** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**Form 10-Q**

** **
| **x**                                                                                                                                                                                                                                                                                           | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934**  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                     |
| **For the  quarterly period ended September 30, 2006**                                                                                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                     |
| **OR**                                                                                                                                                                                                                                                                                          |
| ** **                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                     |
| **o**                                                                                                                                                                                                                                                                                           | ** ** | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15  (d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
| ** **                                                                                                                                                                                                                                                                                      | ** ** | ** **                                                                                     |
| **For the  transition period from                        to                     ** |

** **

**Commission File Number0-19728**

** **

**GRANITE BROADCASTING CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Delaware**              |   | **13-3458782**                        |
|---------------------------|--------|---------------------------------------|
| (State of  Incorporation) |   | (I.R.S. Employer  Identification No.) |

 

**767 Third Avenue, 34thFloor**

**New York, New York 10017**

**(212) 826-2530**

(Address, including zip code, and telephone number, 

including area code, of registrant’s principalexecutive offices)

 

Indicate by check mark whether the registrant(1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x   No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer or a non-accelerated filer. Seedefinition of “accelerated filer” and “large accelerated filer” in Rule 12b-2of the Exchange Act.
| (Check one): |   | Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |
|--------------|--------|--------------------------------|--------|--------------------------|--------|------------------------------|

 

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

(APPLICABLE ONLY TO CORPORATE ISSUERS:)

As ofNovember 3, 2006, the Registrant had 98,250 shares of Class A Voting CommonStock, par value $.01 per share outstanding; and 19,859,046 shares of CommonStock (Nonvoting), par value $.01 per share outstanding.

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**DOCUMENTS INCORPORATEDBY REFERENCE:   None**

 

 

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**GRANITEBROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**
|               | ** ** | ** **                                                                                                         | ** ** | **Page** |
|---------------|------------|--------------------------------------------------------------------------------------------------------------------|------------|----------|
| PART I        |       | FINANCIAL INFORMATION                                                                                              |       | 3        |
|          |       |                                                                                                               |       |     |
| Item 1.       |       | Financial Statements                                                                                               |       | 3        |
|          |       | Consolidated  Balance Sheets as of September 30, 2006 (unaudited) and December 31, 2005                            |       | 3        |
|          |       | Consolidated Statements of Operations for the Three  and Nine Months Ended September 30, 2006 and 2005 (unaudited) |       | 4        |
|          |       | Consolidated Statements of Cash Flows for the Nine  Months Ended September 30, 2006 and 2005 (unaudited)           |       | 5        |
|          |       | Notes to Consolidated Financial Statements                                                                         |       | 6        |
|          |       |                                                                                                               |       |     |
| Item 2.       |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                        |       | 27       |
| Item 3.       |       | Quantitative  and Qualitative Disclosures About Market Risk                                                        |       | 39       |
| Item 4.       |       | Controls and  Procedures                                                                                           |       | 40       |
|          |       |                                                                                                               |       |     |
| PART II  |       | OTHER INFORMATION                                                                                                  |       | 41       |
|          |       |                                                                                                               |       |     |
| Item 1.       |       | Legal Proceedings                                                                                                  |       | 41       |
| Item 1A. |       | Risk  Factors                                                                                                      |       | 42       |
| Item 2.       |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                       |       | 43       |
| Item 3.       |       | Defaults Upon  Senior Securities                                                                                   |       | 43       |
| Item 4.       |       | Submission of  Matters to a Vote of Security Holders                                                               |       | 43       |
| Item 5.       |       | Other Information                                                                                                  |       | 43       |
| Item  6.      |       | Exhibits                                                                                                           |       | 44       |
|          |       |                                                                                                               |       |     |
| SIGNATURES    |       | 45                                                                                                                 |

 

Granite Broadcasting Corporation is a Delawarecorporation. As used in this Quarterly Report on Form 10-Q and unless thecontext otherwise requires, (1) ”Granite,” the “Company,” “we,” “us” and “our”refer to Granite Broadcasting Corporation, together with its direct andindirect subsidiaries, and (2) ”Malara Broadcast Group” and “Malara” referto Malara Broadcast Group, Inc., together with its direct and indirectsubsidiaries. Our principal executive offices are located at 767 Third Avenue,34th Floor, New York, NY 10017, and our telephone number at that address is(212) 826-2530. Our web site is located at http://www.granitetv.com. Theinformation on our web site is not part of this report.

As of March 8, 2005, we have shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) relating to the two television stations ownedby Malara Broadcast Group, but do not own any of the equity interests in MalaraBroadcast Group. For a description of the relationship between us and MalaraBroadcast Group, see Item 2. “Management’s Discussion and Analysis of FinancialCondition and Results of Operations — Executive Summary.”

As of September 1, 2005, we have local serviceagreements relating to one television station owned by Four Seasons BroadcastCompany, but do not own any of the equity interests in Four Seasons BroadcastCompany. For a description of the relationship between us and Four SeasonsBroadcast Company, see Item 2. “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — Executive Summary.”

1

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**CAUTIONARY NOTE REGARDING FORWARD-LOOKINGSTATEMENTS**

Any statements that are included or incorporated byreference in this report or that are otherwise attributable to us or personsacting on our behalf, other than statements of historical fact, which addressactivities, events or developments that we expect or anticipate will or mayoccur in the future, including, without limitation, statements regardingexpected financial performance; future capital expenditures; projected revenuegrowth or synergies resulting from acquisitions and other transactions;anticipated completion of sales of assets under contracts of sale; efforts tocontrol or reduce costs; contingent liabilities; development or purchase of newprogramming; financing and reorganization efforts; expected competition; use ofdigital spectrum; our ability to service our outstanding debt; and businessstrategy, are “forward-looking statements”—that is, statements related tofuture, not past, events that are subject to risks and uncertainties. These forward-lookingstatements generally can be identified as statements that include phrases suchas “believe”, “project”, “target”, “predict”, “estimate”, “forecast”, “strategy”,“may”, “goal”, “expect”, “anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”,“should” or other similar words or phrases.  Although we believe suchstatements are based on reasonable assumptions, actual outcomes and results maydiffer materially from those projected.  Accordingly, all forward-lookingstatements should be evaluated with the understanding of their inherentuncertainty.  Important factors that could cause actual results to differmaterially from our expectations include, but are not limited to, those factorsdescribed under Item 1A. “Risk Factors” of our Annual Report on Form 10-K forthe year ended December 31, 2005, filed with the Securities and ExchangeCommission as modified by those factors described under Item 1A. “Risk Factors”of this Quarterly Report on Form 10-Q. We undertake no obligation to updateforward-looking statements, whether as a result of new information, futuredevelopments or otherwise, and disclaim any obligation to do so.

2

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**PART I. FINANCIAL INFORMATION**

***Item 1.****                         FinancialStatements*

**GRANITEBROADCASTING CORPORATIONCONSOLIDATED BALANCE SHEETS**
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                     | ** ** | **(Unaudited)**              | ** **  | ** **                  | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                         |       |                         |        |                        |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                                |       |                         |        |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                                                                                                                     |       | $                            | 18,228,888  |                        | $          | 8,629,044 |   |
| Restricted cash  equivalents                                                                                                                                                                                                                                                                                                                                                   |       | —                       |        | 24,997,500                  |       |
| Accounts  receivable, less allowance for doubtful accounts ($431,236 at September 30,  2006 and $632,156 at December 31, 2005)                                                                                                                                                                                                                                                 |       | 20,044,498                   |        | 22,388,546                  |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                          |       | 10,047,992                   |        | 7,331,096                   |       |
| Other current  assets                                                                                                                                                                                                                                                                                                                                                          |       | 8,433,125                    |        | 7,213,936                   |       |
| Total current  assets                                                                                                                                                                                                                                                                                                                                                          |       | 56,754,503                   |        | 70,560,122                  |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Restricted cash  equivalents                                                                                                                                                                                                                                                                                                                                                   |       | 1,000,000                    |        | —                      |       |
| Property and equipment,  net                                                                                                                                                                                                                                                                                                                                                   |       | 51,711,571                   |        | 49,574,351                  |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                           |       | 14,192,667                   |        | 2,548,419                   |       |
| Other non current  assets                                                                                                                                                                                                                                                                                                                                                      |       | 1,895,948                    |        | 836,975                     |       |
| Deferred financing  fees, less accumulated amortization ($8,658,900 at September 30, 2006 and  $4,334,405 at December 31, 2005)                                                                                                                                                                                                                                                |       | 10,750,930                   |        | 11,757,197                  |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                       |       | 98,607,697                   |        | 71,346,231                  |       |
| Broadcast licenses, net                                                                                                                                                                                                                                                                                                                                                        |       | 135,828,727                  |        | 134,038,727                 |       |
| Network affiliations,  net                                                                                                                                                                                                                                                                                                                                                     |       | 72,820,977                   |        | 65,174,688                  |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                                   |       | $                            | 443,563,020 |                        | $          | 405,836,710 |   |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                               |       | $                            | 3,816,143   |                        | $          | 1,828,003 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                               |       | 13,793,129                   |        | 3,290,625                   |       |
| Other accrued  liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 8,097,368                    |        | 8,236,736                   |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                                  |       | 28,150,678                   |        | 23,167,285                  |       |
| Current portion  of long-term debt                                                                                                                                                                                                                                                                                                                                             |       | 73,272,000                   |        | 25,844,000                  |       |
| Other current  liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 11,934,481                   |        | 9,120,118                   |       |
| Total current  liabilities                                                                                                                                                                                                                                                                                                                                                     |       | 139,063,799                  |        | 71,486,767                  |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Long-term debt, less  current portion                                                                                                                                                                                                                                                                                                                                          |       | 428,033,988                  |        | 428,871,456                 |       |
| Film contract rights  payable                                                                                                                                                                                                                                                                                                                                                  |       | 22,893,528                   |        | 12,972,056                  |       |
| Deferred tax liability                                                                                                                                                                                                                                                                                                                                                         |       | 49,006,509                   |        | 21,560,807                  |       |
| Redeemable preferred  stock                                                                                                                                                                                                                                                                                                                                                    |       | 199,457,594                  |        | 199,191,138                 |       |
| Accrued dividends on  redeemable preferred stock                                                                                                                                                                                                                                                                                                                               |       | 114,965,300                  |        | 95,804,417                  |       |
| Other non current liabilities                                                                                                                                                                                                                                                                                                                                                  |       | 4,201,515                    |        | 7,028,838                   |       |
|                                                                                                                                                                                                                                                                                                                                                                           |       |                         |        |                        |       |
| Stockholders’ deficit:                                                                                                                                                                                                                                                                                                                                                    |       |                         |        |                        |       |
| Common stock:  41,000,000 shares authorized consisting of 1,000,000 shares of Class A Common  Stock, $.01 par value, and 40,000,000 shares of Common Stock (Nonvoting),  $.01 par value; 98,250 shares of Class A Common Stock and 19,859,046 shares  of Common Stock (Nonvoting) (19,480,142 shares at December 31, 2005)  issued and outstanding at September 30, 2006. |       | 199,572                      |        | 195,783                     |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                                                                                                                    |       | 514,214                      |        | 393,701                     |       |
| Accumulated  deficit                                                                                                                                                                                                                                                                                                                                                           |       | (513,897,324                 | )           | (430,792,098                | )          |
| Unearned  compensation                                                                                                                                                                                                                                                                                                                                                         |       | —                       |        | (480                        | )          |
| Treasury stock,  at cost                                                                                                                                                                                                                                                                                                                                                       |       | (875,675                     | )           | (875,675                    | )          |
| Total  stockholders’ deficit                                                                                                                                                                                                                                                                                                                                              |       | (514,059,213                 | )           | (431,078,769                | )          |
| Total liabilities and stockholders’ deficit                                                                                                                                                                                                                                                                                                                               |       | $                            | 443,563,020 |                        | $          | 405,836,710 |   |

 

See accompanying notes.

3

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)**
| ** **                                                                                                                 | ** ** | **Three Months Ended  September 30,** | ** **  | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**                                             | ** **  | **2005**                                            | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Net revenues                                                                                                               |       | $                                                    | 30,109,194  |                                                | $          | 28,157,111 |   | $ | 90,752,825 |   | $ | 84,905,032 |   |
| Operating  expenses:                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 14,000,653                                           |        | 14,070,502                                          |       | 36,901,185 |   | 38,889,258 |   |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 9,988,639                                            |        | 9,407,424                                           |       | 28,808,803 |   | 27,649,367 |   |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 2,726,425                                            |        | 2,558,465                                           |       | 8,912,073 |   | 7,981,523 |   |
| Corporate  reorganization expense                                                                                          |       | 2,923,159                                            |        | —                                              |       | 4,307,330 |   | — |   |
| Depreciation                                                                                                               |       | 2,141,351                                            |        | 1,434,789                                           |       | 5,494,196 |   | 4,709,146 |   |
| Amortization of  intangible assets                                                                                         |       | 826,755                                              |        | 1,951,672                                           |       | 2,333,710 |   | 6,386,779 |   |
| Performance  award expense                                                                                                 |       | —                                               |        | 319,797                                             |       | 88,831 |   | 959,391 |   |
| Non-cash  compensation expense (1)                                                                                         |       | 36,710                                               |        | 94,146                                              |       | 147,605 |   | 282,296 |   |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Operating (loss) income                                                                                                    |       | (2,534,498                                           | )           | (1,679,684                                          | )          | 3,759,092 |   | (1,952,728 | ) |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Other expenses  (income):                                                                                                  |       |                                                 |        |                                                |       |   |   |   |   |
| Interest expense                                                                                                           |       | 12,592,686                                           |        | 11,172,520                                          |       | 34,875,531 |   | 32,503,642 |   |
| Interest income                                                                                                            |       | (152,666                                             | )           | (574,854                                            | )          | (537,057 | ) | (1,312,653 | ) |
| Non-cash interest expense                                                                                                  |       | 2,806,560                                            |        | 1,124,056                                           |       | 5,760,172 |   | 3,341,809 |   |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                                            |        | 6,386,961                                           |       | 19,160,883 |   | 19,160,883 |   |
| Other                                                                                                                      |       | (14,800                                              | )           | 22,080                                              |       | (22,003 | ) | 190,112 |   |
| Loss before  income taxes                                                                                                  |       | (24,153,239                                          | )           | (19,810,447                                         | )          | (55,478,434 | ) | (55,836,521 | ) |
| Provision  (benefit) for income taxes:                                                                                     |       |                                                 |        |                                                |       |   |   |   |   |
| Current                                                                                                                    |       | (95,732                                              | )           | 52,980                                              |       | 174,823 |   | 164,375 |   |
| Deferred                                                                                                                   |       | 12,074,887                                           |        | (209,066                                            | )          | 27,451,969 |   | (645,854 | ) |
| Total provision  (benefit) for income taxes                                                                                |       | 11,979,155                                           |        | (156,086                                            | )          | 27,626,792 |   | (481,479 | ) |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Net loss                                                                                                                   |       | $                                                    | (36,132,394 | )                                                   | $          | (19,654,361 | ) | $ | (83,105,226 | ) | $ | (55,355,042 | ) |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Basic and  diluted net loss per share                                                                                      |       | $                                                    | (1.81       | )                                                   | $          | (1.00 | ) | $ | (4.19 | ) | $ | (2.83 | ) |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                |       | 19,956,876                                           |        | 19,578,392                                          |       | 19,818,258 |   | 19,552,211 |   |
|                                                                                                                       |       |                                                 |        |                                                |       |   |   |   |   |

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(1)             Allocationof non-cash compensation expense to other operating expenses:

 
| Operating  expense - Selling, general and administrative expenses |   | $      | 16,956 |   | $      | 19,456 |   | $       | 50,868  |   | 58,226 |    |
|-------------------------------------------------------------------|--------|--------|--------|--------|--------|--------|--------|---------|---------|--------|--------|---------|
| Corporate  expense                                                |   | 19,754 |   | 74,690 |   | 96,737 |   | 224,070 |    |
| Non-cash compensation  expense                                    |   | $      | 36,710 |   | $      | 94,146 |   | $       | 147,605 |   | $      | 282,296 |   |
|                                                                   |        |        |        |        |        |        |        |         |         |        |        |         |  |

 

See accompanyingnotes.

4

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**
| ** **                                                                                 | ** ** | **Nine Months Ended  September 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2006**                                            | ** **  | **2005** | ** ** |
| ** **                                                                                 | ** ** | ** **                                          | ** **  | ** ** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                                |        |   |   |
| Net loss                                                                                   |       | $                                                   | (83,105,226 | ) | $ | (55,355,042 | ) |
|                                                                                       |       |                                                |        |   |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                                |        |   |   |
| Amortization of intangible assets                                                          |       | 2,333,710                                           |        | 6,386,779 |   |
| Depreciation                                                                               |       | 5,494,196                                           |        | 4,709,146 |   |
| Performance award expense                                                                  |       | 88,831                                              |        | 959,391 |   |
| Non-cash compensation expense                                                              |       | 147,605                                             |        | 282,296 |   |
| Non-cash interest expense                                                                  |       | 5,760,172                                           |        | 3,341,809 |   |
| Non-cash preferred stock dividend                                                          |       | 19,160,883                                          |        | 19,160,883 |   |
| Film amortization and impairment                                                           |       | 9,587,371                                           |        | 12,764,422 |   |
| Deferred tax provision (benefit)                                                           |       | 27,626,792                                          |        | (481,479 | ) |
| Change in assets  and liabilities:                                                         |       |                                                |        |   |   |
| Decrease in accounts receivable                                                            |       | 3,879,803                                           |        | 3,165,483 |   |
| Increase in accrued liabilities                                                            |       | 10,140,578                                          |        | 8,350,196 |   |
| Increase (decrease) in accounts payable                                                    |       | 1,972,131                                           |        | (775,782 | ) |
| WB affiliation payment                                                                     |       | —                                              |        | (1,261,714 | ) |
| Increase in film contract rights and other assets                                          |       | (26,216,072                                         | )           | (4,838,388 | ) |
| Increase (decrease) in film contract rights payable  and other liabilities                 |       | 13,542,424                                          |        | (7,960,282 | ) |
| Net cash used in operating activities                                                      |       | (9,586,802                                          | )           | (11,552,282 | ) |
|                                                                                       |       |                                                |        |   |   |
| Cash flows from  investing activities:                                                     |       |                                                |        |   |   |
| Sales of marketable securities and other investments                                       |       | 2,792                                               |        | 5,600,506 |   |
| Payment for acquisition of assets                                                          |       | (45,253,312                                         | )           | (55,742,424 | ) |
| Sales (purchase) of U.S. Government Securities                                             |       | 25,315,677                                          |        | (24,997,500 | ) |
| Capital expenditures                                                                       |       | (1,895,411                                          | )           | (2,755,698 | ) |
| Net cash used in investing activities                                                      |       | (21,830,254                                         | )           | (77,895,116 | ) |
|                                                                                       |       |                                                |        |   |   |
| Cash flows from  financing activities:                                                     |       |                                                |        |   |   |
| Proceeds from senior credit facility                                                       |       | —                                              |        | 53,500,000 |   |
| Proceeds from senior credit agreement                                                      |       | 70,000,000                                          |        | — |   |
| Payment of senior credit facility                                                          |       | (24,664,872                                         | )           | (691,884 | ) |
| Payment of deferred financing fees                                                         |       | (3,318,228                                          | )           | (2,242,401 | ) |
| Net cash provided by financing activities                                                  |       | 42,016,900                                          |        | 50,565,715 |   |
|                                                                                       |       |                                                |        |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |       | 10,599,844                                          |        | (38,881,683 | ) |
| Cash and cash  equivalents, beginning of period                                            |       | 8,629,044                                           |        | 60,858,710 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                                   | 19,228,888  |   | $ | 21,977,027 |   |
|                                                                                       |       |                                                |        |   |   |
| Supplemental  information:                                                                 |       |                                                |        |   |   |
| Cash paid for interest                                                                     |       | $                                                   | 23,718,309  |   | $ | 22,096,374 |   |
| Cash paid for income taxes                                                                 |       | 242,500                                             |        | 116,766 |   |
| Non-cash capital  expenditures                                                             |       | 190,082                                             |        | 258,833 |   |

 

See accompanying notes.

5

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***GRANITE BROADCASTING CORPORATIONNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)***

**Note 1 — Operations of the Company**

The business operations of Granite BroadcastingCorporation and its wholly owned subsidiaries (the “Company”) consist of ninefull-power television stations in the United States, consisting of fourNBC-affiliated television stations, one ABC-affiliated station, twoCBS-affiliated television stations, one MyNetworkTV-affiliated station and oneindependent station. The Company’s stations are located in New York,California, Michigan, Indiana, Illinois and Minnesota. Through various localservice agreements (as fully discussed below), the Company provides advertisingsales, promotion, administrative services and selected programming to two televisionstations owned and controlled by Malara Broadcast Group, Inc (“Malara BroadcastGroup”) and one television station owned and controlled by Four SeasonsBroadcast Company.

As more fully discussed in Note 3, the Companyacquired the Binghamton, New York CBS affiliate, WBNG-TV from TelevisionStation Group Holdings, LLC on July 26, 2006. In March 2005, the Company soldits Fort Wayne, Indiana ABC affiliate, WPTA-TV, to Malara Broadcast Group andacquired the Fort Wayne, Indiana NBC affiliate, WISE-TV from New Vision Group,LLC. Malara Broadcast Group also acquired KDLH-TV, the CBS affiliate servingDuluth, Minnesota from New Vision Group, LLC. The Company entered into astrategic arrangement with Malara Broadcast Group, under which the Company providesadvertising sales, promotion and administrative services, and selectedprogramming to WPTA-TV and KDLH-TV under local services agreements. Althoughthe Company does not own or control Malara Broadcast Group or its televisionstations, the Company is deemed to be the primary beneficiary of MalaraBroadcast Group as defined under Financial Accounting Standards BoardInterpretation No. 46, *Consolidation of VariableInterest Entities* (“Interpretation 46”). As a result, Interpretation46 requires the Company to consolidate Malara Broadcast Group’s financialposition, results of operations and cash flows.

In September 2005, the Company entered into astrategic arrangement with Four Seasons Broadcast Company, under which theCompany provides advertising sales, promotion and administrative services, andselected programming to WAOE-TV under local services agreements. The Companydoes not own or control Four Seasons Broadcast Company or its televisionstations, and pursuant to Interpretation 46, the Company is not deemed to bethe primary beneficiary of Four Seasons Broadcast Company and therefore, hasnot consolidated their results with the Company’s.

