**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

** **

**Form 10-Q**

** **

** **

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

**For the quarterly periodended June 30, 2006**

** **

** **

**OR**

** **

** **

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

**For the transition periodfrom                    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, 34thFloorNew York, New York 10017(212) 826-2530**

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes   x   No   o

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer or anon-accelerated filer. See definition of “accelerated filer” and “largeaccelerated filer” in Rule 12b-2 of 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 ofAugust 4, 2006, the Registrant had 98,250 shares of Class A Voting Common Stock,par value $.01 per share outstanding; and 19,857,996 shares of Common Stock(Nonvoting), par value $.01 per share outstanding.

 

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**DOCUMENTS INCORPORATED BYREFERENCE:      None**

 

 

 

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**GRANITE BROADCASTING CORPORATION**

**Form 10-Q**

**Table of Contents**

 
|            | ** ** | ** **                                                                                                   | ** ** | **Page** |
|------------|------------|--------------------------------------------------------------------------------------------------------------|------------|----------|
| PART  I    |       | FINANCIAL  INFORMATION                                                                                       |       | 3        |
|       |       |                                                                                                         |       |     |
| Item  1.   |       | Financial  Statements                                                                                        |       | 3        |
|       |       | Consolidated Balance Sheets as of June 30, 2006  (unaudited) and December 31, 2005                           |       | 3        |
|       |       | Consolidated Statements of Operations for the Three  and Six Months Ended June 30, 2006 and 2005 (unaudited) |       | 4        |
|       |       |                                                                                                         |       |     |
|       |       | Consolidated Statements of Cash Flows for the Three  and Six Months Ended June 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                                                  |       | 42       |
| Item 4.    |       | Controls and Procedures                                                                                      |       | 42       |
|       |       |                                                                                                         |       |     |
| PART  II   |       | OTHER  INFORMATION                                                                                           |       | 43       |
|       |       |                                                                                                         |       |     |
| Item  1.   |       | Legal  Proceedings                                                                                           |       | 43       |
| Item  1A.  |       | Risk Factors                                                                                                 |       | 43       |
| Item 2.    |       | Unregistered Sales of Equity Securities and Use of  Proceeds                                                 |       | 44       |
| Item 3.    |       | Defaults Upon Senior Securities                                                                              |       | 44       |
| Item 4.    |       | Submission of Matters to a Vote of Security Holders                                                          |       | 44       |
| Item  5.   |       | Other  Information                                                                                           |       | 45       |
| Item 6.    |       | Exhibits                                                                                                     |       | 45       |
|       |       |                                                                                                         |       |     |
| SIGNATURES |       | 46                                                                                                           |

 

Granite Broadcasting Corporation is a Delawarecorporation. As used in this Quarterly Report on Form 10-Q and unless the contextotherwise 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**

Anystatements that are included or incorporated by reference in this report orthat are otherwise attributable to us or persons acting on our behalf, otherthan statements of historical fact, which address activities, events ordevelopments that we expect or anticipate will or may occur in the future,including, without limitation, statements regarding expected financialperformance; future capital expenditures; projected revenue growth or synergiesresulting from acquisitions and other transactions; anticipated completion ofsales of assets under contracts of sale; efforts to control or reduce costs;contingent liabilities; development or purchase of new programming; financingand restructuring efforts; expected competition; use of digital spectrum; ourability to service our outstanding debt; and business strategy, are “forward-lookingstatements”—that is, statements related to future, not past, events that aresubject to risks and uncertainties. These forward-looking statements generallycan be identified as statements that include phrases such as “believe”, “project”,“target”, “predict”, “estimate”, “forecast”, “strategy”, “may”, “goal”, “expect”,“anticipate”, “intend”, “plan”, “foresee”, “likely”, “will”, “should” or othersimilar words or phrases.  Although we believe such statements are basedon reasonable assumptions, actual outcomes and results may differ materiallyfrom those projected.  Accordingly, all forward-looking statements shouldbe evaluated with the understanding of their inherent uncertainty. Important factors that could cause actual results to differ materially from ourexpectations include, but are not limited to, those factors described underItem 1A. “Risk Factors” of our Annual Report on Form 10-K for the year ended December31, 2005, filed with the Securities and Exchange Commission as modified bythose factors described under Item 1A. “Risk Factors” of this Quarterly Reporton Form 10-Q. We undertake no obligation to update forward-looking statements,whether as a result of new information, future developments or otherwise, anddisclaim any obligation to do so.

 

2

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** **

**PART I. FINANCIALINFORMATION**

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

**GRANITEBROADCASTING CORPORATIONCONSOLIDATED BALANCE SHEETS**

** **
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **June 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                                                                                                                                | ** ** | **(Unaudited)**         | ** **  | ** **                  | ** ** |
| Assets                                                                                                                                                                                                                                                                                                                                                                    |       |                    |        |                        |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Current assets:                                                                                                                                                                                                                                                                                                                                                           |       |                    |        |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                                                                                                                                 |       | $                       | 11,599,310  |                        | $          | 8,629,044 |   |
| Restricted cash equivalents                                                                                                                                                                                                                                                                                                                                               |       | —                  |        | 24,997,500                  |       |
| Accounts receivable, less allowance for doubtful  accounts ($452,177 at June 30, 2006 and $632,156 at December 31, 2005)                                                                                                                                                                                                                                                  |       | 21,577,770              |        | 22,388,546                  |       |
| Film contract rights                                                                                                                                                                                                                                                                                                                                                      |       | 5,252,437               |        | 4,375,644                   |       |
| Other current assets                                                                                                                                                                                                                                                                                                                                                      |       | 6,009,589               |        | 6,709,481                   |       |
| Assets held for sale                                                                                                                                                                                                                                                                                                                                                      |       | 62,245,141              |        | 64,169,805                  |       |
| Total current assets                                                                                                                                                                                                                                                                                                                                                      |       | 106,684,247             |        | 131,270,020                 |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Property and  equipment, net                                                                                                                                                                                                                                                                                                                                              |       | 44,939,847              |        | 46,575,468                  |       |
| Film contract  rights                                                                                                                                                                                                                                                                                                                                                     |       | 10,619,926              |        | 516,766                     |       |
| Other non  current assets                                                                                                                                                                                                                                                                                                                                                 |       | 3,152,141               |        | 836,975                     |       |
| Deferred  financing fees, less accumulated amortization ($6,190,322 at June 30, 2006  and $4,334,405 at December 31, 2005)                                                                                                                                                                                                                                                |       | 10,258,838              |        | 11,757,197                  |       |
| Goodwill                                                                                                                                                                                                                                                                                                                                                                  |       | 59,823,596              |        | 60,320,347                  |       |
| Broadcast  licenses, net                                                                                                                                                                                                                                                                                                                                                  |       | 89,385,289              |        | 89,385,249                  |       |
| Network  affiliations, net                                                                                                                                                                                                                                                                                                                                                |       | 63,667,733              |        | 65,174,688                  |       |
| Total assets                                                                                                                                                                                                                                                                                                                                                              |       | $                       | 388,531,617 |                        | $          | 405,836,710 |   |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                               |       |                    |        |                        |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Current liabilities:                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Accounts payable                                                                                                                                                                                                                                                                                                                                                          |       | $                       | 1,428,334   |                        | $          | 1,765,318 |   |
| Accrued interest                                                                                                                                                                                                                                                                                                                                                          |       | 23,205,350              |        | 3,290,625                   |       |
| Other accrued liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 5,391,737               |        | 7,603,528                   |       |
| Film contract rights payable                                                                                                                                                                                                                                                                                                                                              |       | 9,635,570               |        | 10,441,860                  |       |
| Current portion of long-term debt                                                                                                                                                                                                                                                                                                                                         |       | 2,985,000               |        | 25,844,000                  |       |
| Other current liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 9,470,496               |        | 7,135,938                   |       |
| Liabilities held for sale                                                                                                                                                                                                                                                                                                                                                 |       | 24,133,868              |        | 26,416,034                  |       |
| Total current liabilities                                                                                                                                                                                                                                                                                                                                                 |       | 76,250,355              |        | 82,497,303                  |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| Long-term debt,  less current portion                                                                                                                                                                                                                                                                                                                                     |       | 428,209,189             |        | 428,871,456                 |       |
| Film contract  rights payable                                                                                                                                                                                                                                                                                                                                             |       | 12,954,790              |        | 1,991,126                   |       |
| Deferred tax  liability                                                                                                                                                                                                                                                                                                                                                   |       | 36,931,622              |        | 21,560,807                  |       |
| Redeemable  preferred stock                                                                                                                                                                                                                                                                                                                                               |       | 199,368,775             |        | 199,191,138                 |       |
| Accrued  dividends on redeemable preferred stock                                                                                                                                                                                                                                                                                                                          |       | 108,578,339             |        | 95,804,417                  |       |
| Other non  current liabilities                                                                                                                                                                                                                                                                                                                                            |       | 4,199,111               |        | 6,999,232                   |       |
|                                                                                                                                                                                                                                                                                                                                                                      |       |                    |        |                        |       |
| 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 19,857,996 shares of Common Stock (Nonvoting)  (19,480,142 shares at December 31, 2005) issued and outstanding at June  30, 2006. |       | 199,561                 |        | 195,783                     |       |
| Additional paid-in capital                                                                                                                                                                                                                                                                                                                                                |       | 480,480                 |        | 393,701                     |       |
| Accumulated deficit                                                                                                                                                                                                                                                                                                                                                       |       | (477,764,930            | )           | (430,792,098                | )          |
| Unearned compensation                                                                                                                                                                                                                                                                                                                                                     |       | —                  |        | (480                        | )          |
| Treasury stock, at cost                                                                                                                                                                                                                                                                                                                                                   |       | (875,675                | )           | (875,675                    | )          |
| Total stockholders’ deficit                                                                                                                                                                                                                                                                                                                                          |       | (477,960,564            | )           | (431,078,769                | )          |
| Total liabilities and  stockholders’ deficit                                                                                                                                                                                                                                                                                                                         |       | $                       | 388,531,617 |                        | $          | 405,836,710 |   |

 

See accompanying notes.

3

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**CONSOLIDATEDSTATEMENTS OF OPERATIONS(Unaudited)**

** **
| ** **                                                                                                                 | ** ** | **Three Months Ended June 30,** | ** **  | **Six Months Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------|-------------|---------------------------------------------------|------------|
| ** **                                                                                                                 | ** ** | **2006**                                            | ** **  | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Net revenues                                                                                                               |       | $                                                   | 26,876,271  |                                              | $          | 26,661,001 |   | $ | 51,677,420 |   | $ | 48,282,844 |   |
| Operating  expenses:                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 9,956,572                                           |        | 10,185,965                                        |       | 19,812,204 |   | 20,090,734 |   |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 7,969,485                                           |        | 7,539,482                                         |       | 15,651,199 |   | 14,477,417 |   |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 3,536,980                                           |        | 2,725,159                                         |       | 6,384,782 |   | 5,423,058 |   |
| Corporate  reorganization expense                                                                                          |       | 965,219                                             |        | —                                            |       | 1,185,037 |   | — |   |
| Depreciation                                                                                                               |       | 1,656,739                                           |        | 1,269,010                                         |       | 3,352,845 |   | 2,882,324 |   |
| Amortization of  intangible assets                                                                                         |       | 753,477                                             |        | 1,266,731                                         |       | 1,506,955 |   | 2,177,835 |   |
| Performance  award expense                                                                                                 |       | —                                              |        | 319,797                                           |       | 88,831 |   | 639,594 |   |
| Non-cash  compensation expense (1)                                                                                         |       | 60,738                                              |        | 93,557                                            |       | 110,895 |   | 188,150 |   |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Operating income                                                                                                           |       | 1,977,061                                           |        | 3,261,300                                         |       | 3,584,672 |   | 2,403,732 |   |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Other expenses  (income):                                                                                                  |       |                                                |        |                                              |       |   |   |   |   |
| Interest expense                                                                                                           |       | 11,205,243                                          |        | 11,140,969                                        |       | 22,282,845 |   | 21,331,122 |   |
| Interest income                                                                                                            |       | (66,816                                             | )           | (289,045                                          | )          | (384,391 | ) | (737,799 | ) |
| Non-cash interest expense                                                                                                  |       | 1,032,889                                           |        | 1,052,578                                         |       | 2,663,370 |   | 2,025,135 |   |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                                           |        | 6,386,961                                         |       | 12,773,922 |   | 12,773,922 |   |
| Other                                                                                                                      |       | (3,845                                              | )           | 88,626                                            |       | (7,203 | ) | 168,032 |   |
| Loss from  continuing operations before income taxes                                                                       |       | (16,577,371                                         | )           | (15,118,789                                       | )          | (33,743,871 | ) | (33,156,680 | ) |
| Provision  (benefit) for income taxes:                                                                                     |       |                                                |        |                                              |       |   |   |   |   |
| Current                                                                                                                    |       | 124,865                                             |        | 50,541                                            |       | 270,555 |   | 111,679 |   |
| Deferred                                                                                                                   |       | 15,664,351                                          |        | (197,190                                          | )          | 15,377,082 |   | (437,072 | ) |
| Total provision  (benefit) for income taxes                                                                                |       | 15,789,216                                          |        | (146,649                                          | )          | 15,647,637 |   | (325,393 | ) |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Loss from  continuing operations                                                                                           |       | (32,366,587                                         | )           | (14,972,140                                       | )          | (49,391,508 | ) | (32,831,287 | ) |
| Discontinued  operations:                                                                                                  |       |                                                |        |                                              |       |   |   |   |   |
| Income (loss) from discontinued operations, net of  taxes                                                   |       | 1,012,684                                           |        | (1,234,752                                        | )          | 2,418,676 |   | (2,869,394 | ) |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Net loss                                                                                                                   |       | $                                                   | (31,353,903 | )                                                 | $          | (16,206,892 | ) | $ | (46,972,832 | ) | $ | (35,700,681 | ) |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Basic and  diluted loss per share from continuing operations                                                     |       | $                                                   | (1.63       | )                                                 | $          | (0.77 | ) | $ | (2.50 | ) | $ | (1.68 | ) |
| Basic and  diluted income (loss) per share from discontinued operations                                                    |       | 0.05                                                |        | (0.06                                             | )          | 0.12 |   | (0.15 | ) |
| Basic and  diluted net loss per share                                                                                      |       | $                                                   | (1.58       | )                                                 | $          | (0.83 | ) | $ | (2.38 | ) | $ | (1.83 | ) |
|                                                                                                                       |       |                                                |        |                                              |       |   |   |   |   |
| Weighted average  common shares outstanding                                                                                |       | 19,802,913                                          |        | 19,577,199                                        |       | 19,748,949 |   | 19,539,121 |   |

 

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(1)             Allocationof non-cash compensation expense to other operating expenses:
| Operating  expense - Selling, general and administrative expenses |   | $      | 16,956 |   | $                                                                   | 18,867 |   | $       | 33,912 |                                                     | $      | 38,770 |   |
|-------------------------------------------------------------------|--------|--------|--------|--------|---------------------------------------------------------------------|--------|--------|---------|--------|----------------------------------------------------------|--------|--------|--------|
| Corporate  expense                                                |   | 43,782 |   | 74,690 |                                                                | 76,983 |   | 149,380 |   |
| Non-cash compensation  expense                                    |   | $      | 60,738 |   | $          93,557 |   | $      | 110,895 |   | $        188,150 |   |

 

See accompanying notes.

4

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**GRANITEBROADCASTING CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)**

 
| ** **                                                                                 | ** ** | **Six Months Ended June 30,** | ** **  |
|--------------------------------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                                                 | ** ** | **2006**                                          | ** **  | **2005** | ** ** |
| ** **                                                                                 | ** ** | ** **                                        | ** **  | ** ** | ** ** |
| Cash flows from  operating activities:                                                     |       |                                              |        |   |   |
| Net loss                                                                                   |       | $                                                 | (46,972,832 | ) | $ | (35,700,681 | ) |
|                                                                                       |       |                                              |        |   |   |
| Adjustments to  reconcile net loss to net cash provided by (used in) operating activities: |       |                                              |        |   |   |
| Amortization of intangible assets                                                          |       | 1,506,955                                         |        | 4,435,107 |   |
| Depreciation                                                                               |       | 3,352,845                                         |        | 3,274,357 |   |
| Performance award expense                                                                  |       | 88,831                                            |        | 639,594 |   |
| Non-cash compensation expense                                                              |       | 110,895                                           |        | 188,150 |   |
| Non-cash interest expense                                                                  |       | 2,953,612                                         |        | 2,217,753 |   |
| Non-cash preferred stock dividend                                                          |       | 12,773,922                                        |        | 12,773,922 |   |
| Film amortization and impairment                                                           |       | 5,230,171                                         |        | 7,669,525 |   |
| Deferred tax benefit                                                                       |       | 15,647,637                                        |        | (325,393 | ) |
| Change in assets  and liabilities:                                                         |       |                                              |        |   |   |
| Decrease in accounts receivable                                                            |       | 810,776                                           |        | 1,195,396 |   |
| Increase (decrease) in accrued liabilities                                                 |       | 17,751,313                                        |        | (2,001,219 | ) |
| Decrease in accounts payable                                                               |       | (247,397                                          | )           | (216,673 | ) |
| WB affiliation payment                                                                     |       | —                                            |        | (1,261,714 | ) |
| (Increase) decrease in film contract rights and  other assets                              |       | (16,118,670                                       | )           | 2,331,843 |   |
| Increase (decrease) in film contract rights payable  and other liabilities                 |       | 6,767,887                                         |        | (10,872,138 | ) |
| Net cash provided by (used in) operating activities                                        |       | 3,655,945                                         |        | (15,652,171 | ) |
|                                                                                       |       |                                              |        |   |   |
| Cash flows from  investing activities:                                                     |       |                                              |        |   |   |
| Sales of marketable securities and other investments                                       |       | 2,792                                             |        | 5,610,506 |   |
| Payment for acquisition of assets                                                          |       | —                                            |        | (55,696,971 | ) |
| Sales (purchase) of U.S. Government Securities                                             |       | 25,315,677                                        |        | (24,997,500 | ) |
| Capital expenditures                                                                       |       | (1,271,341                                        | )           | (950,800 | ) |
| Net cash provided by (used in) investing activities                                        |       | 24,047,128                                        |        | (76,034,765 | ) |
|                                                                                       |       |                                              |        |   |   |
| Cash flows from  financing activities:                                                     |       |                                              |        |   |   |
| Proceeds from senior credit facility                                                       |       | —                                            |        | 53,500,000 |   |
| Payment of senior credit facility                                                          |       | (24,375,249                                       | )           | (383,159 | ) |
| Payment of deferred financing fees                                                         |       | (357,558                                          | )           | (2,242,401 | ) |
| Net cash (used in) provided by financing activities                                        |       | (24,732,807                                       | )           | 50,874,440 |   |
|                                                                                       |       |                                              |        |   |   |
| Net increase  (decrease) in cash and cash equivalents                                      |       | 2,970,266                                         |        | (40,812,496 | ) |
| Cash and cash  equivalents, beginning of period                                            |       | 8,629,044                                         |        | 60,858,710 |   |
| Cash and cash  equivalents, end of period                                                  |       | $                                                 | 11,599,310  |   | $ | 20,046,214 |   |
|                                                                                       |       |                                              |        |   |   |
| Supplemental  information:                                                                 |       |                                              |        |   |   |
| Cash paid for interest                                                                     |       | $                                                 | 1,906,569   |   | $ | 21,033,658 |   |
| Cash paid for income taxes                                                                 |       | 234,537                                           |        | 38,250 |   |
| Non-cash capital  expenditures                                                             |       | 59,613                                            |        | 153,307 |   |

 

See accompanying notes.

