employment
      Agreement, entered into as of June 28, 2006, by and between Grande
      Communications Networks, Inc. and W.K.L. “Scott” Ferguson, Jr. (previously
      filed as exhibit 10.1 to Form 8-K dated July 5, 2006).10.7+
            
            Employment
      Agreement, entered into as of June 28, 2006, by and between Grande
      Communications Networks, Inc. and Michael Wilfley (previously filed as
      exhibit 10.2 to Form 8-K dated July 5, 2006).10.8+
            
            Form
      of Incentive Stock Option Agreement (Common Stock - Regular) (previously
      filed as exhibit 10.4 to Form 8-K dated July 5, 2006).10.9+
            
            Form
      of Incentive Stock Option Agreement (Common Stock - Executive Compensation
      Shares) (previously filed as exhibit 10.5 to Form 8-K dated July 5,
      2006).10.10+
            
            Form
      of Incentive Stock Option Agreement (Series H Preferred Stock) (previously
      filed as exhibit 10.6 to Form 8-K dated July 5, 2006).10.11+
            
            Form
      of Nonqualified Stock Option Agreement (Common Stock - Regular)
      (previously filed as exhibit 10.7 to Form 8-K dated July 5,
      2006).10.12+
            
            Form
      of Nonqualified Stock Option Agreement (Common Stock - Executive
      Compensation Shares) (previously filed as exhibit 10.8 to Form 8-K dated
      July 5, 2006).10.13+
            
            Form
      of Nonqualified Stock Option Agreement (Series H Preferred Stock)
      (previously filed as exhibit 10.9 to Form 8-K dated July 5,
      2006).10.14
            
            Schedule
      No. 05, dated May 2, 2007, between Varilease Finance, Inc. as Secured
      Party, and Grande Communications Holdings, Inc., as Co-Debtor and Grande
      Communications Networks, Inc. as Co-Debtor to the Master Lease Agreement
      dated as of March 14, 2006 between Varilease Finance, Inc., Grande
      Communications Holdings, Inc. and Grande Communications Networks, Inc.
      (previously filed as exhibit 10.17 to Form Post Effective Amendment No. 3
      to Form S-1 dated May 23, 2007).10.15
            
            Purchase
      Agreement dated July 6, 2007 by and among Grande Communications Holdings,
      Inc., Grande Communications Networks, Inc., Goldman, Sachs & Co.,
      Highland Crusader Offshore Partners, L.P., Communications Media Advisors,
      LLC and Highland Capital Management, L.P. (previously filed as exhibit
      10.1 to Form 8-K dated July 11, 2007).10.16+*
            
            Second
      Amendment to Employment Agreement, entered into as of February 5, 2008, by
      and between Grande Communications Networks, Inc. and Roy H.
      Chestnutt.10.17+*
            
            Amendment
      to Employment Agreement, entered into as of February 5, 2008, by and
      between Grande Communications Networks, Inc. and W.K.L. “Scott” Ferguson,
      Jr.10.18+*
            
            Amendment
      to Employment Agreement, entered into as of February 5, 2008, by and
      between Grande Communications Networks, Inc. and Michael
      Wilfley.21
            
            Subsidiaries
      of Registrant (previously filed as exhibit 21 to Form 10-K dated March 31,
      2007).23.1*
            
            Consent
      of Ernst & Young LLP.24*
            
            Power
      of Attorney of Grande Communications Holdings, Inc. (included on signature
      page).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).


____________________________


*
            Filed
      herewith.





+
            Management
      compensatory plan or agreement.




84
 Table of Contents





SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report on Form 10-K to be signed on
its behalf by the undersigned, thereunto duly authorized.





Grande
      Communications Holdings, Inc.
              (Registrant)Date:
      March 31, 2008
            By:
            /s/    ROY H.
      CHESTNUTTRoy
      H. ChestnuttPresident,
      Chief Executive Officer, and Chairman of the Board(Duly
      Authorized Officer and Principal Executive Officer)Date:
      March 31, 2008
            By:
            /s/    MICHAEL L.
      WILFLEYMichael
      L. WilfleyChief
      Financial Officer(Duly
      Authorized Officer and Principal Financial
  Officer)





POWER
OF ATTORNEY





Know All
Men By These Presents, that each person whose signature appears below
constitutes and appoints Roy H. Chestnutt and Michael L. Wilfley and each and
any of them, our true lawful attorneys-in-fact and agents, to do any and all
acts and things in our names and our behalf in our capacities as trustees and
officers and to execute any and all instruments for us and in our name in the
capacities indicated below, which said attorneys and agents, or either of them,
may deem necessary or advisable to enable said Corporation to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his or her substitute or substitutes, may do or cause to
be done by virtue hereof.





Pursuant
to the requirements of the Securities Exchange Act of 1934, this report on Form
10-K has been signed by the following persons on behalf of the Registrant and in
the capacities and on the dates indicated.





Signature
            
            Title
            
            Date/s/    ROY H.
      CHESTNUTT
            
            President,
      Chief Executive Officer (Principal Executive Officer)
            
            March
      31, 2008Roy
      H. Chestnutt
            
            and Chairman of the Board of Directors/s/    MICHAEL L.
      WILFLEY
            
            Chief
      Financial Officer (Principal Financial Officer
            
            March
      31, 2008Michael
      L. Wilfley
            
            and Principal Accounting Officer)/s/    DUNCAN T.
      BUTLER
            
            Director
            
            March
      31, 2008Duncan
      T. Butler/s/    JOHN C.
      HOCKIN
            
            Director
            
            March
      31, 2008John
      C. Hockin/s/    DAVID C. HULL,
      JR.
            
            Director
            
            March
      31, 2008David
      C. Hull, Jr./s/    WILLIAM LAVERACK,
      JR.
            
            Director
            
            March
      31, 2008William
      Laverack, Jr./s/    RICHARD W.
      ORCHARD
            
            Director
            
            March
      31, 2008Richard
      W. Orchard/s/    LAWRENCE M.
      SCHMELTEKOPF
            
            Director
            
            March
      31, 2008Lawrence
      M. Schmeltekopf





85
 Table of Contents





INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS




GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


AS
OF DECEMBER 31, 2006 AND 2007 AND FOR EACH OF THE THREE YEARS


IN
THE PERIOD ENDED DECEMBER 31, 2007





PageReport
      of Independent Registered Public Accounting Firm
            F-2Financial
      StatementsConsolidated
      Balance Sheets
            F-3Consolidated
      Statements of Operations
            F-4Consolidated
      Statements of Stockholders’ Equity
            F-5Consolidated
      Statements of Cash Flows
            F-6Notes
      to Consolidated Financial Statements
            F-7





F-1
 Table of Contents





Report
of Independent Registered Public Accounting Firm




To the
Stockholders and Board of Directors of


Grande
Communications Holdings, Inc. and Subsidiary





We have
audited the accompanying consolidated balance sheets of Grande Communications
Holdings, Inc. and Subsidiary as of December 31, 2006 and 2007, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2007. These financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial statements based on
our audits.





We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. We were not engaged to perform an
audit of the Company’s internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.





In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Grande Communications
Holdings, Inc. and its Subsidiary as of December 31, 2006 and 2007, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2007, in conformity with U.S.
generally accepted accounting principles.





As
discussed in Note 2 to the consolidated financial statements, effective January
1, 2006, the Company adopted Financial Accounting Standards Board Statement of
Financial Accounting Standards No. 123(R), “Shared Based
Payment.”





/s/    Ernst
& Young LLP





March 26,
2008


Austin,
Texas




F-2
 Table of Contents





GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)








December 31,2006
            
            
            2007AssetsCurrent
      assets:Cash
      and cash equivalents, net of restricted cash of $2,889 and
      $3,129
            
            $
            43,948
            
            
            $
            48,138Accounts
      receivable, net of allowance for doubtful accounts of $1,193 and
      $1,138
            
            
            17,241
            
            
            
            17,793Prepaid
      expenses
            
            
            1,823
            
            
            
            1,867Total
      current assets
            
            
            63,012
            
            
            
            67,798Property,
      plant and equipment, net of accumulated depreciation of $261,485 and
      $313,526
            
            
            271,939
            
            
            
            249,310Intangible
      assets, net of accumulated amortization of $753 and $1,417
            
            
            1,748
            
            
            
            1,398Debt
      issue costs, net
            
            
            5,115
            
            
            
            4,255Restricted
      cash and other assets
            
            
            3,227
            
            
            
            3,482Total
      assets
            
            $
            345,041
            
            
            $
            326,243Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
            
            $
            11,981
            
            
            $
            13,809Accrued
      liabilities
            
            
            14,556
            
            
            
            15,328Accrued
      interest payable
            
            
            5,880
            
            
            
            6,755Deferred
      revenue
            
            
            6,546
            
            
            
            6,996Current
      portion of long-term debt
            
            
            9
            
            
            
            1,612Current
      portion of capital lease obligations
            
            
            3,859
            
            
            
            3,548Total
      current liabilities
            
            
            42,831
            
            
            
            48,048Deferred
      rent
            
            
            1,268
            
            
            
            1,228Deferred
      revenue
            
            
            4,551
            
            
            
            4,377Capital
      lease obligations, net of current portion
            
            
            16,634
            
            
            
            13,592Long
      term debt, net of current portion
            
            
            160,797
            
            
            
            189,994Total
      liabilities
            
            
            226,081
            
            
            
            257,239Stockholders’
      equity:Senior
      series preferred stock:Series
      G preferred stock, $0.001 par value per share; 34,615,384 shares
      authorized, 34,615,330 shares issued and outstanding; liquidation
      preference of $134,999,787
            