As more fully discussedin Note 6, on February 10, 2006, the letter of credit issued in March 2005 tosupport the $23.5 million Tranche A Term Loan was drawn upon in satisfaction ofMalara Broadcast Group’s obligations to such lenders under the Malara Tranche ATerm Loan following non-renewal of the letter of credit. The Company paid itsreimbursement obligation to the letter of credit issuer on February 10, 2006,using U.S. government securities which had been pledged in support of suchobligation. The $25 million Malara Broadcast Group Tranche B Term Loan and the$5 million revolving loan are secured by the assets of WPTA-TV and KDLH-TV, andguaranteed on an unsecured basis by the Company.

On September 8, 2005, the Company had entered into adefinitive agreement to sell substantially all of the assets of KBWB-TV, thethen WB affiliate serving the San Francisco, California television market, toAM Broadcasting KBWB, Inc. In addition, on September 8, 2005, the Company hadentered into a definitive agreement to sell substantially all of the assets ofWMYD-TV (formerly WDWB-TV), the then WB affiliate serving the Detroit, Michigantelevision market, to AM Broadcasting WDWB, Inc.

On May 1, 2006, the Company terminated such agreementsand entered into new separate definitive agreements to sell its two televisionstations, KBWB-TV serving San Francisco, California and WMYD-TV servingDetroit, Michigan to affiliates of DS Audible, LLC. On July 17, 2006, theCompany terminated the aforementioned agreements with affiliates of DS Audible,LLC. As of September 30, 2006, the Company intends to retain its San Francisco,California television station KBWB-TV and its Detroit, Michigan televisionstation WMYD-TV (see Note 7 — Discontinued Operations for further details).

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On May 17, 2006, the Company filed a lawsuit in theDelaware Court of Chancery regarding the termination by The WB TelevisionNetwork Partners, L.P. (“The WB”) of the Company’s WB affiliation agreementsfor its San Francisco and Detroit television stations. The lawsuit follows theJanuary 24, 2006 announcement of the merging of the UPN and WB televisionnetworks, and was filed against The WB, WB Communications, a division of TimeWarner Entertainment Company, L.P., CBS Corporation (“CBS”) and Warner BrothersEntertainment, Inc. (“Warner Brothers”). The lawsuit alleges, among other things, that The WB’s prematuretermination of the Company’s San Francisco and Detroit network affiliationagreements, and The WB’s repudiation of agreements to extend the terms of itsSan Francisco and Detroit network affiliation agreements, damaged the Companyand led to the termination of the then-existing agreements to sell thosestations to wholly-owned subsidiaries of AM Media Holdings, LLC. In addition,it alleges that Warner Brothers and CBS tortuously interfered with the Company’sSan Francisco and Detroit network affiliation agreements and the agreements toextend the terms of the San Francisco and Detroit network affiliationagreements. On August 4, 2006, The WB, WB Communications, Warner Brothers andCBS filed their answers to the complaint. The WB has asserted a counterclaim against the Company.  The two-count counterclaim alleges that theCompany has breached the San Francisco and Detroit network affiliationagreements by failing to make certain payments thereunder and that, as of July14, 2006, the Company owes The WB $2,523,428 under those agreements, plusinterest thereon.

For a discussion of other legal proceedings in whichthe Company is involved, please see Part II, Item 1 “Legal Proceedings” of thisreport.

In March 2006, WMYD-TV entered into an affiliationagreement with MyNetworkTV. MyNetworkTV was launched on September 5, 2006.  The Company’s San Francisco televisionstation, KBWB-TV currently operates as an independent after The WB ceased toprovide programming in September 2006.

On March 13, 2006, theCompany retained the services of Houlihan Lokey Howard & Zukin as itsfinancial advisors to assist the Company in the evaluation of strategic optionsand to advise it on available financing and capital reorganizationalternatives. For the nine months ended September 30, 2006, the Companyincurred $3,883,000 of corporate reorganization expense related to financialadvisors and other professionals retained in connection with reorganizationservices.

An interest payment of $19,744,000 on the Company’s 93¤4 %Senior Secured Notes (the “Notes”) was due on June 1, 2006. Since payment wasnot made within 30 days after June 1, 2006, an “Event of Default” under theIndenture (the “Indenture”) governing the Notes had occurred, which wassubsequently cured as described below.

On July 5, 2006, theCompany entered into a Credit and Guaranty Agreement with Silver Point FinanceLLC, as Administrative Agent, and the Lenders party thereto (the “Lenders”)from time to time (the “Credit Agreement”). The Credit Agreement provides fortwo secured loans: a $40 million Tranche A Term Loan and a Convertible TrancheB Term Loan for $30 million. The Tranche B Term Loan is presently convertible,at the option of the Lenders in the aggregate, into 200,000 shares of theCompany’s 12 3⁄4% Cumulative Exchangeable Preferred Stock (the “Preferred Stock”).Both term loans are secured by the existing assets of the Company and itssubsidiaries generally on a pari passu basis with the Notes. Both term loansmature on December 1, 2006.

On July 5, 2006, theCompany borrowed $27.5 million of the Tranche B Term Loan under the CreditAgreement and approximately $19.9 million of the proceeds were used to payinterest on the Notes that was due June 1, 2006, thus curing the Event ofDefault with respect to such Notes. The remaining proceeds of approximately$7.6 million became available for working capital purposes. On July 26, 2006,the Company borrowed the remaining $2.5 million of the Tranche B Term Loan and$40 million Tranche A Term Loan to complete the acquisition of WBNG-TV asdescribed below.

In connection with the execution of the CreditAgreement, the Indenture, dated as of December 22, 2003, between theCompany, the guarantors party thereto and The Bank of New York, as Trustee, assupplemented by the First Supplemental Indenture, dated as of March 9,2005, by and between the Company, the guarantors party thereto and The Bank ofNew York, as Trustee (the “Indenture”), was further supplemented by the SecondSupplemental Indenture, dated as of July 5, 2006, by and between the Company,the guarantors party thereto and The Bank of New York, as Trustee (the “SecondSupplemental Indenture”), under which, among other things, the Trustee agreedto act as collateral agent for the Lenders under the Credit Agreement. TheSecond Supplemental Indenture also makes conforming changes necessary to allowthe Company to enter into the Credit Agreement, grant liens securing thatindebtedness and makes certain other changes negotiated between the Company andthe beneficial owners of more than a majority of the principal amount of theoutstanding Notes (the “Majority Note Holders”).

In connection with the Second Supplemental Indenture,the Company entered into the Supplemental Agreement, dated as of July 5,2006, in relation to the Second Supplemental Indenture and the Credit andGuaranty Agreement, by and between the Company, the parties identified as “Guarantors”on the signature pages thereof and the parties identified as “QualifiedHolders” on the signature pages thereto (the “Supplemental Agreement”).The Supplemental Agreement provides the Majority Note Holders, among otherthings, with certain consent rights to actions by the Company, including, butnot limited to, incurring additional indebtedness, making certain types ofinvestments or acquisitions, selling assets, granting additional liens oncertain assets of the Company, and issuing or selling certain types ofadditional capital stock. The Supplemental Indenture provides that defaultsunder the Supplemental Agreement will be defaults under the Indenture.

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On August 1, 2006, the Company entered into a ThirdSupplemental Indenture, by and between the Company, the guarantors partythereto and The Bank of New York, as Trustee, which amends the Indenture inaccordance with the Supplemental Agreement.

On August 15, 2006, the Company entered into AmendmentNo. 1 under Credit and Guaranty Agreement (“Amendment No. 1”) to its CreditAgreement.  Amendment No. 1 extends fromAugust 15, 2006 to August 31, 2006: (i) the date by which the Company and its subsidiariesare obligated to execute an agreement on the terms of a comprehensivereorganization plan in form and substance acceptable to the lenders holdingmore than 50% of the aggregate loan exposure under the Credit Agreement; and(ii) the date by which the failure of Malara to refinance Malara’s existingcredit facility with a new credit facility from the lenders under the CreditAgreement would constitute an event of default under the Credit Agreement.  On August 31, 2006, the Company entered intoAmendment No. 2 and Limited Waiver to its Credit Agreement, which, among otherthings, further extended such deadline from August 31, 2006 to September 15,2006.

The Company hasexperienced annual operating losses over the past three years and at September30, 2006 had unrestricted cash and accumulated deficit of $18,229,000 and$513,897,000 respectively.

The Company, does not presently have enough cash tomake the December 1, 2006 interest payment of $19,744,000 on its Notes and torepay all amounts outstanding under its $70,000,000 Credit Agreement also dueon December 1, 2006. In order to improve the Company’s existing liquidityposition and to further the Company’s business strategy, the Company isreviewing all potential reorganization alternatives with respect to its debtobligations and preferred stock, including a reorganization under Chapter 11 ofthe Bankruptcy Code.  A lack of liquiditywould have a material adverse effect on the Company’s business strategy andtherefore affect its ability to continue as a going concern. The financialstatements do not include any adjustments to reflect the possible futureeffects on the recoverability and classification of assets or the amounts andclassification of liabilities that might result from the outcome of thisuncertainty.

**Note 2 — Summary ofSignificant Accounting Policies**

*InterimFinancial Statements*

The accompanying unaudited consolidated financialstatements include the accounts of the Company and have been prepared inaccordance with the instructions to Form 10-Q and do not include all of theinformation and footnotes required by United States generally acceptedaccounting principles for complete financial statements. Operating results forthe three and nine months ended September 30, 2006 are not necessarilyindicative of the results that may be expected for the year ended December 31,2006. For further information, refer to the Company’s consolidated financialstatements and notes thereto for the year ended December 31, 2005, which wereincluded in the Company’s Annual Report on Form 10-K for the year endedDecember 31, 2005. In the opinion of management, all adjustments of a normalrecurring nature, which are necessary for a fair presentation of the resultsfor the interim periods, have been made.

*Principlesof Consolidation*

The accompanying unaudited consolidated financialstatements include the accounts of Granite Broadcasting Corporation, its whollyowned subsidiaries and the accounts of independently-owned Malara BroadcastGroup where it has been determined that the Company is the primary beneficiaryof a variable interest entity in accordance with Interpretation 46. Allintercompany account balances and transactions have been eliminated inconsolidation.

Since March 2005, Malara Broadcast Group is includedin these consolidated financial statements. The Company does not own or control Malara Broadcast Group or itstelevision stations.  However, theCompany is deemed to be the primary beneficiary of Malara Broadcast Group asdefined by Interpretation 46 as a result of (i) the Company’s guarantee of theobligations incurred under Malara Broadcast Group’s Senior Secured CreditFacility, (ii) local service agreements the Company has with Malara BroadcastGroup and (iii) put or call option agreements the Company has with MalaraBroadcast Group to acquire all of the assets and assume the liabilities of eachMalara Broadcast Group television station, subject to approval by the FederalCommunications Commission (“FCC”).

In March 2005, the Company entered into a strategicarrangement with Malara Broadcast Group, under which the Company providesadvertising sales, promotion and administrative services, and selectedprogramming to WPTA-TV and KDLH-TV in return for certain fees that will be paidby Malara Broadcast Group to the Company. The fees payable to the Company willbe paid after current debt service as well as certain other expenses MalaraBroadcast Group incurs directly are satisfied. During the nine months endedSeptember 30, 2006, Malara Broadcast Group’s payments to the Company totaledapproximately $2,903,000 under the strategic arrangements between thecompanies. Malara Broadcast Group did not make any payments under the strategicagreements during the three months ended September 30, 2006. During the threeand nine months ended September 30, 2005, Malara Broadcast Group paid theCompany approximately $996,000 and $1,796,000, respectively under the strategicarrangements between the companies.  Asof September 30, 2006, the total amount owed to the Company from Malara BroadcastGroup under these strategic agreements totaled approximately $24,961,000.

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*DiscontinuedOperations*

At September 30, 2006, in accordance with theprovisions of Statement of Financial Accounting Standards No. 144 (“Statement144”), *Accounting for the Impairment or Disposal ofLong-Lived Assets,* the operating results of KBWB-TV, San Francisco,California, which had been reported as part of discontinued operations sinceSeptember 8, 2005, will be reported as part of continuing operations for theperiods ended September 30, 2006 and 2005 and their respective assets andliabilities as part of the consolidated “held and used” on the accompanyingbalance sheets for the periods ended September 30, 2006 and December 31, 2005.As of September 30, 2006, the Company was no longer committed to a plan to sellthe asset, the asset is no longer available for immediate sale and the Companyis not actively seeking buyers. (See Note 7 for further details.)

*Reclassification*

Certain balances in the prior period have been reclassifiedto conform to the current period’s presentation.

*Restricted Cash Equivalents*

On February 10, 2006, in accordance with the terms ofthe Malara Broadcast Group’s Senior Credit Facility, the letter of creditissued in March 2005 (see Note 6) to support the $23.5 million Tranche A TermLoan was drawn upon in satisfaction of Malara Broadcast Group’s obligations tosuch lenders Loans under the Malara Tranche A Term Loan following non-renewalof the letter of credit. The Company paid its reimbursement obligation to theletter of credit issuer on February 10, 2006, using U.S. government securitiesthat had been pledged in support of such obligation.

*Cash Equivalents and Investments in MarketableSecurities*

All highly liquidinvestments with a maturity of ninety days or less from the date of purchaseare considered cash equivalents. Marketable securities, if applicable, areclassified as available-for-sale in accordance with the provisions of Statementof Financial Accounting Standards No. 115, *Accounting for CertainInvestments in Debt and Equity Securities*. Marketable securities arecarried at fair market value based on current market quotes. Any unrealizedgains and losses are reported in stockholders’ equity as a separate componentof other comprehensive income / (loss) until realized. Gains and losses onsecurities sold are based on the specific identification method. The Companydoes not hold securities for speculative or trading purposes. At September 30,2006, the Company did not have any marketable securities.

*Property and Equipment*

Property and equipment are recorded at cost anddepreciated on a straight-line basis over their estimated useful lives, byasset classifications, ranging from a period of 3 to 40 years. Maintenance andrepairs are charged to operations as incurred.

*Stock-Based Compensation*

Prior to January 1, 2006,the Company accounted for employee stock option plans based on the intrinsicvalue method in accordance with Accounting Principles Board (APB) Opinion No.25, *Accounting for Stock Issued to Employees*,or APB 25, and related Interpretations and had adopted the disclosurerequirements of Statement of Financial Accounting Standards No.123, *Accounting for Stock-Based Compensation* or Statement 123 asamended by Statement of Financial Accounting Standards No.148, *Accounting for Stock-Based Compensation-Transition and Disclosure.*Accordingly, compensation cost for stock options was measured as the excess, ifany, of the quoted market price of the Company’s stock at the grant date overthe amount an employee must pay to acquire the stock. The Company granted stockoptions with exercise prices equal to the market price of the underlying stockon the date of grant, therefore, the Company did not record stock-basedcompensation expense under APB 25.

In December 2004, theFinancial Accounting Standards Board (FASB) issued Statement of FinancialAccounting Standards No. 123(R), *Share-Based Payments*or Statement 123(R) to require that compensation cost relating to share-basedpayment arrangements be recognized in the financial statements.

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Effective January 1,2006, the Company adopted Statement 123(R) using the modified prospectivemethod, which requires measurement of compensation cost for all stock-basedawards at fair value on date of grant and recognition of compensation over theservice period for awards expected to vest but that are unvested at the date ofadoption. Under this method, previously reported amounts are not restated. Thefair value of stock options were determined using the Black-Scholes valuationmodel, which is consistent with our valuation techniques previously utilizedfor stock options in footnote disclosures required under Statement 123. Suchfair value is recognized as expense over the service period, net of estimatedforfeitures. The adoption of Statement 123(R) resulted in no cumulative changein accounting as of the date of adoption.

The weighted average fairvalue of options outstanding during the three and nine months ended September30, 2006 was $1.39. These options vest over a period of one to three years. Thefair value for these options was estimated at the date of grant using aBlack-Scholes option pricing model with the following range of assumptions:risk-free interest rates of 2.93% to 3.19%, volatility factor of the expectedmarket price of the Company’s Common Stock of 0.59 — 1.03, assumed dividendyield of 0%, and a weighted-average expected life of the option of 5 years.

For the three and ninemonths ended September 30, 2006, stock option compensation expense ofapproximately $17,000 and $51,000, respectively, was charged to non-cashcompensation expense for unvested options granted prior to December 31, 2005.As of September 30, 2006, there was $78,000 of total unrecognized compensationcost, net of estimated forfeitures, related to nonvested share-basedcompensation arrangements, which is expected to be recognized over aweighted-average period of 1.7 years.

In April 1993, the Company adopted a Management StockPlan. Under the Management Stock Plan, the Company may select eligibleofficers, other key employees and non-employee directors of the Company and itssubsidiaries to receive a discretionary bonus of Common Stock (non-voting)based upon position, responsibilities, contributions and value to the Company andsuch other factors. The Company measures compensation expense for awardsgranted under the Management Stock Plan at fair value on the date of the grantand recognizes compensation expense over the related service period. The fairvalue of awards granted under the Management Stock Plan is determined based onthe number of shares granted and the quoted price of the Company’s common stockon the date of grant. The Company reserved 2,500,000 shares of common stock(non-voting) for issuance under the Management Stock Plan. As of September 30,2006, the Company had issued a total of 2,235,425 shares of Common Stock(non-voting) under the Management Stock Plan, of which 2,158,925 had vested.

For the three and ninemonths ended September 30, 2006, Management Stock Plan compensation expense ofapproximately $17,000 and $77,000 was charged to non-cash compensation expensefor grants under the Management Stock Plan. As of September 30, 2006, there was$91,000 of total unrecognized compensation cost, net of estimated forfeitures,related to nonvested awards, which is expected to be recognized over aweighted-average period of 2 years.

The following tableillustrates the effect on net loss and net loss per share for the three andnine months ended September 30, 2005 as if the Company had consistentlymeasured the compensation cost for the Company’s stock option programs underthe fair value method adopted on January 1, 2006:
| ** **                                                 | ** ** | **Three months ended  September 30,  2005** | ** **  | **Nine months ended  September 30,  2005** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------------|-------------|-----------------------------------------------------------|------------|
| ** **                                                 | ** ** | **(unaudited)**                                            | ** **  | **(unaudited)**                                           | ** ** |
| Net loss  attributable to common shareholders, as reported |       | $                                                          | (19,654,000 | )                                                         | $          | (55,355,000 | ) |
| Add: pro forma  compensation expense                       |       | 104,000                                                    |        | 313,000                                                   |       |
| Less:  compensation expense, as reported                   |       | (9,000                                                     | )           | (28,000                                                   | )          |
| Pro forma net  loss attributable to common shareholders    |       | $                                                          | (19,749,000 | )                                                         | $          | (55,640,000 | ) |
|                                                       |       |                                                       |        |                                                      |       |
| Basic and  diluted net loss per share, as reported         |       | $                                                          | (1.00       | )                                                         | $          | (2.83 | ) |
| Pro forma basic and  diluted net loss per share            |       | $                                                          | (1.01       | )                                                         | $          | (2.85 | ) |

 

The fair value for each option grant was estimated atthe date of grant using the Black-Scholes options pricing model. TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded options, which have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. TheCompany’s employee stock options have characteristics significantly differentfrom those of traded options and changes in the subjective input assumptionscan materially affect the fair value estimate.

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*Recent Accounting Pronouncements*

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FinancialInterpretation No. 48,*Accounting forUncertainty in Income Taxes,* or Interpretation 48.Interpretation 48, which clarifies the accounting for uncertainty in incometaxes by prescribing a recognition threshold for tax positions taken orexpected to be taken in a tax return. Interpretation 48 is effective for fiscalyears beginning after December 15, 2006. The Company is currently evaluating the impact, if any, Interpretation48 may have on its financial position, consolidated results of operations orstatement of cash flows.

**Note 3 —Acquisitions and Dispositions**

On July 26, 2006, the Company through a wholly ownedsubsidiary acquired substantially all of the assets of WBNG-TV the CBSaffiliate serving Binghamton and Elmira, New York from Television Station GroupHoldings, LLC, or Television Station Group, for approximately $45 million plusapproximately $253,000 of transactions costs, pursuant to the terms andconditions of an asset purchase agreement, dated January 13, 2006. Theacquisition was accounted for under the purchase method of accounting andaccordingly, the purchase price was allocated to liabilities acquired based ontheir estimated fair value on the acquisition date.

*WBNG*

Thefollowing table summarizes the allocation of the purchase price of WBNG-TV onJuly 26, 2006. The Company is currently obtaining a third-party valuation ofcertain acquired tangible and intangible assets and therefore the allocationbelow is preliminary and estimated and is subject to change once thethird-party valuation is completed. In addition, net assets acquired aresubject to future working capital adjustments and therefore the amount below ispreliminary and estimated and subject to change.