 

5

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**GRANITEBROADCASTING 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 eightnetwork affiliated television stations in the United States, consisting of fourNBC-affiliated television stations, one ABC-affiliated station, oneCBS-affiliated television station and two WB Network stations. The Company’sstations are located in New York, California, Michigan, Indiana, Illinois andMinnesota. Through various local service agreements (as fully discussed below),the Company provides advertising sales, promotion, administrative services andselected programming to two television stations owned by Malara BroadcastGroup, Inc (“Malara Broadcast Group”) and one television station owned by FourSeasons Broadcast Company.

As more fully discussed in Note 3, the Companycompleted the sale of its Fort Wayne, Indiana ABC affiliate, WPTA-TV, to MalaraBroadcast Group and acquired the Fort Wayne, Indiana NBC affiliate, WISE-TVfrom New Vision Group, LLC in March 2005. Malara Broadcast Group alsoacquired KDLH-TV, the CBS affiliate serving Duluth, Minnesota from New VisionGroup, LLC. The Company entered into a strategic arrangement with MalaraBroadcast Group, under which the Company provides advertising sales, promotionand administrative services, and selected programming to WPTA-TV and KDLH-TVunder local services agreements. Although the Company does not own MalaraBroadcast Group or its television stations, the Company is deemed to be theprimary beneficiary of Malara Broadcast Group as defined under FinancialAccounting Standards Board Interpretation No. 46, *Consolidationof Variable Interest Entities* (“Interpretation 46”). As a result,Interpretation 46 requires the Company to consolidate Malara Broadcast Group’sfinancial position, 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 Four Seasons Broadcast Company or its television stations, andpursuant to Interpretation 46, the Company is not deemed to be the primarybeneficiary of Four Seasons Broadcast Company and therefore, has notconsolidated 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, the WBaffiliate serving the San Francisco, California television market, to AMBroadcasting 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 WB affiliate serving the Detroit, Michigantelevision market, to AM Broadcasting WDWB, Inc. On May 1, 2006, the Companyterminated such agreements.

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. The aggregate considerationthat was to be received by the Company in connection with the sale of KBWB-TVwas $65,000,000, before closing and other adjustments, which was payable incash. The aggregate consideration that was to be received by the Company inconnection with the sale of WMYD-TV was $85,000,000, before closing and otheradjustments which was payable in cash.

On July 17, 2006, the Company terminated suchagreements and announced its intention to continue to market its San Francisco,California television station KBWB-TV and retain its Detroit, Michigantelevision station WMYD-TV.

The Company hasexperienced annual operating losses over the past three years and at June 30,2006 had unrestricted cash and accumulated deficit of $11,599,000 and$477,765,000, respectively.

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OnMay 17, 2006, the Company filed a lawsuit in the Delaware Court of Chanceryregarding the termination by The WB Television Network Partners, L.P. (“The WB”)of the Company’s WB affiliation agreements for its San Francisco and Detroittelevision stations. The lawsuit follows the January 24, 2006 announcement ofthe merging of the UPN and WB television networks, and was filed against TheWB, WB Communications, a division of Time Warner Entertainment Company, L.P.,CBS Corporation (“CBS”) and Warner Brothers Entertainment, Inc. (“WarnerBrothers”).  The lawsuit alleges, amongother things, that The WB’s premature termination of the Company’s SanFrancisco and Detroit network affiliation agreements, and The WB’s repudiationof agreements to extend the terms of its San Francisco and Detroit networkaffiliation agreements, damaged the Company’s 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 the Company’s San Francisco andDetroit network affiliation agreements and the agreements to extend the termsof the San Francisco and Detroit network affiliation agreements. On August 4,2006, The WB, WB Communications, Warner Brothers and CBS filed their answers tothe complaint.  The WB has asserted acounterclaim against the Company.  Thetwo-count counterclaim alleges that the Company has breached the San Franciscoand Detroit network affiliation agreements by failing to make certain paymentsthereunder and that, as of July 14, 2006, the Company owes The WB $2,523,428under those agreements, plus interest thereon.

InMarch 2006, WMYD-TV entered into an affiliation agreement withMyNetworkTV.  MyNetworkTV has stated thatthe new network will be launched on September 5, 2006.  The Company’s San Francisco televisionstation, KBWB-TV plans to remain independent after The WB ceases to provideprogramming.

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 restructuring alternatives.For the six months ended June 30, 2006, the Company incurred $1,185,000 ofcorporate reorganization expense due to financial advisors and otherprofessionals retained in connection with reorganization services.

An interest payment of$19,744,000 on the Company’s 9 3/4 % Senior Secured Notes (the “Notes”) was dueon June 1, 2006. Since payment was not made within 30 days after June 1, 2006,an “Event of Default” under the Indenture (the “Indenture”) governing the Noteshad occurred.

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.

Inconnection with the execution of the Credit Agreement, the Indenture, dated asof December 22, 2003, between the Company, the guarantors party theretoand The Bank of New York, as Trustee, as supplemented by the First SupplementalIndenture, dated as of March 9, 2005, by and between the Company, theguarantors party thereto and The Bank of New York, as Trustee (the “Indenture”),was further supplemented by the Second Supplemental Indenture, dated as ofJuly 5, 2006, by and between the Company, the guarantors party thereto andThe Bank of New York, as Trustee (the “Second Supplemental Indenture”), underwhich, among other things, the Trustee agreed to act as collateral agent forthe Lenders under the Credit Agreement. The Second Supplemental Indenture alsomakes conforming changes necessary to allow the Company to enter into theCredit Agreement, grant liens securing that indebtedness and makes certainother changes negotiated between the Company and the beneficial owners of morethan a majority of the principal amount of the outstanding Notes (the “MajorityNote holders”).

Inconnection with the Second Supplemental Indenture, the Company entered into theSupplemental Agreement, dated as of July 5, 2006, in relation to theSecond Supplemental Indenture and the Credit and Guaranty Agreement, by andbetween the Company, 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.

OnAugust 1, 2006, the Company entered into a Third Supplemental Indenture, by andbetween the Company, the guarantors party thereto and The Bank of New York, asTrustee, which amends the Indenture in accordance with the SupplementalAgreement.

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On January 13, 2006, the Company and certain of itssubsidiaries entered into a definitive agreement with Television Station GroupHoldings, LLC and certain of its subsidiaries to purchase substantially all ofthe assets of WBNG-TV, Channel 12, the CBS-affiliated television stationserving Binghamton and Elmira, New York, for $45 million in cash, subject toclosing adjustments.

OnJuly 26, 2006 the Company and certain of its subsidiaries completed theacquisition of WBNG-TV, Channel 12, the CBS-affiliated television stationserving Binghamton and Elmira, New York, for $45 million in cash, plus certainclosing adjustments from Television Station Group Holdings, LLC and certain ofits subsidiaries.

The Credit Agreementrequires that the Company enter into a definitive agreement effectuating acomprehensive restructuring of the Company in form and substance satisfactoryto the lenders holding 51% of the loans by August 15, 2006. Absent changesto its capital structure the Company will not have enough cash to make theDecember 1, 2006 interest payment on its Notes and to repay all amounts outstanding under its Credit Agreement when dueon December 1, 2006. In order to improve the Company’s existing liquidityposition and to further the Company’s business strategy, the Company continuesto explore selling its San Francisco, California station KBWB-TV and isreviewing potential restructuring alternatives with respect to its debt andpreferred stock obligations. However, under its Indenture, the Company’s use ofthe net proceeds from the sale of assets is restricted. Of the net asset saleproceeds, $5 million may be used for working capital purposes and the remaindermust be used either:

·                  tomake an investment in properties and assets that replace the properties andassets that were the subject of such asset sale or in properties and assetsthat will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, aPermitted Business Acquisition or enter into a definitive agreement toeffectuate such acquisition; provided that (A) the primary purpose of suchacquisition of Replacement Assets or Permitted Business Acquisition is toacquire, and there is acquired, a television station with a Big-4 (ABC, CBS,NBC or Fox) network affiliation agreement in place or the creation (throughownership by the Company and its Restricted Subsidiaries) of a “duopoly” in amarket and (B) that the Company shall use all reasonable best efforts topromptly dispose of any other assets acquired in such acquisition or PermittedBusiness Acquisition (as such terms are defined in the Indenture); or

·                  tomake an offer to all holders of the Notes to purchase such amount of the Notesless any such net proceeds used to acquire qualifying Replacement Assets or tomake a Permitted Business Acquisition.

The Indenture, as supplemented, provides that, priorto delivery of an acceleration notice following an event of default, theCompany is entitled to obtain a release of the Trustee under the Indenture touse cash, including cash in the collateral account (other than asset saleproceeds required to be used as provided above), to pay operating expenses andto pay interest on the Notes.

Absent a restructuring of the Company, the Companywill not make the December 1, 2006 interest payment on its Notes or repay allamounts outstanding under its Credit Agreement when due on December 1, 2006. Alack of liquidity would have a material adverse effect on the Company’sbusiness strategy and therefore affect its ability to continue as a goingconcern. The financial statements do not include any adjustments to reflect thepossible future effects on the recoverability and classification of assets orthe amounts and classification of liabilities that might result from theoutcome of this uncertainty.

**Note 2 — Summary of Significant 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 months and six months ended June 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.

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Malara Broadcast Group is included in theseconsolidated financial statements because the Company is deemed to be theprimary beneficiary of Malara Broadcast Group as defined by Interpretation 46as a result of (i) the Company’s guarantee of the obligations incurred underMalara Broadcast Group’s Senior Secured Credit Facility, (ii) local serviceagreements the Company has with Malara Broadcast Group and (iii) put or calloption agreements the Company has with Malara Broadcast Group to acquire all ofthe assets and assume the liabilities of each Malara Broadcast Group televisionstation, subject to approval by the Federal Communications Commission (“FCC”)(see Note 3 for further details on the aforementioned).

*DiscontinuedOperations*

In accordance with the provisions of Statement of FinancialAccounting Standards No. 144 (“Statement 144”), *Accountingfor the Impairment or Disposal of Long-Lived Assets,* the operatingresults of KBWB-TV, San Francisco, California are not included in ourconsolidated results from continuing operations for the three and six monthsended June 30, 2006 and 2005 since KBWB-TV, San Francisco, California continuesto meet the criteria for a qualifying plan of sale. At June 30, 2006, theCompany had committed to a plan to sell the asset, the asset is available forimmediate sale and the Company is actively seeking buyers and marketing theasset and believes that the sale of the asset is probable at prices that arereasonable in relation to their current fair value. The assets and liabilitiesthat are being disposed of have been classified as “held for sale” on theaccompanying balance sheets and their operations have been recorded asdiscontinued operations. Discontinued operations have not been segregated inthe consolidated statement of cash flows and, therefore, amounts for certaincaptions will not agree with the accompanying consolidated balance sheets andstatements of operations. Their financial position and results of operationshave been reclassified accordingly for all periods presented. (See Note 7 for furtherdetails.)

*Reclassification*

Certain balances in the prior period have beenreclassified to 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 liquid investments with a maturity ofninety days or less from the date of purchase are considered cash equivalents.Marketable securities, if applicable, are classified as available-for-sale inaccordance with the provisions of Statement of Financial Accounting StandardsNo. 115, *Accounting for Certain Investments in Debt andEquity Securities*. Marketable securities are carried at fair marketvalue based on current market quotes. Any unrealized gains and losses arereported in stockholders’ equity as a separate component of other comprehensiveincome / (loss) until realized. Gains and losses on securities sold are basedon the specific identification method. The Company does not hold securities forspeculative or trading purposes. At June 30, 2006 the Company did not have anymarketable 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.

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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.

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 six months ended June 30,2006 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 sixmonths ended June 30, 2006, stock option compensation expense of approximately$17,000 and $34,000, respectively, was charged to non-cash compensation expensefor unvested options granted prior to December 31, 2005. As of June 30, 2006,there was $95,000 of total unrecognized compensation cost, net of estimatedforfeitures, related to nonvested share-based compensation arrangements, whichis expected to be recognized over a weighted-average period of 1.9 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 Companyand such 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 June 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 sixmonths ended June 30, 2006, Management Stock Plan compensation expense ofapproximately $43,000 and $60,000 was charged to non-cash compensation expensefor grants under the Management Stock Plan. As of June 30, 2006, there was$108,000 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 and sixmonths ended June 30, 2005 as if the Company had consistently measured thecompensation cost for the Company’s stock option programs under the fair valuemethod adopted on January 1, 2006:

 
| ** **                                                 | ** ** | **Three months ended  June 30,  2005** | ** **  | **Six months ended  June 30,  2005** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------------|-------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **(unaudited)**                                       | ** **  | **(unaudited)**                                     | ** ** |
| Net loss  attributable to common shareholders, as reported |       | $                                                     | (16,207,000 | )                                                   | $          | (35,701,000 | ) |
| Add: pro forma  compensation expense                       |       | 104,000                                               |        | 209,000                                             |       |
| Less:  compensation expense, as reported                   |       | (9,000                                                | )           | (19,000                                             | )          |
| Pro forma net  loss attributable to common shareholders    |       | $                                                     | (16,302,000 | )                                                   | $          | (35,891,000 | ) |
|                                                       |       |                                                  |        |                                                |       |
| Basic and  diluted net loss per share, as reported         |       | $                                                     | (0.83       | )                                                   | $          | (1.83 | ) |
| Pro forma basic and  diluted net loss per share            |       | $                                                     | (0.83       | )                                                   | $          | (1.84 | ) |

 

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*

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48,*Accounting for Uncertainty in Income Taxes,*or Interpretation 48. Interpretation 48, which clarifies the accounting foruncertainty in income taxes by prescribing a recognition threshold for taxpositions taken or expected to be taken in a tax return. Interpretation 48 iseffective for fiscal years beginning after December 15, 2006.  The Company is currently evaluating theimpact, if any Interpretation 48 may have on its financial position,consolidated results of operations or statement of cash flows.

**Note 3 —Acquisitions and Dispositions**

On March 7, 2005, the Company completed the saleof its Fort Wayne, Indiana ABC affiliate, WPTA-TV to a subsidiary of MalaraBroadcast Group Inc. (“Malara Broadcast Group”) for approximately $45.4million, pursuant to the terms and conditions of an asset purchase agreement,dated April 23, 2004. In addition, on March 8, 2005, the Companycompleted its purchase of WISE-TV, the NBC affiliate serving Fort Wayne fromNew Vision Group, LLC, or New Vision Television, for approximately $43.5million, pursuant to the terms and conditions of a stock purchase agreement,dated April 23, 2004.

Furthermore, another subsidiary of Malara BroadcastGroup acquired CBS affiliate KDLH-TV, Duluth, Minnesota from New VisionTelevision on March 8, 2005 for approximately $9.5 million, pursuant to theterms and conditions of an asset purchase agreement, dated April 23, 2004.

On March 8, 2005, the Company entered into astrategic arrangement with Malara Broadcast Group, under which the Companyprovides advertising 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 three and six monthsended June 30, 2006, Malara Broadcast Group paid the Company approximately$2,181,000 and $2,903,000, respectively, under the strategic arrangementsbetween the companies. During the three and six months ended June 30, 2005,Malara Broadcast Group paid the Company approximately $800,000 under thestrategic arrangements between the companies. As of June 30, 2006, the total amount owed to the Company from MalaraBroadcast Group totaled approximately $21,013,000.

Malara Broadcast Group financed its acquisition ofWPTA-TV and KDLH-TV with the proceeds of the Malara Broadcast Group SeniorCredit Facility (see Note 6).

The Company does not own Malara Broadcast Group or itstelevision stations. However, as a result of the Company’s guarantee of theobligations incurred under Malara Broadcast Group’s senior secured creditfacility with respect to the Tranche B Term Loan and the revolving loan and dueto its arrangements under the local service agreements and put or call optionagreements, under Interpretation 46, the Company is required to consolidateMalara Broadcast Group’s financial position, results of operations and cashflows. In addition, in accordance with the provisions of Interpretation 46, theCompany did not account for the sale of the assets of WPTA-TV and no gain therefrom was recognized in the consolidated statements of operations. Additionally,the Company did not apply the provisions of purchase accounting to MalaraBroadcast Group’s acquisition of WPTA-TV.

Each of the acquisitions listed below was consummatedduring the three months ended March 31, 2005. The Company’s acquisition of WISEand Malara Broadcast Group’s acquisition of KDLH were accounted for under thepurchase method of accounting. The consolidated financial statements continueto include the operating results of WPTA as well as the operating results ofWISE and KDLH from the date of consummation of the acquisition. In accordancewith the provisions of Interpretation 46, the Company did not account for thesale of the assets of WPTA.

 
| **Station**   | ** ** | **Network  Affiliation** | ** ** | **Market**          | ** ** | **Date Acquired** | ** ** | **Acquiring Company**    |
|---------------|------------|--------------------------|------------|---------------------|------------|-------------------|------------|-------------------------------|
| WISE          |       | NBC                      |       | Fort Wayne, Indiana |       | March 8, 2005     |       | Granite Broadcast Corporation |
| WPTA (1), (2) |       | ABC                      |       | Fort Wayne, Indiana |       | March 7, 2005     |       | Malara Broadcast Group        |
| KDLH (1)      |       | CBS                      |       | Duluth, Minnesota   |       | March 8, 2005     |       | Malara Broadcast Group        |

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(1)             Operationsunder local service agreements, whereby, the Company provides advertising,sales, promotions, administrative services and selected programming services toMalara Broadcast Group television stations in return for certain fees that willbe paid to the Company by Malara Broadcast Group.

(2)             Inaccordance with Interpretation 46, the Company did not account for the sale ofthe assets of WPTA-TV and no gain there from was recognized in the consolidatedstatements of operations. In addition, the Company did not apply the provisionsof purchase accounting to Malara Broadcast Group’s acquisition of WPTA-TV.

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*WISE*

On March 8, 2005, the Company acquired the stock ofWISE-TV from New Vision Group, LLC for $43.5 million plus approximately$2,900,000 of transactions costs. The acquisition was accounted for under thepurchase method of accounting and accordingly, the purchase price was allocatedto liabilities acquired based on their estimated fair value on the acquisitiondate.

The following table summarizes the allocation of thepurchase price of WISE-TV on March 8, 2005. The Company obtained a valuation ofcertain acquired tangible and intangible assets and has finalized theallocations below to reflect such valuations. In addition, net liabilitiesassumed have been finalized to reflect all adjustments identified during theyear of acquisition.

|                                                        | ** ** | **Value at  March 8, 2005** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| Purchase Price                                         |       | $                                          | 46,440,000 |   |
| Net Liabilities  Assumed                               |       | 1,038,000                                  |       |
| FCC License  (indefinite lived)                        |       | (5,248,000                                 | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (14,088,000                                | )          |
| Goodwill (indefinite  lived)                           |       | $                                          | 28,142,000 |   |

 

*KDLH*

On March 8, 2005, Malara Broadcast Group acquiredsubstantially all of the assets of KDLH-TV from New Vision Group, LLC for $9.5million plus approximately $360,000 of transactions costs. The acquisition wasaccounted for under the purchase method of accounting and accordingly, thepurchase price was allocated to assets acquired based on their estimated fairvalue on the acquisition date.