            
            35
            
            
            
            35Junior
      series preferred stock:Series
      A preferred stock, $0.001 par value per share; 232,617,839 shares
      authorized, 232,617,838 shares issued and outstanding; liquidation
      preference of $232,617,838
            
            
            233
            
            
            
            233Series
      B preferred stock, $0.001 par value per share; 20,833,333 shares
      authorized, issued and outstanding; liquidation preference of
      $25,000,000
            
            
            21
            
            
            
            21Series
      C preferred stock, $0.001 par value per share; 30,000,000 shares
      authorized, 17,005,191 shares issued and outstanding; liquidation
      preference of $20,406,229
            
            
            17
            
            
            
            17Series
      D preferred stock, $0.001 par value per share; 115,384,615 shares
      authorized, 114,698,442 shares issued and outstanding; liquidation
      preference of $149,107,975
            
            
            115
            
            
            
            115Series
      E preferred stock, $0.001 par value per share; 8,000,000 shares
      authorized, 7,999,099 shares issued and outstanding; liquidation
      preference of $19,997,748
            
            
            8
            
            
            
            8Series
      F preferred stock, $0.001 par value per share; 12,307,792 shares
      authorized, 11,758,278 shares issued and outstanding; liquidation
      preference of $15,285,761
            
            
            12
            
            
            
            12Series
      H preferred stock, $0.001 par value per share; 30,000,000 shares
      authorized, no shares issued and outstanding
            
            
            —
            
            
            
            —Common
      stock, $0.001 par value per share; 828,835,883 shares authorized,
      13,091,140 and 13,175,940 shares issued, 12,591,140 and 12,675,940 shares
      outstanding, as of December 31, 2006 and 2007,
respectively
            
            
            13
            
            
            
            13Additional
      paid-in capital
            
            
            508,736
            
            
            
            509,312Treasury
      stock, at cost
            
            
            (5
            )
            
            
            (5
            )Accumulated
      deficit
            
            
            (390,225
            )
            
            
            (440,757
            )Total
      stockholders’ equity
            
            
            118,960
            
            
            
            69,004Total
      liabilities and stockholders’ equity
            
            $
            345,041
            
            
            $
            326,243








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





F-3
 Table of Contents





GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTS OF OPERATIONS


(In
thousands, except per share data)








For the year ended
      December 31,2005
            
            
            2006
            
            
            2007Operating
      revenues
            
            $
            194,731
            
            
            $
            189,867
            
            
            $
            197,146Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
            
            
            72,515
            
            
            
            63,931
            
            
            
            68,348Selling,
      general and administrative
            
            
            95,992
            
            
            
            97,826
            
            
            
            93,717Depreciation
      and amortization
            
            
            59,507
            
            
            
            56,037
            
            
            
            56,752Total
      operating expenses
            
            
            228,014
            
            
            
            217,794
            
            
            
            218,817Operating
      loss
            
            
            (33,283
            )
            
            
            (27,927
            )
            
            
            (21,671
            )Other
      income (expense):Interest
      income
            
            
            709
            
            
            
            1,546
            
            
            
            1,670Interest
      expense, net of capitalized interest
            
            
            (18,801
            )
            
            
            (23,970
            )
            
            
            (29,012
            )Other
      income (expense)
            
            
            750
            
            
            
            —
            
            
            
            (472
            )Gain
      on disposal of assets
            
            
            431
            
            
            
            2,353
            
            
            
            76Goodwill
      impairment
            
            
            (39,576
            )
            
            
            (93,639
            )
            
            
            —Total
      other income (expense)
            
            
            (56,487
            )
            
            
            (113,710
            )
            
            
            (27,738
            )Loss
      before income tax expense
            
            
            (89,770
            )
            
            
            (141,637
            )
            
            
            (49,409
            )Income
      tax expense
            
            
            —
            
            
            
            —
            
            
            
            (1,123
            )Net
      loss
            
            $
            (89,770
            )
            
            $
            (141,637
            )
            
            $
            (50,532
            )Basic
      and diluted net loss per share
            
            $
            (7.21
            )
            
            $
            (11.30
            )
            
            $
            (4.01
            )Basic
      and diluted weighted average common shares outstanding
            
            
            12,458
            
            
            
            12,530
            
            
            
            12,610








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





F-4
 Table of Contents




GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(In
thousands)








Additional
            
            
            
            
            
            
            
            
            TotalPreferred
      Stock
            
            
            Common
      Stock
            
            
            Paid-in
            
            
            Treasury
            
            
            Accumulated
            
            
            Stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Stock
            
            
            Deficit
            
            
            EquityBalance
      as of December 31, 2004
            
            
            439,527
            
            
            $
            441
            
            
            
            12,920
            
            
            $
            13
            
            
            $
            508,313
            
            
            $
            (5
            )
            
            $
            (158,818
            )
            
            $
            349,944Exercise
      of common stock options
            
            
            —
            
            
            
            —
            
            
            
            70
            
            
            
            —
            
            
            
            31
            
            
            
            —
            
            
            
            —
            
            
            
            31Amortization
      of non-qualified options
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            2
            
            
            
            —
            
            
            
            —
            
            
            
            2Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (89,770
            )
            
            
            (89,770
            )Balance
      as of December 31, 2005
            
            
            439,527
            
            
            
            441
            
            
            
            12,990
            
            
            
            13
            
            
            
            508,346
            
            
            
            (5
            )
            
            
            (248,588
            )
            
            
            260,207Exercise
      of common stock options
            
            
            —
            
            
            
            —
            
            
            
            101
            
            
            
            —
            
            
            
            13
            
            
            
            —
            
            
            
            —
            
            
            
            13Stock
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            377
            
            
            
            —
            
            
            
            —
            
            
            
            377Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (141,637
            )
            
            
            (141,637
            )Balance
      as of December 31, 2006
            
            
            439,527
            
            
            
            441
            
            
            
            13,091
            
            
            
            13
            
            
            
            508,736
            
            
            
            (5
            )
            
            
            (390,225
            )
            
            
            118,960Exercise
      of common stock options
            
            
            —
            
            
            
            —
            
            
            
            85
            
            
            
            —
            
            
            
            3
            
            
            
            —
            
            
            
            —
            
            
            
            3Stock
      compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            573
            
            
            
            —
            
            
            
            —
            
            
            
            573Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (50,532
            )
            
            
            (50,532
            )Balance
      as of December 31, 2007
            
            
            439,527
            
            
            $
            441
            
            
            
            13,176
            
            
            $
            13
            
            
            $
            509,312
            
            
            $
            (5
            )
            
            $
            (440,757
            )
            
            $
            69,004








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





F-5
 Table of Contents





GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


CONSOLIDATED
STATEMENTS OF CASH FLOWS


(In
thousands)








For the year ended
      December 31,2005
            
            
            2006
            
            
            2007Cash
      flows from operating activities:Net
      loss
            
            $
            (89,770
            )
            
            $
            (141,637
            )
            
            $
            (50,532
            )Adjustment
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
            
            
            55,266
            
            
            
            55,775
            
            
            
            56,335Amortization
      of intangible assets
            
            
            4,241
            
            
            
            262
            
            
            
            417Amortization
      of deferred financing costs
            
            
            978
            
            
            
            1,000
            
            
            
            1,025Provision
      for bad debts
            
            
            5,262
            
            
            
            3,514
            
            
            
            3,301Amortization
      of debt discounts/premiums
            
            
            827
            
            
            
            1,109
            
            
            
            1,237Non-cash
      compensation expense
            
            
            29
            
            
            
            377
            
            
            
            573Net
      gain on sale of assets
            
            
            (431
            )
            
            
            (2,353
            )
            
            
            (76
            )Goodwill
      impairment
            
            
            39,576
            
            
            
            93,639
            
            
            
            —Changes
      in operating assets and liabilities:Accounts
      receivable
            
            
            (3,195
            )
            
            
            (1,848
            )
            
            
            (3,853
            )Prepaid
      expenses and other assets
            
            
            1,597
            
            
            
            781
            
            
            
            (299
            )Accounts
      payable
            
            
            1,192
            
            
            
            (1,432
            )
            
            
            1,377Accrued
      liabilities and interest payable
            
            
            (1,302
            )
            
            
            103
            
            
            
            1,647Deferred
      revenue
            
            
            295
            
            
            
            112
            
            
            
            629Deferred
      rent
            
            
            230
            
            
            
            285
            
            
            
            (40
            )Net
      cash provided by operating activities
            
            
            14,795
            
            
            
            9,687
            
            
            
            11,741Cash
      flows from investing activities:Purchases
      of property, plant and equipment
            
            
            (48,226
            )
            
            
            (30,886
            )
            
            
            (35,290
            )Proceeds
      from sale of assets
            
            
            1,151
            
            
            
            3,274
            
            
            
            638Proceeds
      from sales tax refunds
            
            
            —
            
            
            
            922
            
            
            
            1,130Maturities
      of short term investments
            
            
            20,000
            
            
            
            350
            
            
            
            —Purchases
      of short term investments
            
            
            (350
            )
            
            
            —
            
            
            
            —Other
      investing activity
            
            
            (964
            )
            
            
            (47
            )
            
            
            (67
            )Net
      cash used in investing activities
            
            
            (28,389
            )
            
            
            (26,387
            )
            
            
            (33,589
            )Cash
      flows from financing activities:Net
      proceeds from borrowings
            
            
            —
            
            
            
            30,581
            
            
            
            30,054Proceeds
      from sale leaseback arrangement
            
            
            —
            
            
            
