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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


FORM 10-K

(Mark One)

|    |  |                                                                                                                     
|--- |  | --------------------------------------------------------------------------------------------------------------------
|[X] |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934                            
|    |  | For the fiscal year ended December 31,
    2002                                                                     
|    |  | OR                                                                                                                  
|[   |  | ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE
    REQUIRED)
|    |  | For the transition period
    from                   to                                                             

Commission File Number 1-13452

PAXSON COMMUNICATIONS CORPORATION

(Exact name of registrant as specified in its
charter)


|                                                                                                   |  |                                     
|-------------------------------------------------------------------------------------------------- |  | ------------------------------------
|DELAWARE                                                                                           |  | 59-3212788                          
|(State or other jurisdiction of incorporation
    or organization)                                 |  | (I.R.S. Employer Identification No.)
|                                                                                                  
|601 Clearwater Park Road, West Palm Beach,
    Florida(Address of principal executive
    offices) |  | 33401(Zip Code)                     

Registrants telephone number, including
area code: (561) 659-4122

Securities Registered Pursuant to
Section 12(b) of the Act:

|                                                                             |  |                                                    
|---------------------------------------------------------------------------- |  | ---------------------------------------------------
|                                                                             |  | Name of Exchange                                   
|Title of Each Class                                                          |  | on Which Registered                                
|                                                                             |  |                                                    
|Class A Common Stock, $0.001 par value
    10 3/4% Senior Subordinated Notes |  | American Stock Exchange
    American Stock Exchange

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 twelve months (or 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. x

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. o

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

The aggregate market value of common stock held
by non-affiliates of the registrant as of March 17, 2003 is
$98,207,000 computed by reference to the closing price for such
shares on the American Stock Exchange.

The number of shares outstanding of each of the
registrants classes of common stock, as of March 17,
2003 was: 59,261,670 shares of Class A Common Stock, $0.001
par value, and 8,311,639 shares of Class B Common Stock,
$0.001 par value.

Documents Incorporated By Reference

Parts of the definitive Proxy Statement for the
Registrants Annual Meeting of Stockholders to be held on
May 16, 2003.



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TABLE OF CONTENTS



|                                                                                                       |  |  |  |  |  |  |  | 
|------------------------------------------------------------------------------------------------------ |  |  |  |  |  |  |  | 
|PART I                                                                                                
|Item 1.Business                                                                                       
|Item 2.Properties                                                                                     
|Item 3.Legal Proceedings                                                                              
|Item 4.Submission of Matters to Vote of Security Holders                                              
|PART II                                                                                               
|Item 5.Market for Registrants Common Equity and Related Stockholder Matters                          
|Item 6.Selected Financial Data                                                                        
|Item 7.Managements Discussion and Analysis of Financial Condition and Results of Operations          
|Item 7A.Quantitative and Qualitative Disclosures About Market Risk                                    
|Item 8.Financial Statements and Supplementary Financial Data                                          
|Item 9.Changes in and Disagreements With Accountants on Accounting and Financial Disclosure           
|PART III                                                                                              
|Item 10.Directors and Executive Officers of the Registrant                                            
|Item 11.Executive Compensation                                                                        
|Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|Item 13.Certain Relationships and Related Transactions                                                
|Item 14.Controls and Procedures                                                                       
|PART IV                                                                                               
|Item 15.Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|SIGNATURES                                                                                            
|CERTIFICATIONS                                                                                        
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE                           
|REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                                                    
|CONSOLIDATED BALANCE SHEETS                                                                           
|CONSOLIDATED STATEMENTS OF OPERATIONS                                                                 
|NOTES TO CONSOLIDATED FINANCIAL STATEMENTS                                                            
|VALUATION AND QUALIFYING ACCOUNTS                                                                     
|Waiver Dated as of March 13, 2003.                                                                    
|Agreement Dated December 16, 2002.                                                                    
|Amendment to Employment Agreement.                                                                    
|Subsidiaries of the Company                                                                           
|Consent of PricewaterhouseCoopers LLP                                                                 
|Certification of CEO                                                                                  
|Certification of CFO                                                                                  



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TABLE OF CONTENTS

|         |  |                                                                                                    |  |      |    | 
|-------- |  | -------------------------------------------------------------------------------------------------- |  | ---- | -- | 
|         |  |                                                                                                    |  | Page
|         |  |                                                                                                    |  |     
|Item 1.  |  | Business                                                                                           |  |      | 1  | 
|Item 2.  |  | Properties                                                                                         |  |      | 28 | 
|Item 3.  |  | Legal Proceedings                                                                                  |  |      | 28 | 
|Item 4.  |  | Submission of Matters to a Vote of Security
    Holders                                            |  |      | 29 | 
|Item 5.  |  | Market for Registrants Common Equity and
    Related Stockholder Matters                          |  |      | 30 | 
|Item 6.  |  | Selected Financial Data                                                                            |  |      | 31 | 
|Item 7.  |  | Managements Discussion and Analysis of
    Financial Condition and Results of Operations          |  |      | 32 | 
|Item 7A. |  | Quantitative and Qualitative Disclosures About
    Market Risk                                     |  |      | 46 | 
|Item 8.  |  | Financial Statements and Supplementary Data                                                        |  |      | 46 | 
|Item 9.  |  | Changes in and Disagreements With Accountants on
    Accounting and Financial Disclosure           |  |      | 46 | 
|Item 10. |  | Directors and Executive Officers of the Registrant                                                 |  |      | 47 | 
|Item 11. |  | Executive Compensation                                                                             |  |      | 47 | 
|Item 12. |  | Security Ownership of Certain Beneficial Owners
    and Management and Related Stockholder Matters |  |      | 47 | 
|Item 13. |  | Certain Relationships and Related Transactions                                                     |  |      | 47 | 
|Item 14. |  | Controls and Procedures                                                                            |  |      | 47 | 
|Item 15. |  | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K                                |  |      | 48 | 



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PART I




Item 1. Business

General

We are a network television broadcasting company
which owns and operates the largest broadcast television station
group in the United States, as measured by the number of
television households in the markets our stations serve. We
currently own and operate 63 full power broadcast television
stations (including three stations we operate under time
brokerage agreements), all of which carry PAX TV, including
stations reaching all of the top 20 U.S. markets, and 41 of the
top 50 U.S. markets. We operate PAX TV, a network that provides
family oriented entertainment programming seven days per week
between the hours of 5:00 p.m. and 11:30 p.m. (eastern
standard time equivalent), Monday through Friday, and 6:00 p.m.
and 11 p.m. (eastern standard time equivalent), Saturday and
Sunday. PAX TVs programming consists of shows originally
developed by us and shows that have appeared previously on other
broadcast networks which we have purchased the right to air. PAX
TV reaches approximately 88% of prime time television households
in the U.S. (approximately 94 million homes) through our
broadcast television station group, and pursuant to distribution
agreements with cable and satellite systems and affiliates. PAX
TV reaches approximately 64% of U.S. television households
through our owned and operated broadcast television station
group. We have agreements with cable television system owners
and satellite television providers to carry PAX TV, through
which we reach an additional 17% of U.S. television households
in markets not served by our owned and operated stations. We
reach an additional 7% of U.S. television households through
affiliation agreements with 62 independently owned PAX TV
affiliated stations. We have obtained audience ratings and
share, market rank and television household data set forth in
this report from the most recent information available from
Nielsen Media Research. We do not assume responsibility for the
accuracy or completeness of this data.

We derive our revenues from the sale of network
spot advertising time, network long form paid programming and
station advertising:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Network Spot Advertising.We sell commercial air time to
    advertisers who want to reach the entire nationwide PAX TV
    viewing audience with a single advertisement. Most of our
    network advertising is sold under advance, or
    upfront, commitments to purchase advertising time
    which are obtained before the beginning of our PAX TV
    programming season. The National Broadcasting Company, Inc.
    (NBC) serves as our exclusive sales representative
    to sell most of our network advertising. Any remaining inventory
    which is not sold by NBC is sold by us as direct response
    advertising. Our network advertising sales represented
    approximately 33% of our revenue during the year ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                                     
|
| |  | Network Long Form Paid Programming.We sell air time for long form paid
    programming, consisting primarily of infomercials, during
    broadcasting hours when we are not airing PAX TV. Infomercials
    are shows produced by others, at no cost to us, principally to
    promote and sell products or services through viewer direct
    response. Our network long form paid programming represented
    approximately 32% of our revenue during the year ended
    December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|
| |  | Station Advertising.We sell commercial air time to
    advertisers who want to reach the viewing audience in specific
    geographic markets in which our stations operate. These
    advertisers may be local businesses or regional or national
    advertisers who want to target their advertising in these
    markets. NBC provides national advertising sales services for a
    majority of our stations. In markets in which our stations are
    operating under joint sales agreements, or JSAs, our JSA partner
    serves as our exclusive sales representative to sell our local
    station advertising. For stations for which NBC does not provide
    national account representation, our JSA partners national
    representation firm performs this function. Our local sales
    forces sell this advertising in markets without JSAs. Our
    station advertising sales represented approximately 35% of our
    revenue during the year ended December 31, 2002 (including
    15% of our revenue during such year which was derived from local
    and national long form paid programming).

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We believe that our business model benefits from
many of the favorable attributes of both traditional television
networks and network-affiliated television station groups.
Similar to traditional television networks, we provide
advertisers with nationwide reach through our extensive
television distribution system. We own and operate most of our
distribution system and, therefore, we receive advertising
revenue from the entire broadcast day (consisting of both PAX TV
and long form paid programming), unlike traditional networks,
which receive advertising revenue only from commercials aired
during network programming hours. In addition, due to the size
and centralized operations of our station group, we are able to
achieve economies of scale with respect to our programming,
promotional, research, engineering, accounting and
administrative expenses which we believe enable us to have lower
per station expenses than those of a typical network-affiliated
station.

Business Strategy

The principal components of our strategy are set
forth below:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Provide Quality Family Programming.We believe there is significant
    demand, including from adult demographic groups which are
    attractive to advertisers, for quality family oriented
    programming which is free of excessive violence, explicit sexual
    themes and foul language. We are attracting viewers and
    establishing a nationally recognized brand by offering quality
    family programming. As our PAX TV brand recognition grows, we
    believe that PAX TV will increasingly be a destination
    channel to which viewers turn regularly for family
    programming. We have developed original entertainment
    programming for PAX TV at lower costs than those typically
    incurred by other broadcast networks for original entertainment
    programming by employing cost efficient development, financing
    and production techniques.                                                                                                                       
|
| |  | Benefit from a Centralized, Efficient
    Operating Structure.We centralize
    many of the functions of our owned and operated stations,
    including promotions, advertising, research, engineering,
    accounting and sales traffic. Our stations average fewer than
    ten employees compared to an average of 90 employees at
    network-affiliated stations, and an average of 60 employees at
    independent stations in markets of similar size to ours. We
    promote PAX TV and each of our television stations by utilizing
    a centralized advertising and promotional program. We also
    employ a centralized programming strategy, which we believe
    enables us to keep our programming costs per station
    significantly lower than those of comparable stations. We
    provide programming for all of our stations and, except for
    local news and syndicated programming provided by JSA partners,
    each station offers substantially the same programming schedule.
|
| |  | Improve Local Television Station Operations by
    Implementing Joint Sales Agreements.In order to improve the operations of
    our local stations, we have entered into JSAs with respect to 52
    of our stations, including JSAs between 44 of our stations and
    NBC owned stations or independently owned NBC affiliated
    stations. Substantially all of those stations are currently
    operating under the terms of the JSAs. Generally, JSAs are for
    ten-year terms. Substantially all JSA partners have the right to
    terminate the JSA upon a sale by the JSA partner of its station
    that is the subject of the JSA. Each JSA typically provides the
    following:                                                                                                                                                                                                                                                                                                           



| |   |                                                                                                                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | The JSA partner serves as our exclusive sales
    representative to sell our station advertising, enabling our
    station to benefit from the strength of the JSA partners
    sales organization and existing advertiser relationships;                             
|
| |  | We integrate and co-locate many of our station
    operations with those of the JSA partner, reducing our costs
    through operating efficiencies and economies of scale, including
    the elimination of redundant owned and leased facilities and
    staffing; and
|
| |  | The JSA partner may provide local news and
    syndicated programming, supplementing and enhancing our
    stations programming lineup.                                                                                                                               



| |   |                                                                                                                                                                                                      
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Expand and Improve PAX TV Distribution.We intend to continue to expand our
    television distribution system through the addition of
    affiliated broadcast television stations and cable systems.

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | We intend to expand our distribution to reach as
    many U.S. television households as possible in a cost efficient
    manner. We continue to improve the channel positioning of our
    broadcast television stations on local cable systems across the
    country, as we believe the ability to view our programming on
    one of the lower numbered channel positions (generally below
    channel 21) on a cable system improves the likelihood that
    viewers will watch our programming.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| |  | Develop Our Broadcast Station Groups
    Digital Television Platform.Our owned
    and operated station group gives us a significant platform for
    digital broadcasting. We are continuing the construction of our
    digital broadcast facilities and intend to explore the most
    effective use of digital broadcast technology for each of our
    stations. Upon completion of the construction of our digital
    facilities, we believe that we will be able to provide a
    significant broadband platform on which to broadcast digital
    television, including multiple additional television networks.
    While future applications of this technology and the time frame
    within which digital broadcasting will commence are uncertain,
    we believe that with our existing broadcast stations we are well
    positioned to take advantage of future digital broadcasting
    opportunities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|
| |  | Continue Airing Long-Form Paid
    Programming. We continue to air a
    substantial amount of long form paid programming as we believe
    they provide us with a stable revenue base as we continue to
    develop the PAX TV networks entertainment programming. In
    January 2003, we increased our inventory of air time available
    for long form paid programming by approximately 42% by shifting
    26.5 hours per week of non-prime time PAX TV network
    entertainment programming to long form paid programming. We
    determined that we could sell this air time for long form paid
    programming at higher rates than the rates at which we were
    selling spot advertising time in these time periods. As a result
    of this change, we expect that the portion of our revenues which
    is derived from network advertising will decrease and the
    portion of our revenues which is derived from network and
    station long form paid programming will increase. This reduction
    in our network entertainment programming, which consisted
    principally of syndicated programs, will also enable us to
    reduce our programming costs. We expect to periodically review
    and adjust the amount of air time we sell for long form paid
    programming in order to take advantage of opportunities that may
    arise for us to increase our advertising revenue.

Distribution

We distribute PAX TV through a television
distribution system comprised of our owned and operated
broadcast television stations, cable television systems in
various markets not served by a PAX TV station, satellite
television providers and independently owned PAX TV affiliated
broadcast stations. According to Nielsen our programming
currently reaches 88% of U.S. television households
(approximately 94 million homes).

We seek to reach as many U.S. television
households as possible in a cost efficient manner. In evaluating
opportunities to increase our television distribution, we
consider factors such as the attractiveness of specific
geographic markets and their audience demographics to potential
television advertisers, the degree to which the increased
distribution would improve our nationwide audience reach or
upgrade our distribution in a market in which we already
operate, and the effect of any changes in our distribution on
our national ownership position under the Communications Act of
1934, as amended, which we refer to as the Communications Act,
and the rules and regulations of the Federal Communications
Commission, which we refer to as the FCC, restricting the
ownership of attributable interests in television stations. We
have increased the number of U.S. television households which
can receive our programming by entering into agreements with
cable system operators and satellite television providers under
which they carry our programming on a designated channel of
their cable system or satellite service.

Our Owned and Operated Television Stations.We currently own and operate 63 full
power broadcast television stations (including three stations we
operate under time brokerage agreements, or TBAs), all of which
carry PAX TV, including stations reaching all of the top 20 U.S.
markets and 41 of the top 50 U.S. markets. Our owned and
operated station group reaches approximately 64% of U.S. prime
time television households, according to Nielsen. Our ownership
of the stations providing most of our television distribution

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enables us to receive advertising revenue from
each stations entire broadcast day and to achieve
operating efficiencies typically not enjoyed by network
affiliated television stations. As nearly all of our owned and
operated stations operate in the ultra high
frequency, or UHF, portion of the broadcast spectrum, only
half of the number of television households they reach are
counted against the national ownership cap under the
Communications Act. By exercising our rights under the
Communications Act to require cable television system operators
to carry the broadcast signals of our owned and operated
stations, we reach many more television households in each
stations designated market area, or DMA, than we would if
our stations were limited to transmitting their broadcast
signals over the airwaves.


We operate an additional three stations (WPXL,
New Orleans; WPXX, Memphis; and WBNA, Louisville) pursuant to
time brokerage agreements, or TBAs, with the station owners.
Under these agreements, we provide the station with PAX TV
programming and retain the advertising revenues from the sale of
advertising time during PAX TV programming hours. We have
options to acquire two of these stations (WPXL and WPXX) and a
right of first refusal to acquire the third (WBNA). The owners
of the two stations for which we have options have the right to
require us to purchase these stations at any time after
January 1, 2005 through December 31, 2006.

The table below provides information about our
owned and operated stations and stations we operate pursuant to
TBAs. Upon completion of the pending acquisition and sale
transactions noted in the table, we will own and operate 60
stations, all of which will carry PAX TV, including stations
reaching all of the top 20 U.S. markets and 40 of the top 50
markets.

|                    |  |         |    |              |  |           |      |                 |  |                |    |  |  |  |           |  |  |  |                                     | 
|------------------- |  | ------- | -- | ------------ |  | --------- | ---- | --------------- |  | -------------- | -- |  |  |  | --------- |  |  |  | ----------------------------------- | 
|                    |  | Market  |    | Station      |  | Broadcast |      | Total Market TV |  |               
|Market Name         |  | Rank(1) |    | Call Letters |  | Channel   |      | Households(2)   |  | JSA Partner(3)
|                    |  |         |    |              |  |           |      |                 |  |               
|New York            |  |         | 1  |              |  |           | WPXN |                 |  |                | 31 |  |  |  | 7,282,320 |  |  |  | NBC                                 | 
|Los Angeles         |  |         | 2  |              |  |           | KPXN |                 |  |                | 30 |  |  |  | 5,318,040 |  |  |  | NBC                                 | 
|Chicago             |  |         | 3  |              |  |           | WCPX |                 |  |                | 38 |  |  |  | 3,351,330 |  |  |  | NBC                                 | 
|Philadelphia        |  |         | 4  |              |  |           | WPPX |                 |  |                | 61 |  |  |  | 2,830,470 |  |  |  | NBC                                 | 
|San Francisco       |  |         | 5  |              |  |           | KKPX |                 |  |                | 65 |  |  |  | 2,436,220 |  |  |  | NBC                                 | 
|Boston (3 stations) |  |         | 6  |              |  |           | WBPX |                 |  |                | 68 |  |  |  | 2,353,500 |  |  |  |                                    | 
|Dallas              |  |         | 7  |              |  |           | KPXD |                 |  |                | 68 |  |  |  | 2,195,540 |  |  |  | NBC                                 | 
|Washington D.C      |  |         | 8  |              |  |           | WPXW |                 |  |                | 66 |  |  |  | 2,169,230 |  |  |  | NBC                                 | 
|Washington D.C      |  |         | 8  |              |  |           | WWPX |                 |  |                | 60 |  |  |  | 2,169,230 |  |  |  | NBC                                 | 
|Atlanta             |  |         | 9  |              |  |           | WPXA |                 |  |                | 14 |  |  |  | 1,971,180 |  |  |  | Gannett Co., Inc.                   | 
|Detroit             |  |         | 10 |              |  |           | WPXD |                 |  |                | 31 |  |  |  | 1,899,910 |  |  |  |                                    | 
|Houston             |  |         | 11 |              |  |           | KPXB |                 |  |                | 49 |  |  |  | 1,814,140 |  |  |  | Belo Corp.                          | 
|Seattle             |  |         | 12 |              |  |           | KWPX |                 |  |                | 33 |  |  |  | 1,659,100 |  |  |  | Belo Corp.                          | 
|Tampa               |  |         | 13 |              |  |           | WXPX |                 |  |                | 66 |  |  |  | 1,620,110 |  |  |  | Media General, Inc.                 | 
|Minneapolis         |  |         | 14 |              |  |           | KPXM |                 |  |                | 41 |  |  |  | 1,594,740 |  |  |  | Gannett Co., Inc.                   | 
|Cleveland           |  |         | 15 |              |  |           | WVPX |                 |  |                | 23 |  |  |  | 1,528,840 |  |  |  | Gannett Co., Inc.                   | 
|Phoenix             |  |         | 16 |              |  |           | KPPX |                 |  |                | 51 |  |  |  | 1,524,130 |  |  |  | Gannett Co., Inc.                   | 
|Miami               |  |         | 17 |              |  |           | WPXM |                 |  |                | 35 |  |  |  | 1,486,860 |  |  |  | NBC                                 | 
|Denver              |  |         | 18 |              |  |           | KPXC |                 |  |                | 59 |  |  |  | 1,366,250 |  |  |  | Gannett Co., Inc.                   | 
|Sacramento          |  |         | 19 |              |  |           | KSPX |                 |  |                | 29 |  |  |  | 1,227,600 |  |  |  | Hearst-Argyle Television, Inc.      | 
|Orlando             |  |         | 20 |              |  |           | WOPX |                 |  |                | 56 |  |  |  | 1,224,470 |  |  |  | Hearst-Argyle Television, Inc.      | 
|Portland, OR        |  |         | 23 |              |  |           | KPXG |                 |  |                | 22 |  |  |  | 1,061,080 |  |  |  | Belo Corp.                          | 
|Indianapolis        |  |         | 25 |              |  |           | WIPX |                 |  |                | 63 |  |  |  | 1,019,870 |  |  |  | Dispatch Broadcast Group            | 
|Hartford            |  |         | 27 |              |  |           | WHPX |                 |  |                | 26 |  |  |  | 980,410   |  |  |  | NBC                                 | 
|Raleigh-Durham      |  |         | 29 |              |  |           | WFPX |                 |  |                | 62 |  |  |  | 929,460   |  |  |  | NBC                                 | 
|Raleigh-Durham      |  |         | 29 |              |  |           | WRPX |                 |  |                | 47 |  |  |  | 929,460   |  |  |  | NBC                                 | 
|Nashville           |  |         | 30 |              |  |           | WNPX |                 |  |                | 28 |  |  |  | 880,670   |  |  |  |                                    | 
|Milwaukee           |  |         | 31 |              |  |           | WPXE |                 |  |                | 55 |  |  |  | 860,350   |  |  |  | Journal Broadcast Group, Inc.       | 
|Kansas City         |  |         | 33 |              |  |           | KPXE |                 |  |                | 50 |  |  |  | 852,510   |  |  |  | Scripps Howard Broadcasting Company | 
|Salt Lake City      |  |         | 36 |              |  |           | KUPX |                 |  |                | 16 |  |  |  | 769,230   |  |  |  |                                    | 
|San Antonio         |  |         | 37 |              |  |           | KPXL |                 |  |                | 26 |  |  |  | 718,730   |  |  |  | Clear Channel Broadcasting, Inc.    | 
|Grand Rapids        |  |         | 38 |              |  |           | WZPX |                 |  |                | 43 |  |  |  | 713,800   |  |  |  | LIN Television Corp.                | 
|West Palm Beach     |  |         | 39 |              |  |           | WPXP |                 |  |                | 67 |  |  |  | 700,850   |  |  |  | Scripps Howard Broadcasting Company | 
|Birmingham          |  |         | 40 |              |  |           | WPXH |                 |  |                | 44 |  |  |  | 690,030   |  |  |  | NBC                                 | 

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|                        |  |         |     |              |  |           |      |                 |  |                |    |  |  |  |         |  |  |  |                                     | 
|----------------------- |  | ------- | --- | ------------ |  | --------- | ---- | --------------- |  | -------------- | -- |  |  |  | ------- |  |  |  | ----------------------------------- | 
|                        |  | Market  |     | Station      |  | Broadcast |      | Total Market TV |  |               
|Market Name             |  | Rank(1) |     | Call Letters |  | Channel   |      | Households(2)   |  | JSA Partner(3)
|                        |  |         |     |              |  |           |      |                 |  |               
|Norfolk                 |  |         | 41  |              |  |           | WPXV |                 |  |                | 49 |  |  |  | 677,610 |  |  |  | LIN Television Corp.                | 
|New Orleans(4)(5)       |  |         | 42  |              |  |           | WPXL |                 |  |                | 49 |  |  |  | 658,830 |  |  |  | Hearst-Argyle Television, Inc.      | 
|Memphis(4)(5)           |  |         | 43  |              |  |           | WPXX |                 |  |                | 50 |  |  |  | 653,840 |  |  |  | Raycom America, Inc.                | 
|Buffalo                 |  |         | 44  |              |  |           | WPXJ |                 |  |                | 51 |  |  |  | 639,190 |  |  |  | Gannett Co., Inc.                   | 
|Oklahoma City           |  |         | 45  |              |  |           | KOPX |                 |  |                | 62 |  |  |  | 636,970 |  |  |  | The New York Times Company          | 
|Greensboro              |  |         | 46  |              |  |           | WGPX |                 |  |                | 16 |  |  |  | 634,140 |  |  |  | Hearst-Argyle Television, Inc.      | 
|Providence              |  |         | 48  |              |  |           | WPXQ |                 |  |                | 69 |  |  |  | 624,020 |  |  |  | NBC                                 | 
|Albuquerque (6)         |  |         | 49  |              |  |           | KAPX |                 |  |                | 14 |  |  |  | 620,230 |  |  |  | Hubbard Broadcasting, Inc.          | 
|Louisville(4)(7)        |  |         | 50  |              |  |           | WBNA |                 |  |                | 21 |  |  |  | 612,300 |  |  |  |                                    | 
|Jacksonville-Brunswick  |  |         | 51  |              |  |           | WPXC |                 |  |                | 21 |  |  |  | 587,200 |  |  |  | Post-Newsweek Stations, Inc.        | 
|Wilkes Barre            |  |         | 53  |              |  |           | WQPX |                 |  |                | 64 |  |  |  | 580,290 |  |  |  | The New York Times Company          | 
|Albany                  |  |         | 55  |              |  |           | WYPX |                 |  |                | 55 |  |  |  | 532,520 |  |  |  | Hubbard Broadcasting, Inc.          | 
|Tulsa                   |  |         | 60  |              |  |           | KTPX |                 |  |                | 44 |  |  |  | 496,880 |  |  |  | Scripps Howard Broadcasting Company | 
|Charleston, WV          |  |         | 61  |              |  |           | WLPX |                 |  |                | 29 |  |  |  | 495,320 |  |  |  |                                    | 
|Knoxville               |  |         | 63  |              |  |           | WPXK |                 |  |                | 54 |  |  |  | 489,710 |  |  |  | Raycom America, Inc.                | 
|Lexington               |  |         | 65  |              |  |           | WUPX |                 |  |                | 67 |  |  |  | 454,440 |  |  |  |                                    | 
|Roanoke                 |  |         | 67  |              |  |           | WPXR |                 |  |                | 38 |  |  |  | 445,000 |  |  |  | Media General, Inc.                 | 
|Honolulu                |  |         | 71  |              |  |           | KPXO |                 |  |                | 66 |  |  |  | 401,330 |  |  |  |                                    | 
|Des Moines              |  |         | 72  |              |  |           | KFPX |                 |  |                | 39 |  |  |  | 400,830 |  |  |  | The New York Times Company          | 
|Portland-Auburn, ME (6) |  |         | 76  |              |  |           | WMPX |                 |  |                | 23 |  |  |  | 391,930 |  |  |  | Gannett Co., Inc.                   | 
|Spokane                 |  |         | 79  |              |  |           | KGPX |                 |  |                | 34 |  |  |  | 381,130 |  |  |  | KHQ, Incorporated                   | 
|Syracuse                |  |         | 80  |              |  |           | WSPX |                 |  |                | 56 |  |  |  | 375,880 |  |  |  | Raycom America, Inc.                | 
|Shreveport              |  |         | 81  |              |  |           | KPXJ |                 |  |                | 21 |  |  |  | 372,950 |  |  |  | KTBS, Inc.                          | 
|Cedar Rapids            |  |         | 88  |              |  |           | KPXR |                 |  |                | 48 |  |  |  | 323,810 |  |  |  |                                    | 
|Greenville-N. Bern      |  |         | 103 |              |  |           | WEPX |                 |  |                | 38 |  |  |  | 266,390 |  |  |  | GOCOM Television LLC                | 
|Greenville-N. Bern      |  |         | 103 |              |  |           | WPXU |                 |  |                | 35 |  |  |  | 266,390 |  |  |  | GOCOM Television LLC                | 
|Wausau(8)               |  |         | 134 |              |  |           | WTPX |                 |  |                | 46 |  |  |  | 175,790 |  |  |  |                                    | 
|St. Croix (6)           |  |         |    |              |  |           | WPXO |                 |  |                | 15 |  |  |  |        |  |  |  | Alpha Broadcasting Corporation      | 



---



| |     |                                                                                                                                                                                            
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Market rank is based on the number of television
    households in the television market or Designated Market Area,
    or DMA, as used by Nielsen, effective as of
    September 2002.  
|
| | (2) | Refers to the number of television households in
    the DMA as estimated by Nielsen, effective as of September 2002.                                                                      
|
| | (3) | Indicates the company with which we have entered
    into a JSA for the station.                                                                                                           
|
| | (4) | Station is independently owned and is operated by
    us under a time brokerage agreement.                                                                                                 
|
| | (5) | We have the option to acquire the station and the
    current owner has the right to require us to purchase the
    station at anytime after January 1, 2005 through
    December 31, 2006.
|
| | (6) | Station is subject to a pending sale transaction.                                                                                                                                          
|
| | (7) | We have a right of first refusal to acquire the
    station.                                                                                                                               
|
| | (8) | The station has been constructed but is currently
    off the air.                                                                                                                         

Cable and Satellite Distribution.In order to increase the distribution
of our programming, we have entered into carriage agreements
with the nations largest cable multiple system operators,
as well as with other cable system operators and satellite
television providers. These cable and satellite system operators
carry our programming on a designated channel of their service.
These carriage agreements enable us to reach television
households in markets not served by our owned or affiliated
stations. Our carriage agreements with cable system operators
generally require us to pay an amount based upon the number of
additional television households reached. Our carriage
agreements with satellite television providers allow the
satellite provider to sell and retain the advertising revenue
from a portion of the non-network advertising time during PAX TV
programming hours. Some of our carriage agreements with cable
operators also provide this form of compensation to the cable
operator. We do not pay compensation for reaching households in
DMAs already served by our broadcast stations, even though the
cable operator may provide our programming to these households
because we have exercised our must carry rights
under the Communications Act. We believe that the ability to
view our programming on one of the lower numbered channel
positions (generally below channel 21) on a cable system
improves the likelihood that viewers will watch our programming,
and we have

5



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##### Table of Contents



successfully negotiated favorable channel
positions with most of the cable system operators and satellite
television providers with whom we have carriage agreements.
Through cable and satellite distribution, we reach approximately
17% of U.S. prime time television households in DMAs not already
served by a PAX TV station.


Our PAX TV Affiliated Stations.To increase the distribution of PAX
TV, we have entered into affiliation agreements with stations in
markets where we do not otherwise own or operate a broadcast
station. These stations include full power and low power
television stations. Each affiliation agreement gives the
particular station the right to broadcast PAX TV programming, or
portions of it, in the stations market. Although the
majority of the affiliation agreements provide for the
distribution of PAX TV prime time programming, some affiliates
do not carry all of our PAX TV programming. In addition, some
affiliates do not air PAX TV programming in the exact time
patterns that the programming is broadcast on our network
because of issues related to their specific markets. Our
affiliation agreements provide us with additional distribution
of our PAX TV programming without the expense of acquiring a
station or paying compensation to cable system operators in the
markets reached. Under our affiliation agreements, we are not
required to pay cash compensation to the affiliate, and the
affiliate is entitled to sell and retain the revenue from all or
a portion of the non-network advertising time during the PAX TV
programming hours. We have affiliation agreements with respect
to 62 television stations which reach approximately 7% of U.S.
prime time television households.

Programming

During our PAX TV network hours, which are
between 5:00 p.m. and 11:30 p.m., Monday through Friday, and
6:00 p.m. and 11 p.m., Saturday and Sunday, we offer family
entertainment programs that are free of excessive violence,
explicit sexual themes and foul language. We produce original
shows to air during PAX TVs prime time hours. The balance
of our PAX TV lineup consists of syndicated programs and a
limited amount of entertainment and sports programming on a
market-by-market basis. Since our launch, we have sought to
develop our original PAX TV programming, as our operating
experience with PAX TV has shown that quality original programs
can generate higher ratings and deliver a greater return to us,
in terms of advertising revenues, than syndicated programs of
comparable cost. We are concentrating our programming efforts on
creating and promoting existing and new original shows to air
during PAX TVs prime time hours.

We have developed original entertainment
programming for PAX TV at lower costs than those typically
incurred by other broadcast networks for original entertainment
programming. We have done this by employing cost efficient
development and production techniques, such as the development
of program concepts without the use of pilots, and by entering
into production arrangements with foreign production companies
through which we are able to share production costs, gain access
to lower cost production labor and participate in tax
incentives. In addition, we generally pre-sell the foreign and
other distribution rights to our original PAX TV programming and
thereby are able to recover a significant portion of the
programs production costs, while retaining all of the
domestic exploitation rights. Our agreements for syndicated
programming generally entitle us to exclusive nationwide
distribution rights over our entire television distribution
system for a fixed cost, without regard to the number of
households that receive our programming. As our syndicated
programming licenses expire, we are replacing that programming
with less costly original programming.

During non-network hours, our stations broadcast
long form paid programming, consisting primarily of
infomercials, which are shows produced at no cost to us to
market and sell products and services through viewer direct
response, and paid religious programming. Pursuant to an
agreement with The Christian Network, Inc., or CNI, our
broadcast stations carry CNIs programming between the
hours of 1:00 a.m. and 6:00 a.m., seven days per week. For
additional details on our relationship with CNI, see
Certain Relationships and Related Transactions.

Under many of our JSAs, the JSA partner provides
our station with late evening local news broadcasts, which we
believe enhances our stations appeal to viewers and
advertisers. This news programming may be a rebroadcast of the
JSA partners news in a different time slot or a news
broadcast produced for PAX TV.

6



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Ratings

The advertising revenues from our PAX TV
operations are largely dependent upon the popularity of our
programming, in terms of audience ratings, and the
attractiveness of our PAX TV viewing audience to advertisers.
Higher ratings generally will enable us to charge higher rates
to advertisers. Nielsen, one of the leading providers of
national audience measuring services, has grouped all television
stations in the country into approximately 210 DMAs that are
ranked in size according to the number of television households,
and periodically publishes data on estimated audiences for the
television stations in the various DMAs. The estimates are
expressed in terms of the percentage of the total potential
audience in the market viewing a station (the stations
Rating) and of the percentage of the audience
actually watching television (the stations
Share). Nielsen provides this data on the basis of
total television households and selected demographic groupings
in the DMA.

Some viewer demographic groups are more
attractive to advertisers than others, such as adults of working
age who typically have greater purchasing power than other
viewer demographic groups. Many products and services are
targeted to consumers with specific demographic characteristics,
and a viewer demographic group containing a concentration of
these types of consumers generally will be more attractive to
advertisers. Based on our experiences with PAX TV, advertisers
often will pay higher rates to advertise during programming that
reaches demographic groups that are targeted by that advertiser.
In general, we believe that advertisers for many products and
services consider adults from ages 25-54 to be one of the most
desirable viewer demographic groups. A significant component of
our original programming strategy is to develop and air
programming that will increase PAX TVs ratings among the
demographic groups that are most attractive to advertisers.

Advertising

We offer advertisers the opportunity to reach PAX
TVs nationwide viewing audience with a single commercial,
which we refer to as network advertising, and to target specific
geographical markets airing our programming, which we refer to
as local and national advertising.

We sell commercial air time to advertisers who
want to reach the entire nationwide PAX TV viewing audience with
a single advertisement. Most of our network advertising is sold
under advance, or upfront, commitments to purchase
advertising time, which are obtained before the beginning of our
PAX TV programming season. NBC serves as our exclusive sales
representative to sell most of our network advertising. Network
advertising represented approximately 33% of our revenue during
the year ended December 31, 2002. The central programming
signal through which we supply PAX TV and other programming to
our stations and to cable and satellite viewers includes
advertising, generally of a direct response nature, which
reaches our cable and satellite viewers (during both PAX TV and
other viewing hours) in markets not served by our stations
during time that is otherwise allocated to station spot
advertising, and which reaches viewers in local markets during
unsold station spot advertising time. We include the revenue
from this advertising in our network advertising revenues.

We also sell commercial air time to local and
national advertisers who want to reach our viewing audience in
specific geographic markets in which we operate. These
advertisers may be local businesses or regional or national
advertisers who want to target their advertising in these
markets. NBC provides national advertising sales services for a
majority of our stations. In markets in which our stations are
operating under JSAs, our JSA partner serves as our exclusive
sales representative to sell our local station advertising. For
stations for which NBC does not provide national account
representation, our JSA partner performs this function. Our
local sales force sells this advertising in markets without
JSAs. Our station spot advertising represented approximately 35%
of our revenue during the year ended December 31, 2002
(including 15% of our revenue during such year which was derived
from local and national long form paid programming).

Our advertising rates are typically negotiated
and based upon:



| |   |                                                        
| | - | -------------------------------------------------------
| |  | economic and market conditions;                        
|
| |  | the size of the market in which a station
    operates;

7



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| |   |                                                                      
| | - | ---------------------------------------------------------------------
| |  | the ratings of the show during which the
    advertising will appear;
|
| |  | the number of advertisers competing for a time
    slot; and         
|
| |  | the demographic composition of the market served
    by the station. 

We also sell long form paid programming,
consisting primarily of infomercials. This programming may
appear on our entire television distribution system or it may be
aired only in specific markets. Network and regional paid
programming time is sold by our national long form sales team.
Local paid programming may be sold by our national sales team or
by the local sales team at each station.

NBC Relationship

On September 15, 1999, we entered into an
investment agreement with NBC under which wholly-owned
subsidiaries of NBC purchased shares of our Series B
preferred stock and warrants to purchase shares of our common
stock for an aggregate purchase price of $415 million. At the
same time, a wholly-owned subsidiary of NBC entered into an
agreement with Mr. Paxson and entities controlled by
Mr. Paxson, under which the NBC subsidiary was granted the
right to purchase all, but not less than all, of the 8,311,639
shares of our Class B common stock beneficially owned by
Mr. Paxson.

Series B Preferred
Stock.Under the investment agreement,
a wholly-owned subsidiary of NBC acquired $415 million aggregate
liquidation preference of our Series B preferred stock.
This security accrues cumulative dividends at an annual rate of
8% and is convertible, subject to adjustment under the terms of
the Series B preferred stock, into 31,896,032 shares of our
Class A common stock at an initial conversion price of
$13.01 per share ($16.44 per share as of December 31,
2002). The Series B preferred stock is exchangeable at the
option of the holder at any time, subject to various conditions,
into our 8% exchange debentures.

On September 15, 2004, the rate at which
dividends accrue on the Series B preferred stock will be
adjusted to a market rate determined by a nationally recognized
independent investment banking firm chosen by the Company.

Warrant A and Warrant B.A wholly-owned subsidiary of NBC also
acquired a warrant (Warrant A) to purchase up to
13,065,507 shares of Class A common stock at an exercise
price of $12.60 per share, and a warrant (Warrant B)
to purchase up to 18,966,620 shares of Class A common stock
at an exercise price equal to the average of the closing sale
prices of the Class A common stock for the 45 consecutive
trading days ending on the trading day immediately preceding the
warrant exercise date, provided that the average price shall not
be more than 17.5% higher or 17.5% lower than the six month
trailing average closing sale price. The warrants are
exercisable until September 2009, subject to various conditions
and limitations. In addition:



| |   |                                                                                                                                                                                                                                                                                                                                                  
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Warrant B may not be exercised before the
    exercise in full of Warrant A; and                                                                                                                                                                                                                                                                 
|
| |  | Warrant B may not be exercised to the extent
    that, after giving effect to the exercise, Mr. Paxson would
    no longer constitute our single majority stockholder
    unless Warrant B is exercised in full and at the same time NBC
    exercises its right to purchase all the shares of our
    Class B common stock held by Mr. Paxson.

Right to Purchase Class B Common Stock.Concurrently with entering into the
Investment Agreement and issuing the Series B preferred
stock and Warrants A and B to subsidiaries of NBC, a
wholly-owned subsidiary of NBC entered into an agreement with
Mr. Paxson and entities controlled by Mr. Paxson,
under which the NBC subsidiary was granted the right to purchase
all, but not less than all, of the 8,311,639 shares of our
Class B common stock beneficially owned by Mr. Paxson.
This right is exercisable through September 15, 2009, and
may not be exercised before the exercise in full of Warrant A
and Warrant B.

These shares of Class B common stock are
entitled to ten votes per share on all matters submitted to a
vote of our stockholders and are convertible into an equal
number of shares of Class A common stock. The purchase
price per share of Class B common stock is equal to the
higher of:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | the average of the closing sale prices of the
    Class A common stock for the 45 consecutive trading days
    ending on the trading day immediately preceding the exercise of
    NBCs call right, provided that the

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| |   |                                                                                                                                      
| | - | -------------------------------------------------------------------------------------------------------------------------------------
| |   | average price shall not be more than 17.5% higher
    or 17.5% lower than the six month trailing average closing sale
    prices; and
|
| |  | $20.00 per share.                                                                                                                    

The owners of the shares that are subject to the
call right have agreed not to transfer those shares before
September 15, 2005, and not to convert those shares into
any of our other securities, including shares of Class A
common stock. NBCs exercise of the call right is subject
to compliance with applicable provisions of the Communications
Act and the rules and regulations of the FCC.

Optional Redemption by NBC.NBC has the right, at any time that
the FCC renders a final decision that NBCs investment in
us is attributable to NBC (as that term is defined
under applicable rules of the FCC), or for a period of
60 days beginning on September 15, 2002, and on each
September 15 thereafter, to demand that we redeem, or
arrange for a third party to acquire, any shares of our
Series B preferred stock then held by NBC (an
Involuntary Redemption) at an amount equal to the
liquidation preference of $10,000 per share plus accrued and
unpaid dividends (approximately $12,633 per share at
December 31, 2002). With respect to the period that began
on September 15, 2002, we have agreed with NBC to extend
the duration of this period until April 4, 2003. If NBC
exercises this right, we will have up to one year to consummate
the redemption. If at any time during the one year redemption
period, the terms of our outstanding debt and preferred stock do
not prohibit the redemption and we have sufficient funds on hand
to consummate the redemption, we must consummate the redemption
at that time. NBC may not exercise Warrant A, Warrant B or its
right to purchase shares of Class B common stock
beneficially owned by Mr. Paxson during the one year
redemption period.

Should we fail to effect an Involuntary
Redemption within one year after NBC has exercised its right to
demand that we redeem its securities, NBC will again be
permitted to exercise Warrant A and Warrant B and its right to
acquire Mr. Paxsons Class B common stock, and
generally will be permitted to transfer, without restriction,
any of our securities acquired by it, its right to acquire
Mr. Paxsons Class B common stock, the
contractual rights described below, and its other rights under
the related transaction agreements, provided that Warrant A,
Warrant B and the right to acquire Mr. Paxsons
Class B common stock shall expire, to the extent
unexercised, 30 days after any such transfer. If NBC
transfers any of our securities or its right to acquire
Mr. Paxsons Class B common stock, the transferee will
remain subject to the terms and conditions of such securities,
including those limitations on exercise described above.

Default Redemption by NBC.NBC also has the right to require that
we redeem any Series B preferred stock and Class A
common stock issued upon conversion of the Series B
preferred stock then held by NBC upon the occurrence of various
events of default (a Default Redemption). If NBC
exercises this right, we will have up to 180 days to
consummate the redemption. If at any time during the
180 day redemption period, the terms of our outstanding
debt and preferred stock do not prohibit the redemption and we
have sufficient funds on hand to consummate the redemption, we
must consummate the redemption at that time. NBC may not
exercise Warrant A, Warrant B or its right to purchase shares of
Class B common stock beneficially owned by Mr. Paxson
during the 180 day redemption period.

Should we fail to effect a Default Redemption
within 180 days after NBC has exercised its right to
require us to redeem its securities, NBC will have 180 days
within which to exercise Warrant A and Warrant B and its right
to acquire Mr. Paxsons Class B common stock, and
generally will be permitted to transfer, without restriction,
any of our securities acquired by it, its right to acquire
Mr. Paxsons Class B common stock, the
contractual rights described below, and its other rights under
the related transaction agreements, provided that Warrant A,
Warrant B and the right to acquire Mr. Paxsons
Class B common stock shall expire, to the extent
unexercised, 30 days after any such transfer. If NBC does
not effect any of these transactions within the 180 day
period, we will have the right, for 30 days, to redeem
NBCs securities. If we do not effect a redemption during
this period, NBC will have the right to require us to effect, at
our option, either a public sale or a liquidation of our company
and may participate as a bidder in any such transaction. If the
highest bid in any public sale of our company would be
insufficient to pay NBC the redemption price of its securities,
NBC will have a right of first refusal to purchase our company
for the highest bid amount. NBC will not be

9



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permitted to exercise Warrant A, Warrant B or its
right to acquire Mr. Paxsons Class B common
stock during the public sale or liquidation process.