The following table summarizes the allocation of thepurchase price of KDLH-TV acquired on March 8, 2005. Malara Broadcast Groupobtained a valuation of certain acquired tangible and intangible assets and hasfinalized the allocations below to reflect such valuations. In addition, netassets acquired have been finalized to reflect all adjustments identifiedduring the year of acquisition.

 

|                                                        | ** ** | **Value at  March 8, 2005** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|
| Purchase Price                                         |       | $                                          | 9,864,000  |   |
| Net Assets  Acquired                                   |       | (5,086,000                                 | )          |
| FCC License  (indefinite lived)                        |       | (1,459,000                                 | )          |
| Network  Affiliation (estimated useful life, 25 years) |       | (612,000                                   | )          |
| Goodwill (indefinite  lived)                           |       | $                                          | 2,707,000  |   |

 

**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 9 3/4 % SeniorSecured Notes, the proceeds of which were used by the Company in part to repayall outstanding borrowings (plus accrued interest) under the Company’s thenoutstanding senior credit agreement, which satisfied the performance objectiveof the awards. Mr. Cornwell’s award, which vested in one-third tranches overthree years from the refinancing date, was to be used to repay in full hisoutstanding loan from the Company of $3,286,065 due January 25, 2006. Mr.Cornwell irrevocably elected to defer payment of the first two tranches underhis performance award until January 25, 2006 when his loan was due. On March 1,2005, the Board of Directors approved the acceleration of payment of the thirdtranche of Mr. Cornwell’s award to January 25, 2006. The Company’s ManagementStock Plan, pursuant to which the performance award was granted, permits thecompensation Committee, in its sole discretion, to require as a condition topayment of an award, that the award recipient pay to the Company the amount ofany taxes that the Company is required to withhold. The Compensation Committeehas so elected to require Mr. Cornwell to pay to the Company the applicablewithholding taxes with respect to the performance award. Mr. Cornwell hasinformed the Company that he is presently unable to do so, since the fullamount of the performance award must be used to satisfy his outstanding loanfrom the Company. In light of the forgoing, the Company has neither paid theperformance award to Mr. Cornwell nor offset the amount of the award inrepayment of the loan, which loan remains due and payable.

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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 three and six months ended June 30, 2006,the Company recorded a $34,000 restructuring charge related to stay-bonusesawarded to transitional employees at its Duluth, Minnesota television stations.As of June 30, 2006, the Company completed the separation payments related tothe corporate restructuring charges recorded in 2004, and reduced its accrualby approximately $20,000 to adjust for payments of benefits and amountsoriginally accrued for.

During 2005 and 2004, the Company 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 which were paid over an eighteen monthperiod from date of separation in September 2004 through March 2006. As of June30, 2006, the remaining restructuring charges related to employee separations,which included severance, other benefits and stay-bonuses awarded totransitional employees at its Duluth, Minnesota and Fort Wayne, Indianatelevision stations. 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 June 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*.

*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.

13

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At June 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 June 30,2006:

 
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended June 30, 2006**                                                                         | ** ** |
| ** **           | ** ** | **March 31,  2006**                                                                                                              | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 50,000     |   | $ | — |   | $ | 35,800 |   | $ | 14,200 |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 50,000     |   | $ | — |   | $ | 35,800 |   | $ | 14,200 |   |

 
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Six Months Ended June 30, 2006**                                                                           | ** ** |
| ** **           | ** ** | **December 31,  2005**                                                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 81,000     |   | $ | 34,000 |   | $ | 100,800 |   | $ | 14,200 |   |
| Corporate            |       | 192,000                                                                                                                               |       | (20,000 | ) | 172,000 |   | — |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 273,000    |   | $ | 14,000 |   | $ | 272,800 |   | $ | 14,200 |   |

 

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**

Currentportion of long-term debt consists of the following:

|                                                | ** ** | **June 30,  2006** | ** ** | **December 31,  2005** | ** ** |
|------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| Malara Broadcast  Group Senior Credit Facility |       | $                       | 2,985,000  |                        | $          | 25,844,000 |   |
|                                           |       |                    |       |                        |       |
| Total                                          |       | $                       | 2,985,000  |                        | $          | 25,844,000 |   |

 

Long-termdebt consists of the following:

|                                                                                                                             | ** ** | **June 30,  2006** | ** **  | **December 31,  2005** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|-------------|-----------------------------|------------|
| 9 3/4% Senior  Secured Notes, due 2010, net of discount of $3,152,000 at June 30, 2006 and  $3,504,000 at December 31, 2005 |       | $                       | 401,848,000 |                        | $          | 401,496,000 |   |
| Malara Broadcast  Group Senior Credit Facility, less current portion                                                        |       | 26,361,000              |        | 27,375,000                  |       |
|                                                                                                                        |       |                    |        |                        |       |
| Total                                                                                                                       |       | $                       | 428,209,000 |                        | $          | 428,871,000 |   |

 

***The Company’s 9 3/4 % SeniorSecured Notes and******Tranche A Term Loan and aConvertible Tranche B Term Loan***

On December 22, 2003, the Company completed a$405,000,000 offering of its 9 3/4 % Senior Secured Notes (the “Notes”) dueDecember 1, 2010, at a discount, resulting in proceeds of $400,067,100.Interest on the Notes is payable on December 1 and June 1 of eachyear, which commenced on June 1, 2004. The Company used the net proceedsfrom the offering in part to (i) repay all outstanding borrowings, plusaccrued interest, under its senior credit agreement, (ii) redeem at par,plus accrued interest, all of its 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, theCompany entered into a Credit and Guaranty Agreement with Silver Point FinanceLLC, as Administrative Agent, and the Lenders party (the “Lenders”) theretofrom 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 its Notes. Both term loansmature on December 1, 2006.  On July5, 2006, the Company 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. 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 (seeabove for further details.)

14

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Inconnection with the execution of the Credit Agreement, the Indenture, dated asof December 22, 2003, between the Company, the guarantors party theretoand The Bank of New York, as Trustee, as supplemented by the First SupplementalIndenture, dated as of March 9, 2005, by and between the Company, theguarantors party thereto and The Bank of New York, as Trustee (the “Indenture”),was further supplemented by the Second Supplemental Indenture, dated as ofJuly 5, 2006, by and between the Company, the guarantors party thereto andThe Bank of New York, as Trustee (the “Second Supplemental Indenture”).

TheSecond Supplemental Indenture adds WBNG, Inc. and WBNG License, Inc.,the acquisition entities (which the Company completed the acquisition on July26, 2006, see above for further details) as guarantors to the Indenture. TheLenders have a first lien on the assets of WBNG, Inc and WBNGLicense, Inc. Note holders have a second lien in the assets of WBNG, Incand 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”).

Inconnection with the Second Supplemental Indenture, the Company entered into theSupplemental Agreement, dated as of July 5, 2006, in relation to theSecond Supplemental Indenture and the Credit and Guaranty Agreement, each datedas of July 5, 2006 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.

The Credit Agreementcontains certain covenants, including the following: (i) the Company mustsubmit to the administrative agent a proposed comprehensive restructuring planfor the Company no later than July 14, 2006; (ii) the Company must sign adefinitive agreement effectuating a comprehensive restructuring of the Companyin form and substance satisfactory to the lenders holding 51% of the loans byAugust 15, 2006; (iii) the Company must maintain a minimum broadcast cashflow; (iv) the Company must not make or incur consolidated capital expendituresin excess of $4,038,000; and (v) the Company’s ability to incur incrementalindebtedness, issue capital stock, make investments or acquire or dispose ofassets is restricted.

The Credit Agreementspecifies certain events of default, including the following: (i) failure tomake payments when due under the Credit Agreement; (ii) certain defaults inother agreements concerning indebtedness; (iii) failure of the Company to enterinto a definitive agreement effectuating a comprehensive restructuring of theCompany in form and substance satisfactory to the lenders holding 51% of the loansby August 15, 2006; (iv) material breach of a representation; (v)involuntary or voluntary bankruptcy; (vi) judgment, writs or warrants ofattachment in the aggregate amount in excess of $2,000,000 shall be entered orfiled against the Company; (vii) the failure of Malara Broadcast Group torefinance the Malara Broadcast Group senior credit facility with a new facilityfrom the lenders by August 15, 2006; and (viii) the failure of the Companyto execute and deliver a supplement to Indenture on or prior to July 31, 2006in accordance with the Supplemental Agreement.

OnAugust 9, 2006, the administrative agent agreed (i) to extend the due date by which the Company must sign a definitive agreement effectuating acomprehensive restructuring of the Company in form and substance satisfactoryto the lenders holding 51% of the loans from August 15, 2006 to August 31, 2006and (ii) to extend the due date for Malara Broadcast Group to refinance theMalara Broadcast Group senior credit facility with a new facility with thelenders from August 15, 2006 to August 18, 2006.

OnAugust 1, 2006, the Company entered into a Third Supplemental Indenture, by andbetween the Company, the guarantors party thereto and The Bank of New York, asTrustee, which amends the Indenture in accordance with the SupplementalAgreement.

The Notes and Credit Agreement are the Company’ssenior secured obligations. The Notes are guaranteed by each of the Company’srestricted subsidiaries. The Credit Agreement is guaranteed by WBNG, Inc andWBNG License, Inc. 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 andCredit 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) sellor acquire assets; and (viii) enter into new lines of business.

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.

15

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***Malara Broadcast Group’s SeniorCredit Facility***

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV in March 2005 with theproceeds of the Malara Broadcast Group Senior Credit Facility, consisting oftwo terms loans totaling $48.5 million and a revolving loan of $5 million. The$23.5 million Malara Broadcast Group Tranche A Term Loan, which was secured bya letter of credit, was repaid on February 10, 2006. To secure thereimbursement obligations in the event of a draw on the letter of credit,pursuant to the terms and conditions of an Application and Agreement forStandby Letter of Credit, the Company had pledged $25 million of U.S.Government Securities. To the****extent thatprincipal payments were made on the Tranche A Term Loan, the letter of creditwas to be proportionately reduced and the Company was to be permitted toproportionately reduce the amount of the pledged U.S. Government Securities.  The $25 million Malara Broadcast Group TermLoan B and the $5 million revolving loan are secured by the assets of WPTA-TVand KDLH-TV, and guaranteed on an unsecured basis by the Company pursuant to aguaranty agreement (the “Granite Guaranty”).

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 associatedwith the Tranche A Term Loan were based, at Malara Broadcast Group’s option, ateither (i) the higher of the Prime Rate or the Federal Funds EffectiveRate plus 0.50% (the “Base Rate”) or (ii) the Adjusted Eurodollar Rateplus 0.60% per annum, as such terms are defined in the Malara Broadcast GroupSenior Credit Facility.  Interest ratesassociated with the Tranche B Term Loan and Revolving Loan are based, at MalaraBroadcast Group’s option, on either (i) the Base Rate plus 4.625% perannum or (ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Tranche B Term Loan and Revolving Loanat a rate of 3% per annum. Additionally, Malara Broadcast Group is required topay monthly commitment fees on the unused portion of its revolving loancommitment at a rate of 0.50% per annum. Cash interest payments are payable monthly.

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

Malara Broadcast Groupwas required to make monthly principal payments on the Tranche A Term Loan andthe Revolving Loan equal to the product of (i) the Repayment Percentage(which is 25% unless there is an Event of Default or the Consolidated Loan toStick Value is less than 70%, in which case the Repayment Percentage is 100%)and (ii) the Consolidated Excess Free Cash Flow for the month precedingthe month in which such installment is due, as such terms are defined in theMalara Broadcast Group Senior Credit Facility. All such payments would have been applied first to repay the outstandingRevolving Loan to the full extent thereof (without a corresponding reduction inthe Revolving Loan Commitment Amount) and second to repay the outstandingTranche A Term Loan to the full extent thereof; provided that, if the RepaymentPercentage for such monthly installment is 100%, the excess 75% of such monthlyinstallment shall be applied first to repay the outstanding Revolving Loan tothe full extent thereof and second to repay the outstanding Tranche B Term Loanto the full extent thereof. For the three and six months ended June 30, 2006,the total principal payments made on the Revolving Loan and Tranche B Term Loanapproximated $640,000 and $824,000, respectively, and total principal paymentsmade to date approximated $1,845,000.

On February 10, 2006, in accordance with the terms of the MalaraBroadcast Group Senior Credit Facility, the letter of credit issued inMarch 2005 to support the $23.5 million Tranche A Term Loan was drawn uponin satisfaction of Malara Broadcast Group’s obligations to such lenders underthe Malara Tranche A Term Loan following non-renewal of the letter ofcredit. The Company paid the reimbursement obligation to the letter ofcredit issuer on February 10, 2006, using U.S. government securities whichhad been pledged in support of such obligation.

Under a Reimbursement Agreement dated as of March 8, 2005 (the “*Reimbursement Agreement*”) among the Company, MalaraBroadcast Group and certain of Malara Broadcast Group’s subsidiaries (togetherwith Malara, the “*Malara Borrowers*”), the MalaraBorrowers agreed to repay the Company any amounts drawn on the letter of creditplus interest at a rate of 8% per annum. The Company reduced the $23.5 million owed from Malara Broadcast Groupunder the Reimbursement Agreement by approximately $6.9 million to $16.6million.

**Note 7 — DiscontinuedOperations**

In accordance with theprovisions of Statement 144, the operating results of KBWB-TV, SanFrancisco, California are reported as discontinued operations in theaccompanying consolidated balance sheets and statements of operations. Theassets and liabilities being disposed of have been classified as “held for sale”on the accompanying balance sheets presented, and their operations have beenrecorded as discontinued operations. Discontinued operations have not beensegregated in the consolidated statement of cash flows and, therefore, amountsfor certain captions will not agree with the accompanying consolidated balancesheets and statements of operations.

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

On September 8,2005, the Company had entered into a definitive agreement to sell substantiallyall of the assets of KBWB-TV, the WB affiliate serving the San Francisco,California television market, to the AM Broadcasting KBWB, Inc. Inaddition, on September 8, 2005, the Company had entered into a definitiveagreement to sell substantially all of the assets of WMYD-TV (formerlyWDWB-TV), the WB affiliate serving the Detroit Michigan television market, tothe AM Broadcasting WDWB, Inc.

On May 1, 2006, theCompany terminated such agreements and entered into new separate definitiveagreements to KBWB-TV serving San Francisco, California and WMYD-TV servingDetroit, Michigan to affiliates of DS Audible, LLC. The aggregate considerationthat was to be received by the Company in connection with the sale of KBWB-TVwas $65,000,000, before closing and other adjustments, which was payable incash.  The aggregate consideration thatwas to be received by the Company in connection with the sale of WMYD-TV was$85,000,000, before closing and other adjustments which was payable in cash.

On July 17, 2006, theCompany terminated its agreements to sell KBWB-TV serving San Francisco,California and WMYD-TV serving Detroit, Michigan to affiliates of DS Audible,LLC. The Company also announced its intentions to continue to market its SanFrancisco, California television station KBWB-TV and retain its Detroit,Michigan television station WMYD-TV. Due to the Company’s aforementioned plansand in accordance with the provisions of Statement 144, the Company willcontinue to report the operating results of KBWB-TV as discontinued operationsfor the periods ended June 30, 2006 and 2005 and their respective assets andliabilities as “held for sale” on the accompanying balance sheets for theperiods ended June 30, 2006 and December 31, 2005. Furthermore, the Companywill report the operating results of WMYD-TV as part of its continuingoperations for the periods ended June 30, 2006 and 2005 and their respectiveassets and liabilities as part of the consolidated “held and used” on theaccompanying balance sheets for the periods ended June 30, 2006 and December31, 2005. In addition, the Company has recorded approximately $500,000 ofdepreciation expense which would have been recorded on the assets of WMYD-TVfor the period September 9, 2005 through June 30, 2006, when the assets andliabilities of WMYD-TV were initially classified as “held for sale” anddepreciation had ceased.

As of June 30, 2006 theaggregate assets held for sale totaled $62,245,000 and the aggregateliabilities held for sale totaled $24,134,000. Assets for which the Companyanticipates it would retain the rights to in an anticipated asset sale agreementinclude cash and cash equivalents and accounts receivable. Cash and cashequivalents totaled $536,000 and $480,000 as of June 30, 2006 andDecember 31, 2005, respectively and are included in the Company’sconsolidated balance sheets. Accounts receivable related to discontinuedoperations is included in accounts receivable, net of allowance for doubtfulaccounts, in the accompanying consolidated balance sheets for all periodspresented. Such amounts totaled $3,438,000 (net of allowance of $35,000) as ofJune 30, 2006 and $3,086,000 (net of allowance of $57,000) as ofDecember 31, 2005 and are included in the Company’s consolidated balancesheets. Net income from discontinued operations totaled $1,013,000 and$2,419,000 for the three and six months ended June 30, 2006, respectively. Netloss from discontinued operations totaled $1,235,000 and $2,869,000 for thethree and six months ended June 30, 2005, respectively. Net revenues fromdiscontinued operations were $4,491,000 and $8,966,000 for the three and sixmonths ended June 30, 2006, respectively. Net revenues from discontinuedoperations were $4,350,000 and $8,465,000 for the three and six months endedJune 30, 2005, respectively.