            7,373
            
            
            
            —Payments
      of long-term debt and capital lease obligations
            
            
            (766
            )
            
            
            (3,193
            )
            
            
            (4,305
            )Deferred
      financing costs
            
            
            6
            
            
            
            (86
            )
            
            
            (165
            )Net
      borrowings (repayments) on zero-balance cash account
            
            
            (153
            )
            
            
            (758
            )
            
            
            451Other
      financing activity
            
            
            31
            
            
            
            12
            
            
            
            3Net
      cash provided by (used in) financing activities
            
            
            (882
            )
            
            
            33,929
            
            
            
            26,038Net
      change in cash and cash equivalents
            
            
            (14,476
            )
            
            
            17,229
            
            
            
            4,190Cash
      and cash equivalents, beginning of year
            
            
            41,195
            
            
            
            26,719
            
            
            
            43,948Cash
      and cash equivalents, end of year
            
            $
            26,719
            
            
            $
            43,948
            
            
            $
            48,138Non-cash
      investing and financing activity:Capital
      lease obligations
            
            $
            1,364
            
            
            $
            8,341
            
            
            $
            461Supplemental
      disclosure:Cash
      paid for interest
            
            $
            19,040
            
            
            $
            22,886
            
            
            $
            26,502Cash
      paid for franchise taxes
            
            $
            177
            
            
            $
            180
            
            
            $
            —








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





F-6
 Table of Contents





GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS





1.
Background and Basis of Presentation





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





The
accompanying consolidated financial statements of the Company have been prepared
in conformity with U.S. generally accepted accounting principles. The
consolidated financial statements include the accounts of Grande Communications
Holdings, Inc.’s wholly owned subsidiary. All inter-company transactions and
balances have been eliminated.





Certain
reclassifications have been made to prior year amounts to conform to current
year classifications. Accrued interest payable is presented separately in the
accompanying consolidated balance sheets instead of being included in accrued
liabilities. This change in presentation resulted in an increase in accrued
interest payable and a decrease in accrued liabilities of $5.9 million as of
December 31, 2006.





2.
Summary of Significant Accounting Policies





Accounting
Estimates





Preparation
of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the
amounts reported in the consolidated financial statements and accompanying
disclosures. These estimates are based on management’s best knowledge of current
events and actions the Company may undertake in the future. Actual results may
ultimately differ from these estimates.





Cash
and Cash Equivalents





The
Company considers all highly liquid investments with original maturities of
three months or less to be cash and cash equivalents.





As a
result of the Company’s cash management system, checks issued but not presented
to the banks for payment may create negative book cash balances (zero-balance
accounts). Such negative balances are included in accounts payable and total
$3.5 million and $4.0 million as of December 31, 2006 and 2007,
respectively.





The
Company has entered into letter of credit agreements that restrict the use of
cash. This restricted cash consists of cash maintained in a money market bank
account. Restricted cash was approximately $2.9 million and $3.1 million as of
December 31, 2006 and 2007, respectively, and is included as a component of
other assets in the accompanying consolidated balance sheets.





Accounts
Receivable





Accounts
receivable are recorded at their net realizable values. The Company uses
estimates to determine the allowance for doubtful accounts and records an
accounts receivable reserve for known collectibility issues, as such issues
relate to specific transactions or customer balances. These estimates are based
on historical collection experience, current trends, credit policy and a
percentage of the Company’s customer accounts receivable. In determining these
percentages, the Company looks at historical write-offs of the receivables. The
Company writes off accounts receivable when it becomes apparent based upon age
or customer circumstances that such amounts will not be collected.





Property,
Plant and Equipment





The
Company’s industry is capital intensive and a large portion of the Company’s
resources is spent on capital activities associated with building our network.
Property, plant and equipment reflects the original cost of acquisition or
construction, including costs associated with network construction and initial
customer installations. Direct labor costs directly associated with capital
projects are capitalized. The Company capitalizes direct labor costs associated
with personnel based upon allocations of time devoted to network construction
and customer installation activities. Costs capitalized as part of initial
customer installations include materials, direct labor, and certain indirect
costs. These indirect costs are associated with the activities of personnel who
assist in connecting and activating the new service and consist of compensation
and overhead costs associated with these support functions. Capitalized internal
direct labor and overhead costs were approximately $10.6 million, $8.3 million
and $8.5 million, during the years ended December 31, 2005, 2006 and 2007,
respectively. Capitalized labor and overhead costs are depreciated along with
the physical assets to which they relate, which have lives of three to ten years
depending on the type of asset.





F-7
 Table of Contents





The costs
of disconnecting service at a customer’s dwelling or reconnecting service to a
previously installed dwelling are charged to operating expense in the period
incurred.





Construction
and other materials are valued at the lower of cost or market (determined on a
weighted-average basis) and include customer premise equipment and certain plant
construction materials. These items are transferred to the telecommunications
plant when installed and activated.





Expenditures
for repairs and maintenance are charged to expense when incurred. Expenditures
for major renewals and betterments, which extend the useful lives of existing
equipment, are capitalized and depreciated. Upon retirement or disposition of
property, plant and equipment, the cost and related accumulated depreciation are
removed from the accounts and any resulting gain or loss is recognized in the
statements of operations.





Depreciation
is calculated on the straight-line method based on the useful lives of the
various classes of depreciable property. Assets recorded under capital leases
are amortized over the lesser of the life of the underlying asset or the lease
term and such amortization is included with depreciation and amortization
expense. The average estimated lives of depreciable property, plant and
equipment are:





Communications
      plant
            7
      to 10 yearsComputer
      equipment
            3
      yearsSoftware,
      including general purpose and network
            3
      yearsBuildings
            20
      yearsLeasehold
      improvements
            5
      yearsAssets
      under capital lease
            3
      to 20 yearsFurniture,
      fixtures and vehicles
            5
      to 7 yearsOther
            5
      to 7 years





Goodwill





The
Company follows the Financial Accounting Standards Board (“FASB”) Statement of
Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets(SFAS 142), which recognizes that since goodwill and certain intangible
assets may have indefinite useful lives, these assets are not amortized but are
to be evaluated at least annually for impairment.





The
Company used a two-step process to test for impairment of the carrying value of
goodwill in accordance with SFAS 142. The first step of the process compared the
fair value of each reporting unit with the carrying value of the reporting unit,
including any goodwill. The Company utilized discounted cash flow and other
valuation methodologies to determine the fair value of each reporting unit. If
the fair value of each reporting unit exceeded the carrying amount of the
reporting unit, goodwill is deemed not to be impaired in which case the second
step in the process is unnecessary. If the carrying amount exceeded fair value,
the Company performed the second step to measure the amount of impairment. Any
impairment is measured by comparing the implied fair value of goodwill,
calculated per SFAS 142, with the carrying amount of goodwill at the reporting
unit, with the excess of the carrying amount over the fair value recognized as
an impairment. During 2005 and 2006, the annual goodwill impairment tests
resulted in an impairment of $39.6 million and $93.6 million, respectively, and
as a result, all goodwill was written off as of December 31, 2006.





Intangible
Assets





Intangible
assets are accounted for in accordance with SFAS 142.  The Company
classifies intangible assets as definite-lived or indefinite-lived intangible
assets. As of December 31, 2007, definite-lived intangibles include multiple
family dwelling unit (“MDU”) exclusive access rights, which are amortized over
the respective lives of the agreements, typically seven to eighteen years. The
Company periodically reviews the appropriateness of the amortization periods
related to its definite-lived assets. The Company does not currently have any
intangible assets classified as indefinite-lived.





The
Company tests for possible impairment of definite-lived intangible assets
whenever events or changes in circumstances, such as a reduction in operating
cash flow or a dramatic change in the manner that the asset is intended to be
used indicates that the carrying amount of the asset is not recoverable. If
indicators exist, the Company compares the undiscounted cash flows related to
the asset to the carrying value of the asset. If the carrying value is greater
than the undiscounted cash flow amount, an impairment charge is recorded in the
statements of operations for amounts necessary to reduce the carrying value of
the asset to fair value.





F-8
 Table of Contents





During
the year ended December 31, 2005, the Company recognized a $1.8 million
impairment related to a franchise fee intangible asset. Refer to Footnote No. 5
“Intangible Assets” for further discussion of the impairment. There were no
impairments recognized on other definite-lived intangible assets during 2006 or
2007.





Long-Lived
Assets





The
Company evaluates its long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment of
Long-Lived Assets. Long-lived assets held and used by the Company are
reviewed for impairment whenever events or changes in circumstances indicate
that their net book value may not be recoverable. When such factors and
circumstances exist, the Company compares 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.





Revenue
Recognition





Revenue
from residential and small and medium sized business customers is principally
derived from bundled packages of video, voice, HSD and other
services.  Bundled services revenue consists of fixed monthly fees and
usage based fees for long distance service and is recorded as revenue in the
period the service is provided.  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.  Installation revenues obtained from bundled service
connections are recognized in accordance with SFAS No. 51, Financial Reporting by Television
Cable Companies, as the connections are completed since installation
revenues recognized are less than the related direct selling
costs.  Installation costs are included in property, plant, and
equipment and depreciated over the estimated life of communications
plant.  Local governmental authorities impose franchise fees on the
majority of the Company’s franchises of 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 the Company’s
customers and periodically remitted to local franchise authorities. Franchise
fees collected and paid of approximately $2.2 million, $2.5 million, and $2.9
million during the years ended December 31, 2005, 2006, and 2007, respectively,
are reported as revenues and cost of revenues, respectively. The Federal
Communications Commissions imposes a tax on long distance calls to fund
telephone service for the poor, and to support telecommunications services for
libraries, schools, and rural health care providers.  Such taxes are
collected on a monthly basis from the Company’s customers and periodically
remitted to the Universal Service Fund (“USF”).  Sales and other taxes
imposed by governmental authorities are also collected on a monthly basis from
the Company’s customers and periodically remitted to governmental authorities.
Revenue is presented net of the applicable USF, sales and other
taxes.