Inability to Effect a Redemption Requested by
NBC.Our ability to effect any
redemption is restricted by the terms of our outstanding debt
and preferred stock. Were NBC to exercise its right to demand
that we redeem its Series B preferred stock, in order to be
able to do so we would need not only to raise sufficient cash to
fund payment of the redemption price, but also to obtain the
consents of the holders of our outstanding debt and preferred
stock or repay, redeem or refinance these securities in a manner
that obviated the need to obtain the consents of the holders.
Alternatively, we would need to identify a third party willing
to purchase NBCs Series B preferred stock directly
from NBC or to enter into a merger, acquisition or other
transaction with us as a result of which NBCs
Series B preferred stock would be redeemed or acquired at
the stated redemption price.

Optional Redemption by the Company.Beginning on September 15, 2004,
we have the right, at any time, to redeem any or all of our
outstanding Series B preferred stock at a redemption price
per share equal to the higher of (i) the liquidation
preference of $10,000 per share plus accrued and unpaid
dividends, and (ii) the product of 80% of the average of
the closing sale prices of the Class A common stock for the
ten consecutive trading days ending on the trading day
immediately preceding our notice to NBC exercising the optional
redemption, and the number of shares of Class A common
stock into which a share of Series B preferred stock is
convertible (approximately 768.58 shares of Class A common
stock as of December 31, 2002).

If we elect to redeem a portion of our
outstanding Series B preferred stock, we are required to
declare and pay, in full, all of the accumulated and unpaid
dividends on the Series B preferred stock. As of
December 31, 2002, accumulated and unpaid dividends on the
Series B preferred stock aggregated approximately $109.3
million.

Consent Rights.The
investment agreement also provides that we must obtain the
consent of NBC for various actions, including:



| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | approval of annual budgets;                                                                                                                                                                                           
|
| |  | expenditures materially in excess of budgeted
    amounts;                                                                                                                                                            
|
| |  | material acquisitions of programming;                                                                                                                                                                                 
|
| |  | material amendments to our certificate of
    incorporation or bylaws;                                                                                                                                                
|
| |  | material asset sales or purchases, including, in
    some cases, sales of our television stations;                                                                                                                    
|
| |  | business combinations where we would not be the
    surviving corporation or as a result of which we would
    experience a change of control;                                                                        
|
| |  | issuances or sales of any capital stock, with
    some exceptions;                                                                                                                                                    
|
| |  | stock splits or recombinations;                                                                                                                                                                                       
|
| |  | any increase in the size of our board of
    directors other than any increase resulting from provisions of
    our outstanding preferred stock of up to two additional
    directors; and                            
|
| |  | joint sales, joint services, time brokerage,
    local marketing or similar agreements as a result of which our
    stations with national household coverage of 20% or more would
    be subject to those agreements.

Miscellaneous Rights.In connection with its investment in
us, we also granted NBC various rights with respect to our
broadcast television operations, including:



| |   |                                                                                                                                   
| | - | ----------------------------------------------------------------------------------------------------------------------------------
| |  | the right to require the conversion of our
    television stations to NBC network affiliates, subject to
    various conditions;  
|
| |  | a right of first refusal on proposed sales of
    television stations; and                                                        
|
| |  | the right to require our television stations to
    carry NBC network programming that is preempted by NBC network
    affiliates.

10



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Stockholders Agreement.We also entered into a stockholders
agreement with NBC, Mr. Paxson and entities controlled by
Mr. Paxson under which we are permitted (but not required)
to nominate persons named by NBC for election to our board of
directors upon request by NBC if NBC determines that its
nominees are permitted under the Communications Act and FCC
rules to serve on our board. Mr. Paxson and his affiliates
agreed to vote their shares of common stock in favor of the
election of those persons as our directors. As part of the
outcome of the proceedings that we initiated, which are
described below, the FCC determined in 2002 that any NBC
nominated director must not be an NBC employee and must be a
person who would reasonably be expected to act independently on
all matters. The stockholders agreement further provides that we
will not, without the prior written consent of NBC, enter into
certain agreements or adopt certain plans which would be
breached or violated upon the acquisition of our securities by
NBC or its affiliates or would otherwise restrict or impede the
ability of NBC or its affiliates to acquire additional shares of
our capital stock.

Registration Rights.We also granted NBC demand and
piggyback registration rights with respect to the shares of
Class A common stock issuable upon:



| |   |                                                                                         
| | - | ----------------------------------------------------------------------------------------
| |  | conversion of the Series B preferred stock;                                             
|
| |  | conversion of the debentures for which the
    Series B preferred stock is exchangeable;
|
| |  | exercise of the warrants; or                                                            
|
| |  | conversion of the Class B common stock.                                                 

Operational Arrangements.In connection with these transactions,
we entered into a number of business arrangements with NBC. As
part of these arrangements and our relationship with NBC:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | NBC provides network advertising sales, marketing
    and network research services for PAX TV;                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | NBC provides national advertising sales services
    for a majority of our stations;                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| |  | NBC provides some of its programming, including
    movies and sporting events, for broadcast on PAX TV; and                                                                                                                                                                                                                                                                                                                                                                                                                                          
|
| |  | we have entered into JSAs with NBC with respect
    to 14 of our stations serving 12 markets also served by an NBC
    owned and operated station, and with 30 independently owned NBC
    affiliated stations serving our markets. Under the JSAs, the NBC
    stations sell all non-network advertising of our stations and
    receive commission compensation for those sales, and each of our
    stations may carry one hour per day of NBC syndicated
    programming, subject to compliance with our family programming
    content standards.

Arbitration and FCC Proceedings.In December 2001, we commenced a
binding arbitration proceeding against NBC in which we asserted
that NBC breached its agreements with us and breached its
fiduciary duty to us and to our shareholders. We asserted that
NBCs proposed acquisition of Telemundo Communications
Group, Inc. (Telemundo Group) (which was completed
in April 2002) violates the terms of the agreements governing
the investment and partnership between us and NBC. In September
2002, the arbitrator ruled against us on all of our claims,
denying us any of the relief we had sought with respect to what
we believed to be NBCs wrongful actions. Accordingly, the
provisions of our agreements with NBC remain in effect without
change.

We also made two filings with the FCC, one of
which requested a declaratory ruling as to whether conduct by
NBC, including NBCs influence and apparent control over
certain members of our board of directors selected by NBC (all
of whom have since resigned from our board), caused NBC to have
an attributable interest in us in violation of FCC rules or
infringed upon our rights as an FCC license holder. The second
FCC filing sought to deny FCC approval of NBCs acquisition
of the Telemundo Groups television stations. In an opinion
and order adopted April 9, 2002, the FCC granted approval
of NBCs applications for consent to the transfer to NBC of
control of the Telemundo Group television stations, denied our
petition to deny these applications, and granted in part and
denied in part our request for a declaratory ruling. The FCC
found that the placement of NBC employees on our board and the
subsequent actions of these persons in their

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capacity as our directors, including a finding
that one such director was protecting NBCs interests and
not acting as an independent member of our board, resulted in
NBC having an attributable interest in us in violation of the
FCCs multiple ownership rules. The FCC determined that
admonishment was the appropriate remedy and further inquiry was
not necessary. The FCC further indicated that should NBC choose
to exercise its rights to nominate new members of our board of
directors, the FCC would require that such persons not be NBC
employees or agents but persons who would reasonably be expected
to act independently in all future matters concerning our
company.


As NBC has consummated the acquisition of the
Telemundo Group, it is highly unlikely that NBC would be able to
acquire control of our company under the terms of our existing
agreements. At the same time, NBC retains its investment in us
and its ability to exercise a significant influence over our
operations.

Exploration of Strategic
Alternatives

We believe that absent significant improvement in
our ratings and revenues, our business operations are unlikely
to provide sufficient cash flow to support our debt service and
preferred stock dividend requirements. We have engaged the firm
of Bear Stearns & Co. Inc. to act as our financial advisor
to assess our business plan, capital structure and future
capital needs, and to explore strategic alternatives for our
company. These strategic alternatives may include the sale of
all or part of our assets to a third party, locating a strategic
partner for our company who would provide the financial
resources to enable us to restructure our debt and preferred
stock, or finding a third party to purchase the equity of our
company.

Competition

We compete for audience and advertisers and our
television stations are located in highly competitive markets
and face strong competition on all levels.

Audience.Television
stations compete for audience share principally on the basis of
program popularity, which has a direct effect on advertising
rates. Our PAX TV programming competes for audience share in all
of our markets with the programming offered by other broadcast
networks, and competes for audience share in our stations
respective market areas with the programming offered by
non-network affiliated television stations. Our other
programming also competes for audience share in our
stations respective market areas principally with the
non-network programming offered by other television stations. We
believe our stations also compete for audience share in their
respective markets on the basis of their channel positions on
the cable systems which carry our programming, and that the
ability to view our programming on the lower numbered channel
positions (generally below channel 21) generally improves the
likelihood that viewers will watch our programming.

Our stations also compete for audience share with
other forms of entertainment programming, including home
entertainment systems and direct broadcasting satellite video
distribution services which transmit programming directly to
homes equipped with special receiving antennas and tuners.
Further advances in technology may increase competition for
household audiences.

Advertising.Television broadcast advertising rates
are typically negotiated and based upon:



| |   |                                                                                                
| | - | -----------------------------------------------------------------------------------------------
| |  | economic and market conditions;                                                                
|
| |  | the size of the market in which the station
    operates;                                      
|
| |  | a programs popularity among the viewers
    that an advertiser wishes to attract;             
|
| |  | the number of advertisers competing for the
    available time;                                
|
| |  | the demographic makeup of the market served by
    the station;                                
|
| |  | the availability of alternative advertising media
    in the market area; and                  
|
| |  | development of projects, features and programs
    that tie advertiser messages to programming.

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PAX TV competes for advertising revenues
principally with other broadcast and cable television networks
and to some degree with other nationally distributed advertising
media, such as print publications. During the annual up
front process, broadcast networks seek to obtain advance
commitments from advertisers to purchase network commercial air
time, and competition occurs principally on the basis of the
advertisers perception of the anticipated popularity
(i.e., ratings) of a networks programming for the upcoming
broadcast season and the demographic groups to which the
programming is expected to appeal.

Our television stations also compete for
advertising revenues with other television stations in their
respective markets, as well as with other advertising media,
such as newspapers, radio stations, magazines, outdoor
advertising, transit advertising, yellow page directories,
direct mail and local cable systems. Competition for advertising
dollars at the television station level occurs primarily within
individual markets. Generally, a television station in one
market does not compete with stations in other market areas.

Federal Regulation of Broadcasting

The FCC regulates television broadcast stations
under the Communications Act. The following is a brief summary
of certain provisions of the Communications Act and the rules of
the FCC.

License Issuance and Renewal.The Communications Act provides that a
broadcast station license may be granted to an applicant if the
public interest, convenience and necessity will be served
thereby, subject to certain limitations. Television broadcast
licenses generally are granted and renewed for a period of eight
years. Interested parties including members of the public may
file petitions to deny a license renewal application but
competing applications for the license will not be accepted
unless the current licensees renewal application is
denied. The FCC is required to grant a license renewal
application if it finds that the licensee (1) has served
the public interest, convenience and necessity; (2) has
committed no serious violations of the Communications Act or the
FCCs rules; and (3) has committed no other violations
of the Communications Act or the FCCs rules which would
constitute a pattern of abuse. Our licenses are subject to
renewal at various times between 2004 and 2007.

General Ownership Matters.The Communications Act requires the
prior approval of the FCC for the assignment of a broadcast
license or the transfer of control of a corporation or other
entity holding a license. In determining whether to approve such
an assignment or transfer of control, the FCC considers, among
other things, the financial and legal qualifications of the
prospective assignee or transferee, including compliance with
rules limiting the common ownership of certain attributable
interests in broadcast, cable and newspaper properties.

The FCCs multiple ownership rules may limit
the acquisitions and investments that we may make or the
investments that others may make in us. The FCC generally
applies its ownership limits to attributable interests held by
an individual, corporation, partnership or other association or
entity. In the case of corporations holding or controlling
broadcast licenses, the interests of officers, directors and
those who, directly or indirectly, have the right to vote five
percent or more of the corporations stock are generally
attributable. The FCC treats all partnership and limited
liability company interests as attributable, except for those
interests that are insulated under FCC rules and policies. For
insurance companies, certain regulated investment companies and
bank trust departments that hold stock for investment purposes
only, stock interests become attributable with the ownership of
20% or more of the voting stock of the corporation holding or
controlling broadcast licenses.

Under the FCCs single majority
shareholder exception, the FCC generally does not treat
any minority voting shareholder as attributable if one person or
entity (such as Mr. Paxson in the case of our company)
holds more than 50% of the combined voting power of the common
stock of a company holding or controlling broadcast licenses.
The FCC currently is considering whether to retain, modify, or
eliminate this exception in a pending rulemaking proceeding. We
cannot predict at this time the rules that the FCC may adopt or
how the new rules might affect the single majority shareholder
exception as it applies to the ownership of television stations.

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The FCC treats as attributable debt and equity
interests that, when combined, exceed 33% of a station
licensees total assets, which is defined as the total
amount of debt and equity capital, if the party holding the
equity and debt interests (1) supplies more than 15% of the
stations total weekly programming or (2) has an
attributable interest in another media entity, whether
television, radio or newspaper, in the same market. Non-voting
equity, loans, and insulated interests count toward the 33%
equity/debt threshold. Non-conforming interests acquired before
November 7, 1996, are permanently grandfathered for
purposes of the equity/debt rules and thus do not constitute
attributable ownership interests.

Television National Ownership Rule.Under FCC rules, no individual or
entity may have an attributable interest in television stations
reaching more than 35% of the national television viewing
audience. The FCC applies a 50% discount for purposes of
calculating a UHF stations audience reach. If a broadcast
licensee has an attributable interest in a second television
station in any of its markets, the audience for that market will
not be counted twice for the purposes of determining compliance
with the national cap. The constitutionality of the television
national ownership rule was challenged in federal court. In
February 2002, the U.S. Court of Appeals for the District of
Columbia Circuit held that the reasons the FCC gave for deciding
not to repeal or modify its national television ownership cap
rule as part of its biennial review of its broadcast ownership
rules were inadequate and that the FCCs decision to retain
the national television ownership rule intact was not in
compliance with a provision of the Communications Act that
requires the FCC to review its rules every two years and to
repeal or modify any that are no longer in the public interest.
The court did not find the rule to be unconstitutional, but it
instructed the FCC, on remand, to evaluate the 35% cap in light
of the requirements of the Communications Act.

Television Duopoly Rule.The FCCs television duopoly rule
permits a party to own two television stations without regard to
signal contour overlap if each station is located in a separate
designated market area, or DMA. A party may own two television
stations in the same DMA so long as (1) at least eight
independently owned and operating full-power commercial and
non-commercial television stations remain in the market at the
time of acquisition and (2) at least one of the two
stations is not among the four top-ranked stations in the market
based on audience share. Without regard to the number of
independently owned television stations or media
voices, the FCC permits television duopolies within the
same DMA so long as the stations Grade B service contours
do not overlap. Satellite stations that are authorized to
rebroadcast the programming of a parent station
located in the same DMA are also exempt from the duopoly rule.
On April 2, 2002, the U.S. Court of Appeals for the
District of Columbia Circuit reversed the FCCs decision
establishing an eight media voice standard for
same-market television duopolies. The court remanded the
proceeding to the FCC to consider whether it should include in
its definition of media voices other media
(i.e., newspapers, radio, and cable). The court also
suggested that, on remand, the FCC may decide to adjust the
numerical limit of eight.

Television Time Brokerage and Joint Sales
Agreements.Over the past few years, a
number of television stations, including certain of our
television stations, have entered into agreements commonly
referred to as time brokerage agreements and joint sales
agreements. Under these agreements, separately owned and
licensed stations agree to function cooperatively subject to the
requirements of antitrust laws and compliance with the
FCCs rules and policies, including the requirement that
each party maintain independent control over the programming and
operations of its own station. The FCCs attribution and
television duopoly rules apply to time brokerage agreements in
which one station brokers more than 15% of the broadcast time
per week of another station in the same DMA with an overlapping
Grade B contour. Time brokerage agreements that were in effect
on August 5, 1999, are exempt from the television duopoly
rule for a limited period of time of either two or five years,
depending on the date of the time brokerage agreement.

Alien Ownership.Under the Communications Act, no FCC
broadcast license may be held by a corporation of which more
than one-fifth of its capital stock is owned or voted by aliens
or their representatives or by a foreign government or its
representative, or by any corporation organized under the laws
of a foreign country (collectively Aliens).
Furthermore, the Communications Act provides that no FCC
broadcast license may be granted to any corporation controlled
by any other corporation of which more than one-fourth of its
capital stock is owned of record or voted by Aliens if the FCC
should find that the public interest would be served by the
refusal of the license.

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Cross Ownership Rules.The FCCs rules prohibit a party
from holding attributable interests in a daily English-language
newspaper serving the same market as either a television or
radio station. The FCC rules also limit the number of commonly
owned radio and television stations in the same market depending
upon the number of independently owned media voices in that
market. The FCC has initiated a rulemaking proceeding in which
it is evaluating whether to retain, modify, or eliminate these
cross-ownership rules. We are unable to predict the outcome of
the foregoing or the effect, if any, that changes might have
upon our business.

Dual Network Rule.FCC rules permit the combination of
television broadcast networks, except for a combination of any
two of the four major networks (ABC, CBS, Fox or NBC). The FCC
currently is considering whether to retain, modify, or eliminate
this rule in a pending rulemaking proceeding. We cannot predict
at this time the rules that the FCC may adopt.

Pending Review of Broadcast Ownership Rules.The Communications Act requires the
FCC to undertake a biennial review of its broadcast ownership
rules. In light of that requirement and recent decisions of the
U.S. Court of Appeals for the District of Columbia Circuit
involving the FCCs broadcast ownership rules, the FCC on
September 23, 2002, launched an omnibus
rulemaking proceeding in which it is examining all of its
broadcast ownership rules. The rulemaking directly examines four
rules: the local television duopoly rule, the radio/television
cross-ownership rule, the 35% percent national television
audience cap, and the dual network rule. The proceeding also
incorporates the FCCs pending rulemakings on the
newspaper/broadcast cross-ownership rule and the local radio
ownership limits.

The FCCs Chairman has pledged to conclude
the omnibus proceeding in the spring of 2003. Our broadcast
operations on both a local and national level and the level of
competition we face will continue to be subject to the
FCCs ownership rules and any changes that may be adopted.
We cannot predict the ultimate outcome of the FCCs omnibus
proceeding or the effect of these or other regulatory changes on
our business operations.

Programming and Operation.The Communications Act requires
broadcasters to present programming that responds to community
problems, needs and interests and to maintain certain records
demonstrating its responsiveness. Stations also must follow
various rules that regulate, among other things, obscene and
indecent broadcasts, sponsorship identification, the advertising
of contests and lotteries and technical operations, including
limits on radio frequency radiation.

The FCCs rules limit the amount of
advertising in television programming designed for children
12 years of age and under. The FCC also effectively
requires that television broadcast stations air specified
amounts of programming during specified time periods that serve
the educational and informational needs of children
16 years of age and under.

The Communications Act and FCC rules also
regulate the broadcasting of political advertisements by
television stations. Stations must provide reasonable
access for the purchase of time by legally qualified
candidates for federal office and equal
opportunities for the purchase of equivalent amounts of
comparable broadcast time by opposing candidates for the same
elective office. Before primary and general elections, legally
qualified candidates for elective office may be charged no more
than the stations lowest unit charge for the
same class of advertisement, length of advertisement and daypart.

In March 2002, the U.S. Congress enacted the
so-called McCain-Feingold campaign finance bill, which modifies
the regulation of certain aspects of political campaign
fundraising and expenditures, and imposes new restrictions on
the broadcast of issue advertisements. An expedited
review of the laws constitutionality remains pending. In
addition, the U.S. Congress previously has considered and may in
the future consider amending the political advertising law by
changing the statutory definition of lowest unit
charge in a manner which would require television stations
to sell time to federal political candidates at lower rates. We
are unable to predict whether the McCain-Feingold law will be
upheld, whether additional changes to the political broadcasting
laws will be enacted, or what effect, if any, these changes
might have upon our business.

Equal Employment Opportunity Requirements.In early 2000, the FCC adopted revised
rules requiring broadcast licensees to develop and implement
programs designed to promote equal employment opportunities

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and submit reports on these matters to the FCC.
The U.S. Court of Appeals for the District of Columbia Circuit
struck down the recruitment, outreach and reporting portions of
these rules as unconstitutional, although the general
prohibition against discrimination in employment remains in
effect. The FCC in 2002 adopted a new set of requirements that
became effective on March 10, 2003. Under the new rules,
all broadcast station employment units with five or more
full-time employees must comply with certain general and
specific recruitment, outreach, and reporting requirements. All
broadcast licensees must refrain from engaging in employment
discrimination based on race, color, religion, national origin
or sex (with a limited exception for religious broadcasters).
The FCC is considering applying these rules to part-time
positions.


Cable Must Carry/Retransmission
Consent Regulations.Under the
Communications Act, every local commercial television broadcast
station must elect once every three years to require a cable
system to carry the station subject to certain exceptions, or to
negotiate for retransmission consent to carry the station. A
stations must carry rights are not absolute,
and their exercise depends on variables such as the number of
activated channels on a cable system, the location and size of a
cable system, the amount of duplicative programming on the
station, and the quality of the stations signal at the
cable systems headend. Alternatively, if a broadcaster
chooses to exercise retransmission consent rights, it can
prohibit cable systems from carrying its signal or grant the
cable system consent to retransmit the broadcast signal for a
fee or other consideration. Our television stations have
generally elected the must carry alternative. Our
elections of retransmission or must carry status
will continue until the next election period, which commences on
January 1, 2006.

In an ongoing rulemaking proceeding, the FCC is
considering rules to govern the obligations of cable television
systems to carry the analog and digital television, or DTV,
signals of local television stations or to obtain retransmission
consent to carry those signals during and following the
transition from analog to DTV broadcasting. In an initial order
in the proceeding, the FCC tentatively concluded that
broadcasters would not be entitled to mandatory carriage of both
their analog and DTV signals and that broadcasters with multiple
DTV video programming streams would be required to designate a
single, primary video stream eligible for mandatory carriage.
Alternatively, television licensees may negotiate with cable
television systems for carriage of their DTV signal in addition
to their analog signal under retransmission consent.

Under retransmission consent agreements, some of
our television stations are also carried as distant signals on
cable systems that are located outside of those stations
markets. Cable systems generally must remit a compulsory license
royalty fee to the United States Copyright Office to carry
television stations in distant markets. We have filed a request
with the Copyright Office to change our stations status
under the compulsory license from independent to
network signals. If the Copyright Office grants our
request, certain cable systems may transmit our stations at
reduced royalty rates. We cannot determine when the Copyright
Office will act on this request, or whether we will receive a
favorable ruling.

Satellite Carriage of Television Broadcast
Signals.Under the Satellite Home
Viewer Improvement Act of 1999, which we refer to as SHVIA, a
satellite carrier must obtain retransmission consent before
carrying a television station, and beginning January 1,
2002, a satellite carrier delivering the signal of any local
television station is required to carry all television stations
licensed to the carried stations DMA. The FCC rules
implementing SHVIA are similar to the must-carry and
retransmission consent rules that apply to cable television
systems. The satellite industry challenged SHVIAs
must-carry provisions, primarily claiming a violation of
satellite operators right to freedom of speech. In
December 2001, the U.S. Court of Appeals for the Fourth Circuit
dismissed the challenge, and the U.S. Supreme Court denied
certiorari in June 2002. Our PAX TV signal currently is carried
on satellite systems under agreements we negotiated with the
satellite television providers, which allow the satellite
provider to sell and retain the advertising revenues from a
portion of the non-network advertising time during PAX TV
programming hours and which require the carriage of some of our
television stations in certain circumstances.

Digital Television Service.The FCC has adopted rules for the
implementation of DTV service, a technology which is intended to
improve the quality of television broadcast signals. The FCC
allotted a second channel for DTV operations to each broadcaster
who held a license or a construction permit for a full service
television station on April 3, 1997. Each such licensee and
permittee must return one of its two channels at the

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end of the DTV transition period currently
scheduled to end on December 31, 2006. The transition
period could be extended in certain areas depending generally on
the level of DTV market penetration or if the FCC or Congress
changes the schedule. Except for certain stations operating
analog facilities in the 700 MHz spectrum band that have been
allotted a digital channel in the 700 MHz spectrum band, the FCC
has established a schedule by which broadcasters must begin DTV
service absent extenuating circumstances that may affect
individual stations.


In November 2001, the FCC modified its digital
television transition rules to provide that a station would be
in compliance with its build-out requirement, without
constructing the full authorized facilities, so long as, by
May 1, 2002, it constructed digital facilities capable of
serving its community of license with a signal of requisite
strength. The date by which digital facilities replicating a
stations analog service area must be constructed will be
set by the FCC at a later date. The FCC, by order released
September 17, 2001, authorized analog stations operating in
the 700 MHz spectrum band that have entered into voluntary
agreements with future users of the 700 MHz spectrum resulting
in the surrender of the analog 700 MHz channel to continue
broadcasting their analog signal on the channel assigned for
digital service and to delay the institution of digital service
until December 31, 2005, or later than December 31, 2005 if
it can be demonstrated that less than 70% of the television
households in the stations market are capable of receiving
digital broadcast signals. Broadcasters given a digital channel
allocation within the 700 MHz band may forego the use of that
channel for digital service until December 31, 2005, or
later than December 31, 2005, if it can be demonstrated
that less than 70% of the television households in the
stations market are capable of receiving digital broadcast
signals. Broadcasters left with a single-channel allotment as a
result of clearing the 700 MHz spectrum band will retain the
interference protection associated with their digital television
channel allotment for a period of 31 months after beginning
to transmit in digital.

The FCC has adopted rules permitting DTV
licensees to offer ancillary or supplementary
services on their DTV channels, so long as such services
are consistent with the FCCs DTV standards, do not
derogate required DTV services, and are regulated in the same
manner as similar non-DTV services. The FCCs rules require
that DTV licensees pay a fee (based on revenues) for any
subscription-based services that are provided.

The FCC has commenced a proceeding to consider
additional public interest obligations for television stations
as they transition to digital broadcast television operation.
The FCC is considering various proposals that would require DTV
stations to use digital technology to increase program
diversity, political discourse, access for disabled viewers and
emergency warnings and relief. If these proposals are adopted,
our stations may be required to increase their current level of
public interest programming, which generally does not generate
as much revenue from commercial advertisers.

Class A Television.In November 1999, Congress passed the
Community Broadcasters Protection Act of 1999, which directs the
FCC to award a new Class A status to qualifying low power
television stations. This new status provides eligible low power
television stations with a measure of interference protection
against full power and other low power television stations. The
protected status of Class A stations could limit our
ability to modify our television facilities in the future and
could affect any pending applications for new or modified
facilities to the extent that changes proposed by us would
create interference to qualifying Class A stations.
Class A stations will not be protected from interference
from DTV stations proposing to maximize their DTV service,
provided the DTV stations notified the FCC of their intent to
maximize facilities no later than December 31, 1999, and
filed a maximization application by May 1, 2000.

Proposed Changes.Congress and the FCC have under
consideration, and may in the future adopt, new laws,
regulations and policies regarding a wide variety of matters
that could, directly or indirectly, affect our operation,
ownership and profitability of our company and our television
broadcast stations. We cannot predict what other matters may be
considered in the future, nor can we judge in advance what
impact, if any, the implementation of any of these proposals or
changes might have on our business.

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Employees

As of December 31, 2002, we had 488
full-time employees and 42 part-time employees. None of our
employees are represented by labor unions. We consider our
relations with our employees to be good.

Seasonality

Seasonal revenue fluctuations are common within
the television broadcasting industry and result primarily from
fluctuations in advertising expenditures. We believe that
generally television advertisers spend relatively more for
commercial advertising time in the second and fourth calendar
quarters and spend relatively less during the first calendar
quarter of each year.

Trademarks and Service Marks

We have 20 registered trademarks and service
marks (17 in the United States and 3 in Mexico) and pending
applications for registration of another 63 trademarks and
service marks (43 in the United States, 3 in Canada, 15 in
Mexico and 2 in the European Union). We do not own any patents
or have any pending patent applications.

Available Information

Our internet website address is
www.pax.tv. We make available free of charge through
our internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on
Form 8-K and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange
Commission. Prior to March 3, 2003, we made these reports
and amendments available through a third party provider which,
under certain circumstances, charged a fee for access to those
reports and amendments.

Forward-Looking Statements and Associated
Risks and Uncertainties

This Report contains forward-looking
statements that reflect our current views with respect to
future events. All statements in this Report other than those
that are simply statements of historical facts are generally
forward-looking statements. These statements are based on our
current assumptions and analysis, which we believe to be
reasonable, but are subject to numerous risks and uncertainties
that could cause actual results to differ materially from our
expectations. All forward-looking statements in this Report are
made only as of the date of this Report, and we do not undertake
to update these forward-looking statements, even though
circumstances may change in the future.

Among the significant risks and uncertainties
which could cause actual results to differ from those
anticipated in our forward-looking statements or could otherwise
adversely affect our business or financial condition are those
described below.



| |                                                                                                   
| | --------------------------------------------------------------------------------------------------
| | High Level of Indebtedness; Restrictions
    Imposed by Terms of Indebtedness and Preferred Stock.

We are highly leveraged. At December 31,
2002, we had $900.1 million of total debt and redeemable
securities with an aggregate liquidation preference of
approximately $999.8 million. We may incur additional
indebtedness to finance capital expenditures and for certain
other corporate purposes. Our ability to incur indebtedness is
subject to restrictions in the terms of our senior credit
facility and the indentures governing our senior subordinated
notes, as well as the terms of our outstanding preferred stock.

The level of our indebtedness and redeemable
preferred stock could have important consequences to us,
including that: (i) a significant amount of our cash flow
from operations must be dedicated to debt service and will not
be available for other purposes; (ii) our ability to obtain
additional financing may be limited; (iii) our leveraged
position and covenants contained in our senior credit facility,
the indentures and the terms of our preferred stock (or any
replacements thereof) could limit our ability to expand and make
capital expenditures and acquisitions; and (iv) our level
of indebtedness could make us more vulnerable to economic
downturns,

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limit our ability to withstand competitive
pressures and limit our flexibility in reacting to changes in
our industry and economic conditions generally. Many of our
competitors currently operate on a less leveraged basis and may
have significantly greater operating and financing flexibility
than us.


The senior credit facility, the indentures and
the preferred stock contain covenants that restrict, among other
things, our ability to incur additional indebtedness, incur
liens, make investments, pay dividends or make other restricted
payments, consummate asset sales, consolidate with any other
person or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of our assets. Currently,
these covenants prevent us from incurring additional
indebtedness other than limited amounts of certain types of
permitted indebtedness (e.g., purchase money indebtedness),
although refinancing of existing debt is not prohibited. If we
default under the senior credit facility, our lenders may
terminate their lending commitments and declare the indebtedness
under the senior credit facility immediately due and payable and
this would cause a cross default to occur under the senior
subordinated note and senior subordinated discount note
indentures, thus giving each trustee the right to accelerate
repayment, and would give the holders of each of our three
outstanding series of preferred stock the right to elect two
directors per series to our board of directors. If this were to
occur, there is no assurance that we would have sufficient
assets to pay indebtedness then outstanding. If we are unable to
service our indebtedness or satisfy our dividend or redemption
obligations with respect to our outstanding preferred stock, we
will be forced to adopt an alternative strategy that may include
actions such as reducing or delaying capital expenditures,
selling assets, restructuring or refinancing our indebtedness or
seeking additional equity capital. There is no assurance that
any of these strategies could be effected on satisfactory terms,
if at all.



| |                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------
| | We have a history of operating losses and
    negative cash flow and we may not become profitable in the
    future.

We have incurred losses from continuing
operations in each fiscal year since our inception. As a result
of these net losses, for the years ended December 31, 2002,
2001 and 2000, our earnings were insufficient to cover combined
fixed charges and preferred stock dividend requirements by
approximately $259.9 million, $340.4 million and $390.7 million,
respectively. These amounts include non-cash preferred stock
dividends of $75.1 million in 2000, which resulted from our
issuance of convertible preferred stock to NBC with a conversion
price per share of Class A common stock that was less than
the public trading price of the Class A common stock on the
closing date of the preferred stock sale. We expect to continue
to experience net losses in the foreseeable future, principally
due to interest charges on outstanding debt (and the debentures
into which our outstanding preferred stock can be exchanged, if
issued), dividends on outstanding preferred stock, and non-cash
charges for depreciation and amortization expense related to
fixed assets and amortizable intangible assets. Future net
losses could be greater than those we have experienced in the
past.

Our cash flow from operations has been
insufficient to cover our operating expenses, debt service
requirements and other cash commitments in each of the years
ended December 31, 2002, 2001 and 2000. We have financed
our operating cash requirements, as well as our capital needs,
during these periods with the proceeds of asset sales and
financing activities, including the issuance of preferred stock
and additional borrowings. We cannot assure you that we will
generate sufficient operating cash flow in the future to pay our
debt service requirements on the notes or that we will be able
to obtain sufficient additional financing to meet our debt
service requirements on terms acceptable to us, or at all.



| |                                                         
| | --------------------------------------------------------
| | We cannot predict whether PAX TV will be
    successful.

We launched PAX TV on August 31, 1998, and
have a relatively limited history of operating PAX TV. The
experiences of other new television networks during the past
decade indicate that it requires a substantial period of time
and the commitment of significant financial, managerial and
other resources to gain market acceptance of a new television
network by viewing audiences and advertisers to a sufficient
degree that the new network can attain profitability. The
network television industry has been dominated for many years by
ABC, NBC and CBS, and only recently have additional broadcast
networks entered the market. Although we believe that our
approach is unique among broadcast television networks, in that
we own and operate the stations reaching most of the television
households reached by PAX TV, our business model is unproven. We

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cannot assure you that PAX TV will gain
sufficient market acceptance to be profitable or otherwise be
successful.




| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If our television programming does not attract
    sufficient numbers of viewers in desirable demographic groups,
    our advertising revenue could decrease.

Our success depends upon our ability to generate
advertising revenues, which constitute substantially all of our
operating revenues. Our ability to generate advertising revenues
in turn largely depends upon our ability to provide programming
which attracts sufficient numbers of viewers in desirable
demographic groups to generate audience ratings that advertisers
will find attractive. We cannot assure you that our programming
will attract sufficient targeted viewership or that, whether or
not it achieves favorable ratings, we will be able to generate
enough advertising revenues to achieve profitability. 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 adversely affect our advertising revenues. We may
not be able to anticipate and react effectively to shifts in
viewer tastes and interests in our markets or to generate
sufficient demand and market acceptance for our programming.
Further, we acquire rights to our syndicated programming under
multi-year commitments, and it is difficult to accurately
predict how a program will perform in relation to its cost. In
some instances, we must replace programs before their costs have
been fully amortized, resulting in write-offs that increase our
operating costs. We cannot assure you that our programming costs
will not increase to a degree which may materially adversely
affect our operating results. In addition, we incur production,
talent and other ancillary costs to produce original programs
for PAX TV. We cannot assure you that our original programming
will generate advertising revenues in excess of our programming
costs.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The results of the operations of our stations
    which operate under joint sales agreements substantially depend
    on the performance of our JSA partners.

The performance of our stations operating under
JSAs depends to a substantial degree on the performance of our
JSA partners, over which we have no control. In addition, if we
elect to terminate a JSA in a particular market, we may incur
significant costs to transfer the JSA to another broadcast
television station operator or to resume operating the station
ourselves.



| |                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | If advertisers have to pay higher residual
    payments to the members of the actors guilds that they use
    in spot advertisements on our network, advertisers may reduce or
    discontinue their advertising on our network.

Approximately 33% of our 2002 revenues was
derived from network commercial spot advertisements aired on PAX
TV. We believe substantially all of our network spot
advertisements were produced by advertisers or their advertising
agencies using performers who are members of the Screen Actors
Guild and the American Federation of Television and Radio
Artists. When commercials are aired on broadcast and cable
television networks, the performers are entitled to residual
payments from the advertisers, which are determined under
collective bargaining agreements between the guilds and the
advertising community. In the fall of 2000, after the expiration
of the then effective guild agreements and a prolonged strike by
performers, the guilds and the advertising community entered
into new guild agreements. Under both the old guild agreements
and the current guild agreements, the residual payments required
to be paid by advertisers in connection with advertisements
aired on cable networks are substantially lower than the
residuals required to be paid in connection with advertising
aired on broadcast networks. To date, we believe that a
substantial portion of the network spot advertising time on PAX
TV was purchased by advertisers under the assumption that the
residual payment obligations the advertising community incurred
in connection with airing these spots were to be calculated
under the rates applicable to cable networks, not those
applicable to other broadcast networks. Although the old guild
agreements did not specify how residual payments were to be
calculated for advertisements aired on PAX TV, the current guild
agreements include provisions establishing residual rates that
are applicable to network advertisements aired on PAX TV and
that are substantially lower than the rates

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applicable to broadcast networks but still
higher, in most circumstances, than the rates applicable to
cable networks. As a result of this development, some
advertisers have informed us that our network advertising spots
are no longer as attractive as those of cable networks because
of the relatively higher residual payments applicable to PAX TV
under the current guild agreements. Because of these higher
residual payments, some advertisers may be unwilling to purchase
advertising time on PAX TV unless we lower our rates or
otherwise provide financial compensation to them. We are unable
to predict the magnitude of the effect of this development on
our network spot advertising revenues.




| |                   
| | ------------------
| | Change of Control.

A change of control (as defined in
our senior credit facility) constitutes an event of default
under the senior credit facility. In the event of a change
of control (as defined in the indentures governing our
outstanding senior subordinated notes), we will be required to
offer to purchase all of the outstanding notes at a price equal
to 101% of the principal amount or accreted value, as the case
may be, thereof. In the event of a change of control
(as defined with respect to our outstanding preferred stock), we
will be required to offer to purchase all of the shares of these
preferred stocks then outstanding at 101% (100% for the
Series A preferred stock) of the then effective liquidation
preference thereof, plus accumulated and unpaid dividends.
Generally, under these instruments a change of control will be
deemed to have occurred if any person, other than
Mr. Paxson and his affiliates or, with respect to the
senior credit facility and our outstanding senior subordinated
notes, NBC and its affiliates, acquires control of a majority of
the voting power of our outstanding capital stock or acquires
more than one-third of the outstanding voting power and
possesses voting power in excess of that possessed by
Mr. Paxson and his affiliates (or, with respect to the
senior credit facility and our outstanding senior subordinated
notes, NBC and its affiliates), or there is a merger and we are
not the surviving corporation and our stockholders do not own at
least a majority of the outstanding common stock of the
surviving corporation. Our repurchase of our outstanding senior
subordinated notes or the redemption of any of our preferred
stock upon a change of control could also cause a default under
the senior credit facility. We can provide no assurance that in
the event of a change of control, we will have access to
sufficient funds or will be contractually permitted under the
terms of our outstanding debt to repay our debt under the senior
credit facility, repay our outstanding senior subordinated notes
or pay the required purchase price for any shares of preferred
stock tendered by holders. Were this to occur, we could be
required to seek third party financing to the extent we did not
have sufficient available funds to meet our purchase
obligations, and we can provide no assurance that we would be
able to obtain this financing on favorable terms or at all.



| |                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------
| | NBCs exercise of its rights to exert
    significant influence upon our operations could adversely affect
    our business.

In September 1999, we entered into a series of
agreements with NBC under which it invested $415 million in our
company. The agreements with NBC provided, among other things,
that we must obtain NBCs consent for:



| |   |                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------
| |  | approval of annual budgets;                                                                                                                   
|
| |  | expenditures materially in excess of budgeted
    amounts;                                                                                    
|
| |  | material acquisitions of programming;                                                                                                         
|
| |  | material amendments to our certificate of
    incorporation or bylaws;                                                                        
|
| |  | material asset sales or purchases, including, in
    some cases, sales of our television stations;                                            
|
| |  | business combinations where we would not be the
    surviving corporation or as a result of which we would
    experience a change of control;
|
| |  | issuances or sales of any capital stock, with
    some exceptions;                                                                            
|
| |  | stock splits or recombinations;                                                                                                               

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| |   |                                                                                                                                                                                                                       
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | any increase in the size of our board of
    directors other than an increase resulting from provisions of
    our outstanding preferred stock of up to two additional
    directors; and                             
|
| |  | joint sales, joint services, time brokerage,
    local marketing or similar agreements as a result of which our
    stations with national household coverage of 20% or more would
    be subject to those agreements.

As a result of our agreements with NBC, NBC is in
a position to exert significant influence over our management
and policies and to prevent us from taking actions which our
management may otherwise desire to take. NBC may have interests
that differ from those of our other stockholders and debtholders.

In connection with its investment in us, NBC
acquired rights to purchase more of our securities from us and
the right, subject to various conditions, to purchase all of the
shares of our Class B common stock owned by
Mr. Paxson. The exercise of these rights would result in
NBC acquiring control of our company.



| |                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that NBCs acquisition of the
    Telemundo Group creates regulatory obstacles which make it
    unlikely that NBC would be able to acquire our company absent
    significant regulatory changes.

We believe that NBCs acquisition of the
Telemundo Groups television stations creates serious
additional regulatory obstacles to NBCs ability to acquire
control of us, and that it is highly unlikely that NBC would be
able to obtain the regulatory approvals necessary to enable it
to acquire control of us without significant changes in FCC
rules and without our agreement to divest some of our most
significant television station assets, which in turn could have
a material adverse effect upon the value of our company. We
believe these factors substantially reduce the likelihood of NBC
acquiring more of our shares and control of our company. In
December 2001, we commenced a binding arbitration proceeding
against NBC in which we asserted that NBC had breached its
agreements with us and breached its fiduciary duty to us and to
our shareholders. In September 2002, the arbitrator ruled
against us on all of our claims, denying us any of the relief we
had sought with respect to what we believed to be NBCs
wrongful actions. Accordingly, our agreements with NBC remain in
effect without change.

We have significant operating relationships with
NBC which have been developed since NBCs investment in us
in September 1999. NBC serves as our exclusive sales
representative to sell most of our PAX TV network advertising
and is the exclusive national sales representative for most of
our stations. We have entered into JSAs with NBC owned or NBC
affiliated stations with respect to 44 of our television
stations. Each JSA typically provides for our JSA partner to
serve as our exclusive sales representative to sell our local
station advertising and for many of our stations
operations to be integrated and co-located with those of the JSA
partner. Should NBC or the NBC affiliates elect not to renew the
agreements under which these operating relationships have been
implemented, we could be required to incur significant costs to
resume performing the advertising sales and other operating
functions currently performed by NBC and our JSA partners,
including the expense of re-establishing office and studio
facilities separate from those of the JSA partners, or to
transfer performance of these functions to another broadcast
television station operator. Our network and station revenues
could also be adversely affected by the disruption of our
advertising sales efforts that could result from the unwinding
of the JSAs. The unwinding or termination of some or all of our
JSAs could have a materially adverse effect upon us.



| |                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------
| | We may not be able to redeem our securities
    held by NBC were NBC to demand that we do so and this could have
    adverse consequences for us.

NBC has the right, at any time that the FCC
renders a final decision that NBCs investment in us is
attributable to NBC (as that term is defined under
applicable rules of the FCC), or for a period of 60 days
beginning on September 15, 2002, and on each September 15
after 2002, to demand that we redeem, or arrange for a third
party to acquire, any shares of our Series B preferred
stock then held by NBC. With respect to the period that began on
September 15, 2002, we have agreed with NBC to extend the
duration of this period until April 4, 2003. Our ability to
effect any redemption is restricted by the terms of our
outstanding debt and preferred stock. NBC also has the right to
demand that we redeem any Series B preferred stock and
Class A common stock issued upon conversion of the
Series B preferred stock then held by NBC upon the
occurrence of various events of default. Should we fail to
effect a redemption within prescribed time periods,

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NBC generally will be permitted to transfer,
without restriction, any of our securities acquired by it, its
right to acquire Mr. Paxsons Class B common stock,
the contractual rights described above, and its other rights
under the related transaction agreements. Should we fail to
effect a redemption triggered by an event of default on our part
within 180 days after demand, NBC will have the right to
exercise in full its existing warrants to purchase shares of our
Class A common stock and its right to acquire Mr.
Paxsons Class B common stock at reduced prices. If
NBC does not exercise these rights, we will have another 30-day
period to effect a redemption. If we then fail to effect a
redemption, NBC may require us to conduct, at our option, a
public sale or liquidation of our assets, after which time NBC
will not be permitted to exercise its rights to acquire more of
our securities. Should NBC exercise any of its rights to demand
redemption, we may not have sufficient funds to pay the
redemption price for the securities to be redeemed and may not
be able to identify another party willing to purchase those
securities at the required redemption prices. If we were unable
to complete a redemption, we would be unable to prevent NBC from
transferring its interest in our company to a third party
selected by NBC in its discretion or, in the case of a default
by us, requiring us to effect a public sale or liquidation of
our assets. The occurrence of any of these events could have a
material adverse effect upon us.




| |                                                                           
| | --------------------------------------------------------------------------
| | The outcome of our exploration of strategic
    alternatives is uncertain.

