Review of Must Carry Rules. FCC regulations implementing the Cable Television Consumer Protection and Competition Act of 1992 require each television broadcaster to elect, at three-year intervals beginning October 1, 1993, to either:

        • require carriage of its signal by cable systems in the station’s market, which is referred to as must carry rules; or

        • negotiate the terms on which such broadcast station would permit transmission of its signal by the cable systems within its market, which is referred to as retransmission consent.

        The United States Supreme Court upheld the must-carry rules in a 1997 decision. These must carry rights are not absolute, and their exercise is dependent on a variety of factors such as:

        • the number of active channels on the cable system;

        • the location and size of the cable system; and

        • the amount of programming on a broadcast station that duplicates the programming of another broadcast station carried by the cable system.

         Therefore, under certain circumstances, a cable system may decline to carry a given station. We have elected must carry for each of our stations on all of the cable systems where such carriage can be elected. See also Digital Television Services below.

         Local Marketing Agreements. Under the FCC’s current rules (as well as the New Rules), the licensee of a television station providing more than 15% of another television station’s programming under a LMA is considered to have an attributable interest in the other station for purposes of the FCC’s national and local multiple ownership rules if both stations are located in the same market. The FCC also adopted a grandfathering policy providing that local marketing agreements that are in compliance with the previous FCC rules and policies and were entered into before November 5, 1996, would be permitted to continue in force until the FCC conducts its biennial review of regulations in 2004. Local marketing agreements entered into after November 5, 1996 but prior to the adoption of the new FCC rules in 1999 were grandfathered until August 2001.

         Prior to the adoption of the FCC’s New Rules, we did, from time to time, enter into local marketing agreements, generally in connection with pending station acquisitions. By using local marketing agreements, we can provide programming and other services to a station that we have agreed to acquire before we receive all applicable FCC and other governmental approvals.

         Both the current FCC rules and the FCC’s New Rules generally permit local marketing agreements if the station licensee retains ultimate responsibility for and control of the applicable station, including finances, personnel, programming and compliance with the FCC’s rules and policies. We cannot be sure that we will be able to air all of our scheduled programming on a station with which we may have a LMA or that we would receive the revenue from the sale of advertising for such programming.

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         Joint Sales Agreements. A joint sales agreement is an arrangement where one station sells advertising time on another station. The FCC’s New Rules make joint sales agreements for radio stations an attributable ownership interest if the selling station is located in the same market and sells more than 15% of the other station’s weekly advertising time. The FCC initiated a new rulemaking proceeding that could result in rules which make joint sales agreements for television an attributable ownership interest to the same extent that radio joint sales agreements are an attributable ownership interest. There could be situations where we would want to have a joint sales agreement with another television station in a market where we already own one or more television stations. Therefore, the FCC proceeding could result in the adoption of rules which would limit our opportunities to have those agreements, and that limitation could adversely affect the Company.

         Digital Television Services. The Communications Act and the FCC’s rules have numerous provisions that relate to the establishment of digital television service, which will improve the technical quality of television signals and provide broadcasters the flexibility to offer high-definition television, data broadcasting and other new services. Among other requirements, the FCC must:

         • limit the initial eligibility for licenses to existing television broadcast licensees or permittees (who held those licenses or permits by April 3, 1997);

        • allow digital television licensees to offer ancillary and supplementary services;

        • charge appropriate fees to broadcasters that supply ancillary and supplementary services for which such broadcasters derive certain non-advertising revenues; and

        • require television broadcasters to surrender their license to broadcast analog, or non-digital, signal by February 17, 2009.

        As a starting point, the FCC adopted a table of allotments for digital television. Under the table, all eligible broadcasters with a full-power television station were allocated a separate channel for digital television operation. However, on September 7, 2004, the FCC issued a Report and Order which initiated a process to refine that table of allotments so that all digital television stations will operate on Channels 2 through 51, which are identified by the FCC as the “core” channels. The Report and Order also adopted a procedure that will enable television stations to make certain elections about which channel they would like to use for digital television. It is anticipated that the new table of allotments will be completed sometime in late 2006 or early 2007. The FCC has established a “freeze” on the filing of applications to modify existing analog television stations (like ours) until the new digital table of allotments is completed.

         In the meantime, the FCC’s Report and Order of September 7, 2004 established certain construction deadlines for digital television facilities. All stations affiliated with the top four networks (ABC, CBS, Fox and NBC) in the top 100 markets were required to complete construction of full power digital television facilities by July 1, 2005 if the procedure described above resulted in the retention of the original digital channel assigned to the station. All other commercial and noncommercial television stations must complete construction of full-power digital television facilities by July 1, 2006 if the procedure described above results in the station’s retention of its original digital channel. The Report and Order adopted other deadlines as well concerning the construction of full power digital television facilities.

         We have already constructed full power digital television facilities for each of our stations except the station in Roswell (which was not assigned a digital channel). The FCC’s Report and Order of September 7, 2004 may nonetheless require that we expend monies to build new digital facilities for Roswell. At the same time, the potential exists for new sources of revenue to be derived from digital television. We cannot predict the overall effect the transition to digital television might have on our business.

         Another major issue surrounding the implementation of digital television is the scope of a local cable television system’s obligation to carry the signals of local broadcast television stations. On February 10, 2005, the FCC decided that a cable television system is only obligated under the Communications Act to carry a television station’s “primary video” signal and, accordingly, that a cable television system does not have to carry the television station’s digital signal as well as its analog signal (but must carry the digital signal if the station does not have an analog signal). The new digital technology will enable a television station to broadcast four or more video streams of programming to the public, but the FCC said that the cable television system only has an obligation to carry one of those signals (the “primary video” signal) and not all of them, thus rejecting the broadcasters’ request for the FCC to impose a “multicasting” obligation on cable television systems. The FCC decisions could limit the reach of our television stations’ digital programming and, to that extent, could have an adverse impact on the revenue we derive from station operations.

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         Children’s Television Act. FCC rules limit the amount of commercial matter that a television station may broadcast during programming directed primarily at children 12 years old and younger. FCC rules further require television stations to serve the educational and informational needs of children 16 years old and younger through the stations’ own programming as well as through other means. Television broadcasters must file periodic reports with the FCC to document their compliance with foregoing obligations.

         Dual Network Rule. The FCC repealed the rule that prohibited one of the major television networks (ABC, CBS, NBC or Fox) from owning one of the other television networks. Viacom utilized that change in FCC rules to acquire UPN. However, the FCC’s New Rules retained the rule that prohibits dual ownership of two or more of the four major networks.