 

|                                                        | ** ** | **Value at  July 26, 2006** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| Purchase Price                                         |       | $                                          | 45,253,000 |   |
| Net Assets  Assumed                                    |       | (5,725,000                                 | )          |
| FCC License  (indefinite lived)                        |       | (1,790,000                                 | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (9,980,000                                 | )          |
| Goodwill (indefinite  lived)                           |       | $                                          | 27,758,000 |   |

 

Thefollowing unaudited pro forma information for the three and nine months endedSeptember 30, 2006 and 2005 has been presented as if the Company’s acquisitionof WBNG-TV had occurred on January 1, 2005:

 
| ** **                                    | ** ** | **Three Months Ended September 30,** | ** **  | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------|------------|----------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| ** **                                    | ** ** | **2006**                                                 | ** **  | **2005**                                                | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                                    | ** ** | **Pro Forma**                                       | ** **  | **Pro Forma**                                      | ** ** | **Pro Forma** | ** ** | **Pro Forma** | ** ** |
| Net Revenues                                  |       | $                                                        | 30,596,000  |                                                    | $          | 30,072,000 |   | $ | 95,054,000 |   | $ | 92,472,000 |   |
| Operating  Expenses                           |       | 32,958,000                                               |        | 31,008,000                                              |       | 89,563,000 |   | 91,647,000 |   |
| (Loss) income  from Operations                |       | (2,362,000                                               | )           | (936,000                                                | )          | 5,491,000 |   | 825,000 |   |
| Other Expenses                                |       | 21,927,000                                               |        | 19,974,000                                              |       | 63,232,000 |   | 59,414,000 |   |
| Loss before  taxes                            |       | (24,289,000                                              | )           | (20,910,000                                             | )          | (57,741,000 | ) | (58,589,000 | ) |
| Provision  (benefit) for income taxes         |       | 11,979,000                                               |        | (156,000                                                | )          | 27,627,000 |   | (481,000 | ) |
| Net loss  attributable to common shareholders |       | $                                                        | (36,268,000 | )                                                       | $          | (20,754,000 | ) | $ | (85,368,000 | ) | $ | (58,108,000 | ) |
|                                          |       |                                                     |        |                                                    |       |   |   |   |   |
| Basic and  diluted net loss per share         |       | $                                                        | (1.82       | )                                                       | $          | (1.06 | ) | $ | (4.31 | ) | $ | (2.97 | ) |
|                                          |       |                                                     |        |                                                    |       |   |   |   |   |
| Weighted average common  shares outstanding   |       | 19,957,000                                               |        | 19,578,000                                              |       | 19,818,000 |   | 19,552,000 |   |

 

Theselected unaudited pro forma information is presented for illustrative purposesonly and is not necessarily indicative of results of operations in the futureperiods or results that would have been achieved had the Company’s acquisitionof WBNG-TV occurred during the specified periods.

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**Note 4 —Related Parties**

In February 2003, the Compensation Committeerecommended, and the Board of Directors approved, an incentive award of$3,286,065 to each of Mr. Cornwell and Mr. Beck to be paid, subject to vestingterms, only upon the occurrence of the refinancing with a maturity of at leasttwo years, of the senior debt due April 15, 2004. On December 22, 2003, theCompany issued $405 million aggregate principal amount of 93¤4%Senior Secured Notes, the proceeds of which were used by the Company in part torepay all outstanding borrowings (plus accrued interest) under the Company’sthen outstanding senior credit agreement, which satisfied the performanceobjective of the awards. Mr. Cornwell’s award, which vested in one-thirdtranches over three years from the refinancing date, was to be used to repay infull his outstanding loan from the Company of $3,286,065 due January 25, 2006.Mr. Cornwell irrevocably elected to defer payment of the first two tranchesunder his performance award until January 25, 2006 when his loan was due. OnMarch 1, 2005, the Board of Directors approved the acceleration of payment ofthe third tranche of Mr. Cornwell’s award to January 25, 2006. The Company’sManagement Stock Plan, pursuant to which the performance award was granted,permits the Compensation Committee, in its sole discretion, to require as acondition to payment of an award, that the award recipient pay to the Companythe amount of any taxes that the Company is required to withhold. TheCompensation Committee has so elected to require Mr. Cornwell to pay to theCompany the applicable withholding taxes with respect to the performance award.Mr. Cornwell has informed the Company that he is unable to do so, since thefull amount of the performance award must be used to satisfy his outstandingloan from the Company. In light of the forgoing, the Company has neither paidthe performance award to Mr. Cornwell nor offset the amount of the award inrepayment of the loan, which loan remains due and payable.

On September 21, 2004, Mr. Beck resigned from theCompany to accept the appointment as Ambassador/Permanent Representative of theRepublic of Palau to the United Nations and entered into a separation agreementwith the Company at such time. In accordance with the separation agreement,among other terms, the Company and Mr. Beck amended the Performance Award anddeferral of such payments pursuant to the separation agreement. Under theamended terms of the Performance Award, Mr. Beck’s Performance Award fullyvested as of the separation date and payment of $221,200 was made on September30, 2004 to repay his outstanding promissory note to the Company. The remainingvested award of $3,065,000 is payable in cash on December 22, 2006. Mr. Beckremains on the Company’s Board of Directors

In addition, the Company modified the terms of Mr.Beck’s outstanding stock option awards to allow his options to continue to vestand have the right to exercise his options until the earlier of (i) the laterof January 2, 2007 and 30 days after the last day of Mr. Beck’s continuousservice on the Company’s Board of Directors and (ii) the fixed date on whicheach stock option award was initially set to expire.

**Note 5 — Restructuring and Severance Charges**

*Restructuring Charges*

During the first three months of 2006, the Companyrecorded a $34,000 restructuring charge related to stay-bonuses awarded totransitional employees at its Duluth, Minnesota television stations. As of theperiod ended March 31, 2006, the Company completed the separation paymentsrelated to the corporate restructuring charges recorded in 2004, and reducedits accrual by approximately $20,000 to adjust for payments of benefits andamounts originally accrued for.

During 2005 and 2004, the Company recordedrestructuring charges in the aggregate totaling $2,474,000. Of the total$2,474,000, approximately $1,406,000 related to severance and other benefits,associated with the departure of Stuart J. Beck (see Note 4, Related Parties)and administrative support staff at the corporate office which were paid overan eighteen month period from date of separation in September 2004 throughMarch 2006. As of September 30, 2006, the remaining restructuring chargesrelated to employee separations, which included severance, other benefits andstay-bonuses awarded to transitional employees at its Fort Wayne, Indianatelevision station. The Company anticipates that from time to time it willincur minimal restructuring charges in future periods as part of its continuedeffort to achieve and maintain cost control initiatives at its variousstations. These costs are not anticipated to be significant in nature andtherefore, will not be separately disclosed herein.

At September 30, 2006, the accruals for restructuringactivities were included in “other accrued liabilities” on the consolidatedbalance sheets and the related expense for the charge at the televisionstations are included in “selling, general and administrative expenses” on theconsolidated statement of operations. These costs were recognized in accordancewith the provisions of Statement of Financial Accounting StandardsNo. 146, *Accounting for Costs Associated with Exit orDisposal Activities*.

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*Acquisition Charges*

During 2005, the Company accrued $627,000 related toemployee separations, which included severance and other benefits as part ofthe Company’s purchase accounting. These accrued costs were a result ofemployees not retained by the Company subsequent to its acquisition of its FortWayne, Indiana television station, which included operational throughmanagement employees.

At September 30, 2006, the accruals for acquisitionactivities of the television station were included in “other accruedliabilities” on the consolidated balance sheets. These charges were recognizedin accordance with the provisions of Emerging Issues Task Force Issue No. 95-3 *Recognition of Liabilities in Connection with a Purchase BusinessCombination*.

The following is a reconciliation of the aggregateliability recorded for restructuring and acquisition charges as of September30, 2006:
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended September 30, 2006**                                                                    | ** ** |
| ** **           | ** ** | **June 30,  2006**                                                                                                               | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 14,200     |   | $ | — |   | $ | 10,600 |   | $ | 3,600 |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 14,200     |   | $ | — |   | $ | 10,600 |   | $ | 3,600 |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |

 
| ** **          | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|---------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **          | ** ** | **Nine Months Ended September 30, 2006**                                                                     | ** ** |
| ** **          | ** ** | **December 31,  2005**                                                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2006** | ** ** |
| Television stations |       | $                                                                                                                                     | 81,000     |   | $ | 34,000 |   | $ | 111,400 |   | $ | 3,600 |   |
| Corporate           |       | 192,000                                                                                                                               |       | (20,000 | ) | 172,000 |   | — |   |
|                |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total               |       | $                                                                                                                                     | 273,000    |   | $ | 14,000 |   | $ | 283,400 |   | $ | 3,600 |   |

 

The liability for the restructuring and acquisitioncharges will be paid in accordance with the provisions of the severanceagreements and payments are expected to be completed at various times through2006.

**Note6 — Debt**

Current portion of long-term debt consists of the following:

|                                                                             | ** ** | **September 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| Malara Broadcast  Group Senior Credit Facility                              |       | $                            | 3,272,000  |                        | $          | 25,844,000 |   |
| Tranche A Term  Loan and Tranche B Term Loan — Senior Credit Agreement |       | 70,000,000                   |       | —                      |       |
|                                                                        |       |                         |       |                        |       |
| Total                                                                       |       | $                            | 73,272,000 |                        | $          | 25,844,000 |   |

 

Long-term debt consists of the following:

 

|                                                                                                                                      | ** ** | **September 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|-------------|-----------------------------|------------|
| 93¤4%  Senior Secured Notes, due 2010, net of discount of $2,975,000 at September  30, 2006 and $3,504,000 at December 31, 2005 |       | $                            | 402,025,000 |                        | $          | 401,496,000 |   |
| Malara Broadcast  Group Senior Credit Facility, less current portion                                                                 |       | 26,009,000                   |        | 27,375,000                  |       |
|                                                                                                                                 |       |                         |        |                        |       |
| Total                                                                                                                                |       | $                            | 428,034,000 |                        | $          | 428,871,000 |   |

 

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*** ***

***The Company’s 9***3¤4% SeniorSecured Notes, Tranche A Term Loan and Convertible Tranche B Term Loan

On December 22,2003, the Company completed a $405,000,000 offering of its 93¤4% Senior Secured Notes (the “Notes”) due December 1, 2010, at a discount,resulting in proceeds of $400,067,100. Interest on the Notes is payable onDecember 1 and June 1 of each year, which commenced on June 1,2004. The Company used the net proceeds from the offering in part to(i) repay all outstanding borrowings, plus accrued interest, under itssenior credit agreement, (ii) redeem at par, plus accrued interest, all ofits 9 3/8 % and 10 3/8 % senior subordinated notes due May andDecember 2005, respectively, and (iii) to repurchase at par, plusaccrued interest, all of its 8 7/8 % senior subordinated notes dueMay 2008. The remaining proceeds were invested in short-term securities aswell as being used for general working capital purposes.

On July 5, 2006, the Company entered into a Credit andGuaranty Agreement with Silver Point Finance LLC, as Administrative Agent, andthe Lenders party (the “Lenders”) thereto from time to time (the “CreditAgreement”). The Credit Agreement provides for two secured loans: a $40 millionTranche A Term Loan and a Convertible Tranche B Term Loan for $30 million. TheTranche B Term Loan is presently convertible, at the option of the Lenders inthe aggregate, into 200,000 shares of the Company’s 12 3⁄4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”). Both term loans aresecured by the existing assets of the Company and its subsidiaries generally ona pari passu basis with its Notes. Both term loans mature on December 1,2006.  On July 5, 2006, the Companyborrowed $27.5 million of the Tranche B Term Loan and approximately $19.9million of the proceeds were used to pay interest on the Notes that was dueJune 1, 2006. The remaining proceeds of approximately $7.6 million becameavailable for working capital purposes. On July 26, 2006, the Company borrowedthe remaining $2.5 million of the Tranche B Term Loan and $40 million Tranche ATerm Loan to complete the acquisition of WBNG-TV (see above for furtherdetails.) Interest on the Credit Agreement, which is LIBOR plus 5.0%, ispayable generally on the last day of each month and/or the last day of eachinterest period, which commenced on July 31, 2006. As of September 30, 2006,the Company incurred approximately $1,528,000 of interest expense on the $70million Credit Agreement entered into on July 5, 2006.

In connection with the execution of the CreditAgreement, the Indenture, dated as of December 22, 2003, between theCompany, the guarantors party thereto and The Bank of New York, as Trustee, assupplemented by the First Supplemental Indenture, dated as of March 9,2005, by and between the Company, the guarantors party thereto and The Bank ofNew York, as Trustee (the “Indenture”), was further supplemented by the SecondSupplemental Indenture, dated as of July 5, 2006, by and between theCompany, the guarantors party thereto and The Bank of New York, as Trustee (the“Second Supplemental Indenture”).

The Second Supplemental Indenture adds WBNG, Inc.and WBNG License, Inc., the WBNG entities (which the Company completed theacquisition on July 26, 2006, see above for further details) as guarantors tothe Indenture. The Lenders have a first lien on the assets of WBNG, Inc andWBNG License, Inc. Note holders have a second lien in the assets of WBNG,Inc and WBNG License, Inc. Additionally, the Trustee agreed to act ascollateral agent for the Lenders under the Credit Agreement. The SecondSupplemental Indenture also makes conforming changes necessary to allow theCompany to enter into the Credit Agreement, grant liens securing thatindebtedness and makes certain other changes negotiated between the Company andthe beneficial owners of more than a majority of the principal amount of theoutstanding Notes (the “Majority Note Holders”).

In connection with the Second Supplemental Indenture,the Company entered into the Supplemental Agreement, dated as of July 5,2006, in relation to the Second Supplemental Indenture and the Credit andGuaranty Agreement, each dated as of July 5, 2006 by and between theCompany, the parties identified as “Guarantors” on the signaturepages thereof  and the parties identified as “Qualified Holders” onthe signature pages thereto (the “Supplemental Agreement”). TheSupplemental Agreement provides the Majority Note Holders, among other things,with certain consent rights to actions by the Company, including, but notlimited to, incurring additional indebtedness, making certain types ofinvestments or acquisitions, selling assets, granting additional liens oncertain assets of the Company, and issuing or selling certain types ofadditional capital stock. The Supplemental Indenture provides that defaultsunder the Supplemental Agreement will be defaults under the Indenture.

On August 15, 2006, the Company entered into AmendmentNo. 1 under Credit and Guaranty Agreement (“Amendment No. 1”) to its CreditAgreement.  Amendment No. 1 extends fromAugust 15, 2006 to August 31, 2006: (i) the date by which the Company and itssubsidiaries are obligated to execute an agreement on the terms of acomprehensive reorganization plan in form and substance acceptable to thelenders holding more than 50% of the aggregate loan exposure under the CreditAgreement; and (ii) the date by which the failure of Malara to refinanceMalara’s existing credit facility with a new credit facility from the lendersunder the Credit Agreement would constitute an event of default under theCredit Agreement.  On August 31, 2006,the Company entered into Amendment No. 2 and Limited Waiver to its CreditAgreement, which, among other things, further extended such deadline fromAugust 31, 2006 to September 15, 2006.

The Credit Agreement, asamended, contains certain covenants, including the following: (i) the Companymust submit to the administrative agent a proposed comprehensive reorganizationplan for the Company no later than September 15, 2006; (ii) the Company mustsign a definitive agreement effectuating a comprehensive reorganization of theCompany in form and substance satisfactory to the lenders holding 51% of theloans by September 15, 2006; (iii) the Company must maintain a minimumbroadcast cash flow; (iv) the Company must not make or incur consolidatedcapital expenditures in excess of $4,038,000; and (v) the Company’s ability toincur incremental indebtedness, issue capital stock, make investments oracquire or dispose of assets is restricted.

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The Credit Agreement, asamended, specifies certain events of default, including the following: (i)failure to make payments when due under the Credit Agreement; (ii) certaindefaults in other agreements concerning indebtedness; (iii) failure of theCompany to enter into a definitive agreement effectuating a comprehensivereorganization of the Company in form and substance satisfactory to the lendersholding 51% of the loans by September 15, 2006; (iv) material breach of arepresentation; (v) involuntary or voluntary bankruptcy; (vi) judgment, writsor warrants of attachment in the aggregate amount in excess of $2,000,000 shallbe entered or filed against the Company and remain un-discharged for 30 days;(vii) the failure of Malara Broadcast Group to refinance the Malara BroadcastGroup senior credit facility with a new facility from the lenders by September15, 2006; and (viii) the failure of the Company to execute and deliver asupplement to Indenture on or prior to July 31, 2006 in accordance with theSupplemental Agreement.

Sincethe Company has not yet entered into such a reorganization agreement and MalaraBroadcast Group has not yet refinanced its existing credit facility with such anew facility, which constitute events of default under the Credit Agreement, uponthe Company’s receipt of notice from the administrative agent under the CreditAgreement, among other things: (a) the unpaid principal amount of and accruedinterest on the loans and all other obligations under the Credit Agreementshall become due and payable and (b) the administrative agent may causecollateral agent to enforce any and all liens and security interests createdpursuant to collateral documents under the Credit Agreement. Theoccurrence of any acceleration of debt due under the Credit Agreement wouldconstitute an event of default under the Indenture. The Company andadministrative agent are continuing to work on a comprehensive reorganizationsatisfactory to the lenders holding 51% of the loans and Malara Broadcast Groupcontinues to work on refinancing its existing credit facility and as ofNovember 13, 2006, the Company has not received a default notice.

On August 1, 2006, the Company entered into a ThirdSupplemental Indenture, by and between the Company, the guarantors partythereto and The Bank of New York, as Trustee, which amends the Indenture inaccordance with the Supplemental Agreement.

The Notes and Credit Agreement are the Company’s seniorsecured obligations. The Notes are guaranteed by each of the Company’srestricted subsidiaries. The Credit Agreement is guaranteed by all of theCompany’s subsidiaries. The Notes, Credit Agreement and the guarantees aresecured by substantially all of the Company’s assets. The Company may redeemsome or all of the Notes at any time on or after December 1, 2006.

The Indenture, which governs the Company’s Notes, andthe Credit Agreement restrict the Company’s ability and the ability of itsrestricted subsidiaries to, among other things: (i) incur additional debtand issue preferred stock; (ii) make certain distributions, investmentsand other restricted payments; (iii) create certain liens; (iv) enterinto transactions with affiliates; (v) enter into agreements that restrictits restricted subsidiaries from making payments to the Company;(vi) merge, consolidate or sell substantially all of its assets;(vii) sell or acquire assets; and (viii) enter into new lines ofbusiness.

The Malara Broadcast Group companies to which theCompany provides services pursuant to the local services agreements are subjectto the terms of the Indenture applicable to Restricted Subsidiaries that arenot Guarantors, as such terms are defined in the Indenture.

***Malara Broadcast Group’s Senior Credit Facility***

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV in March 2005 with the proceeds of the MalaraBroadcast Group Senior Credit Facility, consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Tranche A Term Loan, which was secured by a letter of credit,was repaid on February 10, 2006. To secure the reimbursement obligationsin the event of a draw on the letter of credit, pursuant to the terms andconditions of an Application and Agreement for Standby Letter of Credit, theCompany had pledged $25 million of U.S. Government Securities. To the****extent that principal payments were made on the Tranche ATerm Loan, the letter of credit was to be proportionately reduced and theCompany was to be permitted to proportionately reduce the amount of the pledgedU.S. Government Securities.  The $25million Malara Broadcast Group Term Loan B and the $5 million revolving loanare secured by the assets of WPTA-TV and KDLH-TV, and guaranteed on anunsecured basis by the Company pursuant to a guaranty agreement (the “GraniteGuaranty”).

15

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The Malara Broadcast Group Senior Credit Facility contains covenants restricting the ability of Malara Broadcast Group and its subsidiaries to, among other things, (i) incur additional debt, (ii) incur liens, (iii) make loans and investments, (iv) incur contingent obligations (including hedging arrangements), (v) declare dividends or redeem or repurchase capital stock or debt, (vi) engage in certain mergers, acquisitions and asset sales, (vii) engage in transactions with affiliates, (viii) engage in sale-leaseback transactions and (ix) change the nature of its business and the business conducted by its subsidiaries.  Malara Broadcast Group is also required to comply with financial covenants with respect to a minimum interest coverage ratio, minimum consolidated available cash flow, a maximum leverage ratio and minimum consolidated net revenue and limits on capital expenditures.

Interest rates associated with the Tranche A Term Loanwere based, at Malara Broadcast Group’s option, at either (i) the higherof the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as suchterms are defined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Tranche BTerm Loan and Revolving Loan are based, at Malara Broadcast Group’s option, oneither (i) the Base Rate plus 4.625% per annum or (ii) the AdjustedEurodollar Rate plus 7.375% per annum. In addition, Deferred Interest (as defined in the Malara Broadcast GroupSenior Credit Facility) accrues with respect to, and is added to the principalamount of, the Tranche B Term Loan and Revolving Loan at a rate of 3% perannum. Additionally, Malara Broadcast Group is required to pay monthlycommitment fees on the unused portion of its revolving loan commitment at arate of 0.50% per annum.  Cash interestpayments are payable monthly.

Malara Broadcast Group is required to make monthlyprincipal payments on the Tranche B Term Loan as follows: (i) $125,000payable at the end of each month from June 1, 2006 through March 31,2007, (ii) $158,333 payable at the end of each month from April 1,2007, through March 31, 2008, and (iii) $216,667 payable at the endof each month from April 1, 2008, through February 1, 2010.

Malara Broadcast Group was required to make monthlyprincipal payments on the Tranche A Term Loan and the Revolving Loan equal tothe product of (i) the Repayment Percentage (which is 25% unless there isan Event of Default or the Consolidated Loan to Stick Value is less than 70%,in which case the Repayment Percentage is 100%) and (ii) the ConsolidatedExcess Free Cash Flow for the month preceding the month in which suchinstallment is due, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  All suchpayments would have been applied first to repay the outstanding Revolving Loanto the full extent thereof (without a corresponding reduction in the RevolvingLoan Commitment Amount) and second to repay the outstanding Tranche A Term Loanto the full extent thereof; provided that, if the Repayment Percentage for suchmonthly installment is 100%, the excess 75% of such monthly installment shallbe applied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Tranche B Term Loan to the fullextent thereof. For the three and nine months ended September 30, 2006, thetotal principal payments made on the Revolving Loan and Tranche B Term Loanapproximated $290,000 and $1,114,000, respectively, and total principalpayments made to date approximated $2,135,000.

OnFebruary 10, 2006, in accordance with the terms of the Malara BroadcastGroup Senior Credit Facility, the letter of credit issued in March 2005 tosupport the $23.5 million Tranche A Term Loan was drawn upon in satisfaction ofMalara Broadcast Group’s obligations to such lenders under the Malara Tranche ATerm Loan following non-renewal of the letter of credit. The Company paidthe reimbursement obligation to the letter of credit issuer onFebruary 10, 2006, using U.S. government securities which had been pledgedin support of such obligation.

Under a ReimbursementAgreement dated as of March 8, 2005 (the “*ReimbursementAgreement*”) among the Company, Malara Broadcast Group and certain ofMalara Broadcast Group’s subsidiaries (together with Malara, the “*Malara Borrowers*”), the Malara Borrowers agreed to repay theCompany any amounts drawn on the letter of credit plus interest at a rate of 8%per annum.  The Company reduced the $23.5million owed from Malara Broadcast Group under the Reimbursement Agreement byapproximately $6.9 million to $16.6 million.

