UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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




for the
fiscal year ended 12/31/2008




 ̈
            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  x





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  x





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





Indicate
by check mark 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.  x





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
filerxSmaller reporting
company ̈




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





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





The
number of shares of the registrant’s Common Stock outstanding as of March 15,
2009 was 12,784,072.










GRANDE COMMUNICATIONS HOLDINGS, INC.


ANNUAL
REPORT ON FORM 10-K


YEAR
ENDED DECEMBER 31, 2008


TABLE
OF CONTENTS




PAGEPART
      IItem
      1.
                      
                      Business
                      1Item
      1A.
                      
                      Risk Factors
                      26Item
      1B.
                      
                      Unresolved Staff Comments
                      33Item
      2.
                      
                      Properties
                      33Item
      3.
                      
                      Legal Proceedings
                      33Item
      4.
                      
                      Submission of Matters to a Vote of Security
      Holders
                      34PART
      IIItem
      5.
                      
                      Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of Equity Securities
                      35Item
      6.
                      
                      Selected Financial Data
                      36Item
      7.
                      
                      Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
                      38Item
      7A.
                      
                      Quantitative and Qualitative Disclosures About Market
      Risk
                      55Item
      8.
                      
                      Financial Statements and Supplementary
    Data
                      55Item
      9.
                      
                      Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
                      55Item
      9T.
                      
                      Controls and Procedures
                      56Item
      9B.
                      
                      Other Information
                      56PART
      IIIItem
      10.
                      
                      Directors, Executive Officers and Corporate
      Governance
                      57Item
      11.
                      
                      Executive Compensation
                      62Item
      12.
                      
                      Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
                      86Item
      13.
                      
                      Certain Relationships and Related Transactions, and
      Director Independence
                      98Item
      14.
                      
                      Principal Accounting Fees and Services
                      99PART
      IVItem
      15.
                      
                      Exhibits, Financial Statement Schedules
                      100Signatures
                      103Financial Statement Index
                      F-1




Table of Contents


CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





This
annual report on Form 10-K 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, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended (the “Exchange Act”). 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 on Form 10-K, including the financial statements.





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. 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 on Form 10-K
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 on Form 10-K are made only as of the date of this annual
report. We cannot ensure that any projected results or events will be achieved.
We have no intention, and disclaim any obligation to publicly update or revise
any forward-looking statements whether as a result of new information, future
results or otherwise, except as required by law.





PART
I





For
convenience in this annual report on Form 10-K, “Grande,” “we,” “us,” “our,” and
“the Company” refer to Grande Communications Holdings, Inc. and its 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 business customers in Texas.  We provide these
services in seven markets in the state of Texas using local broadband networks
that we acquired and/or constructed. We refer to the homes and businesses that
our network is capable of providing services to as “marketable homes passed.” We
believe that an important measure of our growth potential is the number of
marketable homes passed by our networks and the marketable homes we are able to
pass in the future in the markets in which we currently operate. Marketable
homes passed are the number of residential and business units, such as single
residential homes, apartment units and condominium units, passed by our
networks. Since 2001, we have grown our marketable homes passed through
acquisitions and the construction of our networks. The expansion of our networks
has, in turn, allowed us to pursue a retail strategy of offering bundled video,
voice and HSD services to residential and business customers. As of December 31,
2007 and 2008, we had the ability to market services to 340,058 and 340,681
distinct homes and businesses over our networks, respectively, and had 145,675
and 146,210 residential and business customers, respectively. Our operating
revenues were $197.1 million in 2007 compared to $205.3 million for
2008.


1
 Table of Contents


Grande
was founded in November 1999 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 $155.0 million in 2007
compared to $168.4 million for 2008.   We have continued to grow
our bundled services to commercial business customers, which increased 23% to
$24.2 million during 2008 from $19.6 million during 2007.





In
addition, we have leveraged our retail metro network build-out with the 2003
acquisition of a long haul fiber optic network to allow us to provide broadband
transport services to medium and large enterprises and communications carriers.
Operating revenues for broadband transport services were $9.4 million in 2007
compared to $12.3 million for 2008.





In July
2000, when our network construction was still in a very early stage, we acquired
substantially all of the assets of 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 is also the platform
that provides wholesale network services to medium and large enterprises and
communications carriers in the wholesale market. Operating revenues for network
services were $32.7 million in 2007 compared to $24.6 million for
2008.




Our
network services are primarily provided using our existing infrastructure and
personnel. By leveraging our brand, communications infrastructure, voice and
data volume, and personnel that predominantly 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 stockholder 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:





•
            general
      economic conditions, including the availability of, and our ability to
      obtain additional funding, if
necessary,


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


•
            our
      ability to compete effectively depends on our ability to keep pace with
      advances in technology and maintain high-quality services at prices
      generally equal to or below those charged by our competitors,
      and


•
            increasing
      programming and other costs.


2
 Table of Contents


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 network. 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 video, voice, HSD and other 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 with
      an additional capital investment of approximately one to two million
      dollars.





•
            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 call center system, with centers in Austin and
      San Marcos, Texas, 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, 2008, we had
      146,210 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 have grown our residential and business
      customers from 145,675 as of December 31, 2007 to 146,210 as of December
      31, 2008 and have an overall 43% customer penetration rate at December 31,
      2008. We believe that there is opportunity to further penetrate our
      existing markets, particularly in our newer
  passings.


3
 Table of Contents


•
            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
      23% over 2007 to $24.2 million in revenue during 2008. 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. Our
      commercial business is part of our overall bundled services
      business.





•
            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. Broadband
      transport services increased 31% over 2007 while network services
      decreased 25% from 2007 to $12.3 million and $24.6 million in revenue,
      respectively during 2008. These services are primarily provided using our
      existing infrastructure and personnel. By leveraging our brand,
      communications infrastructure, voice and data volume, and personnel that
      predominantly 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 bundle the three
products, 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 analog 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, news and entertainment guides. As of December 31, 2008, we
      provided video services to 101,864 connections. On average, during 2008,
      each of our video connections generated $57.96 in monthly
      revenues.





Our video
offerings include:





•
            Basic Cable. Our basic
      cable offering consists of over 20 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 45
      additional channels (over 65 total), including ESPN, Disney, CNN, Comedy
      Central and MTV.





•
            Super Digital Cable.
      Our digital cable offering consists of our expanded cable offering plus
      approximately 100 additional digital cable channels for access to a total
      of over 300 channels.  Digital service includes an interactive
      program guide, 48 channels of digital music and Grande Interactive TV with
      features such as games and local guides. 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.


4
 Table of Contents


•
            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 a minimum of 31 channels of HDTV programming (number of channels may
      vary by market).





•
            Premium Movie Channels.
      These 59 additional channels provide commercial-free movies and other
      programming including HBO, Cinemax, Showtime, The Movie Channel, Starz!
      and Encore.





•
            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.





•
            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, 2008, we provided service to 114,512 telephone
      connections. On average, during 2008, each of our telephone connections
      generated $41.02 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 and operator services. We offer
      our customers an option of a flat rate for domestic or intrastate
      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 per minute rate for any additional minutes. We also offer flat per
      minute rate for direct-dial international calling with no additional fees,
      surcharges or minimum call times per call. Our customers also may purchase
      800 number calling services or toll restriction 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.


5
 Table of Contents


•
            HSD and
      Other.As of December 31, 2008, we had 101,502 HSD and other
      service connections. On average, during 2008, each of our HSD and other
      connections generated $34.94 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, up to
      24Mbps with addition of our Bolt burstable Internet product, (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 1000Mbps, 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 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 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, personal Web space, email switching services and Internet
      security software. We also offer web premium packages, such as additional
      Internet security, family oriented premiums, sports, gaming and learning
      web applications as well as downloadable music and movies. 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.





•
            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.





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.


6
 Table of Contents


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. A Federal Communications Commission (“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. Grande’s marketing focuses
on three primary strategies that are used to drive sales, create awareness, and
help retain customers.  These strategies include: (i) a strong
community presence that we believe positions Grande as a hometown company; (ii)
a targeted branding strategy that seeks to provide overarching brand awareness;
and (iii) a heavy direct marketing strategy that maximizes the efficiency of our
marketing efforts.





Grande’s
heavy involvement in community events and participation with local charitable
organizations is driven primarily by our local Community Relations and Direct
Sales teams in the markets.  As part of this effort, our employees run
our Passion and Commitment Investment Club, which supports community
organizations in our markets that provide food, shelter, clothing and healthcare
to persons in need.  Grande’s Passion and Commitment Investment Club
has made significant donations to non profit organizations across our markets
and has been recognized with numerous local and state awards for its community
service.  We believe these activities help develop a strong local
brand that in turn translates into support for our direct sales
efforts.





Grande
also uses targeted branding opportunities to create additional brand awareness
in the marketplace.  In our less ubiquitous markets, we employ tactics
such as outdoor advertising, vehicle wraps, and local
sponsorships.  In areas where our footprint has a greater reach, we
are also able to use mass media such as television and radio on a limited
basis.  Additionally, we are becoming more involved in emerging
Internet technologies to help further extend our brand by utilizing social media
tactics such as Twitter, Facebook, and corporate blog sites.


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This
overarching brand strategy serves to provide an umbrella of awareness that
increases the effectiveness of the third component of our strategy, direct
marketing.  Grande’s unique footprint is the primary driver of our
direct marketing strategy.  Because of our unique footprint, we must
deliver materials on a household level in order to maximize our marketing
efforts.  We utilize a variety of tactics such as direct mail, zoned
newspaper inserts, door tags, telemarketing, and door-to-door sales in an effort
to generate new sales.  Additionally, we utilize third party market
segmentation data in an effort to segment our markets and target each unique
customer segment with the appropriate mix of messaging, product offering, and
pricing.





We
believe our marketing strategies help us penetrate our target markets where the
acquisition of new customers is typically dependent upon customers switching to
our services from their existing providers.  We have grown our
residential and business customers from 145,675 as of December 31, 2007 to
146,210 as of December 31, 2008 and have an overall 43% customer penetration
rate at December 31, 2008.


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 residential and commercial sales calls for all
markets.





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.


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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 call center system, with centers in Austin and San
Marcos, Texas, that handle all customer service transactions other than network
trouble calls, which we handle through our technical service center also located
in San Marcos, Texas. 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, Texas. 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.




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 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. We 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.


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We also
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.





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.





Markets




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





December
    31,Market Areas in
      Texas
                          
                          2006
                          
                          
                          2007
                          
                          
                          2008Austin/San
      Marcos
                          
                          
                          73,527
                          
                          
                          
                          74,713
                          
                          
                          
                          75,327San
      Antonio
                          
                          
                          63,692
                          
                          
                          
                          63,800
                          
                          
                          
                          64,044Suburban
      Northwest Dallas
                          
                          
                          59,618
                          
                          
                          
                          57,317
                          
                          
                          
                          54,695Corpus
      Christi
                          
                          
                          47,932
                          
                          
                          
                          49,332
                          
                          
                          
                          49,620Waco
                          
                          
                          44,270
                          
                          
                          
                          44,909
                          
                          
                          
                          45,154Midland/Odessa
                          
                          
                          40,750
                          
                          
                          
                          42,734
                          
                          
                          
                          44,589Houston
                          
                          
                          7,236
                          
                          
                          
                          7,253
                          
                          
                          
                          7,252Total
                          
                          
                          337,025
                          
                          
                          
                          340,058
                          
                          
                          
                          340,681





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 employees, 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.





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We are
not the first provider of any one 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 consumers 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”), 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, Cable One, Suddenlink Communications, CenturyTel Inc.
      (“CenturyTel”), Clearwire Corporation (“Clearwire”) and
      others;





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





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





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. In some
of our markets, our competitors are also offering wireless service. Our
competitors could have a significant adverse impact on our ability to market our
bundled services to customers.





•
            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, Dallas, Corpus Christi and Waco; Cable One in Odessa;
      Suddenlink Communications in Midland and Austin; and Charter 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 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
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 total
marketable homes we pass as of December 31, 2008. Verizon utilizes Internet
protocol to provide video services.


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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 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.





We also
face competition from a number of different sources, including companies that
deliver movies, television shows and other video programming over broadband
Internet connections, such as Hulu.com, as well as online order services with
mail delivery, and video stores and home video services. Increasingly, content
owners are utilizing Internet-based delivery of content directly to consumers,
often without charging a fee for access to the content. Furthermore, due to
consumer electronics innovations, consumers will over time be more readily able
to watch such Internet-delivered content on television sets. In addition to
multi-channel video providers, we compete with all other sources of news,
information and entertainment, including over-the-air television broadcast
reception, live events, movie theaters and the Internet.





•
            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.


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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 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.  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 CenturyTel and Clearwire.
      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.





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.





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.


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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. 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 by broadcasters became effective on
January 1, 2009. 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 many
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
immediate past 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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By
statute, cable operators must make local broadcasters’ primary video and
program-related material viewable by all of their subscribers.  The
FCC adopted rules to ensure that all cable subscribers, including those with
analog sets, can view broadcast television after the transition to digital
television occurs.  The transition to digital television currently is
scheduled to occur on June 12, 2009.  Cable operators were given two
options for compliance with viewability requirements, which extend to February
2012 and the FCC has committed to review the requirements during the final year
of this period.  We expect to be able to comply with viewability
requirements but our implementation may be flawed, or circumstances beyond our
control may make it impossible for us to comply in a timely fashion, in which
case we could be subject to investigations and potential fines and
penalties.





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
arrangements between MDUs and cable providers that provide a single cable
provider with exclusive access to the MDU for the provision of video services
("cable exclusivity clauses").  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. The appeal is scheduled for oral argument in
early 2009 before the U.S. Court of Appeals for the District of Columbia;
however, the FCC order has not been stayed and is in effect while the appeals
are considered.  Since Grande has cable exclusivity clauses 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 no longer prevented from
competing in even more MDU properties that have cable exclusivity clauses 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.


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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.





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.


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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 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 has considered 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.





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.


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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 have enabled 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.


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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.





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.





Both
Congress and the FCC have considered measures that, if enacted, would impose
“net neutrality” obligations on Internet access providers to not interfere or
discriminate against consumers’ use of broadband services, especially regarding
access to Internet applications and content of their choice.  Some
proposals have taken the additional step of effectively restricting the ability
of broadband providers to offer users additional service quality or service
prioritization. The FCC found in 2008 that Comcast had “unduly interfered” with
Internet users’ right to access the lawful content and other applications of
their choice – in the particular case under review, BitTorrent’s peer-to-peer
traffic – in violation of a FCC 2005 Internet policy statement.  The
FCC particularly faulted Comcast for not being transparent with subscribers in
disclosing its Internet management practices.  The order has been
appealed.  However, if upheld on appeal, the decision is likely to
lead to more case-by-case investigations and adjudications of Internet access
providers’ network management practices.  In addition, legislation
requiring the FCC to consider adoption of such net neutrality requirements
currently is under consideration by Congress as part of a national economic
stimulus package.


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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.





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.


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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.  The FCC has concluded that calls to ISPs are
jurisdictionally interstate and the exchange of ISP-bound traffic is not subject
to the reciprocal compensation requirements of the Communications Act, although
the FCC’s classification of this traffic is the subject of an appeal to the U.S.
Court of Appeals for the District of Columbia.





The FCC
has a pending rulemaking to consider a comprehensive rewrite of the rules
governing intercarrier compensation, including switched access charge rate
structures, switched access rate levels, certain interconnection rules that
relate to intercarrier compensation arrangements, and compensation for the
transport and termination of IP-enabled traffic.  (See
“Voice-over-Internet Protocol,” below.)  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. Whether IP-Enabled Services should be classified as
telecommunications services and made subject to switched access charge
assessment, is a key issue presented in that proceeding.  (See
“Voice-over-Internet Protocol,” below.) 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.





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.


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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.


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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 and are subject to certain requirements relating to telephone number
portability and protection of the privacy of customer proprietary
information.





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.





The FCC
currently has before it a series of petitions for declaratory ruling requesting
clarification on whether VoIP traffic is subject to switched access charge
assessment, which parties are interexchange carriers for purposes of access
charge liability on any IP-enabled traffic subject to access charges, whether
interexchange carriers not directly connected to local exchange carriers can be
subject to access charges, and whether intermediate, terminating local exchange
carriers can rely on certification by their customers that traffic is enhanced
services traffic in making decisions regarding the routing and access charge
assessment for VoIP traffic.  For example, 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 FCC 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.  One of these
petitions recently was denied, but the other remains pending and we cannot
predict how it will be decided. The regulatory classification of VoIP traffic,
including the applicability of access charges to such traffic, also is an
important issue under consideration in ongoing FCC rulemakings concerning
IP-Enabled Services and intercarrier compensation reform. Future rulings in
connection with VoIP, including whether access charges apply and whether they
can be assessed retroactively, 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. To the extent necessary to advance competition in the
telecommunications industry, however, the Telecommunications Act of 1996 does
place limits on state authority; 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.


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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 Texas. A major
revision to Texas’ telecommunications law was adopted by the Texas Legislature
in 2005 (“SB5”). 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 Texas could have
a significant impact on us.





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 and broadband initiatives such as the state’s
DSL and advanced services in rural areas initiatives. 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 of Texas may cause us to incur unforeseen expenses
relating to the security and protection of telecommunications
networks.


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 Table of Contents


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 Chapter 66 of PURA, which
was adopted in 2005, require municipalities to manage public rights-of-way in a
competitively neutral and non-discriminatory manner.





Employees





As of
December 31, 2008, we had 785 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, current and special reports, and other information with the
SEC, in accordance with the Exchange Act. You may read and copy any document we
file or furnish 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.


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 Table of Contents


ITEM1A.
            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, 2008, we had an accumulated deficit of $491.1 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 by increasing customer penetration in the
markets we currently serve, expanding our revenue from commercial business,
broadband transport and network services 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.





The
current turmoil in the credit markets and poor economic conditions could
negatively impact our business by squeezing demand for our products and the
availability of capital and increasing our cost of credit.





The
current turmoil in the credit markets could limit demand for our products, and
affect the overall availability and cost of credit. Our operations are affected
by local and national economic conditions, which have recently deteriorated
significantly and may remain depressed for the foreseeable future. The
consequences of a prolonged recession may include a lower level of economic
activity and changes in demand for the services we provide in our markets, which
may adversely affect our revenues, liquidity and future
growth.  Current economic conditions may be exacerbated by
insufficient financial sector liquidity leading to potential increased
unemployment, which may adversely impact remittances from our customers,
increase customer bankruptcies, and may lead to increased bad
debt.   It is expected that commercial and wholesale customers
will be impacted first with residential customers following, if such
circumstances occur. Customer collections are our primary source of
cash.  While we believe we have a diversified customer base and no
concentration of credit risk with any single customer, if the current market
conditions continue to deteriorate, our ability to attract customers, maintain
or increase subscription revenue will be negatively impacted and we may
experience increased churn in our customer base, which could also have a
material adverse effect on our liquidity.





Instability
in the financial markets, as a result of recession or otherwise, also may affect
the cost of capital and our ability to raise capital. At this time, it is
unclear whether and to what extent the actions taken by the U.S. government,
including, without limitation, the passage of the Emergency Economic
Stabilization Act of 2008, the American Recovery and Reinvestment Act of 2009
and other measures currently being implemented or contemplated, will mitigate
the effects of the crisis.  The impact of the current crisis on our
ability to obtain financing in the future, and the cost and terms of same, is
unclear. No assurances can be given that the effects of the current crisis will
not have a material adverse effect on our business, financial condition and
results of operations.





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.


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 Table of Contents


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 one 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 consumers 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, DIRECTV, DISH Network, AT&T, Verizon and
      others;





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





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





•
            for
      local telephone services: AT&T, Verizon, CenturyTel, Birch Telecom,
      Time Warner Cable, Time Warner Telecom, Suddenlink Communications, Vonage
      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.
Some of our competitors offer all three services; in particular, Time Warner
Cable and other cable operators have begun providing digital phone services
through VoIP technology. In some of our markets, AT&T and Verizon, which are
upgrading their networks and providing video services, 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.





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 (“the Indenture”), 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:


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 Table of Contents


•
            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; and





•
            merge
      or consolidate with other entities.





In
addition, the Indenture contains a covenant restricting certain capital
expenditures if such expenditures would result in us having less than $20
million in cash and cash equivalents after giving effect to such expenditures.
Cash and cash equivalents at December 31, 2008 was approximately $27.0 million.
This covenant could adversely affect the Company’s ability to make planned
capital expenditures.





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, 2008, we had approximately $209.1 million of indebtedness and
capital lease obligations outstanding, including the carrying value of our
senior notes of $189.3 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 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.


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 Table of Contents


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 (“TCA”) filed
a lawsuit in U.S. District Court, Western District of Texas, Austin division, to
challenge a 2005 Texas statute providing for a state-issued cable/video
franchise authority and implementing a transition plan 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.
Constitution, 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 TCA’s complaint
without prejudice. TCA subsequently filed an appeal of the dismissal in the
Fifth Circuit Court of Appeals. The Fifth Circuit granted the appeal, overturned
the dismissal of TCA’s challenge and remanded the case to the district court for
further proceedings.  Both AT&T and Verizon filed petitions for
rehearing, which the Fifth Circuit Court of Appeals overruled. AT&T filed a
petition for the U.S. Supreme Court to review the Fifth Circuit’s ruling, which
has been denied.  On April 30, 2008, TCA filed an amended complaint,
adding Time Warner Cable Inc. as a plaintiff.  Cross motions for
summary judgment are currently pending. 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;


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 Table of Contents


•
            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.