Revenue
from broadband transport services is principally derived from providing medium
and large enterprises and communication carriers with access to the Company’s
metro area networks and point-to-point circuits on the Company’s long-haul fiber
optic network.  Revenue from network services is principally derived
from switched carrier services and managed modem services.  Broadband
transport and network services revenue consists of fixed monthly fees and usage
based fees and is recorded as revenue in the period the service is
provided.  Amounts billed in advance are reflected in the balance
sheet as deferred revenue and are deferred until the service is
provided.  Revenue also includes upfront non-recurring fees for
construction, installation and configuration services that are deferred and
recognized over the related service contract period.





In
instances where multiple deliverables are sold contemporaneously to the same
counterparty, the Company follows the guidance in EITF Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables, and SEC Staff Accounting Bulletin No. 104, Revenue Recognition.
Specifically, if the Company enters into sales contracts for the sale of
multiple products or services, then the Company evaluates whether it has
objective fair value evidence for each deliverable in the transaction. If the
Company has objective fair value evidence for each deliverable of the
transaction, then it accounts for each deliverable in the transaction
separately, based on the revenue recognition policies outlined above. The
residual method is used when no fair value is available for the deliverable. For
example, this would occur when the Company enters into an agreement for service
that includes the Company providing equipment in connection with the service and
the subscriber paying an installation fee as well as monthly charges. Because
the Company is providing both a product and a service, revenue is allocated to
the product and monthly subscription service based on relative fair value and
revenue is allocated to installation services using the residual method. To
date, product revenues have not been significant.





F-9
 Table of Contents





Advertising
Costs





The
Company expenses all advertising costs as incurred. Total advertising expense
for 2005, 2006 and 2007 was approximately $3.3 million, $2.6 million and $2.5
million, respectively, and is reflected as a component of selling, general and
administrative expense in the accompanying consolidated statements of
operations.





Debt
Issuance Costs





Debt
issuance costs are amortized over the life of the related indebtedness using a
method that approximates the effective interest method. Amortization expense
related to debt issuance costs charged to interest expense was approximately
$1.0 million in each year ended December 31, 2005, 2006 and 2007.





Income
Taxes





The
Company utilizes the liability method of accounting for income taxes, as set
forth in SFAS No. 109, Accounting for Income Taxes.
Under the liability method, deferred taxes are determined based on the
difference between the financial and tax bases of assets and liabilities using
enacted tax rates in effect in the years in which the differences are expected
to reverse (see Note 7).





Effective
January 1, 2007, the state of Texas changed its method of taxation from a
franchise tax, which was based on taxable capital,to a tax based on gross margin.  This change resulted in a
different financial statement presentation of the tax to the state of
Texas.  Prior to January 1, 2007, the Texas franchise tax expense was
included as a component of selling, general and administrative expense in the
accompanying condensed consolidated statements of operations.  The
gross margin tax is presented as income tax expense during the year ended
December 31, 2007.





Net
Loss Per Share





The
Company follows the provisions of SFAS No. 128, Earnings Per Share. Basic
earnings per share is computed by dividing net income (loss) available to common
shareholders by the weighted-average number of common shares outstanding during
the period. Diluted earnings per share includes the weighted average number of
common shares outstanding and the number of equivalent shares which would be
issued related to the stock options and warrants using the treasury method, and
convertible preferred stock using the if-converted method, unless such
additional equivalent shares are anti-dilutive.





For the
years ended December 31, 2005, 2006 and 2007, the Company reported a net loss,
therefore, the following equivalent shares of common stock were not included in
the computation of diluted EPS, as their effect was anti-dilutive:





2005
            
            
            2006
            
            
            2007Convertible
      preferred stock
            
            
            439,527,511
            
            
            
            439,527,511
            
            
            
            439,527,511Common
      stock warrants
            
            
            150,586,160
            
            
            
            59,575,248
            
            
            
            152,107,016Common
      stock options
            
            
            50,871,494
            
            
            
            51,967,818
            
            
            
            51,557,894Series
      H preferred stock options
            
            
            —
            
            
            
            13,479,726
            
            
            
            27,514,521Total
      anti-dilutive shares
            
            
            590,113,671
            
            
            
            499,102,759
            
            
            
            439,527,511





Stock
Based Compensation





As of
December 31, 2007, the Company has a stock-based employee compensation plan,
which is described more fully in Note 9. Prior to January 1, 2006, the Company
accounted for the plan under the recognition and measurement provisions of APB
Opinion No. 25, Accounting for
Stock Issued to Employees, and related Interpretations, as permitted by
SFAS No. 123, Accounting for
Stock-Based Compensation. No stock-based employee compensation cost was
recognized in the Consolidated Statement of Operations for the year ended
December 31, 2005, as all options granted under those plans had an exercise
price equal to the fair value of the underlying common stock on the date of
grant. Prior to the adoption of SFAS No. 123(R), Share-Based Payment (“SFAS
123(R)”), the Company used the minimum value method of measuring stock options
for the pro forma disclosure under SFAS 123. Effective January 1, 2006, the
Company adopted the fair value recognition provisions of SFAS 123(R), using the
prospective transition method. Under that transition method, compensation cost
recognized in 2006 and 2007 includes compensation cost for all share-based
payments granted subsequent to January 1, 2006, based on the grant-date fair
value estimated in accordance with the provisions of SFAS 123(R). Results for
prior periods have not been restated. Compensation expense calculated under SFAS
123(R) is amortized to compensation expense on a straight-line basis over the
vesting period of the underlying stock option grants.





F-10
 Table of Contents





Fair
Value of Financial Instruments





The
carrying amounts reflected in the balance sheets for cash, cash equivalents,
accounts receivable, accounts payable and accrued liabilities approximate fair
value due to the short-term nature of the instruments. Fair value of the
following debt instruments was estimated based on trading activity for the
senior notes and borrowing rates currently available to the Company for
equipment financing with similar terms and maturities:





December 31,
2006
            
            
            December 31,
2007Carrying Amount
            
            
            Estimated Fair Value
            
            
            Carrying Amount
            
            
            Estimated Fair Value(in
      millions)14%
      Senior Notes
            
            $
            160.8
            
            
            $
            179.8
            
            
            $
            188.0
            
            
            $
            194.7Equipment
      financing
            
            
            —
            
            
            
            —
            
            
            
            3.6
            
            
            
            3.6





Recent
Accounting Pronouncements





Business
Combinations





In
December 2007, the FASB issued SFAS No. 141 (Revised 2007), Business Combinations (“SFAS
141(R)”). SFAS 141(R) will significantly change the accounting for business
combinations. Under SFAS 141(R), an acquiring entity will be required to
recognize all the assets acquired and liabilities assumed in a transaction at
the acquisition-date fair value with limited exceptions. SFAS 141(R) will change
the accounting treatment for certain specific acquisition related items
including: (1) expensing acquisition related costs as incurred; (2) valuing
noncontrolling interests at fair value at the acquisition date; and (3)
expensing restructuring costs associated with an acquired business. SFAS 141(R)
also includes a substantial number of new disclosure requirements. SFAS 141(R)
is to be applied prospectively to business combinations for which the
acquisition date is on or after January 1, 2009. The Company expects SFAS 141(R)
will have an impact on the Company’s accounting for future business combinations
once adopted but the effect is dependent upon the acquisitions that are made in
the future.





Fair
Value Measurements





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring
fair value in applying generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies whenever an entity
is measuring fair value under other accounting pronouncements that require or
permit fair value measurement. SFAS 157 is effective for financial statements
issued for fiscal years beginning after November 15, 2007, however the FASB
provided a one year deferral for implementation of the standard for
non-financial assets and liabilities. The Company does not expect the adoption
of SFAS 157 to have a material impact on the consolidated financial
statements.





In
February 2006, the FASB issued SFAS No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities, including an amendment of FASB Statement No.
115(“SFAS 159”). SFAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value that are not
currently required to be measured at fair value. Unrealized gains and losses on
items for which the fair value option has been elected are reported in earnings.
SFAS 159 does not affect any existing accounting literature that requires
certain assets and liabilities to be carried at fair value. SFAS 159 was
effective for us on January 1, 2008. The Company did not apply the fair value
option therefore; SFAS 159 did not have an impact on the consolidated financial
statements.