We have engaged the firm of Bear Stearns &
Co. Inc. to act as our financial advisor and explore strategic
alternatives for our company. These strategic alternatives may
include the sale of all or part of our assets to a third party,
finding a strategic partner for our company, or finding a third
party to purchase the equity of our company. Our ability to
pursue strategic alternatives is subject to various limitations
and issues which we may be unable to control. A strategic
transaction will, in most circumstances, require that we seek
the consent of, or refinance, NBC and the other holders of our
preferred stock, as well as the holders of our senior and
subordinated debt. There may be FCC regulatory limitations on
the type of strategic alternatives we may pursue and the parties
with whom we may pursue strategic alternatives. In addition, our
ability to pursue a strategic alternative will be dependent upon
the attractiveness of our assets and business plan to potential
new strategic partners. Among other things, certain strategic
partners may find unattractive our capital structure and high
indebtedness, our carriage of the PAX TV programming and the
overnight programming provided by The Christian Network, Inc.
and certain of our television stations serving major television
markets. We may be prevented from consummating a strategic
transaction due to any of these and other factors, or we may
incur significant costs to terminate obligations and commitments
with respect to, or receive less consideration in a strategic
transaction as a result of these and other factors. There is no
assurance that we will be successful in our efforts to find or
effectuate strategic alternatives for our company.



| |                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We could be subject to a material tax
    liability if the IRS successfully challenges our position
    regarding the 1997 disposition of our radio division.

We structured the disposition of our radio
division in 1997 and our acquisition of television stations
during the period following this disposition in a manner that we
believed would qualify these transactions as a like
kind exchange under Section 1031 of the Internal
Revenue Code and would permit us to defer recognizing for income
tax purposes up to approximately $333 million of gain. The IRS
is examining our 1997 tax return and has issued us a notice of
proposed adjustment disallowing all of our gain deferral. We
intend to contest this determination and, based upon the advice
of our legal counsel, we believe that it is likely that we will
prevail. We can provide no assurance, however, that we will
prevail. In addition, the IRS has issued us an alternative
notice of proposed adjustment that, in the event the IRS is
unsuccessful in disallowing all of the gain deferral,
approximately $62 million of the $333 million gain deferral will
be disallowed. We intend to contest this alternative
determination as well, however we can provide no assurance that
we will prevail. Should the IRS successfully challenge our
position and disallow all or part of our gain deferral, because
we had net operating losses in the years subsequent to 1997 in
excess of the amount of the deferred gain, we would not be
liable for any tax deficiency, but could be liable for interest
on the tax liability for the period prior to the carryback of
our net operating losses. We have estimated the amount of
interest for which we could be held liable to be a maximum of
approximately $15 million should the IRS succeed in disallowing
all of the deferred gain.

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However, should the IRS only be successful in
disallowing part of the gain under its alternative notice of
proposed adjustment, we estimate we would be liable for only a
nominal amount of interest.




| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We are required by the FCC to abandon the
    analog broadcast service of 24 of our full power stations
    occupying the 700 MHz spectrum and may suffer adverse
    consequences if we are unable to secure alternative distribution
    on reasonable terms.

Twenty-four of our full power stations are
licensed to broadcast by using either an analog or digital
signal on channels 52-69, a portion of the frequency within the
700 MHz band of broadcast spectrum that is currently allocated
to television broadcasting by the FCC. As part of the nationwide
transition from analog to digital broadcasting, the 700 MHz band
will be transitioned to use by new wireless and public safety
operators. A federal statute requires that, after
December 31, 2006, or the date on which 85% of television
households in a television market are capable of receiving
digital services, broadcasters must surrender analog signals and
broadcast only on their allotted digital frequency. In some
cases, broadcasters, including our company, have been given a
digital channel allocation within the 700 MHz band of spectrum.
We have lobbied Congress and the FCC to delay enforcement of
these rules to allow us to develop and implement strategies to
vacate our 700 MHz spectrum and secure alternative distribution.
The FCC, by order released September 17, 2001, authorized
analog stations operating in the 700 MHz band to enter into
private agreements with prospective new users of the 700 MHz
spectrum that would result in the operation of their analog
signal on the channel assigned for digital service and delay
institution of digital service until December 31, 2005, or
later than December 31, 2005, if less than 70% of the
television households in the stations market area are
capable of receiving digital broadcast signals. Broadcasters
given a digital channel allocation within the 700 MHz band may
delay institution of digital service until December 31, 2005, or
later than December 31, 2005, if less than 70% of the
television households in the stations market are capable
of receiving digital broadcast signals. The FCC has not yet
conducted the auction necessary to determine the future users of
the 700 MHz spectrum. On June 19, 2002, Congress passed the
Auction Reform Act of 2002, indefinitely postponing the auction
of the 700 MHz spectrum. We cannot predict when we will abandon,
by private agreement or as required by law, the broadcast
service of our 24 stations occupying the 700 MHz spectrum. We
could suffer adverse consequences if we are unable to secure
alternative simultaneous distribution of both the analog and
digital signals of those stations on reasonable terms and
conditions. We cannot now predict the impact, if any, on our
business of the abandonment of our broadcast television service
in the 700 MHz spectrum.



| |                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------
| | We cannot assure you that we will successfully
    develop our broadcast station groups digital television
    platform.

We have commenced construction of our digital
broadcasting facilities and intend to explore the most effective
use of digital broadcast technology for each of our stations. We
cannot assure you, however, that we will derive commercial
benefits from the development of our digital broadcasting
capacity. Although we believe that proposed alternative and
supplemental uses of our analog and digital spectrum will
continue to grow in number, the viability and success of each
proposed alternative or supplemental use of spectrum involves a
number of contingencies and uncertainties. We cannot predict
what future actions the FCC or Congress may take with respect to
regulatory control of these activities or what effect these
actions would have on us.



| |                                                           
| | ----------------------------------------------------------
| | We operate in a very competitive business
    environment.

We compete for audience share and advertising
revenues with other providers of television programming. Our PAX
TV programming competes for audience share and advertising
revenues with the programming offered by other broadcast and
cable networks, and also competes for audience share and
advertising revenues in our stations respective market
areas with the programming offered by non-network affiliated
television stations. Our ability to compete successfully for
audience share and advertising revenues depends upon the
popularity of our programming with viewing audiences in
demographic groups that advertisers desire to reach. Our ability
to provide popular programming depends upon many factors,
including our ability to correctly gauge audience tastes and
accurately predict which programs will appeal to viewing
audiences, to produce

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original programs and purchase the right to air
syndicated programs at costs which are not excessive in relation
to the advertising revenue generated by the programming, and to
fund marketing and promotion of our programming to generate
sufficient viewer interest. Many of our competitors have greater
financial and operational resources than we do which may enable
them to compete more effectively for audience share and
advertising revenues. All of the existing television broadcast
networks and most of the cable networks have been operating for
a longer period than we have been operating PAX TV, and
therefore have more experience in network television operations
than we have which may enable them to compete more effectively.


Our television stations also compete for audience
share with other forms of entertainment programming, including
home entertainment systems and direct broadcast satellite video
distribution services which transmit programming directly to
homes equipped with special receiving antennas and tuners.
Further advances in technology may increase competition for
household audiences. Our stations also compete for advertising
revenues with other television stations in their respective
markets, as well as with other advertising media, such as
newspapers, radio stations, magazines, outdoor advertising,
transit advertising, yellow page directories, direct mail and
local cable systems. We cannot assure you that our stations will
be able to compete successfully for audience share or that we
will be able to obtain or maintain significant advertising
revenue.

The television broadcasting industry faces
continual technological change and innovation, the possible rise
in popularity of competing entertainment and communications
media, and governmental restrictions or actions of federal
regulatory bodies, including the FCC and the Federal Trade
Commission, any of which could have a material effect on our
operations.



| |                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------
| | We may be adversely affected by changes in the
    television broadcasting industry or a general deterioration in
    economic conditions.

The profitability of our television stations is
subject to various factors that influence the television
broadcasting industry as a whole, including:



| |   |                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |  | the condition of the U.S. economy;                                                                                                       
|
| |  | changes in audience tastes;                                                                                                              
|
| |  | changes in priorities of advertisers;                                                                                                    
|
| |  | new laws and governmental regulations and
    policies;                                                                                  
|
| |  | changes in broadcast technical requirements;                                                                                             
|
| |  | technological changes;                                                                                                                   
|
| |  | proposals to eliminate the tax deductibility of
    expenses incurred by advertisers;                                                    
|
| |  | changes in the law governing advertising by
    candidates for political office; and                                                     
|
| |  | changes in the willingness of financial
    institutions and other lenders to finance television station
    acquisitions and operations.

We cannot predict which, if any, of these or
other factors might have a significant effect on the television
broadcasting industry in the future, nor can we predict what
effect, if any, the occurrence of these or other events might
have on our operations. Generally, advertising expenditures tend
to decline during economic recession or downturn. Consequently,
our revenues are likely to be adversely affected by a recession
or downturn in the U.S. economy or other events or circumstances
that adversely affect advertising activity. Our operating
results in individual geographic markets also could be adversely
affected by local regional economic downturns. Seasonal revenue
fluctuations are common in the television broadcasting industry
and result primarily from fluctuations in advertising
expenditures by local retailers.

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| |                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our business is subject to extensive and
    changing regulation that could increase our costs, expose us to
    greater competition, or otherwise adversely affect the ownership
    and operation of our stations or our business
    strategies.

Our television operations are subject to
significant regulation by the FCC under the Communications Act
of 1934. A television station may not operate without the
authorization of the FCC. Approval of the FCC is required for
the issuance, renewal and transfer of station operating
licenses. In particular, our business depends upon our ability
to continue to hold television broadcasting licenses from the
FCC, which generally have a term of eight years. Our station
licenses are subject to renewal at various times between 2004
and 2007. Third parties may challenge our license renewal
applications. Although we have no reason to believe that our
licenses will not be renewed in the ordinary course, we cannot
assure you that our licenses or the licenses owned by the
owner-operators of the stations with which we have JSAs will be
renewed. The non-renewal or revocation of one or more of our
primary FCC licenses could have a material adverse effect on our
operations.

The Communications Act of 1934 empowers the FCC
to regulate other aspects of our business, in addition to
imposing licensing requirements. For example, the FCC has the
authority to:



| |   |                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------
| |  | determine the frequencies, location and power of
    our broadcast stations;                                               
|
| |  | regulate the equipment used by our stations;                                                                               
|
| |  | adopt and implement regulations and policies
    concerning the ownership and operation of our television
    stations; and
|
| |  | impose penalties on us for violations of the
    Communications Act of 1934 or FCC regulations.                            

Our failure to observe FCC or other rules and
policies can result in the imposition of various sanctions,
including monetary forfeitures or the revocation of a license.

Congress and the FCC currently have under
consideration, and may in the future adopt, new laws,
regulations, and policies regarding a wide variety of matters
that could, directly or indirectly, affect the operation and
ownership of our broadcast properties. Relaxation and proposed
relaxation of existing cable ownership rules and broadcast
multiple ownership and cross-ownership rules and policies by the
FCC and other changes in the FCCs rules following passage
of the Telecommunications Act of 1996 have affected and may
continue to affect the competitive landscape in ways that could
increase the competition we face, including competition from
larger media, entertainment and telecommunications companies,
which may have greater access to capital and resources. We are
unable to predict the effect that any such laws, regulations or
policies may have on our operations.



| |                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We believe that the success of our television
    operations depends to a significant extent upon access to
    households served by cable television systems. If the law
    requiring cable system operators to carry our signal were to
    change, we might lose access to cable television households,
    which could adversely affect our operations.

Under the 1992 Cable Act, each broadcast station
is required to elect, every three years, to either require cable
television system operators in their local market to carry their
signals, which we refer to as must carry rights, or
to prohibit cable carriage or condition it upon payment of a fee
or other consideration. By electing the must carry
rights, a broadcaster can demand carriage on a specified channel
on cable systems within its market. These must carry
rights are not absolute, and under some circumstances, a cable
system may decline to carry a given station. Our television
stations elected must carry on local cable systems
for the three year election period which commenced
January 1, 2003. The required election date for the next
three year election period commencing January 1, 2006, will
be October 1, 2005. If the law were changed to eliminate or
materially alter must carry rights, our business
could be adversely affected.

The FCC is developing rules to govern the
obligations of cable television systems to carry local
television stations during and following the transition from
analog to digital television broadcasting. The FCC tentatively
concluded that a television broadcast station would not be
entitled to mandatory carriage of both the stations analog
signal and its digital signal, and would not be entitled to
mandatory carriage of its digital signal unless it

26



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first gives up its analog signal. Furthermore,
the FCC tentatively concluded that a broadcaster with multiple
digital programming streams would be required to designate the
primary video stream eligible for mandatory carriage. If the FCC
maintains its current position, mandatory carriage rights for
digital signals would be accorded only to those television
stations operating solely with a digital signal. Broadcasters
operating with both analog and digital signals nevertheless
could negotiate with cable television systems for carriage of
their digital signal. We cannot predict what final rules the FCC
ultimately will adopt or what effect those rules will have on
our business.




| |                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The occurrence of extraordinary events, such
    as the attacks on the World Trade Center and the Pentagon and
    the war in Iraq, may substantially decrease the use of and
    demand for advertising, which may decrease our
    revenues.

On September 11, 2001, terrorists attacked
the World Trade Center in New York City and the Pentagon outside
of Washington, D.C. In addition to the tragic loss of life and
suffering occasioned by these attacks, there has been
infrastructure damage and a nationwide disruption of commercial
and leisure activities. Following the terrorist attacks, the
already weak advertising market worsened, resulting in lower
advertising sales revenues for television network and cable
programming businesses nationwide. The occurrence of future
terrorist attacks cannot be predicted, and their occurrence can
be expected to further negatively affect the United States
economy generally, and specifically the market for television
advertising.

In addition, the war in Iraq can be expected to
generally divert attention from our programming in favor of news
based programming and may negatively affect the United States
economy generally, and specifically the market for television
advertising.



| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | We may be adversely affected by the expiration
    of the lease on the property on which our satellite up-link
    facility is located.

Our lease of property in Clearwater, Florida, on
which our satellite up-link facility is located, terminates on
July 1, 2003. We are currently in negotiations for the
extension of this lease with the owners of the property, The
Christian Network, Inc. If we are not able to successfully
negotiate an extension of this lease, we will be required to
relocate our up-link and network operations to another location.
While we believe that we could accomplish any such relocation
without interruption of our PAX TV network signal, we would be
required to incur expenses in connection with such a relocation,
the amount of which we cannot currently predict.



| |                                                                     
| | --------------------------------------------------------------------
| | We may lose a portion of PAX TV networks
    distribution platform.

A number of our carriage agreements in markets
where we do not own a television station place restrictions on
the type of programming that we may broadcast on the local cable
system. In certain cases, local cable operators have notified us
that we are exceeding the number of hours of infomercial
programming that we may broadcast on the operators system.
We are currently in discussions with these local cable operators
to remove the restrictions. If we are unsuccessful in
negotiating the elimination of these restrictions, we may be
required to distribute additional entertainment programming over
these cable systems in order to remain in compliance with our
carriage agreements, or face the possibility of termination of
these carriage agreements. We believe that we have the ability
to provide additional entertainment programming to these systems
at a negligible cost. However, there can be no assurance that
any loss of revenues from replacing infomercials with spot
advertisements during additional entertainment programming would
not be material.



| |                      
| | ---------------------
| | Change in Revenue Mix

In January 2003, we reduced the number of PAX TV
network hours by 26.5 hours per week and significantly increased
our inventory of available time for long form paid programming.
While we believe that all of the newly available time will be
sold, we are unable to predict whether the rates we generate for
this time will increase or decrease because of the increased
supply of available time for long form paid programming. In
addition, as a result of this change, we expect that the portion
of our revenues which is derived from network

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advertising will decrease and the portion of our
revenues which is derived from combined network and station long
form paid programming will increase.




| |                                                  
| | -------------------------------------------------
| | Reduced Level of Spending for New
    Programming

Our budget provides for a reduced level of
spending in 2003 for new original programming. As we reduce the
number of new original programs broadcast on PAX TV, we would
expect that our ratings will be adversely affected, which in
turn will adversely affect our advertising revenues. We are
unable to predict the magnitude of the effect of this reduced
level of spending for programming on our ratings or advertising
revenues.




Item 2. Properties

Our corporate headquarters is located in West
Palm Beach, Florida. We have a satellite up-link facility
through which we supply our central programming feed, including
PAX TV, to satellite transmitters which relay the signal to our
stations. Our satellite up-link facility is located on leased
property in Clearwater, Florida.

Each of our stations has a facility in the market
in which it operates at which the central programming feed is
received and retransmitted in its market. Each of our stations
broadcasts its signal from a transmission tower or antenna
situated on a transmitter site. Each station also has an office
and studio and related broadcasting equipment. For those
stations with respect to which we have entered into JSAs,
we have vacated or expect to vacate the leased studio and office
facilities of our stations as we co-locate our operations with
those of our JSA partner. We generally lease our broadcast
transmission towers and own substantially all of the equipment
used in our broadcasting operations. Our tower leases have
expiration dates that range generally from two to twenty years.
We do not anticipate any difficulties in renewing those leases
that expire within the next several years or in leasing other
space, if required.

Our antenna, transmitter and other broadcast
equipment for our New York television station (WPXN) were
destroyed upon the collapse of the World Trade Center on
September 11, 2001. We are currently broadcasting from
towers outside of Manhattan at substantially lower height and
power and expect to begin broadcasting from a tower located on
the Empire State Building in Manhattan during the third quarter
of 2003. We are continuing to evaluate several alternatives to
improve our signal through transmission from other locations. We
expect, however, that it could take several years to replace the
signal we enjoyed at the World Trade Center location with a
comparable signal. We have property and business interruption
insurance coverage to mitigate the losses sustained, although
the extent of coverage of such insurance is currently being
litigated.

We believe our existing facilities are adequate
for our current and anticipated future needs. No single property
is material to our overall operations.




Item 3. Legal
Proceedings

We are involved in litigation from time to time
in the ordinary course of our business. We believe the ultimate
resolution of these matters will not have a material effect on
our financial position or results of operations or cash flows.

In December 2001, we commenced a binding
arbitration proceeding against NBC in which we asserted that NBC
breached its agreements with us and breached its fiduciary duty
to us and to our shareholders. We asserted that NBCs
proposed acquisition of Telemundo Group (which was completed in
April 2002) violates the terms of the agreements governing the
investment and partnership between us and NBC. In September
2002, the arbitrator ruled against us on all of our claims,
denying us any of the relief we had sought with respect to what
we believed to be NBCs wrongful actions. Accordingly, the
provisions of our agreements with NBC remain in effect without
change.

28



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##### Table of Contents








|         |                                                      
|-------- | -----------------------------------------------------
|Item  4. | Submission of Matters to Vote of Security
    Holders

No matters were submitted to a vote of security
holders during the fourth quarter of the period covered by this
report.

29



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##### Table of Contents






PART II






|         |                                                                          
|-------- | -------------------------------------------------------------------------
|Item  5. | Market for Registrants Common Equity
    and Related Stockholder Matters

Our Class A common stock is listed on the
American Stock Exchange under the symbol PAX. The following
table sets forth, for the periods indicated, the high and low
sales price per share for our Class A common stock.

|               |  |      |       |      |  |      |      |     |  |   |       |  |  |   |      | 
|-------------- |  | ---- | ----- | ---- |  | ---- | ---- | --- |  | - | ----- |  |  | - | ---- | 
|               |  |      |       |     
|               |  | 2002 |       | 2001
|               |  |      |       |     
|               |  | High |       | Low  |  | High |      | Low
|               |  |      |       |      |  |      |      |    
|First Quarter  |  | $    | 13.00 |      |  | $    | 8.50 |     |  | $ | 12.48 |  |  | $ | 8.75 | 
|Second Quarter |  |      | 11.49 |      |  |      | 5.50 |     |  |   | 14.00 |  |  |   | 9.70 | 
|Third Quarter  |  |      | 6.15  |      |  |      | 2.10 |     |  |   | 12.75 |  |  |   | 7.00 | 
|Fourth Quarter |  |      | 3.29  |      |  |      | 2.03 |     |  |   | 10.50 |  |  |   | 6.85 | 

On March 17, 2003, the closing sale price of
our Class A common stock on the American Stock Exchange was
$2.55 per share. As of that date, there were approximately 544
holders of record of the Class A common stock.

We have not paid cash dividends and do not intend
for the foreseeable future to declare or pay any cash dividends
on any classes of common stock and intend to retain earnings, if
any, for the future operation and expansion of our business. Any
determination to declare or pay dividends will be at the
discretion of our board of directors and will depend upon our
future earnings, results of operations, financial condition,
capital requirements, contractual restrictions under our debt
instruments, considerations imposed by applicable law and other
factors deemed relevant by our board of directors. In addition,
the terms of our senior credit facility, the indentures
governing our outstanding subordinated notes and our outstanding
preferred stock contain restrictions on the declaration of
dividends with respect to our common stock.

As of December 31, 2002, the following
shares of Class A common stock were authorized for issuance
under equity compensation plans:

|                                                               |       |                      |           |                   |  |                           |      |      |  |  |           |           | 
|-------------------------------------------------------------- | ----- | -------------------- | --------- | ----------------- |  | ------------------------- | ---- | ---- |  |  | --------- | --------- | 
|                                                               |       | Number of Securities |           | Weighted-Average  |  | Number of Securities     
|                                                               |       | to be Issued Upon    |           | Exercise Price of |  | Remaining Available for  
|                                                               |       | Exercise of          |           | Outstanding       |  | Future Issuance Under    
|                                                               |       | Outstanding          |           | Options,          |  | Equity Compensation Plans
|                                                               |       | Options, Warrants    |           | Warrants          |  | [excluding Securities    
|Plan Category                                                  |       | and Rights           |           | and Rights        |  | Reflected in Column(a)]  
|                                                               |       |                      |           |                   |  |                          
|                                                               |       | (a)                  |           | (b)               |  | (c)                      
|Equity compensation plans approved by security
    holders     |       |                      | 9,103,336 |                   |  | $                         | 5.88 |      |  |  | 1,854,428 | (2)      
|Equity compensation plans not approved by
    security holders |       |                      | 2,322,500 | (1)               |  | $                         | 8.62 |      |  |  |          |          
|                                                               |       |                      |           |                   |  |                           |      |      |  |  |           |          
|                                                               | Total |                      |           | 11,425,836        |  |                           | $    | 6.44 |  |  |           | 1,854,428 | 
|                                                               |       |                      |           |                   |  |                           |      |      |  |  |           |          






|    |                                                                                                                                                                                                                                            
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | A narrative description of the material terms of
    these plans is set forth in the final paragraph of Note
    14  STOCK INCENTIVE PLANS, to our consolidated
    financial statements which are set forth elsewhere in this
    report.
|(2) | Includes 1.0 million options available for grant
    which are subject to stockholder approval at our annual
    stockholder meeting on May 16, 2003.                                                                                      

In January 2003, we consummated a stock option
exchange offer under which we granted to holders who tendered
their eligible options in the exchange offer, new options under
our 1998 Stock Incentive Plan, as amended, to purchase one share
of our Class A common stock for each two shares of our
Class A common stock issuable upon the exercise of tendered
options, at an exercise price of $0.01 per share. Because the
terms of the new options provided for a one business day
exercise period, all holders who tendered their eligible options
in the exchange offer exercised their new options promptly after
the issuance of those new options. The effect of the stock
option exchange was to reduce the number of outstanding options
under the existing equity compensation plans by 7.3 million and
increase by 4.5 million the number of shares of Class A
common stock available for stock-based awards under equity
compensation plans approved by security holders.

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After giving effect to the consummation of the
exchange offer and the exercise by holders of the new options
that were granted in the exchange offer, in each case as if such
consummation and exercise occurred on December 31, 2002, as
of December 31, 2002, 1.8 million options to purchase
shares of Class A common stock would have been outstanding and
6.4 million shares of Class A common stock would have been
available for issuance under equity compensation plans approved
by security holders.




Item 6. Selected Financial
Data

The following table sets forth selected
consolidated financial data as of and for each of the years in
the five year period ended December 31, 2002. This
information is qualified in its entirety by, and should be read
in conjunction with, the consolidated financial statements and
the notes thereto which are included elsewhere in this report.
The following data, insofar as it relates to each of the years
presented, has been derived from annual financial statements,
including the consolidated balance sheets at December 31,
2002 and 2001, and the related consolidated statements of
operations and of cash flows for the three years ended
December 31, 2002, and notes thereto appearing elsewhere
herein. See Item 5. Market for Registrants
Common Equity and Related Stockholder Matters for a
discussion of our dividend policy.

|                                                              |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|------------------------------------------------------------- |  | ------------------------------- | --------- | ---- |  | ---- | --------- | ---- |  | ---- | --------- | - |  | - | --------- | - |  | - | --------- | -
|                                                              |  |                                
|                                                              |  | For the Year Ended December 31,
|                                                              |  |                                
|                                                              |  | 2002                            |           | 2001 |  | 2000 |           | 1999 |  | 1998
|                                                              |  |                                 |           |      |  |      |           |      |  |     
|Statement of Operations Data:                                 |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Revenues                                                      |  | $                               | 321,896   |      |  | $    | 308,806   |      |  | $    | 315,936   |   |  | $ | 248,362   |   |  | $ | 134,196   |  
|Less: agency commissions                                      |  |                                 | (44,975   | )    |  |      | (43,480   | )    |  |      | (44,044   | ) |  |   | (34,182   | ) |  |   | (16,908   | )
|                                                              |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Net revenues                                                  |  |                                 | 276,921   |      |  |      | 265,326   |      |  |      | 271,892   |   |  |   | 214,180   |   |  |   | 117,288   |  
|Operating loss                                                |  |                                 | (92,812   | )    |  |      | (157,732  | )    |  |      | (151,035  | ) |  |   | (225,251  | ) |  |   | (135,531  | )
|Loss from continuing operations before
    extraordinary item |  |                                 | (286,309  | )    |  |      | (193,879  | )    |  |      | (178,525  | ) |  |   | (160,372  | ) |  |   | (89,470   | )
|Income from discontinued operations(a)                        |  |                                 |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   | 1,182     |  
|Extraordinary item(b)                                         |  |                                 | (17,552   | )    |  |      | (9,903    | )    |  |      |          |   |  |   |          |   |  |   |          |  
|Net loss                                                      |  |                                 | (303,861  | )    |  |      | (203,782  | )    |  |      | (178,525  | ) |  |   | (160,372  | ) |  |   | (88,288   | )
|Net loss attributable to common stockholders(c)               |  |                                 | (413,960  | )    |  |      | (350,438  | )    |  |      | (391,329  | ) |  |   | (314,579  | ) |  |   | (137,955  | )
|Basic and Diluted Per Share Data:(d)                          |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Loss from continuing operations                               |  | $                               | (6.11     | )    |  | $    | (5.28     | )    |  | $    | (6.16     | ) |  | $ | (5.10     | ) |  | $ | (2.31     | )
|Discontinued operations                                       |  |                                 |          |      |  |      |          |      |  |      |          |   |  |   |          |   |  |   | 0.02      |  
|Extraordinary item(b)                                         |  |                                 | (.27      | )    |  |      | (.15      | )    |  |      |          |   |  |   |          |   |  |   |          |  
|Net loss                                                      |  |                                 | (6.38     | )    |  |      | (5.43     | )    |  |      | (6.16     | ) |  |   | (5.10     | ) |  |   | (2.29     | )
|Weighted average shares outstanding  basic
    and diluted   |  |                                 | 64,849    |      |  |      | 64,509    |      |  |      | 63,515    |   |  |   | 61,738    |   |  |   | 60,360    |  
|Balance Sheet Data:                                           |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Working capital                                               |  | $                               | 19,204    |      |  | $    | 57,871    |      |  | $    | 74,298    |   |  | $ | 237,855   |   |  | $ | 1,807     |  
|Total assets                                                  |  |                                 | 1,251,009 |      |  |      | 1,383,675 |      |  |      | 1,526,047 |   |  |   | 1,690,087 |   |  |   | 1,542,786 |  
|Current portion of bank financing                             |  |                                 | 3,144     |      |  |      | 2,899     |      |  |      | 15,966    |   |  |   | 18,698    |   |  |   | 529       |  
|Senior subordinated notes and bank financing                  |  |                                 | 896,957   |      |  |      | 526,281   |      |  |      | 389,510   |   |  |   | 369,723   |   |  |   | 373,469   |  
|Mandatorily redeemable securities                             |  |                                 | 993,101   |      |  |      | 1,164,160 |      |  |      | 1,080,389 |   |  |   | 949,807   |   |  |   | 521,401   |  
|Total stockholders (deficit) equity                          |  |                                 | (948,465  | )    |  |      | (538,043  | )    |  |      | (199,789  | ) |  |   | 96,721    |   |  |   | 247,673   |  
|Other Data:                                                   |  |                                 |           |      |  |      |           |      |  |      |           |   |  |   |           |   |  |   |           |  
|Cash flows used in operating activities                       |  | $                               | (75,428   | )    |  | $    | (60,772   | )    |  | $    | (76,036   | ) |  | $ | (181,808  | ) |  | $ | (150,580  | )
|Cash flows (used in) provided by investing
    activities     |  |                                 | (7,689    | )    |  |      | 48,477    |      |  |      | (12,784   | ) |  |   | (160,508  | ) |  |   | (168,486  | )
|Cash flows provided by financing activities                   |  |                                 | 25,024    |      |  |      | 44,790    |      |  |      | 14,994    |   |  |   | 418,065   |   |  |   | 285,865   |  
|Program rights payments and deposits                          |  |                                 | 116,243   |      |  |      | 130,566   |      |  |      | 128,288   |   |  |   | 125,916   |   |  |   | 62,076    |  
|Payments for cable distribution rights                        |  |                                 | 9,286     |      |  |      | 14,418    |      |  |      | 10,727    |   |  |   | 30,713    |   |  |   | 19,905    |  
|Capital expenditures                                          |  |                                 | 31,177    |      |  |      | 35,213    |      |  |      | 25,110    |   |  |   | 34,609    |   |  |   | 82,922    |  






|    |                                                                                                                                                                                                                             
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Includes gain on the 1997 disposal of our former
    Network-Affiliated Television and Paxson Radio segments of $1.2
    million, net of applicable income taxes.                                                           
|(b) | Extraordinary charges related to early
    extinguishment of debt.                                                                                                                                                          
|(c) | Includes dividends and accretion on redeemable
    preferred stock.                                                                                                                                                         
|(d) | Due to losses from continuing operations, the
    effect of stock options and warrants is antidilutive.
    Accordingly, our presentation of diluted earnings per share is
    the same as that of basic earnings per share.

31



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|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

General

We are a network television broadcasting company
which owns and operates the largest broadcast television station
group in the U.S., as measured by the number of television
households in the markets our stations serve. We currently own
and operate 63 broadcast television stations (including three
stations we operate under time brokerage agreements), which
reach all of the top 20 U.S. markets and 41 of the top 50 U.S.
markets. We operate PAX TV, a network that provides family
entertainment programming seven days per week and reaches
approximately 88% of prime time television households in the
U.S. (approximately 94 million homes) through our broadcast
television station group, and pursuant to distribution
arrangements with cable and satellite distribution systems and
our affiliates.

We were founded in 1991 by Mr. Paxson, our
Chairman, Chief Executive Officer and controlling stockholder.
We began by purchasing radio and television stations, and grew
to become Floridas largest radio station group, while also
owning two network-affiliated television stations and other
television stations that carried principally infomercials and
other paid programming. In 1997, we sold our radio station group
and our network-affiliated television stations to concentrate on
building our owned and operated television station group. We
used the proceeds from the sale of our radio station group and
network-affiliated television stations to acquire television
stations and build the PAX TV network. Since commencing our
television operations in 1994, we have established the largest
owned and operated broadcast television station group in the
U.S., as measured by the number of television households in the
markets our stations serve. We launched PAX TV on
August 31, 1998, and are now in our fifth network
programming season.

In September 1999, NBC invested $415 million in
our company. We have also entered into a number of agreements
with NBC that are intended to strengthen our business. Under
these agreements, NBC sells our network spot advertising and
performs our network research and sales marketing functions. We
have also entered into JSAs with NBC with respect to all of our
stations serving markets also served by an NBC owned and
operated station, and with many independently owned NBC
affiliated stations serving markets also served by our stations.
During the years ended December 31, 2002, 2001 and 2000, we
incurred expenses totaling approximately $20.8 million, $19.1
million and $17.8 million, respectively, for commission
compensation and cost reimbursements under our agreements with
NBC. Should NBC or the NBC affiliates elect not to renew the
agreements under which these operating relationships have been
implemented, we could be required to incur significant costs to
resume performing the advertising sales and other operating
functions currently performed by NBC and our JSA partners or to
transfer performance of these functions to another broadcast
television station operator and our revenues could be adversely
affected during any transition period where we either resume or
transfer these functions, which, in each case, could have a
material adverse effect upon us.

We derive our revenues from the sale of network
spot advertising time, network long form paid programming and
station advertising:



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Network Spot Advertising.We sell commercial air time to
    advertisers who want to reach the entire nationwide PAX TV
    viewing audience with a single advertisement. Most of our
    network advertising is sold under advance, or
    upfront, commitments to purchase advertising time,
    which are obtained before the beginning of our PAX TV
    programming season. Network advertising rates are significantly
    affected by audience ratings and our ability to reach audience
    demographics that are desirable to advertisers. Higher ratings
    generally will enable us to charge higher rates to advertisers.
    We pay commissions of up to 15% of gross revenue to advertising
    agencies for network advertising. Our network advertising sales
    represented approximately 33% of our revenue during the year
    ended December 31, 2002.
|
| |  | Network Long Form Paid Programming.We sell air time for long form paid
    programming, consisting primarily of infomercials, during
    broadcasting hours when we are not airing PAX TV. We pay
    commissions of up to 15% of gross revenue to advertising
    agencies for long form paid programming. Our network long form
    paid programming represented approximately 32% of our revenue
    during the year ended December 31, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                             

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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Station Advertising.We sell commercial air time to
    advertisers who want to reach the viewing audience in specific
    geographic markets in which our stations operate. These
    advertisers may be local businesses or regional or national
    advertisers who want to target their advertising in these
    markets. Station advertising rates are affected by ratings and
    local market conditions. We pay commissions of up to 15% of
    gross revenue to advertising agencies for station advertising
    sales. Our station advertising sales represented approximately
    35% of our revenue during the year ended December 31, 2002.
    Included in station advertising revenue is long form paid
    programming sold locally or nationally which represented
    approximately 15% of our revenue during the year ended
    December 31, 2002.

Our revenue mix has changed since we launched PAX
TV in 1998. The percentage of our television advertising
revenues derived from long form paid programming has declined
from more than 90% in 1997 to 47% (combined network and station
long form) in the year ended December 31, 2002 due to the
increase in spot advertising sales following the launch of PAX
TV. Long-form paid programming, however, continues to represent
a significant portion of our revenues. Beginning in January
2003, we modified our programming schedule by replacing network
programming during the hours of 1 p.m. to 5 p.m., Monday through
Friday, and 5 p.m. to 6 p.m. and 11 p.m. to midnight, Saturday
and Sunday, with long form paid programming. As a result, we
expect our percentage mix of long form paid programming to
increase in 2003 to approximately 60% (combined network and
station long form) of our total revenues.

Starting in the fourth quarter of 1999, we began
entering into JSAs with owners of broadcast stations in markets
served by our stations. After implementation of a JSA, we no
longer employ our own on-site station sales staff. The JSA
partner provides station spot advertising sales management and
representation for our stations and we integrate and co-locate
our station operations with those of our JSA partners. To date,
we have entered into JSAs for 52 of our television stations.

Our primary operating expenses include selling,
general and administrative expenses, depreciation and
amortization expenses, programming expenses, employee
compensation and costs associated with cable and satellite
distribution, ratings services and promotional advertising.
Programming amortization is a significant expense and is
affected significantly by several factors, including the mix of
syndicated versus lower cost original programming as well as the
frequency with which programs are aired. As we acquire a more
complete library of lower cost original programming to replace
our syndicated programming, our programming amortization expense
should decline.

Critical Accounting Policies and
Estimates

The discussion and analysis of our financial
condition and results of operations is based on our consolidated
financial statements, which have been prepared in accordance
with U.S. generally accepted accounting principles. The
preparation of financial statements requires us to make
estimates and assumptions that affect the reported amounts of
assets and liabilities, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses
during the reporting period. We believe the most significant
estimates involved in preparing our financial statements include
estimates related to the net realizable value of our programming
rights, barter revenue recognition, estimates used in accounting
for leases and estimates related to the impairment of long-lived
assets, FCC licenses and goodwill. We base our estimates on
historical experience and various other assumptions we believe
are reasonable. Actual results could differ from those estimates.

We consider the accounting policies described
below to be critical since they have the greatest impact on our
reported financial condition and results of operations and they
require significant estimates and judgments.

We carry programming rights assets on our balance
sheet at the lower of unamortized cost or net realizable value.
We periodically evaluate the net realizable value of our program
rights based on anticipated future usage of programming and the
anticipated future ratings and related advertising revenues. We
evaluate the net realizable value of our programming rights by
aggregating the program costs and related estimated future
revenues for each programming daypart. If estimated future
revenues are insufficient to recover the unamortized cost of the
programming assets in each daypart, we record an adjustment to
write-down the value of our assets to net realizable value. We
also evaluate whether future revenues will be sufficient to
recover the

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cost of programs we are committed to purchase in
the future, and if estimated future revenues are insufficient,
we accrue a loss related to our programming commitments. Our
estimates of future advertising revenues are based upon our
actual revenues generated currently, adjusted for estimated
revenue growth assumptions. If market conditions were to
deteriorate, we may not achieve our estimated future revenues,
which could result in future write-downs to net realizable value
and accrued losses on programming commitments.


We have entered into agreements with satellite
television providers and certain cable operators for carriage on
their systems in exchange for advertising spots on our network.
We have recorded satellite and cable distribution rights related
to these agreements based on the estimated value of the
advertising credits at prevailing unit rates in effect at the
time these agreements were entered into. The satellite and cable
assets are amortized over the terms of the agreements. Deferred
revenue under these barter arrangements is recognized when the
spots are aired on our network. Had we used other estimates, our
revenues recognized under these agreements may have been
different.

We have made judgments and estimates in
connection with some of our leasing transactions regarding the
estimated useful lives of the assets subject to lease as well as
the discount rates used to estimate the present value of future
lease payments. These judgments and estimates have led us to
conclude that these leases should be accounted for as operating
leases. Had we used different judgments and estimates, these
leases may have been classified as capital leases. The terms of
our senior credit facility, senior subordinated note indentures
and outstanding preferred stock restrict our ability to incur
indebtedness, including our ability to enter into capital leases.

We review our long-lived assets for possible
impairment whenever events or changes in circumstances indicate
that, based on estimated undiscounted future cash flows, the
carrying amount of the assets may not be fully recoverable. If
our analysis indicates that a possible impairment exists, we are
required to then estimate the fair value of the asset determined
either by third party appraisal or estimated discounted future
cash flows. In addition, our FCC licenses and goodwill are
tested for impairment at least annually by comparing the
estimated fair values of those assets with their recorded
amounts on an aggregate basis as a single reporting unit since
we operate PAX TV as a consolidated distribution platform. We
believe that we have made reasonable estimates and judgments in
determining whether our long-lived assets, FCC licenses and
goodwill have been impaired. If, however, there were a material
change in our determination of fair values or if there were a
material change in the conditions or circumstances influencing
fair value, we could be required to recognize an impairment
charge. In addition, it is possible that the estimated life of
certain long-lived assets will be reduced significantly in the
near term because of the anticipated industry migration from
analog to digital broadcasting. If and when we become aware of
such a reduction of useful lives, depreciation expense will be
adjusted prospectively to ensure assets are fully depreciated
upon migration.

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Results of Operations

The following table sets forth net revenues, the
components of operating expenses with percentages of net
revenues, and other operating data for the periods presented:

|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |      |       | 
|--------------------------------------------------------- | ------------------------------------------------- | ------------------------ | ------- | ------- | ------- | ---- | ----- | ---- | ----- | ---- | -------- | ------- | ------- |  | ----- | ---- | ----- | - | -------- | ------- | ------- |  | ----- | ---- | ----- | 
|                                                          |                                                   |                         
|                                                          |                                                   | Years Ended December 31 
|                                                          |                                                   |                         
|                                                          |                                                   | 2002                     |         | %       |         | 2001 |       | %    |       | 2000 |          | %      
|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |        
|Revenues                                                  |                                                   | $                        | 321,896 |         |         |      |       |      |       | $    | 308,806  |         |         |  |       |      |       | $ | 315,936  |         |         |  |       |     
|Less agency commissions                                   |                                                   |                          | (44,975 | )       |         |      |       |      |       |      | (43,480  | )       |         |  |       |      |       |   | (44,044  | )       |         |  |       |     
|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|Net revenues                                              |                                                   |                          | 276,921 |         |         |      | 100.0 |      |       |      | 265,326  |         |         |  | 100.0 |      |       |   | 271,892  |         |         |  | 100.0 |     
|Expenses:                                                 |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|                                                          | Programming and broadcast operations              |                          |         | 51,204  |         |      |       | 18.4 |       |      |          | 43,030  |         |  |       | 16.2 |       |   |          | 39,001  |         |  |       | 14.3 |      
|                                                          | Program rights amortization                       |                          |         | 77,980  |         |      |       | 28.2 |       |      |          | 84,808  |         |  |       | 32.0 |       |   |          | 100,324 |         |  |       | 36.9 |      
|                                                          | Selling, general and administrative               |                          |         | 132,305 |         |      |       | 47.8 |       |      |          | 119,427 |         |  |       | 45.0 |       |   |          | 137,436 |         |  |       | 50.6 |      
|                                                          | Business interruption insurance proceeds          |                          |         | (1,617  | )       |      |       | (0.6 | )     |      |          |        |         |  |       |     |       |   |          |        |         |  |       |     |      
|                                                          | Time brokerage and affiliation fees               |                          |         | 4,079   |         |      |       | 1.5  |       |      |          | 3,621   |         |  |       | 1.4  |       |   |          | 5,259   |         |  |       | 1.9  |      
|                                                          | Stock-based compensation                          |                          |         | 3,810   |         |      |       | 1.4  |       |      |          | 10,161  |         |  |       | 3.8  |       |   |          | 13,866  |         |  |       | 5.1  |      
|                                                          | Adjustment of programming to net realizable value |                          |         | 41,270  |         |      |       | 14.9 |       |      |          | 66,992  |         |  |       | 25.2 |       |   |          | 24,400  |         |  |       | 9.0  |      
|                                                          | Restructuring charge                              |                          |         | 2,173   |         |      |       | 0.8  |       |      |          | (1,229  | )       |  |       | (0.5 | )     |   |          | 5,760   |         |  |       | 2.1  |      
|                                                          | Depreciation and amortization                     |                          |         | 58,529  |         |      |       | 21.1 |       |      |          | 96,248  |         |  |       | 36.3 |       |   |          | 96,881  |         |  |       | 35.6 |      
|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|                                                          |                                                   | Total operating expenses |         |         | 369,733 |      |       |      | 133.5 |      |          |         | 423,058 |  |       |      | 159.4 |   |          |         | 422,927 |  |       |      | 155.5 | 
|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|Operating loss                                            |                                                   | $                        | (92,812 | )       |         |      | (33.5 | )    |       | $    | (157,732 | )       |         |  | (59.4 | )    |       | $ | (151,035 | )       |         |  | (55.5 | )   
|                                                          |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|Other Data:                                               |                                                   |                          |         |         |         |      |       |      |       |      |          |         |         |  |       |      |       |   |          |         |         |  |       |     
|Cash flows used in operating activities                   |                                                   | $                        | (75,428 | )       |         |      |       |      |       | $    | (60,772  | )       |         |  |       |      |       | $ | (76,036  | )       |         |  |       |     
|Cash flows (used in) provided by investing
    activities |                                                   |                          | (7,689  | )       |         |      |       |      |       |      | 48,477   |         |         |  |       |      |       |   | (12,784  | )       |         |  |       |     
|Cash flows provided by financing activities               |                                                   |                          | 25,024  |         |         |      |       |      |       |      | 44,790   |         |         |  |       |      |       |   | 14,994   |         |         |  |       |     
|Program rights payments and deposits                      |                                                   |                          | 116,243 |         |         |      |       |      |       |      | 130,566  |         |         |  |       |      |       |   | 128,288  |         |         |  |       |     
|Payments for cable distribution rights                    |                                                   |                          | 9,286   |         |         |      |       |      |       |      | 14,418   |         |         |  |       |      |       |   | 10,727   |         |         |  |       |     
|Capital expenditures                                      |                                                   |                          | 31,177  |         |         |      |       |      |       |      | 35,213   |         |         |  |       |      |       |   | 25,110   |         |         |  |       |     

Years Ended
December 31, 2002 and 2001

Net revenues increased 4.4% to $276.9 million for
the year ended December 31, 2002 from $265.3 million for 2001.
This increase is primarily attributable to higher advertising
revenues from our television stations and the PAX TV network.
Television station revenues increased 9% primarily due to
increased television spot advertising revenues in our local
markets and favorable results from our JSA agreements. Network
spot revenues increased 5% and network long form revenues
increased 1% compared to 2001 primarily due to increased
distribution of PAX-TV.