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**Note 7 — Discontinued Operations**

In accordance with the provisions of Statement 144,the Company will report the operating results of WMYD-TV and KBWB-TV as part ofcontinuing operations for the periods ended September 30, 2006 and 2005 andtheir respective assets and liabilities as “held and used” on the accompanyingbalance sheets for the periods ended September 30, 2006 and December 31, 2005.The Company previously reported the operating results of WMYD-TV as part ofdiscontinued operations and their respective assets and liabilities as “heldfor sale” from September 8, 2005 through March 31, 2006. In addition, theCompany previously reported the operating results of KBWB-TV as part ofdiscontinued operations and their respective assets and liabilities as “heldfor sale” from September 8, 2005 through June 30, 2006.

**Agreements to sell KBWB and WMYD (formerly WDWB)**

On September 8, 2005, the Company had enteredinto a definitive agreement to sell substantially all of the assets of KBWB-TV,the WB affiliate serving the San Francisco, California television market, tothe AM Broadcasting KBWB, Inc. In addition, on September 8, 2005, theCompany had entered into a definitive agreement to sell substantially all ofthe assets of WMYD-TV (formerly WDWB-TV), the WB affiliate serving the DetroitMichigan television market, to the AM Broadcasting WDWB, Inc.

On May 1, 2006, the Company terminated suchagreements and entered into new separate definitive agreements to sell KBWB-TVserving San Francisco, California and WMYD-TV serving Detroit, Michigan toaffiliates of DS Audible, LLC.

On July 17, 2006, the Company terminated itsagreements to sell KBWB-TV serving San Francisco, California and WMYD-TVserving Detroit, Michigan to affiliates of DS Audible, LLC. Also, on July 17,2006, the Company announced its intentions to continue to market its SanFrancisco, California television station KBWB-TV while retaining its Detroit,Michigan television station WMYD-TV. As a result of the aforementioned, duringthe three months ended June 30, 2006, the Company recorded approximately$500,000 of depreciation expense which would have been recorded on the assetsof WMYD-TV for the period September 9, 2005 through June 30, 2006, when theassets and liabilities of WMYD-TV were initially classified as “held for sale”and depreciation had ceased.

As of September 30, 2006, the Company reevaluated itsintentions to continue to market KBWB-TV and determined not to sell the assetin the near term, and as such the asset is no longer available for immediatesale and the Company is not actively seeking buyers. As a result of theaforementioned, during the three months ended September 30, 2006, the Companyrecorded approximately $696,000 of depreciation expense which would have beenrecorded on the assets of KBWB-TV for the period September 9, 2005 throughSeptember 30, 2006, when the assets and liabilities of KBWB-TV were initiallyclassified as “held for sale” and depreciation had ceased.

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**Note8 — Condensed Consolidating Financial Information**

The Granite Broadcasting Corporation column representsthe registrant’s financial information. The Malara Broadcast Group columnrepresents the consolidated financial information of Malara Broadcast Group, anindependently owned entity in which the Company is deemed to be the primarybeneficiary (see Note 3) and is required to be consolidated as a variableinterest entity in accordance with Interpretation 46.

**BALANCE SHEETSeptember 30, 2006(Unaudited)**
| ** **                                       | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|--------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                       | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                           |       |                                   |        |                         |       |             |       |                      |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Current assets:                                  |       |                                   |        |                         |       |             |       |                      |        |
| Cash and cash  equivalents                       |       | $                                      | 14,671,240  |                         | $          | 3,557,648        |       | $                         | —      |   | $ | 18,228,888 |   |
| Accounts  receivable, net                        |       | 17,908,040                             |        | 2,136,458                    |       | —           |       | 20,044,498                |        |
| Other current  assets                            |       | 17,569,726                             |        | 911,391                      |       | —           |       | 18,481,117                |        |
| Due from  consolidated entity                    |       | 24,879,810                             |        | 7,046                        |       | (24,886,856      | )          | —                    |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Total current  assets                            |       | 75,028,816                             |        | 6,612,543                    |       | (24,886,856      | )          | 56,754,503                |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Restricted cash  equivalents                     |       | 1,000,000                              |        | —                       |       | —           |       | 1,000,000                 |        |
| Property and equipment,  net                     |       | 42,462,496                             |        | 9,249,075                    |       | —           |       | 51,711,571                |        |
| Other non current  assets                        |       | 46,740,679                             |        | 1,196,881                    |       | (21,098,015      | )          | 26,839,545                |        |
| Intangibles, net                                 |       | 290,923,922                            |        | 44,064,579                   |       | (27,731,100      | )          | 307,257,401               |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Total assets                                     |       | $                                      | 456,155,913 |                         | $          | 61,123,078       |       | $                         | (73,715,971 | ) | $ | 443,563,020 |   |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Liabilities and  stockholders’ deficit      |       |                                   |        |                         |       |             |       |                      |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Current liabilities:                             |       |                                   |        |                         |       |             |       |                      |        |
| Accounts payable  and other accrued liabilities  |       | $                                      | 25,253,049  |                         | $          | 453,591          |       | $                         | —      |   | $ | 25,706,640 |   |
| Current portion  of long-term debt               |       | 70,000,000                             |        | 3,272,000                    |       | —           |       | 73,272,000                |        |
| Other current  liabilities                       |       | 39,128,408                             |        | 956,751                      |       | —           |       | 40,085,159                |        |
| Due to  consolidated entity                      |       | 7,046                                  |        | 24,879,810                   |       | (24,886,856      | )          | —                    |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Total current  liabilities                       |       | 134,388,503                            |        | 29,562,152                   |       | (24,886,856      | )          | 139,063,799               |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Long-term debt, less  current portion            |       | 402,024,523                            |        | 42,615,737                   |       | (16,606,272      | )          | 428,033,988               |        |
| Other non current  liabilities                   |       | 75,934,812                             |        | 4,658,483                    |       | (4,491,743       | )          | 76,101,552                |        |
| Redeemable preferred  stock                      |       | 199,457,594                            |        | —                       |       | —           |       | 199,457,594               |        |
| Accrued dividends on  redeemable preferred stock |       | 114,965,300                            |        | —                       |       | —           |       | 114,965,300               |        |
|                                             |       |                                   |        |                         |       |             |       |                      |        |
| Stockholders’ deficit:                      |       |                                   |        |                         |       |             |       |                      |        |
| Common stock                                     |       | 199,572                                |        | —                       |       | —           |       | 199,572                   |        |
| Additional paid-in  capital                      |       | 514,214                                |        | —                       |       | —           |       | 514,214                   |        |
| Accumulated  deficit                             |       | (470,452,930                           | )           | (15,713,294                  | )          | (27,731,100      | )          | (513,897,324              | )           |
| Treasury stock,  at cost                         |       | (875,675                               | )           | —                       |       | —           |       | (875,675                  | )           |
| Total  stockholders’ deficit                |       | (470,614,819                           | )           | (15,713,294                  | )          | (27,731,100      | )          | (514,059,213              | )           |
| Total liabilities and stockholders’ deficit |       | $                                      | 456,155,913 |                         | $          | 61,123,078       |       | $                         | (73,715,971 | ) | $ | 443,563,020 |   |

 

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**BALANCE SHEETDecember 31, 2005**
| ** **                                        | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|---------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                        | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                            |       |                                   |        |                         |       |             |       |                      |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Current assets:                                   |       |                                   |        |                         |       |             |       |                      |        |
| Cash and cash equivalents                         |       | $                                      | 6,803,511   |                         | $          | 1,825,533        |       | $                         | —      |   | $ | 8,629,044 |   |
| Accounts receivable, net                          |       | 19,373,183                             |        | 3,015,363                    |       | —           |       | 22,388,546                |        |
| Other current assets                              |       | 13,707,566                             |        | 837,466                      |       | —           |       | 14,545,032                |        |
| Restricted cash equivalents                       |       | 24,997,500                             |        | —                       |       | —           |       | 24,997,500                |        |
| Due from consolidated entity                      |       | 14,773,036                             |        | 10,864                       |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Total current assets                              |       | 79,654,796                             |        | 5,689,226                    |       | (14,783,900      | )          | 70,560,122                |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Property and  equipment, net                      |       | 40,232,011                             |        | 9,342,340                    |       | —           |       | 49,574,351                |        |
| Other non  current assets                         |       | 17,477,126                             |        | 1,312,134                    |       | (3,646,668       | )          | 15,142,592                |        |
| Intangibles, net                                  |       | 253,550,014                            |        | 44,740,731                   |       | (27,731,100      | )          | 270,559,645               |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Total assets                                      |       | $                                      | 390,913,947 |                         | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Liabilities and  stockholders’ deficit       |       |                                   |        |                         |       |             |       |                      |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Current  liabilities:                             |       |                                   |        |                         |       |             |       |                      |        |
| Accounts payable and other accrued liabilities    |       | $                                      | 12,747,328  |                         | $          | 608,036          |       | $                         | —      |   | $ | 13,355,364 |   |
| Current portion of long-term debt                 |       | —                                 |        | 25,844,000                   |       | —           |       | 25,844,000                |        |
| Other current liabilities                         |       | 31,176,729                             |        | 1,110,674                    |       | —           |       | 32,287,403                |        |
| Due to consolidated entity                        |       | 10,864                                 |        | 14,773,036                   |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Total current liabilities                         |       | 43,934,921                             |        | 42,335,746                   |       | (14,783,900      | )          | 71,486,767                |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Long-term debt,  less current portion             |       | 401,495,998                            |        | 27,375,458                   |       | —           |       | 428,871,456               |        |
| Other non  current liabilities                    |       | 41,287,350                             |        | 3,921,019                    |       | (3,646,668       | )          | 41,561,701                |        |
| Redeemable  preferred stock                       |       | 199,191,138                            |        | —                       |       | —           |       | 199,191,138               |        |
| Accrued  dividends on redeemable preferred stock  |       | 95,804,417                             |        | —                       |       | —           |       | 95,804,417                |        |
|                                              |       |                                   |        |                         |       |             |       |                      |        |
| Stockholders’  deficit:                      |       |                                   |        |                         |       |             |       |                      |        |
| Common stock                                      |       | 195,783                                |        | —                       |       | —           |       | 195,783                   |        |
| Additional paid-in capital                        |       | 393,701                                |        | —                       |       | —           |       | 393,701                   |        |
| Accumulated deficit                               |       | (390,513,206                           | )           | (12,547,792                  | )          | (27,731,100      | )          | (430,792,098              | )           |
| Unearned compensation                             |       | (480                                   | )           | —                       |       | —           |       | (480                      | )           |
| Treasury stock, at cost                           |       | (875,675                               | )           | —                       |       | —           |       | (875,675                  | )           |
| Total stockholders’ deficit                  |       | (390,799,877                           | )           | (12,547,792                  | )          | (27,731,100      | )          | (431,078,769              | )           |
| Total liabilities and  stockholders’ deficit |       | $                                      | 390,913,947 |                         | $          | 61,084,431       |       | $                         | (46,161,668 | ) | $ | 405,836,710 |   |

 

19

----

 

**STATEMENT OF OPERATIONSFor the three months ended September 30, 2006(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 30,496,055  |                         | $          | 3,256,036        |       | $                         | (3,642,897 | ) | $ | 30,109,194 |   |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                         |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 13,638,465                             |        | 1,419,759                    |       | (1,057,571       | )          | 14,000,653                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 9,607,191                              |        | 2,966,774                    |       | (2,585,326       | )          | 9,988,639                 |       |
| Corporate  expense (exclusive of corporate reorganization expense and depreciation  expense shown separately below)        |       | 2,726,425                              |        | —                       |       |             |       | 2,726,425                 |       |
| Corporate  reorganization expense                                                                                          |       | 2,923,159                              |        | —                       |       |             |       | 2,923,159                 |       |
| Depreciation and  amortization                                                                                             |       | 2,613,099                              |        | 355,007                      |       |             |       | 2,968,106                 |       |
| Non-cash  compensation expense                                                                                             |       | 36,710                                 |        | —                       |       |             |       | 36,710                    |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Operating loss                                                                                                             |       | (1,048,994                             | )           | (1,485,504                   | )          |             |       | (2,534,498                | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                         |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 11,428,040                             |        | 1,164,646                    |       |             |       | 12,592,686                |       |
| Interest income                                                                                                            |       | (152,666                               | )           | —                       |       |             |       | (152,666                  | )          |
| Non-cash interest expense                                                                                                  |       | 2,730,875                              |        | 75,685                       |       |             |       | 2,806,560                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                       |       |             |       | 6,386,961                 |       |
| Other                                                                                                                      |       | (1,165,041                             | )           | 1,150,241                    |       |             |       | (14,800                   | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Loss before  income taxes                                                                                                  |       | (20,277,163                            | )           | (3,876,076                   | )          |             |       | (24,153,239               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                         |       |             |       |                      |       |
| Current                                                                                                                    |       | (95,732                                | )           | —                       |       |             |       | (95,732                   | )          |
| Deferred                                                                                                                   |       | 12,074,887                             |        | —                       |       |             |       | 12,074,887                |       |
| Total provision  (benefit) for income taxes                                                                                |       | 11,979,155                             |        | —                       |       |             |       | 11,979,155                |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (32,256,318 | )                            | $          | (3,876,076       | )          |                      |       | $ | (36,132,394 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Basic and  diluted net loss per share                                                                                      |       | $                                      | (1.62       | )                            |       |             |       |                      | $          | (1.81 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,956,876                             |        |                         |       |             |       | 19,956,876                |       |
|                                                                                                                            |            |                                        |             |                              |            |                  |            |                           |            |  |  |  |  |

 

20

----

 

**STATEMENT OF OPERATIONSFor the three months ended September 30, 2005(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 28,481,446  |                         | $          | 3,397,918        |       | $                         | (3,722,253 | ) | $ | 28,157,111 |   |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                         |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 13,654,877                             |        | 1,546,527                    |       | (1,130,902       | )          | 14,070,502                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 8,975,954                              |        | 3,022,821                    |       | (2,591,351       | )          | 9,407,424                 |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 2,558,465                              |        | —                       |       |             |       | 2,558,465                 |       |
| Depreciation and  amortization                                                                                             |       | 3,046,852                              |        | 339,609                      |       |             |       | 3,386,461                 |       |
| Performance  award expense                                                                                                 |       | 319,797                                |        | —                       |       |             |       | 319,797                   |       |
| Non-cash  compensation expense                                                                                             |       | 94,146                                 |        | —                       |       |             |       | 94,146                    |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Operating loss                                                                                                             |       | (168,645                               | )           | (1,511,039                   | )          |             |       | (1,679,684                | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                         |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 9,872,456                              |        | 1,300,064                    |       |             |       | 11,172,520                |       |
| Interest income                                                                                                            |       | (574,854                               | )           | —                       |       |             |       | (574,854                  | )          |
| Non-cash interest expense                                                                                                  |       | 1,055,104                              |        | 68,952                       |       |             |       | 1,124,056                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                       |       |             |       | 6,386,961                 |       |
| Other                                                                                                                      |       | (1,324,550                             | )           | 1,346,630                    |       |             |       | 22,080                    |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Loss before  income taxes                                                                                                  |       | (15,583,762                            | )           | (4,226,685                   | )          |             |       | (19,810,447               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                         |       |             |       |                      |       |
| Current                                                                                                                    |       | 52,980                                 |        | —                       |       |             |       | 52,980                    |       |
| Deferred                                                                                                                   |       | (209,066                               | )           | —                       |       |             |       | (209,066                  | )          |
| Total provision  (benefit) for income taxes                                                                                |       | (156,086                               | )           | —                       |       |             |       | (156,086                  | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (15,427,676 | )                            | $          | (4,226,685       | )          |                      |       | $ | (19,654,361 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Basic and  diluted net loss per share                                                                                      |       | $                                      | (0.79       | )                            |       |             |       |                      | $          | (1.00 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,578,392                             |        |                         |       |             |       | 19,578,392                |       |
|                                                                                                                            |            |                                        |             |                              |            |                  |            |                           |            |  |  |  |  |

 

21

----

**STATEMENT OF OPERATIONSFor the Nine months ended September 30, 2006(Unaudited)**

 
| ** **                                                                                                                  | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                                                                                                  | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Net revenues                                                                                                                |       | $                                      | 91,230,397  |                         | $          | 11,009,999       |       | $                         | (11,487,571 | ) | $ | 90,752,825 |   |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Station operating  expenses:                                                                                                |       |                                   |        |                         |       |             |       |                      |        |
| Direct operating  expenses (exclusive of depreciation and amortization expenses shown  separately below)                    |       | 35,781,773                             |        | 4,607,416                    |       | (3,488,004       | )          | 36,901,185                |        |
| Selling, general  and administrative expenses (exclusive of depreciation and amortization  expenses shown separately below) |       | 27,869,243                             |        | 8,939,127                    |       | (7,999,567       | )          | 28,808,803                |        |
| Corporate expense  (exclusive of corporate reorganization expense and depreciation expense shown  separately below)         |       | 8,912,073                              |        | —                       |       |             |       | 8,912,073                 |        |
| Corporate  reorganization expense                                                                                           |       | 4,307,330                              |        | —                       |       |             |       | 4,307,330                 |        |
| Depreciation and  amortization                                                                                              |       | 6,460,106                              |        | 1,367,800                    |       |             |       | 7,827,906                 |        |
| Performance award  expense                                                                                                  |       | 88,831                                 |        | —                       |       |             |       | 88,831                    |        |
| Non-cash compensation  expense                                                                                              |       | 147,605                                |        | —                       |       |             |       | 147,605                   |        |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Operating income  (loss)                                                                                                    |       | 7,663,436                              |        | (3,904,344                   | )          |             |       | 3,759,092                 |        |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Other expenses  (income):                                                                                                   |       |                                   |        |                         |       |             |       |                      |        |
| Interest expense                                                                                                            |       | 31,324,904                             |        | 3,550,627                    |       |             |       | 34,875,531                |        |
| Interest income                                                                                                             |       | (537,057                               | )           | —                       |       |             |       | (537,057                  | )           |
| Non-cash  interest expense                                                                                                  |       | 5,534,671                              |        | 225,501                      |       |             |       | 5,760,172                 |        |
| Loss (gain) on  extinguishments of debt                                                                                     |       | 6,893,728                              |        | (6,893,728                   | )          |             |       | —                    |        |
| Non-cash  preferred stock dividend                                                                                          |       | 19,160,883                             |        | —                       |       |             |       | 19,160,883                |        |
| Other                                                                                                                       |       | (2,400,761                             | )           | 2,378,758                    |       |             |       | (22,003                   | )           |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Loss before income  taxes                                                                                                   |       | (52,312,932                            | )           | (3,165,502                   | )          |             |       | (55,478,434               | )           |
| Provision (benefit) for  income taxes:                                                                                      |       |                                   |        |                         |       |             |       |                      |        |
| Current                                                                                                                     |       | 174,823                                |        | —                       |       |             |       | 174,823                   |        |
| Deferred                                                                                                                    |       | 27,451,969                             |        | —                       |       |             |       | 27,451,969                |        |
| Total provision  (benefit) for income taxes                                                                                 |       | 27,626,792                             |        | —                       |       |             |       | 27,626,792                |        |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Net loss                                                                                                                    |       | $                                      | (79,939,724 | )                            | $          | (3,165,502       | )          |                      |        | $ | (83,105,226 | ) |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Basic and diluted net  loss per share                                                                                       |       | $                                      | (4.03       | )                            |       |             |       |                      | $           | (4.19 | ) |
|                                                                                                                        |       |                                   |        |                         |       |             |       |                      |        |
| Weighted average common shares outstanding                                                                                  |       | 19,818,258                             |        |                         |       |             |       | 19,818,258                |        |
|                                                                                                                             |            |                                        |             |                              |            |                  |            |                           |             |  |  |  |  |

 

22

----

 

**STATEMENT OF OPERATIONSFor the Nine months ended September 30, 2005(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 85,063,214  |                         | $          | 8,620,566        |       | $                         | (8,778,748 | ) | $ | 84,905,032 |   |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                         |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 37,923,954                             |        | 3,743,954                    |       | (2,778,650       | )          | 38,889,258                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 26,915,114                             |        | 6,734,351                    |       | (6,000,098       | )          | 27,649,367                |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 7,981,523                              |        | —                       |       |             |       | 7,981,523                 |       |
| Depreciation and  amortization                                                                                             |       | 10,352,297                             |        | 743,628                      |       |             |       | 11,095,925                |       |
| Performance  award expense                                                                                                 |       | 959,391                                |        | —                       |       |             |       | 959,391                   |       |
| Non-cash  compensation expense                                                                                             |       | 282,296                                |        | —                       |       |             |       | 282,296                   |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Operating income (loss)                                                                                                    |       | 648,639                                |        | (2,601,367                   | )          |             |       | (1,952,728                | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                         |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 29,625,162                             |        | 2,878,480                    |       |             |       | 32,503,642                |       |
| Interest income                                                                                                            |       | (1,312,653                             | )           | —                       |       |             |       | (1,312,653                | )          |
| Non-cash interest expense                                                                                                  |       | 3,186,724                              |        | 155,085                      |       |             |       | 3,341,809                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 19,160,883                             |        | —                       |       |             |       | 19,160,883                |       |
| Other                                                                                                                      |       | (2,825,145                             | )           | 3,015,257                    |       |             |       | 190,112                   |       |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Loss before  income taxes                                                                                                  |       | (47,186,332                            | )           | (8,650,189                   | )          |             |       | (55,836,521               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                         |       |             |       |                      |       |
| Current                                                                                                                    |       | 164,375                                |        | —                       |       |             |       | 164,375                   |       |
| Deferred                                                                                                                   |       | (645,854                               | )           | —                       |       |             |       | (645,854                  | )          |
| Total provision  (benefit) for income taxes                                                                                |       | (481,479                               | )           | —                       |       |             |       | (481,479                  | )          |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (46,704,853 | )                            | $          | (8,650,189       | )          |                      |       | $ | (55,355,042 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Basic and  diluted net loss per share                                                                                      |       | $                                      | (2.39       | )                            |       |             |       |                      | $          | (2.83 | ) |
|                                                                                                                       |       |                                   |        |                         |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,552,211                             |        |                         |       |             |       | 19,552,211                |       |
|                                                                                                                            |            |                                        |             |                              |            |                  |            |                           |            |  |  |  |  |

 

23

----

 