3.
Allowance for Doubtful Accounts





The
activity in the Company’s allowance for doubtful accounts for the years ending
December 31, 2005, 2006 and 2007 was as follows:





Balance at Beginning of
      Year
            
            
            Charged to Costs and
      Expenses
            
            
            Write-offs
            
            
            Balance at End of
Year(in
      thousands)2005
            
            $
            2,506
            
            
            $
            5,262
            
            
            $
            (6,326
            )
            
            $
            1,4422006
            
            
            1,442
            
            
            
            3,514
            
            
            
            (3,763
            )
            
            
            1,1932007
            
            
            1,193
            
            
            
            3,301
            
            
            
            (3,356
            )
            
            
            1,138





F-11
 Table of Contents





4.
Property, Plant and Equipment





Property,
plant and equipment consist of the following as of December 31, 2006 and
2007:





2006
            
            
            2007(in
      thousands)Communications
      plant
            
            $
            425,583
            
            
            $
            455,145Computer
      equipment
            
            
            6,377
            
            
            
            6,517Software,
      including general purpose and network
            
            
            29,857
            
            
            
            31,491Buildings,
      leasehold improvements and land
            
            
            4,512
            
            
            
            4,487Furniture,
      fixtures and vehicles
            
            
            4,127
            
            
            
            4,308Other
      equipment
            
            
            23,095
            
            
            
            23,937Assets
      under capital leases
            
            
            24,738
            
            
            
            24,668Construction
      in process
            
            
            6,509
            
            
            
            3,534Construction
      inventory
            
            
            8,626
            
            
            
            8,749533,424
            
            
            
            562,836Less—accumulated
      depreciation
            
            
            (261,485
            )
            
            
            (313,526
            )Property,
      plant and equipment, net
            
            $
            271,939
            
            
            $
            249,310





5.
Intangible Assets





Definite-lived
intangible assets consist of the following as of December 31, 2006 and 2007 (in
thousands):





2006
            
            
            2007Life
            
            Gross Carrying
      Amount
            
            
            Accumulated
      Amortization
            
            
            Gross Carrying
      Amount
            
            
            Accumulated
      AmortizationMDU
      exclusive access rights
            7 –
      18 years
            
            $
            2,501
            
            
            $
            (753
            )
            
            $
            2,815
            
            
            $
            (1,417
            )





During
the year ended December 31, 2005 the Company recognized a $1.8 million
impairment related to a franchise fee intangible asset.  No
impairments were recognized during 2006 or 2007.





Amortization
expense was $4.2 million, $0.3 million and $0.4 million for the years ending
December 31, 2005, 2006 and 2007, respectively. The 2005 amortization expense
was primarily related to the acquisition related subscriber base intangible that
was fully amortized during 2005 and the $1.8 million impairment related to the
franchise fee intangible. The weighted average remaining life for the MDU
exclusive access rights intangible asset is approximately 6 years. Amortization
expense associated with the net carrying value of definite-lived intangible
assets is estimated to be $0.2 million in 2008 through 2012.





6.
Accrued Liabilities





Accrued
liabilities consist of the following as of December 31, 2006 and
2007:





2006
            
            
            2007(in
      thousands)Accrued
      property taxes
            
            $
            4,073
            
            
            $
            4,405Accrued
      compensation
            
            
            2,613
            
            
            
            2,801Accrued
      taxes—other
            
            
            2,108
            
            
            
            2,662Accrued
      programming
            
            
            2,205
            
            
            
            2,587Accrued
      other
            
            
            3,557
            
            
            
            2,873Accrued
      liabilities
            
            $
            14,556
            
            
            $
            15,328





7.
Income Taxes





As of
December 31, 2007, the Company had federal net operating loss carry-forwards of
approximately $418 million. The net operating loss carry-forwards will expire
beginning in 2020 if not utilized.





Utilization
of the net operating losses may be subject to a substantial annual limitation
due to the “change in ownership” provisions of the Internal Revenue Code of
1986. The annual limitation may result in the expiration of net operating losses
before utilization.





F-12
 Table of Contents





Deferred
income taxes reflect the net tax effect of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. The significant components of deferred
tax assets and liabilities as of December 31, 2006 and 2007 are as
follows:





2006
            
            
            2007(in
      thousands)Deferred
      tax assets:Amortizable
      assets
            
            $
            7,979
            
            
            $
            6,254Deferred
      revenue
            
            
            1,755
            
            
            
            1,824Other
            
            
            83
            
            
            
            48Capital
      lease
            
            
            6,187
            
            
            
            5,524Deferred
      rent
            
            
            444
            
            
            
            430Reserves
            
            
            683
            
            
            
            674Net
      operating loss carryforwards
            
            
            129,926
            
            
            
            152,679Total
      deferred tax assets
            
            
            147,057
            
            
            
            167,433Deferred
      tax liabilities:Amortizable
      assets
            
            
            —
            
            
            
            —Depreciable
      assets
            
            
            20,789
            
            
            
            18,189Total
      deferred tax liabilities
            
            
            20,789
            
            
            
            18,189Net
      deferred tax asset
            
            
            126,268
            
            
            
            149,244Less-valuation
      allowance
            
            
            (126,268
            )
            
            
            (149,244
            )Total
      deferred taxes
            
            $
            —
            
            
            $
            —





The
Company has established a valuation allowance equal to the net deferred tax
asset due to uncertainties regarding the realization of the deferred tax asset
based on the Company’s lack of earnings history. The valuation allowance
increased approximately $23 million during the year ended December 31,
2007.





In July
2006, the FASB issued Interpretation No. 48, Accounting for Uncertainty in Income
Taxes — an interpretation of FASB Statement No. 109 (FIN 48), which
clarifies the accounting and disclosure for uncertainty in tax positions, as
defined. FIN 48 seeks to reduce the diversity in practice associated with
certain aspects of the recognition and measurement related to accounting for
income taxes. The Company adopted the provisions of FIN 48 as of January 1,
2007, and has reviewed filing positions in all of the federal and state
jurisdictions where it is required to file income tax returns, as well as all
open tax years in these jurisdictions. The Company has identified its federal
tax return and its state tax returns in Texas as “major” tax jurisdictions, as
defined. The only periods subject to examination for the Company’s federal tax
returns are the 2004 through the 2007 tax years. The periods subject to
examination for the Company’s state tax returns in Texas are years 2003 through
2007. The Company believes that its income tax filing positions and deductions
will be sustained on audit and does not anticipate any adjustments that will
result in a material adverse effect on the Company’s financial condition,
results of operations, or cash flow. Therefore, no reserves for uncertain income
tax positions have been recorded pursuant to FIN 48.





As
discussed in Note 2, effective January 1, 2007, the State of Texas changed its
method of taxation from a franchise tax, which was based on taxable capital,to a tax based on gross margin. This change significantly reduced the
Company’s ability to utilize its net operating loss carryforwards in future
periods under the Texas gross margin tax.





The
Company’s provision for income taxes differs from the expected tax expense
(benefit) amount computed by applying the statutory federal income tax rate of
35% to loss before income taxes primarily as a result of the following for the
years ended December 31:





2005
            
            
            2006
            
            
            2007(in
      thousands)Computed
      at federal statutory rate
            
            $
            (31,372
            )
            
            $
            (49,468
            )
            
            $
            (17,293
            )State
      taxes, net of federal benefit
            
            
            (2,682
            )
            
            
            (1,415
            )
            
            
            730Impact
      of change in state tax law
            
            
            —
            
            
            
            9,688
            
            
            
            (5,191
            )Permanent
      items and other
            
            
            1,054
            
            
            
            (3,292
            )
            
            
            (99
            )Impairment
      of nondeductible goodwill
            
            
            —
            
            
            
            32,774
            
            
            
            —Valuation
      allowance
            
            
            33,000
            
            
            
            11,713
            
            
            
            22,976Provision
      (benefit) for income taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            1,123





F-13
 Table of Contents





8.
Long Term Debt





Long-term
debt consists of the following as of December 31, 2006 and
2007:





2006
            
            
            2007(in
      thousands)14%
      senior notes
            
            $
            168,000
            
            
            $
            193,000Equipment
      financing
            
            
            —
            
            
            
            3,572Other
            
            
            33
            
            
            
            24168,033
            
            
            
            196,596Less-current
      portion
            
            
            (9
            )
            
            
            (1,612
            )Long-term
      debt
            
            
            168,024
            
            
            
            194,984Discounts
      and premiums, net
            
            
            (7,227
            )
            
            
            (4,990
            )Long-term
      debt, net of discounts and premiums
            
            $
            160,797
            
            
            $
            189,994





14%
Senior Secured Notes





Long-term Debt. In March
2004, the Company completed a private placement offering for 136,000 units each
consisting of (1) $1,000 of senior notes due April 1, 2011 and (2) a warrant to
purchase 100.336 shares of common stock. See the discussion of the warrants in
footnote No. 9 below. The senior notes accrue interest at the rate of 14% per
annum with the interest payable semi-annually in cash in arrears on April 1 and
October 1. The senior notes are governed by the indenture between the Company
and U.S. Bank National Association, as Indenture Trustee, dated March 23, 2004
(“Indenture”).





In March
2006, the Company raised net proceeds of approximately $30.5 million in a
private placement of an additional $32.0 million in aggregate principal amount
of senior notes. These additional notes were issued under the Indenture and are
part of the same series of senior notes as those issued in March
2004.





On July
18, 2007, the Company completed a private placement offering of an additional
$25 million in aggregate principal amount of senior notes for gross proceeds of
approximately $26.0 million including a premium on issuance of $1.0
million.  These additional senior notes were issued under the
Indenture and are part of the same series of senior notes as those issued in
March 2004 and 2006.  The holders of a majority of the outstanding
principal balance of the senior notes consented to the amendment of the
Indenture to allow the Company to complete this issuance and the Company entered
into a Supplemental Indenture to reflect this amendment on July 18,
2007.





Grande
Communications Holdings, Inc.’s subsidiary, Grande Communications Networks,
Inc., (the “Subsidiary Guarantor”), has unconditionally guaranteed, jointly and
severally, the payment of the principal, premium and interest (including any
additional interest on the senior notes) on a senior secured basis.





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





The
senior notes may be redeemed, at the Company’s election, as a whole or from time
to time in part, at any time after April 1, 2008, upon not less than 10 nor more
that 60 days’ notice to each holder of notes to be redeemed, subject to the
conditions and at the redemption prices (expressed as percentages of principal
amount) set forth below, together with accrued and unpaid interest and
Liquidating Damages (as defined in the Indenture), if any, to the applicable
redemption date.