Our revenues during the years ended
December 31, 2002 and 2001 were negatively affected by the
temporary loss and continued impairment of the broadcast signal
of our New York television station when our antenna, transmitter
and other broadcast equipment were destroyed upon the collapse
of the World Trade Center on September 11, 2001. We are
currently broadcasting from towers outside of Manhattan at
substantially lower height and power. We expect to begin
broadcasting from the Empire State Building in Manhattan during
the third quarter of 2003, which will substantially improve our
current signal strength and quality. In addition, we are
continuing to evaluate several alternatives for a permanent
location, however we expect it could take several years to
replace the signal we enjoyed at the World Trade Center location
with a comparable signal. The loss of a significant portion of
our over-the-air viewership in the New York market has had a
negative effect on our revenues as a result of lower ratings for
the PAX TV network and our station serving the New York market.
We have property and business interruption insurance coverage to
mitigate the losses sustained. Insurance recoveries are
recognized in the period they become probable of collection and
can be reasonably estimated. To date we have incurred
expenditures for property and extra expenses totaling
approximately $4.9 million. In addition, we estimate our
business interruption losses to be approximately $8.2 million
through December 31, 2002. During 2002, we received $4.3
million of insurance proceeds, $2.7 million of which related to
property/extra expense and $1.6 million related to business
interruption. We are involved

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in a legal dispute with our insurer over these
matters and are presently unable to estimate the amount of
additional insurance proceeds we will receive, if any.


Programming and broadcast operations expenses
were $51.2 million during the year ended December 31, 2002
compared with $43.0 million in 2001. This increase is primarily
due to higher music license fees and tower rent expense for
previously owned towers that we sold in 2001. Program rights
amortization expense was $78.0 million during the year ended
December 31, 2002 compared with $84.8 million for 2001. The
decrease is due to a greater mix of lower cost original
programming as compared with 2001 as well as the lower carrying
value of our programming assets resulting from net realizable
value adjustments. Selling, general and administrative expenses
were $132.3 million during the year ended December 31, 2002
compared with $119.4 million for 2001. The increase is primarily
due to legal costs associated with the NBC arbitration and the
700 MHz spectrum auction, higher advertising expenses associated
with the launch of our 2002/2003 broadcast season and higher
insurance costs. Stock-based compensation expense was $3.8
million during the year ended December 31, 2002 compared
with $10.2 million for 2001. This decrease is due to a reduction
in options vesting in the year ended December 31, 2002
compared with 2001. The programming rights adjustment to net
realizable value described below was $41.3 million during the
year ended December 31, 2002 compared with $67.0 million
for 2001. Depreciation and amortization expense was $58.5
million during the year ended December 31, 2002 compared
with $96.2 million for 2001. This decrease is due primarily to
the adoption of Statement of Financial Accounting Standards
No. 142, Goodwill and Other Intangible Assets,
(SFAS 142) which requires that goodwill and
intangible assets with indefinite lives, including FCC licenses,
be tested for impairment annually rather than amortized over
time. As a result of the new accounting standard, our
amortization expense is now significantly lower as we no longer
amortize goodwill and FCC license intangible assets.

We have issued options to purchase shares of
Class A common stock to certain members of management and
employees under our stock compensation plans. As of
December 31, 2002, there were 9,103,336 options outstanding
under these plans. In addition to these options, we have granted
options to purchase 2,322,500 shares of Class A common
stock to members of senior management and others. In connection
with option grants, we recognized stock-based compensation
expense of approximately $3.8 million, $10.2 million and $13.9
million in 2002, 2001 and 2000, respectively. In January 2003,
we consummated a stock option exchange offer under which we
granted to holders who tendered their eligible options in the
exchange offer new options under our 1998 Stock Incentive Plan,
as amended, to purchase one share of our Class A common
stock for each two shares of our Class A common stock
issuable upon the exercise of tendered options, at an exercise
price of $0.01 per share. Because the terms of the new options
provided for a one business day exercise period, all holders who
tendered their eligible options in the exchange offer exercised
their new options promptly after the issuance of those new
options. The effect of the stock option exchange was to reduce
the number of shares of Class A common stock issuable upon
the exercise of issued and outstanding options under the
existing equity compensation plans by 7.3 million and increase
by 4.5 million the number of shares of Class A common stock
issuable upon the exercise of options available for issuance
under equity compensation plans approved by security holders.
The stock option exchange will result in a fixed non-cash
stock-based compensation expense of approximately $8.5 million,
of which approximately $5.8 million related to vested shares
will be recognized in the first quarter of 2003 and the
remaining $2.7 million will be recognized on a straight-line
basis over the remaining one year vesting schedule of the
modified award. In addition, the remaining deferred stock
compensation expense associated with the original stock option
awards totaling approximately $2.5 million at December 31,
2002 will be recognized on a straight-line basis over the
remaining one year vesting schedule of the modified awards.

As previously described, effective January 2003,
we modified our programming schedule by reducing the number of
hours we program the PAX TV network primarily during the daytime
period and replacing such hours with long form paid programming.
As a result of this change, we no longer plan to air certain
syndicated and original programs. Therefore, we revised our
estimate of the future advertising revenues to be generated
related to these programs and recognized a charge of
approximately $38.4 million in the fourth quarter of 2002
related to these programming assets. Additionally, as further
described below, in the second quarter of 2002

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we recorded a $2.9 million accrued programming
loss related to programming commitments for Touched By An
Angel.


In 2001, we adjusted our estimate of the
anticipated future usage of Touched By An Angeland
certain other syndicated programs and the related advertising
revenues expected to be generated and recognized a charge of
approximately $67.0 million related to the net realizable value
of these programming assets and related programming commitments.
The charge included a $22.2 million accrued loss related to
programming commitments for future seasons of Touched By An
Angel. As further described below, in 2002 we sublicensed
the programming rights to Touched By An Angelto the
Hallmark Channel.

Interest expense for the year ended
December 31, 2002 increased to $85.2 million from $49.7
million in 2001. The increase is primarily due to a greater
level of senior debt due to our refinancings in July 2001 and
January 2002 and borrowings to fund capital expenditures. At
December 31, 2002, total long-term debt and senior
subordinated notes were $900.1 million compared with $529.2
million as of December 31, 2001. Although the July 2001 and
the January 2002 refinancings reduced our overall cost of
capital, the refinancings increased our debt and reduced our
preferred stock, and as a result our interest expense increased
in 2002. Interest income for the year ended December 31,
2002 decreased to $2.4 million from $4.5 million in 2001. The
decrease is due to lower cash and investment balances and lower
interest rates.

During the year ended December 31, 2002, we
sold our television station WPXB serving the Merrimack, New
Hampshire market to NBC for $26 million and realized a pre-tax
gain of approximately $24.5 million.

As further described below, during 2002 we
recorded an increase in our deferred tax asset valuation
allowance totaling approximately $136.3 million resulting from
changes in accounting for the amortization of FCC license
intangible assets and goodwill upon adoption of SFAS 142.

Years Ended
December 31, 2001 and 2000

Net revenues decreased 2.4% to $265.3 million for
the year ended December 31, 2001 from $271.9 million for 2000.
This decrease is primarily attributable to lower station
revenues offset in part by higher advertising revenues from the
PAX TV network. The decrease in television station revenues is
primarily due to reduced television spot advertising revenues in
our local markets. The increase in PAX TV network advertising
revenues resulted from increases in ratings and distribution of
PAX TV and favorable results from our network sales agreement
with NBC. On an overall basis, network spot revenues increased
approximately 11% in 2001 resulting from a strong upfront market
for the 2000/2001 broadcast season. As previously described, our
revenues during the year ended December 31, 2001 were
negatively affected by the temporary loss and continued
impairment of the broadcast signal of our New York television
station when our antenna, transmitter and other broadcast
equipment were destroyed upon the collapse of the World Trade
Center on September 11, 2001. The loss of a significant
portion of our over-the-air viewership in the New York market
has had a negative effect on our revenues as a result of lower
ratings for the PAX TV network and our station serving the New
York market. We have property and business interruption
insurance coverage to mitigate the losses sustained. We are
involved in legal proceedings with our insurer over these
matters and are presently unable to estimate the amount of
additional insurance proceeds we will receive, if any.

Programming and broadcast operations expenses
were $43.0 million during the year ended December 31, 2001
compared with $39.0 million in 2000. This increase is primarily
due to a one-time payment to terminate a tower lease and tower
rent expense from the sale of certain of our broadcast towers in
the fourth quarter of 2001 described below. Program rights
amortization expense was $84.8 million during the year ended
December 31, 2001 compared with $100.3 million for 2000.
The decrease is due to syndicated programming changes and a
greater mix of lower cost original programming as compared with
2000. Selling, general and administrative expenses were $119.4
million during the year ended December 31, 2001 compared
with $137.4 million for 2000. The decrease is primarily due to
lower selling costs and other cost cutting measures. Time
brokerage and affiliation fees were $3.6 million during the year
ended December 31, 2001 compared with $5.3 million for 2000.
This decrease is due to the completion of acquisitions of
stations we previously operated under time brokerage agreements.
Stock-based compensation expense was $10.2 million during the
year ended December 31, 2001 compared with $13.9 million
for 2000. This decrease is due to a reduction in options

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vesting in the year ended December 31, 2001
compared with 2000. The programming rights adjustment to net
realizable value described above was $67.0 million during the
year ended December 31, 2001 compared with $24.4 million
for 2000. Depreciation and amortization expense was $96.2
million during the year ended December 31, 2001, which was
comparable with $96.9 million for 2000.


Interest expense for the year ended
December 31, 2001 increased 3.6% to $49.7 million from
$48.0 million in 2000. The increase is primarily due to a
greater level of debt in 2001 resulting from our July
refinancing of our 12% preferred stock and 11 5/8% senior
subordinated notes and borrowings to fund capital expenditures.
At December 31, 2001, total long-term debt and senior
subordinated notes were $529.2 million compared with $405.5
million as of December 31, 2000. Interest income for the
year ended December 31, 2001 decreased to $4.5 million from
$14.0 million in 2000. The decrease is due to lower cash and
investment balances and lower interest rates.

During the year ended December 31, 2001, we
sold five television stations for aggregate consideration of
$31.9 million and realized pre-tax gains of approximately $12.3
million. In addition, during 2000, we recognized a $10.2 million
gain from the modification for program rights obligations
primarily resulting from our return of certain fully amortized
programming rights in exchange for cash of $4.9 million and the
cancellation of our remaining payment obligations.

The Series B preferred stock issued in
conjunction with the NBC transaction was issued with a
conversion price per share that was less than the closing price
of the Class A common stock on the date of issuance. As a
result, we recognized a beneficial conversion feature in
connection with the issuance of the stock equal to the amount of
the discount multiplied by the number of shares into which the
Series B preferred stock is convertible. In November 2000,
the Emerging Issues Task Force of the Financial Accounting
Standards Board reached a consensus regarding the accounting for
beneficial conversion features which required us to recalculate
the beneficial conversion feature utilizing the accounting
conversion price rather than the stated conversion price used
for 1999. This change resulted in a cumulative catch-up
adjustment totaling approximately $75.1 million, which was
recorded as a preferred stock dividend in the fourth quarter of
2000.

Restructuring Activities

During the fourth quarter of 2002, we approved a
restructuring plan to consolidate certain of our operations,
reduce personnel by 95 employees and modify our programming
schedule in order to significantly reduce our cash operating
costs. These restructuring activities resulted in a charge of
approximately $2.6 million in the fourth quarter of 2002
consisting of $2.2 million for termination benefits and $0.4
million of lease termination and other costs. We have accounted
for these costs pursuant to Statement of Financial Accounting
Standards No. 146, Accounting for Costs Associated
with Exit or Disposal Activities (SFAS 146),
which we early adopted in the fourth quarter of 2002. SFAS 146
requires that a liability for a cost associated with an exit or
disposal activity be recognized when the liability is incurred.
Additional restructuring costs, if any, will be recognized in
2003 as they are incurred. Through December 31, 2002, we
paid termination benefits totaling approximately $1.5 million to
85 employees and paid $0.2 million of lease termination and
other costs which were charged to the reserve. We expect these
restructuring activities will result in approximately $7.5
million of annual salary and occupancy cost savings.

During the fourth quarter of 2000, we approved a
plan to restructure our television station operations by
entering into JSAs with owners of broadcast stations in markets
in which our stations were not already operating under JSAs. Our
restructuring plan included two major components:
(1) termination of 226 station sales and administrative
employees and (2) the closing of our leased studio and
sales office facilities at each of our stations. These
restructuring activities resulted in a charge of approximately
$5.8 million in the fourth quarter of 2000, consisting of $2.7
million of termination benefits and $3.1 million of costs
associated with the closing of our studios and sales offices
that will no longer be utilized upon implementation of the JSAs.
Through December 31, 2002, we paid termination benefits to
83 employees totaling approximately $1.6 million and paid lease
termination costs of approximately $1.9 million, which were
charged against the restructuring reserve. In 2001, we reversed
approximately $1.2 million of restructuring reserves primarily

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related to four stations which had not entered
into JSAs and certain other reserves which were no longer
required. In 2002, we reversed approximately $0.5 million of
restructuring reserves primarily related to two other stations
which had not entered into JSAs and certain other reserves which
were no longer required. We have substantially completed the JSA
restructuring except for contractual lease obligations for
closed locations, the majority of which expire in 2004. As a
result of the JSA restructuring, we have reduced our annual
station operating expenses by an estimated $11 million
consisting primarily of salary and occupancy cost savings of
approximately $20 million partially offset by commissions paid
to our JSA partners which, based on 2002 actual station net
revenues, totaled approximately $9 million.


Income Taxes

As previously described, upon adoption of SFAS
142 on January 1, 2002, we no longer amortize goodwill and
FCC license intangibles. Under previous accounting standards,
these assets were being amortized over 25 years. Although
the provisions of SFAS 142 stipulate that indefinite-lived
intangible assets and goodwill are not amortized, we are
required under Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, to
recognize deferred tax liabilities and assets for temporary
differences related to goodwill and FCC license intangible
assets and the tax-deductible portion of these assets. Prior to
the adoption of SFAS 142, we considered our deferred tax
liabilities related to these assets as a source of future
taxable income in assessing the realization of our deferred tax
assets. Because indefinite-lived intangible assets and goodwill
are no longer amortized for financial reporting purposes under
SFAS 142, the related deferred tax liabilities will not reverse
until some indeterminate future period should the assets become
impaired or are disposed of. Therefore, the reversal of deferred
tax liabilities related to FCC license intangible assets and
goodwill are no longer considered a source of future taxable
income in assessing the realization of deferred tax assets. As a
result of this accounting change, we were required to record an
increase in our deferred tax asset valuation allowance totaling
approximately $136.3 million for 2002. In addition, we will
continue to record increases in our valuation allowance in
future periods based on increases in the deferred tax
liabilities and assets for temporary differences related to
goodwill and FCC license intangible assets.

We structured the disposition of our radio
division in 1997 and our acquisition of television stations
during the period following this disposition in a manner that we
believed would qualify these transactions as a like
kind exchange under Section 1031 of the Internal
Revenue Code and would permit us to defer recognizing for income
tax purposes up to approximately $333 million of gain. The IRS
is examining our 1997 tax return and has issued us a notice of
proposed adjustment disallowing all of our gain deferral. We
intend to contest this determination and, based upon the advice
of our legal counsel, we believe that it is likely that we will
prevail. We can provide no assurance, however, that we will
prevail. In addition, the IRS has issued to us an alternative
notice of proposed adjustment that, in the event the IRS is
unsuccessful in disallowing all of the gain deferral,
approximately $62 million of the $333 million gain deferral will
be disallowed. We intend to contest this alternative
determination as well, however we can provide no assurance that
we will prevail. Should the IRS successfully challenge our
position and disallow all or part of our gain deferral, because
we had net operating losses in the years subsequent to 1997 in
excess of the amount of the deferred gain, we would not be
liable for any tax deficiency, but could be liable for interest
on the tax liability for the period prior to the carryback of
our net operating losses. We have estimated the amount of
interest for which we could be held liable to be a maximum of
approximately $15 million should the IRS succeed in disallowing
all of the deferred gain. However, should the IRS be successful
in disallowing only part of the gain under its alternative
proposed adjustment, we estimate we would be liable for only a
nominal amount of interest.

Liquidity and Capital Resources

Our primary capital requirements are to fund
capital expenditures for our television properties, programming
rights payments and debt service payments. Our primary sources
of liquidity are our net working capital and proceeds from the
planned sale of certain non-core assets which are expected to
generate over $100 million in proceeds. To date, we have
completed $61 million of these asset sales, which include the
sale of our television station WPXB, serving the Merrimack, New
Hampshire market, to NBC for $26 million, which we completed on
October 29, 2002, and the sale of our television station
KPXF, serving the Fresno, California

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market, to Univision Communications, Inc. for $35
million, which we completed on February 19, 2003. In
addition, we have signed definitive agreements with respect to
the sale of other broadcast assets which upon closing will
result in additional proceeds of approximately $45 million.
These pending asset sales include the sale of our television
stations WMPX, serving the Portland-Auburn, Maine market, and
WPXO, serving the St. Croix, U.S. Virgin Islands market for an
aggregate purchase price of $10 million, the sale of our limited
partnership interest in television station WWDP, serving the
Boston, Massachusetts market, for approximately $15 million and
the sale of our television station KAPX, serving the
Albuquerque, New Mexico market, for $20 million. We expect to
complete the sales of WMPX and WPXO and the sale of our limited
partnership interest in WWDP in the second quarter of 2003. The
KAPX sale is subject to regulatory and other approvals. We
believe that cash provided by future operations, net working
capital and the proceeds from the planned asset sales will
provide the liquidity necessary to meet our obligations and
financial commitments for at least the next twelve months. If we
are unable to complete the identified asset sales or our
financial results are not as anticipated, we may be required to
seek to sell additional assets or raise additional funds through
the offering of equity securities in order to generate
sufficient cash to meet our liquidity needs. We can provide no
assurance that we would be successful in selling assets or
raising additional funds if this were to occur.


As of December 31, 2002, we had $42.8
million in cash and short-term investments and working capital
of approximately $19.2 million. During the year ended
December 31, 2002, our cash and short-term investments
decreased by approximately $53.2 million and our working capital
decreased by approximately $38.7 million. These decreases are
due primarily to the use of $43.6 million to pay interest and
$31.8 million to fund operations including programming and cable
payments, partially offset by $26.6 million in proceeds from the
sale of broadcast assets.

Cash used in operating activities was
approximately $75.4 million, $60.8 million and $76.0 million for
2002, 2001 and 2000, respectively. These amounts primarily
reflect payments for interest on our debt and the operating
costs incurred in connection with the operation of PAX TV and
the related programming rights and cable distribution rights
payments.

Cash (used in) provided by investing activities
was approximately ($7.7) million, $48.5 million and ($12.8)
million for 2002, 2001 and 2000, respectively. These amounts
primarily include capital expenditures, short-term investment
transactions, and acquisitions of broadcast properties offset by
proceeds from station sales, the sale of our broadcast towers
and property insurance proceeds. As of December 31, 2002,
we had agreements to purchase significant assets of broadcast
properties totaling approximately $36.0 million, net of
deposits. We do not anticipate spending any significant amounts
to satisfy these commitments until 2005 or thereafter.

Capital expenditures, which consist primarily of
digital conversion costs and purchases of broadcast equipment
for our television stations, were approximately $31.2 million in
2002, $35.2 million in 2001 and $25.1 million in 2000. The FCC
has mandated that each licensee of a full power broadcast
television station that was allotted a second digital television
channel in addition to the current analog channel, complete the
construction of digital facilities capable of serving its
community of license with a signal of requisite strength by May
2002, and complete the build out of the balance of its full
authorized facilities by a later date to be established by the
FCC. Despite the current uncertainty that exists in the
broadcasting industry with respect to standards for digital
broadcast services, planned formats and usage, we have complied
and intend to continue to comply with the FCCs timing
requirements for the construction of digital television
facilities and the broadcast of digital television. We have
commenced migration to digital broadcasting in certain of our
markets and will continue to do so throughout the required time
period. We currently have 29 stations broadcasting in digital
and expect to have 15 more stations broadcasting in digital by
December 31, 2003. We have requested extensions or
modifications with respect to 14 of our television stations and
are awaiting construction permits from the FCC with respect to
nine of our television stations. Nine of our television stations
have not received a digital channel allocation and therefore
will not be converted until the end of the digital transition.
Because of the uncertainty as to standards, formats and usage,
we cannot currently predict with reasonable certainty the amount
or timing of the expenditures we will likely have to make to
complete the digital conversion of our stations. We currently
anticipate, however, that we will spend at least an additional

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$25 million over the next two to three years to
complete the conversion. We will likely fund our digital
conversion from cash on hand and proceeds from our planned asset
sales.


During 2002, we sold our television station WPXB,
serving the Merrimack, New Hampshire market, to NBC for $26
million and realized a pre-tax gain of approximately $24.5
million. During 2001, we sold our interests in five television
stations for aggregate consideration of $31.9 million and
realized pre-tax gains of approximately $12.3 million. During
2000, we sold our interests in four stations for aggregate
consideration of approximately $14.5 million and realized
pre-tax gains of approximately $1.3 million on these sales.

During 2001, we acquired the assets of three
television stations for total consideration of $30.8 million, of
which $16.1 million was paid in prior years, and we paid $1.0
million to acquire the minority interest in a station acquired
in 1998. During 2000, in addition to the acquisition of DP Media
described below, we acquired the assets of four television
stations for total consideration of approximately $68.7 million,
of which $10.9 million was paid in prior years, and we paid
approximately $8.9 million of additional consideration in
respect of an acquisition completed in 1999.

In June 2000, we completed the acquisition of DP
Media, Inc. Before the acquisition, DP Media was beneficially
owned by family members of Mr. Paxson. We acquired DP Media
for aggregate consideration of $113.5 million, $106 million of
which we had previously advanced during 1999. DP Medias
assets included a 32% equity interest in a limited liability
company that owns television station WWDP in Norwell,
Massachusetts and is controlled by the former stockholders of DP
Media. We allocated the aggregate purchase price of DP Media to
the assets acquired and liabilities assumed based on their
relative fair market values. During the third quarter of 1999,
we advanced funds to DP Media to fund operating cash flow needs.
As a result of our significant operating relationships with DP
Media and our funding of DP Medias operating cash flow
needs, the assets and liabilities of DP Media, together with
their results of operations, have been included in our
consolidated financial statements since September 30, 1999.

In December 2001, we completed the sale and
leaseback of certain of our tower assets for aggregate proceeds
of $34.0 million. This transaction resulted in a gain of
approximately $5.2 million which has been deferred and will be
recognized over the lease term as a reduction of rent expense.
As part of the transaction, we entered into operating leases
related to both our analog and digital antennas at these
facilities for terms of up to 20 years. Annual rent expense
over the lease term is approximately $4.0 million. For certain
tower assets with a net book value of approximately $9.1
million, we were temporarily unable to transfer title or assign
leases to the buyer at closing. We expect to complete the
majority of these transfers in 2003. In the interim, we entered
into management agreements with the buyer on terms consistent
with the operating leases. Included in the $34.0 million
proceeds was approximately $12.1 million of deferred
consideration for the managed sites which is included in other
liabilities in the accompanying December 31, 2002
consolidated balance sheet.

Cash provided by financing activities was $25.0
million in 2002, $44.8 million in 2001 and $15.0 million in
2000. These amounts include the proceeds from the January 2002
and July 2001 refinancings described below, as well as the
related principal repayments, redemption premiums, preferred
stock redemptions and refinancing costs. Also included are
proceeds from borrowings to fund capital expenditures and
proceeds from stock option exercises, net of principal
repayments and preferred stock dividends.

In January 2002, we completed an offering of
senior subordinated discount notes due in 2009. Gross proceeds
of the offering totaled approximately $308 million and were used
to refinance our 12 1/2% exchange debentures due 2006,
which were issued in exchange for the outstanding shares of our
12 1/2% exchangeable preferred stock on January 14,
2002, and to pay costs related to the offering. The notes were
sold at a discount of 62.132%, which represents a yield to
maturity of 12 1/4%. Cash interest on the notes will be
payable semi-annually beginning on July 15, 2006. The
senior subordinated discount notes are guaranteed by our
subsidiaries. We recognized an extraordinary loss due to early
extinguishment of debt totaling approximately $17.6 million in
2002 resulting primarily from the redemption premium and the
write-off of unamortized debt costs associated with the
repayment of the 12 1/2% exchange debentures.

On July 12, 2001, we completed a $560
million financing consisting of a $360 million senior credit
facility and $200 million of 10 3/4% senior subordinated
notes due 2008. Proceeds from the initial funding under the

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senior credit facility and the 10 3/4%
senior subordinated notes offering were used to repay all of our
indebtedness and obligations under our previously existing
credit facilities, which were scheduled to mature in June 2002,
to redeem our 11 5/8% senior subordinated notes and our 12%
redeemable preferred stock and to pay redemption premiums, fees
and expenses in connection with the refinancing. In 2001, we
recognized an extraordinary loss related to early extinguishment
of debt totaling approximately $9.9 million resulting primarily
from the write-off of unamortized debt costs related to the
refinanced indebtedness and the redemption premium and costs
associated with the repayment of the 11 5/8% senior
subordinated notes.


The $360 million senior credit facility consists
of a fully drawn $25 million revolving credit facility maturing
June 2006, a $50 million delayed draw Term A facility maturing
December 2005, of which $48.0 million was outstanding at
December 31, 2002, and a $285 million fully drawn Term B
facility maturing June 2006, of which $280.7 million
remained outstanding at December 31, 2002. The revolving credit
facility is available for general corporate purposes and the
Term A facility is available to fund capital expenditures. We
used the Term A portion of the facility to fund the majority of
our capital expenditures in 2002. The interest rate under the
bank facility, as amended, is LIBOR plus 3.25% or Base Rate (as
defined) plus 2.25% at the Companys option. The
10 3/4% senior subordinated notes are due in 2008 and
interest on the notes is payable on January 15 and
July 15 of each year. We have entered into a variable to
fixed interest rate swap in the notional amount of $144.0
million to hedge the impact of interest rate changes on a
portion of our variable rate indebtedness. The fixed rate under
the swap is 3.64% and variable rates are indexed to LIBOR.
Including the impact of the swap, the weighted average interest
rate of our indebtedness at December 31, 2002 was 9.49%.

The terms of the indentures governing our senior
subordinated notes contain covenants limiting our ability to
incur additional indebtedness except for specified indebtedness
related to the funding of capital expenditures and refinancing
indebtedness. In addition, our senior credit facility also
contains covenants restricting our ability and the ability of
our subsidiaries to incur additional indebtedness, dispose of
assets, pay dividends, repurchase or redeem capital stock and
indebtedness, create liens, make capital expenditures, make
certain investments or acquisitions and enter into transactions
with affiliates and otherwise restricting our activities. On
June 28, 2002, we and our lenders amended our senior credit
facility to, among other things, reduce the minimum required
levels of net revenues and EBITDA (as defined in the senior
credit facility and summarized below) for certain periods under
the facilitys financial covenants and allow us to retain
the proceeds from certain planned asset sales for general
corporate purposes. In connection with the amendment, the
interest rates were increased to LIBOR plus 3.25% or Base Rate
(as defined) plus 2.25%, at our option, and we paid an amendment
fee of $0.9 million. On November 4, 2002, we and our
lenders amended our senior credit facility to, among other
things, exclude from the definition of EBITDA certain costs
resulting from our plan to consolidate certain of our
operations, reduce personnel and modify our programming
schedule. In connection with this amendment, we incurred costs
of approximately $0.6 million. Our senior credit facility, as
amended, contains the following financial covenants: (1)
twelve-month trailing minimum net revenue and minimum EBITDA for
each of the fiscal quarters ended June 30, 2001 through
December 31, 2004, (2) maximum ratio of total senior
debt to EBITDA, maximum ratio of total debt to EBITDA, minimum
permitted interest coverage ratio and minimum permitted fixed
charge coverage ratio, each beginning for each of the fiscal
quarters ending on or after March 31, 2005,
(3) maximum annual capital expenditures for 2001 through
2006 and (4) maximum annual programming payments for 2002
through 2006. EBITDA, as defined under our senior credit
facility, is equal to our consolidated net loss plus the sum of
interest expense (net of interest income), depreciation,
amortization (excluding programming amortization), stock-based
compensation, permitted programming net realizable value
adjustments, permitted restructuring and other charges, time
brokerage and affiliation fees, losses on the sale of assets and
other non-cash expenses minus the sum of gains on the sale of
assets and other non-cash income. In addition, EBITDA, as
defined, is adjusted to give effect to acquisitions or
dispositions of television stations as if they occurred at the
beginning of the period they were consummated. For the year
ended December 31, 2002, our net revenues and EBITDA, as
defined, exceeded our covenant minimum net revenues and EBITDA
under our senior credit facility for the period.

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Our twelve-month trailing minimum net revenue and
EBITDA covenants, as amended, for the next four quarters are as
follows (in thousands):

|                      |  |                      |         |                |  |   |        | 
|--------------------- |  | -------------------- | ------- | -------------- |  | - | ------ | 
|Fiscal Quarter Ending |  | Minimum Net Revenues |         | Minimum EBITDA
|                      |  |                      |         |               
|March 31, 2003        |  | $                    | 260,000 |                |  | $ | 20,000 | 
|June 30, 2003         |  | $                    | 270,000 |                |  | $ | 34,000 | 
|September 30, 2003    |  | $                    | 280,000 |                |  | $ | 45,000 | 
|December 31, 2003     |  | $                    | 290,000 |                |  | $ | 50,000 | 

On March 13, 2003, we obtained a waiver from
our lenders under our senior credit facility whereby our lenders
waived compliance with respect to our twelve-month trailing
minimum net revenue covenants for each of the fiscal quarters
ended June 30, September 30 and December 31,
2003, subject to a minimum $250 million net revenue floor in
each period. Failure to meet the minimum net revenue covenants
in these waiver periods will result in a fee equal to 0.125% of
the outstanding principal amount under the facility for each
period subject to the waiver, provided our net revenues are not
less than the $250 million waiver floor. In connection with the
waiver, we paid an upfront fee of approximately $0.5 million.

Our ability to meet these financial covenants is
influenced by several factors, the most significant of which is
our ability to generate revenues which in turn is affected by
overall conditions in the television advertising marketplace,
our network and station ratings and the success of our JSA
strategy and cost cutting initiatives. At December 31,
2002, we were in compliance with these amended covenants.
Although we currently expect to meet these amended covenants
through the end of fiscal 2003, adverse developments with
respect to these or other factors could result in our failing to
meet one or more of these covenants. Accordingly, there can be
no assurance that we will continue to be in compliance with
these covenants in future periods. As previously described, we
have received a waiver from our lenders for our minimum net
revenue covenant for the trailing twelve-month periods ended
June 30, September 30 and December 31, 2003 provided
our net revenues are not less than $250 million for each period.
If we were to violate any of these covenants and/or the terms of
our March 2003 waiver, we would be required to seek an
additional waiver from our lenders under our senior credit
facility and possibly seek another amendment to our senior
credit facility. We can provide no assurance that the lenders
under our senior credit facility would grant us any waiver or
amendment which might become necessary. If we failed to meet any
of our debt covenants and our lenders did not grant a waiver or
amend our facility, they would have the right to declare an
event of default and seek remedies including acceleration of all
outstanding amounts due under the senior credit facility. Should
an event of default be declared under the senior credit
facility, this would cause a cross default to occur under the
senior subordinated note and senior subordinated discount note
indentures, thus giving each trustee the right to accelerate
repayment, and would give the holders of each of our three
outstanding series of preferred stock the right to elect two
directors per series to our board of directors. We can provide
no assurance that we would be successful in obtaining
alternative sources of funding to repay these obligations should
these events occur.

Contractual Obligations and
Commitments

We are obligated under the terms of our debt
facilities, programming contracts, cable distribution agreements
and operating lease agreements and employment contracts as of
December 31, 2002 to make future payments as follows (in
thousands):

|                                          |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |        |  |  |   |         |  |  |   |           | 
|----------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ | ---- |  | ---- | ------ | ---------- |  | ----- | ------- |  |  | - | ------ |  |  | - | ------- |  |  | - | --------- | 
|                                          |  | 2003 |        | 2004 |  | 2005 |        | 2006 |  | 2007 |        | Thereafter |  | Total
|                                          |  |      |        |      |  |      |        |      |  |      |        |            |  |      
|Long-term debt                            |  | $    | 3,144  |      |  | $    | 3,385  |      |  | $    | 50,199 |            |  | $     | 297,247 |  |  | $ | 78     |  |  | $ | 696,493 |  |  | $ | 1,050,546 | 
|Programming contracts                     |  |      | 21,475 |      |  |      | 5,500  |      |  |      | 1,300  |            |  |       |        |  |  |   |       |  |  |   |        |  |  |   | 28,275    | 
|Obligations to CBS                        |  |      | 15,664 |      |  |      | 16,509 |      |  |      | 11,419 |            |  |       | 2,097   |  |  |   |       |  |  |   |        |  |  |   | 45,689    | 
|Cable agreements                          |  |      | 5,246  |      |  |      | 554    |      |  |      | 179    |            |  |       |        |  |  |   |       |  |  |   |        |  |  |   | 5,979     | 
|Operating leases and employment contracts |  |      | 19,044 |      |  |      | 14,733 |      |  |      | 13,251 |            |  |       | 13,287  |  |  |   | 12,831 |  |  |   | 116,885 |  |  |   | 190,031   | 
|                                          |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |        |  |  |   |         |  |  |   |           | 
|                                          |  | $    | 64,573 |      |  | $    | 40,681 |      |  | $    | 76,348 |            |  | $     | 312,631 |  |  | $ | 12,909 |  |  | $ | 813,378 |  |  | $ | 1,320,520 | 
|                                          |  |      |        |      |  |      |        |      |  |      |        |            |  |       |         |  |  |   |        |  |  |   |         |  |  |   |           | 

See Note 15 in the accompanying consolidated
financial statements for a summary of the redemption features of
our mandatorily redeemable preferred stock.

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Under the terms of our programming contracts, as
of December 31, 2002 we have committed to pay for certain
programs for which we currently do not have airing rights as
follows (in thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 11,216 | 
|2004 |  |   | 1,649  | 
|2005 |  |   | 900    | 
|     |  |   |        | 
|     |  | $ | 13,765 | 
|     |  |   |        | 

On August 1, 2002, we entered into
agreements with a subsidiary of CBS Broadcasting, Inc.
(CBS) and Crown Media United States, LLC
(Crown Media) to sublicense our rights to broadcast
the television series Touched By An
Angel(Touched) to Crown Media for exclusive
exhibition on the Hallmark Channel, commencing September 9,
2002. Under the terms of the agreement with Crown Media, we will
receive approximately $47.4 million from Crown Media, $38.6
million of which will be paid over a three-year period
commencing August 2002 and the remaining $8.8 million of which
will be paid over a three-year period commencing August 2003. In
addition, Crown Media is obligated to sub-license future seasons
from us should CBS renew the series.

Under the terms of our agreement with CBS, we
remain obligated to CBS for amounts due under our pre-existing
license agreement, less estimated programming cost savings of
approximately $15 million. As of December 31, 2002, amounts
due or committed to CBS totaled approximately $64.0 million
(including commitments of approximately $18.3 million for the
2002/2003 season to be made available in the future). The
transaction resulted in a gain of approximately $4 million,
which is being deferred over the term of the Crown Media
agreement.

We have a significant concentration of credit
risk with respect to the amounts due from Crown Media under the
sublicense agreement. As of December 31, 2002, the maximum
amount of loss due to credit risk that we would sustain if Crown
Media failed to perform under the agreement totaled
approximately $30.0 million, representing the present value of
amounts due from Crown Media. Under the terms of the sublicense
agreement, we have the right to terminate Crown Medias
rights to broadcast Touched if Crown Media fails to make timely
payments under the agreement. Therefore, should Crown Media fail
to perform under the agreement, we could regain our exclusive
rights to broadcast Touched on PAX TV pursuant to our existing
licensing agreement with CBS.

Under our agreement with CBS, we are required to
license future seasons of Touched from CBS if the series is
renewed by CBS. Under our sublicense agreement with Crown Media,
Crown Media is obligated to sublicense such future seasons from
us. Our financial obligation to CBS for future seasons will
exceed the sublicense fees to be received from Crown Media,
resulting in accrued programming losses to the extent the series
is renewed in future seasons. During the second quarter of 2002,
upon the decision by CBS to renew Touched for the 2002/2003
season, we became obligated to license the 2002/2003 season,
resulting in an accrued programming loss of approximately $10.7
million. This amount was offset in part by a decrease in our
estimated loss on the 2001/2002 season of approximately $7.8
million, resulting in a net accrued programming loss of $2.9
million in the second quarter. The change in estimate for the
2001/2002 season was due to the sublicensing agreement with
Crown Media and a lower number of episodes produced than
previously estimated.

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Our obligations to CBS for Touched will be
partially funded through the sub-license fees from Crown Media.
As of December 31, 2002, our obligation to CBS and our
receivable from Crown Media related to Touched are due as
follows (in thousands):

|                             |  |             |        |                    |  |                  |        |       |  |   |         |   |  |   |        | 
|---------------------------- |  | ----------- | ------ | ------------------ |  | ---------------- | ------ | ----- |  | - | ------- | - |  | - | ------ | 
|                             |  | Obligations |        | Future             |  | Amounts Due from |        |      
|                             |  | to CBS      |        | Commitments to CBS |  | Crown Media      |        | Total
|                             |  |             |        |                    |  |                  |        |      
|2003                         |  | $           | 15,664 |                    |  | $                | 1,742  |       |  | $ | (13,939 | ) |  | $ | 3,467  | 
|2004                         |  |             | 16,509 |                    |  |                  | 2,742  |       |  |   | (12,867 | ) |  |   | 6,384  | 
|2005                         |  |             | 11,419 |                    |  |                  | 6,699  |       |  |   | (7,506  | ) |  |   | 10,612 | 
|2006                         |  |             | 2,097  |                    |  |                  | 7,094  |       |  |   |        |   |  |   | 9,191  | 
|                             |  |             |        |                    |  |                  |        |       |  |   |         |   |  |   |        | 
|                             |  |             | 45,689 |                    |  |                  | 18,277 |       |  |   | (34,312 | ) |  |   | 29,654 | 
|Amount representing interest |  |             |       |                    |  |                  |       |       |  |   | 4,304   |   |  |   | 4,304  | 
|                             |  |             |        |                    |  |                  |        |       |  |   |         |   |  |   |        | 
|                             |  | $           | 45,689 |                    |  | $                | 18,277 |       |  | $ | (30,008 | ) |  | $ | 33,958 | 
|                             |  |             |        |                    |  |                  |        |       |  |   |         |   |  |   |        | 

New Accounting Pronouncements

Effective January 1, 2002, we adopted SFAS
142. SFAS 142 addresses financial accounting and reporting for
acquired goodwill and other intangible assets. Under SFAS 142,
goodwill and intangible assets that have indefinite lives are
not amortized but rather are tested at least annually for
impairment. Intangible assets that have finite useful lives
continue to be amortized over their useful lives. No goodwill
and FCC license impairment loss was recognized upon adoption.
However, due to the deferred tax consequences of SFAS 142
described above, we were required to increase our deferred tax
asset valuation allowance in 2002. Under SFAS 142, we no longer
amortize goodwill and FCC license intangibles (which we believe
have indefinite lives). Under previous accounting standards,
these assets were being amortized over 25 years. Had we not
amortized our goodwill and indefinite lived intangibles pursuant
to SFAS 142 in 2001 and 2000, our net loss attributable to
common stockholders for the years ended December 31, 2001
and 2000 would have been approximately $325.1 million, or $5.04
per share, and $366.8 million, or $5.77 per share, respectively.

In April 2002, the Financial Accounting Standards
Board (FASB) issued Statement of Financial
Accounting Standards No. 145 Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections (SFAS
145). Among other matters, SFAS 145 rescinds FASB
Statement No. 4, Reporting Gains and Losses from
Extinguishment of Debt which required gains and losses
from extinguishments of debt to be classified as an
extraordinary item, net of related income taxes. As a result,
debt extinguishments used as part of an entitys risk
management strategy will no longer meet the criteria for
classification as extraordinary items. The provisions of SFAS
145 related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. We will adopt
SFAS 145 effective January 1, 2003. Any gain or loss on
extinguishment of debt that was classified as an extraordinary
item in prior periods presented shall be reclassified as
appropriate.

In June 2002, the FASB issued Statement of
Financial Accounting Standards No. 146, Accounting
for Costs Associated with Exit or Disposal Activities
(SFAS 146). SFAS 146 supersedes Emerging Issues Task
Force Issue No. 94-3. SFAS 146 requires that the liability
for a cost associated with an exit or disposal activity be
recognized when the liability is incurred, not at the date of an
entitys commitment to an exit or disposal plan. The
provisions of SFAS 146 are effective for exit or disposal
activities initiated after December 31, 2002. As described
above, we early adopted the provisions of SFAS 146 in the fourth
quarter of 2002.

In December 2002, the FASB issued Statement of
Financial Accounting Standards No. 148, Accounting
for Stock-Based Compensation  Transition and
Disclosure (SFAS 148). SFAS 148 amends
Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation (SFAS
123), to provide alternative methods of transition for
companies that voluntarily change to a fair value-based method
of accounting for stock-based employee compensation. SFAS 148
also amends the disclosure provisions of SFAS 123. The
provisions of SFAS 148 are effective for fiscal years ending
after December 15, 2002. We have adopted the disclosure
provisions of SFAS 148 as of December 31, 2002.

45



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##### Table of Contents








|          |                                                               
|--------- | --------------------------------------------------------------
|Item  7A. | Quantitative and Qualitative Disclosures
    About Market Risk

The tables below provide information about our
market sensitive financial instruments and constitute
forward-looking statements. All items described are
non-trading.

Our primary market risk exposure is changing
interest rates. We manage interest rate risks through the use of
a combination of fixed and floating rate debt. We use interest
rate swaps to adjust interest rate exposures when appropriate,
based upon market conditions. Interest rate swaps are entered
into with a group of financial institutions with
investment-grade credit ratings, thereby minimizing the risk of
credit loss. Expected maturity dates for variable rate debt and
interest rate swaps in the tables below are based upon
contractual maturity dates. Average interest rates on variable
rate debt and average variable rates under interest rate swaps
are based on implied forward rates in the yield curve at the
reporting date.

Fair value estimates are made at a specific point
in time, based on relevant market information about the
financial instrument. These estimates are subjective in nature
and involve uncertainties and matters of significant judgment.
The fair value of variable rate debt approximates the carrying
value since interest rates are variable, and thus, approximate
current market rates. The fair value of interest rate swaps is
determined from dealer quotations and represents the discounted
future cash flows through maturity or expiration using current
rates. The fair value is effectively the amount we would pay or
receive to terminate the agreements.

|                   |                        |                        |         |              |   |      |       |      |   |      |        |            |   |       |         |      |   |   |    |      |   |   |     |      |   |   |         |  |  |   |         |   | 
|------------------ | ---------------------- | ---------------------- | ------- | ------------ | - | ---- | ----- | ---- | - | ---- | ------ | ---------- | - | ----- | ------- | ---- | - | - | -- | ---- | - | - | --- | ---- | - | - | ------- |  |  | - | ------- | - | 
|                   |                        |                       
|                   |                        | Expected Maturity Date
|                   |                        |                       
|                   |                        |                        |         | Fair Value  
|                   |                        |                        |         | December 31,
|December 31, 2002  |                        | 2003                   |         | 2004         |   | 2005 |       | 2006 |   | 2007 |        | Thereafter |   | Total |         | 2002
|(in thousands)     |                        |                        |         |              |   |      |       |      |   |      |        |            |   |       |         |     
|Variable rate debt |                        | $                      | 3,144   |              |   | $    | 3,385 |      |   | $    | 50,199 |            |   | $     | 297,247 |      |   | $ | 78 |      |   | $ | 230 |      |   | $ | 354,283 |  |  | $ | 354,283 |  
|                   | Average interest rates |                        |         | 4.74         | % |      |       | 5.62 | % |      |        | 6.46       | % |       |         | 7.42 | % |   |    | 7.86 | % |   |     | 7.86 | % |   |         |  |  |   |         |   | 
|Interest rate swap |                        |                        | 144,000 |              |   |      |      |      |   |      |       |            |   |       |        |      |   |   |   |      |   |   |    |      |   |   | 144,000 |  |  |   | (3,146  | )
|                   | Average pay rate       |                        |         | 6.89         | % |      |       |      |   |      |        |            |   |       |         |      |   |   |    |      |   |   |     |      |   |   |         |  |  |   |         |   | 
|                   | Average receive rate   |                        |         | 4.64         | % |      |       |      |   |      |        |            |   |       |         |      |   |   |    |      |   |   |     |      |   |   |         |  |  |   |         |   | 

|                   |                        |                        |       |              |   |      |         |      |   |      |       |            |   |       |        |      |   |   |         |      |   |   |     |      |   |   |         |  |  |   |         |   | 
|------------------ | ---------------------- | ---------------------- | ----- | ------------ | - | ---- | ------- | ---- | - | ---- | ----- | ---------- | - | ----- | ------ | ---- | - | - | ------- | ---- | - | - | --- | ---- | - | - | ------- |  |  | - | ------- | - | 
|                   |                        |                       
|                   |                        | Expected Maturity Date
|                   |                        |                       
|                   |                        |                        |       | Fair Value  
|                   |                        |                        |       | December 31,
|December 31, 2001  |                        | 2002                   |       | 2003         |   | 2004 |         | 2005 |   | 2006 |       | Thereafter |   | Total |        | 2001
|(in thousands)     |                        |                        |       |              |   |      |         |      |   |      |       |            |   |       |        |     
|Variable rate debt |                        | $                      | 2,899 |              |   | $    | 3,004   |      |   | $    | 3,107 |            |   | $     | 22,617 |      |   | $ | 297,247 |      |   | $ | 307 |      |   | $ | 329,181 |  |  | $ | 329,181 |  
|                   | Average interest rates |                        |       | 5.45         | % |      |         | 7.74 | % |      |       | 9.03       | % |       |        | 9.05 | % |   |         | 9.00 | % |   |     | 9.47 | % |   |         |  |  |   |         |   | 
|Interest rate swap |                        |                        |      |              |   |      | 144,000 |      |   |      |      |            |   |       |       |      |   |   |        |      |   |   |    |      |   |   | 144,000 |  |  |   | (1,350  | )
|                   | Average pay rate       |                        |       | 6.64         | % |      |         | 6.64 | % |      |       |            |   |       |        |      |   |   |         |      |   |   |     |      |   |   |         |  |  |   |         |   | 
|                   | Average receive rate   |                        |       | 5.39         | % |      |         | 7.40 | % |      |       |            |   |       |        |      |   |   |         |      |   |   |     |      |   |   |         |  |  |   |         |   | 






|         |                                                          
|-------- | ---------------------------------------------------------
|Item  8. | Financial Statements and Supplementary
    Financial Data

The response to this item is submitted in a
separate section of this report.






|         |                                                                                         
|-------- | ----------------------------------------------------------------------------------------
|Item  9. | Changes in and Disagreements With
    Accountants on Accounting and Financial Disclosure

None.