**STATEMENT OF CASH FLOWSFor the Nine months ended September 30, 2006(Unaudited)**

 
| ** **                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| **Cash  flows (used in) provided by operating activities** |       | $                                      | (13,181,578 | )                            | $          | 27,146,248       |       | $                         | (23,551,472 | ) | $ | (9,586,802 | ) |
|                                                       |       |                                   |        |                         |       |             |       |                      |        |
| **Cash  flows from investing activities:**                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Investments                                                |       | 2,792                                  |        | —                       |       | —           |       | 2,792                     |        |
| Payment for acquisition of assets                          |       | (45,253,312                            | )           | —                       |       | —           |       | (45,253,312               | )           |
| Sales of U.S. Government Securities                        |       | 25,315,677                             |        | —                       |       | —           |       | 25,315,677                |        |
| Capital expenditures                                       |       | (1,296,017                             | )           | (599,394                     | )          | —           |       | (1,895,411                | )           |
| Net cash used in investing activities                      |       | (21,230,860                            | )           | (599,394                     | )          | —           |       | (21,830,254               | )           |
|                                                       |       |                                   |        |                         |       |             |       |                      |        |
| **Cash  flows from financing activities:**                 | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Proceeds from senior credit agreement                      |       | 70,000,000                             |        | —                       |       | —           |       | 70,000,000                |        |
| Payment of senior credit facility                          |       | (23,550,637                            | )           | (24,664,872                  | )          | 23,551,472       |       | (24,664,037               | )           |
| Payment of deferred financing fees                         |       | (3,169,196                             | )           | (149,867                     | )          | —           |       | (3,319,063                | )           |
| Net cash provided by (used in) financing activities        |       | 43,280,167                             |        | (24,814,739                  | )          | 23,551,472       |       | 42,016,900                |        |
|                                                       |       |                                   |        |                         |       |             |       |                      |        |
| Net increase in  cash and cash equivalents                 |       | 8,867,729                              |        | 1,732,115                    |       |             |       | 10,599,844                |        |
| Cash and cash  equivalents, beginning of period            |       | 6,803,511                              |        | 1,825,533                    |       |             |       | 8,629,044                 |        |
| Cash and cash  equivalents, end of period                  |       | $                                      | 15,671,240  |                         | $          | 3,557,648        |       |                      |        | $ | 19,228,888 |   |
|                                                       |       |                                   |        |                         |       |             |       |                      |        |
| Supplemental  information:                                 |       |                                   |        |                         |       |             |       |                      |        |
| Cash paid for interest                                     |       | $                                      | 20,871,218  |                         | $          | 2,847,091        |       |                      |        | $ | 23,718,309 |   |
| Cash paid for income taxes                                 |       | 242,500                                |        | —                       |       |             |       | 242,500                   |        |
| Non-cash capital  expenditures                             |       | 144,741                                |        | 45,341                       |       |             |       | 190,082                   |        |
|                                                            |            |                                        |             |                              |            |                  |            |                           |             |  |  |  |  |

 

24

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**STATEMENT OF CASH FLOWSFor the Nine months ended September 30, 2005(Unaudited)**
| ** **                                                       | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|----------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                             | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash  flows (used in) provided by operating activities**       |       | $                                      | (13,920,836 | )                            | $          | 2,400,270        |       | $                         | (31,716    | ) | $ | (11,552,282 | ) |
|                                                             |       |                                   |        |                         |       |             |       |                      |       |
| **Cash  flows from investing activities:**                       |       |                                   |        |                         |       |             |       |                      |       |
| Sales (purchase) of marketable securities and other  investments |       | 5,600,506                              |        | —                       |       | —           |       | 5,600,506                 |       |
| Proceeds from sale of assets                                     |       | 45,417,485                             |        | —                       |       | (45,417,485      | )          | —                    |       |
| Payment for acquisition of assets                                |       | (45,878,642                            | )           | (55,312,983                  | )          | 45,449,201       |       | (55,742,424               | )          |
| Proceeds (payments) from option agreements                       |       | (3,646,668                             | )           | 3,646,668                    |       | —           |       | —                    |       |
| Purchase of U.S. Government Securities                           |       | (24,997,500                            | )           | —                       |       | —           |       | (24,997,500               | )          |
| Capital expenditures                                             |       | (2,111,752                             | )           | (643,946                     | )          | —           |       | (2,755,698                | )          |
| Net cash used in investing activities                            |       | (25,616,571                            | )           | (52,310,261                  | )          | 31,716           |       | (77,895,116               | )          |
|                                                             |       |                                   |        |                         |       |             |       |                      |       |
| **Cash  flows from financing activities:**                       |       |                                   |        |                         |       |             |       |                      |       |
| Proceeds from senior credit facility                             |       | —                                 |        | 53,500,000                   |       |             |       | 53,500,000                |       |
| Payment of senior credit facility                                |       | —                                 |        | (691,884                     | )          |             |       | (691,884                  | )          |
| Payment of deferred financing fees                               |       | (864,401                               | )           | (1,378,000                   | )          |             |       | (2,242,401                | )          |
| Net cash (used in) provided by financing activities              |       | (864,401                               | )           | 51,430,116                   |       |             |       | 50,565,715                |       |
|                                                             |       |                                   |        |                         |       |             |       |                      |       |
| Net (decrease)  increase in cash and cash equivalents            |       | (40,401,808                            | )           | 1,520,125                    |       |             |       | (38,881,683               | )          |
| Cash and cash  equivalents, beginning of period                  |       | 60,858,710                             |        | —                       |       |             |       | 60,858,710                |       |
| Cash and cash  equivalents, end of period                        |       | $                                      | 20,456,902  |                         | $          | 1,520,125        |       |                      |       | $ | 21,977,027 |   |
|                                                             |       |                                   |        |                         |       |             |       |                      |       |
| Supplemental  information:                                       |       |                                   |        |                         |       |             |       |                      |       |
| Cash paid for interest                                           |       | $                                      | 19,743,750  |                         | $          | 2,352,624        |       |                      |       | $ | 22,096,374 |   |
| Cash paid for income taxes                                       |       | 116,766                                |        | —                       |       |             |       | 116,766                   |       |
| Non-cash capital  expenditures                                   |       | 258,833                                |        | —                       |       |             |       | 258,833                   |       |
|                                                                  |            |                                        |             |                              |            |                  |            |                           |            |  |  |  |  |

 

**Note 9 —Intangibles**

*Intangibles*

Intangibleassets are summarized as follows:

|                           | ** ** | **September 30,  2006** | ** **   | **December 31,  2005** | ** ** |
|---------------------------|------------|------------------------------|--------------|-----------------------------|------------|
| ** **                | ** ** | **Unaudited**                | ** **   | ** **                  | ** ** |
| ** **                | ** ** | ** **                   | ** **   | ** **                  | ** ** |
| Goodwill                  |       | $                            | 98,608,000   |                        | $          | 71,346,000 |   |
| Network  affiliations     |       | 136,969,000                  |         | 126,989,000                 |       |
| Broadcast licenses        |       | 168,144,000                  |         | 166,354,000                 |       |
|                      |       | 403,721,000                  |         | 364,689,000                 |       |
| Accumulated  amortization |       | (96,464,000                  | )            | (94,130,000                 | )          |
|                      |       |                         |         |                        |       |
| Net intangible assets     |       | $                            | 307,257,0000 |                        | $          | 270,559,000 |   |

 

25

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The Company amortizes its network affiliationagreements for which it does not make contractual payments using an estimateduseful life of 25 years and amortizes its network affiliation agreements forwhich it makes contractual payments over the life of the contract.  The Company recorded amortization expense of$827,000 and $2,334,000 for the three and nine months ended September 30, 2006,respectively. The Company recorded amortization expense of $1,952,000 and $6,387,000for the three and nine months ended September 30, 2005, respectively.

**Note10 - Income Taxes**

The Company evaluates the realizability of itsdeferred taxes and reviews the requirements for a valuation allowance on aquarterly basis. The factors used to assess the likelihood of realization arethe expected timing of the reversals of existing temporary differences,recoverability based on historical taxable income, projected future taxableincome and tax planning strategies. The Company will revise such allowanceswhen changes in circumstances result in changes in management’s judgment aboutthe future realization of deferred taxes.

Theprovision (benefit) for income taxes for the three and nine months endedSeptember 30, 2006 and 2005 consisted of the following:
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September  30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2006**                                             | ** ** | **2005**                                                  | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                           | ** ** | **(Unaudited)**                                      | ** ** | **(Unaudited)**                                           | ** ** |
| Current                              |       | $                                                    | (96,000    | )                                                         | $          | 53,000 |   | $ | 175,000 |   | $ | 164,000 |   |
| Deferred                             |       | 12,075,000                                           |       | (209,000                                                  | )          | 27,452,000 |   | (646,000 | ) |
| Provision (benefit) for income taxes |       | $                                                    | 11,979,000 |                                                      | $          | (156,000 | ) | $ | 27,627,000 |   | $ | (482,000 | ) |

 

The Company records a valuation allowance against itsdeferred tax assets arising from certain net operating losses when it is morelikely than not that some portion or all of such losses will not be realized. Duringthe three months ended September 30, 2006, the Company recorded a net provisionfor income taxes of $11,979,000 due to an increase to the valuation allowanceas compared to a net benefit for income taxes of $156,000 for the same periodin 2005. During the nine months ended September 30, 2006, the Company recordeda net provision for income taxes of $27,627,000 due to an increase to thevaluation allowance as compared to a net benefit for income taxes of $482,000for the same period in 2005. The increases in the valuation allowance for boththe three and nine months ended September 30, 2006 was due to the Company’sintentions to retain both its San Francisco, California television stationKBWB-TV and its Detroit, Michigan television station WMYD-TV, which were bothpreviously available for sale and recorded as part of discontinued operationsduring previous periods (see Note 7).

The increase in the valuation allowance, which willnot adversely affect the Company’s statement of cash flows or liquidity, wasrecorded based on the Company’s existing temporary differences no longerreversing due to the Company’s intentions to retain both its San Francisco,California television station KBWB-TV and its Detroit, Michigan televisionstation WMYD-TV.

TheCompany’s net deferred income tax liability is as follows:
| ** **                  | ** ** | **September 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|-----------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| ** **                  | ** ** | **(Unaudited)**                  | ** **  | ** **                      | ** ** |
| Deferred tax  liability     |       | $                                | (56,140,000 | )                               | $          | (23,125,000 | ) |
| Deferred tax  asset         |       | 81,818,000                       |        | 34,305,000                      |       |
| Valuation  allowance        |       | (74,684,000                      | )           | (32,741,000                     | )          |
| Net deferred tax  liability |       | $                                | (49,006,000 | )                               | $          | (21,561,000 | ) |

 

Deferred taxes reflect the tax effects of temporarydifferences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. Thenet deferred tax liabilities primarily relate to differences between book andtax basis of the Company’s FCC licenses. In accordance with the adoption ofFASB No. 142,*Goodwill and Intangible Assets*,on January 1, 2002, the Company no longer amortizes its FCC licenses for bookpurposes, but instead tests them for impairment annually.

26

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***Item 2.****                         Management’sDiscussion and Analysis of Financial Condition and Results of Operations*

The following information should be read inconjunction with the unaudited consolidated financial statements and notesthereto in this Quarterly Report and the audited financial statements andManagement’s Discussion and Analysis of Financial Condition and Results ofOperations contained in our Form 10-K for the year ended December 31,2005. It includes the following sections:

·                  ExecutiveSummary

·                  CriticalAccounting Policies and Estimates

·                  Resultsof Operations

·                  Liquidityand Capital Resources

***Executive Summary***

We own and operate nine full-power television stationsin geographically diverse markets reaching over 6% of the nation’s televisionhouseholds and have shared services agreements and/or advertisingrepresentation agreements (which we generally refer to as local serviceagreements) to provide advertising, sales, promotion and administrativeservices, and selected programming to two additional stations owned andcontrolled by Malara Broadcast Group, one station owned and controlled by FourSeasons Broadcast Company and one station owned and controlled by EBC Buffalo,Inc. As of September 30, 2006, four of our stations are affiliated with NBC,one of our stations is affiliated with ABC, two of our stations are affiliatedwith CBS, one of our stations is affiliated with MyNetworkTV and one of ourstations is operating as an independent. The NBC affiliates are KSEE-TV, Fresno-Visalia,California, WEEK-TV, Peoria-Bloomington, Illinois, KBJR-TV, Duluth, Minnesota -Superior, Wisconsin and WISE-TV, Fort Wayne, Indiana.  The ABC affiliate is WKBW-TV, Buffalo, NewYork. The CBS affiliates are WTVH-TV, Syracuse, New York and WBNG-TV,Binghamton/Elmira, New York. The MyNetworkTV affiliate is WMYD-TV (formerlyWDWB-TV), Detroit, Michigan and our independent affiliate is KBWB-TV, SanFrancisco, California. The two Malara Broadcast Group-owned and controlledstations to which we provide services and selected programming are WPTA-TV, theABC affiliate serving Fort Wayne, Indiana and KDLH-TV, the CBS affiliateserving Duluth, Minnesota - Superior, Wisconsin.  The Four Seasons Broadcast Company-owned andcontrolled station to which we provide services is WAOE-TV, the MyNetworkTVaffiliate serving Peoria-Bloomington, Illinois. The EBC Buffalo, Inc. owned andcontrolled station to which we provide services is WNGS-TV, the RTN affiliateserving Buffalo, New York.

Malara Broadcast Group is owned by an independentthird party who owns and operates two television stations as of September 30,2006. We do not own Malara Broadcast Group or its television stations. In orderfor both us and Malara Broadcast Group to continue to comply with FCC regulations,Malara Broadcast Group must maintain complete responsibility for and controlover programming, finances, personnel and operations of its televisionstations.  However, as a result of ourguarantee of the obligations incurred under Malara Broadcast Group’s seniorsecured credit facility and the revolving loan, arrangements under the localservice agreements and put or call option agreements, under United Statesgenerally accepted accounting principles (“U.S. GAAP”), specifically, FinancialAccounting Standards Board (“FASB”) Interpretation No. 46, *Consolidation of Variable Interest Entities* (“Interpretation46”), we are required to consolidate Malara Broadcast Group’s financialposition, results of operations and statement of cash flows in our consolidatedresults. In addition, in accordance with the provisions of Interpretation 46,the Company did not account for the sale of the assets of WPTA-TV and no gainthere from was recognized in the consolidated statements of operations.  In addition, we did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV. FourSeasons Broadcast Company is owned by an independent third party. We do not ownFour Seasons Broadcast Company and EBC Buffalo, Inc. or any of its televisionstations, and pursuant to Interpretation 46, we are not deemed to be theprimary beneficiary of Four Seasons Broadcast Company and EBC Buffalo, Inc. andtherefore, we have not consolidated their results.

On September 5, 2006, WMYD-TV began its affiliationwith MyNetworkTV.  Our San Franciscotelevision station, KBWB-TV began to operate as an independent in September2006 after The WB ceased to provide programming.

We believe that inflation has not had a materialimpact on our results of operations for the three and nine months endedSeptember 30, 2006.  However, there canbe no assurance that future inflation would not have an adverse impact on ouroperating results and financial condition.

27

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Our operating revenues are generally lower in thefirst calendar quarter and generally higher in the fourth calendar quarter thanin the other two quarters, due in part to increases in retail advertising inthe fall months in preparation for the holiday season, and in election yearsdue to increased political advertising.

Our revenues are derived principally from local andnational advertising, political advertising in an election year and, to alesser extent, from network compensation for the broadcast of programming andrevenues from studio rental and commercial production activities.  The primary operating expenses involved inowning and operating television stations are employee salaries, depreciationand amortization, programming, advertising and promotion.  Amounts referred to in the followingdiscussion have been rounded to the nearest thousand.

***Third Quarter 2006 Highlights***

·                  OnJuly 5, 2006, we entered into a Credit and Guaranty Agreement with Silver PointFinance LLC, as Administrative Agent, and the Lenders party thereto (the “Lenders”)from time to time (the “Credit Agreement”). The Credit Agreement provides fortwo secured loans: a $40 million Tranche A Term Loan and a Convertible TrancheB Term Loan for $30 million. The Tranche B Term Loan is presently convertible,at the option of the Lenders in the aggregate, into 200,000 shares of our 123⁄4%Cumulative Exchangeable Preferred Stock (the “Preferred Stock”). Both termloans are secured by our existing assets and our subsidiaries generally on apari passu basis with the Notes. Both term loans mature on December 1,2006. On July 5, 2006, we borrowed $27.5 million of the Tranche B Term Loan andapproximately $19.9 million of the proceeds were used to pay interest on theNotes that was due June 1, 2006, thus curing the Event of Default withrespect to such Notes.

·                    In connectionwith the execution of the Credit Agreement, the Indenture, dated as ofDecember 22, 2003, among us, the guarantors party thereto and The Bank ofNew York, as Trustee, as supplemented by the First Supplemental Indenture,dated as of March 9, 2005, by and among us, the guarantors party thereto andThe Bank of New York, as Trustee (the “Indenture”), was further supplemented bythe Second Supplemental Indenture, dated as of July 5, 2006, by and amongus, the guarantors party thereto and The Bank of New York, as Trustee (the “SecondSupplemental Indenture”).

·                  TheSecond Supplemental Indenture adds WBNG, Inc. and WBNG License, Inc.,the WBNG-TV acquisition entities (which we completed on July 26, 2006, seebelow for further details) as guarantors to the Indenture. The Lenders have afirst lien on the assets of WBNG, Inc and WBNG License, Inc. Note holdershave a second lien in the assets of WBNG, Inc and WBNG License, Inc.Additionally, the Trustee agreed to act as collateral agent for the Lendersunder the Credit Agreement. The Second Supplemental Indenture also makesconforming changes necessary to allow us to enter into the Credit Agreement,grant liens securing that indebtedness and makes certain other changesnegotiated between us and the beneficial owners of more than a majority of theprincipal amount of the outstanding Notes (the “Majority Note Holders”).

·                    In connectionwith the Second Supplemental Indenture, we entered into the SupplementalAgreement, dated as of July 5, 2006, in relation to the SecondSupplemental Indenture and the Credit and Guaranty Agreement, each dated as ofJuly 5, 2006 by and among us, the parties identified as “Guarantors” onthe signature pages thereof  and the parties identified as “QualifiedHolders” on the signature pages thereto (the “Supplemental Agreement”).The Supplemental Agreement provides the Majority Note Holders, among otherthings, with certain consent rights to actions by our company, including, butnot limited to, incurring additional indebtedness, making certain types ofinvestments or acquisitions, selling assets, granting additional liens oncertain assets of the Company, and issuing or selling certain types ofadditional capital stock. The Supplemental Indenture provides that defaultsunder the Supplemental Agreement will be defaults under the Indenture.

·                  On July 17, 2006, in connection withtermination of our agreements to sell KBWB-TV serving San Francisco, Californiaand WMYD-TV serving Detroit, Michigan to affiliates of DS Audible, LLC, weannounced our intentions to continue to market our San Francisco, Californiatelevision station KBWB-TV and retain our Detroit, Michigan television stationWMYD-TV. As of September 30, 2006, we reevaluated our intentions to continue tomarket KBWB-TV and determined not sell the asset in the near term, the asset isno longer available for immediate sale and we are not actively seeking buyers.See Note 7 to the consolidated financial statements for further information.

·                  OnJuly 26, 2006, we borrowed the remaining $2.5 million of the Tranche B TermLoan and the $40 million Tranche A Term Loan to complete the acquisition ofWBNG-TV (see below for further details.)

28

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·                  OnJuly 26, 2006, we and certain of our subsidiaries completed the acquisition ofWBNG-TV, Channel 12, the CBS-affiliated television station serving Binghamtonand Elmira, New York for $45 million in cash, plus certain closing adjustments,from Television Station Group Holdings, LLC and certain subsidiaries, pursuantto a definitive purchase agreement dated January 13, 2006.

·                  OnAugust 1, 2006, we entered into a Third Supplemental Indenture, by and betweenus, the guarantors party thereto and The Bank of New York, as Trustee, whichamends the Indenture in accordance with the Supplemental Agreement.

·                  On August 15, 2006, we entered into Amendment No.1 under Credit and Guaranty Agreement (“Amendment No. 1”) to our CreditAgreement.  Amendment No. 1 extends fromAugust 15, 2006 to August 31, 2006: (i) the date by which we are obligated toexecute an agreement on the terms of a comprehensive reorganization plan inform and substance acceptable to the lenders holding more than 50% of theaggregate loan exposure under the Credit Agreement; and (ii) the date by whichthe failure of Malara to refinance Malara’s existing credit facility with a newcredit facility from the lenders under the Credit Agreement would constitute anevent of default under the Credit Agreement. On August 31, 2006, we entered into Amendment No. 2 and Limited Waiverto our Credit Agreement, which, among other things, further extended suchdeadline from August 31, 2006 to September 15, 2006.

·                  Sincewe have not yet entered into a definitive agreement effectuating acomprehensive reorganization of the Company in form and substance satisfactoryto the lenders holding 51% of the loans and Malara Broadcast Group has not yetrefinanced its existing credit facility with a new credit facility from thelenders under the Credit Agreement, the failure of each of which constitutes anevent of default under the Credit Agreement, upon our receipt of notice fromthe administrative agent under the Credit Agreement, among other things: (a) theunpaid principal amount of and accrued interest on the loans and all otherobligations under the Credit Agreement shall immediately become due and payableand (b) the administrative agent may cause collateral agent to enforce any andall liens and security interests created pursuant to collateral documents underthe Credit Agreement. The occurrence of any acceleration of debt due under theCredit Agreement would constitute an event of default under the Indenture. Wecontinue to work on a comprehensive reorganization with the administrativeagent satisfactory to the lenders holding 51% of the loans and Malara BroadcastGroup continues to work on refinancing its existing credit facility and as ofNovember 13, 2006, we have not received a default notice.

***Critical Accounting Polices and Estimates***

We prepare our consolidated financial statements inconformity with United States generally accepted accounting principles whichrequire us to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosures of contingent assets and liabilitiesat the date of the consolidated financial statements and the reported amounts ofrevenues and expenses during the period. Actual results could differ from those estimates.  Results of operations for interim periods arenot necessarily indicative of results for the full year.