Year
            
            Percentage2008
            
            
            107.00
            %2009
            
            
            103.50
            %2010
      and thereafter
            
            
            100.00
            %





If the
Company experiences specific kinds of change of control events, each holder of
senior notes may require us to repurchase all or any portion of such holder’s
senior notes at a purchase price equal to 101% of the principal amount of the
senior notes, plus accrued and unpaid interest to the date of
repurchase.





The
Indenture contains covenants that, among other things, limit the Company’s
ability to:





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





•
            create
      liens on assets;





F-14
 Table of Contents





•
            pay
      dividends on, redeem or repurchase capital stock or make other restricted
      payments;





•
            make
      investments in other companies;





•
            enter
      into transactions with affiliates;





•
            enter
      into sale and leaseback
transactions;





•
            sell
      or make dispositions of assets;





•
            place
      restrictions on the ability of restricted subsidiaries to pay dividends or
      make other payments to us; and





•
            engage
      in certain business activities.





In
addition, the Indenture contains a covenant restricting capital expenditures
relating to the build-out of new or additional parts of the network if such
expenditures would result in us having less than $20 million in cash and cash
equivalents.





The
Indenture also contains customary events of default, including nonpayment of
principal or interest, violations of covenants, cross default and cross
acceleration to certain other indebtedness and material judgments and
liabilities.





The
senior notes were issued with original offering discounts of $5.8 million in
2004 and $1.4 million in 2006 and at a premium of $1.0 million in 2007. These
discounts and premiums are being amortized to interest expense using the
effective interest method over the term of the underlying notes. Net
amortization of discounts and premiums was $0.8 million, $1.1 million, and $1.2
million in 2005, 2006, and 2007, respectively.





The
Company incurred debt issuance costs related to these units of $6.4 million in
2004, $0.1 million in 2006 and $0.2 million in 2007. Amortization of debt
issuance costs was $1.0 million in 2005, 2006, and 2007.





Equipment
Financing





During
2007, the Company completed equipment financing of $4.1 million with a term of
24 months, which was utilized for the purchase of network
equipment.  The financing is secured by the network equipment
purchased with the proceeds of the borrowing and bears interest at an effective
annual rate of approximately 15.3% with monthly payments equal to 4.2%
multiplied by the total amount borrowed.  This financing is permitted
under the indenture between Grande and U.S. Bank National Association, as
Indenture Trustee, dated March 23, 2004 (the “Indenture”) governing the 14%
senior secured notes due 2011 (the “senior notes”).





Capitalized
Interest





The
Company capitalizes interest expense incurred from debt utilized to fund the
construction of the network. The total amounts capitalized were approximately
$3.3 million, $2.2 million and $0.6 million, during the years ended December 31,
2005, 2006 and 2007, respectively.





9.
Stockholders’ Equity





Investor
Rights Agreement





The
Company has entered into an amended and restated investor rights agreement with
preferred stockholders and certain common stockholders. This investor rights
agreement sets forth certain preemptive rights, registration rights, transfer
restrictions and covenants.





Preemptive Rights.Each
preferred stockholder party to the investor rights agreement has the right to
purchase its pro rata share of up to 85% of the equity securities that the
Company may propose to issue and sell in any future offering. This right does
not apply to and terminates upon the effective date of the registration
statement pertaining to the first firm commitment underwritten public offering
with an offering price of at least $1.30 per share and gross proceeds to us of
at least $150 million.





Registration Rights.Preferred stockholders party to the investor rights agreement have the
right to have their shares of stock registered under the Securities Act upon
meeting certain minimum share and value thresholds for the shares to be
registered. Once the thresholds for registration set forth in the investor
rights agreement are met, such parties have the right to effect up to four
long-form registrations (registrations using the Form S-1 or Form S-2
registration statement) and unlimited short-form registrations (registrations
using the Form S-3 registration statement) as long as two such short-form
registrations have not already been effected in the previous twelve months,
though the number of shares registered may be limited if an underwriter to an
offering advises us that marketing factors require a limitation on the number of
shares to be underwritten. Each holder of preferred stock party to the investor
rights agreement will also have the right to include its shares in a
registration statement the Company files, though again the number of shares
registered on behalf of such holder may be limited if an underwriter to an
offering advises us that marketing factors require a limitation on the number of
shares to be underwritten. The Company has also agreed to file a registration
statement to register the securities held by the Series G preferred stockholders
following the expiration or waiver of all lock-up arrangements entered into by
the Series G preferred stockholders in connection with an initial public
offering. The Company obtained a waiver from the preferred stockholders of any
registration rights that may be triggered in connection with the filing of any
registration statements required to be filed pursuant to the terms of the
registration rights agreement and the equity registration rights
agreement.





F-15
 Table of Contents





Transfer Restrictions.Before
a stockholder party to the investor rights agreement may sell, transfer or
exchange its stock, it must offer the shares first to the Company and second to
the preferred stockholders. A preferred stockholder also has the right to
participate in a sale of stock by another preferred stockholder. These transfer
restrictions do not apply to transfers of capital stock to (a) an affiliate or
family member of the stockholder, (b) a partner, member or stockholder of the
stockholder entity, (c) a distribution in connection with the dissolution,
winding-up or liquidation of a stockholder or (d) a transferee of a stockholder
by will or the laws of intestate succession.





Covenants.In addition to
customary covenants, the Company agreed to reserve and keep available enough
shares of common stock to allow for the conversion of all preferred stock into
common stock and placed a ceiling on the number of shares of common stock
available for issuance under the stock option plan. The Company also agreed to
provide certain information to the stockholders party to the investor rights
agreement and agreed to have each employee, officer and consultant sign a
proprietary information and inventions agreement.





Common
Stock





In
February 2000, the Company sold 11,410,000 shares of its $0.001 par value common
stock. These shares are otherwise restricted as to their sale to a third party
for a period ending the earlier of either an initial public equity offering or
February 2010.





Preferred
Stock





The
Company’s $0.001 par value preferred stock may be issued from time to time in
one or more series as determined by the Company’s board of
directors.





The
Company has authorized eight series of preferred stock, in alphabetical sequence
from A to H (the “Preferred Stock”). As of December 31, 2007, no shares of
Series H preferred stock has been issued, however, options to acquire Series H
preferred stock have been granted. See below under the caption “Equity Incentive
Plan” for discussion of the options related to Series H preferred
stock.





The
Preferred Stock is convertible into common stock at any time at the option of
the holders, and automatically convertible to common stock upon the Company’s
sale of its common stock in a firm commitment underwritten public offering
meeting certain pricing specifications. The number of shares of common stock
into which the Preferred Stock are convertible is based on a conversion price
which initially provides for the conversion of one share of Preferred Stock to
one share of common stock. The conversion price is adjusted for certain dilutive
issuances, such as stock splits, stock dividends, recapitalizations or similar
events, so that the number of shares of common stock issuable upon conversion is
increased or decreased in proportion to any increase or decrease in the
aggregate shares of common stock outstanding. The Preferred Stock is entitled to
participate equally in the payment of dividends, when and as declared by the
board of directors, on an as-converted basis. Such stock also has voting rights
on an as-converted basis.





The
Company entered into the Series G Preferred Stock Purchase Agreement, dated
October 27, 2003, with a number of investors under which the Company sold
34,615,330 shares of Series G Preferred Stock (“Series G”) to such investors for
a purchase price of $1.30 per share, for gross proceeds of $44,999,999. Each
share of Series G preferred stock was initially convertible into one share of
common stock at the election of the holder, based on a conversion ratio as
defined in the agreement, initially set at one to one and adjusted from time to
time based on certain anti-dilution provisions. The Company has also issued
warrants to purchase 138,461,320 shares of common stock in connection with this
sale of Series G preferred stock. For every share of Series G preferred stock
purchased by an investor, such investor received four Warrants to purchase one
share of common stock at an initial exercise price of $0.01 per share of common
stock. The warrants have a ten year life and are immediately exercisable. Each
share of Series G preferred stock has voting rights equal to the number of
shares of common stock into which the preferred stock could then be
converted.





The
Company has an investor rights agreement, as amended, with all purchasers of its
various preferred stock that includes certain registration rights, preemptive
rights, transfer restrictions, company covenants and corporate governance
provisions.





F-16
 Table of Contents





In the
event of any liquidation, dissolution or winding up of the Company, the holders
of the Series G preferred stock are entitled to receive, prior and in preference
to any distribution to the holders of any other series of preferred stock or
common stock, $3.90 per share plus declared but unpaid dividends on such shares.
Any amounts remaining, after the payment to the holders of Series G preferred
stock, will be distributed to the holders of the other series of preferred
stock, prior and in preference to any distribution to the holders of common
stock, an amount per share, which ranges from $1.00 to $2.50, plus declared but
unpaid dividends on such shares. Additionally, upon the closing of an
underwritten public offering, the holders of Series G preferred stock are
entitled to receive $3.90 per share of value under an automatic conversion, with
the right but not the obligation to receive $1.30 of the value in cash and the
remainder in common stock. Upon such conversion, all declared but unpaid
dividends shall be paid.





Stock
Purchase Warrants





The
Company valued the common stock warrants issued in connection with the Series G
Preferred Stock at $0.20 per warrant or $27,692,307 and recorded this amount in
additional paid in capital. The assumptions used to value these warrants were as
follows: Expected Life—2 years, Fair Value of Common Stock—$0.20, Dividend
Yield—0%, Risk Free Interest Rate—3%.