46



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##### Table of Contents






PART III






|          |                                                       
|--------- | ------------------------------------------------------
|Item  10. | Directors and Executive Officers of the
    Registrant

Information required by this item regarding
directors and officers is incorporated by reference from the
definitive Proxy Statement being filed by the Company for the
Annual Meeting of Stockholders to be held on May 16, 2003.






|          |                       
|--------- | ----------------------
|Item  11. | Executive Compensation

Information required by this item is incorporated
by reference from the definitive Proxy Statement being filed by
the Company for the Annual Meeting of Stockholders to be held on
May 16, 2003.






|          |                                                                                                       
|--------- | ------------------------------------------------------------------------------------------------------
|Item  12. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Information required by this item is incorporated
by reference from the definitive Proxy Statement being filed by
the Company for the Annual Meeting of Stockholders to be held on
May 16, 2003.






|          |                                                   
|--------- | --------------------------------------------------
|Item  13. | Certain Relationships and Related
    Transactions

Information required by this item is incorporated
by reference from the definitive Proxy Statement being filed by
the Company for the Annual Meeting of Stockholders to be held on
May 16, 2003.






|          |                        
|--------- | -----------------------
|Item  14. | Controls and Procedures

As required by Rule 13a-15 under the
Securities Exchange Act of 1934, within the 90 days prior
to the filing date of this report, we carried out an evaluation
of the effectiveness of the design and operation of our
disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of our
management, including our Chief Executive Officer and our Chief
Financial Officer. Based upon that evaluation, our Chief
Executive Officer and our Chief Financial Officer concluded that
our disclosure controls and procedures are effective in timely
alerting them to material information required to be included in
our periodic SEC reports. It should be noted that the design of
any system of controls is based in part upon certain assumptions
about the likelihood of future events and there can be no
assurance that any design will succeed in achieving its stated
goals under all potential future conditions, regardless of how
remote. In addition, we reviewed our internal controls, and
there have been no significant changes in our internal controls
or in other factors which would significantly affect internal
controls subsequent to the date we carried out this evaluation.

Disclosure controls and procedures are controls
and other procedures that are designed to ensure that
information required to be disclosed in our reports filed or
submitted under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the
Securities and Exchange Commission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 filed under the Exchange
Act is accumulated and communicated to management, including our
Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required
disclosure.

47



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##### Table of Contents






PART IV






|          |                                                                    
|--------- | -------------------------------------------------------------------
|Item  15. | Exhibits, Financial Statement Schedules and
    Reports on Form 8-K

(a) The following documents are filed as
part of the report:

1. The financial statements filed as part of
this report are listed separately in the Index to Consolidated
Financial Statements and Financial Statement Schedule on page
F-1 of this report.

2. The Financial Statement Schedule filed as
part of this report is listed separately in the Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1 of this report.

3. For Exhibits see Item 15(c), below.
Each management contract or compensatory plan or arrangement
required to be filed as an exhibit hereto is listed in Exhibits
Nos. 10.27, 10.28, 10.157, 10.202, 10.207.1, 10.208, 10.208.1,
10.224, 10.225, 10.226 and 10.227 of Item 15(c) below.

(b) Reports on Form 8-K.

The Company filed a Form 8-K, dated
November 1, 2002, under Item 9.
Regulation FD Disclosure disclosing that it
closed on the sale of its television station WPXB TV-60, serving
the Merrimack, New Hampshire market, to NBC for a cash purchase
price of $26.0 million.

The Company filed a Form 8-K, dated
December 12, 2002, under Item 5. Other
Events reporting that the Company and National
Broadcasting Company, Inc. amended the Investment Agreement,
dated September 15, 1999, between the Company and NBC, and
agreed that, for the 60-day redemption period commencing
September 15, 2002 only, the period during which NBC may
demand redemption of its shares of Series B preferred stock
shall expire at 5 p.m., Eastern Standard Time, on Friday,
April 4, 2003. Additionally, NBC agreed not to demand
redemption thereunder prior to March 28, 2003 without
giving the Company five days prior written notice.

The Company filed a Form 8-K, dated
December 16, 2002, under Item 9.
Regulation FD Disclosure disclosing that its
President and Chief Executive Officer, Jeff Sagansky has
accepted the role of Vice-Chairman of the Board of Directors of
the Company. In addition, the Companys Chairman, Lowell W.
Paxson, assumed the role of Chief Executive Officer in addition
to his role of Chairman of the Board of Directors, and Dean
Goodman, the Chief Operating Officer of the Company, became
President as well as Chief Operating Officer of the Company.

The Company filed a Form 8-K, dated
December 23, 2002, under Item 5. Other
Events reporting that the Company commenced an offer to
exchange eligible options to purchase shares of its Class A
common stock for new options to be granted under its 1998 Stock
Incentive Plan.

48



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##### Table of Contents



(c) List of Exhibits:

|        |       |  |  |                         |  |                                                                                                                                                                                                                                                                                                                                                                                                             
|------- | ----- |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |  |  |                        
|Number  |       |  |  | Description of Exhibits
|        |       |  |  |                        
|        | 3.1.1 |  |  |                        |  | Certificate of Incorporation of the Company(2)                                                                                                                                                                                                                                                                                                                                                              
|        | 3.1.6 |  |  |                        |  | Certificate of Designation of the Companys
    9 3/4% Series A Convertible Preferred Stock(7)                                                                                                                                                                                                                                                                                                              
|        | 3.1.7 |  |  |                        |  | Certificate of Designation of the Companys
    13 1/4% Cumulative Junior Exchangeable Preferred Stock(7)                                                                                                                                                                                                                                                                                                   
|        | 3.1.8 |  |  |                        |  | Certificate of Designation of the Companys
    8% Series B Convertible Exchangeable Preferred Stock(9)                                                                                                                                                                                                                                                                                                     
|        | 3.2   |  |  |                        |  | Bylaws of the Company(12)                                                                                                                                                                                                                                                                                                                                                                                   
|        | 4.4   |  |  |                        |  | Investment Agreement, dated as of
    September 15, 1999, by and between Paxson Communications
    Corporation and National Broadcasting Company, Inc.(9)                                                                                                                                                                                                                                                   
|        | 4.4.1 |  |  |                        |  | Stockholder Agreement, dated as of
    September 15, 1999, among Paxson Communications
    Corporation, National Broadcasting Company, Inc., Lowell W.
    Paxson, Second Crystal Diamond Limited Partnership and Paxson
    Enterprises, Inc.(9)                                                                                                                                                           
|        | 4.4.2 |  |  |                        |  | Class A Common Stock Purchase Warrant, dated
    September 15, 1999, with respect to up to 13,065,507 shares
    of Class A Common Stock(9)                                                                                                                                                                                                                                                                 
|        | 4.4.3 |  |  |                        |  | Class A Common Stock Purchase Warrant, dated
    September 15, 1999, with respect to up to 18,966,620 shares
    of Class A Common Stock(9)                                                                                                                                                                                                                                                                 
|        | 4.4.5 |  |  |                        |  | Form of Indenture with respect to the
    Companys 8% Exchange Debentures due 2009(9)                                                                                                                                                                                                                                                                                                                      
|        | 4.4.6 |  |  |                        |  | Registration Rights Agreement, dated
    September 15, 1999, between Paxson Communications
    Corporation and National Broadcasting Company, Inc.(9)                                                                                                                                                                                                                                                       
|        | 4.5   |  |  |                        |  | Indenture, dated as of June 10, 1998, by and
    between the Company, the Guarantors named therein and the Bank
    of New York, as Trustee, with respect to the New Exchange
    Debentures(7)                                                                                                                                                                                                             
|        | 4.6   |  |  |                        |  | Indenture, dated as of July 12, 2001, among
    the Company, the Subsidiary Guarantors party thereto, and The
    Bank of New York, as Trustee, with respect to the Companys
    10 3/4% Senior Subordinated Notes due 2008(13)                                                                                                                                                                            
|        | 4.7   |  |  |                        |  | Credit Agreement, dated as of July 12, 2001,
    among the Company, the Lenders party thereto, Citicorp USA,
    Inc., as Administrative Agent for the Lenders and as Collateral
    Agent for the Secured Parties, Union Bank of California, N.A.,
    as Syndication Agent for the Lenders, and CIBC Inc. and General
    Electric Capital Corporation, as Co-Documentation Agents for the
    Lenders(13)
|        | 4.7.1 |  |  |                        |  | Amendment No. 1, dated as of January 7,
    2002, to the Credit Agreement, dated as of July 12, 2001,
    amount the Company, the Lenders party thereto, and Citicorp USA,
    Inc., as Administrative Agent for the Lenders (16)                                                                                                                                                                           
|        | 4.7.2 |  |  |                        |  | Amendment No. 2, dated as of June 28,
    2002, to the Credit Agreement, dated as of July 12, 2001,
    among the Company, the Lenders party thereto, and Citicorp USA,
    Inc., as Administrative Agent for the Lenders (17)                                                                                                                                                                              
|        | 4.7.3 |  |  |                        |  | Amendment No. 3, dated as of
    November 4, 2002, to the Credit Agreement, dated as of
    July 12, 2001, among the Company, the Lenders party
    thereto, and Citicorp USA, Inc., as Administrative Agent for the
    Lenders (18)                                                                                                                                                                       
|        | 4.7.4 |  |  |                        |  | Waiver, dated as of March 13, 2003, between
    the Company and Citicorp USA, Inc., as Administrative Agent for
    the Lenders                                                                                                                                                                                                                                                                             
|        | 4.8   |  |  |                        |  | Indenture, dated as of January 14, 2002,
    among the Company, the Subsidiary Guarantors party thereto, and
    The Bank of New York, as Trustee, with respect to the
    Companys 12 1/4% Senior Subordinated Discount Notes
    due 2009 (15)                                                                                                                                                           
|        | 10.27 |  |  |                        |  | Paxson Communications Corp. Profit Sharing Plan(1)                                                                                                                                                                                                                                                                                                                                                          
|        | 10.28 |  |  |                        |  | Paxson Communications Corp. Stock Incentive
    Plan(1)                                                                                                                                                                                                                                                                                                                                                     

49



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##### Table of Contents



|        |          |  |  |                         |  |                                                                                                                                                                                                                                                                                                                    
|------- | -------- |  |  | ----------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |          |  |  |                        
|Number  |          |  |  | Description of Exhibits
|        |          |  |  |                        
|        | 10.83    |  |  |                        |  | Lease Agreement, dated June 14, 1994,
    between Paxson Communications of Tampa-66, Inc. and The
    Christian Network, Inc. for lease of production and distribution
    facilities at WFCT-TV(3)                                                                                                                
|        | 10.157   |  |  |                        |  | Paxson Communications Corporation 1996 Stock
    Incentive Plan(4)                                                                                                                                                                                                                                                 
|        | 10.183   |  |  |                        |  | Stock Purchase Agreement, dated September 9,
    1997, by and among Channel 46 of Tucson, Inc., Paxson
    Communications of Tucson-46, Inc. and Sungilt Corporation,
    Inc.(5)                                                                                                                                  
|        | 10.186   |  |  |                        |  | Option Agreement, dated November 14, 1997,
    by and between Paxson Communications Corporation and Flinn
    Broadcasting Corporation for Television station WCCL-TV, New
    Orleans, Louisiana(6)                                                                                                               
|        | 10.187   |  |  |                        |  | Option Agreement, dated November 14, 1997,
    by and between Paxson Communications Corporation and Flinn
    Broadcasting Corporation for Television station WFBI-TV,
    Memphis, Tennessee(6)                                                                                                                   
|        | 10.193.1 |  |  |                        |  | Programming Agreement, dated August 11,
    1998, by and between Paxson Communications of Chicago-38, Inc.
    and Christian Communications of Chicagoland Inc.(6)                                                                                                                                                 
|        | 10.202   |  |  |                        |  | Paxson Communications Corporation 1998 Stock
    Incentive Plan(7)                                                                                                                                                                                                                                                 
|        | 10.207.1 |  |  |                        |  | Agreement, dated December 16, 2002, by and
    between the Company and Jeffrey Sagansky                                                                                                                                                                                                                            
|        | 10.208   |  |  |                        |  | Employment Agreement, dated October 16,
    1999, by and between the Company and Lowell W. Paxson(10)                                                                                                                                                                                                              
|        | 10.208.1 |  |  |                        |  | Amendment to Employment Agreement, dated as of
    December 16, 2002, by and between the Company and Lowell W.
    Paxson                                                                                                                                                                                          
|        | 10.209   |  |  |                        |  | Asset Purchase Agreement, dated November 21,
    1999, by and between Paxson Communications Corporation and DP
    Media, Inc.(10)                                                                                                                                                                                 
|        | 10.209.1 |  |  |                        |  | Restated and Amended Asset Purchase Agreement,
    dated November 21, 1999, by and between Paxson
    Communications Corporation and DP Media(11)                                                                                                                                                                  
|        | 10.210   |  |  |                        |  | Asset Purchase Agreement dated April 30,
    1999, by and between DP Media of Boston, Inc. and Boston
    University Communications, Inc. for television stations WABU
    (TV), Boston, MA WZBU (TV), Vineyard Haven, MA WNBU (TV),
    Concord, NH and Low Power television station W67BA
    (TV) Dennis, MA(10)
|        | 10.217   |  |  |                        |  | Indenture, dated as of July 12, 2001, among
    the Company, the Subsidiary Guarantors party thereto, and The
    Bank of New York, as Trustee, with respect to the Companys
    10 3/4% Senior Subordinated Notes due 2008 (incorporated by
    reference to Exhibit 4.6)(13)                                    
|        | 10.218   |  |  |                        |  | Registration Rights Agreement, dated
    July 12, 2001, among the Company, the Subsidiary Guarantors
    party thereto, and Salomon Smith Barney Inc., Merrill Lynch,
    Pierce, Fenner & Smith, Incorporated, CIBC World Markets
    Corp. and Bear, Stearns & Co. Inc., as Initial Purchasers(14)               
|        | 10.219   |  |  |                        |  | First Supplemental Indenture, dated as of
    August 2, 2001, by and among the Company, S&E Network,
    Inc., the Subsidiary Guarantors party thereto, and The Bank of
    New York, as Trustee(14)                                                                                                               
|        | 10.220   |  |  |                        |  | Purchase Agreement, dated June 29, 2001,
    among by the Company, the Subsidiary Guarantors party thereto,
    and Salomon Smith Barney Inc., Merrill Lynch, Pierce, Fenner
    & Smith, Incorporated, CIBC World Markets Corp. and Bear,
    Stearns & Co. Inc., as Initial Purchasers(15)                       
|        | 10.221   |  |  |                        |  | Indenture, dated as of January 14, 2002,
    among the Company, the Subsidiary Guarantors party thereto, and
    The Bank of New York, as Trustee, with respect to the
    Companys 12 1/4% Senior Subordinated Discount Notes
    due 2009 (incorporated by reference to Exhibit 4.8)(15)                        
|        | 10.222   |  |  |                        |  | Registration Rights Agreement, dated
    January 14, 2002, among the Company, the Subsidiary
    Guarantors party thereto, and Salomon Smith Barney Inc., UBS
    Warburg LLC, Bear, Stearns & Co. Inc. and Credit Suisse
    First Boston Corporation, as Representatives of the Initial
    Purchasers(15)       

50



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##### Table of Contents



|        |        |  |  |                         |  |                                                                                                                                                                                                                                                                                                 
|------- | ------ |  |  | ----------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |        |  |  |                        
|Number  |        |  |  | Description of Exhibits
|        |        |  |  |                        
|        | 10.223 |  |  |                        |  | Purchase Agreement, dated January 7, 2002,
    among by the Company, the Subsidiary Guarantors party thereto,
    and Salomon Smith Barney Inc., UBS Warburg LLC, Bear, Stearns
    & Co. Inc., and Credit Suisse First Boston Corporation, as
    representatives of the Initial Purchasers(15)
|        | 10.224 |  |  |                        |  | Employment Agreement, dated September 25,
    2001, by and between the Company and Anthony L. Morrison(15)                                                                                                                                                                                      
|        | 10.225 |  |  |                        |  | Employment Agreement, dated October 1, 2001,
    by and between the Company and Dean M. Goodman(15)                                                                                                                                                                                             
|        | 10.226 |  |  |                        |  | Amended and Restated Employment Agreement, dated
    March 12, 2002, by and between the Company and Thomas E.
    Severson, Jr.(15)                                                                                                                                                             
|        | 10.227 |  |  |                        |  | Employment Agreement, dated as of
    December 31, 2001, by and between the Company and Seth A.
    Grossman(15)                                                                                                                                                                                
|        | 21     |  |  |                        |  | Subsidiaries of the Company                                                                                                                                                                                                                                                                     
|        | 23     |  |  |                        |  | Consent of PricewaterhouseCoopers LLP                                                                                                                                                                                                                                                           
|        | 99.1   |  |  |                        |  | Tax Exemption Savings Agreement, dated
    May 15, 1994, between the Company and The Christian
    Network, Inc.(3)                                                                                                                                                                             
|        | 99.2   |  |  |                        |  | Certification by the Chief Executive Officer of
    Paxson Communications Corporation pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                           
|        | 99.3   |  |  |                        |  | Certification by the Chief Financial Officer of
    Paxson Communications Corporation pursuant to 18 U.S.C.
    Section 1350 as adopted pursuant to Section 906 of the
    Sarbanes-Oxley Act of 2002                                                                                           






| |     |                                                                                                                                                                             
| | --- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Filed with the Companys Registration
    Statement on Form S-4, filed September 26, 1994,
    Registration No. 33-84416, and incorporated herein by
    reference.         
| | (2) | Filed with the Companys Annual Report on
    Form 10-K, dated March 31, 1995, and incorporated
    herein by reference.                                                    
| | (3) | Filed with the Companys Registration
    Statement on Form S-1, as amended, filed January 26,
    1996, Registration No. 333-473, and incorporated herein by
    reference.
| | (4) | Filed with the Companys Registration
    Statement on Form S-8, filed January 22, 1997,
    Registration No. 333-20163, and incorporated herein by
    reference.          
| | (5) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated September 30, 1997, and incorporated
    herein by reference.                                             
| | (6) | Filed with the Companys Annual Report on
    Form 10-K, dated December 31, 1997, and incorporated herein
    by reference.                                                 
| | (7) | Filed with the Companys Registration
    Statement on Form S-4, as amended, filed July 23,
    1998, Registration No. 333-59641, and incorporated herein
    by reference. 
| | (8) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated September 30, 1999, and incorporated
    herein by reference.                                             
| | (9) | Filed with the Companys Form 8-K dated
    September 15, 1999 and incorporated herein by reference.                                                                        

|     |                                                                                                                                                                                 
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Filed with the Companys Annual Report on
    Form 10-K, dated December 31, 1999, and incorporated
    herein by reference.                                                     
|(11) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated March 31, 2000, and incorporated
    herein by reference.                                                     
|(12) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated March 31, 2001, and incorporated
    herein by reference.                                                     
|(13) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated June 30, 2001, and incorporated
    herein by reference.                                                      
|(14) | Filed with the Companys Registration
    Statement on Form S-4, as amended, filed September 10,
    2001, Registration No. 333-69192, and incorporated herein
    by reference.
|(15) | Filed with the Companys Annual Report on
    Form 10-K, dated December 31, 2001, and incorporated
    herein by reference.                                                     
|(16) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated June 30, 2002, and incorporated
    herein by reference.                                                      
|(17) | Filed with the Companys Form 8-K,
    dated June 28, 2002, and incorporated herein by reference.                                                                               

51



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##### Table of Contents



|     |                                                                                                                                
|---- | -------------------------------------------------------------------------------------------------------------------------------
|(18) | Filed with the Companys Quarterly Report on
    Form 10-Q, dated September 30, 2002, and incorporated
    herein by reference.



| |     |                                                                                                                                                                      
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (d) | The financial statement schedule filed as part of
    this report is listed separately in the Index to Financial
    Statements beginning on page F-1 of this report.

52



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Registrant
has duly caused this report to be signed on its behalf by the
undersigned, thereto duly authorized, in the City of West Palm
Beach, State of Florida, on March 28, 2003.



| |                              
| | -----------------------------
| | PAXSON COMMUNICATIONS        
| | CORPORATION                  
|
| | By: /s/ LOWELL W. PAXSON     
| |                              
| | Lowell W. Paxson             
| | Chairman of the Board and    
| | Chief Executive Officer      
| | (Principal Executive Officer)



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

|                                                  |  |                                                                                                      |  |               
|------------------------------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --------------
|Signatures                                        |  | Title                                                                                                |  | Date          
|                                                  |  |                                                                                                      |  |               
|                                                 
|/s/ LOWELL W. PAXSONLowell W. Paxson              |  | Chairman of the Board, Director and Chief
    Executive Officer (Principal Executive Officer)        |  | March 28, 2003
|                                                 
|/s/ JEFFREY SAGANSKYJeffrey Sagansky              |  | Vice Chairman of the Board and Director                                                              |  | March 28, 2003
|                                                 
|/s/ THOMAS E. SEVERSON, JRThomas E. Severson, Jr. |  | Senior Vice President and Chief Financial Officer
    (Principal Financial Officer)                  |  | March 28, 2003
|                                                 
|/s/ RONALD L. RUBINRonald L. Rubin                |  | Vice President, Chief Accounting Officer and
    Corporate Controller (Principal Accounting Officer) |  | March 28, 2003
|/s/ BRUCE L. BURNHAMBruce L. Burnham              |  | Director                                                                                             |  | March 28, 2003
|/s/ JAMES L. GREENWALDJames L. Greenwald          |  | Director                                                                                             |  | March 28, 2003
|/s/ JOHN E. OXENDINEJohn E. Oxendine              |  | Director                                                                                             |  | March 28, 2003
|/s/ HENRY J. BRANDONHenry J. Brandon              |  | Director                                                                                             |  | March 28, 2003

53



---



##### Table of Contents






CERTIFICATIONS

I, Lowell W. Paxson, Chairman and Chief Executive
Officer of Paxson Communications Corporation, certify that:

1. I have reviewed this annual report on
Form 10-K of Paxson Communications Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ LOWELL W. PAXSON




Lowell W. Paxson


Chairman and Chief Executive Officer


(Principal Executive Officer)


Dated: March 28, 2003


54



---



##### Table of Contents



I, Thomas E. Severson, Jr., Senior Vice President
and Chief Financial Officer of Paxson Communications
Corporation, certify that:

1. I have reviewed this annual report on
Form 10-K of Paxson Communications Corporation;

2. Based on my knowledge, this annual report
does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made,
in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this
annual report;

3. Based on my knowledge, the financial
statements, and other financial information included in this
annual report, fairly present in all material respects the
financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual
report;

4. The registrants other certifying
officer and I are responsible for establishing and maintaining
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Designed such disclosure controls and
    procedures to ensure that material information relating to the
    registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | (b) Evaluated the effectiveness of the
    registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | (c) Presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5. The registrants other certifying
officer and I have disclosed, based on our most recent
evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons
performing the equivalent function):



| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) All significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the registrants ability to record, process,
    summarize and report financial data and have identified for the
    registrants auditors any material weaknesses in internal
    controls; and
|
| | (b) Any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the registrants internal controls; and                                                                                                                                                    

6. The registrants other certifying
officer and I have indicated in this annual report whether or
not there were significant changes in internal controls or in
other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies
and material weaknesses.

/s/ THOMAS E. SEVERSON JR.




Thomas E. Severson, Jr.


Senior Vice President and Chief Financial Officer


(Principal Financial Officer)


Dated: March 28, 2003


55



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION





INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND

FINANCIAL STATEMENT SCHEDULE


|                                                                                 |  |     
|-------------------------------------------------------------------------------- |  | ----
|                                                                                 |  | Page
|                                                                                 |  |     
|Report of Independent Certified Public Accountants                               |  | F-2 
|Consolidated Balance Sheets                                                      |  | F-3 
|Consolidated Statements of Operations                                            |  | F-4 
|Consolidated Statement of Changes in
    Stockholders Equity (Deficit)          |  | F-5 
|Consolidated Statements of Cash Flows                                            |  | F-6 
|Notes to Consolidated Financial Statements                                       |  | F-7 
|Financial Statement Schedule 
    Schedule II-Valuation and Qualifying Accounts |  | F-41

F-1



---



##### Table of Contents






REPORT OF INDEPENDENT CERTIFIED PUBLIC
ACCOUNTANTS

To the Board of Directors and Stockholders 
 of Paxson Communications Corporation:

In our opinion, the consolidated financial
statements referred to under Item 15(a)(1) on page 48
and listed in the accompanying index on page F-1 present fairly,
in all material respects, the financial position of Paxson
Communications Corporation and its subsidiaries at
December 31, 2002 and 2001, and the results of their
operations and their cash flows for each of the three years in
the period ended December 31, 2002 in conformity with
accounting principles generally accepted in the United States of
America. In addition, in our opinion, the financial statement
schedule referred to under Item 15(a)(2) on page 48
and listed in the accompanying index on page F-1 presents
fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated
financial statements. These financial statements and financial
statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these
financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the
United States of America, which 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, 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.

As described in Note 1, during 2002 the Company
ceased amortizing its indefinite lived intangible assets,
including FCC licenses and goodwill.

PricewaterhouseCoopers LLP

Miami, Florida 
 March 27, 2003

F-2



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION






CONSOLIDATED BALANCE SHEETS


(in thousands except share data)


|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |            |    |           |  
|--------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------- | ---------- | -- | --------- | --------- | ---------- | -- | --------- | -
|                                                                                  |                                                                                                  |                                                                                                                                                              
|                                                                                  |                                                                                                  | December 31,                                                                                                                                                 
|                                                                                  |                                                                                                  |                                                                                                                                                              
|                                                                                  |                                                                                                  | 2002                                                                                                                                                          |                                                                                         | 2001      
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |           
|ASSETS                                                                           
|Current assets:                                                                   |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  | Cash and cash equivalents                                                                        |                                                                                                                                                               | $                                                                                       | 25,765     |    |           | $         | 83,858     |   
|                                                                                  | Short-term investments                                                                           |                                                                                                                                                               |                                                                                         | 17,073     |    |           |           | 12,150     |   
|                                                                                  | Accounts receivable, less allowance for doubtful
    accounts of $2,100 and $3,635, respectively |                                                                                                                                                               |                                                                                         | 28,810     |    |           |           | 29,728     |   
|                                                                                  | Program rights                                                                                   |                                                                                                                                                               |                                                                                         | 33,998     |    |           |           | 65,370     |   
|                                                                                  | Amounts due from Crown Media                                                                     |                                                                                                                                                               |                                                                                         | 11,239     |    |           |           |           |   
|                                                                                  | Prepaid expenses and other current assets                                                        |                                                                                                                                                               |                                                                                         | 5,028      |    |           |           | 5,650      |   
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total current assets                                                                    |            |    | 121,913   |           |            |    | 196,756   |  
|Property and equipment, net                                                       |                                                                                                  |                                                                                                                                                               | 129,383                                                                                 |            |    |           | 133,443   |           
|Intangible assets, net                                                            |                                                                                                  |                                                                                                                                                               | 884,898                                                                                 |            |    |           | 901,996   |           
|Program rights, net of current portion                                            |                                                                                                  |                                                                                                                                                               | 35,972                                                                                  |            |    |           | 89,672    |           
|Amounts due from Crown Media, net of current
    portion                          |                                                                                                  |                                                                                                                                                               | 18,769                                                                                  |            |    |           |          |           
|Investments in broadcast properties                                               |                                                                                                  |                                                                                                                                                               | 8,777                                                                                   |            |    |           | 15,271    |           
|Assets held for sale                                                              |                                                                                                  |                                                                                                                                                               | 23,540                                                                                  |            |    |           | 24,383    |           
|Other assets, net                                                                 |                                                                                                  |                                                                                                                                                               | 27,757                                                                                  |            |    |           | 22,154    |           
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total assets                                                                            |            | $  | 1,251,009 |           |            | $  | 1,383,675 |  
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|LIABILITIES, MANDATORILY REDEEMABLE PREFERRED
    STOCK AND STOCKHOLDERS DEFICIT
|Current liabilities:                                                              |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  | Accounts payable and accrued liabilities                                                         |                                                                                                                                                               | $                                                                                       | 34,720     |    |           | $         | 25,858     |   
|                                                                                  | Accrued interest                                                                                 |                                                                                                                                                               |                                                                                         | 14,621     |    |           |           | 15,220     |   
|                                                                                  | Obligations for program rights                                                                   |                                                                                                                                                               |                                                                                         | 21,475     |    |           |           | 76,169     |   
|                                                                                  | Obligations to CBS                                                                               |                                                                                                                                                               |                                                                                         | 15,664     |    |           |           |           |   
|                                                                                  | Obligations for cable distribution rights                                                        |                                                                                                                                                               |                                                                                         | 5,246      |    |           |           | 12,325     |   
|                                                                                  | Deferred revenue from satellite distribution
    rights                                          |                                                                                                                                                               |                                                                                         | 7,839      |    |           |           | 6,414      |   
|                                                                                  | Current portion of bank financing                                                                |                                                                                                                                                               |                                                                                         | 3,144      |    |           |           | 2,899      |   
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total current liabilities                                                               |            |    | 102,709   |           |            |    | 138,885   |  
|Obligations for program rights, net of current
    portion                        |                                                                                                  |                                                                                                                                                               | 6,800                                                                                   |            |    |           | 43,396    |           
|Obligations to CBS, net of current portion                                        |                                                                                                  |                                                                                                                                                               | 30,025                                                                                  |            |    |           |          |           
|Obligations for cable distribution rights, net of
    current portion             |                                                                                                  |                                                                                                                                                               | 733                                                                                     |            |    |           | 710       |           
|Deferred revenue from satellite distribution
    rights, net of current portion   |                                                                                                  |                                                                                                                                                               | 9,210                                                                                   |            |    |           | 11,776    |           
|Deferred income taxes                                                             |                                                                                                  |                                                                                                                                                               | 136,286                                                                                 |            |    |           |          |           
|Senior subordinated notes and bank financing                                      |                                                                                                  |                                                                                                                                                               | 896,957                                                                                 |            |    |           | 526,281   |           
|Other liabilities                                                                 |                                                                                                  |                                                                                                                                                               | 23,653                                                                                  |            |    |           | 36,510    |           
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total liabilities                                                                       |            |    | 1,206,373 |           |            |    | 757,558   |  
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|Mandatorily redeemable preferred stock                                            |                                                                                                  |                                                                                                                                                               | 993,101                                                                                 |            |    |           | 1,164,160 |           
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|Commitments and contingencies (Note 18)                                           |                                                                                                  |                                                                                                                                                               |                                                                                        |            |    |           |          |           
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|Stockholders deficit:                                                            |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  | Class A common stock, $0.001 par value; one
    vote per share; 215,000,000 shares authorized and 56,568,827 and
    56,380,177 shares issued and outstanding |                                                                                         |            | 57 |           |           |            | 56 |          
|                                                                                  |                                                                                                  | Class B common stock, $0.001 par value; ten
    votes per share; 35,000,000 shares authorized and 8,311,639
    shares issued and outstanding                 |                                                                                         |            | 8  |           |           |            | 8  |          
|                                                                                  | Common stock warrants and call option                                                            |                                                                                                                                                               |                                                                                         | 68,384     |    |           |           | 68,384     |   
|                                                                                  | Stock subscription notes receivable                                                              |                                                                                                                                                               |                                                                                         | (747       | )  |           |           | (1,088     | ) 
|                                                                                  | Additional paid-in capital                                                                       |                                                                                                                                                               |                                                                                         | 513,109    |    |           |           | 512,194    |   
|                                                                                  | Deferred stock option compensation                                                               |                                                                                                                                                               |                                                                                         | (2,460     | )  |           |           | (6,537     | ) 
|                                                                                  | Accumulated deficit                                                                              |                                                                                                                                                               |                                                                                         | (1,523,670 | )  |           |           | (1,109,710 | ) 
|                                                                                  | Accumulated other comprehensive loss                                                             |                                                                                                                                                               |                                                                                         | (3,146     | )  |           |           | (1,350     | ) 
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total stockholders deficit                                                             |            |    | (948,465  | )         |            |    | (538,043  | )
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           
|                                                                                  |                                                                                                  |                                                                                                                                                               | Total liabilities, mandatorily redeemable
    preferred stock and stockholders deficit |            | $  | 1,251,009 |           |            | $  | 1,383,675 |  
|                                                                                  |                                                                                                  |                                                                                                                                                               |                                                                                         |            |    |           |           |           

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

F-3



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION






CONSOLIDATED STATEMENTS OF
OPERATIONS


(in thousands, except share and per share
data)


|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |         |         | 
|---------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------------------------- | ---------- | ------- | ------- | ---- | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                                             |                                                                                                            |                                 
|                                                                             |                                                                                                            | For the Years Ended December 31,
|                                                                             |                                                                                                            |                                 
|                                                                             |                                                                                                            | 2002                             |            | 2001    |         | 2000
|                                                                             |                                                                                                            |                                  |            |         |         |     
|Revenues                                                                     |                                                                                                            | $                                | 321,896    |         |         | $    | 308,806    |         |         | $ | 315,936    |        
|Less: agency commissions                                                     |                                                                                                            |                                  | (44,975    | )       |         |      | (43,480    | )       |         |   | (44,044    | )      
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Net revenues                                                                 |                                                                                                            |                                  | 276,921    |         |         |      | 265,326    |         |         |   | 271,892    |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Expenses:                                                                    |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|                                                                             | Programming and broadcast operations (excluding
    stock-based compensation of $575, $1,113 and $351)     |                                  |            | 51,204  |         |      |            | 43,030  |         |   |            | 39,001  |        
|                                                                             | Program rights amortization                                                                                |                                  |            | 77,980  |         |      |            | 84,808  |         |   |            | 100,324 |        
|                                                                             | Selling, general and administrative (excluding
    stock-based compensation of $3,235, $9,048 and $13,515) |                                  |            | 132,305 |         |      |            | 119,427 |         |   |            | 137,436 |        
|                                                                             | Business interruption insurance proceeds                                                                   |                                  |            | (1,617  | )       |      |            |        |         |   |            |        |        
|                                                                             | Time brokerage and affiliation fees                                                                        |                                  |            | 4,079   |         |      |            | 3,621   |         |   |            | 5,259   |        
|                                                                             | Stock-based compensation                                                                                   |                                  |            | 3,810   |         |      |            | 10,161  |         |   |            | 13,866  |        
|                                                                             | Adjustment of programming to net realizable value                                                          |                                  |            | 41,270  |         |      |            | 66,992  |         |   |            | 24,400  |        
|                                                                             | Restructuring charges                                                                                      |                                  |            | 2,173   |         |      |            | (1,229  | )       |   |            | 5,760   |        
|                                                                             | Depreciation and amortization                                                                              |                                  |            | 58,529  |         |      |            | 96,248  |         |   |            | 96,881  |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|                                                                             |                                                                                                            | Total operating expenses         |            |         | 369,733 |      |            |         | 423,058 |   |            |         | 422,927 | 
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Operating loss                                                               |                                                                                                            |                                  | (92,812    | )       |         |      | (157,732   | )       |         |   | (151,035   | )      
|Other income (expense):                                                      |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|                                                                             | Interest expense                                                                                           |                                  |            | (85,214 | )       |      |            | (49,722 | )       |   |            | (47,973 | )      
|                                                                             | Interest income                                                                                            |                                  |            | 2,363   |         |      |            | 4,538   |         |   |            | 14,022  |        
|                                                                             | Other expenses, net                                                                                        |                                  |            | (388    | )       |      |            | (4,049  | )       |   |            | (4,965  | )      
|                                                                             | Gain on modification of program rights obligations                                                         |                                  |            | 1,520   |         |      |            | 932     |         |   |            | 10,221  |        
|                                                                             | Gain on sale of broadcast assets                                                                           |                                  |            | 25,170  |         |      |            | 12,274  |         |   |            | 1,325   |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Loss before income taxes and extraordinary item                              |                                                                                                            |                                  | (149,361   | )       |         |      | (193,759   | )       |         |   | (178,405   | )      
|Income tax provision                                                         |                                                                                                            |                                  | (136,948   | )       |         |      | (120       | )       |         |   | (120       | )      
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Loss before extraordinary item                                               |                                                                                                            |                                  | (286,309   | )       |         |      | (193,879   | )       |         |   | (178,525   | )      
|Extraordinary item                                                           |                                                                                                            |                                  | (17,552    | )       |         |      | (9,903     | )       |         |   |           |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Net loss                                                                     |                                                                                                            |                                  | (303,861   | )       |         |      | (203,782   | )       |         |   | (178,525   | )      
|Dividends and accretion on redeemable preferred
    stock                    |                                                                                                            |                                  | (110,099   | )       |         |      | (146,656   | )       |         |   | (137,674   | )      
|Beneficial conversion feature on issuance of
    convertible preferred stock |                                                                                                            |                                  |           |         |         |      |           |         |         |   | (75,130    | )      
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Net loss available to common stockholders                                    |                                                                                                            | $                                | (413,960   | )       |         | $    | (350,438   | )       |         | $ | (391,329   | )      
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Basic and diluted loss per share:                                            |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|                                                                             | Loss before extraordinary item                                                                             |                                  | $          | (6.11   | )       |      | $          | (5.28   | )       |   | $          | (6.16   | )      
|                                                                             | Extraordinary item                                                                                         |                                  |            | (0.27   | )       |      |            | (0.15   | )       |   |            |        |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|                                                                             | Net loss                                                                                                   |                                  | $          | (6.38   | )       |      | $          | (5.43   | )       |   | $          | (6.16   | )      
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        
|Weighted average shares outstanding                                          |                                                                                                            |                                  | 64,849,068 |         |         |      | 64,508,761 |         |         |   | 63,515,340 |        
|                                                                             |                                                                                                            |                                  |            |         |         |      |            |         |         |   |            |        

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

F-4



---



##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN
STOCKHOLDERS EQUITY (DEFICIT)

(in thousands)


|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |          |  
|------------------------------------------------------------------ | ------------------------------------- | ------------ | -- | -------- |  | ------------ | - | ---------- |  | ------------ | ------ | ------------ |  | ------------- | ------ | ------------- |  | ------------- | ------- | ---- |  | - | ------- | - |  | - | ---------- | -------- | - | - | ------ | ------ | - | - | -------- | -------- | - | - | -------- | -------- | -
|                                                                   |                                       |              |    |          |  | Common       |   |            |  |              |        |              |  |               |        |               |  |               |         |     
|                                                                   |                                       |              |    | Stock    |  | Stock        |   |            |  |              |        |              |  | Accumulated   |        | Total         |  |              
|                                                                   |                                       | Common Stock |    | Warrants |  | Subscription |   | Additional |  | Deferred     |        |              |  | Other         |        | Stockholders |  |              
|                                                                   |                                       |              |    | and Call |  | Notes        |   | Paid-in    |  | Stock Option |        | Accumulated  |  | Comprehensive |        | Equity        |  | Comprehensive
|                                                                   |                                       | Class A      |    | Class B  |  | Option       |   | Receivable |  | Capital      |        | Compensation |  | Deficit       |        | Loss          |  | (Deficit)     |         | Loss
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |     
|Balance at December 31, 1999.                                      |                                       | $            | 55 |          |  | $            | 8 |            |  | $            | 68,245 |              |  | $             | (1,270 | )             |  | $             | 417,652 |      |  | $ | (20,026 | ) |  | $ | (367,943   | )        |   | $ |       |        |   | $ | 96,721   |          |   |   |          |         
|Net loss                                                           |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (178,525   | )        |   |   |        |        |   |   | (178,525 | )        |   | $ | (178,525 | )       
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Stock issued for acquisition                                       |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 251     |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 251      |          |   |   |          |         
|Deferred stock option compensation                                 |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 700     |      |  |   | (700    | ) |  |   |            |          |   |   |        |        |   |   |         |          |   |   |          |         
|Stock-based compensation                                           |                                       |              |    |          |  |              |   |            |  |              | 139    |              |  |               |        |               |  |               |         |      |  |   | 13,727  |   |  |   |            |          |   |   |        |        |   |   | 13,866   |          |   |   |          |         
|Stock options exercised                                            |                                       |              | 1  |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 5,571   |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 5,572    |          |   |   |          |         
|Cumulative effect adjustment for beneficial
    conversion feature |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 75,130  |      |  |   |         |   |  |   | (75,130    | )        |   |   |        |        |   |   |         |          |   |   |          |         
|Dividends on redeemable and convertible preferred
    stock        |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (111,203   | )        |   |   |        |        |   |   | (111,203 | )        |   |   |          |         
|Accretion on redeemable preferred stock                            |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (26,471    | )        |   |   |        |        |   |   | (26,471  | )        |   |   |          |         
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Balance at December 31, 2000.                                      |                                       |              | 56 |          |  |              | 8 |            |  |              | 68,384 |              |  |               | (1,270 | )             |  |               | 499,304 |      |  |   | (6,999  | ) |  |   | (759,272   | )        |   |   |       |        |   |   | (199,789 | )        |   |   |          |         
|Comprehensive loss:                                                |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|                                                                   | Net loss                              |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            | (203,782 | ) |   |        |        |   |   |          | (203,782 | ) |   | $        | (203,782 | )
|                                                                   | Unrealized loss on interest rate swap |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        | (1,350 | ) |   |          | (1,350   | ) |   |          | (1,350   | )
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|                                                                   | Comprehensive loss                    |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   | $        | (205,132 | )
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Deferred stock option compensation                                 |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 9,699   |      |  |   | (9,699  | ) |  |   |            |          |   |   |        |        |   |   |         |          |   |   |          |         
|Stock-based compensation                                           |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   | 10,161  |   |  |   |            |          |   |   |        |        |   |   | 10,161   |          |   |   |          |         
|Stock options exercised                                            |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 3,191   |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 3,191    |          |   |   |          |         
|Repayment of stock subscription notes receivable                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               | 182    |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 182      |          |   |   |          |         
|Dividends on redeemable and convertible preferred
    stock        |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (117,056   | )        |   |   |        |        |   |   | (117,056 | )        |   |   |          |         
|Accretion on redeemable preferred stock                            |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (29,600    | )        |   |   |        |        |   |   | (29,600  | )        |   |   |          |         
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Balance at December 31, 2001.                                      |                                       |              | 56 |          |  |              | 8 |            |  |              | 68,384 |              |  |               | (1,088 | )             |  |               | 512,194 |      |  |   | (6,537  | ) |  |   | (1,109,710 | )        |   |   | (1,350 | )      |   |   | (538,043 | )        |   |   |          |         
|Comprehensive Loss:                                                |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|                                                                   | Net loss                              |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            | (303,861 | ) |   |        |        |   |   |          | (303,861 | ) |   | $        | (303,861 | )
|                                                                   | Unrealized loss on interest rate swap |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        | (1,796 | ) |   |          | (1,796   | ) |   |          | (1,796   | )
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|                                                                   | Comprehensive loss                    |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   | $        | (305,657 | )
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Deferred stock option compensation                                 |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | (267    | )    |  |   | 267     |   |  |   |            |          |   |   |        |        |   |   |         |          |   |   |          |         
|Stock-based compensation                                           |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   | 3,810   |   |  |   |            |          |   |   |        |        |   |   | 3,810    |          |   |   |          |         
|Stock options exercised                                            |                                       |              | 1  |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               | 1,182   |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 1,183    |          |   |   |          |         
|Interest on stock subscription notes receivable                    |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               | (489   | )             |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | (489     | )        |   |   |          |         
|Reserve on stock subscription notes receivable                     |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               | 830    |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   | 830      |          |   |   |          |         
|Dividends on redeemable and convertible preferred
    stock        |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (88,373    | )        |   |   |        |        |   |   | (88,373  | )        |   |   |          |         
|Accretion on redeemable preferred stock                            |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   | (21,726    | )        |   |   |        |        |   |   | (21,726  | )        |   |   |          |         
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         
|Balance at December 31, 2002.                                      |                                       | $            | 57 |          |  | $            | 8 |            |  | $            | 68,384 |              |  | $             | (747   | )             |  | $             | 513,109 |      |  | $ | (2,460  | ) |  | $ | (1,523,670 | )        |   | $ | (3,146 | )      |   | $ | (948,465 | )        |   |   |          |         
|                                                                   |                                       |              |    |          |  |              |   |            |  |              |        |              |  |               |        |               |  |               |         |      |  |   |         |   |  |   |            |          |   |   |        |        |   |   |          |          |   |   |          |         