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 or future rulings in connection with VoIP, including
whether access charges apply and whether they can be assessed retroactively, 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.




During
a liquidation, our obligations to the holders of shares of our preferred stock
must be satisfied before any payments are made to the holders of our common
stock.
  If we are
liquidated, the holders of our preferred stock will be entitled to be paid in
full before any payments are made to the holders of our common stock. Our
outstanding preferred stock has an aggregate liquidation preference of $597.4
million. Any funds used to pay the holders of our preferred stock will restrict
our ability to use such funds for operations and must be paid before any amounts
may be paid to the holders of our common stock. See footnote No. 9,
“Stockholder’s Equity” in the Notes to our Consolidated Financial Statements
included in this annual report on Form 10-K for a description of our preferred
stock.




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.


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 Table of Contents


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.





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.  Provided that we meet our
cash flow projections in our current business plan and current economic market
conditions do not continue to deteriorate, we expect that our available cash and
cash equivalents and cash generated from operations will be sufficient to fund
our existing operations, planned capital spending and other commitments over the
next twelve months through December 31, 2009. However, 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.





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
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.


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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 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.





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.


32
 Table of Contents


The
senior notes are not listed on any securities exchange, which could make it more
difficult for senior noteholders to sell their senior notes and could affect
adversely the price of their senior notes.





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 continue for the senior notes.





We will
not list the senior notes on any securities exchange and we cannot assure senior
noteholders of a continued market for or of the liquidity of any market 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 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.





ITEM1B.
            UNRESOLVED
      STAFF COMMENTS





None.





ITEM 2.
            PROPERTIES





We lease
47 facilities including 29 technical and 18 non-technical real estate
facilities, encompassing 97,920 and 253,472 square feet respectively, to support
our operations.  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.


33
 Table of Contents


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





The
re-election of Roy H. Chestnutt and Richard W. Orchard and the election of
director nominee, Paul V. Walsh, Jr., as Class I directors to serve on the
Company’s board of directors for a three-year term expiring in 2011 was
submitted to a vote of and approved by the stockholders at the 2008 annual
meeting of stockholders held on January 12, 2009.  The directors whose
terms of office as directors continued after the meeting were: Duncan T. Butler,
Jr., William Laverack, Jr., John C. Hockin and David C. Hull,
Jr.  There were no other matters voted upon at the 2008 annual
stockholders meeting.  As of December 16, 2008, the record date for
holders of the Company's capital stock entitled to vote at the 2008 annual
meeting, there were 452,311,583 shares of capital stock issued and
outstanding.  A total of 307,746,061 shares of our capital stock were
present or represented by proxy at the 2008 annual meeting, representing more
than 68% of our shares of capital stock issued and outstanding as of the record
date. The following votes were cast at the 2008 annual meeting regarding the
election of nominated directors:





Nominee
      name
                Votes
      for
                Votes
      withheldRoy
      H. Chestnutt
                307,746,061
                —Richard
      W. Orchard
                307,746,061
                —Paul
      V. Walsh, Jr.
                307,746,061
                —


34
 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 March 15,
2009, we had 12,784,072 shares of common stock outstanding held by 200 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 for debt
service and 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.




The
declaration of dividends is within the discretion of our board of directors and
subject to the limitations set forth in the Delaware General Corporation Law.
Pursuant to our restated certificate of incorporation, holders of our preferred
stock are entitled to any dividends that may be declared from time to time by
our board of directors on a pari passu basis with any dividend on our common
stock (payable other than in our common stock or other securities and rights
convertible into or entitling the holder thereof to receive, directly or
indirectly, additional shares of our common stock), on an as-converted to common
stock basis. Such dividends are not cumulative.




Issuance
of Unregistered Securities





During
2008, the Company issued 108,132 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 1,058,000 shares of common stock
with an exercise price of $0.05 per share that vest over four years and have a
ten year life. No shares of Series H preferred stock were issued during
2008.  We relied on the exemption set forth in Section 4(2) of the
Securities Act of 1933, as amended, in issuing these
securities.


35
 Table of Contents


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 on Form 10-K.





For
      the Year Ended December 31,2004
                
                
                2005
                
                
                2006
                
                
                2007
                
                
                2008(in
      thousands, except per share data)Statement
      of operations data:Operating
      revenues
                
                $
                179,045
                
                
                $
                194,731
                
                
                $
                189,867
                
                
                $
                197,146
                
                
                $
                205,271Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
                
                
                66,754
                
                
                
                72,515
                
                
                
                63,931
                
                
                
                68,348
                
                
                
                69,798Selling,
      general and administrative (1)
                
                
                88,414
                
                
                
                90,730
                
                
                
                94,312
                
                
                
                90,416
                
                
                
                92,486Provision
      for doubtful accounts (1)
                
                
                5,119
                
                
                
                5,262
                
                
                
                3,514
                
                
                
                3,301
                
                
                
                3,363Depreciation
      and amortization
                
                
                57,292
                
                
                
                59,507
                
                
                
                56,037
                
                
                
                56,752
                
                
                
                59,385Total
      operating expenses
                
                
                217,579
                
                
                
                228,014
                
                
                
                217,794
                
                
                
                218,817
                
                
                
                225,032Operating
      loss
                
                
                (38,534
                )
                
                
                (33,283
                )
                
                
                (27,927
                )
                
                
                (21,671
                )
                
                
                (19,761
                )Other
      income (expense):Interest
      income
                
                
                762
                
                
                
                709
                
                
                
                1,546
                
                
                
                1,670
                
                
                
                728Interest
      expense, net of capitalized interest
                
                
                (15,189
                )
                
                
                (18,801
                )
                
                
                (23,970
                )
                
                
                (29,012
                )
                
                
                (31,042
                )Other
      income (expense)
                
                
                —
                
                
                
                750
                
                
                
                —
                
                
                
                (472
                )
                
                
                53Net
      gain on sale/disposal of assets
                
                
                64
                
                
                
                431
                
                
                
                2,353
                
                
                
                76
                
                
                
                764Loss
      on extinguishment of debt
                
                
                (2,145
                )
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                —Goodwill
      impairment
                
                
                —
                
                
                
                (39,576
                )
                
                
                (93,639
                )
                
                
                —
                
                
                
                —Total
      other income (expense)
                
                
                (16,508
                )
                
                
                (56,487
                )
                
                
                (113,710
                )
                
                
                (27,738
                )
                
                
                (29,497
                )Loss
      before income tax expense
                
                
                (55,042
                )
                
                
                (89,770
                )
                
                
                (141,637
                )
                
                
                (49,409
                )
                
                
                (49,258
                )Income
      tax expense
                
                
                —
                
                
                
                —
                
                
                
                —
                
                
                
                (1,123
                )
                
                
                (1,102
                )Net
      loss
                
                $
                (55,042
                )
                
                $
                (89,770
                )
                
                $
                (141,637
                )
                
                $
                (50,532
                )
                
                $
                (50,360
                )Basic
      and diluted net loss per share
                
                $
                (4.49
                )
                
                $
                (7.21
                )
                
                $
                (11.30
                )
                
                $
                (4.01
                )
                
                $
                (3.94
                )


Other
      financial data:Net
      cash provided by operating activities (2)
                  
                  $
                  9,957
                  
                  
                  $
                  14,795
                  
                  
                  $
                  9,687
                  
                  
                  $
                  11,741
                  
                  
                  $
                  13,095Net
      cash used in investing activities
                  
                  
                  (71,161
                  )
                  
                  
                  (28,389
                  )
                  
                  
                  (26,387
                  )
                  
                  
                  (33,589
                  )
                  
                  
                  (28,936
                  )Net
      cash provided by (used in) financing activities (2)
                  
                  
                  60,153
                  
                  
                  
                  (882
                  )
                  
                  
                  33,929
                  
                  
                  
                  26,038
                  
                  
                  
                  (5,309
                  )Cash
      and cash equivalents, end of year
                  
                  
                  41,195
                  
                  
                  
                  26,719
                  
                  
                  
                  43,948
                  
                  
                  
                  48,138
                  
                  
                  
                  26,988





December
      31,2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008Other
      operating data:Marketable
      homes passed (3)
              
              
              308,913
              
              
              
              331,173
              
              
              
              337,025
              
              
              
              340,058
              
              
              
              340,681Customers
              
              
              126,736
              
              
              
              136,109
              
              
              
              137,542
              
              
              
              145,675
              
              
              
              146,210Connections
      (4):Video
              
              
              83,098
              
              
              
              89,417
              
              
              
              93,778
              
              
              
              99,453
              
              
              
              101,864Voice
              
              
              110,360
              
              
              
              114,621
              
              
              
              116,229
              
              
              
              114,303
              
              
              
              114,512HSD
      and other
              
              
              56,184
              
              
              
              72,104
              
              
              
              85,117
              
              
              
              95,125
              
              
              
              101,502Total
      connections
              
              
              249,642
              
              
              
              276,142
              
              
              
              295,124
              
              
              
              308,881
              
              
              
              317,878


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 Table of Contents





December
      31,2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008(in
      thousands)Selected
      balance sheet data:Current
      assets
              
              $
              84,866
              
              
              $
              47,926
              
              
              $
              63,012
              
              
              $
              67,798
              
              
              $
              46,125Property,
      plant and equipment, net
              
              
              303,536
              
              
              
              297,183
              
              
              
              271,939
              
              
              
              249,310
              
              
              
              223,034Total
      assets
              
              
              538,516
              
              
              
              450,538
              
              
              
              345,041
              
              
              
              326,243
              
              
              
              277,435Current
      liabilities
              
              
              40,734
              
              
              
              41,552
              
              
              
              42,831
              
              
              
              48,048
              
              
              
              49,462Capital
      lease obligations, net of current portion
              
              
              13,940
              
              
              
              14,365
              
              
              
              16,634
              
              
              
              13,592
              
              
              
              13,380Long
      term debt, net of current portion
              
              
              128,237
              
              
              
              129,056
              
              
              
              160,797
              
              
              
              189,994
              
              
              
              189,629Stockholders’
      equity
              
              
              349,944
              
              
              
              260,207
              
              
              
              118,960
              
              
              
              69,004
              
              
              
              19,028





(1)
            The
      Company has reclassified provision for doubtful accounts for the annual
      periods ended December 31, 2004, 2005, 2006 and 2007. In prior periods,
      these amounts were included in the line item selling, general and
      administrative.





(2)
            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 period ended December 31, 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 $0.8 million for the year ended
      December 31, 2004. This revision did not have any affect on the Company’s
      cash balances, compliance with debt covenants, working capital, or
      operations.





(3)
            Marketable
      homes passed are the number of residential and business units, such as
      single residence homes, apartments and condominium units, passed by our
      networks.





(4)
            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





We use
EBITDA and Adjusted EBITDA to measure our operating performance on net income
(loss), the most directly comparable GAAP financial measure, before interest
income, interest expense, income taxes, franchise taxes, depreciation and
amortization, referred to as “EBITDA.” Adjusted EBITDA is equal to EBITDA plus
non-cash compensation expense, other expense (income), loss on extinguishment of
debt and goodwill impairment. EBITDA and Adjusted EBITDA are not measures of
financial performance under GAAP. We believe EBITDA and Adjusted EBITDA are a
useful measure of a company’s operating performance and is a significant basis
used by our management to measure the operating performance of our
business.





Because we have funded the build-out of
our networks by raising and expending large amounts of capital, our results of
operations reflect significant charges for depreciation, amortization, and
interest expense. EBITDA, which excludes this information, provides helpful
information about the operating performance of our business, apart from the
expenses associated with our physical plant or capital structure.A limitation of this measure, however,
is that it does not reflect the periodic costs of certain capitalized tangible
and intangible assets used in generating revenues of our businesses.EBITDA is frequently used
as a basis for comparing businesses in our industry, although our measure of
EBITDA may not be comparable to similarly titled measures of other companies.
EBITDA and Adjusted EBITDA do not purport to represent operating loss or cash
flow from operating activities, as those terms are defined under GAAP, and
should not be considered as an alternative to those measurements as an indicator
of our performance.


37
 Table of Contents





For the Year
      Ended December 31,2004
              
              
              2005
              
              
              2006
              
              
              2007
              
              
              2008(in
      thousands)Reconciliation
      of EBITDA/Adjusted EBITDA:Net
      loss, as reported
              
              $
              (55,042
              )
              
              $
              (89,770
              )
              
              $
              (141,637
              )
              
              $
              (50,532
              )
              
              $
              (50,360
              )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
              
              
              (762
              )
              
              
              (709
              )
              
              
              (1,546
              )
              
              
              (1,670
              )
              
              
              (728
              )Interest
      expense, net of capitalized interest
              
              
              15,189
              
              
              
              18,801
              
              
              
              23,970
              
              
              
              29,012
              
              
              
              31,042Income
      tax expense
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,123
              
              
              
              1,102Franchise
      tax expense (benefit)
              
              
              221
              
              
              
              125
              
              
              
              300
              
              
              
              (268
              )
              
              
              —Depreciation
      and amortization
              
              
              57,292
              
              
              
              59,507
              
              
              
              56,037
              
              
              
              56,752
              
              
              
              59,385EBITDA
              
              
              16,898
              
              
              
              (12,046
              )
              
              
              (62,876
              )
              
              
              34,417
              
              
              
              40,441Stock
      based compensation expense
              
              
              —
              
              
              
              —
              
              
              
              377
              
              
              
              573
              
              
              
              378Other
      expense (income)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              489
              
              
              
              (53
              )Loss
      on extinguishment of debt
              
              
              2,145
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Goodwill
      impairment
              
              
              —
              
              
              
              39,576
              
              
              
              93,639
              
              
              
              —
              
              
              
              —Adjusted
      EBITDA
              
              $
              19,043
              
              
              $
              27,530
              
              
              $
              31,140
              
              
              $
              35,479
              
              
              $
              40,766








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, 2006, 2007, and 2008 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 on Form 10-K.





Overview





Grande’s
primary business is providing a bundled package of video, voice, and HSD other
services to residential and business customers in Texas. We provide these
services in seven markets in the state of Texas using local broadband networks
that we acquired and/or constructed. We refer to the homes and businesses that
our network is capable of providing services to as “marketable homes passed”. We
believe that an important measure of our growth potential is the number of
marketable homes passed by our networks and the marketable homes we are able to
pass in the future in the markets in which we currently operate. Marketable
homes passed are the number of residential and business units, such as single
residential homes, apartment units and condominium units, passed by our
networks. Since 2001, we have grown our marketable homes passed through
acquisitions and the construction of our networks. The expansion of our networks
has, in turn, allowed us to pursue a retail strategy of offering bundled video,
voice and HSD services to residential and business customers. As of December 31,
2007 and 2008, we had the ability to market services to 340,058 and 340,681,
respectively, distinct homes and businesses over our networks and had 145,675
and 146,210, respectively, residential and business customers. Our operating
revenues were $189.9 million, $197.1 million and $205.3 million in 2006, 2007
and 2008, respectively.





Grande
was founded in November 1999 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, $155.0
million and $168.4 million in 2006, 2007 and 2008,
respectively.   We have continued to grow our bundled services to
commercial business customers, which totaled $16.3 million, $19.6 million and
$24.2 million during 2006, 2007 and 2008, respectively, and increase of 20%
during 2007 and 23% during 2008.


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 Table of Contents


We have
derived an increasing percentage of our revenues from our bundled services and
we expect this trend to continue. Because of our local networks and existing
fixed infrastructure, we believe we can continue to grow our business within the
markets in which we currently operate.





In
addition, we have leveraged our retail metro network build-out with the 2003
acquisition of a long haul fiber optic network 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, $9.4
million and $12.3 million in 2006, 2007 and 2008, respectively.





In July
2000, when our network construction was still in a very early stage, we acquired
substantially all of the assets of Thrifty Call, which had an established
telephone and data network that served as the platform for the provisioning of
residential voice and HSD services and is also the platform that provides
wholesale network services to medium and large enterprises and communications
carriers in the wholesale market. Operating revenues for network services were
$35.2 million, $32.7 million and $24.6 million in 2006, 2007 and 2008,
respectively.





Our
network services are primarily provided using our existing infrastructure and
personnel. By leveraging our brand, communications infrastructure, voice and
data volume, and personnel that predominantly 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 stockholder 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” above for a discussion of this
non-GAAP measure of our operating performance as well as our use of Adjusted
EBITDA.





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





•
            general
      economic conditions, including the availability of, and our ability to
      obtain additional funding, if
necessary,





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





•
            our
      ability to compete effectively depends on our ability to keep pace with
      advances in technology and maintain high-quality services at prices
      generally equal to or below those charged by our competitors,
      and





•
            increasing
      programming and other costs.





Availability
of Capital





As described more fully under
“Liquidity and Capital Resources” below, we expect that current principal
sources of capital going forward will primarily be cash on hand and cash flow
from operations. If we do not continue to increase the number of customers and
the average prices received for our services, cash flow from operations may be
adversely effected and cash on hand may decline.  If our cash position
falls below the $20 million required by the covenant set forth in the Indenture,
we will be prohibited from making certain capital expenditures. Cash and cash
equivalents at December 31, 2008 was approximately $27.0 million. Provided that
we meet our cash flow projections in our current business plan and current
economic market conditions do not continue to deteriorate as described under
Part I, Item 1A. “Risk Factors” above, we expect that our available cash and
cash equivalents and cash generated from operations will be sufficient to fund
our existing operations, planned capital spending and other commitments over the
next twelve months through December 31, 2009.


39
 Table of Contents


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. As of December 31, 2007 and 2008, we had the ability to market
services to 340,058 and 340,681, respectively, distinct homes and businesses
over our networks and had 145,675 and 146,210, respectively, 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 and 2008, we had 308,881 and 317,878 connections,
respectively.





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 employees, 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.  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 continue to intensify. 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 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.





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 continued to provide service to our existing
customer base. The security revenue is included in HSD and other.




40
 Table of Contents




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 include
      amounts for fiber lease maintenance, 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.


41
 Table of Contents


•
            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.





•
            Broadband transport services
      costs. Our cost of revenues associated with delivering broadband
      traffic consists primarily of fixed transport costs, which include amounts
      for fiber lease maintenance, 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 fiber lease 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, which include amounts needed for fiber lease
      maintenance, 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 fiber
      lease 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, customer invoice processing
and billing platform expenses, professional fees, property taxes, insurance and
facilities costs.