Summarized financial data for assets and liabilitiesheld for sale are as follows:

 
| ** **                        | ** ** | **Balance Sheet Data** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **June 30,  2006**          | ** ** | **December 31,  2005** | ** ** |
| Film contract  rights             |       | $                                | 3,191,000  |   | $ | 4,987,000 |   |
| Property and  equipment, net      |       | 3,088,000                        |       | 2,999,000 |   |
| Intangible and  other assets, net |       | 55,966,000                       |       | 56,184,000 |   |
| Total assets  held for sale       |       | $                                | 62,245,000 |   | $ | 64,170,000 |   |
|                              |       |                             |       |   |   |
| Film contract  rights payable     |       | $                                | 21,139,000 |   | $ | 23,706,000 |   |
| Accrued and  other liabilities    |       | 2,995,000                        |       | 2,710,000 |   |
| Total liabilities held  for sale  |       | $                                | 24,134,000 |   | $ | 26,416,000 |   |

** **

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**Note 8 — 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 SHEETJune 30, 2006(Unaudited)**

 
| ** **                                        | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|---------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                        | ** ** | ** **                             | ** **  | ** **                       | ** ** | ** **       | ** ** | ** **                | ** **  |
| Assets                                            |       |                                   |        |                             |       |             |       |                      |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Current assets:                                   |       |                                   |        |                             |       |             |       |                      |        |
| Cash and cash equivalents                         |       | $                                      | 9,902,869   |                             | $          | 1,696,441        |       | $                         | —      |   | $ | 11,599,310 |   |
| Accounts receivable, net                          |       | 18,757,540                             |        | 2,820,230                        |       | —           |       | 21,577,770                |        |
| Other current assets                              |       | 27,458,495                             |        | 409,803                          |       | (16,606,272      | )          | 11,262,026                |        |
| Assets held for sale                              |       | 62,245,141                             |        | —                           |       | —           |       | 62,245,141                |        |
| Due from consolidated entity                      |       | 20,928,161                             |        | 14,092                           |       | (20,942,253      | )          | —                    |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Total current assets                              |       | 139,292,206                            |        | 4,940,566                        |       | (37,548,525      | )          | 106,684,247               |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Property and  equipment, net                      |       | 35,501,867                             |        | 9,437,980                        |       | —           |       | 44,939,847                |        |
| Other non  current assets                         |       | 26,543,247                             |        | 1,134,326                        |       | (3,646,668       | )          | 24,030,905                |        |
| Intangibles, net                                  |       | 196,464,130                            |        | 44,143,588                       |       | (27,731,100      | )          | 212,876,618               |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Total assets                                      |       | $                                      | 397,801,450 |                             | $          | 59,656,460       |       | $                         | (68,926,293 | ) | $ | 388,531,617 |   |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Liabilities and  stockholders’ deficit       |       |                                   |        |                             |       |             |       |                      |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Current  liabilities:                             |       |                                   |        |                             |       |             |       |                      |        |
| Accounts payable and other accrued liabilities    |       | $                                      | 29,790,499  |                             | $          | 234,922          |       | $                         | —      |   | $ | 30,025,421 |   |
| Current portion of long-term debt                 |       | —                                 |        | 19,591,272                       |       | (16,606,272      | )          | 2,985,000                 |        |
| Other current liabilities                         |       | 18,579,946                             |        | 526,120                          |       | —           |       | 19,106,066                |        |
| Liabilities held for sale                         |       | 24,133,868                             |        | —                           |       | —           |       | 24,133,868                |        |
| Due to consolidated entity                        |       | 14,092                                 |        | 20,928,161                       |       | (20,942,253      | )          | —                    |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Total current liabilities                         |       | 72,518,405                             |        | 41,280,475                       |       | (37,548,525      | )          | 76,250,355                |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Long-term debt,  less current portion             |       | 401,848,348                            |        | 26,360,841                       |       | —           |       | 428,209,189               |        |
| Other non  current liabilities                    |       | 53,879,829                             |        | 3,852,362                        |       | (3,646,668       | )          | 54,085,523                |        |
| Redeemable  preferred stock                       |       | 199,368,775                            |        | —                           |       | —           |       | 199,368,775               |        |
| Accrued  dividends on redeemable preferred stock  |       | 108,578,339                            |        | —                           |       | —           |       | 108,578,339               |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Stockholders’  deficit:                      |       |                                   |        |                             |       |             |       |                      |        |
| Common stock                                      |       | 199,561                                |        | —                           |       | —           |       | 199,561                   |        |
| Additional paid-in capital                        |       | 480,480                                |        | —                           |       | —           |       | 480,480                   |        |
| Accumulated deficit                               |       | (438,196,612                           | )           | (11,837,218                      | )          | (27,731,100      | )          | (477,764,930              | )           |
| Treasury stock, at cost                           |       | (875,675                               | )           | —                           |       | —           |       | (875,675                  | )           |
| Total stockholders’ deficit                  |       | (438,392,246                           | )           | (11,837,218                      | )          | (27,731,100      | )          | (477,960,564              | )           |
| Total liabilities and  stockholders’ deficit |       | $                                      | 397,801,450 |                             | $          | 59,656,460       |       | $                         | (68,926,293 | ) | $ | 388,531,617 |   |

 

18

----

 

**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                              |       | 10,247,659                             |        | 837,466                          |       | —           |       | 11,085,125                |        |
| Restricted cash equivalents                       |       | 24,997,500                             |        | —                           |       | —           |       | 24,997,500                |        |
| Assets held for sale                              |       | 64,169,805                             |        | —                           |       | —           |       | 64,169,805                |        |
| Due from consolidated entity                      |       | 14,773,036                             |        | 10,864                           |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Total current assets                              |       | 140,364,694                            |        | 5,689,226                        |       | (14,783,900      | )          | 131,270,020               |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Property and  equipment, net                      |       | 37,233,128                             |        | 9,342,340                        |       | —           |       | 46,575,468                |        |
| Other non  current assets                         |       | 15,445,472                             |        | 1,312,134                        |       | (3,646,668       | )          | 13,110,938                |        |
| Intangibles, net                                  |       | 197,870,653                            |        | 44,740,731                       |       | (27,731,100      | )          | 214,880,284               |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| 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    |       | $                                      | 12,051,435  |                             | $          | 608,036          |       | $                         | —      |   | $ | 12,659,471 |   |
| Current portion of long-term debt                 |       | —                                 |        | 25,844,000                       |       | —           |       | 25,844,000                |        |
| Other current liabilities                         |       | 16,467,124                             |        | 1,110,674                        |       | —           |       | 17,577,798                |        |
| Liabilities held for sale                         |       | 26,416,034                             |        | —                           |       | —           |       | 26,416,034                |        |
| Due to consolidated entity                        |       | 10,864                                 |        | 14,773,036                       |       | (14,783,900      | )          | —                    |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Total current liabilities                         |       | 54,945,457                             |        | 42,335,746                       |       | (14,783,900      | )          | 82,497,303                |        |
|                                              |       |                                   |        |                             |       |             |       |                      |        |
| Long-term debt,  less current portion             |       | 401,495,998                            |        | 27,375,458                       |       | —           |       | 428,871,456               |        |
| Other non  current liabilities                    |       | 30,276,814                             |        | 3,921,019                        |       | (3,646,668       | )          | 30,551,165                |        |
| 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 OFOPERATIONSFor the three months ended June 30, 2006(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                       | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 26,804,561  |                             | $          | 4,145,800        |       | $                         | (4,074,090 | ) | $ | 26,876,271 |   |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                             |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 9,595,919                              |        | 1,679,177                        |       | (1,318,524       | )          | 9,956,572                 |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 7,659,418                              |        | 3,065,633                        |       | (2,755,566       | )          | 7,969,485                 |       |
| Corporate  expense (exclusive of corporate reorganization expense and depreciation expense  shown separately below)        |       | 3,536,980                              |        | —                           |       |             |       | 3,536,980                 |       |
| Corporate  reorganization expense                                                                                          |       | 965,219                                |        | —                           |       |             |       | 965,219                   |       |
| Depreciation and  amortization                                                                                             |       | 2,070,460                              |        | 339,756                          |       |             |       | 2,410,216                 |       |
| Non-cash  compensation expense                                                                                             |       | 60,738                                 |        | —                           |       |             |       | 60,738                    |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Operating income (loss)                                                                                                    |       | 2,915,827                              |        | (938,766                         | )          |             |       | 1,977,061                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 10,044,008                             |        | 1,161,235                        |       |             |       | 11,205,243                |       |
| Interest income                                                                                                            |       | (66,816                                | )           | —                           |       |             |       | (66,816                   | )          |
| Non-cash interest expense                                                                                                  |       | 958,167                                |        | 74,722                           |       |             |       | 1,032,889                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                           |       |             |       | 6,386,961                 |       |
| Other                                                                                                                      |       | (312,325                               | )           | 308,480                          |       |             |       | (3,845                    | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations before income taxes                                                                       |       | (14,094,168                            | )           | (2,483,203                       | )          |             |       | (16,577,371               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                             |       |             |       |                      |       |
| Current                                                                                                                    |       | 124,865                                |        | —                           |       |             |       | 124,865                   |       |
| Deferred                                                                                                                   |       | 15,664,351                             |        | —                           |       |             |       | 15,664,351                |       |
| Total provision  (benefit) for income taxes                                                                                |       | 15,789,216                             |        | —                           |       |             |       | 15,789,216                |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations                                                                                           |       | (29,883,384                            | )           | (2,483,203                       | )          |             |       | (32,366,587               | )          |
| Discontinued  operations:                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Income from discontinued operations, net of taxes                                                                          |       | 1,012,684                              |        | —                           |       |             |       | 1,012,684                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (28,870,700 | )                                | $          | (2,483,203       | )          |                      |       | $ | (31,353,903 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                               |       | $                                      | (1.51       | )                                |       |             |       |                      | $          | (1.63 | ) |
| Basic and  diluted income per share from discontinued operations                                                           |       | 0.05                                   |        |                             |       |             |       | 0.05                      |       |
| Basic and  diluted net loss per share                                                                                      |       | $                                      | (1.46       | )                                |       |             |       |                      | $          | (1.58 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,802,913                             |        |                             |       |             |       | 19,802,913                |       |
|                                                                                                                            |            |                                        |             |                                  |            |                  |            |                           |            |  |  |  |  |

 

20

----

**STATEMENT OFOPERATIONSFor the three months ended June 30, 2005(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                       | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 26,377,998  |                             | $          | 4,169,412        |       | $                         | (3,886,409 | ) | $ | 26,661,001 |   |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Station operating  expenses:                                                                                               |       |                                   |        |                             |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 9,760,225                              |        | 1,735,742                        |       | (1,310,002       | )          | 10,185,965                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 7,302,826                              |        | 2,813,063                        |       | (2,576,407       | )          | 7,539,482                 |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 2,725,159                              |        | —                           |       |             |       | 2,725,159                 |       |
| Depreciation and  amortization                                                                                             |       | 2,197,501                              |        | 338,240                          |       |             |       | 2,535,741                 |       |
| Performance  award expense                                                                                                 |       | 319,797                                |        | —                           |       |             |       | 319,797                   |       |
| Non-cash  compensation expense                                                                                             |       | 93,557                                 |        | —                           |       |             |       | 93,557                    |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Operating income (loss)                                                                                                    |       | 3,978,933                              |        | (717,633                         | )          |             |       | 3,261,300                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 9,880,136                              |        | 1,260,833                        |       |             |       | 11,140,969                |       |
| Interest income                                                                                                            |       | (289,045                               | )           | —                           |       |             |       | (289,045                  | )          |
| Non-cash interest expense                                                                                                  |       | 983,626                                |        | 68,952                           |       |             |       | 1,052,578                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 6,386,961                              |        | —                           |       |             |       | 6,386,961                 |       |
| Other                                                                                                                      |       | (1,230,395                             | )           | 1,319,021                        |       |             |       | 88,626                    |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations before income taxes                                                                       |       | (11,752,350                            | )           | (3,366,439                       | )          |             |       | (15,118,789               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                             |       |             |       |                      |       |
| Current                                                                                                                    |       | 50,541                                 |        | —                           |       |             |       | 50,541                    |       |
| Deferred                                                                                                                   |       | (197,190                               | )           | —                           |       |             |       | (197,190                  | )          |
| Total provision  (benefit) for income taxes                                                                                |       | (146,649                               | )           | —                           |       |             |       | (146,649                  | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations                                                                                           |       | (11,605,701                            | )           | (3,366,439                       | )          |             |       | (14,972,140               | )          |
| Discontinued  operations:                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Loss from discontinued operations, net of taxes                                                                            |       | (1,234,752                             | )           | —                           |       |             |       | (1,234,752                | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (12,840,453 | )                                | $          | (3,366,439       | )          |                      |       | $ | (16,206,892 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                     |       | $                                      | (0.60       | )                                |       |             |       |                      | $          | (0.77 | ) |
| Basic and  diluted loss per share from discontinued operations                                                             |       | (0.06                                  | )           |                             |       |             |       | (0.06                     | )          |
| Basic and diluted  net loss per share                                                                                      |       | $                                      | (0.66       | )                                |       |             |       |                      | $          | (0.83 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,577,199                             |        |                             |       |             |       | 19,577,199                |       |
|                                                                                                                            |            |                                        |             |                                  |            |                  |            |                           |            |  |  |  |  |

 

21

----

**STATEMENT OFOPERATIONSFor the Six months ended June 30, 2006(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                       | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 51,768,131  |                             | $          | 7,753,963        |       | $                         | (7,844,674 | ) | $ | 51,677,420 |   |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                             |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 19,052,566                             |        | 3,190,071                        |       | (2,430,433       | )          | 19,812,204                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 15,095,501                             |        | 5,969,939                        |       | (5,414,241       | )          | 15,651,199                |       |
| Corporate  expense (exclusive of corporate reorganization expense and depreciation  expense shown separately below)        |       | 6,384,782                              |        | —                           |       |             |       | 6,384,782                 |       |
| Corporate  reorganization expense                                                                                          |       | 1,185,037                              |        | —                           |       |             |       | 1,185,037                 |       |
| Depreciation and  amortization                                                                                             |       | 3,847,007                              |        | 1,012,793                        |       |             |       | 4,859,800                 |       |
| Performance  award expense                                                                                                 |       | 88,831                                 |        | —                           |       |             |       | 88,831                    |       |
| Non-cash  compensation expense                                                                                             |       | 110,895                                |        | —                           |       |             |       | 110,895                   |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Operating income (loss)                                                                                                    |       | 6,003,512                              |        | (2,418,840                       | )          |             |       | 3,584,672                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 19,896,864                             |        | 2,385,981                        |       |             |       | 22,282,845                |       |
| Interest income                                                                                                            |       | (384,391                               | )           | —                           |       |             |       | (384,391                  | )          |
| Non-cash interest expense                                                                                                  |       | 2,513,554                              |        | 149,816                          |       |             |       | 2,663,370                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 12,773,922                             |        | —                           |       |             |       | 12,773,922                |       |
| Loss (gain) on extinguishments of debt                                                                                     |       | 6,893,728                              |        | (6,893,728                       | )          |             |       | —                    |       |
| Other                                                                                                                      |       | (1,235,720                             | )           | 1,228,517                        |       |             |       | (7,203                    | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| (Loss) income  from continuing operations before income taxes                                                              |       | (34,454,445                            | )           | 710,574                          |       |             |       | (33,743,871               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                             |       |             |       |                      |       |
| Current                                                                                                                    |       | 270,555                                |        | —                           |       |             |       | 270,555                   |       |
| Deferred                                                                                                                   |       | 15,377,082                             |        | —                           |       |             |       | 15,377,082                |       |
| Total provision  (benefit) for income taxes                                                                                |       | 15,647,637                             |        | —                           |       |             |       | 15,647,637                |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| (Loss) income  from continuing operations                                                                                  |       | (50,102,082                            | )           | 710,574                          |       |             |       | (49,391,508               | )          |
| Discontinued  operations:                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Income from discontinued operations, net of taxes                                                                          |       | 2,418,676                              |        | —                           |       |             |       | 2,418,676                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Net (loss)  income                                                                                                         |       | $                                      | (47,683,406 | )                                | $          | 710,574          |       |                      |       | $ | (46,972,832 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                               |       | $                                      | (2.53       | )                                |       |             |       |                      | $          | (2.50 | ) |
| Basic and diluted  income per share from discontinued operations                                                           |       | 0.12                                   |        |                             |       |             |       | 0.12                      |       |
| Basic and  diluted net loss per share                                                                                      |       | $                                      | (2.41       | )                                |       |             |       |                      | $          | (2.38 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,748,949                             |        |                             |       |             |       | 19,748,949                |       |
|                                                                                                                            |            |                                        |             |                                  |            |                  |            |                           |            |  |  |  |  |

 

22

----

**STATEMENT OFOPERATIONSFor the six months ended June 30, 2005(Unaudited)**

 
| ** **                                                                                                                 | ** ** | **Granite  Broadcasting  Corporation** | ** **  | **Malara Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------|-------------|----------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                                                                                 | ** ** | ** **                             | ** **  | ** **                       | ** ** | ** **       | ** ** | ** **                | ** ** |
| Net revenues                                                                                                               |       | $                                      | 48,116,691  |                             | $          | 5,222,648        |       | $                         | (5,056,495 | ) | $ | 48,282,844 |   |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Station  operating expenses:                                                                                               |       |                                   |        |                             |       |             |       |                      |       |
| Direct operating expenses (exclusive of depreciation  and amortization expenses shown separately below)                    |       | 19,541,055                             |        | 2,197,427                        |       | (1,647,748       | )          | 20,090,734                |       |
| Selling, general and administrative expenses  (exclusive of depreciation and amortization expenses shown separately below) |       | 14,174,634                             |        | 3,711,530                        |       | (3,408,747       | )          | 14,477,417                |       |
| Corporate  expense (exclusive of depreciation expense shown separately below)                                              |       | 5,423,058                              |        | —                           |       |             |       | 5,423,058                 |       |
| Depreciation and  amortization                                                                                             |       | 4,656,140                              |        | 404,019                          |       |             |       | 5,060,159                 |       |
| Performance  award expense                                                                                                 |       | 639,594                                |        | —                           |       |             |       | 639,594                   |       |
| Non-cash  compensation expense                                                                                             |       | 188,150                                |        | —                           |       |             |       | 188,150                   |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Operating income (loss)                                                                                                    |       | 3,494,060                              |        | (1,090,328                       | )          |             |       | 2,403,732                 |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Other expenses  (income):                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Interest expense                                                                                                           |       | 19,752,706                             |        | 1,578,416                        |       |             |       | 21,331,122                |       |
| Interest income                                                                                                            |       | (737,799                               | )           | —                           |       |             |       | (737,799                  | )          |
| Non-cash interest expense                                                                                                  |       | 1,939,002                              |        | 86,133                           |       |             |       | 2,025,135                 |       |
| Non-cash preferred stock dividend                                                                                          |       | 12,773,922                             |        | —                           |       |             |       | 12,773,922                |       |
| Other                                                                                                                      |       | (1,500,595                             | )           | 1,668,627                        |       |             |       | 168,032                   |       |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations before income taxes                                                                       |       | (28,733,176                            | )           | (4,423,504                       | )          |             |       | (33,156,680               | )          |
| Provision  (benefit) for income taxes:                                                                                     |       |                                   |        |                             |       |             |       |                      |       |
| Current                                                                                                                    |       | 111,679                                |        | —                           |       |             |       | 111,679                   |       |
| Deferred                                                                                                                   |       | (437,072                               | )           | —                           |       |             |       | (437,072                  | )          |
| Total provision  (benefit) for income taxes                                                                                |       | (325,393                               | )           | —                           |       |             |       | (325,393                  | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Loss from  continuing operations                                                                                           |       | (28,407,783                            | )           | (4,423,504                       | )          |             |       | (32,831,287               | )          |
| Discontinued  operations:                                                                                                  |       |                                   |        |                             |       |             |       |                      |       |
| Loss from discontinued operations, net of taxes                                                                            |       | (2,869,394                             | )           | —                           |       |             |       | (2,869,394                | )          |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Net loss                                                                                                                   |       | $                                      | (31,277,177 | )                                | $          | (4,423,504       | )          |                      |       | $ | (35,700,681 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Basic and  diluted loss per share from continuing operations                                                     |       | $                                      | (1.45       | )                                |       |             |       |                      | $          | (1.68 | ) |
| Basic and  diluted loss per share from discontinued operations                                                             |       | (0.15                                  | )           |                             |       |             |       | (0.15                     | )          |
| Basic and diluted  net loss per share                                                                                      |       | $                                      | (1.60       | )                                |       |             |       |                      | $          | (1.83 | ) |
|                                                                                                                       |       |                                   |        |                             |       |             |       |                      |       |
| Weighted average common  shares outstanding                                                                                |       | 19,539,121                             |        |                             |       |             |       | 19,539,121                |       |
|                                                                                                                            |            |                                        |             |                                  |            |                  |            |                           |            |  |  |  |  |

 