Concurrent
with the closing of the senior notes, the Company issued warrants to acquire
13,645,696 shares of common stock at $0.01 per share. The Company valued the
warrants issued in connection with the senior notes at $2.6 million and recorded
this amount in additional paid in capital. The assumptions used to value this
warrant were as follows: Expected Life—12 years, Fair Value of Common
Stock—$0.20, Dividend Yield—0%, Risk Free Interest Rate—3%. Amortization of debt
discounts associated with the common stock warrants was approximately $0.8
million, $1.1 million and $1.2 million in 2005, 2006 and 2007,
respectively.





Equity
Incentive Plan





On
October 25, 2006, the board of directors of the Company approved and adopted the
Grande Communications Holdings, Inc. Second Amended and Restated 2000 Stock
Incentive Plan (the “2000 Stock Incentive Plan”). The stockholders approved the
2000 Stock Incentive Plan at the annual stockholders meeting on December 6,
2006.





•
            Stock Subject to the Plan.The number of shares of common stock available for issuance under
      the 2000 Stock Incentive Plan is the lesser of (i) 10% of all of the
      shares of capital stock on a fully diluted basis, as if all such shares of
      capital stock were converted to common stock or (ii) 82,000,000 shares of
      common stock. In addition, 30,000,000 shares of Series H preferred stock
      shall be available for issuance under the 2000 Stock Incentive
      Plan.  Of the shares available for issuance under the 2000 Stock
      Incentive Plan, 30,000,000 shares of Series H preferred stock and
      12,000,000 shares of common stock are designated as “Executive
      Compensation Shares”. The maximum number of shares that may be reserved
      for issue pursuant to incentive stock options under the 2000 Stock
      Incentive Plan may not exceed 82,000,000 shares of stock. As of December
      31, 2007, approximately 29.0 million shares of common stock and
      approximately 2.2 million shares of Series H Preferred Stock were
      available for issuance under the 2000 Stock Incentive Plan (of which 2.3
      million shares of common stock and 2.2 million shares of Series H
      preferred stock are available for issuance as Executive Compensation
      Shares).





•
            Eligibility.Officers,
      employees, directors, consultants or advisers to the Company are eligible
      to participate in the plan. The 2000 Stock Incentive Plan provides that
      the Executive Compensation Shares may be issued to the Chief Executive
      Officer of Grande Communications Holdings, Inc. The Restated Certificate
      of Incorporation of Grande Communications Holdings, Inc., however,
      provides that the Executive Compensation Shares may only be issued to the
      Chief Executive Officer of the Company or any other independent director,
      officer or key employee, as approved by the board of directors from time
      to time.





•
            Awards Under the Plan.The Company may award “incentive stock options” and “non-statutory
      stock options” under the 2000 Stock Incentive Plan (in either case the
      Company refers to such awards as the
  options(s)).





Incentive Stock Options.Incentive stock options
awarded under the 2000 Stock Incentive Plan must have an exercise price of at
least 100% of the fair market of the stock on the date of grant. In the case of
an employee who owns more than 10% of voting power, the exercise price will be
the greater of the aggregate par value of the stock and at least 110% of the
fair market value of the stock on the date of grant.





Non-Statutory Stock Options.The Company can award non-statutory stock options to any person eligible
under the 2000 Stock Incentive Plan. The minimum exercise price for
non-statutory stock options under the 2000 Stock Incentive Plan is 85% of the
fair market value of the stock on the date of grant, provided, however, that (i)
if the grantee owns more than 10% of the voting power, the exercise price will
be the greater of the aggregate par value of the stock and at least 110% of the
fair market value of the stock on the date of grant, (ii) to the extent that the
option is intended to comply with Section 409A of the Internal Revenue Code of
1986, as amended, the exercise price will be the greater of the aggregate par
value of the stock and at least 100% of the fair market value of the stock on
the date of grant.





F-17
 Table of Contents





•
            Vesting. Options and
      restricted stock awards vest as determined by the board of directors and
      as stated in the individual’s Award Agreement. Vesting is subject to a
      participant’s continued employment or service with the Company. Vesting of
      such options are subject to acceleration upon a Change of Control, as
      defined in the 2000 Stock Incentive Plan, unless the board of directors
      exercises the right to cancel vested options or the option agreement
      provides otherwise. Generally, unless a specific option agreement provides
      otherwise, the options with respect to shares of stock that are not
      Executive Compensation Shares provide for a vesting of the total number of
      option shares over a four year period, commencing with vesting of 25% of
      the option shares on the first anniversary of the vesting start date, and
      an additional 25% for each of the three following anniversaries of that
      date. Generally, unless a specific option agreement provides otherwise,
      the options for Executive Compensation Shares vest as follows: (i) 25% of
      the total option shares on the first anniversary of the vesting start
      date, (ii) 2.1% of the option shares on the last day of each of the first
      35 months after such first anniversary, and (iii) 1.5% of the option
      shares on the last day of the 36th month after such first
      anniversary.





Valuation
assumptions





Effective
January 1, 2006, the Company adopted the fair value recognition provisions of
SFAS 123(R) using the prospective transition method. Under that transition
method, compensation cost recognized in 2006 and 2007 includes compensation cost
for all share-based payments granted subsequent to January 1, 2006, based on the
grant-date fair value estimated in accordance with the provisions of SFAS
123(R).  Prior to the adoption of SFAS 123(R), the Company used the
minimum value method of measuring stock options for the pro forma disclosure
under SFAS 123. No stock-based employee compensation cost was recognized in the
Consolidated Statement of Operations for the year ended December 31, 2005, as
all options granted under those plans had an exercise price equal to the fair
value of the underlying common stock on the date of grant.





The fair
value of each award granted from the Company’s stock option plan during the
years ended December 31, 2006 and 2007 was estimated at the date of grant using
the Black-Scholes-Merton option pricing model, assuming no expected dividends
and the following weighted average assumptions:





2006
            
            
            2007Expected
      volatility
            
            
            75
            %
            
            
            75
            %Expected
      life in years
            
            
            6.25
            
            
            
            6.25Risk-free
      interest rate
            
            
            4.58%-5.23
            %
            
            
            3.45%-4.92
            %





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





Risk free interest rate:
Based on the U.S. Treasury yield curve in effect at the time of the
grant.





Expected volatility of stock:
Based on the volatility of similar entities (referred to as guideline
companies). In evaluating similarity, the Company considered factors such as
industry, stage of life cycle, size and financial leverage.





Dividends: The
Black-Scholes-Merton valuation model includes a single expected dividend yield
as an input. The Company has not issued any dividends and is prohibited to issue
dividends under the Indenture.





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





F-18
 Table of Contents





A summary
of option activity under the 2000 Stock Incentive Plan during the year ended
December 31, 2007 is presented in the following table. There was no intrinsic
value associated with the stock options as of December 31, 2006 and
2007.





Common Stock
      Options
            
            
            Preferred Stock
      OptionsOptions
            
            
            Weighted
                Average
                Exercise
                Price
            
            
            Weighted
                Average
                Remaining Contractual
      Term(years)
            
            
            Options
            
            
            Weighted
                Average
                Exercise
                Price
            
            
            Weighted
                Average
                Remaining Contractual
      Term(years)Outstanding
      as of December 31, 2006
            
            
            52,384,156
            
            
            
            0.08
            
            
            
            6.5
            
            
            
            26,900,000
            
            
            
            0.10
            
            
            
            9.3Granted
            
            
            2,948,000
            
            
            
            0.05
            
            
            
            
            
            
            
            2,000,000
            
            
            
            0.10Exercised
            
            
            (83,800
            )
            
            
            0.05
            
            
            
            
            
            
            
            —
            
            
            
            —Expired
            
            
            (1,325,538
            )
            
            
            0.05
            
            
            
            
            
            
            
            —
            
            
            
            —Forfeited
            
            
            (2,694,200
            )
            
            
            0.05
            
            
            
            
            
            
            
            (1,125,000
            )
            
            
            0.10Outstanding
      as of December 31, 2007
            
            
            51,228,618
            
            
            
            0.08
            
            
            
            5.6
            
            
            
            27,775,000
            
            
            
            0.10
            
            
            
            8.5Vested
      as of December 31, 2007
            
            
            38,692,237
            
            
            
            0.09
            
            
            
            4.7
            
            
            
            10,368,746
            
            
            
            0.10
            
            
            
            8.2Exercisable
      as of December 31, 2007
            
            
            38,549,987
            
            
            $
            0.09
            
            
            
            4.7
            
            
            
            8,618,746
            
            
            $
            0.10
            
            
            
            8.1





The
following table summarizes information concerning option activity during the
years ended December 31, 2005, 2006 and 2007:





2005 (1)
            
            
            2006
            
            
            2007Common
      Stock Options:Weighted
      average fair value of options granted
            
            $
            0.20
            
            
            $
            0.02
            
            
            $
            —Intrinsic
      value of options exercised
            
            
            —
            
            
            
            —
            
            
            
            —Fair
      value of options vested
            
            
            —
            
            
            
            —
            
            
            
            —Preferred
      Stock Options:Weighted
      average fair value of options granted
            
            $
            —
            
            
            $
            0.07
            
            
            $
            0.06Intrinsic
      value of options exercised
            
            
            —
            
            
            
            —
            
            
            
            —Fair
      value of options vested
            
            
            —
            
            
            
            70,000
            
            
            
            661,537





(1)
              Information
      presented for 2005 is prior to the adoption of SFAS 123(R).  No
      stock-based employee compensation cost was recognized in the Consolidated
      Statement of Operations for the year ended December 31, 2005, as all
      options granted under those plans had an exercise price equal to the fair
      value of the underlying common stock on the date of
  grant.