Depreciation
and amortization





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




42
 Table of Contents




Operating Data
—Bundled Services




Years
      EndedDecember 31,
      2006
                          
                          
                          December
      31, 2007
                          
                          
                          December 31,
      2008Operating
      Data:Marketable
      homes passed
                          
                          
                          337,025
                          
                          
                          
                          340,058
                          
                          
                          
                          340,681Customers
                          
                          
                          137,542
                          
                          
                          
                          145,675
                          
                          
                          
                          146,210Number
      of connections:Video
                          
                          
                          93,778
                          
                          
                          
                          99,453
                          
                          
                          
                          101,864Voice
                          
                          
                          116,229
                          
                          
                          
                          114,303
                          
                          
                          
                          114,512HSD
      and other
                          
                          
                          85,117
                          
                          
                          
                          95,125
                          
                          
                          
                          101,502Total
      connections
                          
                          
                          295,124
                          
                          
                          
                          308,881
                          
                          
                          
                          317,878Average
      monthly revenue per:Customer
      – bundled services
                          
                          $
                          89.00
                          
                          
                          $
                          90.64
                          
                          
                          $
                          95.82Video
      connection
                          
                          
                          52.40
                          
                          
                          
                          55.78
                          
                          
                          
                          57.96Voice
      connection
                          
                          
                          40.18
                          
                          
                          
                          40.34
                          
                          
                          
                          41.02HSD
      and other connection
                          
                          
                          31.90
                          
                          
                          
                          32.27
                          
                          
                          
                          34.94





Results
of Operations (in millions)




Years
      Ended December 31,2006
                                                
                                                
                                                Percent
      of Operating Revenues
                                                
                                                
                                                2007
                                                
                                                
                                                Percent
      of Operating Revenues
                                                
                                                
                                                2006
      to 2007 Variance
                                                
                                                
                                                2008
                                                
                                                
                                                Percent
      of Operating Revenues
                                                
                                                
                                                2007
      to 2008 VarianceConsolidated
      Financial Data:Operating
      revenues:Video
                                                
                                                $
                                                57.4
                                                
                                                
                                                
                                                30
                                                %
                                                
                                                $
                                                64.2
                                                
                                                
                                                
                                                32
                                                %
                                                
                                                $
                                                6.8
                                                
                                                
                                                $
                                                70.3
                                                
                                                
                                                
                                                34
                                                %
                                                
                                                $
                                                6.1Voice
                                                
                                                
                                                57.6
                                                
                                                
                                                
                                                30
                                                
                                                
                                                
                                                56.1
                                                
                                                
                                                
                                                28
                                                
                                                
                                                
                                                (1.5
                                                )
                                                
                                                
                                                56.6
                                                
                                                
                                                
                                                28
                                                
                                                
                                                
                                                0.5HSD
      and other
                                                
                                                
                                                31.1
                                                
                                                
                                                
                                                16
                                                
                                                
                                                
                                                34.7
                                                
                                                
                                                
                                                18
                                                
                                                
                                                
                                                3.6
                                                
                                                
                                                
                                                41.5
                                                
                                                
                                                
                                                20
                                                
                                                
                                                
                                                6.8Bundled
      services
                                                
                                                
                                                146.1
                                                
                                                
                                                
                                                76
                                                
                                                
                                                
                                                155.0
                                                
                                                
                                                
                                                78
                                                
                                                
                                                
                                                8.9
                                                
                                                
                                                
                                                168.4
                                                
                                                
                                                
                                                82
                                                
                                                
                                                
                                                13.4Broadband
      transport services
                                                
                                                
                                                8.6
                                                
                                                
                                                
                                                5
                                                
                                                
                                                
                                                9.4
                                                
                                                
                                                
                                                5
                                                
                                                
                                                
                                                0.8
                                                
                                                
                                                
                                                12.3
                                                
                                                
                                                
                                                6
                                                
                                                
                                                
                                                2.9Network
      services
                                                
                                                
                                                35.2
                                                
                                                
                                                
                                                19
                                                
                                                
                                                
                                                32.7
                                                
                                                
                                                
                                                17
                                                
                                                
                                                
                                                (2.5
                                                )
                                                
                                                
                                                24.6
                                                
                                                
                                                
                                                12
                                                
                                                
                                                
                                                (8.1
                                                )Total
      operating revenues
                                                
                                                
                                                189.9
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                197.1
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                7.2
                                                
                                                
                                                
                                                205.3
                                                
                                                
                                                
                                                100
                                                
                                                
                                                
                                                8.2Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
                                                
                                                
                                                63.9
                                                
                                                
                                                
                                                34
                                                
                                                
                                                
                                                68.3
                                                
                                                
                                                
                                                35
                                                
                                                
                                                
                                                4.4
                                                
                                                
                                                
                                                69.8
                                                
                                                
                                                
                                                34
                                                
                                                
                                                
                                                1.5Selling,
      general and administrative
                                                
                                                
                                                94.3
                                                
                                                
                                                
                                                50
                                                
                                                
                                                
                                                90.4
                                                
                                                
                                                
                                                46
                                                
                                                
                                                
                                                (3.9
                                                )
                                                
                                                
                                                92.5
                                                
                                                
                                                
                                                45
                                                
                                                
                                                
                                                2.1Provision
      for doubtful accounts
                                                
                                                
                                                3.5
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                3.3
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                (0.2
                                                )
                                                
                                                
                                                3.4
                                                
                                                
                                                
                                                2
                                                
                                                
                                                
                                                0.1Depreciation
      and amortization
                                                
                                                
                                                56.1
                                                
                                                
                                                
                                                29
                                                
                                                
                                                
                                                56.8
                                                
                                                
                                                
                                                29
                                                
                                                
                                                
                                                0.7
                                                
                                                
                                                
                                                59.4
                                                
                                                
                                                
                                                29
                                                
                                                
                                                
                                                2.6Total
      operating expenses
                                                
                                                
                                                217.8
                                                
                                                
                                                
                                                115
                                                
                                                
                                                
                                                218.8
                                                
                                                
                                                
                                                111
                                                
                                                
                                                
                                                1.0
                                                
                                                
                                                
                                                225.1
                                                
                                                
                                                
                                                110
                                                
                                                
                                                
                                                6.3Operating
      loss
                                                
                                                
                                                (27.9
                                                )
                                                
                                                
                                                (15
                                                )
                                                
                                                
                                                (21.7
                                                )
                                                
                                                
                                                (11
                                                )
                                                
                                                
                                                6.2
                                                
                                                
                                                
                                                (19.8
                                                )
                                                
                                                
                                                (10
                                                )
                                                
                                                
                                                1.9Other
      income (expense):Interest
      income
                                                
                                                
                                                1.5
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                1.7
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                0.2
                                                
                                                
                                                
                                                0.7
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1.0
                                                )Interest
      expense, net of capitalized interest
                                                
                                                
                                                (24.0
                                                )
                                                
                                                
                                                (13
                                                )
                                                
                                                
                                                (29.0
                                                )
                                                
                                                
                                                (15
                                                )
                                                
                                                
                                                (5.0
                                                )
                                                
                                                
                                                (31.0
                                                )
                                                
                                                
                                                (15
                                                )
                                                
                                                
                                                (2.0
                                                )Other
      income (expense)
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (0.5
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (0.5
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                0.5Net
      gain on sale/disposal of assets
                                                
                                                
                                                2.4
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                0.1
                                                
                                                
                                                
                                                —(2.3
                                                )
                                                
                                                
                                                0.8
                                                
                                                
                                                
                                                1
                                                
                                                
                                                
                                                0.7Goodwill
      impairment
                                                
                                                
                                                (93.6
                                                )
                                                
                                                
                                                (49
                                                )
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —Total
      other income (expense)
                                                
                                                
                                                (113.7
                                                )
                                                
                                                
                                                (60
                                                )
                                                
                                                
                                                (27.7
                                                )
                                                
                                                
                                                (14
                                                )
                                                
                                                
                                                86.0
                                                
                                                
                                                
                                                (29.5
                                                )
                                                
                                                
                                                (14
                                                )
                                                
                                                
                                                (1.8
                                                )Loss
      before income tax expense
                                                
                                                
                                                (141.6
                                                )
                                                
                                                
                                                (75
                                                )
                                                
                                                
                                                (49.4
                                                )
                                                
                                                
                                                (25
                                                )
                                                
                                                
                                                92.2
                                                
                                                
                                                
                                                (49.3
                                                )
                                                
                                                
                                                (24
                                                )
                                                
                                                
                                                0.1Income
      tax expense
                                                
                                                
                                                —
                                                
                                                
                                                
                                                —
                                                
                                                
                                                
                                                (1.1
                                                )
                                                
                                                
                                                (1
                                                )
                                                
                                                
                                                (1.1
                                                )
                                                
                                                
                                                (1.1
                                                )
                                                
                                                
                                                (1
                                                )
                                                
                                                
                                                —Net
      loss
                                                
                                                $
                                                (141.6
                                                )
                                                
                                                
                                                (75
                                                )
      %
                                                
                                                $
                                                (50.5
                                                )
                                                
                                                
                                                (26
                                                )%
                                                
                                                $
                                                91.1
                                                
                                                
                                                $
                                                (50.4
                                                )
                                                
                                                
                                                (25
                                                )
      %
                                                
                                                $
                                                0.1




43
 Table of Contents




Year
Ended December 31, 2007 Compared to Year Ended December 31, 2008





Operating Revenues.Our
operating revenues increased $8.2 million, or 4%, during the year ended December
31, 2008.  This increase was driven primarily by a $13.4 million and
$2.9 million increase in bundled services revenues and broadband transport
services revenues, respectively, partially offset by an $8.1 million decrease in
revenues from network services.





Operating
revenues for our bundled services increased $13.4 million, or 9%, during the
year ended December 31, 2008. The increased revenues from bundled services were
primarily due to a 3% growth in the number of connections, from 308,881 as of
December 31, 2007 to 317,878 as of December 31, 2008, and from the cable rate
increases described below. The additional connections and revenues resulted
primarily from the continued increase in penetration of existing marketable
homes, the growth of our commercial business revenue, and to a lesser extent,
sales to new marketable homes built during 2008.





Operating revenues for our video
services increased $6.1 million, or 10%, during the year ended December 31,
2008. Approximately 31% of the $6.1 million increase was due to our annual cable
rate increase that occurred in January 2008, with the remainder due to increased
connections and an increased number of customers adding premium services and
advanced services, such as HD and DVR. Video services to our commercial business
customers increased 33% to $1.2 million during the year ended December 31, 2008
from $0.9 million during the year ended December 31, 2007.




Operating revenues for our voice
services increased $0.5 million, or 1%, during the year ended December 31, 2008
due to a 1% increase in average monthly revenue per telephone connection during
2008. Telephone connections to our residential customers decreased by 785,
ending at 103,829 as of December 31, 2008 however, telephone connections to our
commercial business customers increased by 994, ending at 10,683 as of December
31, 2008.  Our voice services to commercial business customers
increased 12% to $15.5 million during the year ended December 31, 2008 from
$13.8 million during the year ended December 31, 2007.





Operating
revenues for our HSD and other services increased $6.8 million, or 20%, during
the year ended December 31, 2008 primarily due to a 9% increase in average
monthly revenue per connection as customers chose higher speed service
offerings.  Operating revenues for our HSD and other services also
increased due to a 7% growth in the number of connections, from 95,125 as of
December 31, 2007 to 101,502 as of December 31, 2008.  HSD and other
services to our commercial business customers increased 53% to $7.5 million
during the year ended December 31, 2008 from $4.9 million during the year ended
December 31, 2007.





Operating revenues for our broadband
transport services increased $2.9 million, or 31%, during the year ended
December 31, 2008 as a result of an increase in construction revenue as well as
moderate customer growth and an increase in volume from existing customers.





Operating
revenues for our network services decreased $8.1 million, or 25%, during the
year ended December 31, 2008. The decrease was primarily related to a $6.2
million decrease in revenue from transmission services to carriers and other
telecommunications companies due to a decrease in volume, partially offset by an
increase in rates per minute.  Common carrier traffic routed to us for
termination is largely dependent on traffic routed to our common carrier
customers by their customers. Competitive pricing pressures, business
consolidations, and changing consumer preferences for voice services continue to
evolve in the markets served by our common carrier customers. If, as a result,
our customers’ traffic is reduced, or if their competitors’ costs to terminate
or originate traffic are reduced, our traffic will also likely be
reduced.  In addition, we’ve also experienced a decrease of $1.7
million in revenue from data services and a decrease of $0.4 million in revenue
from national directory assistance service.  Decreases in both data
services and national directory assistance are the result of a decrease in
customer volume.  These decreases in network services were partially
offset by an increase of $0.2 million in managed services due to an increase in
customer volume.





Cost of Revenues.Our cost of
revenues increased $1.5 million, or 2%, during the year ended December 31, 2008.
Cost of revenues related to video services increased approximately $5.2 million
during the year ended December 31, 2008. Other costs supporting broadband
transport services, voice services, HSD and other services, and certain network
services such as access fees and other fees that we pay to other carriers to
carry calls outside our networks and HSD transport costs increased $2.6 million
during the year ended December 31, 2008.  These increases in costs of
revenues were partially offset by decreases in costs associated with
transmission services to carriers and other telecommunications companies and
national directory assistance fees, which decreased $6.3 million during the year
ended December 31, 2008.   The increase in direct costs of video
services is primarily due to programming costs increases, which have been
increasing on an aggregate basis due to an increase in connections and on a per
connection basis due to an increase in costs per channel.  We expect
this trend to continue and may not be able to pass these higher costs on to
customers because of competitive factors, which could adversely affect our
operations.  The decrease or increase in access and other carrier fees
related to costs that are variable usage-based costs that decrease or increase
as customer usage varies.


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Selling, General and Administrative
Expense. Our selling, general and administrative expense increased $2.1
million, or 2% during the year ended December 31, 2008. Included in selling,
general and administrative expenses during the year ended December 31, 2008 are
non-recurring expenses of $1.7 million incurred in association with the
exploration of strategic alternatives to enhance stockholder
value.  Other increases in selling, general and administrative expense
during the year ended December 31, 2008 related to a reduction in the amount of
indirect overhead costs capitalized to initial customer installations and
internal construction projects, increases in employee and affiliate commissions
related to revenue initiatives, employee health care costs, utilities and
utility pole rentals, software licensing and maintenance fees and other
miscellaneous expenses that totaled approximately $4.9 million.  These
increases in selling, general and administrative expense were partially offset
by decreases in employee compensation, legal and other professional services,
excluding the strategic exploration costs discussed above, network repairs and
maintenance, temporary labor costs, share based compensation and other
miscellaneous expenses that totaled approximately $4.5 million.





During
the year ending December 31, 2009, we expect our selling, general and
administrative expense, excluding the strategic exploration costs discussed
above, to decrease as a percentage of revenue as compared to the year ended
December 31, 2008 as we continue to focus on cost reductions.





Depreciation and Amortization
Expense. Our depreciation and amortization expense increased $2.6
million, or 5%, during the year ended December 31, 2008. The increase in
depreciation expense was primarily related to property, plant and equipment
additions, primarily for customer premise equipment, long haul fiber optic
network upgrades and capitalized labor expenses as well as an extension to
capital lease terms.  Partially offsetting the increases related to
these additions were decreases in depreciation expense related to sales and
dispositions as well as certain assets that became fully depreciated during the
year ended December 31, 2008.





During
2007 and 2008, we received sales tax refunds as a result of a review of vendor
invoices in the years 2004, 2005 and 2006.  Because a portion of the
sales taxes associated with those invoices were capitalized as property and
equipment and were partially depreciated, $0.7 million and $0.2 million of the
refund was applied as a reduction of depreciation expense during 2007 and 2008,
respectively.





Interest Expense. Interest
expense, which includes interest incurred net of capitalized interest, increased
$2.0 million, or 7%, during the year ended December 31, 2008. 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.





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





Operating Revenues.Our
operating revenues increased $7.2 million, or 4%, during the year ended December
31, 2007.  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 increased $8.9 million, or 6%, during the year
ended December 31, 2007. 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.




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 Table of Contents




Operating
revenues for our video services increased $6.8 million, or 12%, during the year
ended December 31, 2007. 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 decreased $1.5 million, or 3%, during the year
ended December 31, 2007 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.





Operating
revenues for our HSD and other services increased $3.6 million, or 12%, during
the year ended December 31, 2007 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 increased $0.8 million, or 9%, during the year ended December
31, 2007 as a result of an increase in construction as well as moderate customer
growth.




Operating revenues for our network
services decreased $2.5 million, or 7%, during the year ended December 31, 2007.
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 increased $4.4 million, or 7%, during the year ended December 31, 2007.
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 decreased $4.1
million, or 4%, during the year ended December 31, 2007. 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.





Depreciation and Amortization
Expense. Our depreciation and amortization expense increased $0.7
million, or 1%, during the year ended December 31, 2007. 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.




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 Table of Contents




Interest Expense. Our
interest expense, which includes interest incurred net of capitalized interest,
increased $5.0 million, or 21%, during the year ended December 31, 2007. The
increase in interest expense was primarily due to the private placement of an
additional $25.0 million of senior notes in the third quarter of 2007. During
the years ended December 31, 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 Sale/Disposal of
Assets. Our gain on sale/disposal of assets during the years ended
December 31, 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.





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.





Non-GAAP
Financial Measures





Adjusted
EBITDA increased $5.3 million, or 15%, during the year ended December 31,
2008.  The increase in Adjusted EBITDA was primarily due to a $8.2
million increase in operating revenues as well as a $0.7 million increase in net
gain on sale/disposal of assets, partially offset by $1.7 million of
non-recurring expenses incurred in association with the exploration of strategic
alternatives to enhance stockholder value, a $0.2 million increase in selling,
general and administrative expenses and provision for doubtful accounts,
excluding stock-based compensation, franchise tax and strategic exploration
costs, and a $1.5 million increase in costs of revenues.





Adjusted
EBITDA increased $4.4 million, or 14% during the year ended December 31, 2007.
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 and
provision for doubtful accounts, 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/disposal of
assets.


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 Table of Contents


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





Year Ended
      December 31,2006
              
              
              2007
              
              
              2008(in
      thousands)Net
      loss, as reported
              
              $
              (141,637
              )
              
              $
              (50,532
              )
              
              $
              (50,360
              )Add
      back non-EBITDA/Adjusted EBITDA items included in net
loss:Interest
      income
              
              
              (1,546
              )
              
              
              (1,670
              )
              
              
              (728
              )Interest
      expense, net of capitalized interest
              
              
              23,970
              
              
              
              29,012
              
              
              
              31,042Income
      tax expense
              
              
              —
              
              
              
              1,123
              
              
              
              1,102Franchise
      tax expense (benefit)
              
              
              300
              
              
              
              (268
              )
              
              
              —Depreciation
      and amortization
              
              
              56,037
              
              
              
              56,752
              
              
              
              59,385EBITDA
              
              
              (62,876
              )
              
              
              34,417
              
              
              
              40,441Stock-based
      compensation expense
              
              
              377
              
              
              
              573
              
              
              
              378Other
      expense (income)
              
              
              —
              
              
              
              489
              
              
              
              (53
              )Goodwill
      impairment
              
              
              93,639
              
              
              
              —
              
              
              
              —Adjusted
      EBITDA (1)
              
              $
              31,140
              
              
              $
              35,479
              
              
              $
              40,766





(1)
            Adjusted
      EBITDA includes net gain on sale/disposal of assets of $2.4 million in
      2006, $0.1 million in 2007 and $0.8 million in
  2008.





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. Our current primary sources of liquidity are cash
on hand and cash flows from operating activities. As of December 31, 2008, we
had total cash and cash equivalents of $27 million and $209 million of long-term
debt and capital lease obligations outstanding, including the current portion,
and net of discounts and premiums of $3.7 million.





Provided
that we meet our cash flow projections in our current business plan and current
economic market conditions do not continue to deteriorate as described under
Part I, Item 1A. “Risk Factors” above, we expect that our available cash and
cash equivalents and cash generated from operations will be sufficient to fund
our existing operations, planned capital spending and other commitments over the
next twelve months through December 31, 2009. As of December 31, 2008, we had a
net working capital deficit of $(3.3) million, compared to net working capital
of $19.8 million as of December 31, 2007. The $23.1 million decrease in working
capital resulted primarily from a $21.2 million decrease in
cash.  During the third quarter of 2007, we received gross proceeds of
$26 million in a private placement of senior notes, which was used for capital
expenditures and converted into long-term assets.  We believe that we
will manage our cash position above $20 million in accordance with the covenant
set forth in the Indenture over the next twelve months through December 31,
2009.





As
described under “Contractual Obligations and Commercial Commitments” below, the
Indenture contains a covenant restricting certain capital expenditures if such
expenditures would result in us having less than $20 million in cash and cash
equivalents after giving effect to such expenditures. If our cash and cash
equivalents fall below $20 million, we would not be permitted to make certain
capital expenditures until such time as our cash and cash equivalents, including
such proposed certain capital expenditures, increase above $20
million.  If we made certain capital expenditures that would cause our
cash and cash equivalents to fall below $20 million, we would be required to
notify the Trustee of such default.  If we receive notification from
the Trustee or holders of at least 25% in aggregate principal amount of the then
outstanding senior notes, we would have 60 days to comply with the
covenant.   If after 60 days, we have not complied with the
covenant, the senior notes may be declared due and payable immediately by notice
from the Trustee or holders of at least 25% in aggregate principal amount of the
then outstanding senior notes. This covenant could adversely affect our ability
to make planned capital expenditures.


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Our
current business plan is based on our estimates regarding expected future costs
and expected revenues. Our costs may exceed or our revenues may fall short of
our estimates, our estimates may change, and future developments may affect our
estimates. Any of these factors may increase our need for funds, which would
require us to consider asset sales or seek additional financing to fund our
operations, to undertake initiatives not contemplated by our business plan or
obtain additional cushion against possible shortfalls. Future financings may
include a range of different sizes or types of financing, including capital
lease transactions and the sale of additional debt or equity securities. These
financings could increase our level of indebtedness or result in dilution to our
equity holders. Additionally, we can call our existing senior notes at any time
giving us the near term ability to refinance our senior notes in the event
better pricing and terms were available to us in the market. However, we may not
be able to raise additional funds on favorable terms or at all. Our ability to
obtain additional financing depends on several factors, including future market
conditions and the state of the credit markets; our success or lack of success
in penetrating our markets and growing our overall income; our future
creditworthiness; and restrictions contained in agreements with our investors or
lenders, including the restrictions contained in the Indenture.





Cash
Flows from Operating Activities





Net cash
provided by operating activities totaled $9.7 million, $11.7 million and $13.1
million for 2006, 2007 and 2008, respectively. Net cash provided by operating
activities consisted of the following components:





Year Ended
      December 31,2006
                
                
                2007
                
                
                2008(in
      thousands)Cash
      collected from customers
                
                $
                188,416
                
                
                $
                193,449
                
                
                $
                204,003Interest
      income received
                
                
                1,546
                
                
                
                1,631
                
                
                
                691Proceeds
      from sales tax refunds related to operating activities
                
                
                —
                
                
                
                143
                
                
                
                627Payments
      to vendors and employees
                
                
                (159,534
                )
                
                
                (157,607
                )
                
                
                (162,426
                )Interest
      expense paid
                
                
                (20,741
                )
                
                
                (25,875
                )
                
                
                (28,701
                )Income
      taxes paid
                
                
                —
                
                
                
                —
                
                
                
                (1,099
                )Net
      cash provided by operating activities
                
                $
                9,687
                
                
                $
                11,741
                
                
                $
                13,095





Cash
Flows from Investing Activities





Our net
cash used in investing activities for 2006, 2007 and 2008 was $26.4 million,
$33.6 million and $28.9 million, respectively. Net cash used in investing
activities consisted of the following components:





Year Ended
      December 31,2006
                
                
                2007
                
                
                2008(in
      thousands)Purchases
      of property, plant and equipment
                
                $
                (30,886
                )
                
                $
                (35,290
                )
                
                $
                (29,766
                )Proceeds
      from sale of assets
                
                
                3,274
                
                
                
                638
                
                
                
                481Proceeds
      from sales tax refunds
                
                
                922
                
                
                
                1,130
                
                
                
                349Maturities
      of short term investments
                
                
                350
                
                
                
                —
                
                
                
                —Other
      investing activity
                
                
                (47
                )
                
                
                (67
                )
                
                
                —Net
      cash used in investing activities
                
                $
                (26,387
                )
                
                $
                (33,589
                )
                
                $
                (28,936
                )


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 Table of Contents




Cash
Flows from Financing Activities





Our net
cash provided by (used in) financing activities for 2006, 2007 and 2008 was
$33.9 million, $26.0 million and $(5.3) million, respectively.  Net
cash provided by (used in) financing activities consisted of the following
components:





Year Ended
      December 31,2006
                  
                  
                  2007
                  
                  
                  2008(in
      thousands)Net
      proceeds from borrowings (1)
                  
                  $
                  30,581
                  
                  
                  $
                  30,054
                  
                  
                  $
                  —Proceeds
      from sale leaseback arrangement
                  
                  
                  7,373
                  
                  
                  
                  —
                  
                  
                  
                  —Payments
      of long-term debt and capital lease obligations
                  
                  
                  (3,193
                  )
                  
                  
                  (4,305
                  )
                  
                  
                  (4,989
                  )Deferred
      financing costs
                  
                  
                  (86
                  )
                  
                  
                  (165
                  )
                  
                  
                  —Net
      borrowings (repayments) on zero-balance cash account
                  
                  
                  (758
                  )
                  
                  
                  451
                  
                  
                  
                  (326
                  )Other
      financing activity
                  
                  
                  12
                  
                  
                  
                  3
                  
                  
                  
                  6Net
      cash provided by (used in) financing activities
                  
                  $
                  33,929
                  
                  
                  $
                  26,038
                  
                  
                  $
                  (5,309
                  )





(1)
            Consists
      of the net proceeds from the private placement of an additional $32
      million and $25 million in 2006 and 2007, respectively, in aggregate
      principal amount of senior notes.  In addition to the senior
      notes in 2007, net proceeds from borrowings also include $4.1 million in
      proceeds from equipment financing.