23

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**STATEMENT OF CASHFLOWSFor the six months ended June 30, 2006(Unaudited)**

 
| ** **                                                 | ** ** | **Granite Broadcasting  Corporation** | ** ** | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** **  |
|------------------------------------------------------------|------------|--------------------------------------------|------------|------------------------------|------------|------------------|------------|---------------------------|-------------|
| ** **                                                 | ** ** | ** **                                 | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| **Cash  flows provided by (used in) operating activities** |       | $                                          | 2,444,467  |                         | $          | 25,085,095       |       | $                         | (23,873,617 | ) | $ | 3,655,945 |   |
|                                                       |       |                                       |       |                         |       |             |       |                      |        |
| **Cash  flows from investing activities:**                 | ** ** | ** **                                 | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Investments                                                |       | 2,792                                      |       | —                       |       | —           |       | 2,792                     |        |
| Sales of U.S. Government Securities                        |       | 25,315,677                                 |       | —                       |       | —           |       | 25,315,677                |        |
| Capital expenditures                                       |       | (755,383                                   | )          | (515,958                     | )          | —           |       | (1,271,341                | )           |
| Net cash provided by (used in) investing activities        |       | 24,563,086                                 |       | (515,958                     | )          | —           |       | 24,047,128                |        |
|                                                       |       |                                       |       |                         |       |             |       |                      |        |
| **Cash  flows from financing activities:**                 | ** ** | ** **                                 | ** ** | ** **                   | ** ** | ** **       | ** ** | ** **                | ** **  |
| Payment of senior credit facility                          |       | (23,550,637                                | )          | (24,698,229                  | )          | 23,873,617       |       | (24,375,249               | )           |
| Payment of deferred financing fees                         |       | (357,558                                   | )          | —                       |       | —           |       | (357,558                  | )           |
| Net cash used in financing activities                      |       | (23,908,195                                | )          | (24,698,229                  | )          | 23,873,617       |       | (24,732,807               | )           |
|                                                       |       |                                       |       |                         |       |             |       |                      |        |
| Net increase in  cash and cash equivalents                 |       | 3,099,358                                  |       | (129,092                     | )          |             |       | 2,970,266                 |        |
| Cash and cash  equivalents, beginning of period            |       | 6,803,511                                  |       | 1,825,533                    |       |             |       | 8,629,044                 |        |
| Cash and cash  equivalents, end of period                  |       | $                                          | 9,902,869  |                         | $          | 1,696,441        |       |                      |        | $ | 11,599,310 |   |
|                                                       |       |                                       |       |                         |       |             |       |                      |        |
| Supplemental  information:                                 |       |                                       |       |                         |       |             |       |                      |        |
| Cash paid for interest                                     |       | $                                          | —     |                         | $          | 1,906,569        |       |                      |        | $ | 1,906,569 |   |
| Cash paid for income taxes                                 |       | 234,537                                    |       | —                       |       |             |       | 234,537                   |        |
| Non-cash capital  expenditures                             |       | 17,930                                     |       | 41,683                       |       |             |       | 59,613                    |        |
|                                                            |            |                                            |            |                              |            |                  |            |                           |             |  |  |  |  |

 

24

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**STATEMENT OF CASHFLOWSFor the six months ended June 30, 2005(Unaudited)**

** **
| ** **                                                       | ** ** | **Granite Broadcasting  Corporation** | ** **  | **Malara  Broadcast  Group** | ** ** | **Eliminations** | ** ** | **Consolidated  Company** | ** ** |
|------------------------------------------------------------------|------------|--------------------------------------------|-------------|------------------------------|------------|------------------|------------|---------------------------|------------|
| ** **                                                       | ** ** | ** **                                 | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| **Cash  flows (used in) provided by operating activities**       |       | $                                          | (17,021,102 | )                            | $          | 1,400,647        |       | $                         | (31,716    | ) | $ | (15,652,171 | ) |
|                                                             |       |                                       |        |                         |       |             |       |                      |       |
| **Cash  flows from investing activities:**                       | ** ** | ** **                                 | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| Sales (purchase) of marketable securities and other  investments |       | 5,610,506                                  |        | —                       |       | —           |       | 5,610,506                 |       |
| Proceeds from sale of assets                                     |       | 45,417,485                                 |        | —                       |       | (45,417,485      | )          | —                    |       |
| Payment for acquisition of assets                                |       | (45,843,106                                | )           | (55,303,066                  | )          | 45,449,201       |       | (55,696,971               | )          |
| 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                                             |       | (972,964                                   | )           | 22,164                       |       | —           |       | (950,800                  | )          |
| Net cash used in investing activities                            |       | (24,432,247                                | )           | (51,634,234                  | )          | 31,716           |       | (76,034,765               | )          |
|                                                             |       |                                       |        |                         |       |             |       |                      |       |
| **Cash  flows from financing activities:**                       | ** ** | ** **                                 | ** **  | ** **                   | ** ** | ** **       | ** ** | ** **                | ** ** |
| Proceeds from senior credit facility                             |       | —                                     |        | 53,500,000                   |       |             |       | 53,500,000                |       |
| Payment of senior credit facility                                |       | —                                     |        | (383,159                     | )          |             |       | (383,159                  | )          |
| Payment of deferred financing fees                               |       | (864,401                                   | )           | (1,378,000                   | )          |             |       | (2,242,401                | )          |
| Net cash (used in) provided by financing activities              |       | (864,401                                   | )           | 51,738,841                   |       |             |       | 50,874,440                |       |
|                                                             |       |                                       |        |                         |       |             |       |                      |       |
| Net (decrease)  increase in cash and cash equivalents            |       | (42,317,750                                | )           | 1,505,254                    |       |             |       | (40,812,496               | )          |
| Cash and cash  equivalents, beginning of period                  |       | 60,858,710                                 |        | —                       |       |             |       | 60,858,710                |       |
| Cash and cash  equivalents, end of period                        |       | $                                          | 18,540,960  |                         | $          | 1,505,254        |       |                      |       | $ | 20,046,214 |   |
|                                                             |       |                                       |        |                         |       |             |       |                      |       |
| Supplemental  information:                                       |       |                                       |        |                         |       |             |       |                      |       |
| Cash paid for interest                                           |       | $                                          | 19,743,750  |                         | $          | 1,289,908        |       |                      |       | $ | 21,033,658 |   |
| Cash paid for income taxes                                       |       | 38,250                                     |        | —                       |       |             |       | 38,250                    |       |
| Non-cash capital  expenditures                                   |       | 153,307                                    |        | —                       |       |             |       | 153,307                   |       |
|                                                                  |            |                                            |             |                              |            |                  |            |                           |            |  |  |  |  |

 

**Note 9 — Intangibles**

*Intangibles*

Intangible assets are summarized as follows:

|                           | ** ** | **June 30, 2006** | ** **  | **December 31, 2005** | ** ** |
|---------------------------|------------|-----------------------------|-------------|---------------------------------|------------|
| ** **                | ** ** | **Unaudited**               | ** **  | ** **                      | ** ** |
| ** **                | ** ** | ** **                  | ** **  | ** **                      | ** ** |
| Goodwill                  |       | $                           | 80,296,000  |                            | $          | 80,792,000 |   |
| Network  affiliations     |       | 111,421,000                 |        | 111,421,000                     |       |
| Broadcast  licenses       |       | 103,237,000                 |        | 103,237,000                     |       |
|                      |       | 294,954,000                 |        | 295,450,000                     |       |
| Accumulated  amortization |       | (82,077,000                 | )           | (80,570,000                     | )          |
|                      |       |                        |        |                            |       |
| Net intangible assets     |       | $                           | 212,877,000 |                            | $          | 214,880,000 |   |

 

The Company amortizes itsnetwork affiliation agreements for which it does not make contractual paymentsusing an estimated useful life of 25 years and amortizes its networkaffiliation agreements for which it makes contractual payments over the life ofthe contract.  The Company recordedamortization expense from continuing operations of $754,000 and $1,507,000 forthe three and six ended June 30, 2006, respectively. The Company recordedamortization expense from continuing operations of $1,267,000 and $2,178,000for the three and six ended June 30, 2005, respectively.

25

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**Note 10- Income Taxes**

TheCompany evaluates the realizability of its deferred taxes and reviews therequirements for a valuation allowance on a quarterly basis. The factors usedto assess the likelihood of realization are the expected timing of thereversals of existing temporary differences, recoverability based on historicaltaxable income, projected future taxable income and tax planning strategies.The Company will revise such allowances when changes in circumstances result inchanges in management’s judgment about the future realization of deferredtaxes.

The provision(benefit) for income taxes for the three and six months ended June 30, 2006 and2005 consisted of the following:

 
| ** **                            | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                            | ** ** | **2006**                                            | ** ** | **2005**                                          | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **                            | ** ** | **(Unaudited)**                                     | ** ** | **(Unaudited)**                                   | ** ** |
| Current                               |       | $                                                   | 125,000    |                                              | $          | 50,000 |   | $ | 270,000 |   | $ | 112,000 |   |
| Deferred                              |       | 15,664,000                                          |       | (197,000                                          | )          | 15,377,000 |   | (437,000 | ) |
| Provision (benefit) for  income taxes |       | $                                                   | 15,789,000 |                                              | $          | (147,000 | ) | $ | 15,647,000 |   | $ | (325,000 | ) |

 

TheCompany records a valuation allowance against its deferred tax assets arisingfrom certain net operating losses when it is more likely than not that someportion or all of such losses will not be realized. During the quarter endedJune 30, 2006, the Company recorded an income tax expense of $15,789,000 due toits deferred tax liabilities being increased through an increase to thevaluation allowance. Such increase in the valuation allowance was attributableto a change in the Company’s intentions to retain its Detroit, Michigantelevision station WMYD-TV (see Note 7).

Theincrease in the valuation allowance, which will not adversely affect theCompany’s statement of cash flows or liquidity, was recorded based on theCompany’s existing temporary differences no longer reversing due to the Company’sintentions to retain its Detroit, Michigan television station WMYD-TV.

The Company’s netdeferred income tax liability is as follows:
| ** **                  | ** ** | **June 30, 2006** | ** ** | **December 31, 2005** | ** ** |
|-----------------------------|------------|-----------------------------|------------|---------------------------------|------------|
| ** **                  | ** ** | **(Unaudited)**             | ** ** | ** **                      | ** ** |
| Deferred tax  liability     |       | $                           | 36,932,000 |                            | $          | 23,125,000 |   |
| Deferred tax  asset         |       | —                      |       | 1,564,000                       |       |
| Net deferred tax  liability |       | $                           | 36,932,000 |                            | $          | 21,561,000 |   |

 

Deferredtaxes reflect the tax effects of temporary differences between the carryingamounts of assets and liabilities for financial reporting purposes and theamounts used for income tax purposes. The net deferred tax liabilitiesprimarily relate to differences between book and tax basis of the Company’s FCClicenses. In accordance with the adoption of FASB No. 142,*Goodwill and Intangible Assets*, onJanuary 1, 2002, the Company no longer amortizes its FCC licenses for bookpurposes, but instead tests them for impairment annually. For tax purposes, theFCC licenses continue to be amortized and as a result, the deferred taxliabilities will increase over time.

26

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***Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations***

The following informationshould be read in conjunction with the unaudited consolidated financialstatements and notes thereto in this Quarterly Report and the audited financialstatements and Management’s Discussion and Analysis of Financial Condition andResults of Operations contained in our Form 10-K for the year endedDecember 31, 2005. It includes the following sections:

·                  Executive Summary

·                  Recent Developments

·                  Critical Accounting Policies and Estimates

·                  Results of Operations

·                  Liquidity and Capital Resources

***ExecutiveSummary***

We own and operate eightnetwork affiliated television stations in geographically diverse marketsreaching over 6% of the nation’s television households and have shared servicesagreements and advertising representation agreements (which we generally referto as local service agreements) to provide advertising, sales, promotion andadministrative services, and selected programming to two additional stationsowned by Malara Broadcast Group and one additional station owned by FourSeasons Broadcast Company.  As of June30, 2006, four of our stations are affiliated with NBC, one of our stations isaffiliated with ABC and one of our stations is affiliated with CBS, our BigThree Affiliates, and two of our stations are affiliated with the Warner BrosTelevision Network, our WB Affiliates. The NBC affiliates are KSEE-TV, Fresno-Visalia, California, WEEK-TV,Peoria-Bloomington, Illinois, KBJR-TV, Duluth, Minnesota - Superior, Wisconsinand WISE-TV, Fort Wayne, Indiana.  TheABC affiliate is WKBW-TV, Buffalo, New York. The CBS affiliate is WTVH-TV,Syracuse, New York.  The WB affiliatesare KBWB-TV, San Francisco, California and WMYD-TV (formerly WDWB-TV), Detroit,Michigan. The two Malara Broadcast Group-owned stations to which we provideservices and selected programming are WPTA-TV, the ABC affiliate serving FortWayne, Indiana and KDLH-TV, the CBS affiliate serving Duluth, Minnesota - Superior,Wisconsin.  The Four Seasons BroadcastCompany-owned station to which we provide services is WAOE-TV, the UPNaffiliate serving Peoria-Bloomington, Illinois.

Malara Broadcast Group isowned by an independent third party who owns and operates two televisionstations as of June 30, 2006. We do not own Malara Broadcast Group or itstelevision stations. In order for both us and Malara Broadcast Group tocontinue to comply with FCC regulations, Malara Broadcast Group must maintaincomplete responsibility for and control over programming, finances, personneland operations of its television stations. However, as a result of our guarantee of the obligations incurred underMalara Broadcast Group’s senior secured credit facility and the revolving loan,arrangements under the local service agreements and put or call optionagreements, under United States generally accepted accounting principles (“U.S.GAAP”), specifically, Financial Accounting Standards Board (“FASB”)Interpretation No. 46, *Consolidation of VariableInterest Entities* (“Interpretation 46”), we are required toconsolidate Malara Broadcast Group’s financial position, results of operationsand statement of cash flows in our consolidated results. In addition, inaccordance with the provisions of Interpretation 46, the Company did notaccount for the sale of the assets of WPTA-TV and no gain there from wasrecognized 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 or its television stations, and pursuant toInterpretation 46, we are not deemed to be the primary beneficiary of FourSeasons Broadcast Company and therefore, we have not consolidated theirresults.

In September 2005,we entered into a definitive agreements to sell substantially all of the assetsof KBWB-TV, the WB affiliate serving the San Francisco, California televisionmarket and WMYD-TV (formerly WDWB-TV), the WB affiliate serving the DetroitMichigan television market to AM Broadcasting KBWB, Inc. and  AM Broadcasting WDWB, Inc.,respectively.  On May 1, 2006, weterminated our agreements with AM Broadcasting KBWB, Inc and AM BroadcastingWDWB, Inc. for the sale of KBWB-TV and WMYD-TV, respectively. OnMay 1, 2006, we entered into new separate definitive agreements to sellour two WB affiliates, KBWB-TV serving San Francisco, California and WMYD-TVserving Detroit, Michigan to affiliates of DS Audible, LLC.

27

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On May 17, 2006,we filed a lawsuit in the Delaware Court of Chancery regarding the terminationby The WB Television Network Partners, L.P., or The WB, of our WB affiliationagreements for our San Francisco and Detroit television stations. The lawsuitfollows the January 24, 2006 announcement of the merging of the UPN and WBtelevision networks, and was filed against The WB, WB Communications, adivision of Time Warner Entertainment Company, L.P., CBS Corporation, or CBS,and Warner Brothers Entertainment, Inc., or Warner Brothers.  The lawsuit alleges, among other things, thatThe WB’s premature termination of our San Francisco and Detroit networkaffiliation agreements, and The WB’s repudiation of agreements to extend theterms of our San Francisco and Detroit network affiliation agreements, damagedus and led to the termination of our 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 our SanFrancisco 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 us.  The two-count counterclaim alleges that webreached the San Francisco and Detroit network affiliation agreements byfailing to make certain payments thereunder and that, as of July 14, 2006, weowe The WB $2,523,428 under those agreements, plus interest thereon.

InMarch 2006, WMYD-TV entered into an affiliation agreement withMyNetworkTV.  MyNetworkTV has stated thatthe new network will be launched on September 5, 2006.  Our San Francisco television station, KBWB-TVplans to remain independent after The WB ceases to provide programming.

On July 17, 2006, we terminated our agreements to sellKBWB-TV serving San Francisco, California and WMYD-TV serving Detroit, Michiganto affiliates of DS Audible, LLC. We also announced our intentions to continueto market our San Francisco, California television station KBWB-TV and retainour Detroit, Michigan television station WMYD-TV. We have reclassified theoperations of KBWB-TV as discontinued operations and the assets and liabilitiesas held for sale in our consolidated balance sheets and statements ofoperations in accordance with the provisions of Statement of FinancialAccounting Standards No. 144, *Accountingfor the Impairment or Disposal of Long-Lived Assets.*(See Note 7. *Discontinued Operations*in the Notes toour Consolidated Financial Statements.)

We believe that inflationhas not had a material impact on our results of operations for the three andsix months ended June 30, 2006.  However,there can be no assurance that future inflation would not have an adverseimpact on our operating results and financial condition.

Our operating revenuesare generally lower in the first calendar quarter and generally higher in thefourth calendar quarter than in the other two quarters, due in part toincreases in retail advertising in the fall months in preparation for theholiday season, and in election years due to increased political advertising.

Our revenues are derivedprincipally from local and national advertising, political advertising in anelection year and, to a lesser extent, from network compensation for thebroadcast of programming and revenues from studio rental and commercialproduction activities.  The primaryoperating expenses involved in owning and operating television stations areemployee salaries, depreciation and amortization, programming, advertising andpromotion.  Amounts referred to in thefollowing discussion have been rounded to the nearest thousand.

***First and Second QuarterHighlights***

·                  OnJanuary 13, 2006, we and certain of our subsidiaries entered into adefinitive agreement with Television Station Group Holdings, LLC and certain ofits subsidiaries to purchase substantially all of the assets of WBNG-TV,Channel 12, the CBS-affiliated television station serving Binghamton andElmira, New York, for $45 million in cash, subject to closing adjustments.  (the “WBNG Purchase and Sale Agreement”).  Since February 8, 2006, the sellers havehad a right to terminate the WBNG Purchase and Sale Agreement because the salesof two stations affiliated with the WB Network were not completed as of suchdate. However, in conjunction with the payment of an aggregate of $2.25 millionof deposits made to the sellers by us and the execution by us on May 1,2006 of agreements with affiliates of DS Audible LLC described below, thesellers waived until July 31, 2006 their rights to terminate the WBNGPurchase and Sale Agreement. On March 8, 2006, the application seekingconsent to assign the WBNG-TV license to our subsidiary was granted by theFederal Communications Commission (“FCC”).

·                  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 the reimbursement obligation to theletter of credit issuer on February 10, 2006, using U.S. governmentsecurities which had been pledged in support of such obligation.

·                  Undera Reimbursement Agreement, dated as of March 8, 2005 (the “Reimbursement Agreement”),among us, Malara Broadcast Group and certain of Malara Broadcast Group’ssubsidiaries (the “Malara Borrowers”), the Malara Borrowers agreed to repay usany amounts drawn on the letter of credit plus interest at a rate of 8% perannum.  We reduced to $16.6 million theamount due from the Malara Borrowers to Granite under the ReimbursementAgreement.

·                  OnMarch 13, 2006, we retained the services of Houlihan LokeyHoward & Zukin as our financial advisors to assist us with theevaluation of strategic options and to advise us on available financing andcapital restructuring alternatives.

28

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·                  On May 1,2006, we terminated our agreements with AM Broadcasting KBWB, Inc and AMBroadcasting WDWB, Inc. for the sale of KBWB-TV and WDWB-TV, respectively.