         Satellite Home Viewer Act. The Satellite Home Viewer Act, which was renewed and expanded by federal law in December 2004, and related FCC regulations allow satellite carriers to deliver broadcast programming to subscribers who are unable to obtain television network programming over the air from local television stations. Congress later amended the act to facilitate the ability of satellite carriers to provide subscribers with programming from both local and non-local television stations (regardless of the subscribers’ ability to receive the television signals over the air). The FCC has adopted rules to implement certain of those legislative changes and is conducting rulemaking proceedings to implement others. A principal component of the new regulation requires satellite carriers to carry the analog signals of all local television stations in a market if they carry one. We have taken advantage of that regulation to require carriage of our stations on satellite systems in the Salt Lake City, Albuquerque — Santa Fe, Knoxville and Ft. Myers — Naples markets. The Congress recently adopted legislation to renew portions of the Satellite Home Viewer Act that were scheduled to expire and, at the same time, adopted other provisions that affect the delivery of satellite service (including prohibition of one satellite carrier’s requirement that subscribers have a second dish to receive local broadcast signals).

         EEO Rules. FCC rules require broadcast licensees to provide equal employment opportunities. To satisfy those rules, broadcast licensees must widely disseminate information on employment vacancies and promote diversification in their employment. The rules supplement a broadcaster’s obligation to refrain from racial or other prohibited discrimination in its employment practices under other applicable federal as well as state and local laws and regulations. The EEO rules impose substantial record-keeping obligations on broadcasters, require that certain television stations (those with five or more full-time employees) submit reports concerning their EEO efforts mid-way through their license term, and require all television stations to submit information on their EEO compliance with their renewal applications.

         Other Regulatory and Legislative Changes. Federal regulatory agencies and Congress from time to time consider proposals for additional or revised rules. For example, Congress is currently considering legislative proposals that would increase substantially the fines which the FCC can impose for the broadcast of indecent material. We cannot predict how those proposals or other issues discussed above will be resolved, although their outcome could have an adverse or favorable impact on the broadcasting industry generally or us specifically.

         The foregoing summary of FCC and other governmental regulations is not intended to be comprehensive. For further information concerning the nature and extent of federal regulation of broadcast stations, you should refer to the Communications Act, other Congressional acts, FCC rules, and the public notices and rulings of the FCC.

Employees

         At December 31, 2005, our continuing operations had 195 employees, none of whom are subject to collective bargaining agreements. We believe that our relationships with our employees are good.

Available Information

         The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to reports filed pursuant to Section 13 and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge on the Company’s website at www. acmecommunications.com.

Item 1A. Risk Factors

         The following factors could have a material and adverse impact on our business:

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          Our operating results are primarily dependent on advertising revenue, and as a result, we may be more vulnerable to economic downturns than businesses in other industries.

         We derive substantially all of our revenues from advertisers in diverse industries. The success of our business depends in part upon factors beyond our control, such as:

         If a number of our advertisers reduce their expenditures due to a general economic downturn, or an economic downturn in one or more industries or regions, our operating results will be materially and adversely affected. Furthermore, our ratings depend partly upon unpredictable and volatile factors beyond our control, such as viewer preferences, competing programming and the availability of other entertainment activities. A shift in viewer preferences could cause our programming not to gain popularity or to decline in popularity, which could cause our advertising revenues to decline. In addition, we, and those on whom we rely for programming, may not be able to anticipate and react effectively to shifts in viewer tastes and interests in the markets.

      Our continuing television stations are relatively new in their markets and several stations have never generated positive cash flow.

         All of our continuing television stations are relatively new in their markets and are still developing. Several of them have never generated positive cash flow from operations and the group has never generated positive cash flow from operations.

         The developmental nature of our continuing stations poses risks to stockholders, including the following:

         We may not be able to generate sufficient cash flow to meet our debt service obligations, forcing us to refinance all or aportion of our indebtedness, sell assets or obtain additional financing.

          We are a net borrower, and our ability to make scheduled interest payments on our indebtedness will depend on our future performance, which, to a certain extent, will be subject to economic, financial, competitive and other factors beyond our control. Our business may not continue to generate sufficient cash flow from operations in the future to pay our indebtedness or to fund our other liquidity needs. As a result, we may need to refinance all or a portion of our indebtedness, on or before maturity, sell assets or obtain additional financing. We may not be able to refinance any of our indebtedness on commercially reasonable terms, if at all. If we are unable to generate sufficient cash flow or refinance our indebtedness on commercially reasonable terms, we may have to seek to restructure or replace our remaining debt obligations, which could have a material adverse effect on our results of operations and financial condition and the price of our Common Stock and the market, if any, for our debt. Furthermore, our history of operating and net losses may make it difficult to obtain restructured or replacement financing.

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         The terms of our debt limit our operating flexibility and growth opportunities and may put us at a greater risk of default and acceleration of our debt.

         Our senior credit facility contains restrictive covenants that may limit our ability to:

         Additionally, if and as we sell any of our stations, our availability under our senior credit facility will reduce since our maximum available borrowings are calculated as a declining percentage, based on number of stations owned at any given time, of lender appraised station values.

         We may evaluate strategic alternatives to sell some or substantially all of our Company’s assets, however we cannot assure you that a transaction will be successfully completed.

         We may commence a process to evaluate strategic alternatives to sell some or substantially all of our Company’s assets to maximize stockholder value. The process to evaluate strategic alternatives may or may not result in an agreement to sell some or substantially all of our assets. In addition, our ability to complete a transaction, if our Board decides to pursue one, will depend on numerous factors, some of which are outside of our control, including factors affecting the availability of financing for transactions or the financial markets in general. Even if a transaction is completed, there can be no assurance that it will have a positive effect on the price of our Common Stock.  Finally, any process of evaluating strategic alternatives will likely be time consuming and expensive. 

         Whether or not we pursue a transaction to sell our Company’s assets, there may be negative impacts on the Company as a result of the evaluation of strategic alternatives

         The financial results and operations of the Company may be adversely affected by the diversion of management resources to the process to evaluate strategic alternatives and uncertainty regarding the outcome of the process. For example, the uncertainty of whether we will continue to own this Company in the future could lead us to lose or fail to attract employees, customers or business partners.  Although we have taken and would take further steps, if necessary to address these risks, including employee retention plans, there can be no assurance that any such losses or distractions will not adversely affect the operations or financial results of the Company.

         Our business is subject to significant rerun syndicated programming costs, and increased rerun syndication costs could adversely affect our operating results.

        In addition to our stations airing prime time network programming, our stations air syndicated programs. If the pricing for rerun syndication programming increases, such increases in costs could adversely affect our financial performance. In addition, as most rerun syndication programming is purchased well in advance of it becoming available for our stations to air, we are at risk of such acquired programming not achieving its expected ratings and the possibility that the revenues generated by such programs will not recoup the contractual programming costs. In some instances, we may have to replace programs before their costs have been fully amortized, resulting in write-offs that increase station operating costs. In addition, we are generally committed to purchasing all future network seasons of certain programming, irrespective of financial performance.

         If we are unable to obtain popular rerun syndicated programming, our ratings could decrease which could adversely affect the Company’s operating results.

         Competition for popular programming licensed from third parties is intense, and the Company may be outbid by its competitors for the rights to new popular syndicated rerun programming or in connection with the renewal of popular rerun syndicated programming the Company currently licenses. In addition, renewal costs could substantially exceed the existing contract costs. If the Company is unable to acquire certain popular programming, our ratings could decrease which could adversely affect our revenue.