Capital
Expenditures





We had
capital expenditures of approximately $30.9 million, $35.3 million and $29.8
million, including capitalized interest, in 2006, 2007 and 2008, respectively.
These capital expenditures relate to: network construction; initial installation
costs; the purchase of customer premise equipment, such as cable set-top boxes
and cable modems; corporate and network equipment, such as switching and
transport equipment; and billing and information systems. The increase in
capital expenditures during 2007 was primarily due to capital equipment
purchases related to our long haul fiber optic network upgrade.





As
described under “Liquidity and Capital Resources—Sources and Uses of Funds”, the
Indenture contains a covenant restricting certain capital expenditures if such
expenditures would result in us having less than $20 million in cash and cash
equivalents after giving effect to such expenditures. During the year ending
December 31, 2009, 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 and July 2007, we raised net proceeds of
approximately $30.5 million and $25.8 million, respectively, in a private
placement of an additional $32 million and $25 million, respectively, in
aggregate principal amount of senior notes. These additional senior notes were
issued under the Indenture and are part of the same series of senior notes as
those issued in March 2004.





Our
subsidiary, Grande Communications Networks, Inc. (the “Subsidiary Guarantor”),
has unconditionally guaranteed, jointly and severally, the payment of the
principal, premium and interest (including any additional interest on the senior
notes) on a senior secured basis. The senior notes and the Subsidiary
Guarantor’s guarantees thereof are secured by a first priority perfected
security interest, subject to certain permitted encumbrances, in substantially
all of our subsidiary’s property and assets, including substantially all of its
property, plant and equipment.


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 Table of Contents


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





PercentageApril
      1,2008
                  
                  
                  107.00
                  %2009
                  
                  
                  103.50
                  %2010
      and thereafter
                  
                  
                  100.00
                  %





If we
experience specific kinds of change of control events, each holder of senior
notes may require us to repurchase all or any portion of such holder’s senior
notes at a purchase price equal to 101% of the principal amount of the senior
notes, plus accrued and unpaid interest to the date of repurchase. The Indenture contains
covenants that, among other things, limit our ability to:





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





•
            create
      liens on our assets;





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





•
            make
      investments in other companies;





•
            enter
      into transactions with affiliates;





•
            enter
      into sale and leaseback
transactions;





•
            sell
      or make dispositions of assets;


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





•
            engage
      in certain business activities.





In
addition, the Indenture contains a covenant restricting certain capital
expenditures if such expenditures would result in us having less than $20
million in cash and cash equivalents after giving effect to such expenditures.
This covenant could adversely affect our ability to make planned capital
expenditures.





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





During
2007, we completed equipment financing of $4.1 million with a term of 24 months,
which was utilized for the purchase of network equipment.  During
December 2008, the term of the equipment financing was extended 12 months
through March 2010. The financing is secured by the network equipment purchased
with the proceeds of the borrowing and bears interest at an effective annual
rate of approximately 15.3% with monthly payments equal to 4.2% multiplied by
the total amount borrowed.  This financing is permitted under the
Indenture governing the senior notes.





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





Operating Leases.We lease
office space, vehicles and other assets for varying periods. Leases that expire
are evaluated for renewal based on operational necessity.




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 Table of Contents




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





Purchase
Commitments.During
January 2005, we entered into a minimum purchase agreement, as amended, with a
vendor for the purchase of fiber optic equipment and installation and
maintenance services 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.  The
balance as of December 31, 2008 was $2.2 million. We are currently in the
process of finalizing an extension of the purchase agreement through December
31, 2009.The following table represents the
contractual obligations described above as of December 31, 2008:





Payments Due
      by Period2009
                                        
                                        
                                        2010
                                        
                                        
                                        2011
                                        
                                        
                                        2012
                                        
                                        
                                        2013
                                        
                                        
                                        2014 &
      Beyond
                                        
                                        
                                        Total(In
      thousands)Long-term
      debt and related interest obligations
                                        
                                        $
                                        28,833
                                        
                                        
                                        $
                                        27,353
                                        
                                        
                                        $
                                        206,510
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        —
                                        
                                        
                                        $
                                        262,696Capital
      lease obligations
                                        
                                        
                                        5,963
                                        
                                        
                                        
                                        2,926
                                        
                                        
                                        
                                        1,772
                                        
                                        
                                        
                                        1,748
                                        
                                        
                                        
                                        1,748
                                        
                                        
                                        
                                        16,899
                                        
                                        
                                        
                                        31,056Operating
      lease obligations
                                        
                                        
                                        4,012
                                        
                                        
                                        
                                        2,902
                                        
                                        
                                        
                                        2,200
                                        
                                        
                                        
                                        1,948
                                        
                                        
                                        
                                        1,505
                                        
                                        
                                        
                                        7,442
                                        
                                        
                                        
                                        20,009Maintenance
      obligations
                                        
                                        
                                        1,227
                                        
                                        
                                        
                                        1,046
                                        
                                        
                                        
                                        1,046
                                        
                                        
                                        
                                        1,046
                                        
                                        
                                        
                                        1,046
                                        
                                        
                                        
                                        7,279
                                        
                                        
                                        
                                        12,690Purchase
      obligations
                                        
                                        
                                        2,215
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        —
                                        
                                        
                                        
                                        2,215Total
                                        
                                        $
                                        42,250
                                        
                                        
                                        $
                                        34,227
                                        
                                        
                                        $
                                        211,528
                                        
                                        
                                        $
                                        4,742
                                        
                                        
                                        $
                                        4,299
                                        
                                        
                                        $
                                        31,620
                                        
                                        
                                        $
                                        328,666





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 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 $2.5 million, $2.9 million, and $3.2 million during the years
ended December 31, 2006, 2007, and 2008, respectively, are reported as revenues
and cost of revenues, respectively. The Federal Communications Commission
imposes a tax on interstate and international 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.




52
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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 2006, 2007 and 2008, $8.3 million,
$8.5 million and $7.6 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.




53
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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.





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.




54
 Table of Contents




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





Fair
Value Measurements





On
January 1, 2008, the Company adopted certain provisions of the Financial
Accounting Standards Board (“FASB”) Statement of Financial Accounting Standards
(“SFAS”) No. 157, Fair Value
Measurements (“SFAS 157”), which establishes the authoritative definition
of fair value, sets out a framework for measuring fair value and expands the
required disclosures about fair value measurement. The provisions of SFAS 157
adopted on January 1, 2008 relate to financial assets and liabilities, as well
as other assets and liabilities carried at fair value on a recurring basis and
did not have a material impact on the Company’s consolidated financial
statements. The provisions of FAS 157 related to other nonfinancial assets and
liabilities will be effective for the Company on January 1, 2009, and will be
applied prospectively. These provisions are not expected to have any impact on
the Company’s historical consolidated financial statements.





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. 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.





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-27 herein.





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





None.


55
 Table of Contents


ITEM 9T.
            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 Exchange Act) as of December 31, 2008. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that as of December 31, 2008, our disclosure controls and procedures
are effective. Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to be disclosed
in our reports filed under the Exchange Act, is recorded, processed, summarized
and reported, within the time periods specified in the SEC’s rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed in our
reports that are filed under the Exchange Act, is accumulated and communicated
to management, including our chief Executive Officer and our Chief Financial
Officer as appropriate to allow timely decisions regarding required
disclosure.





Changes
in Internal Control over Financial Reporting





During
the three months ended December 31, 2008, 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.





Management’s
Annual 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, 2008 based on the framework in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of December 31,
2008.





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 on Form 10-K 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 on Form 10-K.





ITEM 9B.
            OTHER
      INFORMATION





None


56
 Table of Contents


PART
III





ITEM10.
            DIRECTORS, EXECUTIVE OFFICERS
      AND CORPORATE GOVERNANCEDirectors





Our board of directors is divided into
three classes, being divided as equally as possible with each class having a
term of three years. Each year the term of office of one class expires at
Grande’s annual meeting of stockholders.  At Grande’s next annual
meeting of stockholders, which is expected to occur in December 2009 or January
2010, the term of class II directors, currently consisting of two directors,
will expire.  The following table sets forth the name and age of each
director, indicating the year the director joined the Company and all positions
and offices with our Company currently held by the director as well as the class
and term of office for each director:





Name
                                                        
                                                        Age
                                                        
                                                        Year
      Joined Board
                                                        
                                                        Class/Term
      Expiration
                                                        
                                                        PositionRoy
      H. Chestnutt
                                                        
                                                        49
                                                        
                                                        2006
                                                        
                                                        I /
      2011
                                                        
                                                        President,
      Chief Executive Officer and Chairman of the board of
    directorsRichard
      W. Orchard
                                                        
                                                        55
                                                        
                                                        2006
                                                        
                                                        I /
      2011
                                                        
                                                        Member,
      board of directors, audit and nominating committeesPaul
      V. Walsh, Jr. (1)
                                                        
                                                        44
                                                        
                                                        2009
                                                        
                                                        I /
      2011
                                                        
                                                        Member,
      board of directors, finance committee and Chairman of the audit
      committeeJohn
      C. Hockin
                                                        
                                                        38
                                                        
                                                        2002
                                                        
                                                        II
      / 2009
                                                        
                                                        Member,
      board of directorsDavid
      C. Hull, Jr.
                                                        
                                                        64
                                                        
                                                        2000
                                                        
                                                        II
      / 2009
                                                        
                                                        Member,
      board of directors, audit, compensation and nominating
      committeesDuncan
      T. Butler, Jr.
                                                        
                                                        46
                                                        
                                                        2000
                                                        
                                                        III
      / 2010
                                                        
                                                        Member,
      board of directors, compensation and finance committeesWilliam
      Laverack, Jr.
                                                        
                                                        51
                                                        
                                                        2001
                                                        
                                                        III
      / 2010
                                                        
                                                        Member,
      board of directors, compensation, finance and nominating
      committees






(1)  
Audit committee financial expert.





James M.
Mansour served as Chairman of the board of directors from January 2005 until his
resignation in January 2008.  Lawrence M. Schmeltekopf served as
Chairman of the audit committee from June 2006 until the end of his term in
January 2009.





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, 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 2000
to 2006. He also served as President of the Texas/Oklahoma area from its Austin
offices from September 1998. 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 concentration in
marketing.


57
 Table of Contents


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 ten years with PacTel/Airtouch
and five 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.





Paul V. Walsh, Jr. was
elected as a member of our board of directors in January 2009 and serves as
Chairman of the audit committee and as a member of the finance
committee.  Mr. Walsh currently serves as the Vice President and Chief
Accounting Officer for Silicon Laboratories, a publicly traded technology
company based in Austin, Texas.  Mr. Walsh joined Silicon Laboratories
in January 2004 as Director of Finance, Worldwide Operations, and was appointed
as the Corporate Controller in May 2005.  In November 2006, Mr. Walsh
was promoted to Vice President and Chief Accounting Officer. Prior to joining
Silicon Laboratories, Mr. Walsh was Site Controller from February 2003 to
January 2004 with PerkinElmer, a supplier to the health sciences and photonics
markets.  From 1992 to 2003, Mr. Walsh held various operational,
finance and management roles at Teradyne and Analog Devices.  Mr.
Walsh is certifiable as a CPA and received his BS in Mechanical Engineering from
the University of Maine, and an MBA from Boston University.





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.  From 1969 to 1976, Mr. Hull was an analyst for
Telecom Corporation and was subsequently promoted to vice president of Texas
Capital Corporation, a wholly-owned subsidiary of Telecom Corporation. Mr. Hull
currently serves on the board of directors of Centennial Holdings I, LLC, 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 is currently a managing director and on the investment committee of
Centennial Holdings VI, LLC and Mr. Butler is a Senior Vice President of
Centennial Holdings I, LLC. 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.




58
 Table of Contents




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 named executive officer (1):





Name
                            
                            Age
                            
                            PositionRoy
      H. Chestnutt
                            
                            49
                            
                            President,
      Chief Executive Officer and Chairman of the board of
    directorsMichael
      L. Wilfley
                            
                            53
                            
                            Chief
      Financial OfficerWalter
      K.L. “Scott” Ferguson, Jr.
                            
                            50
                            
                            Chief
      Operating OfficerKay
      Stroman
                            
                            42
                            
                            Vice
      President, Human ResourcesJared
      P. Benson
                            
                            39
                            
                            Vice
      President, Enterprise and Wholesale
Services






(1)
            William
      C. “Chad” Jones, Jr. served as Chief Service Officer until January 2008
      and Jeffrey A. Brennan served as Senior Vice President of Business
      Services until August 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 eight 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, a public company listed on the over-the-counter bulletin board. Mr.
Wilfley is a certified public accountant and a graduate of The University of
Texas at Austin, where he earned his BBA degree in Accounting.





Walter 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 strategies 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.





Kay Stroman has served as our
Vice President of Human Resources since September 2001.  Prior to
that, Ms. Stroman served as both Senior Manager and Director of Human Resources
since joining Grande in July 2000.  Prior to joining Grande, Ms.
Stroman worked with Hexcel Corporation, an international manufacturer of
advanced structural materials. As a member of Hexcel's management team, she
interacted with all levels of plant and corporate management in the creation and
use of strategic employee relations programs. Ms. Stroman earned her Bachelor of
Arts in Political Science and Speech Communications from Texas State
University.





Jared P. Benson has served as
Vice President of Enterprise and Wholesale Services since August
2008.  Prior to that, from January 2001 to August 2008, he served as
Vice President of Network Services.  Mr. Benson is responsible for
Grande’s Enterprise and Wholesale divisions. Prior to joining Grande in April
2000, he served as Senior Carrier Account Manager for C3 Communications Network
Division. Mr. Benson also provided voice, data and Internet service consulting
to a variety of businesses while President of Intellicom Consulting Corporation.
Before his consulting work, he served Westel Long Distance Communications, Inc.
managing regional sales, where he directed multiple branch sales offices across
the South. Additionally, Mr. Benson serves on the Board of Texaltel as its Vice
President, a trade association with the purpose of promoting the business
interests of competitive telecommunications and data service providers. He also
served as the Marketing Chair on the board of the Young Men's Business League of
Austin. Mr. Benson received his Bachelor of Science in Marketing from the
University of Tulsa.




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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. 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.





Currently,
all seven directors of our board of directors were elected in accordance with
designations or selections made under the terms of the investor rights
agreement. Centennial has designated one of our current directors, Mr. Hull, and
Whitney has designated two of our current directors, Messrs. Laverack and
Hockin. Mr. Walsh 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; Mr.
Chestnutt is our president and chief executive officer; and Mr. Orchard serves
as the director selected by the nominating committee of the board of directors
and approved by the stockholders at the January 2009 stockholders meeting. 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





Our
securities are not listed on any national securities exchange, and therefore, we
are not required by any such exchange to have a majority of, or any, independent
directors.  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 would be considered to be independent as that
term is defined under the listing standards of the NASDAQ Global Select Market.
We have also determined that all members of the audit committee met the
additional independence requirements of the applicable SEC rules regarding audit
committee membership, all members of the compensation committee and the
nominating committee met the independence requirements of the NASDAQ Global
Select Market and all members of the compensation committee are “outside
directors” as defined in Section 162(m) of the Internal Revenue
Code.  The relationships of (i) John C. Hockin and William Laverack,
Jr. to the Whitney Funds, (ii) Duncan T. Butler, Jr. and David C. Hull, Jr. to
the Centennial funds and (iii) Duncan T. Butler, Jr. to the Prime fund were
considered in connection with these determinations.  Our nominating
committee, in accordance with its charter, and our board of directors will
continue to periodically evaluate the independence of members of the board of
directors and each committee and expects to complete its annual evaluation
during 2009.





Board
Committees





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





Audit Committee.The audit
committee, currently consisting of Messrs. Walsh, 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 controls over financial
reporting and disclosure controls and procedures.  The audit committee
also oversees audit procedures and approves all audit and non-audit services to
be performed by the independent accountants. Mr. Walsh serves as the Chairman of
the audit committee and is the “audit committee financial expert” as defined by
SEC rules. Prior to the end of his term in January 2009, Mr. Schmeltekopf served
as the Chairman of the audit committee and was the “audit committee financial
expert” as defined by SEC rules.  The committee charter is available
on our website at the investor relations portion of www.grandecom.com.





Compensation Committee.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
and Mr. Butler serves as Chairman of the compensation committee. The committee
charter is available on our website at the investor relations portion of www.grandecom.com.





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.


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Nominating Committee.The
nominating committee recommends individuals to serve on the board of directors
and is responsible for, among other things, reviewing at least annually that the
Board and each of its committees meet the requirements for independence,
expertise or otherwise imposed by the SEC. 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.”





Finance Committee.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
Walsh.  Mr. Schmeltekopf served as a member of the finance committee
until the end of his term in January 2009.





Compensation
Committee Interlocks and Insider Participation





No member
of the compensation committee was at any time during 2008 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 our board of directors or the compensation committee of our board of
directors during 2008.





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 the investor relations portion of www.grandecom.com.  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 desired individual
performance that translates into desired organizational performance and to
attract, retain, and motivate executive officers and other senior management
with the quality and profile required to successfully lead the Company in our
highly competitive and evolving industries. 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”).  The group of employees considered
executive officers for purposes of determining the NEOs for Grande is defined as
our president and chief executive officer, our chief financial officer, our
chief operating officer and any vice president of Grande Communications Holding,
Inc. in charge of a principal business unit, division or function (such as
sales, administration or finance), and any other officer who performs a policy
making function for Grande Communications Holdings, Inc.


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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 or equity
      based incentives;





•
            ensure
      fairness among the executive management team;
  and





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








•
            whether
      the performance targets underlying cash incentive awards have been
      achieved and the difficulty in achieving such targets given current and
      expected economic conditions;





•
            whether
      benefits will be realized under stock options or other equity awards given
      current and expected economic conditions;
and





•
            the
      projections for distributions that may occur in the next several years
      under our compensation plans.





In
addition, 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.





The Thobe
Group survey is a national telecom industry specific survey tool. Companies who
participate 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


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Salary.com
is a national compensation benchmark subscription service with over 3,500
enterprise subscribers offering real time survey information on general industry
positions that can be searched by revenue and company size. The data sets
contain base, bonus and incentive pay data for positions held by more than 80%
of U.S. employees and similar data for the top executives in more than 12,000
U.S. public companies. 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 establish and determine fair and
equitable base salary adjustments each year when budgeting for merit increases
and other 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 other salary adjustment, if
any.   Although the peer group data is used to determine base pay
and other 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 reviews 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 Item 10. “Directors, Executive Officers and Corporate
Governance—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 periodically evaluated for effectiveness by management through benchmark
survey participation and data analysis, employee retention results and internal
survey findings and such policies and practices are reviewed by the compensation
committee on an annual basis.





Allocation between cash and non-cash
compensation. Historically, it has been our policy to allocate all
short-term NEO compensation in the form of cash and all long-term compensation
in the form of option awards to purchase our common stock and Series H preferred
stock to provide a long-term retention incentive. However, during 2008, no stock
options were granted to any NEO and we ceased issuing common stock option grants
to all employees until management and the compensation committee can perform
further analysis on the ability of the equity based incentive program to meet
our compensation program objectives.  During 2008, the potential
compensation that could have been paid consisted of base pay and annual cash
incentive compensation pursuant to our 2008 Cash Incentive Plan. However, no
discretionary bonus or award under the 2008 Cash Incentive Plan was paid during
2008. As noted below under the “Summary Compensation Table,” Mr. Chestnutt was
paid a bonus in January 2008 that related to the fiscal year ending December 31,
2007.





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


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Elements
of Executive Compensation





Historically,
we have provided 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. During the third
quarter of 2008, we ceased issuing common stock option grants to all employees
until management and the compensation committee can perform further analysis on
the ability of the equity based incentive program to meet our compensation
program objectives.  Additionally, effective in 2009 and until
otherwise determined, we have suspended certain elements of compensation
applicable to all employees of Grande as part of a company wide cost reduction
initiative.