Information withrespect to our critical accounting policies which we believe could affect ourreported results require subjective judgments by management and is contained inItem 7, Management’s Discussion and Analysis of Financial Condition and Resultof Operations, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2005.

**RESULTS OF OPERATIONS**

*ThreeMonths Ended September 30, 2006 and 2005*

***Consolidated Operations***

Set forth below are significant factors thatcontributed to our operating results from our consolidated operations for thethree months ended September 30, 2006 and 2005, respectively.

29

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**GROSS REVENUES BYCATEGORY,CONSOLIDATED OPERATIONS**

|                       | ** ** | **Three Months Ended September 30,** | ** ** |
|-----------------------|------------|----------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                 | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Local/Regional        |       | $                                                        | 17,624,000 |   | $ | 17,600,000 |   | 0.1 | % |
| National              |       | 12,660,000                                               |       | 12,831,000 |   | (1.3 | )% |
| Network  Compensation |       | 378,000                                                  |       | 510,000 |   | (25.9 | )% |
| Political             |       | 3,189,000                                                |       | 789,000 |   | 304.2 | % |
| Other                 |       | 1,550,000                                                |       | 1,288,000 |   | 20.3 | % |
| Gross Revenue         |       | 35,401,000                                               |       | 33,018,000 |   | 7.2 | % |
| Agency  Commissions   |       | 5,292,000                                                |       | 4,861,000 |   | 8.9 | % |
| Net Revenue           |       | $                                                        | 30,109,000 |   | $ | 28,157,000 |   | 6.9 | % |

 

Net revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

Net revenue increased $1,952,000 or 6.9% to$30,109,000 for the three months ended September 30, 2006, from $28,157,000 forthe three months ended September 30, 2005. Increases in political advertising revenue and the inclusion of theresults of WBNG-TV (acquired on July 25, 2006) were partially offset bydecreases in non-political local and non-political national revenue anddecreased network compensation. Declines in non-political local and nationalrevenue were driven by lower spending by automotive advertisers, our largestcategory, as well as lower spending in the restaurant, retail, medical andpackaged goods categories. Malara Broadcast Group’s net revenues totaled $3,256,000or 11% and $3,398,000 or 12% of the total net revenues during the three monthsended September 30, 2006 and 2005, respectively

Direct operating expenses, consisting primarily ofprogramming, news and engineering decreased $70,000 or less than 1% to$14,000,000 for the three months ended September 30, 2006 from $14,070,000 forthe same period in 2005. The decrease was primarily due to lower amortizationof film contract rights due to the effects of favorable renewals on ourexisting programming commitments and the replacement of certain expensive,unprofitable programs with less expensive, profitable programming, offset inpart by the inclusion of WBNG-TV in our consolidated results which was acquiredduring the three months ended September 30, 2006. There were $1,093,000 and$1,592,000 of film asset write-downs during the three months ended September30, 2006 and 2005, respectively. Selling, general and administrative expensesincreased $582,000 or 6% to $9,989,000 for the three months ended September 30,2006 from $9,407,000 for the same period in 2005. The increase was primarilydue to the increased advertising and promotional costs primarily relating tothe launch MyNetworkTV at WMYD-TV and to promote KBWB-TV as an independentstation during the third quarter of 2006 as well as the inclusion of WBNG-TV inour consolidated results which was acquired during the three months endedSeptember 30, 2006. Malara Broadcast Group’s direct operating expenses andselling, general and administrative expenses for the three months endedSeptember 30, 2006 and 2005 totaled $744,000 and $847,000, respectively, of thetotal station expenses, after elimination of expenses relating to various localservice agreements between us and Malara Broadcast Group.

***Other Consolidated Expenses***

Amortization expense decreased $1,125,000 or 58%during the three months ended September 30, 2006 as compared to the same perioda year earlier. The decrease was primarily due to the write down of theremaining carrying value of our network affiliation agreement at our KBWB-TVand WMYD-TV television stations during the fourth quarter of 2005 which wasamortized during the same period in 2005, offset in part by the incrementalamortization expense for WBNG-TV which was acquired during the three monthsended September 30, 2006. Depreciation expense increased $706,000 or 49% duringthe three months ended September 30, 2006 compared to the same period a yearearlier.  The increase was primarily dueto the incremental depreciation expense recorded during the three months endedSeptember 30, 2006 on the assets of KBWB-TV for the period of September 9, 2005through September 30, 2006, when the assets were classified as “held for sale”and depreciation had ceased.

30

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Corporate expense totaled $2,726,000; an increase of$168,000 or 6.6% compared to $2,558,000 for the three months ended September30, 2005. The increase was primarily due to increased professional fees as wellas increased compensation expenses due to additional personnel which were addedduring 2006. Corporate reorganization expenses totaled $2,923,000 during thethree months ended September 30, 2006. Corporate reorganization expensesrelates specifically to financial advisors and other professionals beingretained to assist us with the evaluation of strategic options and to advise uson available financing and capital reorganization alternatives for our companyin addition to certain professional fees incurred in connection with ouron-going legal proceedings with The WB Television Network Partners, L.P.,Harbinger Capital Partners Master Fund I, Ltd. and Twentieth Television andTwentieth Century Fox Film Corporation which all commenced during 2006 (seePart II Other Information; Item 1. Legal Proceedings to this form 10-Q forfurther details). The performance award expense for the three months endedSeptember 30, 2006 decreased $320,000 compared to the same period in 2005. Thedecrease was due to the completion of amortization of the unvested portion ofthe performance award expense during the first three months of 2006.  Non-cash compensation expense decreased$57,000 or 61% primarily due to the forfeitures and / or fully vesting of stockawards granted in prior years, offset in part by $17,000 of non-cashcompensation expense recorded during the three months ended September 30, 2006related to stock option grants under Interpretation 123(R).

Interest expense totaled $12,593,000; an increase of$1,420,000 or 13% compared to $11,173,000 for the three months ended September30, 2005. The increase was primarily due to the incremental interest expenseincurred on our $40 million Tranche A Term Loan and $30 million ConvertibleTranche B Term Loan entered into on July 5, 2006. Interest income totaled$153,000; a decrease of $422,000, or 73% compared to $575,000 for the threemonths ended September 30, 2005. The decrease was primarily due to decreasedaverage cash balance invested during the three months ended September 30, 2006as compared to the same period in 2005. Non-cash interest expense totaled$2,807,000; an increase of $1,683,000 or 150% compared to $1,124,000 for thethree months ended September 30, 2005. The increase was primarily due to theamortization of deferred financing costs incurred in connection with our $40million Tranche A Term Loan and $30 million Convertible Tranche B Term Loan onJuly 5, 2006.

We recorded as an expense the accrual of dividends onour 123¤4%Cumulative Exchangeable Preferred Stock totaling $6,387,000 during the threemonths ended September 30, 2006 and 2005, respectively as required by Statementof Financial Accounting Standards No.150.

During the threemonths ended September 30, 2006, we recorded a current tax benefit of $96,000and a deferred tax provision of $12,075,000 compared to a current tax provisionof $53,000 and deferred tax benefit of $209,000 for the three months endedSeptember 30, 2005. The net increased tax expense was due to an increase to thevaluation allowance which was attributable to our determination at September30, 2006 to retain our San Francisco, California television station KBWB-TV (SeeNote 10. *Income Taxes*in the Notes to our Consolidated Financial Statements).

*Nine Months Ended September 30, 2006 and 2005*

***Consolidated Operations***

Set forth below are significant factors thatcontributed to our operating results our consolidated operations for the ninemonths ended September 30, 2006 and 2005, respectively.

**GROSS REVENUES BYCATEGORY,CONSOLIDATED OPERATIONS**

|                       | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------|------------|---------------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                                | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Local/Regional        |       | $                                                       | 56,857,000 |   | $ | 53,369,000 |   | 6.5 | % |
| National              |       | 38,191,000                                              |       | 38,377,000 |   | (0.5 | )% |
| Network  Compensation |       | 1,153,000                                               |       | 2,176,000 |   | (47.0 | )% |
| Political             |       | 5,544,000                                               |       | 1,502,000 |   | 269.2 | % |
| Other                 |       | 4,477,000                                               |       | 3,959,000 |   | 13.1 | % |
| Gross Revenue         |       | 106,222,000                                             |       | 99,383,000 |   | 6.9 | % |
| Agency  Commissions   |       | 15,469,000                                              |       | 14,478,000 |   | 6.8 | % |
| Net Revenue           |       | $                                                       | 90,753,000 |   | $ | 84,905,000 |   | 6.9 | % |

 

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Net revenues consist primarily of local, national andpolitical airtime sales, net of sales adjustments and agency commissions.Additional, but less significant, amounts are generated from networkcompensation, internet revenues, barter/trade revenues, production revenues andother revenues.

Net revenue increased $5,848,000 or 7% to $90,753,000for the nine months ended September 30, 2006, from $84,905,000 for the ninemonths ended September 30, 2005. The increase was primarily due to increases inpolitical advertising revenue of $4,042,000 or 269% and the inclusion ofWBNG-TV in our consolidated results which was acquired during the three monthsended September 30, 2006 which contributed to healthy increases innon-political local revenues of $3,488,000 or 6.5%, offset by decreases networkcompensation of $1,023,000 or 47%. The non-political local revenue increase wasprimarily due to the growth in the home improvement, retail, medical andservices categories. Malara Broadcast Group’s net revenues totaled $11,010,000or 12% and $8,621,000 or 10% of the total net revenues during the nine monthsended September 30, 2006 and 2005, respectively.

Direct operating expenses, consisting primarily ofprogramming, news and engineering decreased $1,987,000 or 5% to $36,901,000 forthe nine months ended September 30, 2006 from $38,888,000 for the same periodin 2005. The decrease was primarily due to lower amortization of film contractrights due to the effects of favorable renewals on our existing programmingcommitments and the replacement of certain expensive, unprofitable programswith less expensive, profitable programming, offset in part by the inclusion ofWBNG-TV in our consolidated results which was acquired during the three monthsended September 30, 2006. There were $1,093,000 and $1,592,000 of film assetwrite-downs during the nine months ended September 30, 2006 and 2005,respectively. Selling, general and administrative expenses increased $1,158,000or 4% to $28,809,000 for the nine months ended September 30, 2006 from$27,651,000 for the same period in 2005. The increase was primarily due tohigher local sales commissions due to increased local sales, increasedadvertising and promotional costs primarily relating to the launch MyNetworkTVat WMYD-TV and to promote KBWB-TV as an independent station during the thirdquarter of 2006 and the inclusion of WBNG-TV in our consolidated results whichwas acquired during the three months ended September 30, 2006. Malara BroadcastGroup’s direct operating expenses and selling, general and administrativeexpenses for the nine months ended September 30, 2006 and 2005 totaled$2,059,000 and $1,700,000, respectively, of the total station expenses, afterelimination of expenses relating to various local service agreements between usand Malara Broadcast Group.

***OtherConsolidated Expenses***

Amortization expense decreased $4,053,000 or 64%during the nine months ended September 30, 2006 as compared to the same perioda year earlier. The decrease was primarily due to the write down of theremaining carrying value of our network affiliation agreement at our KBWB-TVand WMYD-TV television stations during the fourth quarter of 2005 which wasamortized during the same period in 2005, offset in part by the incrementalamortization expense of WBNG-TV which was acquired during the three monthsended September 30, 2006. Depreciation expense increased $785,000 or 17% duringthe nine months ended September 30, 2006 compared to the same period a yearearlier.  The increase was primarily dueto the incremental depreciation expense of KDLH-TV and WISE-TV which wereacquired by Malara Broadcast Group and us, respectively, in March 2005 andWBNG-TV which was acquired during the three months ended September 30, 2006.

 Corporateexpense totaled $8,912,000; an increase of $930,000 or 12% compared to$7,982,000 for the nine months ended September 30, 2005. The increase wasprimarily due to certain professional fees originally capitalized as part ofour pending station sales which were expensed upon termination of the purchase and sale agreements on July 17, 2006as well as increased compensation expenses due to additional personnel whichwere added during 2006. Corporate reorganization totaled $4,307,000 during thenine months ended September 30, 2006. Corporate reorganization expenses relatesspecifically to financial advisors and other professionals being retained toassist us with the evaluation of strategic options and to advise us onavailable financing and capital reorganization alternatives for our company aswell as certain professional fees incurred in connection with our on-goinglegal proceedings with The WB Television Network Partners, L.P., HarbingerCapital Partners Master Fund I, Ltd. and Twentieth Television and TwentiethCentury Fox Film Corporation which all commenced during 2006 (see Part II OtherInformation; Item 1. Legal Proceedings to this form 10-Q for further details).The performance award expense for the nine months ended September 30, 2006decreased $871,000 or 91% compared to the same period in 2005. The decrease wasdue to the completion of amortization of the unvested portion of theperformance award expense during the first three months of 2006.  Non-cash compensation expense decreased $135,000or 48% primarily due to the forfeitures and / or fully vesting of stock awardsgranted in prior years, offset in part by $51,000 of non-cash compensationexpense recorded during the nine months ended September 30, 2006 related tostock option grants under Interpretation 123(R).

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Interest expense totaled $34,876,000; an increase of$2,372,000 or 7% compared to $32,504,000 for the nine months ended September30, 2005.  This increase is primarily dueto the incremental interest expense on Malara Broadcast Group’s Senior CreditFacility which was entered in March 2005 and the incremental interest expenseincurred on our $40 million Tranche A Term Loan and $30 million ConvertibleTranche B Term Loan entered into on July 5, 2006. Interest income totaled$537,000; a decrease of $776,000, or 59% compared to $1,313,000 for the ninemonths ended September 30, 2005. The decrease was primarily due to decreasedaverage cash balance invested during the nine months ended September 30, 2006as compared to the same period in 2005. Non-cash interest expense totaled$5,760,000; an increase of $2,418,000 or 72% compared to $3,342,000 for thenine months ended September 30, 2005. The increase is due to write off deferredfinancing fees during the first three months of 2006 which were incurred inconnection with the Malara Broadcast Group Senior Credit Facility Tranche ATerm Loan in 2005, which was repaid on February 10, 2006 as well as theamortization of deferred financing costs incurred in connection with our 40million Tranche A Term Loan and $30 million Convertible Tranche B Term Loan onJuly 5, 2006.

We recorded as an expense the accrual of dividends onour 123¤4%Cumulative Exchangeable Preferred Stock totaling $19,161,000 during the ninemonths ended September 30, 2006 and 2005, respectively as required by Statementof Financial Accounting Standards No 150.

During the ninemonths ended September 30, 2006, we recorded a current tax provision of$175,000 and a deferred tax provision of $27,452,000, compared to a current taxprovision of $164,000 and a deferred tax benefit of $645,000 for the ninemonths ended September 30, 2005. The net increase in tax expense was due to anincrease to the valuation allowance which was attributable to our recentannouncement to retain our Detroit, Michigan television station WMYD-TV in July2006 and our determination at September 30, 2006 to retain our San Francisco,California television station KBWB-TV (See Note 10. *Income Taxes*in the Notes to our ConsolidatedFinancial Statements).

*Restructuring and Severance Charges*

*Restructuring Charges*

During the first three months of 2006, we recorded a$34,000 restructuring charge related to stay-bonuses awarded to transitionalemployees at the Duluth, Minnesota television stations.  As of June 30, 2006, we completed theseparation payments related to the corporate restructuring charges, and reducedour accrual by approximately $20,000 to adjust for payments of benefits andamounts originally accrued for.

During 2005 and 2004, we recorded restructuring charges in theaggregate totaling $2,474,000. Of the total $2,474,000, approximately$1,406,000 related to severance and other benefits, associated with thedeparture of Stuart J. Beck (see Note 4, Related Parties) and administrativesupport staff at the corporate office who were paid over an eighteen monthperiod from date of separation in September 2004 through March 2006.As of September 30, 2006, the remaining restructuring charges related toemployee separations, which included severance, other benefits and stay-bonusesawarded to transitional employees at the Duluth, Minnesota and Fort Wayne,Indiana television stations. We anticipates that from time to time we willincur minimal restructuring charges in future periods as part of our continuedeffort to achieve and maintain cost control initiatives at our variousstations. These costs are not anticipated to be significant in nature andtherefore, will not be separately disclosed herein.

At September 30, 2006, the accruals for restructuring activitieswere included in “other accrued liabilities” on the consolidated balance sheetsand the related expense for the charge at the television stations are includedin “selling, general and administrative expenses” on the consolidated statementof operations. These costs were recognized in accordance with the provisions ofStatement of Financial Accounting Standards No. 146, *Accountingfor Costs Associated with Exit or Disposal Activities*.

*Acquisition Charges*

During 2005, we accrued $627,000 related to employeeseparations, which included severance and other benefits as part of ourpurchase accounting. These accrued costs were a result of employees notretained by us subsequent to our acquisition of the Fort Wayne, Indianatelevision station, which included operational through management employees.

AtSeptember 30, 2006, the accruals for acquisition activities of the televisionstation were included in “other accrued liabilities” on the consolidatedbalance sheets. These charges were recognized in accordance with the provisionsof Emerging Issues Task Force Issue No. 95-3 *Recognitionof Liabilities in Connection with a Purchase Business Combination*.

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Thefollowing is a reconciliation of the aggregate liability recorded forrestructuring and acquisition charges as of September 30, 2006:
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended September 30, 2006**                                                                    | ** ** |
| ** **           | ** ** | **June 30,  2006**                                                                                                               | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 14,200     |   | $ | — |   | $ | 10,600 |   | $ | 3,600 |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 14,200     |   | $ | — |   | $ | 10,600 |   | $ | 3,600 |   |

 
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Nine Months Ended September 30, 2006**                                                                     | ** ** |
| ** **           | ** ** | **December 31,  2005**                                                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **September 30,  2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 81,000     |   | $ | 34,000 |   | $ | 111,400 |   | $ | 3,600 |   |
| Corporate            |       | 192,000                                                                                                                               |       | (20,000 | ) | 172,000 |   | — |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 273,000    |   | $ | 14,000 |   | $ | 283,400 |   | $ | 3,600 |   |

 

The liability for the restructuring and acquisitioncharges will be paid in accordance with the provisions of the severanceagreements and payments are expected to be completed at various times through2006.

**Liquidity and Capital Resources**

As of September30, 2006, we had approximately $18,229,000 of cash and cash equivalents onhand. On December 31, 2005 we had $24,997,500in U.S. government securities which were pledged to support the reimbursementobligations in the event of a draw on the letter of credit that served ascollateral for the Tranche A Term Loan under Malara Broadcast Group’s SeniorCredit Facility.  On February 10,2006, the letter of credit issued in March 2005 to support the $23.5 million Tranche A Term Loan wasdrawn upon in satisfaction of Malara Broadcast Group’s obligations to suchlenders under the Malara Tranche A Term Loan following non-renewal of theletter of credit.  We paid ourreimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities which had been pledged in support ofsuch obligation.

An interestpayment of $19,744,000 on our 9 3⁄4 Senior Secured Notes (the “Notes”) was due onJune 1, 2006. Since payment was not made within 30 days after June 1,2006, an “Event of Default” under the Indenture governing the Notes occurred,which was subsequently cured as described below.

On July 5, 2006, weentered into a Credit and Guaranty Agreement with Silver Point Finance LLC, asAdministrative Agent, and the Lenders party thereto (the “Lenders”) from timeto time (the “Credit Agreement”). The Credit Agreement provides for two securedloans: a $40 million Tranche A Term Loan and a Convertible Tranche B Term Loanfor $30 million. The Tranche B Term Loan is presently convertible, at theoption of the Lenders in the aggregate, into 200,000 shares of our 12 3⁄4% CumulativeExchangeable Preferred Stock (the “Preferred Stock”). Both term loans aresecured by our existing assets and our subsidiaries generally on a pari passubasis with the Notes. Both term loans mature on December 1, 2006. On July5, 2006, we borrowed $27.5 million of the Tranche B Term Loan and approximately$19.9 million of the proceeds were used to pay interest on the Notes that wasdue June 1, 2006, thus curing the Event of Default with respect to suchNotes. The remaining proceeds of approximately $7.6 million became availablefor working capital purposes. On July 26, 2006, we borrowed the remaining $2.5million of the Tranche B Term Loan and $40 million Tranche A Term Loan tocomplete the acquisition of WBNG-TV as previously described. As of September30, 2006, we paid approximately $1,528,000 of interest on the $70 millionCredit Agreement entered into on July 5, 2006.

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OnAugust 15, 2006, we entered into Amendment No. 1 under Credit and GuarantyAgreement (“Amendment No. 1”) to our Credit Agreement.  Amendment No. 1 extends from August 15, 2006to August 31, 2006: (i) the date by which we are obligated to execute anagreement on the terms of a comprehensive reorganization plan in form andsubstance acceptable to the lenders holding more than 50% of the aggregate loanexposure under the Credit Agreement; and (ii) the date by which the failure ofMalara to refinance Malara’s existing credit facility with a new creditfacility from the lenders under the Credit Agreement would constitute an eventof default under the Credit Agreement. On August 31, 2006, we entered into Amendment No. 2 and Limited Waiverto its Credit Agreement, which, among other things, further extended suchdeadline from August 31, 2006 to September 15, 2006.  

TheCredit Agreement, as amended, specifies certain events of default, includingthe following: (i) failure to make payments when due under the CreditAgreement; (ii) certain defaults in other agreements concerning indebtedness;(iii) failure of the Company to enter into a definitive agreement effectuatinga comprehensive reorganization of the Company in form and substancesatisfactory to the lenders holding 51% of the loans by September 15, 2006;(iv) material breach of a representation; (v) involuntary or voluntarybankruptcy; (vi) judgment, writs or warrants of attachment in the aggregateamount in excess of $2,000,000 shall be entered or filed against the Companyand remain un-discharged for 30 days; (vii) the failure of Malara BroadcastGroup to refinance the Malara Broadcast Group senior credit facility with a newfacility from the lenders by September 15, 2006; and (viii) the failure of theCompany to execute and deliver a supplement to Indenture on or prior to July31, 2006 in accordance with the Supplemental Agreement. Since September 15,2006 we have not yet entered into reorganization agreement and Malara BroadcastGroup has not yet refinanced its existing credit facility, the failure of eachconstitutes an event of default under the Credit Agreement, upon notice to theCompany by the administrative agent under the Credit Agreement among otherthings: (a) the unpaid principal amount of and accrued interest on theloans and all other obligations under the Credit Agreement shall immediatelybecome due and payable and (b) the administrative agent may cause collateralagent to enforce any and all liens and security interests created pursuant tocollateral documents under the Credit Agreement. The occurrence of anyacceleration of debt due under the Credit Agreement would constitute an eventof default under the Indenture. We continue to work on a comprehensivereorganization with the administrative agent satisfactory to the lendersholding 51% of the loans and Malara Broadcast Group continues to work onrefinancing its existing credit facility and as of November 13, 2006, we havenot received a default notice.