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         We have a substantial amount of intangible assets, and if we are required to write down intangible assets in future periods, it would reduce net income, which in turn could materially and adversely affect the results of operations.

         We have a substantial amount of intangible assets and an adverse change in our performance or in economic conditions within our markets could lead to future impairments that could negatively affect our operating results.

         Approximately $83.2 million, or 52%, of our total assets as of December 31, 2005 consists of unamortized intangible assets. Intangible assets principally include broadcast licenses and goodwill. SFAS No. 142, “Goodwill and Other Intangible Assets,” requires, among other things, the impairment testing of goodwill and other intangible assets. If at any point in the future the value of these intangible assets decreased, we would be required to incur an impairment charge that could significantly adversely impact our reported results of operations. We recorded impairments of our broadcast licenses of $3.6 million, $3.0 million and $4.0 million for the years ended December 31, 2005, 2004 and 2003, respectively, due to lower valuations for certain of our stations’ FCC broadcast licenses.

         Our Chief Executive Officer might have conflicts of interest with our business.

         Mr. Jamie Kellner’s consulting agreement provides that, even while he serves as an officer of the Company, he may perform services for other businesses unaffiliated with ours that, in certain limited circumstances, may be competitive. Because of Mr. Kellner’s experience in the television broadcast industry, if Mr. Kellner provides services to a competing business, it could materially affect our operations. Additionally, although Mr. Kellner’s consulting agreement requires him to devote his time, attention, knowledge and skills to fulfill his duties as our Chairman and Chief Executive Officer, it does not require a minimum time commitment.

         Our business operations could be significantly disrupted if we lose members of our management team.

         Our success is largely dependent on the continued services of our senior management team, which includes Mr. Jamie Kellner, our Chairman and Chief Executive Officer, Mr. Doug Gealy, our President and Chief Operating Officer, and Tom Allen, our Executive Vice President and Chief Financial Officer. All three executives are employed under consulting/employment agreements that expire in September 2006. If their employment is not secured beyond that expiration date, our operations might be adversely affected.

         Delaware corporate law and our certificate of incorporation and bylaws could hinder acquisition of our company, which could adversely affect the trading price of our Common Stock.

         Delaware corporate law and our certificate of incorporation and bylaws contain provisions that could delay, defer or prevent a change of control of our company or a change in our management, even if a change in control or a change in management would benefit us. These provisions could also discourage proxy contests and make it more difficult for stockholders to elect directors and take other corporate actions. As a result, these provisions could limit the price that investors are willing to pay in the future for shares of our Common Stock.

         The Company faces risks relating to competition for the leisure and entertainment time of audiences, which has intensified in part due to advances in technology.

         The Company’s business is subject to risks relating to increasing competition for the leisure and entertainment time of consumers. The Company competes with all other sources of news, information and entertainment, including movies, live events, radio broadcasts, home video products, print media and the Internet. Furthermore, technological advancements, such as video on demand, new video formats and streaming capabilities and downloading via the Internet, have increased the number of media and entertainment choices available to consumers and intensified the challenges posed by audience fragmentation. The increasing number of choices available to audiences could negatively impact not only consumer demand for the Company’s stations, but also advertisers’ willingness to purchase advertising from the Company. If the Company does not respond appropriately to further increases in the leisure and entertainment choices available to consumers, it could have an adverse effect on the Company’s competitive position and revenues.

         The Company faces risks relating to competition from cable and satellite broadcasters which could reduce our ratings and harm our ability to generate advertising revenues.

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         Networks that air programming exclusively on cable or direct broadcast satellite television, continue to increase their aggregate share of overall television viewers. A continued decline in broadcast television viewership could result in reduced industry advertising revenues and adversely affect our business. Furthermore, cable operators have become increasingly aggressive and successful in competing for local market advertising revenue as they have been able to upgrade sales capabilities and continue to offer more targeted viewer audiences. This increased competition to local television broadcasters has, and will continue to have, an adverse effect on our business.

         New and emerging technologies may reduce advertising revenues.

         New and emerging technologies, such as digital video recorders (“DVR”) that allow viewers to digitally record and play back television programming, may cause changes in consumer behavior that could affect the attractiveness of our offerings to advertisers and could, therefore, adversely affect our revenues. The DVR penetration rate has increased dramatically over recent years as direct broadcast satellite and cable services are now including such devices for nominal fees in their current set-top boxes and we expect DVR penetration rates to continue to rise. In addition, further increases in the use of portable digital devices (e.g., iPods) which allow users to view content of their own choosing, in their own time, while avoiding traditional commercial advertisements, could adversely affect our advertising revenues. Furthermore, an increasing number of consumers are accessing programs through downloading via the internet. Advertisers and agencies are increasingly raising concerns that this new technology is reducing the value of their commercial messages.

         Our industry is subject to a government-mandated analog-digital conversion process which may ultimately lead to reduced viewership and advertising revenues.

         Federal legislation now requires us to cease all analog transmissions by February 17, 2009. According to industry reports, television sets with digital receivers are only present in approximately 12% of U.S. television households. Although the federal government has created a subsidy for households with analog over-the-air receivers to receive free digital converters, the subsidy may not be large enough to cover all households with over-the-air receivers and a significant percentage of such households may not learn of or choose to take advantage of the subsidy. Furthermore, we are unable to predict the extent of consumer demand for digital television or when that demand will arise. If we are required to cease analog operations before viewers have converted to digital television, our revenues and operating results will be adversely affected.

         FCC regulation of our business could adversely affect our licenses.

         Our operations are subject to extensive regulation by the FCC. Our licenses, which provide us with the rights to broadcast our programming, are subject to periodic renewal by the FCC. We have from time to time violated certain rules of the FCC and these violations, while unintentional, could adversely affect our license renewal and lead to fines assessed by the FCC or further sanctions. We have currently filed separate renewal applications for our five licenses that were scheduled to expire in 2005. Those renewal applications are still pending before the FCC. If the FCC finds that we have not complied with certain regulations or if a party files a complaint, the FCC could refuse to renew one of our FCC licenses or could issue the FCC license subject to conditions. The non-renewal or conditional renewal of one or more of our television broadcast licenses could harm our business.

Item 1B. Unresolved Staff Comments

         We have no unresolved written comments from the Staff of the Securities and Exchange Commission.

Item 2. Properties

         All of our leased studio, office and tower facilities are leased pursuant to long-term leases. We believe that all facilities and equipment are suitable for their purposes, adequate, with minor changes and additions, for conducting operations as presently contemplated. Set forth below is information with respect to our studios and other facilities for our current stations and our discontinued operations. Information as to tower size reflects the height above the average terrain of the antenna radiation center.

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Item 3. Legal Proceedings

         We currently, and from time to time, are involved in litigation incidental to the conduct of our business. We maintain comprehensive general liability and other insurance that we believe to be adequate for the purpose. We are not currently a party to any lawsuit or proceeding that we believe could have a material adverse effect on our consolidated financial condition or results of operations.

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

         No matter was submitted to a vote of the security holders during the fourth quarter of 2005.