·                  On May 1,2006, we entered into new separate definitive agreements to sell our twotelevision stations, KBWB-TV serving San Francisco, California and WMYD-TV(formerly WDWB-TV) serving Detroit, Michigan to affiliates of DS Audible, LLC.The aggregate consideration that was to be received by us in connection withthe sale of KBWB-TV was $65,000,000, before closing and other adjustments,which was payable in cash.  The aggregateconsideration that was to be received by us in connection with the sale ofWMYD-TV was $85,000,000, before closing and other adjustments, which is payablein cash.

·                  An interestpayment of $19,744,000 on our 9 3/4 % Senior Secured Notes (the “Notes”) thatwas due on June 1, 2006 was paid on July 5, 2006, as discussed below.

***Recent Developments***

·                  On July 5, 2006,we entered into a Credit and Guaranty Agreement with Silver Point Finance LLC,as Administrative Agent, and the Lenders party thereto (the “Lenders”) fromtime to time (the “Credit Agreement”). The Credit Agreement provides for twosecured loans: a $40 million Tranche A Term Loan and a Convertible Tranche BTerm Loan for $30 million. The Tranche B Term Loan is presently convertible, atthe 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.

·                    Inconnection with the execution of the Credit Agreement, the Indenture, dated asof December 22, 2003, among us, the guarantors party thereto and The Bankof New York, as Trustee, as supplemented by the First Supplemental Indenture,dated as of March 9, 2005, by and among us, the guarantors party theretoand The Bank of New York, as Trustee (the “Indenture”), was furthersupplemented by the Second Supplemental Indenture, dated as of July 5,2006, by and among us, the guarantors party thereto and The Bank of New York,as Trustee (the “Second Supplemental Indenture”).

·                  TheSecond Supplemental Indenture adds WBNG, Inc. and WBNG License, Inc.,the acquisition entities (which we completed on July 26, 2006, see below forfurther details) as guarantors to the Indenture. The Lenders have a first lienon the assets of WBNG, Inc and WBNG License, Inc. Note holders have asecond 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”).

·                    Inconnection with the Second Supplemental Indenture, we entered into theSupplemental Agreement, dated as of July 5, 2006, in relation to theSecond Supplemental Indenture and the Credit and Guaranty Agreement, each datedas of July 5, 2006 by and among us, 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 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, we and certain of oursubsidiaries terminated the Purchase and Sale Agreement, dated as of May1, 2006, by and among us, KBWB, Inc., KBWB License, Inc. and DSAudible San Francisco, LLC (“San Francisco Buyer”), as amended, by providing written noticeto San Francisco Buyer.  In addition, onJuly 17, 2006, we and certain of our subsidiaries terminated the Purchase andSale Agreement, dated as of May 1, 2006, by and among us, WXON, Inc., WXONLicense, Inc. and DS Audible Detroit, LLC (“Detroit Buyer”), as amended, byproviding written notice to Detroit Buyer.

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·                  In connectionwith termination of our agreements to sell KBWB-TV serving San Francisco,California and WMYD-TV serving Detroit, Michigan to affiliates of DS Audible,LLC, we announced our intentions to continue to market our San Francisco,California television station KBWB-TV and retain our Detroit, Michigantelevision station WMYD-TV. See Note 7 to the consolidated financial statementsfor further information on how this impacted discontinued operations as of June30, 2006.

·                  On July 26,2006, we borrowed the remaining $2.5 million of the Tranche B Term Loan and the$40 million Tranche A Term Loan to complete the acquisition of WBNG-TV (seebelow for further details.)

·                  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 adjustmentsfrom Television Station Group Holdings, LLC and certain of its subsidiaries.

·                  On August 1,2006, we entered into a Third Supplemental Indenture, by and between us, theguarantors party thereto and The Bank of New York, as Trustee, which amends theIndenture in accordance with the Supplemental Agreement.

***Critical Accounting Polices and Estimates***

We prepare ourconsolidated financial statements in conformity with United States generallyaccepted accounting principles which require us to make estimates andassumptions that affect the reported amounts of assets and liabilities anddisclosures of contingent assets and liabilities at the date of theconsolidated financial statements and the reported amounts of revenues andexpenses during the period.  Actual resultscould differ from those estimates. Results of operations for interim periods are not necessarily indicativeof results for the full year.

Information with respect to our critical accounting policies which webelieve could affect our reported results require subjective judgments bymanagement and is contained in Item 7, Management’s Discussion and Analysis ofFinancial Condition and Result of Operations, of our Annual Report onForm 10-K for the fiscal year ended December 31, 2005.

**RESULTS OF OPERATIONS**

*Three Months Ended June 30, 2006 and 2005*

***Continuing Operations***

Set forth below aresignificant factors that contributed to our operating results from continuingoperations for the three months ended June 30, 2006 and 2005, respectively.

**GROSS REVENUES BYCATEGORY,CONSOLIDATED CONTINUING OPERATIONS**

 

|                       | ** ** | **Three Months Ended June 30,** | ** ** |
|-----------------------|------------|-----------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Local/Regional        |       | $                                                   | 17,718,000 |   | $ | 16,679,000 |   | 6.2 | % |
| National              |       | 10,355,000                                          |       | 11,729,000 |   | (11.7 | )% |
| Network  Compensation |       | 374,000                                             |       | 872,000 |   | (57.1 | )% |
| Political             |       | 1,463,000                                           |       | 455,000 |   | 221.5 | % |
| Other                 |       | 1,405,000                                           |       | 1,372,000 |   | 2.4 | % |
| Gross Revenue         |       | 31,315,000                                          |       | 31,107,000 |   | 0.7 | % |
| Agency  Commissions   |       | 4,439,000                                           |       | 4,446,000 |   | 0 | % |
| Net Revenue           |       | $                                                   | 26,876,000 |   | $ | 26,661,000 |   | 0.8 | % |

 

The following discussionis related to the results of our continuing operations, except for discussionsregarding our statements of cash flows which include the results of ourdiscontinued operations.

Net revenues consistprimarily of local, national and political airtime sales, net of salesadjustments and agency commissions. Additional, but less significant, amountsare generated from network compensation, internet revenues, barter/traderevenues, production revenues and other revenues.

30

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Net revenue increased$215,000 or 1% to $26,876,000 for the three months ended June 30, 2006, from$26,661,000 for the three months ended June 30, 2005.  The increase was due to by increases inpolitical advertising revenue of $1,008,000 or 222% and non-political localrevenues of $1,039,000 or 6%, offset by declines in non-political nationalrevenues of $1,374,000 or 12% and network compensation of $498,000 or 57%. Thenon-political local revenue increase was primarily due to the growth in theautomotive, medical, competitive media and services categories. The non-politicalnational revenue decrease was primarily due to declines in the automotive, paidprogramming, restaurant and grocery categories. Malara Broadcast Group’s netrevenues totaled $4,146,000 or 15% and $4,169,000 or 16% of the total netrevenues during the three months ended June 30, 2006 and 2005, respectively.

Direct operatingexpenses, consisting primarily of programming, news and engineering decreased$229,000 or 2% to $9,957,000 for the three months ended June 30, 2006 from$10,186,000 for the same period in 2005. The decrease was primarily due tolower amortization of film contract rights due to the effects favorablerenewals on our existing programming commitments and the replacement of certainexpensive, unprofitable programs with less expensive, profitable programming.There were no film asset write-downs during the three months ended June 30,2006 and 2005. Selling, general and administrative expenses increased $430,000or 6% to $7,969,000 for the three months ended June 30, 2006 from $7,539,000 forthe same period in 2005. The increase was primarily due to the higher localsales commissions due to increased local sales. Malara Broadcast Group’s directoperating expenses and selling, general and administrative expenses at June 30,2006 and 2005 totaled $671,000 and $662,000, respectively, of the total stationexpenses, after elimination of expenses relating to various local serviceagreements between us and Malara Broadcast Group.

***Other Consolidated Expenses***

Amortization expensedecreased $513,000 or 41% during the three months ended June 30, 2006 ascompared to the same period a year earlier. The decrease was primarily due tothe write down of the remaining carrying value of our network affiliationagreement at our WMYD-TV television station during the fourth quarter of 2005which was amortized during the same period in 2005. Depreciation expenseincreased $388,000 or 31% during the three months ended June 30, 2006 comparedto the same period a year earlier.  Theincrease was primarily due to the incremental depreciation expense recordedduring the three months ended June 30, 2006 on the assets of WMYD-TV for theperiod of September 9, 2005 through June 30, 2006, when the assets wereclassified as “held for sale” and depreciation had ceased.

Corporate expense totaled$3,537,000; an increase of $812,000 or 30% compared to $2,725,000 for the threemonths ended June 30, 2005. The increase was primarily due to certainprofessional fees originally capitalized as part of the pending station saleswhich subsequently were expensed upon termination of the purchase and sale agreement on July 17, 2006. Corporatereorganization expenses increased $965,000 during the three months ended June30, 2006. The increase was due to financial advisors and other professionalsretained to assist us with the evaluation of strategic options and to advise uson available financing and capital restructuring alternatives for our company.The performance award expense for the three months ended June 30, 2006decreased of $320,000 compared to the same period in 2005. The decrease was dueto the completion of amortization of the unvested portion of the performanceaward expense during the first three months of 2006.  Non-cash compensation expense decreased$33,000 or 35% primarily due to the forfeitures and / or fully vesting of stockawards granted in prior years during 2005, offset in part by $17,000 ofnon-cash compensation expense recorded during the three months ended June 30,2006 related to stock option grants under Interpretation 123(R).

Interest expense totaled$11,205,000; an increase of $64,000 or less than 1% compared to $11,141,000 forthe three months ended June 30, 2005. Interest income totaled $67,000; a decrease of $222,000, or 77% comparedto $289,000 for the three months ended June 30, 2005. The decrease wasprimarily due to decreased average cash balance invested during the threemonths ended June 30, 2006 as compared to the same period in 2005. Non-cashinterest expense totaled $1,033,000; a decrease of $20,000 or 2% compared to$1,053,000 for the three months ended June 30, 2005.

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $6,387,000 during the three months ended June 30, 2006 and 2005,respectively as required by Statement of Financial Accounting Standards No.150.

During the three months ended June 30, 2006, werecorded a current tax provision of $125,000 and a deferred tax provision of$15,664,000, compared to a current tax provision of $51,000 and a deferred taxbenefit of $197,000 for the three months ended June 30, 2005.  The increased tax expense was due to ourdeferred tax liabilities being increased through an increase to the valuationallowance which was attributable to our recent announcement to retain ourDetroit, Michigan television station WMYD-TV (See Note 10. *Income Taxes*in the Notes to our ConsolidatedFinancial Statements.)

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***Discontinued Operations***

Set forth below are significant factors thatcontributed to our operating results from discontinued operations for the threemonths ended June 30, 2006 and 2005, respectively.

**GROSS REVENUES BYCATEGORY,CONSOLIDATED DISCONTINUED OPERATIONS**

|                     | ** ** | **Three Months Ended June 30,** | ** ** |
|---------------------|------------|-----------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                            | ** ** | **2005** | ** ** | **% Change** | ** ** |
|                |       |                                                |       |   |   |   |   |
| Local/Regional      |       | $                                                   | 2,303,000  |   | $ | 2,782,000 |   | (17.2 | )% |
| National            |       | 2,787,000                                           |       | 2,185,000 |   | 27.6 | % |
| Political           |       | 36,000                                              |       | 9,000 |   | 300 | % |
| Other               |       | 117,000                                             |       | 145,000 |   | (19.3 | )% |
| Gross Revenue       |       | 5,243,000                                           |       | 5,121,000 |   | 2.4 | % |
| Agency  Commissions |       | 752,000                                             |       | 771,000 |   | (2.5 | )% |
| Net Revenue         |       | $                                                   | 4,491,000  |   | $ | 4,350,000 |   | 3.2 | % |

 

Net revenue from our discontinued operations increased$141,000 or 3% to $4,491,000 from $4,350,000 primarily due to increases innon-political national revenues of $602,000 or 28%, offset by a decrease innon-political local revenues of $479,000 or 17%. The non-political nationalrevenue increase was primarily due to growth in the automotive,telecommunications, insurance and services categories. The non-political localrevenue decrease was primarily due to declines in the competitive media,financial services and insurance categories.

Direct operating expensesfrom our discontinued operations, consisting primarily of programming andengineering expenses, decreased $783,000 or 34% to $1,537,000 for the threemonths ended June 30, 2006 from $2,320,000 for the same period in 2005. Thedecrease was primarily due to lower amortization of film contract rights due tothe effects of the replacement of expensive, unprofitable programs with lessexpensive, profitable programming. There were no film asset write-downs duringthe three months ended June 30, 2006 and 2005. Selling, general andadministrative expenses from our discontinued operations decreased $216,000 or12% to $1,651,000 for the three months ended June 30, 2006 from $1,867,000 forthe same period in 2005. The decrease was primarily due to lower advertisingand promotion expenses.

*Six Months Ended June 30, 2006and 2005*

***Continuing Operations***

Set forth below aresignificant factors that contributed to our operating results from continuingoperations for the six months ended June 30, 2006 and 2005, respectively.

**GROSS REVENUES BYCATEGORY,CONSOLIDATED CONTINUING OPERATIONS**

|                       | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------|------------|---------------------------------------------------|------------|
| ** **            | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **% Change** | ** ** |
| Local/Regional        |       | $                                                 | 34,579,000 |   | $ | 30,409,000 |   | 13.7 | % |
| National              |       | 19,813,000                                        |       | 21,133,000 |   | (6.2 | )% |
| Network  Compensation |       | 775,000                                           |       | 1,666,000 |   | (53.5 | )% |
| Political             |       | 2,319,000                                         |       | 696,000 |   | 233.0 | % |
| Other                 |       | 2,707,000                                         |       | 2,410,000 |   | 12.3 | % |
| Gross Revenue         |       | 60,193,000                                        |       | 56,314,000 |   | 6.9 | % |
| Agency  Commissions   |       | 8,516,000                                         |       | 8,031,000 |   | 6.0 | % |
| Net Revenue           |       | $                                                 | 51,677,000 |   | $ | 48,283,000 |   | 7.0 | % |

 

The following discussionis related to the results of our continuing operations, except for discussionsregarding our statements of cash flows which include the results of ourdiscontinued operations.

Net revenues consistprimarily of local, national and political airtime sales, net of salesadjustments and agency commissions. Additional, but less significant, amountsare generated from network compensation, internet revenues, barter/traderevenues, production revenues and other revenues.

32

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Net revenue increased$3,394,000 or 7% to $51,677,000 for the six months ended June 30, 2006, from$48,283,000 for the six months ended June 30, 2005.  The increase was primarily due to theinclusion of two additional stations, WISE-TV and KDLH-TV in our consolidatedresults during the six months ended June 30, 2006 which were acquired inMarch 2005. The inclusion of the additional stations contributed tohealthy increases in non-political local revenues of $4,170,000 or 14% andpolitical advertising revenue of $1,623,000 or 233%, offset by decreases innon-political national revenues of $1,320,000 or 6% and network compensation of$891,000 or 54%. The non-political local revenue increase was primarily due tothe growth in the medical, home improvement, legal services and servicescategories. The non-political national revenue decrease was primarily due todeclines in the automotive, restaurant and packaged goods categories. MalaraBroadcast Group’s net revenues totaled $7,754,000 or 15% and $5,223,000 or 11%of the total net revenues during the six months ended June 30, 2006 and 2005,respectively.

Direct operatingexpenses, consisting primarily of programming, news and engineering decreased$279,000 or 1% to $19,812,000 for the six months ended June 30, 2006 from$20,091,000 for the same period in 2005. The decrease was primarily due tolower amortization of film contract rights due to the effects favorablerenewals on our existing programming commitments and the replacement of certainexpensive, unprofitable programs with less expensive, profitable programming.There were no film asset write-downs during the six months ended June 30, 2006and 2005. Selling, general and administrative expenses increased $1,174,000 or8% to $15,651,000 for the six months ended June 30, 2006 from $14,477,000 forthe same period in 2005. The increase was primarily due to higher local salescommissions due to increased local sales as well as the inclusion of WISE-TVand KDLH-TV which were acquired in March 2005. Malara Broadcast Group’s directoperating expenses and selling, general and administrative expenses at June 30,2006 and 2005 totaled $1,315,000 and $852,000, respectively, of the totalstation expenses, after elimination of expenses relating to various localservice agreements between us and Malara Broadcast Group.

***Other Consolidated Expenses***

Amortization expensedecreased $671,000 or less than 31% during the six months ended June 30, 2006as compared to the same period a year earlier. The decrease was primarily dueto the write down of the remaining carrying value of our network affiliationagreement at our WMYD-TV television station during the fourth quarter of 2005 whichwas amortized during the same period in 2005, offset in part by the incrementalamortization expense of two additional television stations, KDLH and WISE whichwere acquired in March 2005. Depreciation expense increased $471,000 or 16%during the six months ended June 30, 2006 compared to the same period a yearearlier.  The increase was primarily dueto the incremental depreciation expense of two additional television stations,KDLH and WISE which were acquired in March 2005 as well as the incremental depreciationexpense recorded during the three months ended June 30, 2006 on the assets ofWMYD-TV for the period of September 9, 2005 through June 30, 2006, when theassets were classified as “held for sale” and depreciation had ceased.

Corporate expense totaled$6,385,000; an increase of $962,000 or 18% compared to $5,423,000 for the sixmonths ended June 30, 2005. The increase was primarily due to certainprofessional fees originally capitalized as part of the pending station saleswhich subsequently were expensed upon termination of the purchase and sale agreement on July 17, 2006. Corporatereorganization expenses increased $1,185,000 during the six months ended June30, 2006. The increase was due to financial advisors and other professionalsretained to assist us with the evaluation of strategic options and to advise uson available financing and capital restructuring alternatives for our company.The performance award expense for the six months ended June 30, 2006 decreasedof $551,000 compared to the same period in 2005. The decrease was due to thecompletion of amortization of the unvested portion of the performance awardexpense during the first three months of 2006. Non-cash compensation expense decreased $77,000 or 41% primarily due tothe forfeitures and / or fully vesting of stock awards granted in prior yearsduring 2005, offset in part by $34,000 of non-cash compensation expenserecorded during the six months ended June 30, 2006 related to stock optiongrants under Interpretation 123(R).

Interest expense totaled$22,283,000; an increase of $952,000 or 4.5% compared to $21,331,000 for thethree months ended June 30, 2005.  Thisincrease is primarily due to the incremental interest expense on MalaraBroadcast Group’s Senior Credit Facility which was entered in March 2005.Interest income totaled $384,000; a decrease of $354,000, or 48% compared to$738,000 for the six months ended June 30, 2005. The decrease was primarily dueto decreased average cash balance invested during the six months ended June 30,2006 as compared to the same period in 2005. Non-cash interest expense totaled$2,663,000; an increase of $638,000 or 32% compared to $2,025,000 for the sixmonths ended June 30, 2005. The increase is due to write off deferred financingfees during the first three months of 2006 which were incurred in connectionwith the Malara Broadcast Group Senior Credit Facility Tranche A Term Loan in2005, which was repaid on February 10, 2006.

We recorded as an expensethe accrual of dividends on our 12 3/4% Cumulative Exchangeable Preferred Stocktotaling $12,774 during the six months ended June 30, 2006 and 2005,respectively as required by Statement of Financial Accounting Standards No 150.