We do not presently have the cash to make our December1, 2006 interest payment of $19,744,000 on our Notes or repay all amountsoutstanding under our $70 million Credit Agreement when due on December 1,2006. In order to improve our existing liquidity position and to further ourbusiness strategy, we continue to explore all potential reorganizationalternatives with respect to our debt obligations and preferred stock,including a reorganization under Chapter 11 of the Bankruptcy Code. A lack ofliquidity would have a material adverse effect on our business strategy andtherefore affect our ability to continue as a going concern. The financial statementsdo not include any adjustments to reflect the possible future effects on therecoverability and classification of assets or the amounts and classificationof liabilities that might result from the outcome of this uncertainty.

We have established an investment policy for investingcash that is not immediately required for working capital purposes.  Our investment objectives are to preservecapital, maximize our return on investment and to ensure we have appropriateliquidity for our cash needs. The investments are considered to beavailable-for-sale as defined under Statement of Financial Accounting StandardsNo. 115, *Accounting for Certain Investments in Debtand Equity Securities*. As of September 30, 2006, we hadapproximately $18,229,000 of cash and cash equivalents. As of September 30,2006, we had no marketable securities.

***Net Cash Used in orProvided by Operating, Investing and Financing Activities***

Net cash used inoperating activities was $9,587,000 during the nine months ended September 30, 2006compared to $11,552,000 during the nine months ended September 30, 2005. Thechange in 2006 from 2005 was primarily due to the changes in net assets andliabilities.

Net cash used ininvesting activities was $21,830,000 during the nine months ended September 30,2006 compared to $77,895,000 during the nine months ended September 30,2005. The change in 2006 from 2005 was primarily due to the selling of our U.S.Government Securities during the three months ended March 31, 2006, ascompared to the acquisition of assets and the purchase of U.S. GovernmentSecurities during the same period in 2005.

Net cash provided by financing activities was$42,017,000 during the nine months ended September 30, 2006 compared to$50,566,000 during the nine months ended September 30, 2005. The change in2006 from 2005 is primarily due to the increased net proceeds received in 2006compared to 2005, offset in part by increased payments of deferred financingfees.

***Our 9***3¤4%Senior Secured Notes, Tranche A Term Loan and Convertible Tranche B Term Loan

On December 22, 2003, we completed a $405,000,000offering of our 9 3/4 % Senior Secured Notes (the “Notes”) due December 1,2010, at a discount, resulting in proceeds to us of $400,067,100.  Interest on the Notes is payable on December 1and June 1 of each year, which commenced on June 1, 2004.

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On July 5, 2006, we entered into a Credit and GuarantyAgreement with Silver Point Finance LLC, as Administrative Agent, and theLenders party (the “Lenders”) thereto from time to time (the “Credit Agreement”).The Credit Agreement provides for two secured loans: a $40 million Tranche ATerm Loan and a Convertible Tranche B Term Loan for $30 million. The Tranche BTerm Loan is presently convertible, at the option of the Lenders in the aggregate,into 200,000 shares of our 12 3⁄4% Cumulative Exchangeable Preferred Stock (the “PreferredStock”). Both term loans are secured by our existing assets and oursubsidiaries generally on a pari passu basis with our Notes. Both term loansmature on December 1, 2006. On July 5, 2006, we borrowed $27.5 million ofthe Tranche B Term Loan and approximately $19.9 million of the proceeds wereused to pay interest on the Notes that was due June 1, 2006. The remainingproceeds of approximately $7.6 million became available for working capitalpurposes. On July 26, 2006, we borrowed the remaining $2.5 million of theTranche B Term Loan and $40 million Tranche A Term Loan to complete theacquisition of WBNG-TV. Interest on the Credit Agreement, which is LIBOR plus 5.0%,is payable generally on the last day of each month and/or the last day of eachinterest period, which commenced on July 31, 2006. As of September 30, 2006, weincurred approximately $1,528,000 of interest expense on the $70 million CreditAgreement entered into on July 5, 2006.

In connection with the execution of the CreditAgreement, the Indenture, dated as of December 22, 2003, between us, theguarantors party thereto and The Bank of New York, as Trustee, as supplementedby the First Supplemental Indenture, dated as of March 9, 2005, by andbetween us, the guarantors party thereto and The Bank of New York, as Trustee(the “Indenture”), was further supplemented by the Second SupplementalIndenture, dated as of July 5, 2006, by and between us, the guarantorsparty thereto and The Bank of New York, as Trustee (the “Second SupplementalIndenture”).

The Second Supplemental Indenture adds WBNG, Inc.and WBNG License, Inc., the acquisition entities (which we completed theacquisition on July 26, 2006, see above for further details) as guarantors tothe Indenture. The Lenders have a first lien on the assets of WBNG, Inc andWBNG License, Inc. Note holders have a second lien in the assets of WBNG,Inc and WBNG License, Inc. Additionally, the Trustee agreed to act ascollateral agent for the Lenders under the Credit Agreement. The SecondSupplemental Indenture also makes conforming changes necessary to allow us toenter into the Credit Agreement, grant liens securing that indebtedness andmakes certain other changes negotiated between us and the beneficial owners ofmore than a majority of the principal amount of the outstanding Notes (the “MajorityNote Holders”).

In connection with the Second Supplemental Indenture,we entered into the Supplemental Agreement, dated as of July 5, 2006, inrelation to the Second Supplemental Indenture and the Credit and GuarantyAgreement, each dated as of July 5, 2006 by and between us, the partiesidentified as “Guarantors” on the signature pages thereof and theparties identified as “Qualified Holders” on the signature pages thereto(the “Supplemental Agreement”). The Supplemental Agreement provides theMajority Note Holders, among other things, with certain consent rights toactions by us, including, but not limited to, incurring additionalindebtedness, making certain types of investments or acquisitions, sellingassets, granting additional liens on certain assets of the Company, and issuingor selling certain types of additional capital stock. The SupplementalIndenture provides that defaults under the Supplemental Agreement will bedefaults under the Indenture.

On August 15, 2006, the Company entered into AmendmentNo. 1 under Credit and Guaranty Agreement (“Amendment No. 1”) to its CreditAgreement.  Amendment No. 1 extends fromAugust 15, 2006 to August 31, 2006: (i) the date by which the Company and itssubsidiaries are obligated to execute an agreement on the terms of acomprehensive reorganization plan in form and substance acceptable to thelenders holding more than 50% of the aggregate loan exposure under the CreditAgreement; and (ii) the date by which the failure of Malara to refinanceMalara’s existing credit facility with a new credit facility from the lendersunder the Credit Agreement would constitute an event of default under theCredit Agreement.  On August 31, 2006,the Company entered into Amendment No. 2 and Limited Waiver to its CreditAgreement, which, among other things, further extended such deadline fromAugust 31, 2006 to September 15, 2006.

The Notes and Credit Agreement are our senior securedobligations. The Notes are guaranteed by each of our restricted subsidiaries.The Credit Agreement is guaranteed by all of our subsidiaries.  The Notes, Credit Agreement and the guaranteesare secured by substantially all of our assets. We may redeem some or all ofthe Notes at any time on or after December 1, 2006.

The Indenture, which governs our Notes and CreditAgreement  restricts our ability and theability of our restricted subsidiaries to, among other things: (i) incuradditional debt and issue preferred stock; (ii) make certaindistributions, investments and other restricted payments; (iii) createcertain liens; (iv) enter into transactions with affiliates;(v) enter into agreements that restrict our restricted subsidiaries frommaking payments to us; (vi) merge, consolidate or sell substantially allof our assets; (vii) sell or acquire assets; and (viii) enter intonew lines of business.

Under the Indenture, the Malara Broadcast Groupcompanies to which we provide services pursuant to the local servicesagreements are subject to the terms of the Indenture applicable to RestrictedSubsidiaries that are not Guarantors, as such terms are defined in theIndenture.

***Malara Broadcast Group’s Senior Credit Facility***

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV in March 2005 with the proceeds of the MalaraBroadcast Group Senior Credit Facility, consisting of two terms loans totaling$48.5 million and a revolving loan of $5 million. The $23.5 million MalaraBroadcast Group Term Loan A, which was secured by a letter of credit, was paidoff on February 10, 2006. To secure the reimbursement obligations in theevent of a draw on the letter of credit, pursuant to the terms and conditionsof an Application and Agreement for Standby Letter of Credit, we had pledged$25 million of U.S. Government Securities. The $25 million Malara Broadcast Group Term Loan B and the $5 millionrevolving loan are secured by the assets of WPTA-TV and KDLH-TV, and guaranteedon an unsecured basis by Granite Broadcasting Corporation pursuant to aguaranty agreement (the “Granite Guaranty”).

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The Malara Broadcast Group Senior Credit Facilitycontains covenants restricting the ability of Malara Broadcast Group and itssubsidiaries to, among other things, (i) incur additional debt,(ii) incur liens, (iii) make loans and investments, (iv) incurcontingent obligations (including hedging arrangements), (v) declaredividends or redeem or repurchase capital stock or debt, (vi) engage in certainmergers, acquisitions and asset sales, (vii) engage in transactions withaffiliates, (viii) engage in sale-leaseback transactions and(ix) change the nature of its business and the business conducted by itssubsidiaries.  Malara Broadcast Group is alsorequired to comply with financial covenants with respect to a minimum interestcoverage ratio, minimum consolidated available cash flow, a maximum leverageratio and minimum consolidated net revenue and limits on capital expenditures.

Interest rates associated with the Term Loan A werebased, at Malara Broadcast Group’s option, at either (i) the higher of thePrime Rate or the Federal Funds Effective Rate plus 0.50% (the “Base Rate”) or(ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as such terms aredefined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with the Term LoanB and Revolving Loan are based, at Malara Broadcast Group’s option, on either(i) the Base Rate plus 4.625% per annum or (ii) the Adjusted EurodollarRate plus 7.375% per annum. In addition, Deferred Interest (as defined in theMalara Broadcast Group Senior Credit Facility) accrues with respect to, and isadded to the principal amount of, the Term Loan B and Revolving Loan at a rateof 3% per annum. Additionally, Malara Broadcast Group is required to paymonthly commitment fees on the unused portion of its revolving loan commitmentat a rate of 0.50% per annum.  Cashinterest payments are payable monthly.

Malara Broadcast Group is required to make monthlyprincipal payments on the Term Loan B as follows: (i) $125,000 payable atthe end of each month from June 1, 2006 through March 31, 2007,(ii) $158,333 payable at the end of each month from April 1, 2007,through March 31, 2008, and (iii) $216,667 payable at the end of eachmonth from April 1, 2008, through February 1, 2010.

Malara Broadcast Group was required to make monthlyprincipal payments on the Term Loan A and the Revolving Loan equal to theproduct of (i) the Repayment Percentage (which is 25% unless there is anEvent of Default or the Consolidated Loan to Stick Value is less than 70%, inwhich case the Repayment Percentage is 100%) and (ii) the ConsolidatedExcess Free Cash Flow for the month preceding the month in which such installmentis due, as such terms are defined in the Malara Broadcast Group Senior CreditFacility.  All such payments would havebeen applied first to repay the outstanding Revolving Loan to the full extentthereof (without a corresponding reduction in the Revolving Loan CommitmentAmount) and second to repay the outstanding Term Loan A to the full extentthereof; provided that, if the Repayment Percentage for such monthlyinstallment is 100%, the excess 75% of such monthly installment would have beenapplied first to repay the outstanding Revolving Loan to the full extentthereof and second to repay the outstanding Term Loan B to the full extentthereof. For the three and nine months ended September 30, 2006, the totalprincipal payments made on the Revolving Loan and Tranche B Term Loanapproximated $290,000 and $1,114,000, respectively and total principal paymentsmade to date approximated $2,135,000.

OnFebruary 10, 2006, in accordance with the terms of the Malara BroadcastGroup Senior Credit Facility, the letter of credit issued in March 2005 tosupport the $23.5 million Tranche A Term Loan was drawn upon in satisfaction ofMalara Broadcast Group’s obligations to such lenders under the Malara Tranche ATerm Loan following non-renewal of the letter of credit. We paid thereimbursement obligation to the letter of credit issuer on February 10,2006, using U.S. government securities which had been pledged in support ofsuch obligation.

Under aReimbursement Agreement dated as of March 8, 2005 (the “*Reimbursement Agreement*”) among us, Malara Broadcast Groupand certain of Malara Broadcast Group’s subsidiaries (together with Malara, the“*Malara Borrowers*”), the Malara Borrowersagreed to repay us any amounts drawn on the letter of credit plus interest at arate of 8% per annum.  We reduced the$23.5 million owed from Malara Broadcast Group under the ReimbursementAgreement by approximately $6.9 million to $16.6 million.

***Our 12 3/4 % CumulativeExchangeable Preferred Stock***

Under the terms of the Certificate of Designations forour 123¤4%Cumulative Exchangeable Preferred Stock (the “Preferred Stock”), we arerequired to make the semi-annual dividends on such shares in cash beginningOctober 1, 2002.  The cash paymentof dividends had been restricted by the terms of our previous senior creditagreement and indentures and is prohibited under the Indenture, which governsour Notes and under the Credit Agreement. Consequently we have not paid the semi-annual dividend due to theholders since October 1, 2002. During the three and nine months endedSeptember 30, 2006 a dividend payment of $6,387,000 and $19,161,000,respectively, accrued on our Preferred Stock. As of September 30, 2006, we haverecorded an aggregate of $114,965,000 in accrued dividends on our PreferredStock. Since three or more semi-annual dividend payments have not been paid,the holders of the Preferred Stock had the right to elect the lesser of twodirectors or that number of directors constituting 25% of the members of theBoard of Directors. On October 24, 2005, the holders of the majority ofthe Preferred Stock exercised their right to elect two directors to the Boardof Directors of the Company. We are restricted from paying cash dividends underthe Indenture, which governs our Notes, and under the Credit Agreement and donot anticipate paying cash dividends on our Preferred Stock.

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***Film Payments***

As part of an overall effort to reduce stationoperating expenses, we have made substantial progress replacing unprofitableprogramming with competitive, profitable programming.

Film payments from our consolidated operations for thethree and nine months ended September 30, 2006 totaled $2 million and $8.9million, respectively, as compared to the three and nine months ended September30, 2005 totaling $4 million and $15.9 million, respectively.

***No Off-Balance Sheet Arrangements***

At September 30, 2006 and 2005 we did not have anyrelationships with unconsolidated entities or financial partnerships, such asentities often referred to as structured finance or variable interest entities,which would have been established for the purpose of facilitating off-balancesheet arrangements or other contractually narrow or limited purposes. All ofour arrangements with Malara Broadcast Group are on-balance sheet arrangements.

***Capital and Commercial Commitments***

Thefollowing table and discussion reflect our significant contractual obligationsand other commercial commitments related to consolidated operations as ofSeptember 30, 2006:
| ** **                                                                            | ** ** | **Payment Due by Period** | ** **    |
|---------------------------------------------------------------------------------------|------------|------------------------------------------|---------------|
| **Capital Commitment**                                                           | ** ** | ** **                               | ** **    | **Total** | ** ** | **Remainder  of 2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                                                                  |       |                                     |          |   |   |   |   |   |   |   |   |
| 93¤4%  Senior Secured Notes due 2010                                             |       | $                                        | 405,000,000   |   | $ | — |   | $ | — |   | $ | 405,000,000 |   | $ | — |   |
| Interest on  Senior Secured Notes                                                     |       | 174,403,000                              |          | 19,744,000 |   | 78,975,000 |   | 75,684,000 |   | — |   |
| Malara Broadcast  Group Senior Credit Facility (b)                                    |       | 29,281,000                               |          | 994,000 |   | 7,145,000 |   | 21,142,000 |   | — |   |
| Interest on  Malara Broadcast Group Senior Credit Facility (c)                        |       | 10,918,000                               |          | 879,000 |   | 6,496,000 |   | 3,543,000 |   | — |   |
| Senior Credit  Agreement — Tranche A and Tranche B Term Loans (e)                |       | 70,000,000                               |          | 70,000,000 |   | — |   | — |   | — |   |
| Interest on -  Senior Credit Agreement (f)                                            |       | 1,261,000                                |          | 1,261,000 |   | — |   | — |   | — |   |
| Program contract  commitments — current                                          |       | 51,044,000                               |          | 27,044,000 |   | 13,147,000 |   | 5,511,000 |   | 5,342,000 |   |
| Program contract  commitments — future (d)                                       |       | 17,975,000                               |          | 43,000 |   | 7,729,000 |   | 8,427,000 |   | 1,776,000 |   |
| Operating leases                                                                      |       | 11,704,000                               |          | 502,000 |   | 3,464,000 |   | 3,058,000 |   | 4,680,000 |   |
| Network  Affiliations                                                                 |       | 3,154,000                                |          | 3,154,000 |   | — |   | — |   | — |   |
| 123¤4%  Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000                              |          | — |   | — |   | 377,670,000 |   | — |   |
| Deferred  compensation (g)                                                            |       | 3,068,000                                |          | 3,068,000 |   | — |   | — |   | — |   |
| Total capital and  commercial commitments                                             |       | $                                        | 1,155,478,000 |   | $ | 126,689,000 |   | $ | 116,956,000 |   | $ | 900,035,000 |   | $ | 11,798,000 |   |
|                                                                                       |            |                                          |               |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(a)             Asof September 30, 2006, the Cumulative Exchangeable Preferred Stock, includingaccrued dividends totaled $314,423,000. The table above includes the balance asof September 30, 2006 and the expected accrued dividends throughApril 2009, the date of redemption. Payment of cash dividends arerestricted by the terms of the Indenture, which governs our existing SeniorSecured Notes and by the Credit Agreement.

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(b)            Theamounts are our estimates of required cash payments under the Malara SeniorCredit Facility. The Malara Senior Credit Facility currently consists of arevolver and one term loan. The required amortization under the revolver iscalculated based upon Malara’s station performance; therefore, actual requiredamortization may vary from our estimates above. The remaining term loan has afixed amortization schedule, and such amounts are included above.

(c)             Theamounts are our estimates of required interest payments under the Malara SeniorCredit Facility. The actual interest payments may vary based upon the actualrequired amortization payments of the Malara Senior Credit Facility (see(b) above).

(d)            Programcontract commitments — future reflect a license agreement for program materialthat is not yet available for its first broadcast and is therefore not recordedas an asset or liability on our consolidated balance sheet in accordance withthe provisions of Statement of Financial Accounting Standards No. 63, *Financial Reporting for Broadcasters*.

(e)             OnJuly 5, 2006, we entered into a Senior Credit Agreement with Silver Point FinanceLLC. The Credit Agreement provides for two secured loans: a $40 million TrancheA Term Loan and a Convertible Tranche B Term Loan for $30 million. Both termloans mature on December 1, 2006. The Tranche B Term Loan is presentlyconvertible, at the option of the Lenders in the aggregate, into 200,000 sharesof our 12 3⁄4% Cumulative Exchangeable Preferred Stock. On July 5, 2006, weborrowed $27.5 million on the Tranche B Term Loan. On July 26, 2006, weborrowed the remaining $2.5 million on the Tranche B Term Loan and the $40million Tranche A Term Loan. The above amount represents the entire borrowingson the Senior Credit Agreement.

(f)               Theamounts are our estimates of required interest payments under the Senior CreditAgreement. The actual interest payments may vary based upon the actual LIBORrates obtained during the term of the Senior Credit Agreement (see(e) above).

(g)            Deferredcompensation reflects amounts owed under award programs and severanceagreements. Of the total amounts, $3,065,000 is due to Stuart J. Beck inDecember 2006 as part of a performance award granted in December 2003 (see Note4. Related Parties) and the remainder is owed under severance agreements.

*Recent Accounting Pronouncements*

In June 2006, the Financial Accounting Standards Board(“FASB”) issued FinancialInterpretation No. 48,*Accounting forUncertainty in Income Taxes,* or Interpretation 48.Interpretation 48, which clarifies the accounting for uncertainty in incometaxes by prescribing a recognition threshold for tax positions taken orexpected to be taken in a tax return. Interpretation 48 is effective for fiscalyears beginning after December 15, 2006. We are currently evaluating the impact, if any Interpretation 48 mayhave on our financial position, consolidated results of operations or statementof cash flows.

***Item 3.  Quantitative and Qualitative Disclosuresabout Market Risk***

The interest rate on our outstanding Senior SecuredNotes is fixed at 9.75%.  Consequently,our earnings will not be affected by changes in short-term interest rates.

Interest rates associated with Malara Broadcast Group’sMarch 8, 2005, Tranche A Term Loan, which was repaid on February 10,2006, were based, at Malara Broadcast Group’s option, at either (i) thehigher of the Prime Rate or the Federal Funds Effective Rate plus 0.50% (the “BaseRate”) or (ii) the Adjusted Eurodollar Rate plus 0.60% per annum, as suchterms are defined in the Malara Broadcast Group Senior Credit Facility.  Interest rates associated with MalaraBroadcast Group’s March 8, 2005, Tranche B Term Loan and Revolving Loanare based, at Malara Broadcast Group’s option, at either (i) the Base Rateplus 4.625% per annum or (ii) the Adjusted Eurodollar Rate plus 7.375% perannum.  In addition, Deferred Interest(as defined in the Malara Broadcast Group Senior Credit Facility) accrues withrespect to, and is added to the principal amount of, the Term Loan B andRevolving Loan at a rate of 3% per annum. At September 30, 2006, the six-month Adjusted Eurodollar Rate was5.39%.  Malara Broadcast Group has notentered into any agreements to hedge the risk of potential interest rateincreases.  Based on borrowingsoutstanding as of September 30, 2006, a 2% increase in the Adjusted EurodollarRate would increase interest expense on an annual basis by approximately$564,000.