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

         Our common stock is traded on the NASDAQ National Market under the symbol ACME. As of March 17, 2006, there were 34 stockholders of record and the closing price of our common stock that day was $4.05.

         We have not declared or paid any cash dividends or distributions on our common stock since our inception. We anticipate that, for the foreseeable future, any earnings will be retained for use in our business and no cash dividends will be paid on our common stock. Any payment of future cash dividends on our common stock will be dependent upon the ability of our subsidiaries to pay dividends or make cash payments or advances to us. Our current restructured senior credit facility with Foothill Capital Corporation imposes restrictions on our subsidiaries’ ability to make these payments. For a further description of such restriction, see “Notes to Consolidated Financial Statements – (7) Notes Payable Under Revolving Credit Facility and Second-Lien Term Loans” and (14) Subsequent Events. Our ability to pay future dividends will also be subject to restrictions under any future debt obligations and other factors that our board of directors deems relevant.

         Below are the NASDAQ high, low and closing prices of ACME Communications, Inc. for each quarter of 2005 and 2004:

          The “Equity Compensation Plans” table required in Item 5 is incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A relating to our 2006 Annual Meeting of Stockholders.

         On November 8, 2004, our Board of Directors authorized the Company to repurchase up to $10.0 million of our common stock in open market and private transactions through December 31, 2005. This authorization expired without being renewed and no shares were repurchased under this authorization.

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Item 6. Selected Financial Data

Following is the Company’s selected consolidated financial data for the past five years. In accordance with generally accepted accounting principles, operating results relating to our St. Louis and Portland stations, which were sold in 2003, and to our Salt Lake City station, which is subject to a sale as of December 31, 2005 and was sold on April 4, 2006, are accounted for as discontinued operations. This data is derived from our audited Consolidated Financial Statements and should be read in conjunction with the Consolidated Financial Statements and Notes thereto (located at Item 8 of this filing) and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (located at Item 7 of this filing).

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

         In March 2003, we sold two of our stations, KPLR-TV serving the St. Louis marketplace and KWBP-TV, serving the Portland, Oregon marketplace, to subsidiaries of the Tribune Company for an aggregate, all-cash, consideration of $275 million plus a payment for the closing-date working capital of the St. Louis Station in the amount of approximately $4.6 million. In August 2005, we entered into an agreement to sell our Salt Lake City station, KUWB, to subsidiaries of Clear Channel Communications, Inc. for an all-cash consideration of $18.5 million. We completed the Clear Channel Transaction on April 4, 2006. The results relating to these three stations have been accounted for as discontinued operations in accordance with U.S. generally accepted accounting principles (“GAAP”).

         The eight television stations that comprise our continuing operations are regionally diverse and range in market size (based on television households) from the 46th through the 85^th largest in the nation. All but one of our stations are affiliates of The WB Television Network. Our second station in the Albuquerque-Santa Fe marketplace is a UPN affiliate. Our eight stations have only been on the air, or achieving measurable ratings, for 5-7 years.

        Effective September 2006, the WB and UPN networks will cease operations and our WB affiliated stations will begin carrying The CW Network’s programming pursuant to long-term affiliation agreements. The CW, which is a joint venture between CBS Corporation and Warner Bros. Entertainment, will launch with many of the hit shows from current WB and UPN network lineups, like Smallville, America’s Next Top Model, Gilmore Girls and Everybody Hates Chris and we believe The CW’s initial ratings will surpass the current ratings of either The WB or UPN. Similarly, our second station in the Albuquerque-Santa Fe market, KASY, will become an affiliate of the new Fox-owned MyNetworkTV network in September 2006. The network will launch with a telenovela format of programming and we are optimistic that this format, coupled with the higher number of commercials MyNetworkTV allows its affiliates to air, will prove successful in that market.

         We derive revenues primarily from the sale of advertising time to local, regional and national advertisers and from program licensing fees related to The Daily Buzz that have been a fast growing component of our revenue base. Our advertising revenues depend on popular programming that attracts audiences in the demographic groups targeted by advertisers, allowing us to sell advertising time at satisfactory rates. Similar to all commercial television stations, our rates are directly affected by the number of and demographic makeup of our viewing audience, as measured by Nielsen Media Research. Our revenues also depend significantly on factors such as the national and local economy and the level of local competition.

         Approximately 65-75% of our revenues are derived from programming that airs between the hours of 5:00 p.m. to midnight, Monday through Sunday. Network prime time, which is a subset of this daypart, accounts for 15-20% of our total revenues. Our average broadcast season (mid-September to mid-September) ratings among adults viewers ages 18-49 in this 5:00 p.m. to midnight daypart, based on the average of the three major sweeps ratings periods (November, February and May of each broadcast season), grew steadily until the 2003 / 2004 season, when our weighted average rating fell to a 1.7 from the previous season’s 1.8 rating. Our weighted average rating for the 2004 / 2005 season declined again to 1.5. Our loss in in-market viewing shares for this same time period and demographic was less severe than our broadcast competitors, as a group, also experienced rating declines. We believe our recent ratings declines, while not limited to our prime-time daypart, are attributable mostly to the decline in The WB Network’s prime-time ratings and the impact that such a drop, in our highest viewed daypart, has upon the surrounding dayparts. More recently, our November 2005 weighted average ratings for our continuing stations in this 5:00 p.m. – midnight period among adult viewers ages 18-49 decreased 4% from the November 2004 ratings period. But more importantly, on a broader, composite demographic basis for the same time period, our share of viewers relative to our local commercial in-market competitors actually increased during the November 2005 sweeps by 6%. Also, effective January 2, 2006, The WB Network replaced its weekday afternoon children’s programming with programming targeted toward adult viewers. We believe that this programming change will yield two immediate benefits to us; first, such programming change should provide us with more salable commercial inventory and second, it should deliver better audience lead-ins to our syndicated sit-com programming that airs after this programming. This programming replacement which we believe to be a positive change for us plus our rebound demonstrated in our November 2005 in-market viewing share should provide us with positive momentum to generate increased revenues in 2006. We are optimistic that when The CW and MyNetworkTV networks launch in September 2006 we will be positioned to further accelerate our revenue growth.

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         Our stations are generally ranked fifth (or in the case of our second station in the Albuquerque-Santa Fe market, sixth) in their respective markets in terms of either their share of viewers or their share of the market’s broadcast television revenue. In periods of lower advertising demand –as has been the case for much of the past three years — competition from market leaders, generally the ABC, CBS, NBC and Fox affiliated stations, increases as these stations become more aggressive in their pricing to maintain their revenue share. Over the past several years, biennial political spending in the even years has seen a dramatic growth. While we do not directly benefit from this political advertising since most such advertising generally targets viewers older than our normal viewing audience, we indirectly benefit as the increased demand for political advertising reduces the overall inventory available to non-political advertisers in each market which consequently increases the overall advertising price for such non-political advertisers. We expect that the 2006 broadcast season should see a significant increase in overall television market revenues, as strong political advertising demand should again increase the overall television advertising spending in what has become a biennial spike in advertising revenues.