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 component of total
compensation.





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.




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Element
                        
                        Characteristics
                        
                        ObjectivesHealth
      & 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. In addition to the objectives and other
matters discussed above, 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.





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.





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 only 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, which requires approval by the board of directors for salary
increases, and other NEOs, which salary increases are determined by Grande’s
chief executive officer.





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, the pay of other officers and retention needs.





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


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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 for base and total compensation as
well as considering individual performance and experience, in order to ensure
that each executive is appropriately compensated. The 50th
percentile is 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, 2008, total compensation earned by our
current NEOs was approximately $1.6 million, with our chief executive officer
earning approximately $0.6 million of that amount. In 2008, there were no
adjustments made to our NEOs’ compensation based only on company performance and
budgetary constraints. Review of current market pay levels benchmarked in the
published surveys described above, individual performance of the NEO, the role
and responsibilities of the NEO and the relationship of the NEO’s base salary to
the base salary of our other executives were not considered in 2008 when making
the decision to not make any base pay adjustments.





Annual
Cash Incentive Plan





During
2008, we established a 2008 Cash Incentive Plan pursuant to which our executive
officers, including our NEOs, were eligible to receive an annual cash incentive
payment based upon our performance against pre-established annual 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 rewards NEOs for annual operating results that
help create value for our stockholders. The 2008 Cash Incentive Plan was
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 2008, the Cash Incentive Plan was based on a
percentage of base salary subject to the Company’s performance exceeding the
Adjusted EBITDA goal. We chose Adjusted EBITDA as the goal because we believe
that achieving our Adjusted EBITDA goal 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 “Selected Financial Data – Non-GAAP Financial
Measures” for a discussion of this non-GAAP financial 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.


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Generally,
incentive award opportunities are targeted to result in Annual 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 chose the
50th percentile because we believe that it allows us to attract and retain
executives. If the target level for the performance goal is not achieved,
executives and other eligible employees earn no cash incentive plan payments. In
2008, there were no cash incentive payment under the 2008 Cash Incentive Plan
and there were no discretionary cash incentive payments, outside the Cash
Incentive Plan, that were awarded by the board of directors to any employee,
including the NEOs. As noted below under the “Summary Compensation Table,” Mr.
Chestnutt was paid a bonus in January 2008 that related to the fiscal year
ending December 31, 2007. Currently, no Annual Cash Incentive Plan has been
established for 2009 until further consideration by the compensation
committee.





Equity
Incentive Plans (Stock Options)





Historically,
we have offered equity incentive awards to create a long-term incentive and to
reward the performance of our employees, including our NEOs, which improves the
Company’s performance and increases stockholder value, thereby strengthening the
mutual interests between NEOs and stockholders. By providing equity awards to
our NEOs, they are not only rewarded for past performance but also have a
long-term incentive to continue to promote the Company’s success. During the
third quarter of 2008, we ceased issuing common stock option grants to all
employees until management and the compensation committee can perform further
analysis on the ability of the equity based incentive program to meet our
compensation program objectives, which can then be considered by the
compensation committee.





In the past, we have utilized stock
options as the form of our equity incentives. 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 has made discretionary stock option grants to NEOs of the Company, as
recommended by the chief executive officer, based on a number of factors
including each NEO’s individual performance; the importance of the individual’s
talent and knowledge to the future success of the Company; and overall
contribution to the Company’s success. The compensation committee also has
granted equity awards to newly hired executive officers as a way of promoting
long-term investment in the Company as the stock awards are earned over a period
of time. 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,
the amount of other compensation earned by the NEO and the size of option grants
held by other executive officers in comparable roles. 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 equity awards are one component of an overall
compensation package that is 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.


Historically,
stock option grants were 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 were 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. The
grant dates associated with all option grants is the date the option awards are
approved by the board.


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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” or the “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) administers the 2000 Stock Incentive
      Plan.





•
            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, 2008, the number of shares that are reserved for issuance upon
exercise of outstanding option agreements were 33.9 million shares of common
stock that are not Executive Compensation Shares, 7.5 million shares of common
stock that are Executive Compensation Shares and 23.2 million shares of Series H
preferred stock (all shares of Series H preferred stock are Executive
Compensation Shares). The weighted average exercise price of common stock
options and Series H preferred stock options outstanding as of December 31, 2008
was $0.06 and $0.10, respectively, and all option exercise prices currently
exceed the fair value of the underlying stock. As of December 31, 2008, the
number of shares that remain available for future issuance under the 2000
Incentive Stock Plan were 34.2 million shares of common stock that are not
Executive Compensation Shares, 4.5 million shares of common stock that are
Executive Compensation Shares, and 6.8 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. To date, we have not made
      any restricted stock grants under the
Plan.


69
 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 award 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.





•
            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’s 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.


70
 Table of Contents


•
            Adjustments Upon Changes in
      Capitalization, Recapitalization or
      Reorganization
              
              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) is subject to adjustment in certain
      circumstances.





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 would 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. No restricted stock is
outstanding as of December 31, 2008. 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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 Table of Contents


Some of
the NEOs 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.


72
 Table of Contents


•
            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 supplemented 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 stockholders 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.





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 ("Section
409A"), which changed the tax rules applicable to nonqualified deferred
compensation, effective January 1, 2005. Any amendments or modifications to
plans and agreements that were necessary for compliance with Section 409A or the
final Treasury regulations issued thereunder were required to be performed by
December 31, 2008.  We performed a review of all potentially affected
plans and agreements for Section 409A compliance, and all amendments or
modifications to these plans and agreements that we believed were necessary to
ensure compliance were performed in a timely manner.  In addition, we
believe that we operated in good faith compliance with the statutory provisions
of Section 409A 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 under the affected plans and agreements prior to the
above-referenced amendments and modifications.





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 during 2008,
we offered 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.


73
 Table of Contents


Effective
January 2009 until otherwise determined, we suspended matching employees’
contributions to the 401(k) plan, applicable to all employees, as part of a
company wide cost reduction initiative.





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.




74
 Table of Contents




Summary
Compensation Table





The following table summarizes the
compensation earned by our Chief Executive Officer, our Chief Financial Officer
and by 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)
                                                          2008
                                                          
                                                          $
                                                          400,000
                                                          
                                                          
                                                          $
                                                          88,000
                                                          
                                                          
                                                          $
                                                          148,721
                                                          
                                                          
                                                          $
                                                          12,111
                                                          
                                                          
                                                          $
                                                          648,8322007
                                                          
                                                          
                                                          391,346
                                                          
                                                          
                                                          
                                                          88,000
                                                          
                                                          
                                                          
                                                          237,477
                                                          
                                                          
                                                          
                                                          11,859
                                                          
                                                          
                                                          
                                                          728,6822006
                                                          
                                                          
                                                          324,519
                                                          
                                                          
                                                          
                                                          162,260
                                                          
                                                          
                                                          
                                                          183,687
                                                          
                                                          
                                                          
                                                          50,856
                                                          
                                                          
                                                          
                                                          721,322Michael
      Wilfley
                                                          2008
                                                          
                                                          
                                                          250,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          38,924
                                                          
                                                          
                                                          
                                                          7,961
                                                          
                                                          
                                                          
                                                          296,8852007
                                                          
                                                          
                                                          243,302
                                                          
                                                          
                                                          
                                                          26,763
                                                          
                                                          
                                                          
                                                          40,329
                                                          
                                                          
                                                          
                                                          7,651
                                                          
                                                          
                                                          
                                                          318,0452006
                                                          
                                                          
                                                          226,999
                                                          
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          31,519
                                                          
                                                          
                                                          
                                                          9,582
                                                          
                                                          
                                                          
                                                          278,100Walter
      K.L. “Scott” Ferguson, Jr.
                                                          2008
                                                          
                                                          
                                                          209,840
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          38,924
                                                          
                                                          
                                                          
                                                          11,239
                                                          
                                                          
                                                          
                                                          260,0032007
                                                          
                                                          
                                                          208,195
                                                          
                                                          
                                                          
                                                          22,901
                                                          
                                                          
                                                          
                                                          40,329
                                                          
                                                          
                                                          
                                                          10,367
                                                          
                                                          
                                                          
                                                          281,7922006
                                                          
                                                          
                                                          200,140
                                                          
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          31,519
                                                          
                                                          
                                                          
                                                          7,820
                                                          
                                                          
                                                          
                                                          249,479Kay
      Stroman
                                                          2008
                                                          
                                                          
                                                          169,770
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          18,883
                                                          
                                                          
                                                          
                                                          10,037
                                                          
                                                          
                                                          
                                                          198,6902007
                                                          
                                                          
                                                          165,614
                                                          
                                                          
                                                          
                                                          12,752
                                                          
                                                          
                                                          
                                                          18,804
                                                          
                                                          
                                                          
                                                          10,271
                                                          
                                                          
                                                          
                                                          207,4412006
                                                          
                                                          
                                                          151,984
                                                          
                                                          
                                                          
                                                          10,000
                                                          
                                                          
                                                          
                                                          12,180
                                                          
                                                          
                                                          
                                                          9,804
                                                          
                                                          
                                                          
                                                          183,968Jared
      P. Benson
                                                          2008
                                                          
                                                          
                                                          202,682
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          8,230
                                                          
                                                          
                                                          
                                                          11,024
                                                          
                                                          
                                                          
                                                          221,9362007
                                                          
                                                          
                                                          213,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          8,142
                                                          
                                                          
                                                          
                                                          11,311
                                                          
                                                          
                                                          
                                                          232,4532006
                                                          
                                                          
                                                          198,000
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          1,628
                                                          
                                                          
                                                          
                                                          10,887
                                                          
                                                          
                                                          
                                                          210,515Jeffrey
      A. Brennan (4)(5)
                                                          2008
                                                          
                                                          
                                                          130,145
                                                          
                                                          
                                                          
                                                          —
                                                          
                                                          
                                                          
                                                          17,102
                                                          
                                                          
                                                          
                                                          89,181
                                                          
                                                          
                                                          
                                                          236,4282007
                                                          
                                                          
                                                          199,017
                                                          
                                                          
                                                          
                                                          15,324
                                                          
                                                          
                                                          
                                                          27,951
                                                          
                                                          
                                                          
                                                          9,493
                                                          
                                                          
                                                          
                                                          251,7852006
                                                          
                                                          
                                                          131,250
                                                          
                                                          
                                                          
                                                          8,033
                                                          
                                                          
                                                          
                                                          16,124
                                                          
                                                          
                                                          
                                                          39,747
                                                          
                                                          
                                                          
                                                          195,154








(1)
            Bonus
      column includes an accrued discretionary bonus for Mr. Chestnutt, which
      was paid by the Company in January 2008 but was related to the fiscal year
      2007. Bonuses to all other NEOs during 2006 and 2007 were discretionary
      bonuses awarded by the board of directors and paid in 2006 and 2007. No
      discretionary bonus was awarded or accrued during fiscal year 2008 and no
      bonuses were paid under our Annual Cash Incentive Plan for any year
      presented.





(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). Amounts
      reflected in this column is the compensation cost calculated under SFAS
      123(R), which 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 on Form 10-K for the
      valuation assumptions used in determining the fair value of option
      grants.


75
 Table of Contents


(3)
            All Other Compensation includes
      severance, car allowance and 401(k) employer match. Effective in 2009 and
      until otherwise determined, we have suspended the car allowance for most
      employees, including the NEOs, as well as the 401(k) match, applicable to
      all employees of Grande, as part of a company wide cost reduction
      initiative. 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
                                                                                            
                                                                                            
                                                                                            Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                            
                                                                                            
                                                                                            Kay
      Stroman
                                                                                            
                                                                                            
                                                                                            Jared
      P. Benson
                                                                                            
                                                                                            
                                                                                            Jeffrey
      A. BrennanCar
      Allowance
                                                                                            2008
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            3,139401(k)
      match
                                                                                            2008
                                                                                            
                                                                                            
                                                                                            7,311
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,161
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,439
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,237
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,224
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,160Severance
                                                                                            2008
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            81,882Total
      Other Compensation
                                                                                            2008
                                                                                            
                                                                                            $
                                                                                            12,111
                                                                                            
                                                                                            
                                                                                            $
                                                                                            7,961
                                                                                            
                                                                                            
                                                                                            $
                                                                                            11,239
                                                                                            
                                                                                            
                                                                                            $
                                                                                            10,037
                                                                                            
                                                                                            
                                                                                            $
                                                                                            11,024
                                                                                            
                                                                                            
                                                                                            $
                                                                                            89,181Car
      Allowance
                                                                                            2007
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800401(k)
      match
                                                                                            2007
                                                                                            
                                                                                            
                                                                                            7,059
                                                                                            
                                                                                            
                                                                                            
                                                                                            2,851
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,567
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,471
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,511
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,693Total
      Other Compensation
                                                                                            2007
                                                                                            
                                                                                            $
                                                                                            11,859
                                                                                            
                                                                                            
                                                                                            $
                                                                                            7,651
                                                                                            
                                                                                            
                                                                                            $
                                                                                            10,367
                                                                                            
                                                                                            
                                                                                            $
                                                                                            10,271
                                                                                            
                                                                                            
                                                                                            $
                                                                                            11,311
                                                                                            
                                                                                            
                                                                                            $
                                                                                            9,493Car
      Allowance
                                                                                            2006
                                                                                            
                                                                                            $
                                                                                            4,154
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            4,800
                                                                                            
                                                                                            
                                                                                            $
                                                                                            3,231401(k)
      match
                                                                                            2006
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,782
                                                                                            
                                                                                            
                                                                                            
                                                                                            3,020
                                                                                            
                                                                                            
                                                                                            
                                                                                            5,004
                                                                                            
                                                                                            
                                                                                            
                                                                                            6,087
                                                                                            
                                                                                            
                                                                                            
                                                                                            4,160Relocation
                                                                                            2006
                                                                                            
                                                                                            
                                                                                            22,031
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            13,400Tax
      Reimbursements
                                                                                            2006
                                                                                            
                                                                                            
                                                                                            24,671
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            —
                                                                                            
                                                                                            
                                                                                            
                                                                                            18,956Total
      Other Compensation
                                                                                            2006
                                                                                            
                                                                                            $
                                                                                            50,856
                                                                                            
                                                                                            
                                                                                            $
                                                                                            9,582
                                                                                            
                                                                                            
                                                                                            $
                                                                                            7,820
                                                                                            
                                                                                            
                                                                                            $
                                                                                            9,804
                                                                                            
                                                                                            
                                                                                            $
                                                                                            10,887
                                                                                            
                                                                                            
                                                                                            $
                                                                                            39,747
  (4)
                  Mr.
      Chestnutt and Mr. Brennan joined Grande in February 2006 and April 2006,
      respectively; therefore, 2006 compensation included in this table
      represents a partial year.
 
 (5)
                  Mr.
      Brennan’s position was eliminated and his separation from the Company
      occurred in August 2008. Pursuant to the Separation Agreement, Mr. Brennan
      will receive severance in the form of the continuation of his current base
      salary (i.e., $200,497) payable over the approximately 12-month period
      following the Separation Date, in 26 equal semi-monthly installments, less
      withholdings. The Separation Agreement further provides for a lump sum
      payment to Mr. Brennan in an amount equal to his cost of continuing the
      medical insurance coverage for him and his eligible dependents under COBRA
      for the 12-month period following the Separation Date (i.e. $11,529), less
      withholdings.
  Grants
of Plan-Based Awards





There
were no grants of plan-based awards during the year ended December 31,
2008.




76
 Table of Contents




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,
2008.





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
                                                                                                                        
                                                                                                                        
                                                                                                                        3,000,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        1,000,000
                                                                                                                        
                                                                                                                        
                                                                                                                        $
                                                                                                                        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
                                                                                                                        
                                                                                                                        
                                                                                                                        4,958,333
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        2,041,667
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        06/28/16Michael
      L. Wilfley
                                                                                                                        06/13/00
                                                                                                                        
                                                                                                                        
                                                                                                                        1,000,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        06/13/10Michael
      L. Wilfley
                                                                                                                        04/05/02
                                                                                                                        
                                                                                                                        
                                                                                                                        64,386
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/05/12Michael
      L. Wilfley
                                                                                                                        05/07/02
                                                                                                                        
                                                                                                                        
                                                                                                                        200,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/07/12Michael
      L. Wilfley
                                                                                                                        02/25/03
                                                                                                                        
                                                                                                                        
                                                                                                                        55,287
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/25/13Michael
      L. Wilfley
                                                                                                                        05/20/03
                                                                                                                        
                                                                                                                        
                                                                                                                        250,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/20/13Michael
      L. Wilfley
                                                                                                                        12/09/03
                                                                                                                        
                                                                                                                        
                                                                                                                        1,600,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        12/09/13Michael
      L. Wilfley
                                                                                                                        02/09/04
                                                                                                                        
                                                                                                                        
                                                                                                                        104,925
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/09/14Michael
      L. Wilfley
                                                                                                                        02/15/05
                                                                                                                        
                                                                                                                        
                                                                                                                        158,265
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        52,756
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/15/15Michael
      L. Wilfley (9)
                                                                                                                        06/28/06
                                                                                                                        
                                                                                                                        
                                                                                                                        1,593,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        656,250
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        06/28/16Michael
      L. Wilfley (10)
                                                                                                                        05/02/07
                                                                                                                        
                                                                                                                        
                                                                                                                        79,166
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        120,834
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        05/02/17Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        04/04/00
                                                                                                                        
                                                                                                                        
                                                                                                                        500,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/04/10Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        12/05/00
                                                                                                                        
                                                                                                                        
                                                                                                                        100,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        12/05/10Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        04/05/02
                                                                                                                        
                                                                                                                        
                                                                                                                        52,582
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/05/12Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        05/07/02
                                                                                                                        
                                                                                                                        
                                                                                                                        250,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/07/12Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        02/25/03
                                                                                                                        
                                                                                                                        
                                                                                                                        52,531
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/25/13Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        05/20/03
                                                                                                                        
                                                                                                                        
                                                                                                                        250,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/20/13Walter
      K.L. “Scott” Ferguson, Jr.
                                                                                                                        12/09/03
                                                                                                                        
                                                                                                                        
                                                                                                                        1,200,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        12/09/13Walter
      K.L. “Scott” Ferguson, Jr. (9)
                                                                                                                        06/28/06
                                                                                                                        
                                                                                                                        
                                                                                                                        1,593,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        656,250
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        06/28/16Walter
      K.L. “Scott” Ferguson, Jr. (10)
                                                                                                                        05/02/07
                                                                                                                        
                                                                                                                        
                                                                                                                        79,166
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        120,834
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        05/02/17Kay
      Stroman
                                                                                                                        08/30/00
                                                                                                                        
                                                                                                                        
                                                                                                                        50,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        08/30/10Kay
      Stroman
                                                                                                                        04/17/01
                                                                                                                        
                                                                                                                        
                                                                                                                        50,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/17/11Kay
      Stroman
                                                                                                                        10/30/01
                                                                                                                        
                                                                                                                        
                                                                                                                        100,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        10/30/11Kay
      Stroman
                                                                                                                        04/05/02
                                                                                                                        
                                                                                                                        
                                                                                                                        28,845
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/05/12Kay
      Stroman
                                                                                                                        05/07/02
                                                                                                                        
                                                                                                                        
                                                                                                                        75,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/07/12Kay
      Stroman
                                                                                                                        02/25/03
                                                                                                                        
                                                                                                                        
                                                                                                                        15,760
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/25/13Kay
      Stroman
                                                                                                                        05/20/03
                                                                                                                        
                                                                                                                        
                                                                                                                        15,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/20/13Kay
      Stroman
                                                                                                                        12/09/03
                                                                                                                        
                                                                                                                        
                                                                                                                        235,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        12/09/13Kay
      Stroman
                                                                                                                        02/09/04
                                                                                                                        
                                                                                                                        
                                                                                                                        44,557
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/09/14Kay
      Stroman
                                                                                                                        02/15/05
                                                                                                                        
                                                                                                                        
                                                                                                                        52,132
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        17,378
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/15/15Kay
      Stroman (9)
                                                                                                                        06/28/06
                                                                                                                        
                                                                                                                        
                                                                                                                        708,333
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        291,667
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        06/28/16Kay
      Stroman (10)
                                                                                                                        05/02/07
                                                                                                                        
                                                                                                                        
                                                                                                                        79,166
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        120,834
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        05/02/17Jared
      Benson
                                                                                                                        06/13/00
                                                                                                                        
                                                                                                                        
                                                                                                                        100,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        06/13/10Jared
      Benson
                                                                                                                        04/17/01
                                                                                                                        
                                                                                                                        
                                                                                                                        400,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/17/11Jared
      Benson
                                                                                                                        04/05/02
                                                                                                                        
                                                                                                                        
                                                                                                                        38,925
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        04/05/12Jared
      Benson
                                                                                                                        05/07/02
                                                                                                                        
                                                                                                                        
                                                                                                                        30,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/07/12Jared
      Benson
                                                                                                                        02/25/03
                                                                                                                        
                                                                                                                        
                                                                                                                        19,768
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/25/13Jared
      Benson
                                                                                                                        05/20/03
                                                                                                                        
                                                                                                                        
                                                                                                                        15,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        05/20/13Jared
      Benson
                                                                                                                        12/09/03
                                                                                                                        
                                                                                                                        
                                                                                                                        100,000
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        —
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        12/09/13Jared
      Benson
                                                                                                                        02/15/05
                                                                                                                        
                                                                                                                        
                                                                                                                        36,750
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        12,250
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.05
                                                                                                                        
                                                                                                                        02/15/15Jared
      Benson (11)
                                                                                                                        10/25/06
                                                                                                                        
                                                                                                                        
                                                                                                                        270,833
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        229,167
                                                                                                                        
                                                                                                                        
                                                                                                                        
                                                                                                                        0.10
                                                                                                                        
                                                                                                                        10/25/16




77
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(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.