On
May 3, 2006, the compensation committee of the board of directors approved the
repricing of all common stock options outstanding to current employees to an
exercise price of $0.05 per share. The Company recognized no additional
compensation expense as a result of this modification due to the options having
no fair value.





Total
compensation costs related to stock options were $0.4 and $0.6 million for the
years ended December 31, 2006 and 2007, respectively. As of December 31, 2007,
$1.0 million of unrecognized compensation costs related to non-vested option
grants are expected to be recognized over the course of the following four
years. Cash received on exercise of stock options was $11,799 and $4,240 for the
years ended December 31, 2006 and 2007, respectively. Upon share option
exercise, new shares are issued as opposed to treasury shares.





F-19
 Table of Contents





The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement 123 to
options granted under the Company’s stock option plan in the period presented
prior to the adoption of SFAS 123(R).





2005(in
      thousands, except per share data)Net
      loss, as reported
            
            $
            (89,770
            )Total
      stock-based employee compensation expense determined under fair value
      based method for all awards
            
            
            (292
            )Pro
      forma net loss
            
            $
            (90,062
            )Basic
      and diluted net loss per share, as reported
            
            $
            (7.21
            )Basic
      and diluted net loss per share, pro forma
            
            $
            (7.23
            )Basic
      and diluted weighted average number of common shares
      outstanding
            
            
            12,458





For
purposes of this pro forma disclosure, the value of the options was estimated
using a Black-Scholes-Merton option-pricing formula and amortized to expense
over the options’ vesting periods. The fair value of these options was estimated
at the date of grant with the following weighted-average
assumptions:





2005Risk-free
      interest rate
            
            
            4.0
            %Expected
      dividend yield
            
            
            0
            %Expected
      lives
            
            5
      yearsVolatility
      (Minimum Value Method)
            
            
            0
            %





10.
Commitments and Contingencies





Capital
Leases





The
Company has entered into significant capital leases for office buildings and
billing software. In 2006 and 2007, the Company entered into capital leases to
finance the purchase of various customer premise equipment and computer software
and equipment. The leases expire in varying years through 2024. Capital leases
consist of the following as of December 31, 2006 and 2007:





2006
            
            
            2007(in
      thousands)Capital
      leases
            
            $
            20,493
            
            
            $
            17,140Less-current
      portion
            
            
            (3,859
            )
            
            
            (3,548
            )Capital
      leases, net of current portion
            
            $
            16,634
            
            
            $
            13,592





Scheduled
payments for the capital leases as of December 31, 2007 are as follows (in
thousands):





2008
            
            $
            5,0612009
            
            
            2,5742010
            
            
            1,8102011
            
            
            1,6972012
      and thereafter
            
            
            19,673Total
      minimum lease payments
            
            
            30,815Amounts
      representing interest
            
            
            (13,675
            )Present
      value of net minimum lease payments
            
            
            17,140Less
      current maturities
            
            
            (3,548
            )Total
      long term capital lease
            
            $
            13,592





Operating
Leases





The
Company leases office space and other assets for varying periods. Leases that
expire are generally expected to be renewed or replaced by other
leases.





F-20
 Table of Contents





Certain
of the Company’s operating leases provide for payments that, in some cases,
increase over the life of the lease. In accordance with SFAS No. 13, Accounting for Leases, rental
expense for the Company’s operating leases is recognized on a straight-line
basis for all operating leases including those with escalation clauses. The
aggregate of the minimum annual payments is expensed on a straight-line basis
over the term of the related lease without consideration of renewal option
periods. The lease agreements contain provisions that require the Company to pay
for normal repairs and maintenance, property taxes, and insurance.





Future
minimum rental payments required under the operating leases that have initial or
remaining non-cancelable lease terms in excess of one year as of December 31,
2007, are as follows (in thousands):





2008
            
            $
            3,8882009
            
            
            3,3392010
            
            
            2,2592011
            
            
            1,9262012
      and thereafter
            
            
            10,530Total
      minimum lease payments
            
            $
            21,942





Total
rental expense for all operating leases was approximately $5.5 million, $5.8
million and $5.4 million for 2005, 2006 and 2007, respectively.





Franchise
Agreements and Build-Outs





The State
of Texas passed a law in late 2005 allowing cable operators to file for a state
issued certificate of franchise authority (“SICFA”) for the provision of cable
television and video services in Texas rather than negotiating with each
individual municipality for such a right. On October 25, 2005, the Public
Utility Commission of Texas, (“PUCT”), approved Grande’s application for a SICFA
to provide cable TV service in twenty-seven municipalities and in eleven
unincorporated areas of Texas. When the SICFA was approved, all of Grande’s
municipal cable TV franchises were terminated.





Under the
SICFA, among other things, Grande makes quarterly franchise fee payments to each
municipality where it provides cable TV service of five percent of its gross
cable service revenues and reports its subscriber count in each municipality.
Franchise fees collected from the Company’s customers and remitted to local
franchise authorities were approximately $2.2 million, $2.5 million, and $2.9
million during the years ended December 31, 2005, 2006, and 2007, respectively,
and are reported as revenues and cost of revenues, respectively.





Legal
Proceedings





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





Insurance





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





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





Maintenance
Agreements





The
Company has entered into numerous agreements for the maintenance of leased fiber
optic capacity. Future amounts due under these agreements as of December 31,
2007 are as follows (in thousands):




2008
            
            $
            1,0532009
            
            
            1,0542010
            
            
            1,0352011
            
            
            1,0352012
      and thereafter
            
            
            9,245Total
            
            $
            13,422





F-21
 Table of Contents





Purchase
Commitments





During
January 2005, the Company entered into a minimum purchase agreement with a
vendor for the purchase of $5.6 million of fiber optic equipment and
installation and maintenance services through January 2008. During March 2008,
the Company entered into Amendment No. 1 to the minimum purchase agreement
extending the term of the purchase commitment through December 31,
2008.  If the Company does not make the minimum purchases through the
expiration or termination of this agreement, the Company will be required to pay
a fee of 30% of the remaining unfulfilled amount. Purchases under this agreement
were $1.5 million, $1.0 million, and $0.5 million during the years ended
December 31, 2005, 2006, and 2007, respectively. Approximately $2.4 million
remains outstanding as of December 31, 2007.





Employment
Agreements





The
Company has entered into employment agreements with four of the Company’s senior
executives for an indefinite term, subject to continued employment with the
Company.  As of December 31, 2007, estimated benefits that would have
been payable to the senior executives if an event triggering a termination
without cause by the Company or for good reason by the senior executive had
occurred was $1.1 million in the aggregate.  During January 2008, one
of the senior executives subject to an employment agreement voluntarily resigned
and there were no severance payments or continued medical benefits associated
with his voluntary resignation.





11.
Concentration of Credit Risk





Certain
financial instruments potentially subject the Company to concentrations of
credit risk. These financial instruments consist primarily of trade receivables,
cash and temporary cash investments.





The
Company places its cash and temporary cash investments with high credit quality
financial institutions and limits the amount of credit exposure to any one
financial institution. The Company also periodically evaluates the
creditworthiness of the institutions with which it invests. The Company does
maintain invested balances in excess of federally insured limits.





The
Company’s trade receivables reflect a customer base primarily centered in Texas.
The Company routinely assesses the financial strength of its customers and
generally does not require collateral. As a consequence, concentrations of
credit risk are limited.





12.
Employee Benefit Plan





The
Company has a 401(k) plan for its employees. All employees over the age of 18
are eligible to participate in the plan. The Plan provides for discretionary
matching by the Company. During 2005, 2006 and 2007, the Company made
discretionary matching cash contributions to the plan of approximately $0.7
million in 2005 and 2006 and approximately $0.8 million in 2007.





13.
Quarterly Financial Information—Unaudited





2006
            
            1st Quarter
            
            
            2nd Quarter
            
            
            3rd Quarter
            
            
            4th QuarterRevenues
            
            $
            47,636
            
            
            $
            47,557
            
            
            $
            47,483
            
            
            $
            47,191Operating
      loss
            
            
            (6,544
            )
            
            
            (7,936
            )
            
            
            (7,526
            )
            
            
            (5,921
            )Net
      loss
            
            
            (9,636
            )
            
            
            (13,192
            )
            
            
            (13,199
            )
            
            
            (105,610
            )Basic
      and diluted loss per common share
            
            $
            (0.77
            )
            
            $
            (1.06
            )
            
            $
            (1.05
            )
            
            $
            (8.39
            )





2007
            
            1st Quarter (1)
            
            
            2nd Quarter (1)
            
            
            3rd Quarter
            
            
            4th QuarterRevenues
            
            $
            48,395
            
            
            $
            49,852
            
            
            $
            49,348
            
            
            $
            49,551Operating
      loss
            
            
            (3,195
            )
            
            
            (5,554
            )
            
            
            (6,304
            )
            
            
            (6,618
            )Net
      loss
            
            
            (9,736
            )
            
            
            (12,058
            )
            
            
            (13,637
            )
            
            
            (15,101
            )Basic
      and diluted loss per common share
            
            $
            (0.77
            )
            
            $
            (0.96
            )
            
            $
            (1.08
            )
            
            $
            (1.20
            )





(1) The
presentation of Texas gross margin tax has been reclassified to conform to
current presentation.  Texas gross margin tax is presented separately
as income tax expense instead of being included in sales, general and
administrative expense.






F-22