         Similar to the television advertising business in general, our revenues are usually its greatest during the fourth quarter of each year, primarily due to increased expenditures by advertisers in anticipation of holiday season consumer spending and an increase in viewership during this period. We generally pay commissions to advertising agencies on local, regional and national advertising and to national sales representatives on national advertising. Our revenues reflect deductions from gross revenues for commissions payable to advertising agencies and national sales representatives.

         Our primary ongoing operating expenses are costs of services, selling, general and administrative expenses, corporate expenses, depreciation and amortization and expenses related to impairments in our broadcast licenses. Costs of services include programming costs, which consist primarily of amortization of broadcast rights relating to syndicated programs as well as costs associated with our morning news show, The Daily Buzz (which, as of January 1, 2004, became jointly produced by us and Emmis) and music rights fees. Other costs of service include advertising expenses targeted at viewers, which is net of any reimbursement received or due to us for such advertising and promotion from The WB Network, UPN or from other program suppliers, and engineering and transmission related expenses. Selling, general and administrative expenses primarily include salaries, sales commissions to account executives, ratings service expenses, insurance and various related overhead expenses. Corporate expenses reflect costs of corporate management, which includes senior management and other centralized management support staff, along with investor relations expenses, professional fees, directors and officers insurance and other related corporate overhead.

         In the fall of 2000, we began to experience a noticeable slowdown in non-political advertiser demand. By December 2000, it was clear that there was a dramatic weakness in demand affecting all media-related companies and there were broader indications that the U.S. economy was in a slowdown. This slack demand continued through all of 2001, and the resultant effect of the events of September 11, 2001 only made a tough year worse. By industry accounts, 2001 television revenues declined approximately 13-15% over 2000, the steepest decline in the last 50 years. Nearly every publicly traded television broadcaster, including us, posted year-over-year declines in advertising revenues. Advertising demand began to rebound early in 2002 and by the end of the year, aided by robust political advertising demand in most markets, year-over-year gains in most of our markets averaged approximately 10%. In March 2003, Operation Freedom commenced in Iraq and advertising demand was adversely affected for several weeks. Overall, there was only modest growth in non-political advertising revenues in 2003 for our markets. While most expected that the calendar year 2004 would reflect an improved operating environment compared to 2003, despite record breaking political advertising, non-political advertising revenues increased only 2% for the entire year. In 2005, local advertising demand was very solid, averaging an annual increase compared to 2004 of 8.0% in our continuing markets. National advertising, however, was very weak, growing only 1.4% over 2004 despite the record political spending which reduced the overall advertising inventory space available which significantly displaced non-political advertisers and consequently increased the non-political advertising rates. We believe this weak national advertising demand was due to a number of factors, including continued consolidation of advertisers and their advertising budgets, a redirecting of advertising budgets to other television and non-television media and a continued uneven economic recovery.

Results of Operations

Year Ended December 31, 2005 compared to Year Ended December 31, 2004

         In calendar year 2005 our continuing station group achieved a modest 1% gain in net revenue despite a modest decline in our viewership and market revenue shares. We believe the growth in our stations’ net revenues was driven by a 6% growth in underlying non-political market revenues and an improved sales performance at our stations in Ft. Myers, Green Bay and Madison. Net revenues also benefited from a 186%, or $1.1 million, increase over the prior year at our The Daily Buzz venture. However, our combined station group and The Daily Buzz net revenue growth of 4% — $40.9 million in 2005 compared to $39.3 million in 2004 — did not keep pace with the growth in our costs of services and our resulting operating losses grew compared to calendar 2004.

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         Programming expenses increased 12% to $17.2 million compared to the prior year’s programming expense of $15.4 million. This increase was attributable primarily to our continued investment in programming, including Malcolm in the Middle which launched in syndication in September 2004 at four of our stations, a 20% increase in our The Daily Buzz production costs (largely driven by increased news costs related to our increased licensing revenue) and a year-over-year increase of $145,000 in the write-downs of program rights to adjust to net realizable value.

         Other costs of services increased 4% to $6.6 million compared to a prior year expense of $6.3 million. This increase was primarily attributable to increased utilities and operating lease expenses relating to the roll-out of digital transmissions at several of our stations during the last half of 2004.

         Selling, General and Administrative expenses remained unchanged from the previous year and were $15.4 million for both 2005 and 2004.

         Corporate expenses for 2005 decreased to $3.9 million from $4.1 million in 2004. This 3% decrease in corporate expenses was primarily due to lower costs related to our second year implementation of Section 404 of the Sarbanes-Oxley Act our internal controls procedures and documentation.

         Depreciation and amortization expense for 2005 was $4.7 million compared to $4.6 million for 2004. This increase reflects our continued capital expenditures to convert to HDTV, largely offset by assets becoming fully depreciated during the year.

         We wrote off $872,000 and $1.0 million in 2005 and 2004, respectively, in costs associated with our efforts to secure construction permits for television stations in the Lexington, Kentucky and Richmond, Virginia markets as we determined that such permits were not likely to be issued by the FCC due to short-spacing signal issues.

         Impairment of broadcast licenses for 2005 was $3.6 million compared to an impairment expense of $3.0 million in 2004. Both impairment charges reflected lower valuations for certain of our stations’ FCC licenses.

         Interest expense for 2005, net of interest allocated to discontinued operations, was $3.4 million compared to $1.9 million for 2004. This significant increase reflects both the increased debt attributable to funding continuing operations and higher interest rates.

         We incurred income tax expense of $1.1 million in 2005 compared to income tax expense of $1.7 million in 2004. The income tax expense in both years primarily relate to deferred tax liabilities associated with amortization of intangibles for tax purposes.

         Our loss from discontinued operations in 2005 was approximately $2.1 million and relates primarily to our losses at our Salt Lake City station and related allocated interest expense, net of $1.6 million in additional consideration received from Tribune in connection with its use of tax net operating losses from the Tribune Transaction. In 2004, losses from our Salt Lake City station and additional state tax related to the Tribune Transaction accounted for the loss of discontinued operations of $4.3 million.

Year Ended December 31, 2004 compared to Year Ended December 31, 2003

         In calendar year 2004 our station group achieved revenue gains despite a modest decline in our viewership shares and relatively sluggish market conditions apart from political advertising. The growth in our net revenues was attributable to the combined 1.5% growth in underlying non-political market revenues and a growth in our station group’s share of those revenues. Our revenue growth exceeded the growth in our costs of services, excluding depreciation and amortization, and allowed us to continue to narrow our operating losses compared to calendar 2003.

         Net revenues for the year ended December 31, 2004 increased 10% to $39.3 million compared to $35.7 million for the year ended December 31, 2003.

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         Programming expenses increased 15% to $15.4 million compared to the prior year’s programming expense of $13.5 million. This increase was attributable primarily to our continued investment in programming, including Malcolm in the Middle which launched in syndication in September 2004 at four of our stations and an increase in 2004 in the write-down of program rights to adjust to net realizable value of $269,000 compared to 2003.