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

F-5



---



##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION

CONSOLIDATED STATEMENTS OF CASH
FLOWS

(in thousands)


|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |          |          |        |         |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | -------------------------------------------------------- | --------------------------------------------------------------------- | ------------------------------------------------------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | -------- | -------- | ------ | ------- | -
|                                                 |                                                                                 |                                                         
|                                                 |                                                                                 | For the Years Ended December 31,                        
|                                                 |                                                                                 |                                                         
|                                                 |                                                                                 | 2002                                                     |                                                                       | 2001                                                    |          | 2000  
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |       
|Cash flows from operating activities:            |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 | Net loss                                                                        |                                                          | $                                                                     | (303,861                                                | )        |        | $       | (203,782 | )        |        | $       | (178,525 | )       
|                                                 | Adjustments to reconcile net loss to net cash
    used in operating activities: |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |          |         
|                                                 |                                                                                 | Depreciation and amortization                            |                                                                       |                                                         | 58,529   |        |         |          | 96,248   |        |         |          | 96,881   |       
|                                                 |                                                                                 | Stock-based compensation                                 |                                                                       |                                                         | 3,810    |        |         |          | 10,161   |        |         |          | 13,866   |       
|                                                 |                                                                                 | Extraordinary loss on extinguishment of debt             |                                                                       |                                                         | 17,552   |        |         |          | 9,903    |        |         |          |         |       
|                                                 |                                                                                 | Non-cash restructuring charge                            |                                                                       |                                                         | 486      |        |         |          | (1,229   | )      |         |          | 5,677    |       
|                                                 |                                                                                 | Program rights amortization                              |                                                                       |                                                         | 77,980   |        |         |          | 84,808   |        |         |          | 100,324  |       
|                                                 |                                                                                 | Adjustment of programming to net realizable value        |                                                                       |                                                         | 41,270   |        |         |          | 66,992   |        |         |          | 24,400   |       
|                                                 |                                                                                 | Payments for cable distribution rights                   |                                                                       |                                                         | (9,286   | )      |         |          | (14,418  | )      |         |          | (10,727  | )     
|                                                 |                                                                                 | Non-cash barter revenue                                  |                                                                       |                                                         | (659     | )      |         |          | (2,168   | )      |         |          | (1,102   | )     
|                                                 |                                                                                 | Program rights payments and deposits                     |                                                                       |                                                         | (116,243 | )      |         |          | (130,566 | )      |         |          | (128,288 | )     
|                                                 |                                                                                 | Provision for doubtful accounts                          |                                                                       |                                                         | (126     | )      |         |          | 2,119    |        |         |          | 3,277    |       
|                                                 |                                                                                 | Deferred income tax provision                            |                                                                       |                                                         | 136,286  |        |         |          |         |        |         |          |         |       
|                                                 |                                                                                 | Reserve on stock subscription notes receivable           |                                                                       |                                                         | 830      |        |         |          |         |        |         |          |         |       
|                                                 |                                                                                 | Loss on sale or disposal of assets                       |                                                                       |                                                         | 2,264    |        |         |          | 2,908    |        |         |          | 3,449    |       
|                                                 |                                                                                 | Gain on sale of broadcast assets                         |                                                                       |                                                         | (25,170  | )      |         |          | (12,274  | )      |         |          | (1,325   | )     
|                                                 |                                                                                 | Equity in (income) loss of unconsolidated
    investment |                                                                       |                                                         | (460     | )      |         |          |         |        |         |          | 539      |       
|                                                 |                                                                                 | Accretion on senior subordinated discount notes          |                                                                       |                                                         | 37,480   |        |         |          |         |        |         |          |         |       
|                                                 |                                                                                 | Gain on modification of program rights obligations       |                                                                       |                                                         | (1,520   | )      |         |          | (932     | )      |         |          | (9,230   | )     
|                                                 |                                                                                 | Gain on insurance recoveries                             |                                                                       |                                                         | (1,697   | )      |         |          |         |        |         |          |         |       
|                                                 |                                                                                 | Changes in assets and liabilities:                       |                                                                       |                                                         |          |        |         |          |          |        |         |          |          |       
|                                                 |                                                                                 |                                                          | Decrease (increase) in restricted cash and
    short-term investments |                                                         |          |       |         |          |          | 13,729 |         |          |          | (5,571 | )      
|                                                 |                                                                                 |                                                          | Decrease (increase) in accounts receivable                            |                                                         |          | 1,139  |         |          |          | 3,593  |         |          |          | (2,654 | )      
|                                                 |                                                                                 |                                                          | Decrease in amounts due from Crown Media                              |                                                         |          | 3,221  |         |          |          |       |         |          |          |       |        
|                                                 |                                                                                 |                                                          | Decrease (increase) in prepaid expenses and
    other current assets  |                                                         |          | 354    |         |          |          | (959   | )       |          |          | 712    |        
|                                                 |                                                                                 |                                                          | Decrease in other assets                                              |                                                         |          | 7,842  |         |          |          | 6,531  |         |          |          | 9,393  |        
|                                                 |                                                                                 |                                                          | Increase in accounts payable and accrued
    liabilities              |                                                         |          | 5,088  |         |          |          | 3,808  |         |          |          | 266    |        
|                                                 |                                                                                 |                                                          | (Decrease) increase in accrued interest                               |                                                         |          | (599   | )       |          |          | 4,756  |         |          |          | 2,602  |        
|                                                 |                                                                                 |                                                          | Decrease in obligations to CBS                                        |                                                         |          | (9,938 | )       |          |          |       |         |          |          |       |        
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 |                                                                                 |                                                          |                                                                       | Net cash used in operating activities                   |          |        | (75,428 | )        |          |        | (60,772 | )        |          |        | (76,036 | )
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|Cash flows from investing activities:            |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 | (Increase) decrease in short-term investments                                   |                                                          |                                                                       | (4,923                                                  | )        |        |         | 37,851   |          |        |         | 74,987   |         
|                                                 | Acquisitions of broadcasting properties                                         |                                                          |                                                                       | (265                                                    | )        |        |         | (15,679  | )        |        |         | (74,180  | )       
|                                                 | Increase in investments in broadcast properties                                 |                                                          |                                                                       |                                                        |          |        |         |         |          |        |         | (2,957   | )       
|                                                 | Purchases of property and equipment                                             |                                                          |                                                                       | (31,177                                                 | )        |        |         | (35,213  | )        |        |         | (25,110  | )       
|                                                 | Proceeds from sales of broadcast assets                                         |                                                          |                                                                       | 26,647                                                  |          |        |         | 27,122   |          |        |         | 14,476   |         
|                                                 | Proceeds from sale of broadcast towers and
    property and equipment           |                                                          |                                                                       | 143                                                     |          |        |         | 34,396   |          |        |         |         |         
|                                                 | Proceeds from insurance recoveries                                              |                                                          |                                                                       | 2,722                                                   |          |        |         |         |          |        |         |         |         
|                                                 | Other                                                                           |                                                          |                                                                       | (836                                                    | )        |        |         |         |          |        |         |         |         
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 |                                                                                 |                                                          |                                                                       | Net cash (used in) provided by investing
    activities |          |        | (7,689  | )        |          |        | 48,477  |          |          |        | (12,784 | )
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|Cash flows from financing activities:            |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 | Borrowings of long-term debt                                                    |                                                          |                                                                       | 336,338                                                 |          |        |         | 539,767  |          |        |         | 19,452   |         
|                                                 | Repayments of long-term debt                                                    |                                                          |                                                                       | (2,898                                                  | )        |        |         | (416,924 | )        |        |         | (2,018   | )       
|                                                 | Redemption of preferred stock                                                   |                                                          |                                                                       |                                                        |          |        |         | (59,102  | )        |        |         |         |         
|                                                 | Redemption of 12 1/4% exchange debentures                                       |                                                          |                                                                       | (284,410                                                | )        |        |         |         |          |        |         |         |         
|                                                 | Payment of loan origination costs                                               |                                                          |                                                                       | (10,886                                                 | )        |        |         | (13,787  | )        |        |         | (920     | )       
|                                                 | Preferred stock dividends                                                       |                                                          |                                                                       |                                                        |          |        |         | (3,783   | )        |        |         | (7,092   | )       
|                                                 | Debt extinguishment premium and costs                                           |                                                          |                                                                       | (14,302                                                 | )        |        |         | (4,754   | )        |        |         |         |         
|                                                 | Proceeds from exercise of common stock options,
    net                         |                                                          |                                                                       | 1,182                                                   |          |        |         | 3,191    |          |        |         | 5,572    |         
|                                                 | Repayment of stock subscription notes receivable                                |                                                          |                                                                       |                                                        |          |        |         | 182      |          |        |         |         |         
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|                                                 |                                                                                 |                                                          |                                                                       | Net cash provided by financing activities               |          |        | 25,024  |          |          |        | 44,790  |          |          |        | 14,994  |  
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|(Decrease) increase in cash and cash equivalents |                                                                                 |                                                          | (58,093                                                               | )                                                       |          |        | 32,495  |          |          |        | (73,826 | )       
|Cash and cash equivalents, beginning of year     |                                                                                 |                                                          | 83,858                                                                |                                                         |          |        | 51,363  |          |          |        | 125,189 |         
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         
|Cash and cash equivalents, end of year           |                                                                                 | $                                                        | 25,765                                                                |                                                         |          | $      | 83,858  |          |          | $      | 51,363  |         
|                                                 |                                                                                 |                                                          |                                                                       |                                                         |          |        |         |          |          |        |         |         

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

F-6



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION






NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


1. NATURE OF THE BUSINESS AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:

Basis of Presentation

Paxson Communications Corporation (the
Company), a Delaware corporation, was organized in
1993. The Company owns and operates television stations
nationwide, and on August 31, 1998, launched PAX TV. PAX TV
is the brand name for the programming that the Company
broadcasts through its owned, operated and affiliated television
stations, as well as certain cable and satellite system
affiliates.

The Company has engaged the firm of Bear Stearns
& Co. Inc. to act as its financial advisor and explore
strategic alternatives for the Company, which may include the
sale of all or part of the Companys assets to a third
party, finding a strategic partner for the Company, or finding a
third party to purchase the equity of the Company. The
Companys ability to pursue strategic alternatives is
subject to various limitations and issues which it may be unable
to control. See Note 18.

The consolidated financial statements include the
accounts of the Company and its subsidiaries and those of DP
Media, Inc. (DP Media), a company acquired in June
2000. Prior to acquisition, DP Media was beneficially owned by
family members of Lowell W. Paxson
(Mr. Paxson), the Companys Chairman and
principal shareholder. The financial position and results of
operations of DP Media have been included in the Companys
consolidated financial statements since September 1999 (see Note
4). All significant inter-company balances and transactions have
been eliminated.

Cash and Cash Equivalents

Cash and cash equivalents include highly liquid
investments with original maturities of three months or less and
are stated at cost.

Short-Term Investments

Short-term investments consist of marketable
government securities with original maturities of one year or
less. All short-term investments are classified as trading and
are recorded at fair value based upon quoted market prices.

Property and Equipment

Purchases of property and equipment, including
additions and improvements and expenditures for repairs and
maintenance that significantly add to productivity or extend the
economic lives of assets, are capitalized at cost and
depreciated using the straight line method over their estimated
useful lives as follows (see Note 6):

|                                    |  |  |               | 
|----------------------------------- |  |  | ------------- | 
|Broadcasting towers and equipment   |  |  | 6-30 years    | 
|Office furniture and equipment      |  |  | 5-10 years    | 
|Buildings and building improvements |  |  | 15-40 years   | 
|Leasehold improvements              |  |  | Term of lease | 
|Aircraft, vehicles and other        |  |  | 5 years       | 

Maintenance, repairs, and minor replacements are
charged to expense as incurred.

Intangible Assets

The Company adopted Statement of Financial
Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets (SFAS
142) effective January 1, 2002. SFAS 142 addresses
financial accounting and reporting for acquired goodwill and
other intangible assets. Under SFAS 142, goodwill and intangible
assets that have indefinite lives are not amortized but rather
are tested at least annually for impairment. Intangible assets
that have finite useful lives continue to be amortized over
their estimated useful

F-7



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

lives. The Company tests its goodwill and FCC
license intangible assets for impairment by comparing the
estimated fair values of those assets, based upon an independent
appraisal, with their recorded amounts on an aggregate basis as
a single reporting unit since the Company operates PAX TV as a
consolidated distribution platform. No goodwill or FCC license
intangible asset impairment loss was recognized upon adoption.
However, due to the deferred tax consequences of SFAS 142, the
Company was required to increase its deferred tax asset
valuation allowance in 2002. In addition, the Company tested its
goodwill and FCC license intangible assets for impairment as of
December 31, 2002. No impairment charge was required as a
result of this testing.

Under SFAS 142, the Company no longer amortizes
goodwill and FCC license intangibles (which the Company believes
have indefinite lives). Under previous accounting standards,
these assets were being amortized over 25 years.

The following table shows the effect on loss
available to common stockholders before extraordinary item and
net loss per share had the Company not amortized its goodwill
and indefinite lived intangible pursuant to SFAS 142 during 2001
and 2000 (in thousands, except per share data):

|                                                                             |  |                             |          |      |  |      |          |   |  |   |          |  
|---------------------------------------------------------------------------- |  | --------------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                                             |  |                            
|                                                                             |  | For the Twelve Months Ended
|                                                                             |  | December 31,               
|                                                                             |  |                            
|                                                                             |  | 2002                        |          | 2001 |  | 2000
|                                                                             |  |                             |          |      |  |     
|Reported loss available to common stockholders
    before extraordinary item |  | $                           | (396,408 | )    |  | $    | (340,535 | ) |  | $ | (391,329 | )
|Add: FCC license amortization                                                |  |                             |         |      |  |      | 36,771   |   |  |   | 36,088   |  
|Add: Goodwill amortization                                                   |  |                             |         |      |  |      | 2,733    |   |  |   | 1,612    |  
|Deduct: Deferred taxes                                                       |  |                             |         |      |  |      | (14,203  | ) |  |   | (13,122  | )
|                                                                             |  |                             |          |      |  |      |          |   |  |   |          |  
|Adjusted loss before extraordinary item                                      |  | $                           | (396,408 | )    |  | $    | (315,234 | ) |  | $ | (366,751 | )
|                                                                             |  |                             |          |      |  |      |          |   |  |   |          |  
|Basic and diluted loss per share:                                            |  |                             |          |      |  |      |          |   |  |   |          |  
|Reported loss available to common stockholders
    before extraordinary item |  | $                           | (6.11    | )    |  | $    | (5.28    | ) |  | $ | (6.16    | )
|FCC license amortization                                                     |  |                             |         |      |  |      | 0.57     |   |  |   | 0.57     |  
|Goodwill amortization                                                        |  |                             |         |      |  |      | 0.04     |   |  |   | 0.03     |  
|Deferred taxes                                                               |  |                             |         |      |  |      | (0.22    | ) |  |   | (0.21    | )
|                                                                             |  |                             |          |      |  |      |          |   |  |   |          |  
|Adjusted loss before extraordinary item                                      |  | $                           | (6.11    | )    |  | $    | (4.89    | ) |  | $ | (5.77    | )
|                                                                             |  |                             |          |      |  |      |          |   |  |   |          |  

F-8



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The following table shows the effect on net loss
available to common stockholders and net loss per share had the
Company adopted SFAS 142 on January 1, 2000 (in thousands,
except per share data):

|                                                   |  |                             |          |      |  |      |          |   |  |   |          |  
|-------------------------------------------------- |  | --------------------------- | -------- | ---- |  | ---- | -------- | - |  | - | -------- | -
|                                                   |  |                            
|                                                   |  | For the Twelve Months Ended
|                                                   |  | December 31,               
|                                                   |  |                            
|                                                   |  | 2002                        |          | 2001 |  | 2000
|                                                   |  |                             |          |      |  |     
|Reported net loss available to common stockholders |  | $                           | (413,960 | )    |  | $    | (350,438 | ) |  | $ | (391,329 | )
|Add: FCC license amortization                      |  |                             |         |      |  |      | 36,771   |   |  |   | 36,088   |  
|Add: Goodwill amortization                         |  |                             |         |      |  |      | 2,733    |   |  |   | 1,612    |  
|Deduct: Deferred taxes                             |  |                             |         |      |  |      | (14,203  | ) |  |   | (13,122  | )
|                                                   |  |                             |          |      |  |      |          |   |  |   |          |  
|Adjusted net loss available to common stockholders |  | $                           | (413,960 | )    |  | $    | (325,137 | ) |  | $ | (366,751 | )
|                                                   |  |                             |          |      |  |      |          |   |  |   |          |  
|Basic and diluted loss per share:                  |  |                             |          |      |  |      |          |   |  |   |          |  
|Reported net loss available to common stockholders |  | $                           | (6.38    | )    |  | $    | (5.43    | ) |  | $ | (6.16    | )
|FCC license amortization                           |  |                             |         |      |  |      | 0.57     |   |  |   | 0.57     |  
|Goodwill amortization                              |  |                             |         |      |  |      | 0.04     |   |  |   | 0.03     |  
|Deferred taxes                                     |  |                             |         |      |  |      | (0.22    | ) |  |   | (0.21    | )
|                                                   |  |                             |          |      |  |      |          |   |  |   |          |  
|Adjusted net loss available to common stockholders |  | $                           | (6.38    | )    |  | $    | (5.04    | ) |  | $ | (5.77    | )
|                                                   |  |                             |          |      |  |      |          |   |  |   |          |  

The Companys amortizable intangible assets
are recorded at cost and amortized using the straight line
method over their estimated useful lives as follows (see Note 7):

|                                    |  |  |                   | 
|----------------------------------- |  |  | ----------------- | 
|Cable distribution rights           |  |  | Generally 7 years | 
|Covenants not to compete            |  |  | Generally 3 years | 
|Favorable lease and other contracts |  |  | Contract term     | 

Program Rights

The Companys programming consists of both
originally developed programs and syndicated programs that have
previously aired on other networks. The Company generally has
unlimited exclusive domestic broadcast rights for its original
programs. For syndicated programs, the Company licenses the
exclusive domestic distribution rights for a fixed cost over the
license term. Program rights are carried at the lower of
unamortized cost or estimated net realizable value. Program
rights and the related liabilities are recorded at the
contractual amounts when the programming is available to air.
Original programming generally is amortized over three years.
Syndicated programming rights are amortized over the licensing
agreement term using the greater of the straight line per run or
straight line over the license term method. The estimated costs
of programming which will be amortized during the next year are
included in current assets; program rights obligations which
become due within the next year are included in current
liabilities.

The Company periodically evaluates the net
realizable value of its program rights based on anticipated
future usage of programming and the anticipated future ratings
and related advertising revenue to be generated on a daypart
basis. The Company also evaluates whether future revenues will
be sufficient to recover the cost of programs the Company is
committed to purchase in the future and, if estimated future
revenues are insufficient, the Company accrues a loss related to
its programming commitments. As further described in Note 8,
during the years ended December 31, 2002, 2001 and 2000,
the Company recorded charges of approximately $41.3 million,
$67.0 million and $24.4 million, respectively, related to the
write-down of program rights to their estimated net realizable
value and losses on programming commitments.

Cable Distribution Rights

The Company has agreements under which it
receives cable carriage of its PAX TV programming on certain
cable systems in markets not currently served by a Company owned
television station. The Company

F-9



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

pays fees based on the number of cable television
subscribers reached and in certain instances provides local
advertising airtime during PAX TV programming. Cable
distribution rights are recorded when the Company receives
affidavits of subscribers delivered. Cable distribution rights
are amortized over seven years using the straight line method.
Obligations for cable distribution rights which will be paid
within the next year are included in current liabilities.

The Company has also entered into agreements with
cable system operators to improve its channel positioning on
local cable systems in markets served by Company owned stations.
Amounts paid for channel improvement are amortized over the
shorter of the term of the agreement or five years using the
straight line method.

Satellite Distribution Rights

The Company has entered into agreements with
satellite television providers for carriage on their systems in
exchange for advertising credits. The Company has recorded
satellite distribution rights based on the estimated value of
the advertising credits at prevailing rates in effect at the
time these agreements were entered into. Satellite distribution
rights are amortized over five to seven years using the straight
line method. Deferred revenue from satellite distribution rights
is recognized as advertising revenue when advertising credits
are utilized. An estimate of the advertising credit that will be
utilized within the next year is included in current liabilities.

Investments in Broadcast Properties

Investments in broadcast properties represent the
Companys purchase options in entities owning television
broadcasting stations. In connection with these agreements, the
Company has obtained the right to provide programming for the
related stations pursuant to time brokerage agreements
(TBAs) and has options to purchase certain of the
related station assets and FCC licenses at various amounts and
terms (see Note 18).

Long-Lived Assets

Effective January 1, 2002, the Company
adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets (SFAS 144). SFAS
144 supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of and Accounting Principles Board Opinion
(APB) No. 30, Reporting the Results of
Operations  Reporting the Effects of the Disposal of a
Segment Business and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS 144 establishes a
single accounting model for assets to be disposed of by sale
whether previously held and used or newly acquired. SFAS 144
retains the provisions of APB No. 30 for presentation of
discontinued operations in the income statement, but broadens
the presentation to include a component of an entity. The
adoption of SFAS 144 did not have a material impact on the
Companys consolidated financial position, results of
operations or cash flows.

The Company reviews long-lived assets and
reserves for impairment whenever events or changes in
circumstances indicate that, based on estimated undiscounted
future cash flows, the carrying amount of the assets may not be
fully recoverable. If the Companys analysis indicates that
a possible impairment exists, the Company is required to then
estimate the fair value of the asset determined either by third
party appraisal or estimated discounted future cash flows. It is
possible that the estimated life of certain long-lived assets
will be reduced significantly in the near term due to the
anticipated industry migration from analog to digital
broadcasting. If and when the Company becomes aware of such a
reduction of useful lives, depreciation expense will be adjusted
prospectively to ensure assets are fully depreciated upon
migration.

F-10



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company classifies assets as held for sale
following criteria in established in SFAS 144, including when,
in the opinion of management, the sale of the asset is probable
of completion within one year. Assets held for sale are recorded
at the lower of their carrying amount or fair value less cost to
sell. The Company does not depreciate assets while they are
classified as held for sale. The results of operations of assets
held for sale are not classified as discontinued operations
since they are not considered a component under SFAS 144.

Derivative Financial Instruments

The Companys derivative financial
instruments (including certain derivative instruments embedded
in other contracts) are recorded in the balance sheet as either
an asset or liability measured at fair value. Changes in the
derivative instruments fair value are recognized currently
in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative
instruments gains and losses to offset related results on
the hedged item in the statement of operations, to the extent
effective, and requires that the Company must formally document,
designate, and assess the effectiveness of transactions that
receive hedge accounting.

The Company utilizes an interest rate swap to
manage the impact of interest rate changes on the Companys
senior credit facility borrowings. Under the interest rate swap,
the Company agrees with the other party to exchange, at
specified intervals, the difference between fixed-rate and
floating-rate interest amounts calculated by reference to an
agreed notional principal amount. Income or expense under these
instruments is recorded on an accrual basis as an adjustment to
the yield of the underlying exposures over the periods covered
by the contracts. If an interest rate swap is terminated early,
any resulting gain or loss is deferred and amortized as an
adjustment of the cost of the underlying exposure position over
the remaining periods originally covered by the terminated swap.
If all or part of an underlying position is terminated, the
related pro-rata portion of any unrecognized gain or loss on the
swap is recognized in income at that time as part of the gain or
loss on the termination.

Other Comprehensive Loss

Other comprehensive loss represents the
unrealized loss on the Companys interest rate swap
accounted for as a cash flow hedge totaling approximately $1.8
million and $1.4 million for the years ended December 31,
2002 and 2001, respectively. No income tax benefit has been
recorded related to these losses due to uncertainty regarding
realization of the Companys deferred tax assets. No
reclassification adjustments were recorded in 2002 and 2001.
There were no components of other comprehensive loss in 2000.

Revenue Recognition

Revenue is recognized as commercial spots are
aired and ratings guarantees to advertisers, as applicable, are
achieved.

Time Brokerage Agreements

The Company operates certain stations under TBAs
whereby the Company has agreed to provide the station with
programming and sells and retains all advertising revenue during
such programming. The broadcast station licensee retains
responsibility for ultimate control of the station in accordance
with FCC policies. The Company pays a fixed fee to the station
owner as well as certain expenses of the station and performs
other functions. The financial results of TBA operated stations
are included in the Companys statements of operations from
the date of commencement of the TBA.

F-11



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Stock-Based Compensation

Employee stock options are accounted for using
the intrinsic value method. Stock-based compensation to
non-employees is accounted for using the fair value method. When
options are granted to employees, a non-cash charge representing
the difference between the exercise price and the quoted market
price of the common stock underlying the vested options on the
date of grant is recorded as stock-based compensation expense
with the balance deferred and amortized over the remaining
vesting period.

Had compensation expense for the Companys
option plans been determined using the fair value method the
Companys net loss and net loss per share would have been
as follows (in thousands except per share data):

|                                                                                          |             |                         |          |          |   |      |          |          |   |   |          |          |  
|----------------------------------------------------------------------------------------- | ----------- | ----------------------- | -------- | -------- | - | ---- | -------- | -------- | - | - | -------- | -------- | -
|                                                                                          |             |                        
|                                                                                          |             | Year Ended December 31,
|                                                                                          |             |                        
|                                                                                          |             | 2002                    |          | 2001     |   | 2000
|                                                                                          |             |                         |          |          |   |     
|Net loss available to common stockholders:                                                |             |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                          | As reported |                         | $        | (413,960 | ) |      | $        | (350,438 | ) |   | $        | (391,329 | )
|Add: Stock-based compensation expense included in
    reported net loss                   |             |                         | 3,810    |          |   |      | 10,161   |          |   |   | 13,866   |         
|Deduct: Total stock-based compensation expense
    determined under the fair value method |             |                         | (7,317   | )        |   |      | (18,310  | )        |   |   | (33,243  | )       
|                                                                                          |             |                         |          |          |   |      |          |          |   |   |          |         
|Pro forma net loss                                                                        |             | $                       | (417,467 | )        |   | $    | (358,587 | )        |   | $ | (410,706 | )       
|                                                                                          |             |                         |          |          |   |      |          |          |   |   |          |         
|Basic and diluted net loss per share:                                                     |             |                         |          |          |   |      |          |          |   |   |          |         
|                                                                                          | As reported |                         | $        | (6.38    | ) |      | $        | (5.43    | ) |   | $        | (6.16    | )
|                                                                                          | Pro forma   |                         |          | (6.44    | ) |      |          | (5.56    | ) |   |          | (6.47    | )

The fair value of each option grant was estimated
on the date of grant using the Black-Scholes option pricing
model assuming a dividend yield of 0.0%, expected volatility
range of 50% to 73%, and risk free interest rates of 3.0% to
6.9% and weighted average expected option terms of .5 to
7.5 years.

Income Taxes

The Company records deferred income taxes using
the liability method. Under the liability method, deferred tax
assets and liabilities are recognized for the expected future
tax consequences of temporary differences between the financial
statement and income tax bases of the Companys assets and
liabilities. An allowance is recorded, based upon currently
available information, when it is more likely than not that any
or all of a deferred tax asset will not be realized. The
Companys income tax provision consists of taxes currently
payable, if any, and the change during the year of deferred tax
assets and liabilities.

As previously described, upon adoption of SFAS
142 on January 1, 2002, the Company no longer amortizes its
goodwill and FCC license intangibles. Under previous accounting
standards, these assets were being amortized over 25 years.
Although the provisions of SFAS 142 stipulate that
indefinite-lived intangible assets and goodwill are not
amortized, the Company is required under SFAS No. 109,
Accounting for Income Taxes (SFAS 109),
to recognize deferred tax liabilities and assets for temporary
differences related to goodwill and FCC license intangible
assets and the tax-deductible portion of these assets. Prior to
adopting SFAS 142, the Company considered its deferred tax
liabilities related to these assets as a source of future
taxable income in assessing the realization of its deferred tax
assets. Because indefinite-lived intangible assets and goodwill
are no longer amortized for financial reporting purposes under
SFAS 142, the related deferred tax liabilities will not reverse
until some indeterminate future period should the assets become
impaired or are disposed of. Therefore, the reversal of deferred
tax liabilities related to FCC license intangible assets and
goodwill are no longer considered a source of future taxable
income in assessing the realization of deferred tax assets. As a
result of this accounting change, the Company was required to
record an increase in its deferred tax asset valuation allowance
totaling approximately $136.3 million during the year ended

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

December 31, 2002. In addition, the Company
will continue to record increases in its valuation allowance in
future periods based on increases in the deferred tax
liabilities and assets for temporary differences related to
goodwill and FCC license intangible assets.

Per Share Data

Basic and diluted loss per share was computed by
dividing the net loss less dividends and accretion and the
effect of beneficial conversion features on redeemable preferred
stock by the weighted average number of common shares
outstanding during the period. Because of losses, the effect of
stock options and warrants is antidilutive. Accordingly, the
Companys presentation of diluted earnings per share is the
same as that of basic earnings per share.

The following securities, which could potentially
dilute earnings per share in the future, were not included in
the computation of diluted earnings per share, because to do so
would have been antidilutive for the periods presented (in
thousands):

|                                                               |  |      |        |      |  |      |        |  |  |  |        | 
|-------------------------------------------------------------- |  | ---- | ------ | ---- |  | ---- | ------ |  |  |  | ------ | 
|                                                               |  | 2002 |        | 2001 |  | 2000
|                                                               |  |      |        |      |  |     
|Stock options outstanding                                      |  |      | 11,426 |      |  |      | 12,652 |  |  |  | 10,974 | 
|Class A common stock warrants outstanding                      |  |      | 32,428 |      |  |      | 32,428 |  |  |  | 32,428 | 
|Class A common stock reserved under
    convertible securities |  |      | 39,167 |      |  |      | 38,500 |  |  |  | 37,893 | 
|                                                               |  |      |        |      |  |      |        |  |  |  |        | 
|                                                               |  |      | 83,021 |      |  |      | 83,580 |  |  |  | 81,295 | 
|                                                               |  |      |        |      |  |      |        |  |  |  |        | 

As further described in Note 21, in January 2003,
the Company consummated a stock option exchange offer resulting
in the issuance of approximately 2.6 million shares of
Class A common stock. After consummation of the stock
option exchange, the Company had approximately 1.8 million
options to purchase shares of Class A common stock
remaining outstanding and approximately 6.4 million options
available for grant.

Use of Estimates

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

Reclassifications

Certain reclassifications have been made to prior
years financial statements to conform with the 2002
presentation.

New Accounting Pronouncements

In April 2002, the Financial Accounting Standards
Board (FASB) issued SFAS No. 145
Rescission of FASB Statements No. 4, 44 and 64,
Amendment of FASB Statement No. 13, and Technical
Corrections (SFAS 145). Among other matters,
SFAS 145 rescinds SFAS No. 4, Reporting Gains and
Losses from Extinguishment of Debt which required gains
and losses from extinguishments of debt to be classified as an
extraordinary item, net of related income taxes. As a result,
debt extinguishments used as part of an entitys risk
management strategy will no longer meet the criteria for
classification as extraordinary items. The provisions of SFAS
145 related to the rescission of Statement 4 shall be applied in
fiscal years beginning after May 15, 2002. The Company will
adopt SFAS 145 effective January 1, 2003. Any gain or loss
on

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

extinguishment of debt that was classified as an
extraordinary item in prior periods presented shall be
reclassified as appropriate.

In June 2002, the FASB issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal
Activities (SFAS 146). SFAS 146 supersedes
Emerging Issues Task Force Issue No. 94-3. SFAS 146
requires that the liability for a cost associated with an exit
or disposal activity be recognized when the liability is
incurred, not at the date of an entitys commitment to an
exit or disposal plan. The provisions of SFAS 146 are effective
for exit or disposal activities initiated after
December 31, 2002. The Company early adopted the provisions
of SFAS 146 in the fourth quarter of 2002.

In December 2002, the FASB issued SFAS
No. 148, Accounting for Stock-Based Compensation
 Transition and Disclosure (SFAS 148).
SFAS 148 amends SFAS No. 123, Accounting for
Stock-Based Compensation (SFAS 123), to
provide alternative methods of transition for companies that
voluntarily change to a fair value-based method of accounting
for stock-based employee compensation. SFAS 148 also amends the
disclosure provisions of SFAS 123. The provisions of SFAS 148
are effective for fiscal years ending after December 15,
2002. The Company has adopted the disclosure provisions of SFAS
148 as of December 31, 2002.

2. NBC TRANSACTION:

Effective September 15, 1999 (the
Issue Date), the Company entered into an Investment
Agreement (the Investment Agreement) with National
Broadcasting Company, Inc. (NBC), pursuant to which
NBC purchased shares of convertible exchangeable preferred stock
(the Series B Convertible Preferred Stock), and
common stock purchase warrants from the Company for an aggregate
purchase price of $415 million. Further, Mr. Paxson and
certain entities controlled by Mr. Paxson granted NBC the right
(the Call Right) to purchase all (but not less than
all) 8,311,639 shares of Class B Common Stock of the
Company beneficially owned by Mr. Paxson.

The common stock purchase warrants issued to NBC
consist of a warrant to purchase up to 13,065,507 shares of
Class A Common Stock at an exercise price of $12.60 per
share (Warrant A) and a warrant to purchase up to
18,966,620 shares of Class A Common Stock (Warrant
B) at an exercise price equal to the average of the
closing sale prices of the Class A Common Stock for the 45
consecutive trading days ending on the trading day immediately
preceding the warrant exercise date (provided that such price
shall not be more than 17.5% higher or 17.5% lower than the six
month trailing average closing sale price). The Warrants are
exercisable through September 2009 subject to certain conditions
and limitations.

The Call Right has a per share exercise price
equal to the higher of (i) the average of the closing sale
prices of the Class A Common Stock for the 45 consecutive
trading days ending on the trading day immediately preceding the
exercise of the Call Right (provided that such price shall not
be more than 17.5% higher or 17.5% lower than the six month
trailing average closing sale prices), and (ii) $20.00. The
owners of the shares which are subject to the Call Right may not
transfer such shares prior to the sixth anniversary of the Issue
Date, and may not convert such shares into any other securities
of the Company (including shares of Class A Common Stock).
Exercise of the Call Right is subject to compliance with
applicable provisions of the Communications Act of 1934, as
amended (the Communications Act), and the rules and
regulations of the FCC. The Call Right may not be exercised
until Warrant A and Warrant B have been exercised in full. The
Call Right expires on the tenth anniversary of the Issue Date,
or prior thereto under certain circumstances.

The Company valued the common stock purchase
warrants issued to NBC and the Call Right at $66.7 million. The
Company recorded this value along with transaction costs as a
reduction of the face value of the Series B Convertible
Preferred Stock. Such discount was accreted as preferred stock
dividends through September 2002 using the interest method.

F-14



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Series B Convertible Preferred Stock was
issued with a conversion price per share that was less than the
closing price of the Class A Common Stock at the Issue
Date. As a result, the Company recognized a beneficial
conversion feature in connection with the issuance of the stock
equal to the difference between the closing price and the
conversion price multiplied by the number of shares issuable
upon conversion of the Series B Convertible Preferred
Stock. The amount of the beneficial conversion feature initially
calculated for the 1999 fiscal year totaling approximately $65.5
million was reflected as a preferred stock dividend during 1999
and allocated to additional paid-in capital in the accompanying
balance sheet because the preferred stock was immediately
convertible. In November 2000, the Emerging Issues Task Force of
the Financial Accounting Standards Board reached a consensus
regarding the accounting for beneficial conversion features
which required the Company to recalculate the beneficial
conversion feature utilizing the accounting conversion price as
opposed to the stated conversion price used for 1999. This
change resulted in a cumulative catch-up adjustment totaling
approximately $75.1 million which was recorded as a preferred
stock dividend in the fourth quarter of 2000.

The Investment Agreement requires the Company to
obtain the consent of NBC or its permitted transferee with
respect to certain corporate actions, as set forth in the
Investment Agreement, and grants NBC certain rights with respect
to the operations of the Company. NBC was also granted certain
demand and piggyback registration rights with respect to the
shares of Class A Common Stock issuable upon conversion of
the Series B Convertible Preferred Stock (or conversion of
any exchange debentures issued in exchange therefor), exercise
of the Warrants or conversion of the Class B Common Stock
subject to the Call Right.

NBC, the Company, Mr. Paxson and certain
entities controlled by Mr. Paxson also entered into a
Stockholder Agreement, pursuant to which, if permitted by the
Communications Act and FCC rules and regulations, the Company
may nominate persons named by NBC for election to the
Companys board of directors and Mr. Paxson and his
affiliates have agreed to vote their shares of common stock in
favor of the election of such persons as directors of the
Company. Should no NBC nominee be serving as a member of the
Companys board of directors, then NBC may appoint two
observers to attend all board meetings. The Stockholder
Agreement further provides that the Company shall not, without
the prior written consent of NBC, enter into certain agreements
or adopt certain plans, as set forth in the Stockholder
Agreement, which would be breached or violated upon the
acquisition of the Company securities by NBC or its affiliates
or would otherwise restrict or impede the ability of NBC or its
affiliates to acquire additional shares of capital stock of the
Company.

The Company and NBC have entered into a number of
agreements affecting the Companys business operations,
including an agreement under which NBC provides network sales,
marketing and research services for the Companys PAX TV
Network, national advertising sales services and Joint Sales
Agreements (JSA) between the Companys stations
and NBCs owned and operated stations serving the same
markets. Pursuant to the terms of the JSAs, the NBC stations
sell all non-network spot advertising of the Companys
stations and receive commission compensation for such sales and
the Companys stations may agree to carry one hour per day
of the NBC stations syndicated or news programming.
Certain Company station operations, including sales operations,
are integrated with the corresponding functions of the related
NBC station and the Company reimburses NBC for the cost of
performing these operations. During the years ended
December 31, 2002, 2001 and 2000, the Company incurred
expenses totaling approximately $20.8 million, $19.1 million and
$17.8 million, respectively, for commission compensation and
cost reimbursements under these agreements.

3. RESTRUCTURING PLANS:

During the fourth quarter of 2002, the Company
adopted a plan to consolidate certain of its operations, reduce
personnel and modify its programming schedule in order to
significantly reduce the Companys cash operating
expenditures. In connection with this plan, the Company recorded
a restructuring charge of approximately $2.6 million consisting
of $2.2 million in termination benefits for 95 employees and
$0.4 million

F-15



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

for costs associated with the existing leased
properties and consolidating certain operations. As of
December 31, 2002, the Company has paid $1.5 million in
termination benefits to 85 employees and paid $0.2 million of
lease termination and other costs. The Company has accounted for
these costs pursuant to SFAS 146 Accounting for Costs
Associated with Exit or Disposal Activities, (SFAS
146) which the Company early adopted in the fourth quarter
of 2002. SFAS 146 requires that a liability for a cost
associated with an exit or disposal activity be recognized when
the liability is incurred. Additional restructuring costs, if
any, will be recognized in 2003 as they are incurred.

In connection with the NBC strategic
relationship, the Company entered into JSAs with certain of
NBCs owned and operated stations in 1999 and 2000. During
the fourth quarter of 2000, the Company approved a plan to
restructure its television station operations by entering into
JSAs primarily with NBC affiliate stations in each of the
Companys remaining non-JSA markets. To date, the Company
has entered into JSAs for 52 of its television stations, 19 of
which entered into JSAs prior to adoption of the formal JSA
restructuring plan. Under the JSA structure, the Company
generally terminates its station sales staff. The JSA partner
then provides local and national spot advertising sales
management and representation to the Company station and
integrates and co-locates the Company station operations. The
Companys restructuring plan included two major components:
(1) termination of 226 station sales and administrative
employees; and (2) exiting Company studio and sales office
leased properties. These restructuring activities resulted in a
charge of approximately $5.8 million in the fourth quarter of
2000 consisting of $2.7 million of termination benefits and $3.1
million of costs associated with exiting leased properties which
will no longer be utilized upon implementation of the JSAs.
Through December 31, 2002, the Company has paid termination
benefits to 83 employees totaling approximately $1.6 million and
paid lease termination costs of approximately $1.9 million,
which were charged against the restructuring reserve. The
Company has substantially completed the JSA restructuring plan,
except for contractual lease obligations for closed locations,
the majority of which expire in 2004.

In 2002, the Company reversed approximately $0.5
million of restructuring reserves primarily related to two
stations which had not entered into JSAs and certain other
reserves which were no longer required. In 2001, the Company
reversed approximately $1.2 million of restructuring reserves
primarily related to four stations which had not entered into
JSAs and certain other reserves which were no longer
required.

The following summarizes the activity in the
Companys restructuring reserves for the years ended
December 31, 2002 and 2001 (in thousands):

|                        |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |     | 
|----------------------- | --------------------- | ----------------- | ----- | ------------------- |  | ---------- | ----- | ----------------- | - | - | ------ | ------ | - | - | --- | --- | 
|                        |                       |                   |       | Amounts Charged     |  |            |       |                  
|                        |                       | Balance           |       | (Credited) to Costs |  | Cash       |       | Balance          
|                        |                       | December 31, 2001 |       | and Expenses        |  | Deductions |       | December 31, 2002
|                        |                       |                   |       |                     |  |            |       |                  
|Corporate Restructuring |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|Accrued liabilities:    |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|                        | Lease and other costs |                   | $     |                    |  |            | $     | 422               |   |   | $      | (160   | ) |   | $   | 262 | 
|                        | Severance             |                   |       |                    |  |            |       | 2,218             |   |   |        | (1,486 | ) |   |     | 732 | 
|                        |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|                        |                       | $                 |      |                     |  | $          | 2,640 |                   |   | $ | (1,646 | )      |   | $ | 994 |    
|                        |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|JSA Restructuring       |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|Accrued liabilities:    |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|                        | Lease costs           |                   | $     | 1,717               |  |            | $     | (194              | ) |   | $      | (995   | ) |   | $   | 528 | 
|                        | Severance             |                   |       | 382                 |  |            |       | (273              | ) |   |        | (109   | ) |   |     |    | 
|                        |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    
|                        |                       | $                 | 2,099 |                     |  | $          | (467  | )                 |   | $ | (1,104 | )      |   | $ | 528 |    
|                        |                       |                   |       |                     |  |            |       |                   |   |   |        |        |   |   |     |    

F-16



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                     |             |                   |       |                  |  |            |        |                   |   |   |        |        |   |   |       |       | 
|-------------------- | ----------- | ----------------- | ----- | ---------------- |  | ---------- | ------ | ----------------- | - | - | ------ | ------ | - | - | ----- | ----- | 
|                     |             |                   |       | Amounts Credited |  |            |        |                  
|                     |             | Balance           |       | to Cash          |  | Cash       |        | Balance          
|                     |             | December 31, 2001 |       | and Expenses     |  | Deductions |        | December 31, 2002
|                     |             |                   |       |                  |  |            |        |                  
|JSA Restructuring    |             |                   |       |                  |  |            |        |                   |   |   |        |        |   |   |       |      
|Accrued liabilities: |             |                   |       |                  |  |            |        |                   |   |   |        |        |   |   |       |      
|                     | Lease costs |                   | $     | 3,091            |  |            | $      | (430              | ) |   | $      | (944   | ) |   | $     | 1,717 | 
|                     | Severance   |                   |       | 2,586            |  |            |        | (799              | ) |   |        | (1,405 | ) |   |       | 382   | 
|                     |             |                   |       |                  |  |            |        |                   |   |   |        |        |   |   |       |      
|                     |             | $                 | 5,677 |                  |  | $          | (1,229 | )                 |   | $ | (2,349 | )      |   | $ | 2,099 |      
|                     |             |                   |       |                  |  |            |        |                   |   |   |        |        |   |   |       |      

During 2000, the Company recognized severance and
lease termination costs related to JSAs entered into prior to
managements approval of the restructuring plan totaling
approximately $942,000 which are included in selling, general
and administrative expenses.

4. CERTAIN TRANSACTIONS WITH RELATED
PARTIES:

In addition to the transactions with NBC
described in Note 2, the Company has entered into certain
operating and financing transactions with related parties as
described below.

DP Media, Inc.