(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.





(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.


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(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.





(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
      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.


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Option
Exercises





There
were no options exercised by any of the NEOs or directors during the year ended
December 31, 2008.





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 2008. The directors named are the only
directors who received compensation during 2008.





Name
                    Year
                    
                    Fees Earned or Paid in Cash
      (1)
                    
                    
                    Option Awards
      (2)
                    
                    
                    Total
      CompensationRichard
      W. Orchard
                    2008
                    
                    
                    20,000
                    
                    
                    
                    3,505
                    
                    
                    
                    23,505Lawrence
      M. Schmeltekopf
                    2008
                    
                    
                    18,333
                    
                    
                    
                    3,505
                    
                    
                    
                    21,838








(1)
            Mr.
      Orchard received monthly compensation of $1,666 for his service as a
      director. Mr. Schmeltekopf received monthly compensation of $1,666 for his
      service as Chairman of the audit committee until the end of his term in
      January 2009. Directors are reimbursed for their reasonable out-of-pocket
      expenses incurred in attending meetings. Other 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). Amounts
      reflected in this column is the compensation cost calculated under SFAS
      123(R), which 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 on Form 10-K for the
      valuation assumptions used in determining the fair value of option
      grants.





Grant
of Plan Based Awards to Directors





No
options were granted to board members during the year ended December 31,
2008.





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, 2008.





Name
      and Principal Position
                        Option Grant
      Date
                        
                        Number of
      Securities Underlying Unexercised Options (#)
      Exercisable
                        
                        
                        Number of
      Securities Underlying Unexercised Options (#)
      Unexercisable
                        
                        
                        Option
      Exercise Price
                        
                        Option
      Expiration DateRichard
      W. Orchard (1)
                        10/25/06
                        
                        
                        108,333
                        
                        
                        
                        91,667
                        
                        
                        
                        0.10
                        
                        10/25/16Richard
      W. Orchard (2)
                        10/25/06
                        
                        
                        150,000
                        
                        
                        
                        150,000
                        
                        
                        
                        0.05
                        
                        10/25/16Lawrence
      M. Schmeltekopf (3)
                        10/25/06
                        
                        
                        141,666
                        
                        
                        
                        58,334
                        
                        
                        
                        0.10
                        
                        06/28/16Lawrence
      M. Schmeltekopf (3)
                        06/28/06
                        
                        
                        150,000
                        
                        
                        
                        150,000
                        
                        
                        
                        0.05
                        
                        06/28/16








(1)
            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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 Table of Contents




(2)
            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.





(3)
            Subsequent
      to the end of his term in January 2009, Mr. Schmeltekopf’s vested common
      stock options and Series H Preferred Stock Options are only exercisable
      within the period beginning on the service termination date and ending on
      the 90th day after the service termination
date.





Employment
Agreements, Severance Benefits and Change in Control Provisions





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 of directors 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.


81
 Table of Contents


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





•
            If
      Networks terminates the Chestnutt Agreement without cause or Mr. Chestnutt
      terminates the Chestnutt 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
      to 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 directors 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 of directors with written
      notice of an event giving rise to such termination within 90 days of its
      occurrence, the board  of directors 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).





•
            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.





Walter 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 Ferguson Agreement without cause or Mr. Ferguson
      terminates the Ferguson 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 to 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).


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•
            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:





•
            If
      Networks terminates the Wilfley Agreement without cause or Mr. Wilfley
      terminates the Wilfley 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 to 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).


83
 Table of Contents


•
            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.





Severance
Benefits





Severance Practices: Our
severance policy for reductions in force or job elimination relating to our
employees at a job grade defined as vice president and above, states that when
determining the number of weeks that will be paid severance, subject to certain
restrictive covenants described below, past precedent shall apply where service
to the Company is greater than 1 year, not to exceed twelve months, except for
severance contemplated in the employment agreements described above. This is the
Company’s current policy and is subject to change. If our severance policy
changes, we would have no further obligation to pay severance to our employees
at a job grade defined as vice president and above, unless it is covered in a
written agreement. 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


84
 Table of Contents


•
            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.





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,
2008 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.  For the NEOs that do not have an employment agreement, the
estimated benefits shown below are in the case of a reduction in force or job
elimination, see further discussion under “Severance Practices” above for our
severance policy. 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
                
                
                
                266,720Walter
      K.L. “Scott” Ferguson, Jr. (4)
                
                
                209,840
                
                
                
                16,720
                
                
                
                226,560Kay
      Stroman (5)
                
                
                169,770
                
                
                
                9,801
                
                
                
                179,571Jared
      P. Benson (5).
                
                
                174,000
                
                
                
                5,765
                
                
                
                179,765








(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, 2008, 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.


85
 Table of Contents


(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)
                  Ms.
      Stroman and Mr. Benson do not have an employment agreement with the
      Company, therefore, severance and continued medical benefits is estimated
      based upon the Company’s historical practices for NEO severance. See
      “Severance Practices” above. Upon a change in control, other than
      accelerated vesting of stock options, and a voluntary termination or a
      termination by the Company for cause, Ms. Stroman and Mr. Benson are not
      entitled to any other benefits, other than benefits accrued but
      unpaid.


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
February 28, 2009, our outstanding capital stock consisted of 12,784,072 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 452,311,583. The Company has
authorized 30,000,000 shares of Series H Preferred Stock, of which no shares are
issued or outstanding.   As of February 28, 2009, there were
152,107,016 outstanding warrants to purchase common stock, all exerciseable as
of such date at a weighted average exercise price of $0.01, 33,414,853
outstanding options to purchase common stock, exercisable within 60 days at a
weighted average exercise price of $0.07 and 13,362,494 outstanding options to
purchase shares of Series H Preferred Stock, exercisable within 60 days at a
weighted average exercise price of $0.10.




86
 Table of Contents




Principal
Stockholders





The
following table presents, as of February 28, 2009, 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
              
              
              
              89.21
              %
              
              
              72,178,132
              
              
              
              16.42
              %
              
              
              21.75
              %Centennial
      Holdings VI, LLC (5)
              
              
              79,920,563
              
              
              
              86.21
              %
              
              
              53,564,579
              
              
              
              12.19
              %
              
              
              16.70
              %Centennial
      Holdings V, L.P. (5)
              
              
              20,101,025
              
              
              
              61.13
              %
              
              
              13,472,165
              
              
              
              3.07
              %
              
              
              4.38
              %Centennial
      Holdings I, LLC (5)
              
              
              1,507,853
              
              
              
              10.55
              %
              
              
              1,010,597
              
              
              
              *
              
              
              
              *Austin
      Ventures VII, L.P. (6)
              
              
              30,996,152
              
              
              
              70.80
              %
              
              
              23,570,796
              
              
              
              5.36
              %
              
              
              6.74
              %HarbourVest
      Partners VI-Direct Fund, L.P. (7)
              
              
              30,652,654
              
              
              
              70.57
              %
              
              
              23,309,586
              
              
              
              5.30
              %
              
              
              6.67
              %Alta
      Communications (8)
              
              
              30,650,514
              
              
              
              70.57
              %
              
              
              23,309,158
              
              
              
              5.30
              %
              
              
              6.67
              %CIBC
      (9)
              
              
              28,244,166
              
              
              
              68.84
              %
              
              
              21,478,074
              
              
              
              4.89
              %
              
              
              6.15
              %Trinity
      Ventures (10)
              
              
              22,989,490
              
              
              
              64.26
              %
              
              
              17,482,190
              
              
              
              3.98
              %
              
              
              5.02
              %Reliant
      Energy Broadband, Inc. (11)
              
              
              22,368,560
              
              
              
              63.63
              %
              
              
              22,368,560
              
              
              
              5.09
              %
              
              
              4.95
              %Nautic
      Funds (12)
              
              
              22,087,122
              
              
              
              63.34
              %
              
              
              22,087,122
              
              
              
              5.03
              %
              
              
              4.88
              %BancBoston
      Ventures, Inc. (13)
              
              
              20,581,010
              
              
              
              61.68
              %
              
              
              15,650,678
              
              
              
              3.56
              %
              
              
              4.50
              %Prime
      VIII, L.P. (14)
              
              
              17,891,342
              
              
              
              58.32
              %
              
              
              12,740,246
              
              
              
              2.90
              %
              
              
              3.91
              %South
      Atlantic Private Equity Funds (15)
              
              
              15,758,220
              
              
              
              55.21
              %
              
              
              11,983,224
              
              
              
              2.73
              %
              
              
              3.46
              %Lightspeed
      (16)
              
              
              15,326,320
              
              
              
              54.52
              %
              
              
              11,654,792
              
              
              
              2.65
              %
              
              
              3.36
              %Opus
      Capital (17)
              
              
              15,326,308
              
              
              
              54.52
              %
              
              
              11,654,788
              
              
              
              2.65
              %
              
              
              3.36
              %Knology
      (18)
              
              
              14,237,464
              
              
              
              53.68
              %
              
              
              10,446,556
              
              
              
              2.38
              %
              
              
              3.12
              %Kinetic
      Ventures (19)
              
              
              12,872,952
              
              
              
              50.17
              %
              
              
              9,789,144
              
              
              
              2.23
              %
              
              
              2.83
              %Toronto
      Dominion Investments, Inc. (20)
              
              
              10,736,909
              
              
              
              45.65
              %
              
              
              10,736,909
              
              
              
              2.44
              %
              
              
              2.37
              %GPSF
      Securities Inc. (21)
              
              
              9,200,806
              
              
              
              41.85
              %
              
              
              6,996,686
              
              
              
              1.59
              %
              
              
              2.02
              %PNC
      Equity (22)
              
              
              8,404,687
              
              
              
              39.67
              %
              
              
              6,391,287
              
              
              
              1.45
              %
              
              
              1.85
              %Private
      Equity Investment Fund IV, L.P. (23)
              
              
              8,084,586
              
              
              
              38.74
              %
              
              
              6,147,866
              
              
              
              1.40
              %
              
              
              1.78
              %William
      E. Morrow (24)
              
              
              5,715,402
              
              
              
              36.52
              %
              
              
              45,119
              
              
              
              *
              
              
              
              1.26
              %Norwest
      Equity Partners VII, L.P. (25)
              
              
              5,254,681
              
              
              
              29.13
              %
              
              
              3,995,885
              
              
              
              *
              
              
              
              1.16
              %Morgan
      Stanley Dean Witter (26)
              
              
              5,000,000
              
              
              
              28.12
              %
              
              
              5,000,000
              
              
              
              1.14
              %
              
              
              1.11
              %Dupont/Conoco
      Private Market Group Trust (27)
              
              
              4,463,039
              
              
              
              25.88
              %
              
              
              4,463,039
              
              
              
              1.02
              %
              
              
              *Martha
      E. Smiley (28)
              
              
              3,856,756
              
              
              
              24.67
              %
              
              
              145,683
              
              
              
              *
              
              
              
              *Tipton
      Ross (29)
              
              
              2,362,002
              
              
              
              17.55
              %
              
              
              514,822
              
              
              
              *
              
              
              
              *Boeing
      Co. Employee Retirement Plans Master Trust (30)
              
              
              2,231,519
              
              
              
              14.86
              %
              
              
              2,231,519
              
              
              
              *
              
              
              
              *Jerry
      L. James (31)
              
              
              1,844,250
              
              
              
              14.38
              %
              
              
              33,650
              
              
              
              *
              
              
              
              *James
      M. Hoak, Jr. (32)
              
              
              1,730,551
              
              
              
              11.92
              %
              
              
              1,358,751
              
              
              
              *
              
              
              
              *J
      Lyn Findley (33)
              
              
              1,727,298
              
              
              
              11.90
              %
              
              
              770,833
              
              
              
              *
              
              
              
              *Convergent
      Investors V, L.L.C. (34)
              
              
              1,532,630
              
              
              
              10.71
              %
              
              
              1,165,478
              
              
              
              *
              
              
              
              *Mark
      Machen (35)
              
              
              1,511,401
              
              
              
              10.57
              %
              
              
              770,833
              
              
              
              *
              
              
              
              *HC
      Crown Corporation (36)
              
              
              1,338,911
              
              
              
              9.48
              %
              
              
              1,338,911
              
              
              
              *
              
              
              
              *Brady
      Adams (37)
              
              
              1,202,254
              
              
              
              8.61
              %
              
              
              770,833
              
              
              
              *
              
              
              
              *Robert
      W. Hughes (38)
              
              
              1,120,059
              
              
              
              8.11
              %
              
              
              775,699
              
              
              
              *
              
              
              
              *John
      M. Saenz (39)
              
              
              1,100,000
              
              
              
              8.41
              %
              
              
              300,000
              
              
              
              *
              
              
              
              *Douglas
      T. Brannagan (40)
              
              
              924,684
              
              
              
              6.75
              %
              
              
              385,416
              
              
              
              *
              
              
              
              *Citicorp
      North America, Inc. (41)
              
              
              892,608
              
              
              
              6.53
              %
              
              
              892,608
              
              
              
              *
              
              
              
              *SKA
      Management, Inc. (42)
              
              
              750,000
              
              
              
              5.87
              %
              
              
              —
              
              
              
              —
              
              
              
              *Joe
      C. Ross (43)
              
              
              735,685
              
              
              
              5.74
              %
              
              
              27,137
              
              
              
              *
              
              
              
              *




87
 Table of Contents







*
            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





(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
      WarrantsCEF-V Liquidating
      Trust
              
              
              —
              
              
              
              —
              
              
              
              328,547
              
              
              
              12,390
              
              
              
              13,586
              
              
              
              49,726
              
              
              
              198,904CV Liquidating
      Trust
              
              
              —
              
              
              
              —
              
              
              
              10,620,713
              
              
              
              400,431
              
              
              
              439,283
              
              
              
              1,607,489
              
              
              
              6,429,956


88
 Table of Contents


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 sole trustee of each of CEF-V Liquidating Trust and CV
Liquidating Trust. 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 (10) 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





(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


89
 Table of Contents


(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





See
footnote (13) to the Directors and Executive Officers beneficial ownership table
below for a discussion of the relationship of Mr. Butler to Prime VIII,
L.P.




(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


90
 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


91
 Table of Contents


(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





(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
              
              
              
              2,805,971
              
              
              
              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


92
 Table of Contents


(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
              
              
              
              2,655,181
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Martha
      Smiley Ventures, Ltd.
              
              
              —
              
              
              
              —
              
              
              
              125,000
              
              
              
              5,137
              
              
              
              4,073
              
              
              
              11,473
              
              
              
              45,892





(29)
            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





(30)
            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





(31)
            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





(32)
            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
                
                
                
                —
                
                
                
                —





(33)
            Includes
      the following shares:





Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsJ
      Lyn Findley.
              
              
              956,465
              
              
              
              770,833





(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


93
 Table of Contents


(35)
            Includes
      the following shares:





Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsMark
      Machen.
              
              
              740,568
              
              
              
              770,833





(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. All stock options are exercisable within 60 days of
      February 28, 2009.





Common
      Stock
              
              
              Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsBrady
      Adams
              
              
              20,000
              
              
              
              411,421
              
              
              
              770,833





(38)
            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





(39)
            Includes
      the following shares:





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





(40)
            Includes the following shares.
      All stock options are exercisable within 60 days of February 28, 2009.





Common
      Stock
              
              
              Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsDouglas
      T. Brannagan
              
              
              5,000
              
              
              
              534,268
              
              
              
              385,416





(41)
            Includes
      the following shares:





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





(42)
            Includes the following shares:





Common
      StockSKA
      Management, Inc.
              
              
              750,000


94
 Table of Contents


(43)
            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





Directors
and Executive Officers





The
following table presents, as of February 28, 2009, 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 executive officers 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)
              
              
              10,395,833
              
              
              
              44.85
              %
              
              
              5,000,000
              
              
              
              1.12
              %
              
              
              2.25
              %Michael
      L. Wilfley (5)
              
              
              5,457,871
              
              
              
              29.92
              %
              
              
              1,936,988
              
              
              
              *
              
              
              
              1.19
              %Walter K.L. “Scott” Ferguson,
      Jr. (6)
              
              
              4,946,476
              
              
              
              29.04
              %
              
              
              1,837,695
              
              
              
              *
              
              
              
              1.08
              %Kay Stroman
      (7)
              
              
              1,546,171
              
              
              
              10.79
              %
              
              
              862,499
              
              
              
              *
              
              
              
              *Jared P. Benson
      (8)
              
              
              1,054,776
              
              
              
              7.62
              %
              
              
              302,083
              
              
              
              *
              
              
              
              *Richard W. Orchard(9)
              
              
              270,833
              
              
              
              2.07
              %
              
              
              120,833
              
              
              
              *
              
              
              
              *Duncan T. Butler, Jr.(10)
      (13)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —David C. Hull, Jr.(10)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —John C. Hockin(11)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —William Laverack, Jr.(12)
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Paul
      V. Walsh, Jr.
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —All
      directors and executive officers as a group (13 persons)
              
              
              26,194,731
              
              
              
              68.48
              %
              
              
              11,487,180
              
              
              
              2.55
              %
              
              
              5.48
              %







*
            Less
      than 1%.





(1)
            The
      address of all directors and executive 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.


95
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(4)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsRoy
      H. Chestnutt.
              
              
              5,395,833
              
              
              
              5,000,000





(5)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common Stock
      Options
              
              
              Series H
      Preferred Stock Options
              
              
              Series A
      Shares
              
              
              Series F
      Shares
              
              
              Series G
      Shares
              
              
              Common Stock
      WarrantsMichael
      L Wilfley
              
              
              3,485,619
              
              
              
              1,826,041
              
              
              
              99,000
              
              
              
              3,131
              
              
              
              8,816
              
              
              
              35,264





(6)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common
      Stock
              
              
              Common Stock
      Options
              
              
              Series H
      Preferred Stock Options
              
              
              Series A
      Shares
              
              
              Series C
      Shares
              
              
              Series F
      Shares
              
              
              Series G
      Shares
              
              
              Common Stock
      WarrantsWalter
      K.L. “Scott” Ferguson, Jr.
              
              
              700,000
              
              
              
              2,405,113
              
              
              
              1,826,041
              
              
              
              10,000
              
              
              
              411
              
              
              
              326
              
              
              
              917
              
              
              
              3,668





(7)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common Stock
      Options
                
                
                Series H
      Preferred Stock OptionsKay
      Stroman.
                
                
                683,672
                
                
                
                862,499





(8)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsJared
      P. Benson.
              
              
              752,693
              
              
              
              302,083





(9)
            Includes
      the following shares.  All stock options are exercisable within
      60 days of February 28, 2009.





Common Stock
      Options
              
              
              Series H
      Preferred Stock OptionsRichard
      W. Orchard.
              
              
              150,000
              
              
              
              120,833





(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 three or more persons acting by majority
      vote, Messrs. Butler and Hull do not comprise a majority vote and should
      not 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.


96
 Table of Contents


(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.





(13)
            Prime
      SKA I, LLC (“PSKAI”) is the general partner of Prime VIII, L.P., which
      beneficially owns directly the shares and warrants to purchase shares of
      capital stock of the Company.  A management committee of PSKAI
      that is comprised of five natural persons acting by majority vote and
      without veto rights has the sole power to vote and dispose of all of such
      shares and warrants to purchase shares of capital stock of the
      Company.  Mr. Butler is a member, managing director and
      management committee member of PSKAI. Because voting and disposition
      decisions with respect to the Company’s securities beneficially owned by
      Prime are made in each instance by a majority of the management committee
      of PSKAI, Mr. Butler should not be deemed to have direct or indirect
      beneficial ownership over any of the securities of the Company
      beneficially owned by PSKAI, and Mr. Butler expressly disclaims any such
      beneficial ownership.





Investor
Rights Agreement





We are
party to an amended and restated investor rights agreement with our preferred
stockholders and certain of our common stockholders. This investor rights
agreement sets forth certain board designation rights, 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 on Form 10-K for a description of our investor
rights agreement and Item
10 “Directors, Executive Officers and Corporate Governance—Contractual
Provisions Relating to Grande’s Board of Directors” for a description of the
board designation rights set forth in the 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, 2008 for (i) all compensation plans
previously approved by the Company’s stockholders and (ii) all compensation
plans not previously approved by the Company’s stockholders:





(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)
                
                
                41,399,472
                
                
                $
                0.06
                
                
                
                38,726,556Equity
      compensation plan not approved by stockholders—common
stock
                
                
                —
                
                
                
                —
                
                
                
                —Equity
      compensation plan approved by stockholders – Series H preferred stock
      (2)
                
                
                23,224,999
                
                
                
                0.10
                
                
                
                6,775,001Equity
      compensation plan not approved by stockholders – Series H preferred
      stock
                
                
                —
                
                
                
                —
                
                
                
                —Total
                
                
                64,624,471
                
                
                
                
                
                
                
                45,501,557


97
 Table of Contents







(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 7,500,000 common stock options and
      4,500,000 common stock options,
respectively.





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





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 and its unaffiliated
      stockholders;
  •
              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 of
directors.