Interest rates associated with the Company’sJuly 5, 2006 $40 million Tranche A Term Loan and $30 millionTranche B Term Loan is based at the Company’s option at either (i) theLIBOR rate plus 5.00% (the “LIBOR Rate Loan”) or (ii) the higher of thePrime Rate or the Federal Funds Effective Rate plus 6.00% (the “Base Rate”).The Company elected the LIBOR Rate Loan option. At July 5, 2006, the three-month LIBOR Rate was 5.51%.  The Company has not entered into anyagreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding as ofJuly 5, 2006, a 1% increase in the LIBOR Rate would increase interestexpense on an annual basis by approximately $230,000.

 

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***Item 4.****                         Controlsand Procedures*

As of September 30, 2006, an evaluation was carriedout under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of our disclosure controls and procedures (as defined inRules13a-15(e) and 15d-15(e) under the Securities Exchange Act of1934). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of September 30, 2006. There was no change in our internal control over financial reporting (asdefined in Rules 13a-15(f) and 15d-15(f) under the SecuritiesExchange Act of 1934) that occurred during the period covered by this QuarterlyReport on Form 10-Q that has materially affected, or is reasonably likelyto materially affect, our internal control over financial reporting.

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**PART II. OTHER INFORMATION**

***Item 1.****                         LegalProceedings*

***Twentieth Television andTwentieth Century Fox Film Corporation Proceedings***.  On orabout August 31, 2006, Twentieth Television and Twentieth Century Fox FilmCorporation filed a complaint against the Company, Pacific FM, Inc. and othersin the Superior Court for the State of California alleging that the defendantsbreached certain contracts with plaintiff related to certain programmingallegedly supplied by the plaintiffs. The complaint seeks approximately $23 million in damages.  On or about October 4, 2006, the plaintiffsfiled a motion seeking an order of attachment against any assets of thedefendants located in California in the amounts of $4,292,699.85 and$647,883.48 related to the contracts.  OnNovember 1, 2006, the Court granted the plaintiffs motion for an order ofattachment.  Failure to vacate such attachmentlien within 30 days after any lien is placed on any assets of the Companyor any of its subsidiaries would constitute a default under the Company’sIndenture. Failure to vacate such attachment within 15 days after any lienis placed on any assets of the Company or any of its subsidiaries wouldconstitute an event of default under the Company’s Credit Agreement.  On November 6, 2006, the defendants answeredthe complaint.

***WarnerBros. Television Distribution Proceedings***.  On August 9,2006, the Company was served with a complaint in a law suit filed by WarnerBros. Television Distribution, Inc. on August 4, 2006 against the Company andcertain of its subsidiaries in the Superior Court of the State of California,County of Los Angeles.  The complaintalleges breach of several syndication license agreements for non-payment oflicense fees and seeks monetary damages in excess of $7.5 million.  On October 6, 2006, the Company filed ananswer to the complaint with affirmative defenses.

***Refiled Harbinger Proceedings***.  On or about August 21, 2006, HarbingerCapital Partners Master Fund I, Ltd. and Goldentree High Yield Master Fund II,Ltd. filed a complaint in the Court of Chancery of the State of Delawareagainst Granite Broadcasting Corporation and certain of its officers anddirectors. The complaint asserts direct and derivative causes of action andclaims that the defendants breached their fiduciary duties in connection withtheir evaluation of certain restructuring proposals proposed by the plaintiffsin or around June, 2006. The complaint does not specify the amount of damagessought by the plaintiffs.  The defendantshave filed a motion to dismiss the complaint, but the parties have not yetfiled briefs with respect to the motion to dismiss.

***Dismissed HarbingerProceedings***.  OnJune 7, 2006, Harbinger Capital Partners Master Fund I, Ltd. (“Harbinger”), aholder of 123⁄4% Cumulative Exchangeable Preferred Stock (“Preferred Stock”) ofthe Company, filed a lawsuit (the “Delaware Harbinger Suit”) in the Court ofChancery of the State of Delaware in and for New Castle County (the “ChanceryCourt”), C.A. No. 2205-N, against Granite Broadcasting Corporation, DS AudibleSan Francisco, LLC (“DS San Francisco”) and DS Audible Detroit, LLC (“DSDetroit,” and together with DS San Francisco, “DS Audible”) alleging that theproposed sales (the “Sales”) by the Company of TV Stations KBWB-TV and WDWB-TVto DS Audible pursuant to Asset Purchase Agreements dated as of May 1, 2006(the “Sale Agreements”) constituted fraudulent conveyances under the New YorkUniform Fraudulent Conveyance Act and the California and Michigan UniformFraudulent Transfer Acts, and seeking to have the Delaware Court enjoin theSales, or if the Sales occurred, to rescind the Sales, as well as damages. TheCompany believes that the Delaware Harbinger Suit is without merit and on June13, 2006, filed a Motion to Dismiss and requested an expedited hearing withrespect thereto. On June 29, 2006, the Chancery Court granted the Company’sMotion to Dismiss the Delaware Harbinger Suit. On or about June 30, 2006, theplaintiffs filed a notice of appeal of the Chancery Court’s Memorandum Opinionand Order dismissing the lawsuit. The Company intends to continue to vigorouslydefend this lawsuit on appeal. On August 14, 2006, Harbinger voluntarilywithdrew its appeal of the Chancery Court’s Memorandum Opinion and Orderdismissing the lawsuit.

***Mooted Harbinger FCC Proceedings***.  Also on June 7, 2006, Harbinger filed aPetition to Deny before the Federal Communications Commission (the“FCC”) requesting that the FCC not consent to the transfer of FCC licensesrelating to KBWB-TV and WDWB-TV pending resolution of the Delaware HarbingerSuit. The FCC’s Media Bureau (“Bureau”) denied the petition and granted theassignment application in June 2006.  OnJuly 24, 2006, Harbinger filed a petition for reconsideration seeking Bureaureconsideration of its June decision.  OnJuly 25, 2006, the Company notified the FCC that it had decided not toconsummate the assignment of the Stations. The Company subsequently notified the FCC that it did not intend torespond to the petition for reconsideration because it is mooted by thewithdrawal of the assignment applications because the assignment of theStations to DS Audible will not be consummated.

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***The WB Suit***.  On May 17, 2006, Granite BroadcastingCorporation and certain of its subsidiaries filed a lawsuit in the DelawareCourt of Chancery regarding the termination by The WB Television NetworkPartners, L.P. (“The WB”) of Granite’s WB affiliation agreements for its SanFrancisco and Detroit television stations. The lawsuit follows the January 24,2006 announcement of the merging of the UPN and WB television networks, and wasfiled against The WB, WB Communications, a division of Time WarnerEntertainment Company, L.P., CBS Corporation (“CBS”) and Warner BrothersEntertainment, Inc. (“Warner Brothers”). The lawsuit alleges, among otherthings, that The WB’s premature termination of Granite’s San Francisco andDetroit network affiliation agreements, and The WB’s repudiation of agreementsto extend the terms of Granite’s San Francisco and Detroit network affiliationagreements, damaged Granite and its subsidiaries and led to the termination oftheir then-existing agreements to sell those stations to wholly-ownedsubsidiaries of AM Media Holdings, LLC. In addition, it alleges that WarnerBrothers and CBS tortuously interfered with Granite’s San Francisco and Detroitnetwork affiliation agreements and the agreements to extend the terms of the SanFrancisco and Detroit network affiliation agreements. On August 4, 2006, TheWB, WB Communications, Warner Brothers and CBS filed their answers to thecomplaint.  The WB has asserted acounterclaim against us.  The two-countcounterclaim alleges that we breached the San Francisco and Detroit networkaffiliation agreements by failing to make certain payments thereunder and that,as of July 14, 2006, we owe The WB $2,523,428 under those agreements, plusinterest thereon.  On August 24,2006, the Company filed a reply to the counterclaim with affirmative defenses.

***Item 1A.****                Risk Factors*

Our 2005 Annual Report on Form 10-K includes adetailed discussion of our risk factors. The information presented belowupdates, and should be read in conjunction with, the risk factors andinformation disclosed in that Form 10-K.

**We have limitedsources of liquidity and no working capital facility and therefore will not beable to service all of our obligations, absent changes in our capitalstructure.**

Our source of available liquidity isour cash. We do not presently have enough cash to make the interest payment of$19,744,000 on our Notes on December 1, 2006, repay the loans under our CreditAgreement due on December 1, 2006 and otherwise service our existingobligations on an ongoing basis.  Lack ofliquidity would have a material adverse effect on our ability to implement ourbusiness strategy and continue as a going concern. We have engaged theservices of Houlihan Lokey Howard & Zukin as our financial advisorto assist us in the evaluation of strategic options and to advise us onavailable financing and capital reorganization alternatives.There can be no assurance that any transaction will occur or, if one isundertaken, of its potential terms or timing. See “Liquidity and CapitalResources” in our Management’s Discussion and Analysis for further details.

**Our failure toenter into an agreement effectuating a comprehensive restructuring of theCompany in a form acceptable to the requisite lenders under the CreditAgreement by September 15, 2006 constitutes an event of default under ourCredit Agreement, which following notice from the administrative agent underthe Credit Agreement, would, among other things, result in the acceleration ofour obligations under the Credit Agreement.**

The Credit Agreement as amended,requires that by September 15, 2006 the Company enter into a definitiveagreement effectuating a comprehensive reorganization of the Company in formand substance satisfactory to the lenders holding 51% of the loans.  Since the Company has not yet entered into areorganization agreement, which constitutes an event of default under theCredit Agreement, upon notice to the Company by the administrative agent underthe Credit Agreement, among other things: (a) the unpaid principal amount ofand accrued interest on the loans and all other obligations under the CreditAgreement shall immediately become due and payable and (b) the administrativeagent may cause collateral agent to enforce any and all liens and security interestscreated pursuant to collateral documents under the Credit Agreement. Theoccurrence of any acceleration of debt due under the Credit Agreement wouldconstitute an event of default under the Indenture. The Company and administrative agent are continuing to work on acomprehensive reorganization satisfactory to the lenders holding 51% of theloans and as of November 13, 2006, the Company has not received a defaultnotice. There can be no assurance that the Company will be able to enter into aReorganization Plan acceptable to the requisite lenders under the CreditAgreement.

**The failure ofMalara Broadcast Group to refinance the existing Malara Broadcast Group SeniorCredit Facility with a new credit facility with the lenders under our CreditAgreement by September 15, 2006 constitutes an event of default under ourCredit Agreement, which following notice from the administrative agent underthe Credit Agreement, would, among other things, result in the acceleration ofour obligations under the Credit Agreement**.

The Credit Agreement, as amended,requires that by September 15, 2006 Malara Broadcast Group refinance itsexisting credit facility with a new credit facility from the lenders under theCredit Agreement.  Since Malara BroadcastGroup  has not yet refinanced itsexisting credit facility, which constitutes an event of default under theCredit Agreement, upon notice to the Company by the administrative agent underthe Credit Agreement, among other things: (a)  the unpaid principal amountof and accrued interest on the loans and all other obligations under the CreditAgreement shall immediately become due and payable and (b) the administrativeagent may cause collateral agent to enforce any and all liens and securityinterests created pursuant to collateral documents under the Credit Agreement. Theoccurrence of any acceleration of debt due under the Credit Agreement wouldconstitute an event of default under the Indenture. Malara Broadcast Group continues work on refinancing its existing creditfacility and as of November 13, 2006, the Company has not received a defaultnotice.  There can be no assurance thatMalara Broadcast Group will be able to refinance its existing credit facility.

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**Resultsof legal proceedings could have a material adverse effect on our financialcondition, results of operations and liquidity.**

The disclosureappearing in Part II, Item 1 “Legal Proceedings” is hereby incorporated herein byreference.  We are defending thelawsuits filed against us. However, we cannot predict when the legalproceedings will be completed or the likely outcome of any of the legalproceedings. It is possible that they could lead to additional lawsuits,settlements and/or judgments either against us or our subsidiaries or both, andthat, as a result, we will be required to pay damages or other payments orsuffer other penalties, each of which could have a material adverse effect onour financial condition, results of operations and liquidity. We will continueto incur significant costs and expenses as a result of the ongoing legalproceedings.

**The Tranche B Term Loan under our Credit Agreement isconvertible, at the option of the lenders, into shares of the Company’s 12 3⁄4%Cumulative Exchangeable Preferred Stock (“Preferred Stock”).**

The outstanding principle amount ofany Tranche B Term Loan held by a lender is convertible in accordance with theterms of the Credit Agreement into shares of Preferred Stock equal to theresult obtained by dividing the principal amount being converted by theconversion price, as adjusted under the Credit Agreement.  The conversion price is initially $150/pershare, which means the $30 million Tranche B Term Loan is initially convertibleinto 200,000 shares of Preferred Stock. The Credit Agreement further provides that if the Company is party toany transaction in which the previously outstanding Preferred Stock shall bechanged into or exchanged for different securities of the Company or securitiesof another corporation or other entity, then as a condition to consummation of suchtransaction adequate provision shall be made so that each lender with respectto a Tranche B Term Loan shall be entitled, upon conversion, to: (i) theaggregate amount of stock, cash and/or other property, as the case may be, intowhich or for which each share of Preferred Stock is changed or exchanged times(ii) the number of shares of Preferred Stock into which the then outstandingprincipal amount of such lender’s Tranche B Term Loan is convertibleimmediately prior to the consummation of such transaction.

***Item 2.****                         UnregisteredSales of Equity Securities and Use of Proceeds*

None.

***Item 3.****                         DefaultsUpon Senior Securities*

The disclosure appearingunder Part II, Item 1A, “Risk Factors” concerning defaults under the Company’sCredit Agreement is hereby incorporated by reference.

***Item 4.******                         Submissionof Matters to a Vote of Security Holders***

None.

***Item5.******                         OtherInformation***

None.

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***Item6.  Exhibits***
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  | ** ** | ** **                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 3.1         |       | June 26, 2006 Amendments to Amended and Restated  Bylaws of the Company (incorporated by reference to Exhibit 3.1 to our  Current Report on Form 8-K filed on July 3, 2006)                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2         |       | Certificate of Retirement of 123¤4%  Cumulative Exchangeable Preferred Stock of the Company (incorporated by  reference to Exhibit 3.2 to our Current Report on Form 8-K filed on July 3,  2006)                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.3         |       | Certificate of Increase of Authorized Number of  Shares of 123⁄4% Cumulative Exchangeable Preferred Stock of Granite  Broadcasting Corporation (incorporated by reference to Exhibit 3.1 to our  Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.4         |       | Corrected Certificate of Retirement of 123⁄4%  Cumulative Exchangeable Preferred Stock of Granite Broadcasting Corporation  (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K  filed on July 19, 2006)                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.5         |       | Corrected Certificate of Increase of Authorized  Number of Shares of 123⁄4% Cumulative Exchangeable Preferred Stock of Granite  Broadcasting Corporation (incorporated by reference to Exhibit 3.2 to our  Current Report on Form 8-K filed on July 3, 2006)                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1         |       | Credit and Guaranty Agreement, dated as of July 5,  2006, among Granite Broadcasting Corporation, the subsidiaries of Granite  Broadcasting Corporation, Silver Point Finance LLC, as Administrative Agent,  and the Lenders party thereto from time to time (incorporated by reference to  Exhibit 4.1 to our Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2         |       | Second Supplemental Indenture, dated as of July 5,  2006, by and among Granite Broadcasting Corporation, the guarantors party  thereto and The Bank of New York, as Trustee (incorporated by reference to  Exhibit 4.2 to our Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3         |       | Supplemental Agreement, dated as of July 5, 2006, in  relation to Second Supplemental Indenture and Credit and Guaranty Agreement,  each dated as of July 5, 2006, by and among Granite Broadcasting Corporation,  the parties identified as “Guarantors” on the signature pages thereof and the  parties identified as “Qualified Holders” on the signature pages thereto  (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K  filed on July 6, 2006) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4         |       | Third Supplemental Indenture, dated as of August 1,  2006, by and among Granite Broadcasting Corporation, the guarantors party thereto  and The Bank of New York, as Trustee (incorporated by reference to Exhibit 4  to our Current Report on Form 8-K filed on August 7, 2006)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5         |       | Amendment No. 1 under Credit and  Guaranty Agreement, dated as of August 15, 2006, by and amongranite Broadcasting  Corporation, the Subsidiaries of Granite Broadcasting Corporation listed on  the signature pages thereto, as Guarantors, the Lenders party on the  signature pages thereto, and Silver Point Finance, LLC, as Administrative  Agent (incorporated by reference to Exhibit 4 to our Current Report on Form  8-K filed on August 17, 2006)                                        |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6         |       | Amendment No. 2 and Limited Waiver  under Credit and Guaranty Agreement, dated as of August 31, 2006, by and  among Granite Broadcasting Corporation, the Subsidiaries of Granite  Broadcasting Corporation listed on the signature pages thereto, as  Guarantors, the Lenders party on the signature pages thereto, and Silver  Point Finance, LLC, as Administrative Agent (incorporated by reference to  Exhibit 4 to our Current Report on Form 8-K filed on August 31, 2006)                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1        |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. §7241)                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2        |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. §7241)                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32          |       | Certifications of Chief Executive Officer and Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (18 U.S.C. §1350)                                                                                                                                                                                                                                                                                                                                            |

 

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**SIGNATURES**

Pursuant to therequirements of Section 13 or 15 (d) of the Securities Exchange Actof 1934, the Registrant has caused this report to be signed on its behalf bythe undersigned thereunto duly authorized.
|                          |   |   |   | GRANITE  BROADCASTING CORPORATION                     |
|--------------------------|--------|--------|--------|-------------------------------------------------------|
|                     |   |   |   | Registrant                                            |
|                     |   |   |   |                                                  |
|                     |   |   |   |                                                  |
| Date: November 14,  2006 |   |   |   | /s/ W. DON  CORNWELL                                  |
|                     |   |   |   | (W. Don  Cornwell)                                    |
|                     |   |   |   | Chief Executive  Officer                              |
|                     |   |   |   |                                                  |
|                     |   |   |   |                                                  |
| Date: November 14,  2006 |   |   |   | /s/ LAWRENCE I.  WILLS                                |
|                     |   |   |   | (Lawrence I.  Wills)                                  |
|                     |   |   |   | Senior Vice  President — Chief Financial Officer |
|                     |   |   |   | (Principal  Financial Officer)                        |

 

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**Exhibit Index**
| Exhibit No. | ** ** | **Description of Exhibit**                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.1         |       | June 26, 2006 Amendments to Amended and Restated  Bylaws of the Company (incorporated by reference to Exhibit 3.1 to our  Current Report on Form 8-K filed on July 3, 2006)                                                                                                                                                                                                                                                                                                                         |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.2         |       | Certificate of Retirement of 123¤4%  Cumulative Exchangeable Preferred Stock of the Company (incorporated by  reference to Exhibit 3.2 to our Current Report on Form 8-K filed on July 3,  2006)                                                                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.3         |       | Certificate of Increase of Authorized Number of  Shares of 123⁄4% Cumulative Exchangeable Preferred Stock of Granite  Broadcasting Corporation (incorporated by reference to Exhibit 3.1 to our  Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                                                                                                                               |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.4         |       | Corrected Certificate of Retirement of 123⁄4%  Cumulative Exchangeable Preferred Stock of Granite Broadcasting Corporation  (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K  filed on July 19, 2006)                                                                                                                                                                                                                                                                 |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 3.5         |       | Corrected Certificate of Increase of Authorized  Number of Shares of 123⁄4% Cumulative Exchangeable Preferred Stock of Granite  Broadcasting Corporation (incorporated by reference to Exhibit 3.2 to our  Current Report on Form 8-K filed on July 3, 2006)                                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.1         |       | Credit and Guaranty Agreement, dated as of July 5,  2006, among Granite Broadcasting Corporation, the subsidiaries of Granite  Broadcasting Corporation, Silver Point Finance LLC, as Administrative Agent,  and the Lenders party thereto from time to time (incorporated by reference to  Exhibit 4.1 to our Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.2         |       | Second Supplemental Indenture, dated as of July 5,  2006, by and among Granite Broadcasting Corporation, the guarantors party  thereto and The Bank of New York, as Trustee (incorporated by reference to  Exhibit 4.2 to our Current Report on Form 8-K filed on July 6, 2006)                                                                                                                                                                                                                     |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.3         |       | Supplemental Agreement, dated as of July 5, 2006, in  relation to Second Supplemental Indenture and Credit and Guaranty Agreement,  each dated as of July 5, 2006, by and among Granite Broadcasting Corporation,  the parties identified as “Guarantors” on the signature pages thereof and the  parties identified as “Qualified Holders” on the signature pages thereto  (incorporated by reference to Exhibit 4.3 to our Current Report on Form 8-K  filed on July 6, 2006) |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.4         |       | Third Supplemental Indenture, dated as of August 1,  2006, by and among Granite Broadcasting Corporation, the guarantors party  thereto and The Bank of New York, as Trustee (incorporated by reference to  Exhibit 4 to our Current Report on Form 8-K filed on August 7, 2006)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.5         |       | Amendment No. 1 under Credit and  Guaranty Agreement, dated as of August 15, 2006, by and among Granite  Broadcasting Corporation, the Subsidiaries of Granite Broadcasting  Corporation listed on the signature pages thereto, as Guarantors, the Lenders  party on the signature pages thereto, and Silver Point Finance, LLC, as  Administrative Agent (incorporated by reference to Exhibit 4 to our Current  Report on Form 8-K filed on August 17, 2006)                                      |
| ** **  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 4.6         |       | Amendment No. 2 and Limited Waiver  under Credit and Guaranty Agreement, dated as of August 31, 2006, by and  among Granite Broadcasting Corporation, the Subsidiaries of Granite  Broadcasting Corporation listed on the signature pages thereto, as  Guarantors, the Lenders party on the signature pages thereto, and Silver  Point Finance, LLC, as Administrative Agent (incorporated by reference to  Exhibit 4 to our Current Report on Form 8-K filed on August 31, 2006)                   |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.1        |       | Certification of Chief Executive Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. §7241)                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 31.2        |       | Certification of Chief Financial Officer Pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 (15 U.S.C. §7241)                                                                                                                                                                                                                                                                                                                                                                          |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 32          |       | Certifications of Chief Executive Officer and Chief  Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002  (18 U.S.C. §1350)                                                                                                                                                                                                                                                                                                                                            |

 

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