In June 2000, the Company completed the
acquisition of DP Media for aggregate consideration of $113.5
million, $106.0 million of which had previously been advanced by
the Company during 1999. DP Medias assets included a 32%
equity interest in a limited liability company controlled by the
former stockholders of DP Media, which owns television station
WWDP in Norwell, Massachusetts. The Company is entitled to
receive a 45% distribution of the proceeds upon sale of the
station. The Company allocated the aggregate purchase price of
DP Media to the assets acquired and liabilities assumed based on
their relative fair market values. The Company accounts for its
equity interest in WWDP utilizing the equity method of
accounting and has recorded its equity investment in WWDP within
other assets. In December 2002, the owners of WWDP entered into
an agreement to sell WWDP to Valuevision Media Acquisition, Inc.
for a purchase price of $32.5 million, of which the Company
expects to receive proceeds of $14.6 million. The sale is
expected to close in the second quarter of 2003.

The Christian Network, Inc.

The Company has entered into several agreements
with The Christian Network, Inc. and certain of its for profit
subsidiaries (individually and collectively referred to herein
as CNI). The Christian Network, Inc. is a section
501(c)(3) not-for-profit corporation to which Mr. Paxson,
the majority stockholder of the Company, has been a substantial
contributor and of which he was a member of the Board of
Stewards through 1993.

CNI Master Agreement.In connection with the NBC
transactions described elsewhere herein, in September 1999 the
Company entered into a Master Agreement for Overnight
Programming, Use of Digital Capacity and Public Interest
Programming with CNI, pursuant to which the Company granted CNI,
for a term of 50 years (with automatic ten year renewals,
subject to certain limited conditions), certain rights to
continue broadcasting CNIs programming on Company stations
during the hours of 1:00 a.m. to 6:00 a.m. When digital
programming begins, the Company will make a digital channel
available for CNIs use for 24 hour CNI digital
programming. See Note 18 for additional discussion of CNI
Master Agreement.

License Agreement.The Company and CNI entered into a
three year agreement in March 1999 under which the Company pays
license fees to CNI to broadcast CNIs religious
programming. The license agreement expired in May 2002 without
being renewed. During the years ended December 31, 2002,
2001 and 2000, the Company paid license fees in connection with
this agreement of approximately $93,000, $215,000 and $210,000,
respectively.

F-17



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

CNI Tax Indemnification Agreement.The Company and CNI entered into an
agreement in May 1994 (the CNI Agreement) under
which the Company agreed that, if the tax exempt status of CNI
were jeopardized by virtue of its relationships with the Company
and its subsidiaries, the Company would take certain actions to
ensure that CNIs tax exempt status would no longer be so
jeopardized. Such steps could include, but not be limited to,
rescission of one or more transactions or payment of additional
funds by the Company. If the Companys activities with CNI
are consistent with the terms governing their relationship, the
Company believes that it will not be required to take any
actions under the CNI Agreement. However, there can be no
assurance that the Company will not be required to take any
actions under the CNI Agreement at a material cost to the
Company.

Worship Channel Studio.CNI and the Company have contracted
for the Company to lease CNIs television production and
distribution facility, the Worship Channel Studio. As the lease
expires in July 2003, the Company has entered into negotiations
with CNI to extend or renew the lease. The Company utilizes this
facility primarily as its network operations center and
originates the PAX TV network signal from this location. During
the years ended December 31, 2002, 2001 and 2000, the
Company incurred rental charges in connection with this
agreement of $209,000, $205,000 and $199,000 respectively.

Aircraft Lease

During 1997, the Company entered into a three
year aircraft lease with a company which is owned by
Mr. Paxson. The lease was for a Boeing 727 aircraft with
monthly payments of approximately $64,000. Effective,
January 1, 2001 the Company no longer leased the aircraft.
In connection with such lease, the Company incurred rental costs
of approximately $759,000 during the year ended
December 31, 2000.

5. ACQUISITIONS AND
DIVESTITURES:

During 2001, the Company acquired the assets of
three television stations for total consideration of
approximately $30.8 million of which $16.1 million was paid in
prior years. Additionally, the Company paid approximately $1.0
million to acquire the minority interest in a station acquired
in 1998. During 2000, in addition to the acquisition of DP Media
described in Note 4, the Company acquired the assets of four
television stations (including construction permits) for total
consideration of approximately $68.7 million of which $10.9
million was paid in prior years.

During 2002, the Company sold its interest in its
television station WPXB, serving the Merrimack, NH market, for
consideration of approximately $26 million and realized a
pre-tax gain of approximately $24.5 million on this sale. During
2001, the Company sold interests in five stations for aggregate
consideration of approximately $31.9 million and realized
pre-tax gains of approximately $12.3 million on these sales.
During 2000, the Company sold interests in four stations for
aggregate consideration of approximately $14.5 million and
realized pre-tax gains of approximately $1.3 million on these
sales.

F-18



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

6. PROPERTY AND EQUIPMENT:

Property and equipment consist of the following
(in thousands):

|                                     |  |      |          |      |  |   |          |  
|------------------------------------ |  | ---- | -------- | ---- |  | - | -------- | -
|                                     |  | 2002 |          | 2001
|                                     |  |      |          |     
|Broadcasting towers and equipment    |  | $    | 232,651  |      |  | $ | 216,545  |  
|Office furniture and equipment       |  |      | 19,595   |      |  |   | 19,582   |  
|Buildings and leasehold improvements |  |      | 15,475   |      |  |   | 13,443   |  
|Land and land improvements           |  |      | 667      |      |  |   | 790      |  
|Aircraft, vehicles and other         |  |      | 3,593    |      |  |   | 3,441    |  
|                                     |  |      |          |      |  |   |          |  
|                                     |  |      | 271,981  |      |  |   | 253,801  |  
|Accumulated depreciation             |  |      | (142,598 | )    |  |   | (120,358 | )
|                                     |  |      |          |      |  |   |          |  
|Property and equipment, net          |  | $    | 129,383  |      |  | $ | 133,443  |  
|                                     |  |      |          |      |  |   |          |  

Depreciation expense aggregated approximately
$33.3 million, $37.1 million and $37.7 million for the years
ended December 31, 2002, 2001 and 2000, respectively. In
connection with restructuring activities described in Note 3,
the Company identified certain leasehold improvements and office
furniture and equipment which would no longer be used in its
operations upon exiting certain leased properties. The Company
prospectively shortened the estimated remaining useful lives
through the expected disposal date of these assets resulting in
approximately $3.1 million and $2.1 million of additional
depreciation expense in 2001 and 2000, respectively.

As described in Note 11, the Companys
senior credit facility is secured by all assets of the Company,
including property and equipment.

7. INTANGIBLE ASSETS:

Intangible assets consist of the following (in
thousands):

|                                    |                                         |                   |         |                   |  |          |         |              |   |   |         |         |  |   |         |         |  
|----------------------------------- | --------------------------------------- | ----------------- | ------- | ----------------- |  | -------- | ------- | ------------ | - | - | ------- | ------- |  | - | ------- | ------- | -
|                                    |                                         |                   |         |                  
|                                    |                                         | December 31, 2002 |         | December 31, 2001
|                                    |                                         |                   |         |                  
|                                    |                                         | Gross             |         |                   |  | Gross    |         |             
|                                    |                                         | Carrying          |         | Accumulated       |  | Carrying |         | Accumulated 
|                                    |                                         | Amount            |         | Amortization      |  | Amount   |         | Amortization
|                                    |                                         |                   |         |                   |  |          |         |             
|Amortizable intangible assets:      |                                         |                   |         |                   |  |          |         |              |   |   |         |         |  |   |         |        
|                                    | Cable and satellite distribution rights |                   | $       | 129,379           |  |          | $       | (78,205      | ) |   | $       | 127,302 |  |   | $       | (59,181 | )
|                                    | Other                                   |                   |         | 5,441             |  |          |         | (4,263       | ) |   |         | 5,441   |  |   |         | (4,090  | )
|Indefinite lived intangible assets: |                                         |                   |         |                   |  |          |         |              |   |   |         |         |  |   |         |        
|                                    | FCC licenses                            |                   |         | 777,993           |  |          |         |             |   |   |         | 777,971 |  |   |         |        |  
|                                    | Goodwill                                |                   |         | 54,553            |  |          |         |             |   |   |         | 54,553  |  |   |         |        |  
|                                    |                                         |                   |         |                   |  |          |         |              |   |   |         |         |  |   |         |        
|                                    |                                         | $                 | 967,366 |                   |  | $        | (82,468 | )            |   | $ | 965,267 |         |  | $ | (63,271 | )      
|                                    |                                         |                   |         |                   |  |          |         |              |   |   |         |         |  |   |         |        

As discussed in Note 1, upon adoption of SFAS 142
on January 1, 2002, the Company no longer amortizes FCC
licenses and goodwill. Amortization expense related to
intangible assets aggregated $19.2 million, $59.1 million and
$59.2 million for the years ended December 31, 2002, 2001
and 2000, respectively.

Estimated future amortization expense is as
follows for the periods indicated (in thousands):

|     |  |   |        | 
|---- |  | - | ------ | 
|2003 |  | $ | 19,787 | 
|2004 |  |   | 19,746 | 
|2005 |  |   | 11,719 | 
|2006 |  |   | 560    | 
|2007 |  |   | 210    | 

F-19



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

8. PROGRAM RIGHTS:

Program rights consist of the following (in
thousands):

|                         |  |      |          |      |  |   |          |  
|------------------------ |  | ---- | -------- | ---- |  | - | -------- | -
|                         |  | 2002 |          | 2001
|                         |  |      |          |     
|Program rights           |  | $    | 319,843  |      |  | $ | 394,847  |  
|Accumulated amortization |  |      | (249,873 | )    |  |   | (239,805 | )
|                         |  |      |          |      |  |   |          |  
|                         |  |      | 69,970   |      |  |   | 155,042  |  
|Less: current portion    |  |      | (33,998  | )    |  |   | (65,370  | )
|                         |  |      |          |      |  |   |          |  
|Program rights, net      |  | $    | 35,972   |      |  | $ | 89,672   |  
|                         |  |      |          |      |  |   |          |  

Program rights amortization expense aggregated
$78.0 million, $84.8 million and $100.3 million for the years
ended December 31, 2002, 2001 and 2000, respectively.

As of December 31, 2002, the Companys
programming contracts require collective payments by the Company
of approximately $42.0 million as follows (in thousands):

|     |  |                 |        |                |  |       |        |  |  |   |        | 
|---- |  | --------------- | ------ | -------------- |  | ----- | ------ |  |  | - | ------ | 
|     |  | Obligations for |        |                |  |      
|     |  | Program         |        | Program Rights |  |      
|     |  | Rights          |        | Commitments    |  | Total
|     |  |                 |        |                |  |      
|2003 |  | $               | 21,475 |                |  | $     | 11,216 |  |  | $ | 32,691 | 
|2004 |  |                 | 5,500  |                |  |       | 1,649  |  |  |   | 7,149  | 
|2005 |  |                 | 1,300  |                |  |       | 900    |  |  |   | 2,200  | 
|     |  |                 |        |                |  |       |        |  |  |   |        | 
|     |  | $               | 28,275 |                |  | $     | 13,765 |  |  | $ | 42,040 | 
|     |  |                 |        |                |  |       |        |  |  |   |        | 

Effective January 2003, the Company modified its
programming schedule by reducing the PAX TV programming hours
primarily during the daytime period and replacing such hours
with long form paid programming. As a result of this change, the
Company no longer plans to air certain syndicated and original
programs. Therefore, the Company revised its estimate of future
advertising revenues to be generated related to these programs
and recognized a charge of approximately $38.4 million in the
fourth quarter of 2002 related to these programming assets.
Additionally, as further described below, in the second quarter
of 2002 the Company recorded a $2.9 million accrued programming
loss related to programming commitments for Touched By An
Angel.

In 2001, the Company adjusted its estimate of the
anticipated future usage of Touched By An Angeland
certain other syndicated programs and the related advertising
revenues expected to be generated and recognized a charge of
approximately $67.0 million related to the net realizable value
of these programming assets and related programming commitments.
The charge included a $22.2 million accrued loss related to
programming commitments which is included in other liabilities
in the accompanying December 31, 2001 balance sheet. As
further described below, in 2002 the Company sublicensed the
programming rights to Touched By An Angelto the Crown
Media United States, LLC (Crown Media). In 2000, the
Company adjusted the carrying value of certain of its program
rights to net realizable value resulting in an expense of
approximately $24.4 million.

On August 1, 2002, the Company entered into
agreements with a subsidiary of CBS Broadcasting, Inc.
(CBS) and Crown Media to sublicense the
Companys rights to broadcast the television series
Touched By An Angel(Touched) to Crown Media
for exclusive exhibition on the Hallmark Channel, commencing
September 9, 2002. Under the terms of the agreement with
Crown Media, the Company will receive approximately $47.4
million from Crown Media, $38.6 million of which will be paid
over a three-year period commencing August 2002 and the
remaining $8.8 million, for the 2002/2003 season, will be paid
over a three-year period commencing August 2003. In addition,
Crown Media is obligated to sublicense future seasons of Touched
from the Company should CBS renew the series.

F-20



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Under the terms of the Companys agreement
with CBS, the Company remains obligated to CBS for amounts due
under its pre-existing license agreement, less estimated
programming cost savings of approximately $15 million. As of
December 31, 2002, amounts due or committed to CBS totaled
approximately $64.0 million (including commitments of
approximately $18.3 million for the 2002/2003 season to be made
available in the future). The sub-license transaction resulted
in a gain of approximately $4 million which represents the
excess of the present value of amounts due from Crown Media over
the carrying value of the Touched programming asset. This gain
is being deferred over the term of the Crown Media agreement.

The Company has a significant concentration of
credit risk with respect to the amounts due from Crown Media
under the sublicense agreement. As of December 31, 2002,
the maximum amount of loss due to credit risk that the Company
would sustain if Crown Media failed to perform under the
agreement totaled approximately $30.0 million, representing the
present value of amounts due from Crown Media. Under the terms
of the sublicense agreement, the Company has the right to
terminate Crown Medias rights to broadcast Touched if
Crown Media fails to make timely payments. Therefore, should
Crown Media fail to perform under the agreement, the Company
could regain its exclusive rights to broadcast Touched on PAX TV
pursuant to its existing licensing agreement with CBS.

Under its agreement with CBS, the Company is
required to license future seasons of Touched from CBS if the
series is renewed by CBS. Under its sublicense agreement with
Crown Media, Crown Media is obligated to sublicense such future
seasons from the Company. The Companys financial
obligation to CBS for such seasons will exceed the sublicense
fees to be received from Crown Media, resulting in accrued
programming losses to the extent the series is renewed in future
seasons. During the second quarter of 2002, upon the decision by
CBS to renew Touched for the 2002/2003 season, the Company
became obligated to license the 2002/2003 season, resulting in
an accrued programming loss of approximately $10.7 million. This
amount was offset in part by a reduction in the Companys
estimated loss on the 2001/2002 season of approximately $7.8
million, resulting in a net accrued programming loss of $2.9
million in the second quarter of 2002. The change in estimate
for the 2001/2002 season was due to the sublicensing agreement
with Crown Media and a lower number of episodes produced than
previously estimated.

As of December 31, 2002, the Companys
obligation and commitments to CBS and the Companys
receivable from Crown Media related to Touched are due as
follows (in thousands):

|                             |  |             |        |             |  |                  |        |  |  |   |         |  
|---------------------------- |  | ----------- | ------ | ----------- |  | ---------------- | ------ |  |  | - | ------- | -
|                             |  | Obligations |        | Future      |  |                 
|                             |  | Due to      |        | Commitments |  | Amounts Due from
|                             |  | CBS         |        | to CBS      |  | Crown Media     
|                             |  |             |        |             |  |                 
|2003.                        |  | $           | 15,664 |             |  | $                | 1,742  |  |  | $ | (13,939 | )
|2004.                        |  |             | 16,509 |             |  |                  | 2,742  |  |  |   | (12,867 | )
|2005.                        |  |             | 11,419 |             |  |                  | 6,699  |  |  |   | (7,506  | )
|2006.                        |  |             | 2,097  |             |  |                  | 7,094  |  |  |   |        |  
|                             |  |             |        |             |  |                  |        |  |  |   |         |  
|                             |  |             | 45,689 |             |  |                  | 18,277 |  |  |   | (34,312 | )
|Amount representing interest |  |             |       |             |  |                  |       |  |  |   | 4,304   |  
|                             |  |             |        |             |  |                  |        |  |  |   |         |  
|                             |  | $           | 45,689 |             |  | $                | 18,277 |  |  | $ | (30,008 | )
|                             |  |             |        |             |  |                  |        |  |  |   |         |  

In March 2000, the Company gave up its rights to
air certain syndicated programming, in exchange for
approximately $4.9 million in cash and forgiveness of the
remaining programming rights payments due under the original
programming agreement. This transaction resulted in a gain of
approximately $9.9 million. In September 2000, the Company
assigned certain other programming rights to a third party who
assumed the Companys remaining payment obligation. In
connection with this transaction, $2.8 million of deferred gain
was recorded. The deferred gain is being amortized over the term
of the third partys assumed payments as the Company
remains liable should the third party default.

F-21



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

The Company recognized into income a portion of
the deferred gains related to these modifications of program
rights totaling approximately $1.5 million, $0.9 million and
$10.2 million in 2002, 2001 and 2000, respectively.

9. ASSETS HELD FOR SALE:

In October 2002, the Company completed the sale
of its television station WPXB, serving Merrimack, New
Hampshire, to NBC. The Company received cash proceeds of $26
million from the sale. In July 2002, the Company entered into an
agreement to sell the assets of its television station KPXF,
serving Fresno, California, to Univision Communications, Inc.
for a cash purchase price of $35 million. The Fresno station
sale closed in February, 2003.

In November 2002, the Company entered into an
agreement to sell the assets of its television stations WMPX,
serving Portland-Auburn, Maine, and WPXO, serving St. Croix,
U.S. Virgin Islands for an aggregate cash purchase price of $10
million. The sale of these stations is expected to close by the
end of the second quarter of 2003.

As described in Note 18, the Company is in the
process of completing the sale of certain broadcast towers with
a net book value of $9.1 million which are included in assets
held for sale.

Assets held for sale consist of the following (in
thousands):

|                            |  |              |        |              |  |   |        | 
|--------------------------- |  | ------------ | ------ | ------------ |  | - | ------ | 
|                            |  | December 31, |        | December 31,
|                            |  | 2002         |        | 2001        
|                            |  |              |        |             
|Intangible assets, net      |  | $            | 9,587  |              |  | $ | 10,151 | 
|Property and equipment, net |  |              | 13,742 |              |  |   | 14,198 | 
|Other assets                |  |              | 211    |              |  |   | 34     | 
|                            |  |              |        |              |  |   |        | 
|                            |  | $            | 23,540 |              |  | $ | 24,383 | 
|                            |  |              |        |              |  |   |        | 

10. OBLIGATIONS FOR CABLE DISTRIBUTION
RIGHTS:

As of December 31, 2002, obligations for
cable distribution rights require collective payments by the
Company of approximately $6.0 million as follows (in thousands):

|     |  |   |       | 
|---- |  | - | ----- | 
|2003 |  | $ | 5,246 | 
|2004 |  |   | 554   | 
|2005 |  |   | 179   | 
|     |  |   |       | 
|     |  | $ | 5,979 | 
|     |  |   |       | 

F-22



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

11. SENIOR SUBORDINATED NOTES AND BANK
FINANCING:

Senior subordinated notes and bank financing
consists of the following (in thousands):

|                                                                   |                                                                                                                                                                                                                                                                                           |      |           |         |  |   |         |         | 
|------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | --------- | ------- |  | - | ------- | ------- | 
|                                                                   |                                                                                                                                                                                                                                                                                           | 2002 |           | 2001   
|                                                                   |                                                                                                                                                                                                                                                                                           |      |           |        
|Senior Subordinated Discount Notes, yielding
    12 1/4%, due 2009 |                                                                                                                                                                                                                                                                                           | $    | 496,263   |         |  | $ |        |        
|10 3/4% Senior Subordinated Notes, due 2008.                       |                                                                                                                                                                                                                                                                                           |      | 200,000   |         |  |   | 200,000 |        
|Senior Credit Facility, secured by all assets of
    the Company:  |                                                                                                                                                                                                                                                                                           |      |           |         |  |   |         |        
|                                                                   |  $25 million revolving line of credit,
    maturing June 30, 2006, interest at LIBOR plus 3.25% or Base
    Rate (as defined) plus 2.25% at the Companys option (5.24%
    and 5.43% at December 31, 2002 and 2001, respectively)                                                       |      |           | 25,000  |  |   |         | 25,000  | 
|                                                                   |  $50 million Term A loan, maturing
    December 31, 2005, interest at LIBOR plus 3.25% or Base
    Rate (as defined) plus 2.25% at the Companys option (4.97%
    and 5.33% at December 31, 2002 and 2001, respectively),
    quarterly principal payments beginning September 30, 2003 |      |           | 48,000  |  |   |         | 20,000  | 
|                                                                   |  $285 million Term B loan, maturing
    June 30, 2006, interest at LIBOR plus 3.25% or Base Rate
    (as defined) plus 2.25% at the Companys option (5.40% and
    6.16% at December 31, 2002 and 2001, respectively),
    quarterly principal payments beginning September 2001        |      |           | 280,725 |  |   |         | 283,575 | 
|Other                                                              |                                                                                                                                                                                                                                                                                           |      | 558       |         |  |   | 605     |        
|                                                                   |                                                                                                                                                                                                                                                                                           |      |           |         |  |   |         |        
|                                                                   |                                                                                                                                                                                                                                                                                           |      | 1,050,546 |         |  |   | 529,180 |        
|Less: discount on Senior Subordinated Discount
    Notes           |                                                                                                                                                                                                                                                                                           |      | (150,445  | )       |  |   |        |        
|Less: current portion                                              |                                                                                                                                                                                                                                                                                           |      | (3,144    | )       |  |   | (2,899  | )      
|                                                                   |                                                                                                                                                                                                                                                                                           |      |           |         |  |   |         |        
|                                                                   |                                                                                                                                                                                                                                                                                           | $    | 896,957   |         |  | $ | 526,281 |        
|                                                                   |                                                                                                                                                                                                                                                                                           |      |           |         |  |   |         |        

In January 2002, the Company completed an
offering of senior subordinated discount notes due in 2009 (the
Discount Notes). Gross proceeds of the offering
totaled approximately $308.3 million and were used to refinance
the Companys 12 1/2% exchange debentures due 2006,
which were issued in exchange for the outstanding shares of the
Companys 12 1/2% exchangeable preferred stock on
January 14, 2002, and to pay costs related to the offering.
The Discount Notes were sold at a discounted price of 62.132% of
the principal amount at maturity which represents a yield to
maturity of 12 1/4%. Cash interest on the notes will be
payable semi-annually beginning on July 15, 2006. The
Discount Notes are guaranteed by the Companys
subsidiaries. The Company recognized an extraordinary loss due
to early extinguishment of debt totaling $17.6 million in the
first quarter of 2002 resulting primarily from the redemption
premium and the write-off of unamortized debt costs associated
with the repayment of the 12 1/2% exchange debentures. See
Note 1 for a discussion of a new accounting pronouncement
effective in 2003 which will require the reclassification of the
Companys extraordinary charges.

The Discount Notes are redeemable at the
Companys option on or after January 15, 2006 at the
redemption prices set forth below (expressed as a percentage of
the face value) plus accrued and unpaid interest, if any, to the
date of redemption.

|                      |  |  |         |  
|--------------------- |  |  | ------- | -
|Twelve Month Period   |  | 
|Beginning January 15, |  | 
|                      |  | 
|2006                  |  |  | 106.125 | %
|2007                  |  |  | 103.063 | %
|2008 and thereafter   |  |  | 100.000 | %

F-23



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On July 12, 2001, the Company completed a
$560 million financing consisting of a $360 million senior
credit facility and $200 million of 10 3/4% Senior
Subordinated Notes due 2008 (the Notes). Proceeds
from the initial funding under the new senior credit facility
and the 10 3/4% Senior Subordinated Notes offering were
used to repay all of the Companys indebtedness and
obligations under its previously existing credit facilities
which were scheduled to mature in June 2002, to redeem its
11 5/8% Senior Subordinated Notes and its 12% redeemable
preferred stock, as well as to pay redemption premiums, fees and
expenses in connection with the refinancing. In 2001, the
Company recognized an extraordinary loss related to early
extinguishment of debt totaling approximately $9.9 million
resulting primarily from the write-off of unamortized debt costs
related to the refinanced indebtedness and the redemption
premium and costs associated with the repayment of the
11 5/8% Senior Subordinated Notes.

The Notes are due in 2008 and interest on the
Notes is payable on January 15 and July 15 of each year,
beginning on January 15, 2002. The Notes are redeemable at
the Companys option on or after July 15, 2005 at the
redemption prices set forth below (expressed as a percentage of
the face value) plus accrued interest to the date of redemption:

|                    |  |  |         |  
|------------------- |  |  | ------- | -
|Twelve Month Period |  | 
|Beginning July 15,  |  | 
|                    |  | 
|2005                |  |  | 105.375 | %
|2006                |  |  | 102.688 | %
|2007                |  |  | 100.000 | %

The Discount Notes and Notes contain certain
covenants, which, among other things, restrict additional
indebtedness, payment of dividends, stock issuance of
subsidiaries, certain investments and transfers or sales of
assets, and provide for the repurchase of the Notes in the event
of a change in control of the Company. The Discount Notes and
Notes are general unsecured obligations of the Company
subordinate in right of payment to all existing and future
senior indebtedness of the Company and senior in right to all
future subordinated indebtedness of the Company.

The $360 million senior credit facility consists
of a $25 million revolving credit facility maturing June 2006, a
$50 million Term A facility maturing December 2005 and a $285
million Term B facility maturing June 2006. The revolving credit
facility is available for general corporate purposes and the
Term A facility is available to fund capital expenditures. The
interest rate under the bank facility, as amended, is LIBOR plus
3.25% or Base Rate (as defined) plus 2.25%, at the
Companys option. In September 2001, the Company entered
into an interest rate swap in the notional amount of $144.0
million to hedge the impact of interest rate changes on a
portion of our variable rate indebtedness. The fixed rate under
the swap is 3.64% (6.89% including the spread over LIBOR under
the senior credit facility) and variable rates are indexed to
LIBOR.

The Companys senior credit facility
contains various covenants restricting the Companys
ability and the ability of its subsidiaries to incur additional
indebtedness, dispose of assets, pay dividends, repurchase or
redeem capital stock and indebtedness, create liens, make
capital expenditures, make certain investments or acquisitions
and enter into transactions with affiliates and otherwise
restricting its activities. On June 28, 2002, the Company
and its lenders amended the senior credit facility to, among
other things, reduce the minimum required levels of net revenues
and EBITDA for certain periods under the facilitys
financial covenants and allow the Company to retain the proceeds
from certain planned asset sales for general corporate purposes.
In connection with the amendment, the interest rates were
increased to LIBOR plus 3.25% or Base Rate (as defined) plus
2.25%, at the Companys option, and the Company paid an
amendment fee of $0.9 million. On November 4, 2002 the
Company and its lenders amended the Companys senior credit
facility to, among other things, exclude from EBITDA, as
defined, up to $10 million of restructuring costs the Company
may incur through June 30, 2003 related to the
Companys plan to consolidate certain of its operations,
reduce personnel and modify its programming schedule as further
discussed in Note 3. In addition, the amendment allows the
Company to record up to $40 million of non-cash programming cost
write downs to net realizable value

F-24



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

through June 30, 2003 related to changes to
its programming schedule. In connection with the amendment, the
Company incurred costs of approximately $0.6 million.

The senior credit facility, as amended, contains
the following financial covenants: (1) twelve-month
trailing minimum net revenue and minimum EBITDA (as defined) for
each of the fiscal quarters ended June 30, 2001 through
December 31, 2004, (2) maximum ratio of total senior debt
to EBITDA, maximum ratio of total debt to EBITDA, minimum
permitted interest coverage ratio and minimum permitted fixed
charge coverage ratio, each beginning for each of the fiscal
quarters ending on or after March 31, 2005,
(3) maximum annual capital expenditures for 2001 through
2006 and (4) maximum annual programming payments for 2002
through 2006.

On March 13, 2003, the Company obtained a
waiver from its lenders under the senior credit facility whereby
the Companys lenders waived compliance with respect to the
twelve-month trailing minimum net revenue covenants for each of
the fiscal quarters ended June 30, September 30 and
December 30, 2003, subject to a $250 million minimum net
revenue floor in each period. Failure to meet the minimum net
revenue covenants in these waiver periods will result in a fee
equal to 0.125% of the outstanding principal amount under the
facility for each period subject to the waiver, provided the
Companys net revenues are not less than the $250 million
waiver floor. In connection with the waiver, the Company paid an
upfront fee of approximately $0.5 million.

At December 31, 2002, the Company was in
compliance with its amended covenants. The Company believes that
it will continue to be in compliance with these amended
covenants through the end of fiscal 2003. As previously
described, the Company has received a waiver from its lenders
under the senior credit facility with respect to the
twelve-month trailing minimum net revenue covenants for each of
the fiscal quarters ended June 30, September 30 and
December 30, 2003, subject a $250 million minimum net
revenue floor in each period. However, there can be no assurance
that the Company will continue to be in compliance with these
covenants in future periods. If the Company were to violate any
of these covenants and/or the terms of the March 2003 waiver,
the Company would be required to seek an additional waiver from
its lenders under the senior credit facility and possibly seek
another amendment to the senior credit facility. There can be no
assurance that the Companys lenders under its senior
credit facility would grant the Company any waiver or amendment
which might become necessary. If the Company failed to meet any
of its debt covenants and the Companys lenders did not
grant a waiver or amend the facility, the lenders would have the
right to declare an event of default and seek remedies including
acceleration of all outstanding amounts due under the senior
credit facility. Should an event of default be declared under
the senior credit facility, this would cause a cross default to
occur under the Notes and Discount Note indentures, thus giving
each trustee the right to accelerate repayment, and would give
the holders of each of the Companys three outstanding
series of preferred stock the right to elect two directors per
series to the Companys Board of Directors. There can be no
assurance that the Company would be successful in obtaining
alternative sources of funding to repay these obligations should
these events occur.

Aggregate maturities of senior subordinated notes
and bank financing at December 31, 2002 are as follows (in
thousands):

|           |  |   |           | 
|---------- |  | - | --------- | 
|2003       |  | $ | 3,144     | 
|2004       |  |   | 3,385     | 
|2005       |  |   | 50,199    | 
|2006       |  |   | 297,247   | 
|2007       |  |   | 78        | 
|Thereafter |  |   | 696,493   | 
|           |  |   |           | 
|           |  | $ | 1,050,546 | 
|           |  |   |           | 

F-25



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In connection with the Companys senior
subordinated note and bank financing, the Company has incurred
debt issuance costs totaling approximately $24.7 million which
are being amortized to interest expense over the term of the
indebtedness using the effective interest method.

12. DERIVATIVE FINANCIAL
INSTRUMENTS:

The Company has entered into an interest rate
swap with a financial institution to manage the impact of
interest rate changes on the Companys variable rate
indebtedness. This interest rate swap has an aggregate notional
amount of $144.0 million and contractually matures in 2003. The
fixed rate under the swap is 3.64% (6.89% including the spread
over LIBOR under the Companys senior credit facility) and
variable rates are indexed to LIBOR.

The amounts exchanged by the counterparties to
interest rate derivatives are based upon the notional amounts
and other terms, generally related to interest rates, of the
derivatives. While notional amounts of interest rate derivatives
form part of the basis for the amounts exchanged by the
counterparties, the notional amounts are not themselves
exchanged and, therefore, do not represent a measure of the
Companys exposure as an end user of derivative financial
instruments.

The Company is exposed to credit related losses
in the event of non-performance by counterparties to derivative
financial instruments. The Company monitors the credit
worthiness of the counterparties and presently does not expect
default by any of the counterparties. The Company does not
obtain collateral in connection with its derivative financial
instruments.

The Company has accounted for the swap as a cash
flow hedge pursuant to SFAS No. 133, as amended, with
changes in the fair value included as a component of other
comprehensive loss. At December 31, 2002 and 2001, the fair
value of the swap was a liability of approximately $3.1 million
and $1.4 million, respectively.

13. INCOME TAXES:

The (provision) benefit for federal and
state income taxes for the years ended December 31, 2002,
2001 and 2000 is as follows (in thousands):

|          |                               |                                  |          |          |          |      |      |         |      |   |      |         |      |  
|--------- | ----------------------------- | -------------------------------- | -------- | -------- | -------- | ---- | ---- | ------- | ---- | - | ---- | ------- | ---- | -
|          |                               | 2002                             |          | 2001     |          | 2000
|          |                               |                                  |          |          |          |     
|Current:  |                               |                                  |          |          |          |      |      |         |      |   |      |        
|          | Federal                       |                                  | $        | (542     | )        |      | $    |        |      |   | $    |        |     
|          | State                         |                                  |          | (120     | )        |      |      | (120    | )    |   |      | (120    | )   
|          |                               |                                  |          |          |          |      |      |         |      |   |      |        
|          |                               |                                  | (662     | )        |          |      | (120 | )       |      |   | (120 | )      
|          |                               |                                  |          |          |          |      |      |         |      |   |      |        
|Deferred: |                               |                                  |          |          |          |      |      |         |      |   |      |        
|          | Federal                       |                                  |          | 50,723   |          |      |      | 66,821  |      |   |      | 58,485  |     
|          | State                         |                                  |          | 4,348    |          |      |      | 5,728   |      |   |      | 5,013   |     
|          | Change in valuation allowance |                                  |          | (191,357 | )        |      |      | (72,549 | )    |   |      | (63,498 | )   
|          |                               |                                  |          |          |          |      |      |         |      |   |      |        
|          |                               |                                  | (136,286 | )        |          |      |     |         |      |   |     |        
|          |                               |                                  |          |          |          |      |      |         |      |   |      |        
|          |                               | Total provision for income taxes |          | $        | (136,948 | )    |      | $       | (120 | ) |      | $       | (120 | )
|          |                               |                                  |          |          |          |      |      |         |      |   |      |        

F-26



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred tax assets and deferred tax liabilities
reflect the tax effect of differences between financial
statement carrying amounts and tax bases of assets and
liabilities as follows (in thousands):

|                          |                                                 |                            |         |          |          |   |         |          |   | 
|------------------------- | ----------------------------------------------- | -------------------------- | ------- | -------- | -------- | - | ------- | -------- | - | 
|                          |                                                 | 2002                       |         | 2001    
|                          |                                                 |                            |         |         
|Deferred tax assets:      |                                                 |                            |         |          |          |   |         |         
|                          | Net operating loss carryforwards                |                            | $       | 295,876  |          |   | $       | 243,112  |  
|                          | Programming rights                              |                            |         | 30,805   |          |   |         | 29,306   |  
|                          | Deferred compensation                           |                            |         | 18,844   |          |   |         | 17,731   |  
|                          | Deferred interest expense                       |                            |         | 12,138   |          |   |         |         |  
|                          | Other                                           |                            |         | 1,415    |          |   |         | 2,583    |  
|                          |                                                 |                            |         |          |          |   |         |         
|                          |                                                 |                            | 359,078 |          |          |   | 292,732 |         
|                          | Deferred tax asset valuation allowance          |                            |         | (348,110 | )        |   |         | (156,753 | )
|                          |                                                 |                            |         |          |          |   |         |         
|                          |                                                 |                            | 10,968  |          |          |   | 135,979 |         
|Deferred tax liabilities: |                                                 |                            |         |          |          |   |         |         
|                          | Basis difference on fixed and intangible assets |                            |         | (147,254 | )        |   |         | (135,979 | )
|                          |                                                 |                            |         |          |          |   |         |         
|                          |                                                 | Net deferred tax liability |         | $        | (136,286 | ) |         | $        |  | 
|                          |                                                 |                            |         |          |          |   |         |         

The reconciliation of income tax
(provision) benefit computed at the U.S. federal statutory
tax rate, to the (provision) benefit for income taxes is as
follows (in thousands):

|                                                  |  |      |          |      |  |      |         |   |  |   |         |  
|------------------------------------------------- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                                  |  | 2002 |          | 2001 |  | 2000
|                                                  |  |      |          |      |  |     
|Tax benefit at U.S. federal statutory tax rate    |  | $    | 58,651   |      |  | $    | 71,281  |   |  | $ | 62,442  |  
|State income tax benefit, net of federal tax      |  |      | 5,024    |      |  |      | 5,958   |   |  |   | 5,145   |  
|Non-deductible preferred stock redemption premium |  |      | (6,647   | )    |  |      |        |   |  |   |        |  
|Disqualified original issue discount              |  |      | (2,104   | )    |  |      |        |   |  |   |        |  
|Non-deductible items                              |  |      | (515     | )    |  |      | (1,773  | ) |  |   | (1,548  | )
|Valuation allowance                               |  |      | (191,357 | )    |  |      | (72,549 | ) |  |   | (63,498 | )
|Other                                             |  |      |         |      |  |      | (3,037  | ) |  |   | (2,661  | )
|                                                  |  |      |          |      |  |      |         |   |  |   |         |  
|Provision for income taxes                        |  | $    | (136,948 | )    |  | $    | (120    | ) |  | $ | (120    | )
|                                                  |  |      |          |      |  |      |         |   |  |   |         |  

At December 31, 2002 and 2001, the Company
has recorded a valuation allowance for its deferred tax assets
net of those deferred tax liabilities which are expected to
reverse in determinate future periods, as it believes it is more
likely than not that it will be unable to utilize its remaining
net deferred tax assets. As previously described in Note 1,
following the adoption of SFAS 142 on January 1, 2002, the
Company no longer amortizes FCC license intangible assets and
goodwill for financial reporting purposes. Therefore, the
reversal of deferred tax liabilities related to FCC license
intangible assets and goodwill are no longer considered a source
of future taxable income in assessing the realization of
deferred tax assets. As a result of this accounting change, the
Company was required to record an increase in its deferred tax
asset valuation allowance totaling approximately $136.3 million
during the year ended December 31, 2002.

The Company structured the disposition of its
radio division in 1997 and its acquisition of television
stations during the period following this disposition in a
manner that the Company believed would qualify these
transactions as a like kind exchange under
Section 1031 of the Internal Revenue Code and would permit
the Company to defer recognizing for income tax purposes up to
approximately $333 million of gain. The IRS is examining the
Companys 1997 tax return and has issued the Company a
notice of proposed adjustment disallowing all of the
Companys gain deferral. The Company intends to contest
this determination and, based upon the advice of its legal
counsel, the Company believes it is likely that it will prevail.
The Company can provide no assurance, however, that it will
prevail. In addition, the IRS has issued the Company an
alternative notice of proposed adjustment that, in the event the
IRS is unsuccessful in disallowing all of the

F-27



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

gain deferral, approximately $62 million of the
$333 million gain deferral will be disallowed. The Company
intends to contest this alternative determination as well,
however the Company can provide no assurance that it will
prevail. Should the IRS successfully challenge the
Companys position and disallow all or part of the gain
deferral, because the Company had net operating losses in the
years subsequent to 1997 in excess of the amount of the deferred
gain, the Company would not be liable for any tax deficiency,
but could be liable for interest on the tax liability for the
period prior to the carryback of its net operating losses. The
Company has estimated the amount of interest for which it could
be held liable to be a maximum of approximately $15 million
should the IRS succeed in disallowing all of the gain. However,
should the IRS be successful in disallowing only part of the
gain under its alternative proposed adjustment, the Company
estimates it would be liable for only a nominal amount of
interest.

The Company has net operating loss carryforwards
for income tax purposes subject to certain carryforward
limitations of approximately $779 million at December 31,
2002 expiring through 2022. A portion of the net operating
losses, amounting to approximately $10.0 million, are limited to
annual utilization as a result of a change in ownership
occurring when the Company acquired the subsidiary.
Additionally, further limitations on the utilization of the
Companys net operating tax loss carryforwards could result
in the event of certain changes in the Companys ownership.

14. STOCK INCENTIVE PLANS:

The Company has established various stock
incentive plans to provide incentives to officers, employees and
others who perform services for the Company through awards of
options and shares of restricted stock. Awards granted under the
plans are at the discretion of the Companys Compensation
Committee and may be in the form of either incentive or
nonqualified stock options or awards of restricted stock.
Options granted under the plans generally vest over a four to
five year period and expire ten years after the date of grant.
In December 2002, the Companys Board of Directors approved
an amendment to the Companys 1998 Stock Plan, subject to
stockholder approval at the Companys annual stockholder
meeting on May 16, 2003, to increase the number of shares
available for issuance by 1.0 million plus the number of
additional shares (up to 1.7 million) subject to options granted
outside of the plan (see below) that are tendered and cancelled
in connection with the stock option exchange discussed below. At
December 31, 2002, 1,854,428 shares of Class A common
stock were available for additional awards under the plans.

In May 2000, the Compensation Committee of the
Board of Directors approved certain amendments to the terms of
the stock options previously granted under the Companys
stock option plans. The amendments were as follows: (1) to
extend the exercise period in the event of an involuntary
termination other than for cause to three years from the date of
termination (or the original expiration, if earlier);
(2) to extend the exercise period in the event of a
voluntary termination to one year from the date of termination
(or the original expiration, if earlier); and (3) to
retroactively revise the vesting schedule for those options
which included a deferred vesting schedule over a five year
period at the rates of 10%, 15%, 20%, 25% and 30% per year to a
vesting schedule at the rate of 20% per year over a five year
period. These modifications resulted in a new measurement date
for purposes of measuring compensation expense for stock options
outstanding at the date of the modification. However, no
additional compensation expense was recognized as the intrinsic
value at the modification date did not exceed the intrinsic
value at the original measurement date.

During 1999, the Compensation Committee of the
Board of Directors reduced the per share exercise price of
840,000 unvested stock options held by the Companys former
CEO to $.01 and 360,000 vested stock options held by the
Companys former CEO to $1.00. The Company recognized stock
based compensation of approximately $0.6 million, $2.3 million
and $5.7 million for the years ended December 31, 2002,
2001 and 2000, respectively, related to these options.

A summary of the Companys 1994, 1996 and
1998 stock option plans as of December 31, 2002, 2001 and
2000 and changes during the three years ending December 31,
2002 is presented below:

F-28



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                   |  |           |           |          |  |           |      |          |  |           |           |          |  |   |      |  |  |  |            |   |  |   |      | 
|------------------------------------------------------------------ |  | --------- | --------- | -------- |  | --------- | ---- | -------- |  | --------- | --------- | -------- |  | - | ---- |  |  |  | ---------- | - |  | - | ---- | 
|                                                                   |  |           |           |          |  |          
|                                                                   |  | 2002      |           | 2001     |  | 2000     
|                                                                   |  |           |           |          |  |          
|                                                                   |  |           |           | Weighted |  |           |      | Weighted |  |           |           | Weighted
|                                                                   |  |           |           | Average  |  |           |      | Average  |  |           |           | Average 
|                                                                   |  | Number of |           | Exercise |  | Number of |      | Exercise |  | Number of |           | Exercise
|                                                                   |  | Options   |           | Price    |  | Options   |      | Price    |  | Options   |           | Price   
|                                                                   |  |           |           |          |  |           |      |          |  |           |           |         
|Outstanding, beginning of year                                     |  |           | 9,452,436 |          |  | $         | 5.91 |          |  |           | 7,774,286 |          |  | $ | 5.59 |  |  |  | 8,891,061  |   |  | $ | 6.31 | 
|Granted                                                            |  |           | 80,500    |          |  |           | 7.25 |          |  |           | 2,303,750 |          |  |   | 7.25 |  |  |  | 515,000    |   |  |   | 7.25 | 
|Forfeited                                                          |  |           | (240,950  | )        |  |           | 7.25 |          |  |           | (117,575  | )        |  |   | 8.23 |  |  |  | (366,925   | ) |  |   | 6.88 | 
|Exercised                                                          |  |           | (188,650  | )        |  |           | 6.37 |          |  |           | (508,025  | )        |  |   | 6.39 |  |  |  | (1,264,850 | ) |  |   | 4.40 | 
|                                                                   |  |           |           |          |  |           |      |          |  |           |           |          |  |   |      |  |  |  |            |   |  |   |      | 
|Outstanding, end of year                                           |  |           | 9,103,336 |          |  |           | 5.88 |          |  |           | 9,452,436 |          |  |   | 5.91 |  |  |  | 7,774,286  |   |  |   | 5.59 | 
|                                                                   |  |           |           |          |  |           |      |          |  |           |           |          |  |   |      |  |  |  |            |   |  |   |      | 
|Weighted average fair value of options granted
    during the year |  |           |           |          |  |           | 7.66 |          |  |           |           |          |  |   | 8.22 |  |  |  |            |   |  |   | 6.88 | 

The majority of the Companys option grants
have been at exercise prices of $7.25 and $3.42, prices which
have historically been below the quoted market price of the
underlying common stock at the date of grant.