Transaction
with Robert Hughes





Hughes
Family Partnership, L.P. has invested in a real estate purchase and leaseback
transaction between Hill Partners, Inc., general partner of Grand HP, Ltd., and
Grande Communications Networks, Inc. pursuant to which Grande Communications
Networks, Inc. paid approximately $67,000 per month for 2008 to Hill Partners,
Inc. for approximately 26,000 square feet of buildings and property located in
Austin, Texas. The lease term is 20 years through November 2020 with renewal
options for an additional 15 years. 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.”


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 Table of Contents


ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





Audit fees include amounts billed for
our annual audit, quarterly reviews and consultations related to the audit. Tax
fees include amounts billed for services rendered during the year ended December
31, 2007 and 2008 for tax consulting and compliance.





2007
                
                
                2008Audit
      Fees
                
                $
                280,000
                
                
                $
                280,000Tax
      Fees
                
                
                26,000
                
                
                
                26,000$
                306,000
                
                
                $
                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 2007 and 2008. For a copy of
our audit committee charter, please visit our website at the investor relations
portion of www.grandecom.com.


99
 Table of Contents


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 30, 2006).4.1
            
            Indenture,
      dated as of March 23, 2004, by and among Grande Communications Holdings,
      Inc., the Guarantors named therein and U.S. Bank National Association
      (previously filed as exhibit 4.1 to Form S-1 dated May 18,
      2004).4.2
            
            Registration
      Rights Agreement, dated as of March 23, 2004, by and among Grande
      Communications Holdings, Inc., the Guarantors named therein, Bear, Stearns
      & Co. Inc. and Deutsche Bank Securities Inc. (previously filed as
      exhibit 4.2 to Form S-1 dated May 18, 2004).4.3
            
            Form
      of 14% Senior Secured Note due 2011 issued in connection with March 2004
      offering (previously filed as exhibit 4.3 to Form S-1 dated May 18,
      2004).4.4
            
            Pledge
      and Security Agreement, dated March 23, 2004, by and among Grande
      Communications Holdings, Inc., Grande Communications Networks, Inc.,
      Grande Communications ClearSource, Inc., Grande Communications, Inc.,
      Grande Communications Houston, Inc., Denton Telecom Holdings I, L.L.C.,
      Denton Telecom Investors I, L.L.C, Denton Telecom Partners I, L.P., and
      U.S. Bank National Association (previously filed as exhibit 4.4 to Form
      S-1 dated May 18, 2004).4.5
            
            Form
      of 14% Senior Secured Notes due 2011 issued in connection with March 2006
      private placement (previously filed as exhibit 4.5 to Form 10-K dated
      March 31, 2006).4.6
            
            Supplemental
      Indenture, dated as of July 18, 2007, by and among Grande Communications
      Holdings, Inc., the Guarantor named therein and U.S. Bank National
      Association (previously filed as exhibit 10.1 to Form 8-K dated July 18,
      2007).4.7
            
            Warrant
      Agreement, dated as of March 23, 2004, by and between Grande
      Communications Holdings, Inc. and U.S. Bank National Association as
      Warrant Agent (previously filed as exhibit 4.7 to Amendment No. 5 to the
      Registration Statement on Form S-1 dated March 20,
  2009).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).


100
 Table of Contents





Exhibit
      No.
            
            Description10.3
            
            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).10.5+
            
            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
      (previously filed as exhibit 10.16 to Form 10-K dated March 31,
      2008).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. (previously filed as exhibit 10.17 to Form 10-K dated March 31,
      2008).10.18+
            
            Amendment
      to Employment Agreement, entered into as of February 5, 2008, by and
      between Grande Communications Networks, Inc. and Michael Wilfley
      (previously filed as exhibit 10.18 to Form 10-K dated March 31,
      2008).


101
 Table of Contents




Exhibit
      No.
            
            Description10.19
            
            Purchase
      and License Agreement by and between Grande Communications Networks, Inc.
      and Nortel Networks, Inc., dated as of January 24, 2005, as amended
      (previously filed as exhibit 10.1 to Form 10-Q dated May 9,
      2008).10.20
            
            Amendment
      to Purchase and License Agreement by and between Grande Communications
      Networks, Inc. and Nortel Networks, Inc., dated as of January 24, 2008
      (previously filed as exhibit 10.2 to Form 10-Q dated May 9,
      2008).10.21+
            
            Separation
      Agreement and Full and Final Release of Claims between Grande
      Communications Networks, Inc. and Jeffrey A. Brennan dated August 15, 2008
      (previously filed as exhibit 10.1 to Form 10-Q dated November 10,
      2008).10.22*
            
            Lease
      Agreement between Grande Communications Networks, Inc. and Grand HP, Ltd.,
      dated June 27, 2006, covering 7.942 acres of land.10.23*
            
            Lease
      Agreement between Grande Communications Networks, Inc. and Grand HP, Ltd.,
      dated June 27, 2006, covering 8.470 acres of land.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
      of Chief Executive Officer pursuant to Rule 13a – 14(a) promulgated under
      the Exchange Act.31.2*
            
            Certification
      of Chief Financial Officer pursuant to Rule 13a – 14(a) promulgated under
      the Exchange Act.32.1*
            
            Certification
      pursuant to Rule 13a – 14(b) promulgated under the Exchange Act and 18
      U.S.C. Section 1350.







*
            Filed
      herewith.





+
            Management
      compensatory plan or agreement.


102
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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 20, 2009
                      By:
                      /s/    Roy
      H. ChestnuttRoy
      H. ChestnuttPresident,
      Chief Executive Officer, and Chairman of the Board(Duly
      Authorized Officer and Principal Executive Officer)Date:
      March 20, 2009
                      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/    ROYH.
    CHESTNUTTRoy
      H. Chestnutt
                                        
                                        President,
      Chief Executive Officer (Principal Executive Officer) and Chairman of the
      Board of Directors
                                        
                                        March
      20, 2009/s/    MICHAELL.
WILFLEYMichael
      L. Wilfley
                                        
                                        Chief
      Financial Officer (Principal Financial Officer and Principal Accounting
      Officer)
                                        
                                        March
      20, 2009/s/    DUNCAN T. BUTLER,JR.Duncan
      T. Butler, Jr.
                                        
                                        Director
                                        
                                        March
      20, 2009/s/    JOHNC. HOCKINJohn
      C. Hockin
                                        
                                        Director
                                        
                                        March
      20, 2009/s/    DAVID C. HULL, JR.David
      C. Hull, Jr.
                                        
                                        Director
                                        
                                        March
      20, 2009/s/    WILLIAM LAVERACK, JR.William
      Laverack, Jr.
                                        
                                        Director
                                        
                                        March
      20, 2009/s/    RICHARDW.
ORCHARDRichard
      W. Orchard
                                        
                                        Director
                                        
                                        March
      20, 2009/s/    PAULV. WALSH,JR.Paul
      V. Walsh, Jr.
                                        
                                        Director
                                        
                                        March
      20,
2009


103
 Table of Contents


INDEX TO CONSOLIDATEDFINANCIAL STATEMENTS





GRANDE
COMMUNICATIONS HOLDINGS, INC. AND SUBSIDIARY


AS
OF DECEMBER 31, 2007 AND 2008 AND FOR EACH OF THE THREE YEARS


IN
THE PERIOD ENDED DECEMBER 31, 2008





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, 2007 and 2008, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
each of the three years in the period ended December 31, 2008. 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, 2007 and 2008, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008, in conformity with U.S.
generally accepted accounting principles.


/s/ Ernst
& Young LLP


March 16,
2009


Austin,
Texas   F-2
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY


CONSOLIDATED
BALANCE SHEETS


(In
thousands, except share data)





December
      31,2007
              
              
              2008AssetsCurrent
      assets:Cash
      and cash equivalents, net of restricted cash of $3,129
              
              $
              48,138
              
              
              $
              26,988Accounts
      receivable, net of allowance for doubtful accounts of $1,138 and
      $1,311
              
              
              17,793
              
              
              
              17,047Prepaid
      expenses and other current assets
              
              
              1,867
              
              
              
              2,090Total
      current assets
              
              
              67,798
              
              
              
              46,125Property,
      plant and equipment, net of accumulated depreciation of $313,526 and
      $368,907
              
              
              249,310
              
              
              
              223,034Intangible
      assets, net of accumulated amortization of $1,417 and
    $1,661
              
              
              1,398
              
              
              
              1,154Debt
      issue costs, net
              
              
              4,255
              
              
              
              3,203Restricted
      cash
              
              
              3,129
              
              
              
              3,129Deposit
      and other long-term assets
              
              
              353
              
              
              
              790Total
      assets
              
              $
              326,243
              
              
              $
              277,435Liabilities
      and stockholders’ equityCurrent
      liabilities:Accounts
      payable
              
              $
              13,809
              
              
              $
              13,111Accrued
      liabilities
              
              
              15,328
              
              
              
              15,938Accrued
      interest payable
              
              
              6,755
              
              
              
              6,755Deferred
      revenue and customer deposits
              
              
              6,996
              
              
              
              7,598Current
      portion of long-term debt
              
              
              1,612
              
              
              
              1,655Current
      portion of capital lease obligations
              
              
              3,548
              
              
              
              4,405Total
      current liabilities
              
              
              48,048
              
              
              
              49,462Deferred
      rent
              
              
              1,228
              
              
              
              1,177Deferred
      revenue
              
              
              4,377
              
              
              
              4,759Capital
      lease obligations, net of current portion
              
              
              13,592
              
              
              
              13,380Long
      term debt, net of current portion
              
              
              189,994
              
              
              
              189,629Total
      liabilities
              
              
              257,239
              
              
              
              258,407Stockholders’
      equity:Senior
      series preferred stock:Series
      G preferred stock, $0.001 par value per share; 34,615,384 shares
      authorized, 34,615,330 shares issued and outstanding; liquidation
      preference of $134,999,787
              
              
              35
              
              
              
              35Junior
      series preferred stock:Series
      A preferred stock, $0.001 par value per share; 232,617,839 shares
      authorized, 232,617,838 shares issued and outstanding; liquidation
      preference of $232,617,838
              
              
              233
              
              
              
              233Series
      B preferred stock, $0.001 par value per share; 20,833,333 shares
      authorized, issued and outstanding; liquidation preference of
      $25,000,000
              
              
              21
              
              
              
              21Series
      C preferred stock, $0.001 par value per share; 30,000,000 shares
      authorized, 17,005,191 shares issued and outstanding; liquidation
      preference of $20,406,229
              
              
              17
              
              
              
              17Series
      D preferred stock, $0.001 par value per share; 115,384,615 shares
      authorized, 114,698,442 shares issued and outstanding; liquidation
      preference of $149,107,975
              
              
              115
              
              
              
              115Series
      E preferred stock, $0.001 par value per share; 8,000,000 shares
      authorized, 7,999,099 shares issued and outstanding; liquidation
      preference of $19,997,748
              
              
              8
              
              
              
              8Series
      F preferred stock, $0.001 par value per share; 12,307,792 shares
      authorized, 11,758,278 shares issued and outstanding; liquidation
      preference of $15,285,761
              
              
              12
              
              
              
              12Series
      H preferred stock, $0.001 par value per share; 30,000,000 shares
      authorized, no shares issued and outstanding
              
              
              —
              
              
              
              —Common
      stock, $0.001 par value per share; 786,835,883 shares authorized,
      13,175,940 and 13,284,072 shares issued, 12,675,940 and 12,784,072 shares
      outstanding, as of December 31, 2007 and 2008,
respectively
              
              
              13
              
              
              
              13Additional
      paid-in capital
              
              
              509,312
              
              
              
              509,696Treasury
      stock, at cost
              
              
              (5
              )
              
              
              (5
              )Accumulated
      deficit
              
              
              (440,757
              )
              
              
              (491,117
              )Total
      stockholders’ equity
              
              
              69,004
              
              
              
              19,028Total
      liabilities and stockholders’ equity
              
              $
              326,243
              
              
              $
              277,435





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 31,2006
              
              
              2007
              
              
              2008Operating
      revenues
              
              $
              189,867
              
              
              $
              197,146
              
              
              $
              205,271Operating
      expenses:Cost
      of revenues (excluding depreciation and amortization)
              
              
              63,931
              
              
              
              68,348
              
              
              
              69,798Selling,
      general and administrative
              
              
              94,312
              
              
              
              90,416
              
              
              
              92,486Provision
      for doubtful accounts
              
              
              3,514
              
              
              
              3,301
              
              
              
              3,363Depreciation
      and amortization
              
              
              56,037
              
              
              
              56,752
              
              
              
              59,385Total
      operating expenses
              
              
              217,794
              
              
              
              218,817
              
              
              
              225,032Operating
      loss
              
              
              (27,927
              )
              
              
              (21,671
              )
              
              
              (19,761
              )Other
      income (expense):Interest
      income
              
              
              1,546
              
              
              
              1,670
              
              
              
              728Interest
      expense, net of capitalized interest
              
              
              (23,970
              )
              
              
              (29,012
              )
              
              
              (31,042
              )Other
      income (expense)
              
              
              —
              
              
              
              (472
              )
              
              
              53Net
      gain on sale/disposal of assets
              
              
              2,353
              
              
              
              76
              
              
              
              764Goodwill
      impairment
              
              
              (93,639
              )
              
              
              —
              
              
              
              —Total
      other income (expense)
              
              
              (113,710
              )
              
              
              (27,738
              )
              
              
              (29,497
              )Loss
      before income tax expense
              
              
              (141,637
              )
              
              
              (49,409
              )
              
              
              (49,258
              )Income
      tax expense
              
              
              —
              
              
              
              (1,123
              )
              
              
              (1,102
              )Net
      loss
              
              $
              (141,637
              )
              
              $
              (50,532
              )
              
              $
              (50,360
              )Basic
      and diluted net loss per share
              
              $
              (11.30
              )
              
              $
              (4.01
              )
              
              $
              (3.94
              )Basic
      and diluted weighted average common shares outstanding
              
              
              12,530
              
              
              
              12,610
              
              
              
              12,765





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)





Preferred
      Stock
              
              
              Common
      StockShares
              
              
              Amount
              
              
              Shares
              
              
              Amount
              
              
              Additional
      Paid-in Capital
              
              
              Treasury
      Stock
              
              
              Accumulated
      Deficit
              
              
              Total
      Stockholders’ EquityBalance
      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
              )
              
              
              69,004Exercise
      of common stock options
              
              
              —
              
              
              
              —
              
              
              
              108
              
              
              
              —
              
              
              
              6
              
              
              
              —
              
              
              
              —
              
              
              
              6Stock
      compensation
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              378
              
              
              
              —
              
              
              
              —
              
              
              
              378Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (50,360
              )
              
              
              (50,360
              )Balance
      as of December 31, 2008
              
              
              439,527
              
              
              $
              441
              
              
              
              13,284
              
              
              $
              13
              
              
              $
              509,696
              
              
              $
              (5
              )
              
              $
              (491,117
              )
              
              $
              19,028





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 31,2006
              
              
              2007
              
              
              2008Cash
      flows from operating activities:Net
      loss
              
              $
              (141,637
              )
              
              $
              (50,532
              )
              
              $
              (50,360
              )Adjustment
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
              
              
              55,775
              
              
              
              56,335
              
              
              
              59,141Amortization
      of intangible and other assets
              
              
              262
              
              
              
              417
              
              
              
              257Amortization
      of deferred financing costs
              
              
              1,000
              
              
              
              1,025
              
              
              
              1,052Provision
      for bad debts
              
              
              3,514
              
              
              
              3,301
              
              
              
              3,363Amortization
      of debt discounts/premiums
              
              
              1,109
              
              
              
              1,237
              
              
              
              1,289Non-cash
      compensation expense
              
              
              377
              
              
              
              573
              
              
              
              378Net
      gain on sale/disposal of assets
              
              
              (2,353
              )
              
              
              (76
              )
              
              
              (764
              )Goodwill
      impairment
              
              
              93,639
              
              
              
              —
              
              
              
              —Changes
      in operating assets and liabilities:Accounts
      receivable
              
              
              (1,848
              )
              
              
              (3,853
              )
              
              
              (2,516
              )Prepaid
      expenses and other assets
              
              
              781
              
              
              
              (299
              )
              
              
              (660
              )Accounts
      payable
              
              
              (1,432
              )
              
              
              1,377
              
              
              
              (372
              )Accrued
      liabilities and interest payable
              
              
              103
              
              
              
              1,647
              
              
              
              610Deferred
      revenue
              
              
              112
              
              
              
              629
              
              
              
              1,728Deferred
      rent
              
              
              285
              
              
              
              (40
              )
              
              
              (51
              )Net
      cash provided by operating activities
              
              
              9,687
              
              
              
              11,741
              
              
              
              13,095Cash
      flows from investing activities:Purchases
      of property, plant and equipment
              
              
              (30,886
              )
              
              
              (35,290
              )
              
              
              (29,766
              )Proceeds
      from sale of assets
              
              
              3,274
              
              
              
              638
              
              
              
              481Proceeds
      from sales tax refunds
              
              
              922
              
              
              
              1,130
              
              
              
              349Maturities
      of short term investments
              
              
              350
              
              
              
              —
              
              
              
              —Other
      investing activity
              
              
              (47
              )
              
              
              (67
              )
              
              
              —Net
      cash used in investing activities
              
              
              (26,387
              )
              
              
              (33,589
              )
              
              
              (28,936
              )Cash
      flows from financing activities:Net
      proceeds from borrowings
              
              
              30,581
              
              
              
              30,054
              
              
              
              —Proceeds
      from sale leaseback arrangement
              
              
              7,373
              
              
              
              —
              
              
              
              —Payments
      of long-term debt and capital lease obligations
              
              
              (3,193
              )
              
              
              (4,305
              )
              
              
              (4,989
              )Deferred
      financing costs
              
              
              (86
              )
              
              
              (165
              )
              
              
              —Net
      borrowings (repayments) on zero-balance cash account
              
              
              (758
              )
              
              
              451
              
              
              
              (326
              )Other
      financing activity
              
              
              12
              
              
              
              3
              
              
              
              6Net
      cash provided by (used in) financing activities
              
              
              33,929
              
              
              
              26,038
              
              
              
              (5,309
              )Net
      change in cash and cash equivalents
              
              
              17,229
              
              
              
              4,190
              
              
              
              (21,150
              )Cash
      and cash equivalents, beginning of year
              
              
              26,719
              
              
              
              43,948
              
              
              
              48,138Cash
      and cash equivalents, end of year
              
              $
              43,948
              
              
              $
              48,138
              
              
              $
              26,988Non-cash
      investing and financing activity:Capital
      lease obligations
              
              $
              8,341
              
              
              $
              461
              
              
              $
              4,023Supplemental
      disclosure:Cash
      paid for interest
              
              $
              22,886
              
              
              $
              26,502
              
              
              $
              28,701Cash
      paid for franchise taxes
              
              $
              180
              
              
              $
              —
              
              
              $
              —Cash
      paid for income taxes
              
              $
              —
              
              
              $
              —
              
              
              $
              1,099





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
business customers in Texas. The Company provides these services in seven
markets in the state of Texas using local broadband networks that the Company
acquired and/or 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. Provision for doubtful accounts is presented separately in
the accompanying consolidated statements of operations instead of being included
in selling, general and administrative expense. This change in presentation
resulted in an increase in provision for doubtful accounts and a decrease in
selling, general and administrative expense of $3.5 million and $3.3 million for
the years ended December 31, 2006 and 2007, respectively.




As
described under Note 8 “Long Term Debt” below, the Company’s 14% senior notes
due April 1, 2011 (“senior notes”) are governed by the indenture between the
Company and U.S. Bank National Association, as Indenture Trustee, dated
March 23, 2004 (“Indenture”). The Indenture contains a covenant restricting
certain capital expenditures if such expenditures would result in the Company
having less than $20 million in cash and cash equivalents after giving effect to
such expenditures. If cash and cash equivalents fall below $20 million, the
Company would not be permitted to make certain capital expenditures until such
time as cash and cash equivalents, including such proposed certain capital
expenditures, increase above $20 million.  If the Company made certain
capital expenditures that would cause cash and cash equivalents to fall below
$20 million, the Company would be required to notify the Trustee of such
default.  If the Company receives notification from the Trustee or
holders of at least 25% in aggregate principal amount of the then outstanding
senior notes, the Company would have 60 days to comply with the
covenant.   If after 60 days, the Company has not complied with
the covenant, the senior notes may be declared due and payable immediately by
notice from the Trustee or holders of at least 25% in aggregate principal amount
of the then outstanding senior notes. This covenant could adversely affect the
Company’s ability to make planned capital expenditures.  Cash and cash
equivalents were $27.0 million at December 31, 2008.




The
Company expects that the available cash and cash equivalents and cash generated
from operations will be sufficient to fund existing operations, planned capital
spending and other commitments over the next twelve months through December 31,
2009. The Company also believes that it will manage its cash position above $20
million in accordance with the covenant set forth in the Indenture over the next
twelve months through December 31, 2009. The Company’s current business
plan is based on estimates regarding expected future costs and expected
revenues. Actual costs may exceed or revenues may fall short of the estimates,
the estimates may change, and future developments may affect the estimates. Any
of these factors may increase the need for funds, which would require the
Company to consider asset sales or seek additional financing to fund operations,
to undertake initiatives not contemplated by the current business plan or obtain
additional cushion against possible shortfalls. Future financings may include a
range of different sizes or types of financing, including capital lease
transactions and the sale of additional debt or equity securities. These
financings could increase the Company’s level of indebtedness or result in
dilution to the equity holders. Additionally, the Company can call the existing
senior notes at any time giving the Company the near term ability to refinance
the senior notes in the event better pricing and terms were available to the
Company in the market. However, the Company may not be able to raise additional
funds on favorable terms or at all. The Company’s ability to obtain additional
financing depends on several factors, including future market conditions and the
state of the credit markets; the Company’s success or lack of success in
penetrating the markets the Company serves and growing overall income; the
Company’s future creditworthiness; and restrictions contained in agreements with
the Company’s investors or lenders, including the restrictions contained in the
Indenture.