         Other costs of services increased 14% to $6.3 million compared to a prior year expense of $5.6 million. This increase was primarily attributable to increased utilities and operating lease expenses relating to the roll-out of digital transmissions at several of our stations during 2003 and 2004.

         Selling, General and Administrative expenses decreased 1% to $15.4 million compared to a prior year expense of $15.5 million. This decrease in SG&A relates primarily to reduced metering costs in one of our stations due to another station in the market participating in the costs of such meters.

         Corporate expenses for 2004 increased to $4.0 million from $3.6 million in 2003. This 14% increase in corporate expense was due primarily to increased costs related to our implementation of Section 404 of the Sarbanes-Oxley Act relating to our internal controls.

         Depreciation and amortization expense for 2004 was $4.6 million compared to $3.8 million for 2003. This increase reflects our continued capital expenditures over the past two years in connection with the conversion to digital, and more recently, to HDTV, and to our facility upgrades at our Madison station.

         In 2004, we wrote-off $1.0 million in costs associated with our efforts to secure a construction permit for a television station in the Richmond, Virginia market as we determined that it was not likely going to be issued by the FCC.

         Impairment of broadcast licenses for 2004 was $3.0 million compared to an impairment expense of $4.0 million in 2003. Both impairment charges reflected lower valuations for certain of our smaller market station licenses.

         Interest expense for 2004, net of interest expense allocated to discontinued operations, was $1.9 million compared to $11.9 million for 2003. This $10.0 million decrease in interest expense reflects the redemption in 2003 of our 10 7/8% Senior Discount Notes due 2004 (the “Television Notes”) and our 12% Senior Secured Discount Notes (the “Intermediate Notes”) with the proceeds from the sale of our St. Louis and Portland, Oregon stations.

         We incurred income tax expense of $1.7 million in 2004 compared to income tax expense of $2.5 million in 2003. The income tax expense in both years primarily relate to deferred tax liabilities associated with amortization of intangibles for tax purposes.

         Our loss from discontinued operations for the twelve months ended December 31, 2004 was approximately $4.3 million and represents primarily the losses of our Salt Lake City station, including allocated interest expense plus additional state taxes payable attributable to the gain on the sale of our Tribune Transaction, net of a remittance from them of state tax NOL benefits they received subsequent to the March 2003 closing. Our income from discontinued operations for the twelve months ended December 31, 2003 was $110.3 million, which included a pre-tax gain on sale of assets of $87.0 million relating to the Tribune Transaction. Our pre-tax loss from operations of discontinued operations for the twelve months ended December 31, 2003 was $1.2 million, comprised mostly of interest expense.

Liquidity and Capital Resources

         Prior to 2003, we carried a high level of debt arising from the issuance of our Television Notes and Intermediate Notes in September 1997. Largely due to our desire to significantly reduce our debt levels, we sold our biggest stations (i.e., St. Louis and Portland, Oregon) to Tribune in March 2003 and during 2003 redeemed substantially all of our long-term debt, including both our Television Notes and our Intermediate Notes.

         In November 2004, we amended our senior credit facility and simultaneously completed a new $20 million second-lien term loan facility (“SLTL”). The senior credit facility was amended to increase the maximum borrowings thereunder to $60 million, reduce the borrowing rates, provide us the ability to repurchase up to $10 million of our common stock, extend the maturity date to November 2008 and amend and eliminate certain of our financial covenants. The SLTL matures in May 2009, and bears interest at LIBOR plus 7.00%, with interest payable quarterly. The financial covenants in both agreements are limited to (a) quarterly tests for minimum trailing twelve month EBITDA, (b) an annual test for maximum capital expenditures and (c) a covenant that the combined outstanding borrowings under both the senior credit facility and the SLTL facility will not exceed 60% of the Company’s most recent lender-approved appraised valuation of our stations.

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         As of December 31, 2005, the balances due under our revolving credit facility and SLTL were approximately $33.0 million and $20.0 million, respectively, and we were not in compliance with the minimum EBITDA covenants contained in both credit agreements. The weighted average interest rate on the outstanding borrowings at that date was 9.3% for the revolving credit facility and 12.2% for the SLTL.

         On March 29, 2006 we amended our senior credit facility to eliminate all financial covenants effective December 31, 2005, extend the term until May 2009, change the borrowing rates, increase the amount of our stock we can repurchase up to $20 million and to allow borrowings under the facility or from future station sales to repay the SLTL.

         The amended senior credit facility allows for borrowings up to a maximum of the lower of $60 million or 50% of our stations’ aggregate appraised “STAC” (start-up station with an affiliation contract) values, which are lower than the fair value of our station group. On the date that we amended our senior credit facility, we borrowed $10 million under the senior credit facility to reduce our outstanding borrowings under the SLTL. On April 4, we completed the Clear Channel Transaction and repaid the $10 million remaining balance under the SLTL and terminated that facility. The remaining $8.5 million portion of the sales proceeds were used to reduce our outstanding borrowings under the senior credit facility to approximately $36 million. Based on the current STAC value of our remaining stations, our maximum borrowings post the Clear Channel Transaction are approximately $56.0 million. Our availability as of April 4, 2006 under the revolver, net of approximately $1.9 million associated with lender reserves for projected six-month cash interest payments, was approximately $16.9 million.

         We have been, and continue to be, a net borrower. Outstanding borrowings under our credit facilities grew from $27.0 million at December 31, 2003 to $44.6 million at December 31, 2004 and to $53.0 million at December 31, 2005. The sale of our Salt Lake City station reduced our outstanding borrowings by approximately the sales price of $18.5 million and also reduced our operating losses and related negative cash flows, as our station there has been the most unprofitable in our group. Still, given our remaining outstanding debt and the interest thereon, we will continue to be a net borrower at least into 2007. Our amended senior credit facility contains a provision that upon the occurrence of an event or condition that has a material adverse change on our business (a “MAC”), the lenders can refuse to make additional advances under the facility.  Accordingly, if a MAC occurs in the future, we might not have access to funds under our senior credit facility which may be necessary for us to meet our obligations, including cash interest payable to the lenders, as they become due.  If we fail to meet such obligations as they become due, the lenders could claim a default and accelerate all amounts due under the Senior Credit Facility.  

         Net cash used in operating activities was $5.9 million for 2005 compared to net cash used in operating activities of $3.0 million for 2004. This increase in use of cash of $3.0 million was primarily due to increased cash interest expense of $1.6 million and an increase in working capital requirements.

         Net cash used in investing activities was $653,000 for 2005 compared to $6.3 million for 2004. The $5.7 million decrease in net cash used in investing activities relates primarily to a decrease in capital expenditures in 2005 of $3.8 million – most of which related to the build-out of our new transmitter facilities in Madison — and the net proceeds from the sale of our Flint construction permit in April 2005.

        Net cash provided by financing activities for 2005 was $8.7 million compared to $12.3 million provided by financing activities for 2004. This $3.6 million decrease relates primarily to our 2004 stock repurchases of $5.0 million which did not recur in 2005, net of reduced borrowings under our credit facilities.