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During the six months ended June 30, 2006, we recordeda current tax provision of $271,000 and a deferred tax provision of$15,377,000, compared to a current tax provision of $112,000 and a deferred taxbenefit of $437,000 for the six months ended June 30, 2005. The increased taxexpense was due to our deferred tax liabilities being increased through anincrease to the valuation allowance which was attributable to our recentannouncement to retain our Detroit, Michigan television station WMYD-TV (SeeNote 10. *Income Taxes*in the Notes to our Consolidated Financial Statements.)

***Discontinued Operations***

Set forth below are significant factors thatcontributed to our operating results from discontinued operations for the sixmonths ended June 30, 2006 and 2005, respectively.

**GROSS REVENUES BYCATEGORY,CONSOLIDATED DISCONTINUED OPERATIONS**
| ** **          | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------|------------|---------------------------------------------------|------------|
| ** **          | ** ** | **2006**                                          | ** ** | **2005** | ** ** | **% Change** | ** ** |
|                |       |                                              |       |   |   |   |   |
| Local/Regional      |       | $                                                 | 4,653,000  |   | $ | 5,361,000 |   | (13.2 | )% |
| National            |       | 5,718,000                                         |       | 4,413,000 |   | 29.6 | % |
| Political           |       | 36,000                                            |       | 16,000 |   | 125 | % |
| Other               |       | 220,000                                           |       | 261,000 |   | (15.7 | )% |
| Gross Revenue       |       | 10,627,000                                        |       | 10,051,000 |   | 5.7 | % |
| Agency  Commissions |       | 1,661,000                                         |       | 1,586,000 |   | 4.7 | % |
| Net Revenue         |       | $                                                 | 8,966,000  |   | $ | 8,465,000 |   | 5.9 | % |

 

Net revenue from our discontinued operations increased$501,000 or 6% to $8,966,000 from $8,465,000 primarily due to increases innon-political national revenues of $1,305,000 or 30%, offset by a decrease innon-political local revenues of $708,000 or 13%. The non-political nationalrevenue increase was primarily due to growth in the telecommunications, insurance,movies and services categories. The non-political local revenue decrease wasprimarily due to declines in the restaurant, instructional schools, competitivemedia and insurance categories

Direct operating expensesfrom our discontinued operations, consisting primarily of programming andengineering expenses, decreased $1,632,000 or 35% to $3,096,000 for the sixmonths ended June 30, 2006 from $4,728,000 for the same period in 2005. Thedecrease was primarily due to lower amortization of film contract rights due tothe effects of the replacement of expensive, unprofitable programs with lessexpensive, profitable programming. There were no film asset write-downs duringthe six months ended June 30, 2006 and 2005. Selling, general andadministrative expenses from our discontinued operations decreased $604,000 or16% to $3,161,000 for the six months ended June 30, 2006 from $3,765,000 forthe same period in 2005. The decrease was primarily due to lower advertisingand promotion expenses.

*Restructuring and SeveranceCharges*

*Restructuring Charges*

During the three and sixmonths ended June 30, 2006, we recorded a $34,000 restructuring charge relatedto stay-bonuses awarded to transitional employees at the Duluth, Minnesotatelevision stations.  As of June 30, 2006,we completed the separation payments related to the corporate restructuringcharges, and reduced our accrual by approximately $20,000 to adjust forpayments of benefits and amounts 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 June 30, 2006, the remaining restructuring charges related to employeeseparations, which included severance, other benefits and stay-bonuses awardedto transitional employees at the Duluth, Minnesota and Fort Wayne, Indianatelevision stations.  We anticipates thatfrom time to time we will incur minimal restructuring charges in future periodsas part of our continued effort to achieve and maintain cost controlinitiatives at our various stations. These costs are not anticipated to besignificant in nature and therefore, will not be separately disclosed herein.

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At June 30, 2006, theaccruals for restructuring activities were included in “other accruedliabilities” on the consolidated balance sheets and the related expense for thecharge at the television stations are included in “selling, general andadministrative expenses” on the consolidated 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*.

*Acquisition Charges*

During 2005, we accrued$627,000 related to employee separations, which included severance and otherbenefits as part of our purchase accounting. These accrued costs were a resultof employees not retained by us subsequent to our acquisition of the FortWayne, Indiana television station, which included operational throughmanagement employees.

At June 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 IssueNo. 95-3 *Recognition of Liabilities in Connectionwith a Purchase Business Combination*.

The following is a reconciliation of the aggregateliability recorded for restructuring and acquisition charges as of June 30,2006:
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Three Months Ended June 30, 2006**                                                                         | ** ** |
| ** **           | ** ** | **March 31  2006**                                                                                                               | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 50,000     |   | $ | — |   | $ | 35,800 |   | $ | 14,200 |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 50,000     |   | $ | — |   | $ | 35,800 |   | $ | 14,200 |   |

 
| ** **           | ** ** | **Reconciliation of Aggregate Liability Recorded for  Restructuring and Acquisition Charges** | ** ** |
|----------------------|------------|---------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **           | ** ** | **Six Months Ended June 30, 2006**                                                                           | ** ** |
| ** **           | ** ** | **December 31,  2005**                                                                                                           | ** ** | **Provision** | ** ** | **Payments** | ** ** | **June 30, 2006** | ** ** |
| Television  stations |       | $                                                                                                                                     | 81,000     |   | $ | 34,000 |   | $ | 100,800 |   | $ | 14,200 |   |
| Corporate            |       | 192,000                                                                                                                               |       | (20,000 | ) | 172,000 |   | — |   |
|                 |       |                                                                                                                                  |       |   |   |   |   |   |   |
| Total                |       | $                                                                                                                                     | 273,000    |   | $ | 14,000 |   | $ | 272,800 |   | $ | 14,200 |   |

 

The liability for therestructuring and acquisition charges will be paid in accordance with theprovisions of the severance agreements and payments are expected to becompleted at various times through 2006.

**Liquidity and Capital Resources**

As of June 30, 2006, we had approximately $11,599,000 of cash and cashequivalents on hand. On December 31, 2005 we had $24,997,500 in U.S. government securities which were pledged tosupport the reimbursement obligations in the event of a draw on the letter ofcredit that served as collateral for the Tranche A Term Loan under MalaraBroadcast Group’s Senior Credit Facility. On February 10, 2006, the letter of credit issued inMarch 2005 to support the $23.5million Tranche A Term Loan was drawn upon in satisfaction of Malara BroadcastGroup’s obligations to such lenders under the Malara Tranche A Term Loanfollowing non-renewal of the letter of credit. We paid our reimbursement obligation to the letter of credit issuer onFebruary 10, 2006, using U.S. government securities which had been pledgedin support of such obligation.

On March 13, 2006,we retained the services of Houlihan Lokey Howard & Zukin as ourfinancial advisors to assist us in the evaluation of strategic options and toadvise us on available financing and capital restructuring alternatives.

An interest payment of $19,744,000 on our 9 3⁄4 Senior Secured Notes (the“Notes”) was due on June 1, 2006. Since payment was not made within 30days after June 1, 2006, a “Event of Default” under the Indenturegoverning the Notes occurred.

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%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 the Notesthat was due June 1, 2006, thus curing the Event of Default with respectto such Notes. The remaining proceeds of approximately $7.6 million becameavailable for working capital purposes. On July 26, 2006, we borrowed theremaining $2.5 million of the Tranche B Term Loan and $40 million Tranche ATerm Loan to complete the acquisition of WBNG-TV as previously described.

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Under the CreditAgreement, we must sign a definitive agreement effectuating a comprehensiverestructuring of the Company in form and substance satisfactory to the lendersholding 51% of the loans by August 15, 2006.  The Credit Agreement specifies certain eventsof default, including the following: (i) failure to make payments when dueunder the Credit Agreement; (ii) certain defaults in other agreementsconcerning indebtedness; (iii) failure of the Company to enter into adefinitive agreement effectuating a comprehensive restructuring of the Companyin form and substance satisfactory to the lenders holding 51% of the loans byAugust 15, 2006; (iv) material breach of a representation; (v) involuntaryor voluntary bankruptcy; (vi) judgment, writs or warrants of attachment in theaggregate amount in excess of $2,000,000 shall be entered or filed against theCompany; (vii) the failure of Malara Broadcast Group to refinance the MalaraBroadcast Group senior credit facility with a new facility from the lenders byAugust 15, 2006; and (viii) the failure of the Company to execute anddeliver a supplement to Indenture on or prior to July 31, 2006 in accordancewith the Supplemental Agreement.

On August 9, 2006, theadministrative agent agreed  (i) toextend the due date that we must sign a definitive agreement effectuating acomprehensive restructuring of the Company in form and substance satisfactoryto the lenders holding 51% of the loans from August 15, 2006 to August 31, 2006and (ii) to extend the due date for Malara Broadcast Group to refinance theMalara Broadcast Group senior credit facility with a new facility with the lendersfrom August 15, 2006 to August 18, 2006.

Absent changes to ourcapital structure, we will not have enough cash to make the December 1, 2006interest payment on our Notes and to repay all amounts outstanding under ourCredit Agreement when due on December 1, 2006. In order to improve our existingliquidity position and to further our business strategy, we continue to explorethe selling our San Francisco, California station KBWB-TV and are reviewingpotential restructuring alternatives with respect to our debt and preferredstock obligations. However, under our Indenture, our use of the net proceedsfrom the sale of assets is restricted. Of the net asset sale proceeds, $5million may be used for working capital purposes and the remainder must be usedeither:

·                  tomake an investment in properties and assets that replace the properties andassets that were the subject of such asset sale or in properties and assetsthat will be used in the business of the Company and its RestrictedSubsidiaries as existing on the Issue Date or in businesses reasonably relatedthereto (“Replacement Assets”) or to finance, directly or indirectly, aPermitted Business Acquisition or enter into a definitive agreement toeffectuate such acquisition; provided that (A) the primary purpose of suchacquisition of Replacement Assets or Permitted Business Acquisition is toacquire, and there is acquired, a television station with a Big-4 (ABC, CBS,NBC or Fox) network affiliation agreement in place or the creation (throughownership by the Company and its Restricted Subsidiaries) of a “duopoly” in amarket and (B) that the Company shall use all reasonable best efforts topromptly dispose of any other assets acquired in such acquisition or PermittedBusiness Acquisition (as such terms are defined in the Indenture); or

·                  tomake an offer to all holders of the Notes to purchase such amount of the Notesless any such net proceeds used to acquire qualifying Replacement Assets or tomake a Permitted Business Acquisition.

The Indenture, as supplemented, provides that, priorto delivery of an acceleration notice following an event of default, we areentitled to obtain a release of the Trustee under the Indenture to use cash,including cash in the collateral account (other than asset sale proceeds requiredto be used as provided above), to pay operating expenses and to pay interest onthe Notes.

On May 1, 2006, weentered into separate definitive agreements to sell our two televisionstations, KBWB-TV serving San Francisco, California and WMYD-TV (formerlyWDWB-TV) serving Detroit, Michigan to affiliates of DS Audible, LLC. Theaggregate consideration that was to be received by us in connection with thesale of KBWB-TV was $65,000,000, before closing and other adjustments, whichwas payable in cash.  The aggregateconsideration that was to be received by us in connection with the sale ofWMYD-TV was $85,000,000, before closing and other adjustments which was payablein cash.

On July 17, 2006, we terminated our agreements to sellKBWB-TV serving San Francisco, California and WMYD-TV serving Detroit, Michiganto affiliates of DS Audible, LLC. We also announced our intentions to continueto market our San Francisco, California television station KBWB-TV and retainour Detroit, Michigan television station WMYD-TV.

Absent a restructuring of the Company, we will notmake the December 1, 2006 interest payment on our Notes or repay all amountsoutstanding under our Credit Agreement when due on December 1, 2006. A lack ofliquidity would have a material adverse effect on our business strategy andtherefore affect our 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.

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We have established aninvestment policy for investing cash that is not immediately required forworking capital purposes.  Our investmentobjectives are to preserve capital, maximize our return on investment and toensure we have appropriate liquidity for our cash needs. The investments areconsidered to be available-for-sale as defined under Statement of FinancialAccounting Standards No. 115, *Accounting for Certain Investmentsin Debt and Equity Securities*. As of June 30, 2006, we hadapproximately $11,599,000 of cash and cash equivalents. As of June 30, 2006, wehad no marketable securities.

***Net Cash Used in or Provided by Operating, Investing andFinancing Activities***

Net cash provided by operating activities was $3,656,000 during the sixmonths ended June 30, 2006 compared to net cash used in operating activities of$15,652,000 during the six months ended June 30, 2005. The change in 2006 from2005 was primarily due to the interest payment of $19,744,000 on our 9 3⁄4 SeniorSecured Notes which was not paid during the second quarter of 2006.

Net cash provided by investing activities was $24,047,000 during thesix months ended June 30, 2006 compared to net cash used in investingactivities of $76,035,000 during the six months ended June 30, 2005. Thechange 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 used infinancing activities was $24,733,000 during the six months ended June 30,2006 compared to net cash provided by financing activities of $50,874,000during the six months ended June 30, 2005. The change in 2006 from 2005 isprimarily due to the draw on the letter of credit we guaranteed for the MalaraBroadcast Group Tranche A Term Loan during the three months endedMarch 31, 2006 compared to proceeds received from the Malara BroadcastGroup Senior Credit Facility, offset in part by increased payments of deferredfinancing fees during the same period in 2005.

***Our 9 3/4 % Senior Secured Notes and******Tranche A Term Loan and a Convertible Tranche BTerm Loan***

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

On July 5, 2006, weentered into a Credit and Guaranty Agreement with Silver Point Finance LLC, asAdministrative Agent, and the Lenders party (the “Lenders”) thereto 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%Cumulative Exchangeable Preferred Stock (the “Preferred Stock”). Both termloans are secured by our existing assets and our subsidiaries generally on apari passu basis with our 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. The remaining proceeds of approximately$7.6 million became available for working capital purposes. On July 26, 2006,we borrowed the remaining $2.5 million of the Tranche B Term Loan and $40million Tranche A Term Loan to complete the acquisition of WBNG-TV.

Inconnection with the execution of the Credit Agreement, the Indenture, dated asof December 22, 2003, between us, the guarantors party thereto and TheBank of New York, as Trustee, as supplemented by the First SupplementalIndenture, dated as of March 9, 2005, by and between us, the guarantorsparty thereto and The Bank of New York, as Trustee (the “Indenture”), wasfurther supplemented by the Second Supplemental Indenture, dated as ofJuly 5, 2006, by and between us, the guarantors party thereto and The Bankof New York, as Trustee (the “Second Supplemental Indenture”).

TheSecond Supplemental Indenture adds WBNG, Inc. and WBNG License, Inc.,the acquisition entities (which we completed the acquisition on July 26, 2006,see above for further details) as guarantors to the Indenture. The Lenders havea first lien on the assets of WBNG, Inc and WBNG License, Inc. Noteholders have a second lien in the assets of WBNG, Inc and WBNGLicense, Inc. Additionally, the Trustee agreed to act as collateral agentfor the Lenders under the Credit Agreement. The Second Supplemental Indenturealso makes conforming changes necessary to allow us to enter into the CreditAgreement, grant liens securing that indebtedness and makes certain otherchanges negotiated between us and the beneficial owners of more than a majorityof the principal amount of the outstanding Notes (the “Majority Note holders”).

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In connection withthe Second Supplemental Indenture, we entered into the Supplemental Agreement,dated as of July 5, 2006, in relation to the Second Supplemental Indentureand the Credit and Guaranty Agreement, each dated as of July 5, 2006 byand between us, 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 us, including, but not limited to,incurring additional indebtedness, making certain types of investments oracquisitions, selling assets, granting additional liens on certain assets ofthe Company, and issuing or selling certain types of additional capital stock.The Supplemental Indenture provides that defaults under the SupplementalAgreement will be defaults under the Indenture.

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 WBNG, Inc and WBNG License, Inc. TheNotes, Credit Agreement and the guarantees are secured by substantially all of ourassets. We may redeem some or all of the Notes at any time on or afterDecember 1, 2006.

The Indenture, whichgoverns our Notes and Credit Agreement restricts our ability and the ability of our restricted subsidiaries to,among other things: (i) incur additional debt and issue preferred stock;(ii) make certain distributions, investments and other restrictedpayments; (iii) create certain liens; (iv) enter into transactionswith affiliates; (v) enter into agreements that restrict our restrictedsubsidiaries from making payments to us; (vi) merge, consolidate or sellsubstantially all of our assets; (vii) sell or acquire assets; and(viii) enter into new lines of business.

Under the Indenture, theMalara Broadcast Group companies to which we provides services pursuant to thelocal services agreements are subject to the terms of the Indenture applicableto Restricted Subsidiaries that are not Guarantors, as such terms are definedin the Indenture.

***Malara Broadcast Group’s SeniorCredit Facility***

Malara Broadcast Groupfinanced its acquisition of WPTA-TV and KDLH-TV in March 2005 with theproceeds of the Malara Broadcast Group Senior Credit Facility, consisting oftwo terms loans totaling $48.5 million and a revolving loan of $5 million. The$23.5 million Malara Broadcast Group Term Loan A, which was secured by a letterof credit, was paid off on February 10, 2006. To secure the reimbursementobligations in the event of a draw on the letter of credit, pursuant to theterms and conditions of an Application and Agreement for Standby Letter ofCredit, we had pledged $25 million of U.S. Government Securities.  The $25 million Malara Broadcast Group TermLoan B and the $5 million revolving loan are secured by the assets of WPTA-TVand KDLH-TV, and guaranteed on an unsecured basis by Granite BroadcastingCorporation pursuant to a guaranty agreement (the “Granite Guaranty”).

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

Interest rates associatedwith the Term Loan A were based, at Malara Broadcast Group’s option, at either(i) the higher of the Prime Rate or the Federal Funds Effective Rate plus0.50% (the “Base Rate”) or (ii) the Adjusted Eurodollar Rate plus 0.60%per annum, as such terms are defined in the Malara Broadcast Group SeniorCredit Facility.  Interest ratesassociated with the Term Loan B and Revolving Loan are based, at MalaraBroadcast Group’s option, on either (i) the Base Rate plus 4.625% perannum or (ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Term Loan B and Revolving Loan at arate of 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 isrequired to make monthly principal payments on the Term Loan B as follows:(i) $125,000 payable at the end of each month from June 1, 2006through March 31, 2007, (ii) $158,333 payable at the end of eachmonth from April 1, 2007, through March 31, 2008, and(iii) $216,667 payable at the end of each month from April 1, 2008,through February 1, 2010.

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Malara Broadcast Groupwas required to make monthly principal payments on the Term Loan A and theRevolving Loan equal to the product of (i) the Repayment Percentage (whichis 25% unless there is an Event of Default or the Consolidated Loan to StickValue is less than 70%, in which case the Repayment Percentage is 100%) and(ii) the Consolidated Excess Free Cash Flow for the month preceding themonth in which such installment is due, as such terms are defined in the MalaraBroadcast Group Senior Credit Facility. All such payments would have been applied first to repay the outstandingRevolving Loan to the full extent thereof  (without a corresponding reduction in theRevolving Loan Commitment Amount) and second to repay the outstanding Term LoanA to the full extent thereof; provided that, if the Repayment Percentage forsuch monthly installment is 100%, the excess 75% of such monthly installmentwould have been applied first to repay the outstanding Revolving Loan to thefull extent thereof and second to repay the outstanding Term Loan B to the fullextent thereof. For the three and six months ended June 30, 2006, the totalprincipal payments made on the Revolving Loan and Tranche B Term Loanapproximated $640,000 and $824,000, respectively and total principal paymentsmade to date approximated $1,841,000.