The following table summarizes information about
employee and director stock options outstanding and exercisable
at December 31, 2002:

|                |  |              |           |             |  |                |   |  |  |  |           | 
|--------------- |  | ------------ | --------- | ----------- |  | -------------- | - |  |  |  | --------- | 
|                |  |              |           | Weighted    |  |               
|                |  | Number       |           | Average     |  | Number        
|                |  | Outstanding  |           | Remaining   |  | Exercisable at
|                |  | December 31, |           | Contractual |  | December 31,  
|Exercise Prices |  | 2002         |           | Life        |  | 2002          
|                |  |              |           |             |  |               
|$0.01           |  |              | 840,000   |             |  |                | 5 |  |  |  | 840,000   | 
|$1.00           |  |              | 360,000   |             |  |                | 5 |  |  |  | 360,000   | 
|$3.42           |  |              | 1,080,311 |             |  |                | 2 |  |  |  | 1,080,311 | 
|$7.25           |  |              | 6,823,025 |             |  |                | 6 |  |  |  | 4,850,188 | 
|                |  |              |           |             |  |                |   |  |  |  |           | 
|                |  |              | 9,103,336 |             |  |                |   |  |  |  | 7,130,499 | 
|                |  |              |           |             |  |                |   |  |  |  |           | 

In addition to the options granted under its
stock incentive plans, the Company has granted nonqualified
options to purchase shares of its Class A common stock to
members of senior management and others. Options outstanding
under these grants totaled 2.3 million and 3.2 million at
December 31, 2002 and 2001, respectively, with weighted
average exercise prices of $8.62 and $10.39, respectively.
During 2002, the Companys Chairman and CEO forfeited 1.0
million options previously granted. The Company recognized
stock-based compensation related to these grants of
approximately $(0.4) million $0.9 million and $2.3 million for
the years ended December 2002, 2001 and 2000, respectively.

As further described in Note 21, in January 2003,
the Company consummated a stock option exchange offer resulting
in the issuance of approximately 2.6 million shares of
Class A common stock. After consummation of the stock
option exchange, the Company had approximately 1.8 million
options to purchase shares of Class A common stock
remaining outstanding and approximately 6.4 million options
available for grant under its plans.

F-29



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

15. MANDATORILY REDEEMABLE PREFERRED
STOCK:

The following represents a summary of the changes
in the Companys mandatorily redeemable preferred stock
during the three years ended December 31, 2002 and the aggregate
liquidation preference as of December 31, 2002 (in
thousands):

|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  
|---------------------------------------------------------- |  | --------- | ------- | ------------- |  | ------------ | -------- | ------------ |  | ----------- | ------- | ----- |  | - | ------- |  |  | - | ------- |  |  | - | --------- | -
|                                                           |  |           |         |               |  | Junior       |          |              |  |             |         |      
|                                                           |  |           |         |               |  | Exchangeable |          |              |  | Series B    |         |      
|                                                           |  | Junior    |         | Exchangeable  |  | Preferred    |          | Convertible  |  | Convertible |         |      
|                                                           |  | Preferred |         | Preferred     |  | Stock        |          | Preferred    |  | Preferred   |         |      
|                                                           |  | Stock 12% |         | Stock 12 1/2% |  | 13 1/4%      |          | Stock 9 3/4% |  | Stock 8%    |         | Total
|                                                           |  |           |         |               |  |              |          |              |  |             |         |      
|Balance at December 31, 1999                               |  | $         | 56,141  |               |  | $            | 217,561  |              |  | $           | 236,226 |       |  | $ | 83,644  |  |  | $ | 356,235 |  |  | $ | 949,807   |  
|Accretion                                                  |  |           | 714     |               |  |              | 676      |              |  |             | 1,170   |       |  |   | 489     |  |  |   | 23,422  |  |  |   | 26,471    |  
|Accrual of cumulative dividends                            |  |           | 7,092   |               |  |              | 28,641   |              |  |             | 33,458  |       |  |   | 8,812   |  |  |   | 33,200  |  |  |   | 111,203   |  
|Cash dividends                                             |  |           | (7,092  | )             |  |              |         |              |  |             |        |       |  |   |        |  |  |   |        |  |  |   | (7,092    | )
|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  
|Balance at December 31, 2000                               |  |           | 56,855  |               |  |              | 246,878  |              |  |             | 270,854 |       |  |   | 92,945  |  |  |   | 412,857 |  |  |   | 1,080,389 |  
|Accretion                                                  |  |           | 2,247   |               |  |              | 679      |              |  |             | 1,177   |       |  |   | 492     |  |  |   | 25,005  |  |  |   | 29,600    |  
|Accrual of cumulative dividends                            |  |           | 3,783   |               |  |              | 32,333   |              |  |             | 38,037  |       |  |   | 9,703   |  |  |   | 33,200  |  |  |   | 117,056   |  
|Cash dividends                                             |  |           | (3,783  | )             |  |              |         |              |  |             |        |       |  |   |        |  |  |   |        |  |  |   | (3,783    | )
|Redemption                                                 |  |           | (59,102 | )             |  |              |         |              |  |             |        |       |  |   |        |  |  |   |        |  |  |   | (59,102   | )
|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  
|Balance at December 31, 2001                               |  |           |        |               |  |              | 279,890  |              |  |             | 310,068 |       |  |   | 103,140 |  |  |   | 471,062 |  |  |   | 1,164,160 |  
|Accretion                                                  |  |           |        |               |  |              | 24       |              |  |             | 1,185   |       |  |   | 496     |  |  |   | 20,021  |  |  |   | 21,726    |  
|Accrual of cumulative dividends                            |  |           |        |               |  |              | 1,244    |              |  |             | 43,245  |       |  |   | 10,684  |  |  |   | 33,200  |  |  |   | 88,373    |  
|Exchange into debentures
    (see Note 11)                 |  |           |        |               |  |              | (281,158 | )            |  |             |        |       |  |   |        |  |  |   |        |  |  |   | (281,158  | )
|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  
|Balance at December 31, 2002                               |  | $         |        |               |  | $            |         |              |  | $           | 354,498 |       |  | $ | 114,320 |  |  | $ | 524,283 |  |  | $ | 993,101   |  
|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  
|Aggregate liquidation preference at
    December 31, 2002. |  | $         |        |               |  | $            |         |              |  | $           | 359,156 |       |  | $ | 116,340 |  |  | $ | 524,283 |  |  | $ | 999,779   |  
|                                                           |  |           |         |               |  |              |          |              |  |             |         |       |  |   |         |  |  |   |         |  |  |   |           |  

Junior Preferred Stock 12%

In July 2001, the Company redeemed all 33,000
shares issued and outstanding of its $0.001 par value Junior
Preferred Stock (the Junior Preferred Stock). Prior
to redemption, the Company paid cash dividends of approximately
$3.8 million and $7.1 million in 2001 and 2000, respectively.

Exchangeable Preferred Stock
12 1/2%

As discussed in Note 11, in January 2002 the
Company exchanged all issued and outstanding shares of
Exchangeable Preferred Stock in the amount of $281.2 million,
including accumulated but unpaid dividends, into 12 1/2%
Exchange Debentures. The 12 1/2% Exchange Debentures were
then redeemed with proceeds from the issuance of the Discount
Notes. At December 31, 2001, the Company had authorized
440,000 shares of $0.001 par value Cumulative Exchangeable
Preferred Stock (the Exchangeable Preferred Stock)
of which 277,380 were issued and outstanding as of
December 31, 2001.

During 2001 and 2000, the Company paid dividends
of approximately $31.7 million and $28.1 million, respectively,
by the issuance of additional shares of Exchangeable Preferred
Stock. Accrued Exchangeable Preferred Stock dividends since the
last dividend payment date aggregated approximately $5.8 million
at December 31, 2001.

F-30



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Junior Exchangeable Preferred Stock
13 1/4%

During 1998, the Company issued 20,000 shares of
Cumulative Junior Exchangeable Preferred Stock (the Junior
Exchangeable Preferred Stock) with an aggregate $200
million liquidation preference for gross proceeds of an
equivalent amount. At December 31, 2002 and 2001, the
Company had authorized 72,000 shares of $0.001 par value Junior
Exchangeable Preferred Stock of which 35,330 and 31,076 shares
were issued and outstanding, respectively. Holders of the Junior
Exchangeable Preferred Stock are entitled to cumulative
dividends at an annual rate of 13 1/4% of the liquidation
preference, payable semi-annually in cash or additional shares
beginning November 15, 1998 and accumulating from the issue
date. If dividends for any period ending after May 15, 2003
are paid in additional shares of Junior Exchangeable Preferred
Stock, the dividend rate will increase by 1% per annum for such
dividend payment period. The Company intends to pay dividends in
additional shares in 2003, therefore the dividend rate will
increase to 14.25% after May 15, 2003.

The Company is required to redeem all of the then
outstanding Junior Exchangeable Preferred Stock on
November 15, 2006, at a price equal to the aggregate
liquidation preference thereof plus accumulated and unpaid
dividends to the date of redemption. The Junior Exchangeable
Preferred Stock is redeemable at the Companys option at
any time on or after May 15, 2003, at the redemption prices
set forth below (expressed as a percentage of liquidation
preference) plus accumulated and unpaid dividends to the date of
redemption:

|                    |  |  |         |  
|------------------- |  |  | ------- | -
|Twelve month        |  | 
|period              |  | 
|beginning May 15,   |  | 
|                    |  | 
|2003                |  |  | 106.625 | %
|2004                |  |  | 103.313 | %
|2005 and thereafter |  |  | 100.000 | %

Upon a change of control, the Company is required
to offer to purchase the Junior Exchangeable Preferred Stock at
a price equal to 101% of the liquidation preference thereof plus
accumulated and unpaid dividends.

The Company may, provided it is not contractually
prohibited from doing so, exchange the outstanding Junior
Exchangeable Preferred Stock on any dividend payment date for
13 1/4% Exchange Debentures due 2006. The Exchange
Debentures have redemption features similar to those of the
Junior Exchangeable Preferred Stock.

During 2002, 2001 and 2000, the Company paid
dividends of approximately $42.5 million, $37.4 million and
$32.9 million, respectively, by the issuance of additional
shares of Junior Exchangeable Preferred Stock. Accrued Junior
Exchangeable Preferred Stock dividends since the last dividend
payment date aggregated approximately $5.9 million and $5.1
million at December 31, 2002 and 2001, respectively.

Convertible Preferred Stock
9 3/4%

During 1998, the Company issued 7,500 shares of
Series A Convertible Preferred Stock (Convertible
Preferred Stock) with an aggregate liquidation preference
of $75 million, and warrants to purchase 240,000 shares of
Class A common stock. Of the gross proceeds of $75 million,
approximately $960,000 was allocated to the value of the
warrants, which are exercisable at a price of $16 per share
through June 2003. At December 31, 2002 and 2001, the
Company had authorized 17,500 shares of $0.001 par value
Convertible Preferred Stock of which 11,634 and 10,566 shares
were issued and outstanding, respectively. Holders of the
Convertible Preferred Stock are entitled to receive cumulative
dividends at an annual rate of 9 3/4%, payable quarterly
beginning September 30, 1998 and accumulating from the issue
date. The Company may pay dividends either in cash, in
additional shares of Convertible Preferred Stock, or (subject to
an increased dividend rate) by the issuance of shares of
Class A common stock equal in value to the amount of such
dividends.

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During 2002, 2001 and 2000, the Company paid
dividends of approximately $10.7 million, $9.7 million and $8.8
million, respectively, by the issuance of additional shares of
Convertible Preferred Stock. At December 31, 2002 and 2001,
there were no accrued and unpaid dividends on the Convertible
Preferred Stock.

The Company is required to redeem the Convertible
Preferred Stock on December 31, 2006, at a price equal to
the aggregate liquidation preference thereof plus accumulated
and unpaid dividends to the date of redemption. The Convertible
Preferred Stock is redeemable at the Companys option at
any time on or after June 30, 2003, at the redemption
prices set forth below (expressed as a percentage of liquidation
preference) plus accumulated and unpaid dividends to the date of
redemption:

|                    |  |  |        |  
|------------------- |  |  | ------ | -
|Twelve month period |  | 
|beginning June 30,  |  | 
|                    |  | 
|2003                |  |  | 104.00 | %
|2004                |  |  | 102.00 | %
|2005 and thereafter |  |  | 100.00 | %

Upon a change of control, the Company is required
to offer to purchase the Convertible Preferred Stock at a price
equal to the liquidation preference thereof plus accumulated and
unpaid dividends. The Convertible Preferred Stock contains
restrictions, primarily based on the trading price of the common
stock, on the issuance of additional preferred stock ranking
senior to the Convertible Preferred Stock.

Each share of Convertible Preferred Stock is
convertible into shares of Class A common stock at an
initial conversion price of $16 per share. If the Convertible
Preferred Stock is called for redemption, the conversion right
will terminate at the close of business on the date fixed for
redemption.

Holders of the Convertible Preferred Stock have
voting rights on all matters submitted for a vote to the
Companys common stockholders and are entitled to one vote
for each share of Class A common stock into which their
Convertible Preferred Stock is convertible.

Series B Convertible Preferred Stock
8%

Pursuant to the Investment Agreement, NBC
acquired $415 million aggregate liquidation preference of a new
series of the Companys convertible exchangeable preferred
stock which accrues cumulative dividends from the Issue Date at
an annual rate of 8% and is convertible (subject to adjustment
under the terms of the Certificate of Designation relating to
the Series B Convertible Preferred Stock) into 31,896,032
shares of the Companys Class A common stock at an
initial conversion price of $13.01 per share, which increases at
a rate equal to the dividend rate ($16.44 per share at December
31, 2002). On September 15, 2004, the rate at which
dividends accrue on the Series B preferred stock will be
adjusted to a market rate determined by a nationally recognized
independent investment banking firm chosen by the Company. At
December 31, 2002 and 2001, the Company had 41,500 shares
of $0.001 par value Series B Convertible Preferred Stock
authorized, issued and outstanding.

NBC has the right to demand that the Company
redeem the Series B Convertible Preferred Stock for a
period of 60 days beginning in September 2002 or annually
thereafter through September 2009 and prior to such dates under
certain circumstances related to the attribution to NBC of its
investment in the Company under rules established by the FCC.
The Companys redemption obligation in respect of the
Series B Convertible Preferred Stock is subject to the
Companys compliance with the terms of its existing debt
and preferred stock instruments as well as the existence of
funds on hand to consummate such redemption. With respect to the
60 day period that began on September 15, 2002, the
Company has agreed with NBC to extend the duration of this
period until April 4, 2003. If NBC exercises this right,
the Company will have up to one year to consummate the
redemption. If at any time during the one year redemption
period, the terms of the Companys outstanding debt and
preferred stock do not prohibit the redemption and the Company
has

F-32



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

sufficient funds on hand to consummate the
redemption, the Company must consummate the redemption at that
time. NBC may not exercise Warrant A, Warrant B or its call
right to purchase shares of Class B common stock
beneficially owned by Mr. Paxson during the one year
redemption period.

Should the Company fail to effect a redemption
within one year after NBC has exercised its right to demand that
the Company redeem its securities, NBC will again be permitted
to exercise Warrant A and Warrant B and its call right to
acquire Mr. Paxsons Class B common stock, and
generally will be permitted to transfer, without restriction,
any of the Companys securities acquired by it, its call
right to acquire Mr. Paxsons Class B common
stock, certain contractual rights, and its other rights under
the related transaction agreements, provided that Warrant A,
Warrant B and the call right to acquire Mr. Paxsons
Class B common stock shall expire, to the extent
unexercised, 30 days after any such transfer. If NBC transfers
any of the Companys securities or its call right to
acquire Mr. Paxsons Class B common stock, the
transferee will remain subject to the terms and conditions of
such securities and such call right, including those limitations
on exercise described above.

NBC also has the right to require that the
Company redeem any Series B preferred stock and
Class A common stock issued upon conversion of the
Series B preferred stock then held by NBC upon the
occurrence of various events of default (a Default
Redemption). If NBC exercises this right, the Company will
have up to 180 days to consummate the redemption. If at any
time during the 180 day redemption period, the terms of the
Companys outstanding debt and preferred stock do not
prohibit the redemption and the Company has sufficient funds on
hand to consummate the redemption, the Company must consummate
the redemption at that time. NBC may not exercise Warrant A,
Warrant B or its right to purchase shares of Class B common
stock beneficially owned by Mr. Paxson during the
180 day redemption period.

Should the Company fail to effect a Default
Redemption within 180 days after NBC has exercised its
right to require the Company to redeem its securities, NBC will
have 180 days within which to exercise Warrant A and
Warrant B and its right to acquire Mr. Paxsons
Class B common stock, and generally will be permitted to
transfer, without restriction, any of the Companys
securities acquired by it, NBCs right to acquire
Mr. Paxsons Class B common stock, certain contractual
rights, and NBCs other rights under the related
transaction agreements, provided that Warrant A, Warrant B and
the right to acquire Mr. Paxsons Class B common
stock shall expire, to the extent unexercised, 30 days
after any such transfer. If NBC does not effect any of these
transactions within the 180 day period, the Company will
have the right, for 30 days, to redeem NBCs
securities. If the Company does not effect a redemption during
this period, NBC will have the right to require the Company to
effect, at our option, either a public sale or a liquidation of
the Company and may participate as a bidder in any such
transaction. If the highest bid in any public sale of the
Company would be insufficient to pay NBC the redemption price of
its securities, NBC will have a right of first refusal to
purchase the Company for the highest bid amount. NBC will not be
permitted to exercise Warrant A, Warrant B or its right to
acquire Mr. Paxsons Class B common stock during
the public sale or liquidation process.

Beginning on September 15, 2004, the Company
has the right, at any time, to redeem any or all of our
outstanding Series B preferred stock at a redemption price
per share equal to the higher of:



| |   |                                                                                                                                                                                                                                                                                                                                                                            
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | $10,000 per share plus accrued and unpaid
    dividends; and                                                                                                                                                                                                                                                                                                               
|
| |  | the product of 80% of the average of the closing
    sale prices of the Class A common stock for the 10
    consecutive trading days ending on the trading day immediately
    preceding the Companys notice to NBC exercising the
    redemption, and the number of shares of Class A common
    stock into which a share of Series B preferred stock is
    convertible.

If the Company elects to redeem a portion of its
outstanding Series B preferred stock, the Company is
required to declare and pay, in full, all of the accumulated and
unpaid dividends on the Series B preferred

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

stock. As of December 31, 2002 and 2001,
accumulated and unpaid dividends on the Series B preferred
stock aggregated approximately $109.3 million and $76.1 million,
respectively.

The Series B Convertible Preferred Stock is
exchangeable, at the option of the holder, subject to the
Companys debt and preferred stock covenants limiting
additional indebtedness but in any event not later than
January 1, 2007, into convertible debentures of the Company
ranking on a parity with the Companys other subordinated
indebtedness. Should NBC determine that the rules and
regulations of the FCC prohibit it from holding shares of
Class A common stock, NBC may convert the Series B
Convertible Preferred Stock held by it into an equal number of
shares of non-voting common stock of the Company, which
non-voting common stock shall be immediately convertible into
Class A common stock upon transfer by NBC.

Redemption Features of Preferred
Stock

The following table presents the redemption value
of the three classes of preferred stock outstanding at
December 31, 2002 should the Company elect to redeem the
preferred stock in the indicated year, assuming no dividends are
paid in cash prior to redemption (in thousands):

|     |  |                     |         |                       |  |                      |         |  |  |   |         | 
|---- |  | ------------------- | ------- | --------------------- |  | -------------------- | ------- |  |  | - | ------- | 
|     |  | Junior Exchangeable |         | Convertible Preferred |  | Series B Convertible
|     |  | Preferred Stock     |         | Stock                 |  | Preferred Stock     
|     |  | 13 1/4%(1)          |         | 9 3/4%(2)             |  | 8%(3)               
|     |  |                     |         |                       |  |                     
|2003 |  | $                   | 437,474 |                       |  | $                    | 133,228 |  |  | $ |        | 
|2004 |  |                     | 486,697 |                       |  |                      | 143,880 |  |  |   | 582,383 | 
|2005 |  |                     | 540,916 |                       |  |                      | 155,324 |  |  |   | 615,583 | 
|2006 |  |                     | 609,879 |                       |  |                      | 171,029 |  |  |   | 648,783 | 
|2007 |  |                     |        |                       |  |                      |        |  |  |   | 681,983 | 






|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mandatorily redeemable on November 15, 2006;
    redeemable by the Company on or after May 15, 2003.                                                                                                                                                                                                                                                                                                                                                                                                        
|(2) | Mandatorily redeemable on December 31, 2006;
    redeemable by the Company on or after June 30, 2003.                                                                                                                                                                                                                                                                                                                                                                                                       
|(3) | NBC has the right to demand redemption beginning
    in September 2002 and annually thereafter through September
    2009, and prior to such dates under certain circumstances
    related to the attribution of NBCs investment in the
    Company under rules established by the FCC. The Company has the
    right to redeem the Series B Convertible Preferred Stock in
    whole or in part commencing in September 2004 at the redemption
    value of such shares plus accrued and unpaid dividends.

Covenants Under Preferred Stock
Terms

The certificates of designation of the preferred
stock contain certain covenants which, among other things,
restrict additional indebtedness, payment of dividends,
transactions with related parties, certain investments and
transfers or sales of assets.

16. COMMON STOCK AND COMMON STOCK
WARRANTS:

On May 1, 2000, the Companys
stockholders approved an amendment to the Companys
certificate of incorporation to increase the total number of
authorized shares of common stock from 197,500,000 shares to
327,500,000 shares, the number of authorized shares of
Class A common stock from 150,000,000 shares to 215,000,000
shares and the number of authorized shares of Class C
non-voting common stock, par value $0.001 per share, from
12,500,000 shares to 77,500,000 shares. No shares of the
Companys Class C common stock were issued or
outstanding at December 31, 2002 or 2001.

Class A common stock and Class B common
stock will vote as a single class on all matters submitted to a
vote of the stockholders, with each share of Class A common
stock entitled to one vote and each share of Class B common
stock entitled to ten votes; Class C common stock is
non-voting. Each share of Class B common stock is
convertible, at the option of its holder, into one share of
Class A common stock at any time. Under certain
circumstances, Class C common stock may be converted, at
the option of the holder, into Class A common stock.

F-34



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

During December 1996, the Company approved a
program under which it extended loans to certain members of
management for the purchase of Company common stock in the open
market by those individuals. The loans are full recourse
promissory notes bearing interest at 5.75% per annum and are
collateralized by the shares of stock purchased with the loan
proceeds. The Company extended the maturity of all outstanding
loans under this program until March 31, 2003. The
outstanding principal balance on such loans was approximately
$1.6 million and $1.1 million at December 31, 2002 and
2001, respectively and is reflected as stock subscription notes
receivable in the accompanying balance sheets. The Company
expects the note holders to make a partial payment on the loans
totaling approximately $0.8 million upon maturity leaving an
unpaid balance of $0.8 million. The Company fully intends to
pursue collection of any unpaid balances due under these notes,
however due to uncertainty regarding the timing and collection
of unpaid balances, the Company recorded a reserve totaling $0.8
million in the fourth quarter of 2002.

In connection with the NBC transaction discussed
elsewhere herein, NBC acquired a warrant to purchase up to
13,065,507 shares of Class A Common stock at an exercise
price of $12.60 per share (Warrant A) and a warrant
to purchase up to 18,966,620 shares of Class A Common Stock
(Warrant B) at an exercise price equal to the
average of the closing sale prices of the Class A Common
Stock for the 45 consecutive trading days ending on the trading
day immediately preceding the warrant exercise date (provided
that such price shall not be more than 17.5% higher or 17.5%
lower than the six month trailing average closing sale price).
The Warrants are exercisable for ten years from the Issue Date,
subject to certain conditions and limitations.

In connection with the Series A Convertible
Preferred Stock sale in June 1998, the Company issued warrants
to purchase 240,000 shares of Class A common stock at an
exercise price of $16. The warrants were valued at $960,000.

In June 1998, the Company issued to an affiliate
of a former member of its Board of Directors five year warrants
entitling the holder to purchase 155,500 shares of Class A
common stock at an exercise price of $16.00 per share. In March
2000, the Company reduced the exercise price of warrants held by
the affiliate from $16.00 per share to $12.60 per share
resulting in stock-based compensation expense of $139,000.

17. FAIR VALUE OF FINANCIAL
INSTRUMENTS:

The estimated fair value of financial instruments
has been determined by the Company using available market
information and appropriate valuation methodologies. However,
considerable judgment is required in interpreting data to
develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts
that the Company could realize in a current market exchange. The
fair value estimates presented herein are based on pertinent
information available to management as of December 31,
2002. Although management is not aware of any factors that would
significantly affect the estimated fair value amounts, such
amounts have not been comprehensively revalued for purposes of
these financial statements since that date and current estimates
of fair value may differ significantly from the amounts
presented herein. The following methods and assumptions were
used to estimate the fair value of each class of financial
instruments for which it is practicable to estimate such value:

Cash and cash equivalents, accounts
receivable, accounts payable and accrued expenses.The fair values approximate the
carrying values due to their short term nature.

Investments in broadcast properties.The fair value of investments in
broadcast properties is estimated based on recent market sale
prices for comparable stations and/or markets. The fair value
approximates the carrying value.

Long-term debt.The
fair value of the Companys long-term debt is estimated
based on current market rates and instruments with the same risk
and maturities. The fair value of the Companys senior
credit facility borrowings approximates its carrying value. The
fair market value of the Companys 10 3/4% and 12 1/4%
senior

F-35



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

subordinated notes are estimated based on year
end quoted market prices for such securities. At
December 31, 2002, the estimated fair value of the
Companys 10 3/4% and 12 1/4% senior subordinated
notes were approximately $197.0 million and $310.8 million,
respectively.

Mandatorily redeemable securities.The fair value of the Companys
mandatorily redeemable preferred stock is estimated based on
quoted market prices plus accumulated but unpaid dividends
except for the Series B Convertible Preferred Stock which
is estimated at the December 31, 2002 aggregate liquidation
preference as no quoted market prices are available for these
securities. The estimated fair value of the Companys
mandatorily redeemable preferred stock is as follows (in
thousands):

|                                      |  |   |         | 
|------------------------------------- |  | - | ------- | 
|Junior Exchangeable Preferred 13 1/4% |  | $ | 195,740 | 
|Convertible Preferred 9 3/4%          |  |   | 46,536  | 
|Series B Convertible Preferred 8%     |  |   | 524,283 | 
|                                      |  |   |         | 
|                                      |  | $ | 766,559 | 
|                                      |  |   |         | 

18. COMMITMENTS AND
CONTINGENCIES:

Future minimum annual payments under
non-cancelable operating leases for broadcasting facilities and
equipment as of December 31, 2002 are as follows (in thousands):

|           |  |   |         | 
|---------- |  | - | ------- | 
|2003       |  | $ | 16,987  | 
|2004       |  |   | 13,524  | 
|2005       |  |   | 13,251  | 
|2006       |  |   | 13,287  | 
|2007       |  |   | 12,831  | 
|Thereafter |  |   | 116,885 | 
|           |  |   |         | 
|           |  | $ | 186,765 | 
|           |  |   |         | 

The Company incurred total operating expenses of
approximately $17.9 million, $14.9 million and $16.2 million for
the years ended December 31, 2002, 2001 and 2000,
respectively, under these leases.

As of December 31, 2002, the Company is
obligated under employment agreements with its senior management
to make payments totaling approximately $2.1 million in
2003 and $1.2 million in 2004.

In December 2001, the Company completed the sale
and leaseback of certain of its tower assets for aggregate
proceeds of $34.0 million. This transaction resulted in a
deferred gain of approximately $5.2 million which is being
recognized over the lease term as a reduction of rent expense.
As part of the transaction, the Company entered into operating
leases related to both its analog and digital antennas at these
facilities for terms of up to 20 years. Annual rent expense
over the lease term is approximately $4.0 million. For certain
tower assets with a net book value of approximately $9.1
million, the Company was temporarily unable to transfer title or
assign leases to the buyer at closing. The Company expects to
complete the majority of such transfers in 2003. These assets
are included in assets held for sale in the accompanying
December 31, 2002 and 2001 balance sheets. In the interim,
at closing the Company entered into management agreements with
the buyer on terms consistent with the operating leases.
Included in the $34.0 million proceeds was approximately $12.1
million of deferred consideration for the managed sites which is
included in other liabilities. Under the terms of the agreement
with the buyer, the proceeds received by the Company related to
these assets are not refundable to the buyer in the event the
Company is unable to complete the transfer of title for these
assets.

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Investment Commitments

The Company has an option to purchase the assets
of two television stations serving the Memphis, TN and New
Orleans, LA markets for an aggregate purchase price of $40.0
million of which $4.0 million has been deposited into escrow.
The owners of these stations also have the right to require the
Company to purchase these stations at any time after
January 1, 2005 through December 31, 2006. These stations
are currently operating under time brokerage agreements with the
Company. The purchase of these assets is subject to various
conditions, including the receipt of regulatory approvals. The
completion of these investments is also subject to a variety of
factors and to the satisfaction of various conditions, and there
can be no assurance that these investments will be completed.

Legal Proceedings

The Company is involved in litigation from time
to time in the ordinary course of its business. In the opinion
of management, the ultimate resolution of these matters will not
have a material effect on the Companys consolidated
financial position or results of operations and cash flows.

In December 2001, the Company commenced a binding
arbitration proceeding against NBC in which the Company asserted
that NBC breached its agreements with the Company and breached
its fiduciary duty to the Company and to the Companys
shareholders. The Company asserted that NBCs proposed
acquisition of Telemundo Group (which was completed in April
2002) violates the terms of the agreements governing the
investment and partnership between the Company and NBC. In
September 2002, the arbitrator ruled against the Company on all
of its claims, denying the Company any of the relief it had
sought with respect to what the Company believed to be
NBCs wrongful actions. Accordingly, the provisions of the
Companys agreements with NBC remain in effect without
change.

Exploration of Strategic
Alternatives

The Company has engaged the firm of Bear Stearns
& Co. Inc. to act as its financial advisor and explore
strategic alternatives for the Company, which may include the
sale of all or part of the Companys assets to a third
party, finding a strategic partner for the Company, or finding a
third party to purchase the equity of the Company. The
Companys ability to pursue strategic alternatives is
subject to various limitations and issues which it may be unable
to control. A strategic transaction will, in most circumstances,
require that the Company seek the consent of, or refinance, NBC
and the other holders of the Companys preferred stock, as
well as the holders of the Companys senior and
subordinated debt. There may be FCC regulatory limitations on
the type of strategic alternatives the Company may pursue and
the parties with whom it may pursue strategic alternatives. In
addition, the Companys ability to pursue a strategic
alternative will be dependent upon the attractiveness of its
assets and business plan to potential new strategic partners.
Among other things, certain strategic partners may find
unattractive the Companys capital structure and high
indebtedness, the PAX TV programming and the overnight
programming provided by The Christian Network, Inc. which is
currently carried by the Company, and certain of the
Companys television stations serving major television
markets. The Company may be prevented from consummating a
strategic transaction due to any of these and other factors, or
it may incur significant costs to terminate obligations and
commitments with respect to, or receive less consideration in a
strategic transaction as a result of these and other factors.
There is no assurance that the Company will be successful in our
efforts to find or effectuate strategic alternatives for the
Company.

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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Other

See also Notes 8 and 15.

19. SUPPLEMENTAL CASH FLOW
INFORMATION:

Supplemental cash flow information and non-cash
operating, investing and financing activities are as follows (in
thousands):

|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |         | 
|----------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------ | - | ------ |  | ---- | - | ------- |  |  | - | ------- | 
|                                                            |                                                                              |                         
|                                                            |                                                                              | Years Ended December 31,
|                                                            |                                                                              |                         
|                                                            |                                                                              | 2002                     |   | 2001   |  | 2000
|                                                            |                                                                              |                          |   |        |  |     
|Supplemental disclosures of cash flow information:          |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Cash paid for interest                                                       |                          | $ | 43,630 |  |      | $ | 39,987  |  |  | $ | 40,101  | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Cash paid for income taxes                                                   |                          | $ | 625    |  |      | $ | 255     |  |  | $ | 1,301   | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|Non-cash operating, investing and financing
    activities: |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Accretion of discount on Senior Subordinated Notes                           |                          | $ | 37,480 |  |      | $ | 240     |  |  | $ | 445     | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Issuance of common stock in connection with
    acquisitions                 |                          | $ |       |  |      | $ |        |  |  | $ | 251     | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Beneficial conversion feature on issuance of
    convertible preferred stock |                          | $ |       |  |      | $ |        |  |  | $ | 75,130  | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Dividends accrued on redeemable preferred stock                              |                          | $ | 88,373 |  |      | $ | 113,273 |  |  | $ | 104,111 | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Discount accretion on redeemable securities                                  |                          | $ | 21,726 |  |      | $ | 29,600  |  |  | $ | 26,471  | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Satellite and cable distribution                                             |                          | $ |       |  |      | $ | 1,151   |  |  | $ | 5,345   | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        
|                                                            | Notes receivable from sales of broadcast
    properties                      |                          | $ |       |  |      | $ | 4,792   |  |  | $ |        | 
|                                                            |                                                                              |                          |   |        |  |      |   |         |  |  |   |        

20. QUARTERLY RESULTS OF OPERATIONS
(UNAUDITED):

Seasonal revenue fluctuations are common within
the television broadcasting industry and result primarily from
fluctuations in advertising expenditures. The Company believes
that television advertisers generally spend relatively more for
commercial advertising time in the second and fourth calendar
quarters and spend relatively less during the first calendar
quarter of each year.

Operating loss in the second and fourth quarters
of 2002 and the third quarter of 2001 includes adjustments of
programming to net realizable value of approximately $2.9
million, $38.4 million and $67.0 million, respectively as
described in Note 8.

Operating loss in the fourth quarters of 2002 and
2001 include restructuring charges (credits) of $2.6
million and ($1.2) million, respectively as described in Note 3.

Net loss attributable to common stockholders in
the first quarter of 2002 includes an increase in the
Companys deferred tax valuation allowance of approximately
$125.9 million as described in Notes 1 and 13.

F-38



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Net loss attributable to common stockholders in
the first quarter of 2002 and the third quarter of 2001 include
extraordinary charges of $17.6 million and $9.9 million related
to the early extinguishment of debt as described in Note 11.

|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |   |       | 
|------------------------------------------------------------------------------- | -------------- | ---------------------------------------------- | ---------- | --------------- | ---- | ---------- | ---------- | ----------- | ---- | - | ---------- | - | ----- | - | ---------- | - | ----- | 
|                                                                                |                |                                               
|                                                                                |                | For the 2002 Quarters Ended                   
|                                                                                |                |                                               
|                                                                                |                | December 31                                    |            | September 30(2) |      | June 30(2) |            | March 31(2)
|                                                                                |                |                                                |            |                 |      |            |            |            
|                                                                                |                |                                               
|                                                                                |                | (in thousands except share and per share data)
|                                                                                |                |                                               
|Revenues                                                                        |                | $                                              | 85,374     |                 |      | $          | 77,130     |             |      | $ | 78,611     |   |       | $ | 80,781     |  
|Less: agency commissions                                                        |                |                                                | (12,116    | )               |      |            | (10,874    | )           |      |   | (10,279    | ) |       |   | (11,706    | )
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Net revenues                                                                    |                |                                                | 73,258     |                 |      |            | 66,256     |             |      |   | 68,332     |   |       |   | 69,075     |  
|Expenses, excluding depreciation, amortization
    and stock based compensation |                |                                                | 107,954    |                 |      |            | 68,648     |             |      |   | 68,713     |   |       |   | 62,079     |  
|Depreciation and amortization                                                   |                |                                                | 17,191     |                 |      |            | 14,472     |             |      |   | 14,228     |   |       |   | 12,638     |  
|Stock-based compensation                                                        |                |                                                | 719        |                 |      |            | 1,216      |             |      |   | 542        |   |       |   | 1,333      |  
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Operating loss                                                                  |                | $                                              | (52,606    | )               |      | $          | (18,080    | )           |      | $ | (15,151    | ) |       | $ | (6,975     | )
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Net loss attributable to common stockholders
    before extraordinary charge    |                | $                                              | (75,305    | )               |      | $          | (72,461    | )           |      | $ | (66,732    | ) |       | $ | (181,910   | )
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Net loss attributable to common stockholders                                    |                | $                                              | (75,305    | )               |      | $          | (72,461    | )           |      | $ | (66,732    | ) |       | $ | (199,462   | )
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Basic and diluted loss per share before
    extraordinary charge                |                | $                                              | (1.16      | )               |      | $          | (1.11      | )           |      | $ | (1.03      | ) |       | $ | (2.81      | )
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|Weighted average common shares outstanding                                      |                |                                                | 64,880,466 |                 |      |            | 68,880,466 |             |      |   | 64,875,141 |   |       |   | 64,758,512 |  
|                                                                                |                |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |  
|                                                                                | Stock price(1) |                                                |            |                 |      |            |            |             |      |   |            |   |       |   |            |   |      
|                                                                                |                | High                                           |            | $               | 3.29 |            |            | $           | 6.15 |   |            | $ | 11.49 |   |            | $ | 13.00 | 
|                                                                                |                | Low                                            |            | $               | 2.03 |            |            | $           | 2.10 |   |            | $ | 5.50  |   |            | $ | 8.50  | 






|    |                                                                                                                                                                                                                   
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | The Companys Class A common stock is
    listed on the American Stock Exchange under the symbol PAX.                                                                                                             
|(2) | The following amounts have been amended from
    those originally filed through the Companys filing of
    reports on Form 10-Q/A for the periods ended March 31,
    2002, June 30, 2002 and September 30, 2002.

F-39



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##### Table of Contents



PAXSON COMMUNICATIONS CORPORATION


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |   |       | 
|------------------------------------------------------------------------------- | -------------- | ---------------------------------------------- | ---------- | ------------ | ----- | ------- | ---------- | ----------- | ----- | - | ---------- | - | ----- | - | ---------- | - | ----- | 
|                                                                                |                |                                               
|                                                                                |                | For the 2001 Quarters Ended                   
|                                                                                |                |                                               
|                                                                                |                | December 31                                    |            | September 30 |       | June 30 |            | March 31(2)
|                                                                                |                |                                                |            |              |       |         |            |            
|                                                                                |                |                                               
|                                                                                |                | (in thousands except share and per share data)
|                                                                                |                |                                               
|Revenues                                                                        |                | $                                              | 77,149     |              |       | $       | 72,462     |             |       | $ | 78,981     |   |       | $ | 80,214     |  
|Less: agency commissions                                                        |                |                                                | (10,825    | )            |       |         | (10,507    | )           |       |   | (11,249    | ) |       |   | (10,899    | )
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Net revenues                                                                    |                |                                                | 66,324     |              |       |         | 61,955     |             |       |   | 67,732     |   |       |   | 69,315     |  
|Expenses, excluding depreciation, amortization
    and stock based compensation |                |                                                | 58,960     |              |       |         | 127,366    |             |       |   | 63,391     |   |       |   | 66,932     |  
|Depreciation and amortization                                                   |                |                                                | 23,903     |              |       |         | 24,213     |             |       |   | 24,136     |   |       |   | 23,996     |  
|Stock-based compensation                                                        |                |                                                | 4,426      |              |       |         | 2,546      |             |       |   | 2,071      |   |       |   | 1,118      |  
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Operating loss                                                                  |                | $                                              | (20,965    | )            |       | $       | (92,170    | )           |       | $ | (21,866    | ) |       | $ | (22,731    | )
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Net loss attributable to common stockholders
    before extraordinary charge    |                | $                                              | (71,336    | )            |       | $       | (139,640   | )           |       | $ | (59,721    | ) |       | $ | (69,838    | )
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Net loss attributable to common stockholders                                    |                | $                                              | (71,336    | )            |       | $       | (149,543   | )           |       | $ | (59,721    | ) |       | $ | (69,838    | )
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Basic and diluted loss per share before
    extraordinary charge                |                | $                                              | (1.10      | )            |       | $       | (2.16      | )           |       | $ | (0.93      | ) |       | $ | (1.09      | )
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|Weighted average common shares outstanding                                      |                |                                                | 64,657,508 |              |       |         | 64,602,832 |             |       |   | 64,482,532 |   |       |   | 64,288,943 |  
|                                                                                |                |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |  
|                                                                                | Stock price(1) |                                                |            |              |       |         |            |             |       |   |            |   |       |   |            |   |      
|                                                                                |                | High                                           |            | $            | 10.50 |         |            | $           | 12.75 |   |            | $ | 14.00 |   |            | $ | 12.48 | 
|                                                                                |                | Low                                            |            | $            | 6.85  |         |            | $           | 7.00  |   |            | $ | 9.70  |   |            | $ | 8.75  | 






|    |                                                                                                      
|--- | -----------------------------------------------------------------------------------------------------
|(1) | The Companys Class A common stock is
    listed on the American Stock Exchange under the symbol PAX.

21. SUBSEQUENT EVENTS:

In January 2003, the Company consummated a stock
option exchange offer under which the Company granted to holders
who tendered their eligible options in the exchange offer, new
options under the Companys 1998 Stock Incentive Plan, as
amended, to purchase one share of the Companys
Class A common stock for each two shares of Class A
common stock issuable upon the exercise of tendered options, at
an exercise price of $0.01 per share. Because the terms of the
new options provided for a one business day exercise period, all
holders who tendered their eligible options in the exchange
offer exercised their new options promptly after the issuance of
those new options. Approximately 7.3 million options were
tendered in the exchange and approximately 2.6 million new
shares of Class A common stock issued upon exercise of the
new options. The stock option exchange will result in a fixed
non-cash stock-based compensation expense of approximately $8.5
million, of which approximately $5.8 million related to vested
shares will be recognized in the first quarter of 2003 and the
remaining $2.7 million will be recognized on a straight-line
basis over the remaining one year vesting schedule of the
modified award. In addition, the remaining deferred stock
compensation expense totaling approximately $2.5 million at
December 31, 2002 associated with the tendered options will
be recognized on a straight-line basis over the remaining one
year vesting schedule of the modified award.

In February 2003, the Company completed the sale
of its television station KPXF, serving the Fresno, California
market, for approximately $35 million. The Company expects to
recognize a pre-tax gain of approximately $27 million on this
sale. In February 2003, the Company entered into an agreement to
sell the assets of its television station KAPX, serving the
Albuquerque, New Mexico market, for a cash purchase price of
$20.0 million. The station sale is subject to regulatory and
other approvals.

As discussed in Note 11, in March 2003 the
Company obtained from its lenders a waiver of certain 2003
financial covenants.

F-40



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##### Table of Contents



SCHEDULE II

PAXSON COMMUNICATIONS CORPORATION






VALUATION AND QUALIFYING ACCOUNTS


For the Three Years Ended December 31,
2002


(In thousands)


|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |         | 
|----------------------------------------- | --------------------------------------- | ---------- | - | --------- |  | -------- | - | ---------- | --- | ---------- | - | ------ | ---- |  | - | ------ | ---- |  | - | ------- | 
|                                          |                                         |            |   |           |  |          |   |           
|Column A                                  |                                         | Column B   |   | Column C  |  | Column D |   | Column E  
|                                          |                                         |            |   |           |  |          |   |           
|                                          |                                         |            |   |           |  |          |   |           
|                                          |                                         |            |   | Additions |  |          |   |           
|                                          |                                         |            |   |           |  |          |   |           
|                                          |                                         |            |   | Charged   |  |          |   |            |     |           
|                                          |                                         | Balance at |   | to        |  |          |   |            |     | Balance at
|                                          |                                         | Beginning  |   | Costs and |  |          |   |            |     | End of    
|                                          |                                         | of Year    |   | Expenses  |  | Other    |   | Deductions |     | Year      
|                                          |                                         |            |   |           |  |          |   |            |     |           
|For the year ended December 31,
    2002: |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Allowance for doubtful accounts         |            | $ | 3,635     |  |          | $ | (126       | )   |            | $ |       |      |  | $ | (1,409 | )(1) |  | $ | 2,100   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Deferred tax assets valuation allowance |            | $ | 156,753   |  |          | $ | 191,357    | (2) |            | $ |       |      |  | $ |       |      |  | $ | 348,110 | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Restructuring reserves                  |            | $ | 2,099     |  |          | $ | 2,173      |     |            | $ |       |      |  | $ | (2,750 | )(3) |  | $ | 1,522   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|For the year ended December 31,
    2001: |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Allowance for doubtful accounts         |            | $ | 4,167     |  |          | $ | 2,119      |     |            | $ |       |      |  | $ | (2,651 | )(1) |  | $ | 3,635   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Deferred tax assets valuation allowance |            | $ | 84,204    |  |          | $ | 72,549(2   | )   |            | $ |       |      |  | $ |       |      |  | $ | 156,753 | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Restructuring reserves                  |            | $ | 5,677     |  |          | $ | (1,229     | )   |            | $ |       |      |  | $ | (2,349 | )(3) |  | $ | 2,099   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|For the year ended December 31,
    2000: |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Allowance for doubtful accounts         |            | $ | 4,255     |  |          | $ | 3,277      |     |            | $ |       |      |  | $ | (3,365 | )(1) |  | $ | 4,167   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Deferred tax assets valuation allowance |            | $ | 27,429    |  |          | $ | 63,498     | (2) |            | $ | (6,723 | )(4) |  | $ |       |      |  | $ | 84,204  | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        
|                                          | Restructuring reserves                  |            | $ |          |  |          | $ | 5,760      |     |            | $ |       |      |  | $ | (83    | )(3) |  | $ | 5,677   | 
|                                          |                                         |            |   |           |  |          |   |            |     |            |   |        |      |  |   |        |      |  |   |        






|    |                                                                                                                                         
|--- | ----------------------------------------------------------------------------------------------------------------------------------------
|(1) | Write off of uncollectible receivables.                                                                                                 
|(2) | Valuation allowance for net deferred tax assets
    due to uncertainty surrounding the Companys utilization of
    future tax benefits.
|(3) | Cash payments of termination benefits and lease
    obligations.                                                                        
|(4) | Effect of acquired deferred tax liabilities.                                                                                            

F-41