F-7
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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
$4.0 million and $3.6 million as of December 31, 2007 and 2008,
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 $3.1 million as of both
December 31, 2007 and 2008 and is included in the caption “restricted cash”
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 $8.3 million, $8.5 million
and $7.6 million, during the years ended December 31, 2006, 2007 and 2008,
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-8
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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 2006, the annual goodwill impairment tests resulted in an
impairment of $93.6 million and as a result, all goodwill was written off as of
December 31, 2006.


F-9
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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, 2008, 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. There were no impairments recognized on other
definite-lived intangible assets during 2006, 2007 or 2008.




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 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 $2.5 million, $2.9 million, and $3.2
million during the years ended December 31, 2006, 2007, and 2008, respectively,
are reported as revenues and cost of revenues, respectively. The Federal
Communications Commission imposes a tax on interstate and international 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.


F-10
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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.




Advertising
Costs




The
Company expenses all advertising costs as incurred. Total advertising expense
for 2006, 2007 and 2008 was approximately $2.6 million, $2.5 million and $2.7
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 during both the years ended December 31, 2006 and 2007 and
approximately $1.1 million during the year ended December 31, 2008.




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 “Income Taxes”).




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 years ended
December 31, 2007 and 2008.


F-11
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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
stockholders 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, 2006, 2007 and 2008, 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:




2006
                            
                            
                            2007
                            
                            
                            2008Convertible
      preferred stock
                            
                            
                            439,527,511
                            
                            
                            
                            439,527,511
                            
                            
                            
                            439,527,511Common
      stock warrants
                            
                            
                            59,575,248
                            
                            
                            
                            152,107,016
                            
                            
                            
                            152,107,016Common
      stock options
                            
                            
                            51,967,818
                            
                            
                            
                            51,557,894
                            
                            
                            
                            44,447,340Series
      H preferred stock options
                            
                            
                            13,479,726
                            
                            
                            
                            27,514,521
                            
                            
                            
                            25,200,330Total
      anti-dilutive shares
                            
                            
                            499,102,759
                            
                            
                            
                            670,706,942
                            
                            
                            
                            661,282,197




Stock
Based Compensation




As of
December 31, 2008, 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. 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, 2007 and 2008 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). 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-12
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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, 2007
                      
                      
                      December
      31, 2008Carrying
                        Amount
                      
                      
                      Estimated
                        Fair
      Value
                      
                      
                      Carrying
                        Amount
                      
                      
                      Estimated
                        Fair
      Value(in
      millions)14%
      Senior Notes
                      
                      $
                      188.0
                      
                      
                      $
                      194.7
                      
                      
                      $
                      189.3
                      
                      
                      $
                      142.3Equipment
      financing
                      
                      
                      3.6
                      
                      
                      
                      3.6
                      
                      
                      
                      2.0
                      
                      
                      
                      2.0




Recent
Accounting Pronouncements




Fair
Value Measurements




On
January 1, 2008, the Company adopted certain provisions of SFAS
No. 157, Fair Value
Measurements (“SFAS 157”), which establishes the authoritative
definition of fair value, sets out a framework for measuring fair value and
expands the required disclosures about fair value measurement. The provisions of
SFAS 157 adopted on January 1, 2008 relate to financial assets and
liabilities, as well as other assets and liabilities carried at fair value on a
recurring basis and did not have a material impact on the Company’s consolidated
financial statements. The provisions of FAS 157 related to other
nonfinancial assets and liabilities will be effective for the Company on
January 1, 2009, and will be applied prospectively. These provisions are
not expected to have any impact on the Company’s historical consolidated
financial statements.




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. 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.


F-13
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




3.
Allowance for Doubtful Accounts




The
activity in the Company’s allowance for doubtful accounts for the years ending
December 31, 2006, 2007 and 2008 was as follows:




Balance at
      Beginning of
                      Year
                    
                    
                    Charged to
      Costs and Expenses
                    
                    
                    Write-offs
                    
                    
                    Balance at
      End of
                      Year(in
      thousands)2006
                    
                    $
                    1,442
                    
                    
                    $
                    3,514
                    
                    
                    $
                    (3,763
                    )
                    
                    $
                    1,4422007
                    
                    
                    1,193
                    
                    
                    
                    3,301
                    
                    
                    
                    (3,356
                    )
                    
                    
                    1,1932008
                    
                    
                    1,138
                    
                    
                    
                    3,363
                    
                    
                    
                    (3,190
                    )
                    
                    
                    1,311




4.
Property, Plant and Equipment




Property,
plant and equipment consist of the following as of December 31, 2007 and
2008:




2007
                          
                          
                          2008(in
      thousands)Communications
      plant
                          
                          $
                          455,145
                          
                          
                          $
                          481,036Computer
      equipment
                          
                          
                          6,517
                          
                          
                          
                          6,518Software,
      including general purpose and network
                          
                          
                          31,491
                          
                          
                          
                          31,810Buildings,
      leasehold improvements and land
                          
                          
                          4,487
                          
                          
                          
                          4,667Furniture,
      fixtures and vehicles
                          
                          
                          4,308
                          
                          
                          
                          3,990Other
      equipment
                          
                          
                          23,937
                          
                          
                          
                          24,523Assets
      under capital leases
                          
                          
                          24,668
                          
                          
                          
                          28,288Construction
      in process
                          
                          
                          3,534
                          
                          
                          
                          2,069Construction
      inventory
                          
                          
                          8,749
                          
                          
                          
                          9,040562,836
                          
                          
                          
                          591,941Less—accumulated
      depreciation
                          
                          
                          (313,526
                          )
                          
                          
                          (368,907
                          )Property,
      plant and equipment, net
                          
                          $
                          249,310
                          
                          
                          $
                          223,034




5.
Intangible Assets




Definite-lived
intangible assets consist of the following as of December 31, 2007 and 2008
(in thousands):




2007
                          
                          
                          2008Life
                          
                          Gross
                            Carrying
      Amount
                          
                          
                          Accumulated
      Amortization
                          
                          
                          Gross
                            Carrying
      Amount
                          
                          
                          Accumulated
      AmortizationMDU
      exclusive access rights
                          7 – 18 years
                          
                          $
                          2,815
                          
                          
                          $
                          (1,417
                          )
                          
                          $
                          2,815
                          
                          
                          $
                          (1,661
                          )




No
impairments of intangible assets were recognized during 2006, 2007 or
2008.




Amortization
expense was $0.3 million, $0.4 million and $0.2 million for the years ending
December 31, 2006, 2007 and 2008, respectively. The weighted average
remaining life for the MDU exclusive access rights intangible asset is
approximately 5 years. Amortization expense associated with the net carrying
value of definite-lived intangible assets is estimated to be $0.2 million in
2009 through 2012 and $0.1 million in 2013.


F-14
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




6.
Accrued Liabilities




Accrued
liabilities consist of the following as of December 31, 2007 and
2008:




2007
                            
                            
                            2008(in
      thousands)Accrued
      property taxes
                            
                            $
                            4,405
                            
                            
                            $
                            3,829Accrued
      compensation
                            
                            
                            2,801
                            
                            
                            
                            2,660Accrued
      taxes—other
                            
                            
                            2,662
                            
                            
                            
                            3,171Accrued
      programming
                            
                            
                            2,587
                            
                            
                            
                            3,045Accrued
      other
                            
                            
                            2,873
                            
                            
                            
                            3,233Accrued
      liabilities
                            
                            $
                            15,328
                            
                            
                            $
                            15,938




7.
Income Taxes




As of
December 31, 2008, the Company had federal net operating loss
carry-forwards of approximately $467 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.




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, 2007 and 2008 are as
follows:




2007
                                      
                                      
                                      2008(in
      thousands)Deferred
      tax assets:Amortizable
      assets
                                      
                                      $
                                      6,254
                                      
                                      
                                      $
                                      4,416Deferred
      revenue
                                      
                                      
                                      1,824
                                      
                                      
                                      
                                      1,900Other
                                      
                                      
                                      48
                                      
                                      
                                      
                                      238Capital
      lease
                                      
                                      
                                      5,524
                                      
                                      
                                      
                                      5,926Deferred
      rent
                                      
                                      
                                      430
                                      
                                      
                                      
                                      412Reserves
                                      
                                      
                                      674
                                      
                                      
                                      
                                      828Net
      operating loss carry-forwards
                                      
                                      
                                      152,679
                                      
                                      
                                      
                                      169,704Total
      deferred tax assets
                                      
                                      
                                      167,433
                                      
                                      
                                      
                                      183,424Deferred
      tax liabilities:Other
                                      
                                      
                                      —
                                      
                                      
                                      
                                      251Depreciable
      assets
                                      
                                      
                                      18,189
                                      
                                      
                                      
                                      16,510Total
      deferred tax liabilities
                                      
                                      
                                      18,189
                                      
                                      
                                      
                                      16,761Net
      deferred tax asset
                                      
                                      
                                      149,244
                                      
                                      
                                      
                                      166,663Less-valuation
      allowance
                                      
                                      
                                      (149,244
                                      )
                                      
                                      
                                      (166,663
                                      )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 $17.4 million during the year ended December 31,
2008.


F-15
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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 2005 through the 2008 tax years. The
periods subject to examination for the Company’s state tax returns in Texas are
years 2004 through 2008. 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
carry-forwards 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:




2006
                        
                        
                        2007
                        
                        
                        2008(in
      thousands)Computed
      at federal statutory rate
                        
                        $
                        (49,468
                        )
                        
                        $
                        (17,293
                        )
                        
                        $
                        (17,240
                        )State
      taxes, net of federal benefit
                        
                        
                        (1,415
                        )
                        
                        
                        730
                        
                        
                        
                        716Impact
      of change in state tax law
                        
                        
                        9,688
                        
                        
                        
                        (5,191
                        )
                        
                        
                        —Permanent
      items and other
                        
                        
                        (3,292
                        )
                        
                        
                        (99
                        )
                        
                        
                        208Impairment
      of nondeductible goodwill
                        
                        
                        32,774
                        
                        
                        
                        —
                        
                        
                        
                        —Valuation
      allowance
                        
                        
                        11,713
                        
                        
                        
                        22,976
                        
                        
                        
                        17,418Provision
      for income taxes
                        
                        $
                        —
                        
                        
                        $
                        1,123
                        
                        
                        $
                        1,102




8.
Long Term Debt




Long-term
debt consists of the following as of December 31, 2007 and
2008:




2007
                              
                              
                              2008(in
      thousands)14%
      senior notes
                              
                              $
                              193,000
                              
                              
                              $
                              193,000Equipment
      financing
                              
                              
                              3,572
                              
                              
                              
                              1,971Other
                              
                              
                              24
                              
                              
                              
                              14196,596
                              
                              
                              
                              194,985Less-current
      portion
                              
                              
                              (1,612
                              )
                              
                              
                              (1,655
                              )Long-term
      debt
                              
                              
                              194,984
                              
                              
                              
                              193,331Discounts
      and premiums, net
                              
                              
                              (4,990
                              )
                              
                              
                              (3,701
                              )Long-term
      debt, net of discounts and premiums
                              
                              $
                              189,994
                              
                              
                              $
                              189,630


F-16
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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. 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.




In March
2006 and July 2007, the Company raised net proceeds of approximately $30.5
million and $25.8 million, respectively, in a private placement of an additional
$32 million and $25 million, respectively, in aggregate principal amount of
senior notes. These additional senior notes were issued under the Indenture and
are part of the same series of senior notes as those issued in March
2004.




Grande
Communications Holdings, Inc.’s subsidiary, Grande Communications Networks, Inc.
(the “Subsidiary Guarantor”), has unconditionally guaranteed, jointly and
severally, the payment of the principal, premium and interest (including any
additional interest on the senior notes) on a senior secured basis. Grande
Communications Holdings, Inc. is a holding company with no independent assets
and conducts all of its operations through a subsidiary and is therefore
dependent on the receipt of funds from its subsidiary to pay the interest and
principal on the senior notes.  Limitations or restrictions contained
in the Indenture could adversely affect the Company’s ability to make such
payments on the senior notes.




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




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




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




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




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




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




•
            create
      liens on assets;




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




•
            make
      investments in other companies;




•
            enter
      into transactions with affiliates;




•
            enter
      into sale and leaseback
transactions;




•
            sell
      or make dispositions of assets;


F-17
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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




•
            engage
      in certain business activities.




In
addition, the Indenture contains a covenant restricting certain capital
expenditures if such expenditures would result in us having less than $20
million in cash and cash equivalents after giving effect to such expenditures.
This covenant could adversely affect the Company’s ability to make planned
capital expenditures.




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




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 $1.1 million, $1.2 million, and $1.3
million in 2006, 2007, and 2008, respectively.




The
Company incurred debt issuance costs related to the issuances of the senior
notes 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 both 2006 and 2007 and
approximately $1.1 million in 2008.




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.  During December 2008, the term of the equipment financing
was extended 12 months through March 2010.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.




Capitalized
Interest




The
Company capitalizes interest expense incurred from debt utilized to fund the
construction of the network. The total amounts capitalized were approximately
$2.2 million, $0.6 million and $0.3 million, during the years ended
December 31, 2006, 2007 and 2008, 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.


F-18
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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.




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, 2008, 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.


F-19
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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.




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 $0.3
million during both 2006 and 2007 and approximately $0.4 million during
2008.




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. During the third quarter of 2008, the Company ceased
granting options to all employees until otherwise determined.


F-20
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




•
            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, 2008, approximately 38.7 million shares of common
      stock and approximately 6.8 million shares of Series H Preferred
      Stock were available for issuance under the 2000 Stock Incentive Plan (of
      which 4.5 million shares of common stock and 6.8 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
option(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.




•
            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.


F-21
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




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, 2007 and 2008 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.




The fair
value of each Series H preferred stock option 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 weighted average assumptions in
the following table.  No Series H preferred stock options were issued
during 2008. For common stock options issued during 2006, 2007 and 2008, the
value of the underlying common stock was zero; therefore, no fair value was
assigned to those options.




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-22
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




A summary
of option activity under the 2000 Stock Incentive Plan during the year ended
December 31, 2008 is presented in the following table.




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, 2007
                            
                            
                            51,228,618
                            
                            
                            $
                            0.08
                            
                            
                            
                            5.6
                            
                            
                            
                            27,775,000
                            
                            
                            $
                            0.10
                            
                            
                            
                            8.5Granted
                            
                            
                            1,058,000
                            
                            
                            
                            0.05
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            —Exercised
                            
                            
                            (108,132
                            )
                            
                            
                            0.05
                            
                            
                            
                            
                            
                            
                            
                            —
                            
                            
                            
                            —Expired
                            
                            
                            (8,793,360
                            )
                            
                            
                            0.18
                            
                            
                            
                            
                            
                            
                            
                            (1,870,833
                            )
                            
                            
                            0.10Forfeited
                            
                            
                            (1,985,654
                            )
                            
                            
                            0.05
                            
                            
                            
                            
                            
                            
                            
                            (2,679,168
                            )
                            
                            
                            0.10Outstanding
      as of December 31, 2008
                            
                            
                            41,399,472
                            
                            
                            
                            0.06
                            
                            
                            
                            4.7
                            
                            
                            
                            23,224,999
                            
                            
                            
                            0.10
                            
                            
                            
                            7.3Vested
      as of December 31, 2008
                            
                            
                            34,983,849
                            
                            
                            
                            0.07
                            
                            
                            
                            4.2
                            
                            
                            
                            14,868,743
                            
                            
                            
                            0.10
                            
                            
                            
                            7.2Exercisable
      as of December 31, 2008
                            
                            
                            34,855,599
                            
                            
                            
                            0.07
                            
                            
                            
                            4.2
                            
                            
                            
                            11,368,743
                            
                            
                            
                            0.10
                            
                            
                            
                            7.1




The
following table summarizes information concerning option activity during the
years ended December 31, 2006, 2007 and 2008:




2006
                    
                    
                    2007
                    
                    
                    2008Common
      Stock Options:Weighted
      average fair value of options granted
                    
                    $
                    0.02
                    
                    
                    $
                    —
                    
                    
                    $
                    —Intrinsic
      value of options exercised
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Fair
      value of options vested based on grant date fair value
                    
                    
                    —
                    
                    
                    
                    —
                    
                    
                    
                    —Preferred
      Stock Options:Weighted
      average fair value of options granted
                    
                    $
                    0.07
                    
                    
                    $
                    0.06
                    
                    
                    
                    N/AIntrinsic
      value of options exercised
                    
                    
                    N/A
                    
                    
                    
                    N/A
                    
                    
                    
                    N/AFair
      value of options vested based on grant date fair value
                    
                    $
                    70,000
                    
                    
                    $
                    661,537
                    
                    
                    $
                    443,410




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 million, $0.6 million and
$0.4 million for the years ended December 31, 2006, 2007 and 2008,
respectively. As of December 31, 2008, $0.3 million of unrecognized
compensation costs related to non-vested option grants are expected to be
recognized over the course of the following three years. Upon share option
exercise, new shares are issued as opposed to treasury shares.


F-23
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




10.
Commitments and Contingencies




Capital
Leases




The
Company has entered into significant capital leases for office buildings and
billing software. In 2007 and 2008, 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, 2007 and 2008:




2007
                            
                            
                            2008(in
      thousands)Capital
      leases
                            
                            $
                            17,140
                            
                            
                            $
                            17,785Less-current
      portion
                            
                            
                            (3,548
                            )
                            
                            
                            (4,405
                            )Capital
      leases, net of current portion
                            
                            $
                            13,592
                            
                            
                            $
                            13,380




Scheduled
payments for the capital leases as of December 31, 2008 are as follows (in
thousands):




2009
                            
                            $
                            5,9632010
                            
                            
                            2,9262011
                            
                            
                            1,7722012
                            
                            
                            1,7482013
      and thereafter
                            
                            
                            18,647Total
      minimum lease payments
                            
                            
                            31,056Amounts
      representing interest
                            
                            
                            (13,271
                            )Present
      value of net minimum lease payments
                            
                            
                            17,785Less
      current maturities
                            
                            
                            (4,405
                            )Total
      long term capital lease
                            
                            $
                            13,380




Operating
Leases




The
Company leases office space and other assets for varying periods. Leases that
expire are evaluated for renewal based on operational necessity.




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, 2008, are as follows (in thousands):




2009
                    
                    $
                    4,0122010
                    
                    
                    2,9022011
                    
                    
                    2,2002012
                    
                    
                    1,9482013
      and thereafter
                    
                    
                    8,947Total
      minimum lease payments
                    
                    $
                    20,009


F-24
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Total
rental expense for all operating leases was approximately $5.8 million, $5.4
million and $5.2 million for 2006, 2007 and 2008, 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 $2.5 million, $2.9 million, and $3.2
million during the years ended December 31, 2006, 2007, and 2008, 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, 2008 are as follows (in thousands):




2009
                        
                        $
                        1,2272010
                        
                        
                        1,0462011
                        
                        
                        1,0462012
                        
                        
                        1,0462013
      and thereafter
                        
                        
                        8,325Total
                        
                        $
                        12,690




F-25
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




Purchase
Commitments




During
January 2005, the Company entered into a minimum purchase agreement with a
vendor, as amended, for the purchase of $5.6 million of fiber optic equipment
and installation and maintenance services 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 $1.0
million, $0.5 million, and $0.2 million during the years ended December 31,
2006, 2007 and 2008, respectively. Approximately $2.2 million remains
outstanding as of December 31, 2008. The Company is currently in the
process of finalizing an extension of the purchase agreement through December
31, 2009.




Employment
Agreements




The
Company has entered into employment agreements with three of the Company’s
senior executives for an indefinite term, subject to continued employment with
the Company.  As of December 31, 2008, 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 $0.9 million in the aggregate.




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. At December 31,
2008, the Company does maintain certain 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 2006, 2007 and 2008, the Company made
discretionary matching cash contributions to the plan of approximately $0.7
million in 2006 and approximately $0.8 million in both 2007 and
2008.   Effective January 2009 until otherwise determined, the
Company suspended matching employees’ contributions to the 401(k) plan,
applicable to all employees, as part of a company wide cost reduction
initiative.


F-26
 Table of Contents


GRANDE
COMMUNICATIONS HOLDINGS, INC. & SUBSIDIARY




NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




13.
Quarterly Financial Information—Unaudited




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
                    )





2008
                  
                  1st Quarter
                  
                  
                  2nd Quarter
                  
                  
                  3rd Quarter
                  
                  
                  4th QuarterRevenues
                  
                  $
                  49,886
                  
                  
                  $
                  52,009
                  
                  
                  $
                  51,963
                  
                  
                  $
                  51,413Operating
      loss
                  
                  
                  (5,052
                  )
                  
                  
                  (3,787
                  )
                  
                  
                  (7,180
                  )
                  
                  
                  (3,742
                  )Net
      loss
                  
                  
                  (12,764
                  )
                  
                  
                  (11,194
                  )
                  
                  
                  (14,861
                  )
                  
                  
                  (11,541
                  )Basic
      and diluted loss per common share
                  
                  
                  (1.00
                  )
                  
                  
                  (0.88
                  )
                  
                  
                  (1.16
                  )
                  
                  
                  (0.90
                  )








(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-27