On February 10, 2006, in accordance with the terms of the MalaraBroadcast Group Senior Credit Facility, the letter of credit issued inMarch 2005 to support the $23.5 million Tranche A Term Loan was drawn uponin satisfaction of Malara Broadcast Group’s obligations to such lenders underthe Malara Tranche A Term Loan following non-renewal of the letter ofcredit.  We paid the reimbursement obligation to the letter of creditissuer on February 10, 2006, using U.S. government securities which hadbeen pledged in support of such obligation.

Under a Reimbursement 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.

***Our12 3/4 % Cumulative Exchangeable Preferred Stock***

Under the terms of theCertificate of Designations for our 12 3/4 % Cumulative Exchangeable PreferredStock (the “Preferred Stock”), we are required to make the semi-annualdividends on such shares in cash beginning October 1, 2002.  The cash payment of dividends had beenrestricted by the terms of our previous senior credit agreement and indenturesand is prohibited under the Indenture, which governs our Notes.  Consequently we have not paid the semi-annualdividend due to the holders since October 1, 2002.  During the three and six months ended June30, 2006 a dividend payment of $6,387,000 and $12,744,000, respectively,  accrued on our Preferred Stock. As of June30, 2006, we have recorded an aggregate of $108,578,000 in accrued dividends onour Preferred Stock. Since three or more semi-annual dividend payments have notbeen paid, the holders of the Preferred Stock had the right to elect the lesserof two directors or that number of directors constituting 25% of the members ofthe Board of Directors. On October 24, 2005, the holders of the majorityof the Preferred Stock exercised their right to elect two directors to theBoard of Directors of the Company. We are restricted from paying cash dividendsunder the Indenture, which governs our Notes, and do not anticipate paying cashdividends on our Preferred Stock in the foreseeable future.

***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 continuing operations for thethree months ended June 30, 2006 totaled $2.3 million, as compared to thethree months ended June 30, 2005 totaling $2.9 million.

Film payments from our discontinued operations for thethree months ended June 30, 2006 totaled $1.2 million, as compared to the threemonths ended June 30, 2005 totaling $2.8 million.

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

At June 30, 2006 and 2005we did not have any relationships with unconsolidated entities or financialpartnerships, such as entities often referred to as structured finance orvariable interest entities, which would have been established for the purposeof facilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. All of our arrangements with Malara Broadcast Group areon-balance sheet arrangements.

 

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***Capital and CommercialCommitments***

The following table and discussion reflect oursignificant contractual obligations and other commercial commitments related tocontinuing operations as of June 30, 2006:

 
| ** **                                                                        | ** ** | **Payment Due by Period** | ** **    |
|-----------------------------------------------------------------------------------|------------|------------------------------------------|---------------|
| **Capital Commitment**                                                       | ** ** | **Total**                                | ** **    | **Remainder of 2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                                                              |       |                                     |          |   |   |   |   |   |   |   |   |
| 9 3/4% Senior  Secured Notes due 2010                                             |       | $                                        | 405,000,000   |   | $ | — |   | $ | — |   | $ | 405,000,000 |   | $ | — |   |
| Interest on  Senior Secured Notes                                                 |       | 194,147,000                              |          | 39,488,000 |   | 78,975,000 |   | 75,684,000 |   | — |   |
| Malara Broadcast  Group Senior Credit Facility (b)                                |       | 29,346,000                               |          | 1,417,000 |   | 7,379,000 |   | 20,550,000 |   | — |   |
| Interest on  Malara Broadcast Group Senior Credit Facility (c)                    |       | 11,314,000                               |          | 1,838,000 |   | 6,513,000 |   | 2,963,000 |   | — |   |
| Senior Credit  Agreement — Tranche A and Tranche B Term Loans (e)            |       | 70,000,000                               |          | 70,000,000 |   | — |   | — |   | — |   |
| Interest on -  Senior Credit Agreement (f)                                        |       | 2,787,000                                |          | 2,787,000 |   | — |   | — |   | — |   |
| Program contract  commitments — current                                      |       | 22,590,000                               |          | 7,414,000 |   | 5,924,000 |   | 3,910,000 |   | 5,342,000 |   |
| Program contract  commitments - future (d)                                        |       | 19,217,000                               |          | 1,515,000 |   | 10,417,000 |   | 6,511,000 |   | 774,000 |   |
| Operating leases                                                                  |       | 8,831,000                                |          | 634,000 |   | 1,936,000 |   | 1,928,000 |   | 4,333,000 |   |
| Network  Affiliations                                                             |       | 1,021,000                                |          | 1,021,000 |   | — |   | — |   | — |   |
| 12 3/4%  Cumulative Exchangeable Preferred Stock, including accrued dividends (a) |       | 377,670,000                              |          | — |   | — |   | 377,670,000 |   | — |   |
| Restructuring  and severance                                                      |       | 14,000                                   |          | 14,000 |   | — |   | — |   | — |   |
| Total capital and  commercial commitments                                         |       | $                                        | 1,141,937,000 |   | $ | 126,128,000 |   | $ | 111,144,000 |   | $ | 894,216,000 |   | $ | 10,449,000 |   |

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(a)             Asof June 30, 2006, the Cumulative Exchangeable Preferred Stock, includingaccrued dividends totaled $307,947,000. The table above includes the balance asof June 30, 2006 and the expected accrued dividends through April 2009,the date of redemption. Payment of cash dividends are restricted by the termsof the Indenture, which governs our existing Senior Secured Notes.

(b)            Theamounts are our estimates of required cash payments under the Malara SeniorCredit Facility. The Malara Senior Credit Facility consists of a revolver andtwo term loans. The required amortization under the revolver and one of theterm loans is calculated based upon Malara’s station performance; therefore,actual required amortization may vary from our estimates above. The remainingterm loan has a fixed amortization schedule, and such amounts are includedabove.

(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 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 PointFinance LLC. The Credit Agreement provides for two secured loans: a $40 millionTranche A Term Loan and a Convertible Tranche B Term Loan for $30 million. Bothterm loans mature on December 1, 2006. The Tranche B Term Loan ispresently convertible, at the option of the Lenders in the aggregate, into200,000 shares of our 12 3⁄4% Cumulative Exchangeable Preferred Stock. On July 5,2006, we borrowed $27.5 million on the Tranche B Term Loan. On July 26, 2006,we borrowed 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 as of July 26, 2006.

(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).

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The following table and discussion reflect oursignificant contractual obligations and other commercial commitments related todiscontinued operations as of June 30, 2006:

 
| ** **                                   | ** ** | **Payment Due by Period** | ** ** |
|----------------------------------------------|------------|------------------------------------------|------------|
| **Capital Commitment**                  | ** ** | **Total**                                | ** ** | **Remainder of 2006** | ** ** | **2007 - 2008** | ** ** | **2009 - 2010** | ** ** | **Thereafter** | ** ** |
|                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Program contract  commitments — current |       | $                                        | 21,139,000 |   | $ | 10,158,000 |   | $ | 8,051,000 |   | $ | 2,930,000 |   | $ | — |   |
| Program contract  commitments - future (a)   |       | 7,530,000                                |       | 365,000 |   | 2,210,000 |   | 4,955,000 |   | — |   |
| Network  Affiliation                         |       | 2,133,000                                |       | 2,133,000 |   | — |   | — |   | — |   |
| Operating leases                             |       | 3,338,000                                |       | 377,000 |   | 1,492,000 |   | 1,124,000 |   | 345,000 |   |
|                                         |       |                                     |       |   |   |   |   |   |   |   |   |
| Total capital and  commercial commitments    |       | $                                        | 34,140,000 |   | $ | 13,033,000 |   | $ | 11,753,000 |   | $ | 9,009,000 |   | $ | 345,000 |   |

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(a)             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*.

*Recent Accounting Pronouncements*

InJune 2006, the Financial Accounting Standards Board (“FASB”) issued Financial Interpretation No. 48,*Accounting for Uncertainty in Income Taxes,*or Interpretation 48. Interpretation 48, which clarifies the accounting foruncertainty in income taxes by prescribing a recognition threshold for taxpositions taken or expected to be taken in a tax return. Interpretation 48 iseffective for fiscal years beginning after December 15, 2006.  We are currently evaluating the impact, ifany Interpretation 48 may have on our financial position, consolidated resultsof operations or statement of cash flows.

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*** ***

***Item3.  Quantitative and QualitativeDisclosures about Market Risk***

The interest rate on ouroutstanding Senior Secured Notes is fixed at 9.75%.  Consequently, our earnings will not be affectedby changes in short-term interest rates.

Interest rates associatedwith Malara Broadcast Group’s March 8, 2005, Tranche A Term Loan, whichwas repaid on February 10, 2006, were based, at Malara Broadcast Group’soption, at either (i) the higher of the Prime Rate or the Federal FundsEffective Rate plus 0.50% (the “Base Rate”) or (ii) the AdjustedEurodollar Rate plus 0.60% per annum, as such terms are defined in the MalaraBroadcast Group Senior Credit Facility. Interest rates associated with Malara Broadcast Group’s March 8,2005, Tranche B Term Loan and Revolving Loan are based, at Malara BroadcastGroup’s option, at either (i) the Base Rate plus 4.625% per annum or(ii) the Adjusted Eurodollar Rate plus 7.375% per annum.  In addition, Deferred Interest (as defined inthe Malara Broadcast Group Senior Credit Facility) accrues with respect to, andis added to the principal amount of, the Term Loan B and Revolving Loan at arate of 3% per annum.  At March 31,2005, the six-month Adjusted Eurodollar Rate was 3.21%.  Malara Broadcast Group has not entered intoany agreements to hedge the risk of potential interest rate increases.  Based on borrowings outstanding as of June30, 2006, a 2% increase in the Adjusted Eurodollar Rate would increase interestexpense on an annual basis by approximately $1,070,000.

Interest rates associatedwith the Company’s July 5, 2006 $40 million Tranche A Term Loan and$30 million Tranche B Term Loan is based at the Company’s option at either(i) the LIBOR rate plus 5.00% (the “LIBOR Rate Loan”) or (ii) thehigher of the Prime 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 LIBORRate was 5.51%.  The Company has notentered into any agreements to hedge the risk of potential interest rateincreases.  Based on borrowingsoutstanding as of July 5, 2006, a 1% increase in the LIBOR Rate wouldincrease interest expense on an annual basis by approximately $230,000.

***Item4.  Controls and Procedures***

As of June 30, 2006, anevaluation was carried out under the supervision and with the participation ofour management, including our Chief Executive Officer and Chief FinancialOfficer, of the effectiveness of our disclosure controls and procedures (asdefined in Rules13a-15(e) and 15d-15(e) under the Securities ExchangeAct of 1934). Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective as of June 30, 2006.  There wasno change in our internal control over financial reporting (as defined inRules 13a-15(f) and 15d-15(f) under the Securities Exchange Actof 1934) that occurred during the period covered by this Quarterly Report onForm 10-Q that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

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** **

**PART II.  OTHER INFORMATION**

***Item 1.Legal Proceedings***

***Harbinger Proceedings***.  On June 7, 2006, Harbinger Capital PartnersMaster Fund I, Ltd. (“Harbinger”), a holder of 123⁄4% Cumulative ExchangeablePreferred Stock (“Preferred Stock”) of the Company, filed a lawsuit (the “DelawareHarbinger Suit”) in the Court of Chancery of the State of Delaware in and forNew Castle County (the “Chancery Court”), C.A. No. 2205-N, against GraniteBroadcasting Corporation, DS Audible San Francisco, LLC (“DS San Francisco”)and DS Audible Detroit, LLC (“DS Detroit,” and together with DS San Francisco, “DSAudible”) alleging that the proposed sales (the “Sales”) by the Company of TVStations KBWB-TV and WDWB-TV to DS Audible pursuant to Asset PurchaseAgreements dated as of May 1, 2006 (the “Sale Agreements”) constitutedfraudulent conveyances under the New York Uniform Fraudulent Conveyance Act andthe California and Michigan Uniform Fraudulent Transfer Acts, and seeking tohave the Delaware Court enjoin the Sales, or if the Sales occurred, to rescindthe Sales, as well as damages. The Company believes that the Delaware HarbingerSuit is without merit and on June 13, 2006, filed a Motion to Dismiss andrequested an expedited hearing with respect thereto. Additionally, the Companybelieves the Petition to Deny is without merit and that Harbinger lacksstanding before the FCC, and on June 12, 2006 the Company filed an Oppositionto Petition to Deny with the FCC. On June 29, 2006, the Chancery Court grantedthe Company’s Motion to Dismiss the Delaware Harbinger Suit. On or about June30, 2006, the plaintiffs filed a notice of appeal of the Chancery Court’sMemorandum Opinion and Order dismissing the lawsuit. The Company intends tocontinue to vigorously defend this lawsuit on appeal.

Alsoon June 7, 2006, Harbinger filed a Petition to Deny before theFederal Communications Commission (the “FCC”) requesting that theFCC not consent to the transfer of FCC licenses relating to KBWB-TV and WDWB-TVpending resolution of the Delaware Harbinger Suit. The FCC’s Media Bureau (“Bureau”)denied the petition and granted the assignment application in June 2006.  On July 24, 2006, Harbinger filed a petitionfor reconsideration seeking Bureau reconsideration of its June decision.  On July 25, 2006, the Company notified theFCC that it had decided not to consummate the assignment of the Stations.  The Company subsequently notified the FCCthat it did not intend to respond to the petition for reconsideration becauseit is mooted by the withdrawal of the assignment applications because theassignment of the Stations to DS Audible will not be consummated.

***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 theSan Francisco and Detroit network affiliation agreements. On August 4, 2006,The WB, 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.

***Item1A.  Risk Factors***

Our2005 Annual Report on Form 10-K includes a detailed discussion of our riskfactors. The information presented below updates, and should be read inconjunction with, the risk factors and information 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.**

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Oursource of available liquidity is our cash. Absent changes to our capitalstructure we will not 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 or otherwise service our existing obligationson an ongoing basis.  Lack of liquiditywould have a material adverse effect on our ability to implement our businessstrategy 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 restructuring alternatives. Therecan be no assurance that any transaction will occur or, if one is undertaken,of its potential terms or timing. See “Liquidity and Capital Resources” in ourManagement’s Discussion and Analysis for further details.

**Our Credit Agreement requires us toenter into an agreement effectuating a comprehensive restructuring of theCompany in a form acceptable to the requisite lenders under the CreditAgreement by August 31, 2006.**

Underthe terms of the Credit Agreement, on or before August 31, 2006, theCompany must execute an agreement effectuating a comprehensive restructuring ofthe Company in a form acceptable to the requisite lenders under the CreditAgreement (the “Restructuring Plan”).  Afailure to enter into the Restructuring Plan by August 31, 2006 wouldconstitute an event of default under the Credit Agreement, which causes theobligations of the Company under both the Credit Agreement and the Indenture tobecome immediately due and payable. There can be no assurance that the Company will be able to enter into aRestructuring Plan acceptable to the requisite lenders under the CreditAgreement by August 31, 2006.

**The failure of Malara Broadcast Group to refinance theexisting Malara Broadcast Group Senior Credit Facility with a new creditfacility with the lenders under our Credit Agreement by August 18, 2006would constitute an event of Default under our Credit Agreement**.

Underour Credit Agreement, it is an event of default if Malara Broadcast Group failsto refinance the existing Malara Broadcast Group Senior Credit Facility with anew credit facility with the lenders under our Credit Agreement by August 18,2006.  The occurrence of an Event ofDefault under our Credit Agreement would cause the Company’s obligations underboth the Credit Agreement and the Indenture to become immediately due andpayable.  There can be no assurance thatMalara Broadcast Group will be able to refinance the existing Malara BroadcastGroup Senior Credit Facility by August 18, 2006.

**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”).**

Theoutstanding principle amount of any Tranche B Term Loan held by a lender isconvertible in accordance with the terms of the Credit Agreement into shares ofPreferred Stock equal to the result obtained by dividing the principal amountbeing converted by the conversion 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 conversion of the Tranche B Term Loan could decrease the price ofour Preferred Stock.

TheCredit Agreement further provides that if the Company is party to anytransaction 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 ofsuch transaction adequate provision shall be made so that each lender withrespect to a Tranche B Term Loan shall be entitled, upon conversion, to: (i)the aggregate amount of stock, cash and/or other property, as the case may be,into which or for which each share of Preferred Stock is changed or exchangedtimes (ii) the number of shares of Preferred Stock into which the thenoutstanding principal amount of such lender’s Tranche B Term Loan is convertibleimmediately prior to the consummation of such transaction.

***Item 2.Unregistered Sales of Equity Securities and Use of Proceeds***

None.

***Item 3.Defaults Upon Senior Securities***

Aninterest payment of $19,744,000 on the Company’s 9 3/4 % Senior Secured Notes(the “Notes”) was due on June 1, 2006. Since payment was not made within 30days after June 30, 2006, an “Event of Default” under Indenture governing theNotes had occurred.  On July 5, 2006, theCompany made the interest payment due on June 1, 2006, thereby curing the Eventof Default.

***Item4.  Submission of Matters to a Vote ofSecurity Holders***

None.

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*** ***

***Item5.  Other Information***

None.

***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 12 3/4% 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)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1        |       | Purchase and Sale Agreement, dated as of May 1,  2006, by and among DS Audible San Francisco LLC, Granite Broadcasting  Corporation, KBWB, Inc, and KBWB License, Inc. (incorporated by reference to  Exhibit 2.1 to our Current Report on Form 8-K filed on May 5, 2006)                                                                                                                                                                                                                           |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2        |       | Purchase and Sale Agreement, dated as of May 1,  2006, by and among DS Audible Detroit LLC, Granite Broadcasting Corporation,  WXON, Inc, and WXON License, Inc. (incorporated by reference to Exhibit 2.2  to our Current Report on Form 8-K filed on May 5, 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**

Pursuantto the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Registrant has caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized.

 
|                        |   | GRANITE BROADCASTING CORPORATION                      |   |
|------------------------|--------|-------------------------------------------------------|--------|
|                   |   | Registrant                                            |   |
|                   |   |                                                  |   |
|                   |   |                                                  |   |
| Date: August 14,  2006 | /s/    | W. DON CORNWELL                                       |   |
|                   |   | (W. Don  Cornwell)                                    |   |
|                   |   | Chief Executive  Officer                              |   |
|                   |   |                                                  |   |
|                   |   |                                                  |   |
| Date: August 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 12 3/4% 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)                                                                                                                                                                                                                    |
|        |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.1        |       | Purchase and Sale Agreement, dated as of May 1,  2006, by and among DS Audible San Francisco LLC, Granite Broadcasting  Corporation, KBWB, Inc, and KBWB License, Inc. (incorporated by reference to  Exhibit 2.1 to our Current Report on Form 8-K filed on May 5, 2006)                                                                                                                                                                                                                           |
| ** **  |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| 10.2        |       | Purchase and Sale Agreement, dated as of May 1, 2006, by and among DS Audible Detroit LLC, GraniteBroadcasting Corporation,  WXON, Inc, and WXON  License, Inc. (incorporated by reference to Exhibit 2.2 to our Current Report  on Form 8-K filed on May 5, 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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