        In our discontinued operations, net cash used in operating activities for 2005 was approximately $4.2 million compared to $1.8 million used in operating activities for 2004. This increased usage relates to higher losses at our Salt Lake City station in 2005 driven by higher programming payments and lower revenues along with higher allocated interest on higher borrowing rates. Net cash provided by investing activities was $1.6 million for 2005 compared to $645,000 used in investing activities for 2004. This significant increase in investing cash flows relates primarily to the $1.6 million tax-related additional consideration received from the Tribune Company in 2005 compared to a net $411,000 in taxes paid in 2004 relating to the same transaction. There was no cash related to financing activities for our discontinued operations in either 2005 or 2004.

        At December 31, 2005, amounts due under all capital lease facilities totaled $942,000 bearing an implicit average interest rate of 5.3% per annum. We expect to incur approximately $1.0 million in additional miscellaneous capital expenditures in 2006, a significantly reduced amount compared to prior years as we completed our digital buildouts including our HDTV upgrades in 2005 and we expect no significant projects in 2006.

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         At December 31, 2005, we had $1.1 million of unrestricted cash and negative working capital of $5.1 million, including the $18.5 million SLTL classified as a current liability in connection with our credit facility restructure. Apart from any proceeds that might be generated as a result of station sales, it will be necessary for us to continue to borrow under our senior credit facility as the cash generated from our station operations will not offset our projected capital expenditures, cash corporate expenses and cash interest costs during at least the next twelve months. We do not believe it is likely that the FCC will grant the construction permit applications in either Lexington or Richmond, but if they were to be granted, the license acquisition for Lexington could be funded, under certain conditions, through our revolving credit facility. We have no ability to fund the Richmond construction permit through our revolver if it were ever granted. Our restructured credit facilities require lender approval for any station acquisitions. Since our new credit facilities have no operating performance covenants, we believe we have reduced our exposure to risk resulting from an economic downturn. Such a downturn, however, could still adversely affect our business and result in an increase in our borrowing needs and a possible reduction in our STAC values and, therefore, debt capacity. If our maximum borrowings allowed were to be reduced to an amount below our outstanding borrowings, we would be forced to amend our loan agreement, find alternative financing or sell station assets.

Contractual Cash Obligations

Our contractual cash obligations by year of payment, in thousands, including the repayment of our revolving credit facility and our SLTL, are as follows:

         In addition to the above contractual obligations, we expect that our capital expenditures for 2006 will be approximately $1.0 million.

Critical Accounting Policies and Estimates

         Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to broadcast rights, bad debts, intangible assets, income taxes, and contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

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Programming Rights

         Our programming rights are stated, on a gross basis, at the lower of amortized cost or estimated realizable value. We evaluate estimated realizable value of programming rights based on current usage and revenue performance and projected future revenue and usage of such programs. Changes in our programming schedule could impact the estimated realizable value of programming. In addition, estimates of future revenue performance relate to the number of advertising spots we sell and the amount generated from such sales. A decrease in the number of spots sold or the amount for such sales could also impact our estimated realizable value. During 2005, 2004 and 2003, we recorded write-downs of program rights due to impairments of $739,000, $594,000 and $325,000, respectively. The increase in the 2005 write-down was due principally to write-downs related to Malcolm in the Middle and, to a lesser extent, The Drew Carey Show in two of our markets.

Impairment of Long-Lived Asset Values

         The carrying values of our long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The impairment analysis is based upon estimated future undiscounted cash flows of the stations. Based on these estimates, we have not recorded any impairment related to long-lived assets for 2005, 2004 or 2003. Future adverse changes in market conditions, changes in technology and other factors could reduce the expected future cash flows and result in an impairment charge.

Revenue Recognition

         We record revenue from the sale of airtime related to advertising and contracted time at the time of broadcast. Revenue and expenses associated with barter agreements in which broadcast time is exchanged for programming rights are recorded at the estimated average rate of the airtime exchanged. We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We utilize information available to us, including the timing of payments and the financial condition of our customers, to estimate our allowance for doubtful accounts. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. We do not have a significant concentration of accounts receivable from any single customer or industry segment.

Accounting for Goodwill and Other Intangible Assets

         Intangible assets consist of broadcast licenses and goodwill.

         SFAS No. 141, Business Combinations, requires that the purchase method of accounting be used for all business combinations. SFAS No. 141 also specifies criteria that must be met before intangible assets acquired in a purchase method business combination can be recognized and reported apart from goodwill, noting that any purchase price allocable to an assembled workforce may not be accounted for separately. SFAS No. 142, Goodwill and Other Intangible Assets, requires that goodwill and intangible assets with indefinite useful lives be tested for impairment (at least annually) in accordance with the provisions of SFAS No. 142. SFAS No. 142 also requires that intangible assets with definite useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS No. 144.

         The Company re-evaluated its reporting units effective December 31, 2003 and determined that the appropriate level to test goodwill for impairment should be at the market level. Previously, the Company evaluated its goodwill on a consolidated basis. Based on the Company’s evaluations of goodwill (including goodwill relating to discontinued operations) at December 31, 2003, December 31, 2004 and December 31, 2005, there was no impairment of goodwill.

         In connection with the adoption with SFAS No. 142, the Company determined that its intangible assets (broadcast licenses) have an indefinite life. Accordingly, the Company is required to test these intangible assets in accordance with the provisions of Statement 142 and did not amortize these intangibles beginning January 1, 2002. The Company evaluates broadcast licenses on a station-by-station basis, except for its two stations serving the Albuquerque — Santa Fe, New Mexico marketplace, which are evaluated together. Based on the evaluation at January 1, 2002 and December 31, 2002, there was no impairment of intangible assets. Based upon evaluations, the Company determined that due primarily to a decline in market conditions at certain stations, certain of its broadcast licenses had become impaired and a $3.6 million, $3.0 million and $4.0 million impairment expense was recorded at December 31, 2005, 2004 and 2003, respectively. These impairments resulted from the carrying value of the broadcast licenses exceeding their fair values and are included in accumulated amortization.

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Impact of Recently Adopted Accounting Pronouncements

         In February 2003, the FASB issued Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN 46”), which addresses the consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (1) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional financial support from other parties, or (2) the equity investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entity’s activities through voting or similar rights, (b) the obligation to absorb the expected losses of the entity if they occur, or (c) the right to receive the expected residual returns of the entity if they occur. FIN 46 will have a significant effect on existing practice because it requires existing variable interest entities to be consolidated if those entities do not effectively disburse risks among parties involved. In addition, FIN 46 contains detailed disclosure requirements. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. On December 24, 2003, the FASB issued FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Rate Entities (“FIN 46R”). FIN 46R requires the Company to apply FIN 46 or FIN 46R to all entities that are considered Special Purpose Entities (as defined by FIN 46) by the end of the first reporting period that ends after December 15, 2003. We do not have any relationships with Special Purpose Entities. In addition, FIN 46R applies to all other variable interest entities created prior to February 1, 2003 by the end of the first reporting period that ends after March 15, 2004 (our three months ended March 31, 2004). This Interpretation may be applied prospectively with a cumulative-effect adjustment as of the date on which it is first applied or by restating previously issued financial statements for one or more years with a cumulative-effect adjustment as of the beginning of the first year restated. We are deemed the primary beneficiary of our joint venture with Emmis Communications, effective January 1, 2004, to produce The Daily Buzz, a weekday morning three-hour television news show. Accordingly, we have consolidated the venture into our financial statements and reflect Emmis’ share of the net production costs, which are funded through capital contributions to the venture, as minority interest in the accompanying consolidated statement of operations. We have no other ventures or activities that are subject to FIN 46 or FIN 46R.

         In March 2005, the FASB issued FASB Interpretation No. 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB Statement No. 143 (FIN 47), which clarifies the term “conditional asset retirement obligation” as used in SFAS No. 143, Accounting for Asset Retirement Obligations.  FIN 47 is effective for fiscal years ending after December 15, 2005 and we adopted it upon issuance.  FIN 47 provides that an asset retirement obligation is conditional when either the timing and/or method of settling the obligation is conditioned on a future event.  Accordingly, an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value of the liability can be reasonably estimated.  Uncertainty about the timing and/or method of settlement of a conditional asset retirement obligation should be factored into the measurement of the liability when sufficient information exists.  This interpretation also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation.  The adoption of FIN 47 did not have a material impact on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

         In June 2005, the Emerging Issues Task Force (EITF) issued EITF No. 05-6, Determining the Amortization Period for Leasehold Improvements (EITF 05-6).  EITF 05-6 addresses the amortization period for leasehold improvements acquired in a business combination or purchased subsequent to the inception of the lease.  EITF 05-6 was effective for reporting periods beginning after July 1, 2005.  The adoption of this pronouncement did not have a material impact on our consolidated balance sheets, consolidated statements of operations or consolidated statements of cash flows.

New Accounting Standards Not Yet Adopted

         In December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which replaces SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”) and supercedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values. In addition, SFAS No. 123R will cause unrecognized expense (based on the amounts in our pro forma footnote disclosure) related to options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. We are required to adopt SFAS No. 123R on January 1, 2006. Under SFAS No. 123R, we must determine the appropriate fair value model to be used for valuing share-based payments, the amortization method for compensation cost and the transition method to be used at the date of adoption. The transition alternatives include prospective and retroactive adoption methods. Under the retroactive method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. The prospective method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the first quarter of adoption of SFAS No. 123R, while the retroactive method would record compensation expense for all unvested stock options and share awards beginning with the first period restated. We are evaluating the requirements of SFAS No. 123R. The Company is in the process of determining the amount of compensation expense that will be recorded upon the adoption of SFAS No. 123R.

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         In May 2005, the FSAB issued Statement 154 which replaces APB No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Changes in Interim Financial Statements.  The Statement changes the accounting for, and reporting of, a change in accounting principle.  Statement 154 requires retrospective application to prior period’s financial statements of voluntary changes in accounting principle and changes required by new accounting standards when the standard does not include specific transition provisions, unless it is impracticable to do so.   Statement 154 is effective for accounting changes and corrections of errors in fiscal years beginning after December 15, 2005.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

         Our senior credit facility and SLTL have variable interest rates. Accordingly, our interest expense could be materially affected by future fluctuations in the applicable interest rate. At December 31, 2005, we had outstanding borrowings of $33.0 million under the Foothill Facility at an average interest rate of 9.3% per annum and $20.0 million in outstanding borrowings under our SLTL at an average interest rate of 12.2% per annum. A one percent change in our borrowing rates would increase our annual interest expense by approximately $530,000.

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Item 8. Financial Statements and Supplemental Data

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Report of Independent Registered Accounting Firm

The Board of Directors and Stockholders of
ACME Communications, Inc.:

         We have audited the consolidated balance sheets of ACME Communications, Inc. and subsidiaries as of December 31, 2005 and 2004, and the related consolidated statements of operations, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2005. In connection with our audits of the consolidated financial statements, we have also audited the financial statement schedules I and II. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

         In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACME Communications, Inc. and subsidiaries as of December 31, 2005 and 2004 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2005, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

/s/ KPMG LLP

Los Angeles, California
April 7, 2006

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See the notes to the consolidated financial statements

34

See the notes to the consolidated financial statements.

35

See the notes to the consolidated financial statements.

36

See the notes to the consolidated financial statements.

37

See the notes to the consolidated financial statements.

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ACME COMMUNICATIONS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1) Description of the Business and Formation

Formation and Presentation

         ACME Communications, Inc. was formed on July 23, 1999, in preparation for and in conjunction with an initial public offering of its stock.

         On December 27, 2002, the Company announced that it had entered into transactions to sell its stations KPLR-TV serving the St. Louis marketplace, and KWBP-TV serving the Portland, Oregon marketplace, to subsidiaries of the Tribune Company (the “Tribune Transaction”). The Tribune Transaction was completed on March 21, 2003. On August 4, 2005, the Company announced that it had entered into an agreement to sell its station KUWB serving the Salt Lake City marketplace to subsidiaries of Clear Channel Communications (the “Clear Channel Transaction”). The Clear Channel Transaction was completed on April 4, 2006 (see Note 14). In accordance with U.S. generally accepted accounting principles, the statements of operations and cash flows reflect the results of these three stations as discontinued operations for all periods presented.

         The Company adopted the provisions of FASB Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest Entities”, effective January 1, 2004. On that same date, the Company’s joint venture with Emmis Communications (“Emmis”) to produce The Daily Buzz , a weekday morning three-hour television news show, became effective. Under the agreement, the Company made an initial contribution of property and equipment with an agreed fair value and book value of $750,000 and Emmis is required to contribute the next $750,000 in capital equipment purchased by the venture. At December 31, 2005, Emmis had contributed approximately $720,000 in capital equipment purchases. Until and unless Emmis completes this equalizing contribution, under FIN 46R, the Company is deemed the primary beneficiary of the venture and accordingly, has consolidated the venture into its financial statements. The creditors of the venture have no recourse against the Company or Emmis. In accordance with FIN 46R, Emmis’ share of the net production costs, working capital requirements and property and equipment which were funded through capital contributions to the venture were $887,000 and $1,538,000, for the years ended December 31, 2005 and 2004, respectively, compared to its share of net production costs of $779,000 and $914,000 for the years ended December 31, 2005 and 2004. These amounts have been reflected as minority interest in the accompanying consolidated statement of operations.

         The accompanying consolidated financial statements are presented for ACME Communications, Inc. and its wholly-owned subsidiaries, unless the context otherwise requires (together, “ACME” or the “Company”). Segment information is not presented since all of the Company’s revenues are attributed to a single reportable segment.

Nature of Business

        ACME Communications, Inc. is a holding company with no independent operations other than through its indirect wholly-owned subsidiary, ACME Television, LLC (“ACME Television”). ACME Television, through its wholly-owned subsidiaries, owns and operates the following ten commercially licensed, full-power, broadcast television stations located throughout the United States, including KUWB in Salt Lake City and KWBR in Roswell, New Mexico, the latter which is a satellite station of KWBQ: