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# UNITED STATES  SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

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# FORM 10-K

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# ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the fiscal year endedDECEMBER 31, 2005

Commission File
Number: 000-27105

ACME COMMUNICATIONS,
INC.

(Exact name of
registrant as specified in its charter)

|Delaware
(State or other jurisdiction of
incorporation or organization) | 33-0866283
(I.R.S. employer
identification no.)
|----------------------------------------------------------------------- | -----------------------------------------------

2101 E. Fourth Street,
Suite 202 A Santa Ana, California, 92705 (714) 245-9499(Address and telephone
number of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

|Title of each classCommon Stock, par value $.01 per share | Name of each exchange on which registeredNasdaq National Market
|--------------------------------------------------------- | ---------------------------------------------------------------

Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.

Yes   [  ]
           No  [X]

Indicate
by check mark if the registrant is not required to file reports pursuant to Section 13 or
Section 15(d) of the Exchange Act.

Yes  [  ]
           No  [X]

Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes  [X]
          No  [  ]

Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrants
knowledge, in definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.  [  ]

Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer,
or a non-accelerated filer. See definition of accelerated filer and large
accelerated filer in Rule 12b-2 of the Exchange Act.

Large accelerated filer  [  ]
          Accelerated filer  [  ]
          Non-accelerated filer  [X]

Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act).

Yes   [  ]
           No  [X]

As of the last business day of the
registrants most recently completed second fiscal quarter (June 30, 2005), the
aggregate market value of the registrants common stock held by non-affiliates of the
registrant was $43,911,984 based on the basis of $4.02 per share, as reported on the
National Association of Securities Dealers Automated Quotation System National Market
System.

Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.

|Class                                  |  | Outstanding at March 29, 2006                                
|-------------------------------------- |  | -------------------------------------------------------------
|Common Stock, $.01 par value per share |  | 16,772,415 shares (including 725,652 shares held in treasury)

DOCUMENTS INCORPORATED BY REFERENCE

|Document                                                                    |  | Parts Into Which Incorporated
|--------------------------------------------------------------------------- |  | -----------------------------
|Portions of the Proxy Statement for the 2006 Annual Meeting of Stockholders |  | Part III                     

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|ACME COMMUNICATIONS, INC.ANNUAL REPORT ON FORM 10-K TABLE OF CONTENTS
|---------------------------------------------------------------------
|PART I                                                               
|Item 1.                                                              
|Item IA.                                                             
|Item IB.                                                             
|Item 2.                                                              
|Item 3.                                                              
|Item 4.                                                              
|                                                                     
|PART II                                                              
|Item 5.                                                              
|Item 6.                                                              
|Item 7.                                                              
|Item 7A.                                                             
|Item 8.                                                              
|Item 9.                                                              
|Item 9A.                                                             
|Item 9B.                                                             
|                                                                     
|PART III                                                             
|Item 10*.                                                            
|Item 11*.                                                            
|Item 12*.                                                            
|Item 13*.                                                            
|Item 14*.                                                            
|                                                                     
|PART IV                                                              
|Item 15.                                                             
|                                                                     
|                                                                     

| | 
| | 



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Forward-looking Statements

This
Annual Report on Form 10-K includes forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about future
events. In some cases, you can identify forward-looking statements by terminology
such as may, will, intend, could,
expect, anticipate, believe, predict,
potential, might, project, outlook or
continue or the negative of such terms or other comparable terminology.
Forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause our and the television broadcast industrys
actual results, levels of activity, performance, achievements and prospects to
be materially different from those expressed or implied by such forward-looking
statements. These risks, uncertainties and other factors include those identified
under Risk Factors in this Annual Report on Form 10-K. In light of
these risks, uncertainties and assumptions, the forward-looking events discussed
in this Annual Report on Form 10-K might not occur.

We
do not undertake any obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise,
after the date of this Annual Report on Form 10-K. In addition, we make no
representation with respect to any materials available on the Internet, including
materials available on our website.

# PART I

# Item 1. Business

ACME
Communications, Inc. and its wholly-owned subsidiaries unless the context otherwise
requires (together, the Company or we) owns and operates nine
broadcast television stations in medium-sized markets across the United States. Eight of
these television stations are network affiliates of The WB Television Network and one
station is a network affiliate of UPN. These nine stations broadcast in markets that
cover, in the aggregate, approximately 3.7% of the total U.S. television households. We
are the fourth largest WB Network affiliated group in the country. Mr. Jamie Kellner, our
Chairman and Chief Executive Officer, is also a founder of The WB Network and served as
its Chairman and Chief Executive Officer from 1994 until June 2004. Prior to that, Mr.
Kellner was President of Fox Broadcasting Company from its inception in 1986 through 1993.

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

On
January 24, 2006, CBS and Warner Bros. jointly announced that, effective September 2006,
they would cease operations of their respective networks, UPN and The WB Network, and
create a new network, The CW, which will be jointly owned between the two
companies. The CW will launch in September 2006, immediately following the closure of UPN
and The WB Network and is expected to include on its program schedule the better performing shows
from each of The WB and UPN networks. Most industry observers believe that The CW will
achieve stronger initial ratings than either The WB or UPN individually achieved in the
2005/2006 season and will be more financially sound.

Following
the CBS and Warner Bros. joint announcement in January, The CW began securing affiliation
arrangements across the country. In February 2006, Fox announced that it was launching a
new network  MyNetworkTV  effective in the fall 2006. Fox announced that the
terms of its affiliation agreements would include more commercial time for its affiliates
compared to the commercial time offered by The CW and would not include a programming fee
payable by the affiliated stations (unlike The CW which contemplated a programming fee
payable in its affiliation agreements).

After
careful evaluation of each of the two new networks, we concluded that The CW Network was
significantly advantaged due to its proven roster of popular shows culled from the current
WB and UPN schedules and decided to affiliate all of our eight continuing WB Network
affiliated stations with The CW. We affiliated our second station in Albuquerque-Santa Fe,
currently a UPN affiliate, with MyNetworkTV.

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Similar
to both the WBs and UPNs approach, The CW and MyNetworkTV are expected to
focus on younger demographics than the Big Four networks. Accordingly, we will be able to
continue our strategy to focus much of our surrounding, non-network, syndicated
programming on shows that appeal to younger viewers. In addition, in several of our
markets we broadcast local and regional sports programming and provide local news and
weather updates during our morning news show. We believe this programming enhances our
ability to sell advertising time to local and regional advertisers and increase audience
awareness of our still developing stations.

We
will also continue to focus on medium-sized (middle) markets which we believe
provide certain advantages such as fewer competitors and lower operating costs compared to
large markets. Our strategy is to capitalize on these advantages and to grow our revenues
and cash flow with an emphasized focus on local advertising sales. Since we centralize
many of our stations administrative functions and primarily provide entertainment
programming, our station general managers are able to focus on increasing sales and
improving operating margins.

ACME Communications, Inc. was incorporated in Delaware in 1999.
  Our executive office telephone number is (714) 245-9499.

# Our Development,
Strategy and Outlook

We
formed our company in 1997 with the goal of building a middle market broadcast television
station group comprised mostly of new start up stations and underperforming stations
 generally affiliated with The WB Television Network, which at the time was an
emerging network. We believed then, and still believe today, that significant value will
be created in aligning ourself with emerging networks (i.e., The CW and MyNetworkTV) that,
with respect to The CW, enjoys significant financial and creative support from three large
media companies  Time Warner Inc., Viacom and the Tribune Company, and with respect
to MyNetworkTV, enjoys significant financial and creative support from another large media
company, News Corp.

By
the end of 1997 we had three stations on the air. During 1998 we added another two
stations, bringing our total stations on the air to five. In 1999, we put a sixth station
on the air and acquired another four stations. Together, these acquisitions were the major
catalyst for our initial public offering in September 1999.

In
the fall of 2000, signs of a slowing economy and receding advertising demand became
evident and the industry was in a full recession by 2001  with non-political
advertising revenues declining in the double-digit percentage range in many markets. The
events of 9/11 only compounded and delayed an expected recovery.

In
2002, in the face of a continued soft ad environment, we decided to explore opportunities
to reduce our debt and exposure to a prolonged industry slump. In December 2002, we
entered into an agreement to sell our two largest stations  station KPLR, St. Louis
and station KWBP, Portland, Oregon  to the Tribune Company. We used the proceeds
from this transaction, which closed in March 2003, to significantly reduce our debt, which
in turn allowed us to amend and extend our revolving credit facility. In late 2002, we
also completed the purchase of our Madison station  our most recent acquisition.

The
broadcast television business in 2004 saw record-level political advertising, especially
in connection with the 2004 Presidential campaign and especially in key, battleground
states. Including political advertising, aggregate market revenues in our eight markets
were up 13%. However, we, along with other WB Network and UPN Network affiliates, did not
greatly benefit from this record in political advertising expenditures, and we garnered
less than a 1% share of such political advertising revenues.

Aggregate
2005 market revenues in our seven continuing station markets (excluding the Salt Lake City
market), excluding political revenues, were up 5.6% compared to 2004. Local advertising
sales were significantly stronger than national advertising sales, with a growth rate of
8.0% and 1.4% compared with 2004 figures, respectively. The national growth rate, when
viewed in the context of 2004s record level political advertising which reduced the
overall advertising inventory available, thereby increasing prices for non-political
advertisers, reflected very weak demand. Our aggregate share of non-political revenues in
our seven continuing markets decreased slightly from 8.6% in 2004 to 8.3% in 2005. On a
viewer basis, our continuing station groups average in-market share of viewers for
the 2004 / 2005 broadcast season, based on a composite of key demographic categories of
adult viewers during the 5:00 p.m. to midnight daypart, was 9.2% compared to a 10.4%
in-market viewing share for the 2003 / 2004 period which equated to an 11% decrease. We
believe that most of this decrease may be attributed to the decline, for the second
straight season, in the WB Networks prime-time ratings and the resulting effect on
surrounding dayparts. On a positive note, our continuing stations posted a rebound in the
November 2005 sweeps, achieving an average composite viewing share of 9.5% compared to an
average composite viewing share of 9.0% in the November 2004 sweeps, a 5% increase.

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To
date in 2006, there have been no early signs that national advertising demand is
rebounding, but since industry observers seem to be predicting another very strong
political advertising year, which should reduce the overall advertising inventory
available in each market, we believe that we should be able to capitalize on our
availability of advertising inventory (because political advertisers generally do not
advertise on our stations) and increase our market share of non-political revenues during
the year. We expect that the January 2006 announcement that both The WB and UPN networks
will cease operations in September 2006 and be replaced by The CW network will have mixed
results for us in 2006, but should provide us with more upside in the following years.
Both The WB and UPN have lost some programming momentum as a result of their new venture,
with the networks airing fewer original programs to reduce losses in their final broadcast
season. We believe that the reduction of original programming will have a downward
pressure on each networks ratings and our revenues from daypart programming will be
consequently reduced as well. On the positive side, The CW will have the benefit of being
able to broadcast the most highly rated shows from each of the two networks, which should
yield higher ratings than either network enjoyed individually, and which should translate
into higher revenues for our stations as well.

In
2005, there were a number of television station sale transactions announced, including
Emmis Communications sale of most of its television assets and The Liberty
Corporations sale of its small market television station group. The aggregate value
of the television stations sold in the 2005 and the number of such transactions were
significantly higher than in recent years. While there still seems to be gaps between
sellers and buyers pricing expectations, we believe the momentum is continuing for the
acquisitions of television stations. We are optimistic that there will continue to be
opportunities to monetize our station assets and assuming that an offer is reasonable, we
may sell additional television stations, as we recognize that we are in an environment of
continuing industry consolidation.

# Programming

Our
current programming includes:


The WB Network prime time programming (at seven of our eight continuing stations);


The UPN Network prime time programming (at one of our eight continuing stations);


The WB Network weekday afternoon programming (effective January 2, 2006 at seven of our
eight continuing stations);


Kids' WB! Saturday morning programming (at seven of our eight continuing stations);


syndicated programming;

The Daily Buzz, a three-hour morning news program (at seven of our eight continuing stations); and


local programming.

Prime
Time Programming.In prime time, The WB Network, has the youngest average of viewers
compared with the other network broadcasters. Prime time programming includes: 7th
Heaven, Smallville, Everwood, Gilmore Girls, Supernatural, Related, Charmedand
Reba. When The WB Network began broadcasting in 1995, it provided two hours of
prime time programming per week. The WB Network is currently providing 13 hours of prime
time programming Sunday through Friday. It also provides a two hour pre-prime time block
on Sunday nights which consists of earlier seasons episodes of popular WB Network
prime time shows.

Kids
WB! Programming and Weekday Afternoons.The WB Network launched Kids WB! in
September 1995, and until January 2, 2006, it provided 14 hours of kids programming
Monday through Saturday. Effective January 2, 2006, the network ceased airing its two-hour
childrens oriented programming on weekday afternoons and replaced it with
programming targeted at adult demographics leaving only the Saturday morning block with
childrens oriented programming, with shows such as Pokemon, Yu-Gi-Oh!andThe Batman. This scheduling change is expected to meaningfully improve our revenue in
that afternoon time period and also provide us with a better lead-in for our 5:00 p.m. access
programming.

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Syndicated
Programming.In addition to The WB Network and UPN programming, our stations air
syndicated programs. Generally, our most profitable programming time periods are the hours
immediately before and after the network prime time programming. Consequently, during
these time periods, we air programs that are targeted to the audiences similar in
demographics as those that watch The WB Network and UPN prime time programs. These
syndicated programs include That 70s Show, Everybody Loves Raymond, King of
Queens, Will and Grace, Judge Judy, King of the Hill, Drew Carey, Spin Cityand
Malcolm in the Middle.We have secured future broadcast rights for certain of our
stations toFriends(second cycle), Everybody Loves Raymond (second cycle),
That 70s Show(second cycle), According to Jimand other shows.We
have multi-year contracts to air most of our syndicated programming.

The
Daily Buzz.In September 2002, we launched The Daily Buzz,a three-hour (6:00
 9:00 a.m. Eastern / Pacific Time) morning news show. Effective January 1, 2004, we
began jointly producing the program with Emmis Television Broadcasting, L.P.
(Emmis), a subsidiary of Emmis Communications Corporation. In 2005, we
significantly increased the shows distribution and it is now aired on 138 stations,
including all of our WB Network affiliated stations and Emmis two WB Network
affiliates and on The WB 100+ Cable Group (which airs on cable in more than 100 small
markets across the country), representing in the aggregate approximately 38% of U.S.
households. The show is produced at Emmis station facilities in Orlando, Florida,
and in addition to traditional news, weather and sports related stories, contains
entertainment, technology and lifestyle segments. We believe that this program, which is
targeted at younger, underserved viewers, has the potential of generating meaningful
additional revenues in its time slot, including revenues generated from political
advertising and other advertising targeted at traditional news viewers.

Local
Programming.Several of our stations also air certain regional and local sporting
events of local interest, which we believe helps increase local awareness of our stations
and expands our advertiser base. In addition, we air local weather and news updates at all
of our stations during The Daily Buzz, our weekday morning news program. We also
air a 10-minute weeknight newscast on our Knoxville station.

New
Network Programming.In March 2006, we signed affiliation agreements with The CW and
effective September 2006, when The CW launches, all of our current WB Network affiliated
stations will begin airing The CWs prime time lineup two hours per night, Sunday
through Friday. CWs prime-time lineup will include popular shows currently airing on
The WB and UPN networks, including Smallville, Americas Next Top
Model, Gilmore Girls, Veronica Mars, Everybody Hates Chris and
Supernatural. The CW Network will also provide our stations with weekday
programming from 3:00  5:00 p.m., Saturday morning kids programming from 7:00 a.m.
to 12:00 p.m. and a two hour Sunday pre-prime block from 5:00  7:00 p.m. (ET/PT). We
have signed an affiliation agreement with Foxs MyNetworkTV for our second station in
the Albuquerque-Santa Fe market, currently a UPN affiliate, and it will begin airing
MyNetworkTV prime time programming two hours per night, Monday through Saturday, when that
network launches in September 2006.

# Our Stations and Markets

The
following table provides general information concerning our continuing stations:

|Marketplace                           | MarketRank (1) | StationCalls / Channel     | Affiliation | Number ofCommercialStations inMarket (2) | StationRank (3) | Station Share (4) | ACME Operation                     
|------------------------------------- | -------------- | -------------------------- | ----------- | ---------------------------------------- | --------------- | ----------------- | -----------------------------------
|Albuquerque - Santa Fe, NM            | 46             | KWBQ / 19KASY / 50KWBR /21 | WBUPNWB (5) | 77See (5)                                | 56See (5)       | 64See (5)         | March 1999November 1999January 2003
|Knoxville, TN                         | 58             | WBXX / 20                  | WB          | 5                                        | 4               | 8                 | October 1997                       
|Dayton, OH                            | 59             | WBDT / 26                  | WB          | 5                                        | 5               | 6                 | June 1999                          
|Ft. Myers - Naples, FL                | 66             | WTVK / 46                  | WB          | 5                                        | 5               | 5                 | March 1998                         
|Green Bay - Appleton, WI              | 69             | WIWB / 14                  | WB          | 6                                        | 5               | 5                 | June 1999                          
|Champaign - Springfield - Decatur, IL | 82             | WBUI / 23                  | WB          | 6                                        | 5               | 4                 | June 1999                          
|Madison, WI                           | 85             | WBUW / 57                  | WB          | 5                                        | 5               | 2                 | November 2002                      

Effective  September  2006,  The WB and UPN will cease their  operations  and all of our WB  affiliated  stations will become
affiliated with The CW and our UPN affiliate will become affiliated with MyNetworkTV.

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| | (1) | All television stations throughout the United States are grouped into 210
               markets that are ranked in size according to the number of households with
               televisions in the market for the 2005/2006 season.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Represents the number of full-power commercial broadcast television stations in
               the market, excluding Spanish-language stations, digital-only stations and
               satellite stations.
| | --- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Represents our stations rank, based on the average of the February, May
               and November 2004 major ratings periods, for adult viewers ages 18-49 on a Monday through
               Sunday, 5:00 p.m. to midnight basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Station share based on the average of the February, May and November 2004 major
               ratings periods, for adults 18-49 on a Monday through Sunday, 5:00 p.m. to midnight
               basis.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (5) | KWBR is a full-power satellite station of KWBQs, serving the Roswell area
               of the Albuquerque-Santa Fe marketplace. Its viewership is reflected in
               KWBQs station rank and share.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

KWBQ: Albuquerque 
Santa Fe, New Mexico KASY: Albuquerque  Santa Fe, New Mexico

|Designated Market Area: 46         
Total Age 2+ Population: 1,644,000 | TV Households: 653,680
|---------------------------------------------------------------------- | ----------------------

Market
Description.Thirty-five percent of the total population of Albuquerque  Santa
Fe is under 25 years of age. The estimated average household income in the Albuquerque
 Santa Fe market is approximately $40,500 per year. Major employers in the market
include Intel, Motorola, General Electric, General Mills, Philips, Tempur-Pedic and Levi
Strauss.

KWBQ
Station Overview.We launched KWBQ in March 1999 with The WB Network prime time
programming and Kids WB! In addition, the stations syndicated programming
currently includes Malcolm in the Middle, That 70s ShowandKing of the Hill.The station has contracted for the future exclusive-market broadcast rights to popular
shows such as Friends(second cycle) which begins airing in June 2006. KWBQ
delivered a 2004 / 2005 Season Average rating of 0.9 among adult viewers ages 18-49 for
the 5 p.m.  midnight, Monday through Sunday, time period.  a 40% decrease over
the comparable Season Average rating for the 2003 / 2004 broadcast season.

KASY
Station Overview.We began operating KASY, the UPN affiliate in the market, under an
interim LMA in November 1999 and closed our purchase of the station in December 1999. The
station has been a UPN affiliate since that networks launch in January 1995. Prior
to November 1999, the station had been operating as an LMA by another station owner in the
market. The stations syndicated programming includes Everybody Loves
Raymond, King of Queens, Seinfeld, Judge Judyand Judge Joe Brown. All of the
future program rights negotiated for KWBQ are also available to air on KASY. KASY
delivered a 2004 / 2005 Season Average rating of 0.07 among adult viewers ages 18-49 for
the 5 p.m.  midnight, Monday through Sunday, time period  a 13% decrease over
the comparable Season Average rating for the 2003 / 2004 broadcast season.

WBXX: Knoxville, Tennessee

|Designated Market Area: 58         
Total Age 2+ Population: 1,205,000 | TV Households: 516,180
|---------------------------------------------------------------------- | ----------------------

Market
Description.Thirty percent of the total population of Knoxville is under 25 years of
age. The estimated average household income in the Knoxville market is approximately
$40,800 per year. Major employers in the market include the University of Tennessee, TVA,
Oakridge National Laboratories, Alcoa and Nippondenso.

Station
Overview.We launched WBXX in October 1997. In addition to carrying The WB Network
prime time programming and Kids WB!, the stations syndicated programming
currently includes That 70s Show, Will & Grace, Dharma & Greg, King of
the Hill, Friends, King of Queensand Just Shoot Me. In September 2004,
the station began airing a weeknight 10-minute newscast produced by the number one news
affiliate in the market. The station has contracted for the future exclusive-market
broadcast rights to popular shows such as Friends(second cycle) and According
to Jim, which begin airing in June 2006 and September 2006, respectively. In October
2002, Knoxville became Nielsens 54th metered market. WBXX delivered a 2004 / 2005
Season Average rating of 2.1 among adult viewers ages 18-49 for the 5 p.m. 
midnight, Monday through Sunday, time period  a 16% decrease over the comparable
Season Average rating for the 2003 / 2004 broadcast season.

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WBDT: Dayton, Ohio

|Designated Market Area: 59        
Total Age 2+ Population: 1,222,000 | TV Households: 513,610
|--------------------------------------------------------------------- | ----------------------

Market
Description.Thirty-three percent of the total population of Dayton, Ohio is under 25
years of age. The estimated average household income in the Dayton market is approximately
$44,600, per year. Major employers in the market include Chrysler Corp/Acustar Inc.,
General Motors, Bank One Dayton, American Matsushita and BF Goodrich.

Station
Overview.We acquired WBDT in June 1999. WBDT signed on the air in October 1980 and
has been affiliated with The WB Network since our acquisition of the station. The
stations syndicated programming currently includes Malcolm in the Middle,
That 70s Show, Everybody Loves Raymond, Will & Grace andKing of Queens,and the station has contracted for the future exclusive-market broadcast rights to
popular shows such as Sex in the Cityand Friends(second cycle), which both
begin airing in September 2005. WBDT delivered a 2004 / 2005 Season Average rating of 1.9
among adult viewers ages 18-49 for the 5 p.m.  midnight, Monday through Sunday, time
period  a 5% decrease over the comparable Season Average rating for the 2003 / 2004
broadcast season.

WTVK: Ft. Myers 
Naples, Florida

|Designated Market Area: 66        
Total Age 2+ Population: 1,061,000 | TV Households: 461,920
|--------------------------------------------------------------------- | ----------------------

Market
Description.Twenty-six percent of the total population of Ft. Myers  Naples is
under 25 years of age. The estimated average household income in the Ft. Myers 
Naples market is approximately $52,700 per year. Major employers in the market include The
Lee County School District, Lee Memorial Health System, Columbia Healthcare and Publix
SuperMarkets. The market is the fastest growing television market in the country and has
jumped from having the 83rd largest television market in the country in June
1998, when we acquired the station, to currently having the 68th largest
television market in the country.

Station
Overview.We began operating WTVK in March 1998 under a local marketing agreement
(LMA) and acquired the station in June 1998. WTVK signed on the air in October
1990 and has been affiliated with The WB Network since our acquisition of the station. In
addition to carrying The WB Network prime time programming and Kids WB!, the
stations syndicated programming currently includes Judge Judy, Judge Joe Brown,
That 70s Show, King of Queens, Dharma & Greg, Roseanne andJust Shoot Me.The station has contracted for the future exclusive-market broadcast rights to popular
shows such as According to Jimand Frazier,both which begin in September
2006. In May 2001, the Ft. Myers-Naples market became Nielsens 51st metered market.
WTVK delivered a 2004 / 2005 Season Average rating of 1.7 among adult viewers ages 18-49
for the 5 p.m.  midnight, Monday through Sunday, time period  a 6% increase
over the comparable Season Average rating for the 2003 / 2004 broadcast season.

WIWB: Green Bay 
Appleton, Wisconsin

|Designated Market Area: 69        
Total Age 2+ Population: 1,049,000 | TV Households: 432,810
|--------------------------------------------------------------------- | ----------------------

Market
Description.Thirty-two percent of the total population of Green Bay  Appleton
is under 25 years of age. The estimated average household income in the Green Bay 
Appleton market is approximately $44,000 per year. Major employers in the market include
Fort James Corporation, the Oneida Tribe of Indians of Wisconsin, Schneider National,
Humana, Shopko Stores, American Medical Security, Bellin Memorial Hospital and Procter
& Gamble Paper Products.

Station
Overview.We acquired WIWB in June 1999. WIWB signed on the air in August 1998 and has
been affiliated with The WB Network since our acquisition of the station. The
stations syndicated programming currently includes That 70s Show, Will
& Grace, Everybody Loves Raymond, FrasierandKing of Queensand the
station has contracted for the future exclusive-market broadcast rights to popular shows
such as Friends(second cycle), which begins in September 2006. WIWB delivered a
2004 / 2005 Season Average rating of 1.2 among adult viewers ages 18-49 for the 5 p.m.
 midnight, Monday through Sunday, time period  a 9% increase over the
comparable Season Average rating for the 2003 / 2004 broadcast season.

6



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WBUI: Champaign 
Springfield  Decatur, Illinois

|Designated Market Area: 82      
Total Age 2+ Population: 885,000 | TV Households: 378,100
|----------------------------------------------------------------- | ----------------------

Market
Description.Thirty-three percent of the total population of Champaign 
Springfield  Decatur is under 25 years of age. The estimated average household
income in the Champaign  Springfield  Decatur market is approximately $42,100
per year. Major employers in the market include ADM, Staleys, Caterpillar, Mueller,
Illinois Power, Kraft and the University of Illinois.

Station
Overview.We acquired WBUI in June 1999. WBUI signed on the air in May 1984 and has
been affiliated with The WB Network since our acquisition of the station. The
stations syndicated programming currently includes Malcolm in the Middle, That
70s Show, Everybody Loves RaymondandKing of Queens.The station has
contracted for the future exclusive market broadcast rights to popular shows such as
Friends(second cycle), which begins airing in June 2006. WBUI delivered a 2004 /
2005 Season Average rating of 1.1 among adult viewers ages 18-49 for the 5 p.m. 
midnight, Monday through Sunday, time period  unchanged compared to the comparable
Season Average rating for the 2003 / 2004 broadcast season.

WBUW: Madison, Wisconsin

|Designated Market Area: 85       
Total Age 2+ Population: 867,000 | TV Households: 365,550
|------------------------------------------------------------------ | ----------------------

Market
Description.Thirty-two percent of the total population of Madison is under 25 years
of age. The estimated average household income in the Madison market is approximately
$46,300 per year. Madison is the state capitol of Wisconsin and in addition to the state
government, major employers in the market include General Motors, Lands End, Mercy Health
System and the University of Wisconsin.

Station
Overview.We acquired WBUW through a bankruptcy auction in December 2002. Under an
interim LMA, we became fully responsible for its operations effective November 1, 2002.
WBUW signed on the air in May 1984 as an affiliate of UPN. The station became a primary WB
Television Network affiliate in August 2002. The stations syndicated programming
currently includes That 70s Show, King of Queens, Judge JudyandHome
Improvement.In September 2003, we began airing a weeknight half-hour local
newscast on the station that is produced by the markets NBC affiliate. The station
has contracted for the exclusive market broadcast rights to the popular show Sex in the
City (which began airing in September 2005) and Friends(second cycle), which
begins airing in June 2006. WBUW delivered a 2004 / 2005 Season Average rating of 0.7
among adult viewers ages 18-49 for the 5 p.m.  midnight,
Monday through Sunday time period  a 40% increase over the comparable Season Average
rating for the 2003 / 2004 broadcast season.

# Our Affiliation
Agreements

Currently,
seven of our stations are affiliated with The WB Network and one station is affiliated
with UPN. As described above, both The WB Network and UPN will cease operations in
September 2006 and their respective owners will launch a newly formed network, The CW,
that same month. We have affiliated each of our current eight WB Network affiliates with
The CW. Our one UPN affiliated station has affiliated with Foxs MyNetworkTV, which
also will launch in September 2006. Our network affiliation agreements provide each
station with the exclusive right to broadcast the applicable networks programming in
its respective market. Our affiliation agreements with The CW have up to 10 year terms
that expire in September 2016. Our affiliation agreement with MyNetworkTV has a five year
term that expires in September 2011.

Under
the affiliation agreements, The CW and MyNetworkTV each retain the right to program and
sell approximately 75% and 30%, respectively, of the advertising time available during
each networks applicable prime time schedule and our stations sell the remaining
commercial inventory time. The CW will also program other dayparts: a Sunday pre-prime
time two-hour block, a Monday through Friday two-hour late afternoon block and a Saturday
morning childrens five-hour programming block. We retain approximately 33% of the
commercial inventory in the weekday afternoon and Sunday pre-prime blocks and 14% of the
commercial inventory in the Saturday morning block.

7



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Each
of our eight stations affiliated with The CW is also subject to annual compensation
payments to The CW. Although the annual payment to The CW is generally fixed, such payment
is either increased if The CW surpasses a certain prime-time ratings threshold or such
payment amount is completely eliminated if The CW fails to achieve a specified minimum
rating. Our one station affiliated with MyNetworkTV is not required to pay MyNetworkTV an
annual payment. As is the case with our WB and UPN affiliated stations, we expect to
participate in cooperative marketing efforts with The CW and MyNetworkTV whereby the
networks will reimburse us up to 50% of certain pre-approved advertising expenditures to
promote their network programming.

# Advertising/Sales

Most
of our revenues consist of advertising revenues, and no single advertiser has ever
accounted for more than 10% of our gross advertising revenues. Our advertising revenues
are generated both by local advertising and national spot advertising.

Local
Advertising.Local advertising revenues are generated by both local merchants and
service providers and by regional and national businesses and advertising agencies located
in a particular designated market area. Local advertising revenues represented 61% of our
continuing station advertising revenues in 2005, 57% in 2004 and 58% in 2003.

National
Spot Advertising.National spot advertising represents time sold to national and
regional advertisers based outside a stations designated market area. National spot
advertising revenues represented 39% of our continuing station advertising revenues in
2005 and 43% in 2004 and 42% in 2003. National spot advertising primarily comes from:


New advertisers wishing to test the market


advertisers who are regional retailers and manufacturers without national distribution;


advertisers who need to enhance network advertising in given markets; and


advertisers wishing to place more advertisements in specified geographic areas.

In
addition to advertising revenues, we generate revenue from licensing The Daily Buzz
to broadcast and cable stations outside of our markets and Emmis markets. These
licensing fees have grown dramatically over the past three years and represent
approximately 3%, 1% and 0% of our total net revenues in 2005, 2004 and 2003,
respectively.

# Our Competition

Broadcast
television stations compete for advertising revenues primarily with other broadcast
television stations in their respective markets and, to a lesser but increasing extent,
with radio stations, cable television system operators, newspapers, billboard companies,
direct mail and internet sites. ABC, CBS, NBC and Fox programming generally achieve higher
audience levels than that of The WB Network, UPN and syndicated programming aired by
independent stations which is attributable to a number of factors, including:


the traditional networks' efforts to reach a broader audience;


historically, less competition;


generally better channel positions;


more network programming being broadcast weekly;


the traditional networks' cross-promotions; and


the traditional networks more established market presence than The WB Network and UPN.

However,
because The WB Network and UPN have provided (and The CW and MyNetworkTV will provide)
fewer hours of programming per week than the traditional networks, we have a significantly
higher inventory of advertising time for our own use and, therefore, our stations
generally achieve a share of television market advertising revenues greater than their
share of the markets audience. We believe that this available advertising time,
combined with our efforts to attract (via our programming) the audiences that are key
targets of advertisers, and our focus on advertising sales allows us to compete
effectively for advertising revenues within our stations markets.

8



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The
broadcasting industry is continuously faced with technical changes and innovations, the
popularity of competing entertainment and communications media, changes in labor
conditions, and governmental restrictions or actions of federal regulatory bodies,
including the FCC, any of which could possibly have an adverse effect on a television
stations operations and profits. Sources of video service other than conventional
television stations, the most common being cable television, can increase competition for
a broadcast television station by bringing distant broadcasting signals not otherwise
available to the stations audience, serving as a distribution system for national
satellite-delivered programming and other non-broadcast programming originated on a cable
system and selling advertising time to local advertisers. Other principal sources of
competition include home video exhibition, direct-to-home broadcast satellite television,
entertainment services and multi-channel multi-point distribution services. Currently, two
FCC permittees, DirecTV and Echostar, provide subscription DBS services via high-power
communications satellites and small dish receivers, and other companies provide
direct-to-home video service using lower powered satellites and larger receivers.
Furthermore, emerging technologies that allow viewers to digitally record and play back
television programming is likely to decrease viewership of commercials and, as a result,
lower television advertising demand. Additionally, an increasing number of network
programs are becoming available to download, on a fee basis, to consumers computers
or handheld devices and this trend threatens to further erode traditional viewership of
local broadcasters. While these download fees represent new and growing revenue streams to
the networks, as of yet, local broadcast affiliates are not sharing in any of those
revenues.

Other
technology advances and regulatory changes affecting programming delivery through fiber
optic telephone lines and video compression could lower entry barriers for new video
channels and encourage the development of increasingly specialized niche programming. The
Telecommunications Act of 1996 permits telephone companies to provide video distribution
services via radio communication, on a common carrier basis, as cable systems or as open
video systems, each pursuant to different regulatory schemes. We cannot predict the effect
that these and other technological and regulatory changes will have on the broadcast
television industry or on the future profitability and value of a particular broadcast
television station.

Broadcast
television stations compete with other television stations in their designated market
areas for the acquisition of programming. Generally, cable systems do not compete with
local stations for programming, but various national cable networks do from time to time
and on an increasing basis acquire programming that could have been offered to local
television stations. Public broadcasting stations generally compete with
commercially-rated broadcasters for viewers, but do not compete for advertising revenues.
Historically, the cost of programming has increased because of an increase in the number
of independent stations and a shortage of quality programming.

# Federal Regulation of
Television Broadcasting

Television
broadcasting is a regulated industry and is subject to the jurisdiction of the FCC under
the Communications Act of 1934, as amended from time to time (the Communications
Act). The Communications Act prohibits the operation of television broadcasting
stations except under a license issued by the FCC. The Communications Act empowers the
FCC, among other things:


to issue, revoke and modify broadcast licenses;


to decide whether to approve a change of ownership or control of station licenses;


to regulate the equipment used by stations; and


to adopt and implement regulations to carry out the provisions of the Communications Act.

Failure
to observe FCC or other governmental rules and policies can result in the imposition of
various sanctions, including monetary forfeitures, the grant of short, or less than
maximum, license renewal terms or, for particularly egregious violations, the denial of a
license renewal application, the revocation of a license or denial of FCC consent to
acquire additional broadcast properties.

License Grant, Renewal, Transfer
and Assignment.Our current licenses are or were scheduled to expire on the following
dates:

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|Station (by market ranking)              | Expiration Date 
|---------------------------------------- | ----------------
|KWBQ / Albuquerque - Santa Fe            | October 1, 2006 
|KASY / Albuquerque - Santa Fe            | October 1, 2006 
|KWBR / Albuquerque - Santa Fe            | October 1, 2006 
|WBDT / Dayton                            | October 1, 2005 
|WBXX / Knoxville                         | August 1, 2005  
|WTVK / Ft. Myers - Naples                | February 1, 2005
|WIWB / Green Bay - Appleton              | December 1, 2005
|WBUI / Champaign - Decatur - Springfield | December 1, 2005
|WBUW / Madison                           | December 1, 2005

We
have filed separate renewal applications for each of those licenses that were scheduled to
expire in 2005. Those renewal applications are still pending before the FCC. To some
extent, the delay may be occasioned by the FCCs apparent decision not to renew
licenses for WB Network affiliated stations until it completes its investigation of
indecency complaints relating to network programming that was aired by most of its
affiliates, including our WB Network affiliated stations. The delay in FCC action on
our renewal applications may also reflect some violations by our stations of limitations
in FCC rules on the amount of commercial material that is allowed in childrens
programming and, in one case, a violation of the FCC rule with respect to the required
public inspection file. In the meantime, the Communications Act entitles us to continue to
operate the stations under the prior licenses until the FCC acts on the renewal
applications.

A
party must obtain a construction permit from the FCC to build a new television station.
Once a station is constructed and commences broadcast operations, the permittee receives a
license which must be renewed by the FCC at the end of each license term (which may be as
long as eight years under current law). The FCC grants renewal of a broadcast license if
it finds that the station has served the public interest, convenience, and necessity,
there have been no serious violations by the licensee of the Communications Act or FCC
rules and policies, and there have been no other violations of the Communications Act and
FCC rules and policies which, taken together, would constitute a pattern of abuse. If the
FCC finds that a licensee has failed to meet these standards, the FCC may deny renewal,
condition renewal, or impose some other sanction (such as forfeiture). Any party with
standing may petition the FCC to deny a broadcasters application for renewal.
However, only if the FCC issues an order denying renewal will the FCC accept and consider
applications from other parties for a construction permit for a new station to operate on
that channel. The FCC may not consider any new applicant for the channel in making
determinations concerning the grant or denial of the licensees renewal application.
Although renewal of licenses is granted in the majority of cases even when petitions to
deny have been filed, we cannot be sure our station licenses will be renewed for a full
term or without modification.

The
Communications Act prohibits the assignment of a broadcast license or the transfer of
control of a broadcast licensee without the prior approval of the FCC. In determining
whether to permit the assignment or transfer of control of, or the grant or renewal of, a
broadcast license, the FCC considers a number of factors pertaining to the licensee,
including:


compliance with various rules limiting common ownership of media properties;


the character of the licensee and those persons holding attributable interests therein; and


compliance with the Communications Act's limitations on alien ownership.

Character
generally refers to the likelihood that the licensee or applicant will comply with
applicable law and regulation. Attributable interests generally refer to the level of
ownership or other involvement in station operations which would result in the FCC
attributing ownership of that station or other media outlet to the person or entity in
determining compliance with FCC ownership limitations.

To
obtain the FCCs prior consent to assign a broadcast license or transfer control of a
broadcast licensee, an application must be filed with the FCC. If the application involves
a substantial change in ownership or control, the application must be placed on public
notice for a period of no less than 30 days during which petitions to deny the application
may be filed by interested parties, including certain members of the public. If the FCC
grants the application, interested parties have no less than 30 days from the date of
public notice of the grant to seek reconsideration or review of that grant by the
commission or, as the case may be, a court of competent jurisdiction. The full FCC
commission has an additional 10 days to set aside on its own motion any action taken by
the FCCs staff. When passing on an assignment or transfer application, the FCC is
prohibited from considering whether the public interest might be better served by an
assignment or transfer to any party other than the assignee or transferee specified in the
application.

10



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Ownership
Restrictions.The officers, directors and equity owners of 5% or more of our
outstanding voting stock or the voting stock of a company holding one or more broadcast
licenses are deemed to have an attributable interest in the broadcast company. However,
specified institutional investors, including mutual funds, insurance companies and banks
acting in a fiduciary capacity, may own up to (but not as much as) 20% of the outstanding
voting stock without being subject to attribution if they exercise no control over the
management or policies of the broadcast company. Finally, even if it owns non-voting
stock, a third party could be deemed to have an attributable interest if it owns and / or
holds more than 33% of a stations (or the Companys) asset value (which is
generally defined by the FCC to mean the aggregate of equity plus debt) and either has
another attributable interest in the same market as the station(s) or provides more than
15% of the weekly programming for the station(s).

The
FCCs current rules generally prohibit the issuance of a license to any party, or
parties under common control, for a television station if that stations Grade B
contour overlaps with the Grade B contour of another television station in the same
designated market area (DMA) in which that party or those parties already have
an attributable interest. FCC rules provide an exception to that general prohibition and
allow ownership of two television stations with overlapping Grade B contours under any one
of the following circumstances:


there will be eight independent full-power television stations in the DMA after the
acquisition or merger and one of the two television stations owned by the same party is
not among the top four-ranked stations in the DMA based on audience share;


the station to be acquired is a "failing" station under FCC rules and policies;


the station to be acquired is a "failed" station under FCC rules and policies; or


the acquisition will result in the construction of a previously unbuilt station.

On
June 2, 2003, the FCC adopted new rules (the New Rules) with respect to
ownership of broadcast television stations and related matters. The New Rules included
many changes, including the following:


with few exceptions, ownership restrictions would be determined by the DMA in which the
station is located without regard to Grade B contour overlaps;


a single entity could own two television stations in a market with at least five
television stations if one of the stations is not among the top-4 ranked stations;


a single entity could own three television stations in a market with at least 18
television stations as long as two of the stations are not among the top-4 ranked
stations;


waivers would be allowed to permit ownership of two of the top-4 ranked stations in
markets with eleven or fewer television stations if certain criteria were satisfied
(including whether the combination would enable the buyer to better compete with the
dominant television station in the market); and


waivers would be allowed to own another television station in the DMA (regardless of the
number of television stations in the market) if the station does not have a Grade B
contour overlap with the buyers other station in the DMA and if the station to be
purchased is not carried by the same cable television systems and other multi-video
program distributors as the other station.

The
FCCs New Rules also established new cross media limits (CML) to govern
the combined ownership of television stations, radio stations, and daily newspapers. More
specifically, the New Rules include the following changes:


no cross-ownership is allowed in markets with three or fewer television stations;


in markets with 4  8 television stations, a single entity can own (1) a combination
of one daily newspaper, one television station, and half the ownership limit of radio
stations, (2) a combination of one daily newspaper and the full complement of allowed
radio stations, or (3) a combination of two television stations (if otherwise permissible)
and the full complement of radio stations but no daily newspaper; and

11



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
no CML limits in markets with more than eight television stations.

The
FCCs New Rules also raised the cap on the reach of a single entitys television
ownership to 45% of the countrys audience. However, Congress subsequently enacted a
law which reduced that cap to 39%. Prior to adoption of that new statute, stations in the
UHF band, which covers channels 14  69, were attributed with only 50% of the
households in their respective markets (while 100% of the market households are attributed
to stations in the VHF band, which covers channels 2  13). The FCC issued a public
notice requesting comment on whether the new statute had any impact on the ability of the
FCC to continue that UHF discount.

The
New Rules were scheduled to become effective on September 4, 2003. However, several
parties filed appeals in federal court seeking to overturn the New Rules. The court issued
an order on September 3, 2003 which prevented the New Rules from becoming effective and
required the pre-existing rules to remain in effect. On June 24, 2004, the court issued a
decision (with one of the three judges dissenting) which upheld some of the FCCs New
Rules (mostly relating to radio) but concluded that the FCC had failed to provide an
adequate explanation to support other New Rules (mostly relating to television). The court
therefore sent the entire proceeding back to the FCC with instructions to provide a better
explanation of, or to modify, the rules which the court found objectionable. The court
left in place its order of September 3, 2003 which prevented any of the New Rules from
going into effect.

In
response to a request by the FCC, the court issued a decision on September 3, 2004 which
allowed the FCC to implement certain New Rules relating to radio that the court had
upheld. However, the court made no change in its decision with respect to those New Rules
that affect television broadcasting. On January 27, 2005, the FCC and the Department of
Justice (which works with the FCC on certain court appeals) decided not to appeal the
courts decision to the United States Supreme Court. On June 13, 2005, the United
States Supreme Court denied a petition for certiorari filed by other parties. As a result,
the FCC will probably inaugurate a new proceeding at some point in the future to determine
whether the New Rules should be changed and to develop a better explanation for those New
Rules it decides to retain.

At
this juncture, no predictions can be made as to whether or when the New Rules (at least
with respect to television) will be changed and, if so, how those changes will affect the
Company. It is possible, however, that changes could be made in the New Rules that will
adversely affect the Company and our ability to buy new television stations or sell our
existing television stations.

Restrictions on Foreign Ownership.The Communications Act prohibits the issuance of
broadcast licenses to, or the holding of a broadcast license by, foreign citizens or any
corporation of which more than 20% of the capital stock is owned of record or voted by
non-U.S. citizens or their representatives or by a foreign government or a representative
thereof, or by any corporation organized under the laws of a foreign country. The
Communications Act also authorizes the FCC to prohibit the issuance of a broadcast license
to, or the holding of a broadcast license by, any corporation controlled by any other
corporation of which more than 25% of the capital stock is owned of record or voted by
aliens. The FCC has interpreted these restrictions to apply to other forms of business
organizations, including partnerships and limited liability companies. As a result of
these provisions, the FCC licenses granted to our subsidiaries could be revoked if more
than 25% of our stock were directly or indirectly owned or voted by aliens. Our
certificate of incorporation contains limitations on alien ownership and control
substantially similar to those contained in the Communications Act. Pursuant to our
certificate of incorporation, we have the right to refuse to sell shares to aliens or to
repurchase alien-owned shares at their fair market value to the extent necessary, in the
judgment of our board of directors, to comply with the Communications Acts alien
ownership restrictions.

Programming and Operation.The Communications Act requires broadcasters to serve the
public interest, convenience and necessity. The FCC has gradually restricted or eliminated
many of the more formalized procedures it had developed to promote the broadcast of
programming responsive to the needs of the stations community of license. Licensees
continue to be required, however, to present programming that is responsive to community
problems, needs and interests and to maintain certain records demonstrating such
responsiveness. Complaints from viewers concerning a stations programming will be
considered by the FCC when it evaluates the licensees renewal application, but these
complaints may be filed and considered at any time.

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Stations
must also pay regulatory and application fees and follow various FCC rules that regulate,
among other things:


political advertising;


childrens programming;


the broadcast of obscene or indecent programming;


sponsorship identification; and


technical operations.

Failure
to observe these or other rules and policies can result in the imposition of various
sanctions, including monetary forfeitures, the grant of short, less than the maximum,
renewal terms, or for particularly egregious violations, the denial of a license renewal
application or the revocation of a license.

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

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

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

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


the number of active channels on the cable system;


the location and size of the cable system; and

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

# Employees

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

# Available Information

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

# Item 1A. Risk Factors

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

15



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

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

| |  | national
and local economic conditions;
| | - | ---------------------------------------

| |  | industry-specific
economic conditions;
| | - | --------------------------------------

| |  | whether
political advertising is weak in a given year;
| | - | ------------------------------------------------------

| |  | the
relative popularity of the programming on our stations; and
| | - | ---------------------------------------------------------------

| |  | the
activities of our competitors.
| | - | ----------------------------------

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

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

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

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

| |  | we
have not generated positive operating cash flow from our continuing operations and our
future performance will depend upon our ability to continue increasing our ratings and
revenues in a relatively healthy advertising environment;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | our
ability to obtain financing in the future for working capital, capital expenditures and
general corporate purposes, might be impeded; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | we
are more vulnerable to economic downturns and our ability to withstand competitive
pressures is limited.
| | - | -----------------------------------------------------------------------------------------------------------

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

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

16



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

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

| |  | incur
additional debt;
| | - | ----------------------

| |  | pay
dividends;
| | - | --------------

| |  | merge,
consolidate or sell assets;
| | - | ----------------------------------

| |  | make
acquisitions or investments; and
| | - | -------------------------------------

| |  | change
the nature of our business.
| | - | ----------------------------------

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

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

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

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

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

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

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

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

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

17



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

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

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

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

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

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

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

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

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

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

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

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

18



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

New
and emerging technologies may reduce advertising revenues.

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

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

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

FCC
regulation of our business could adversely affect our licenses.

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

# Item 1B. Unresolved
Staff Comments

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

# Item 2. Properties

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

19



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|Market                                                                                                   | Approximate Size (1)           | Ownership        
|-------------------------------------------------------------------------------------------------------- | ------------------------------ | -----------------
|Salt Lake City, Utah (4)   Studio and office facilities   Tower (analog / digital)(2)                    | 9,500 sq. ft4,075 / 4,124 ft.  | LeasedOwned      
|Albuquerque - Santa Fe, New Mexico   Studio and office facilities   Tower (analog / digital)             | 9,000 sq. ft.4,223 / 4223 ft.  | LeasedLeased     
|Knoxville, Tennessee   Studio and office facilities   Tower (analog / digital)(3)                        | 8,000 sq. ft.2,421 / 2,359 ft. | LeasedOwned      
|Dayton, Ohio   Studio and office facilities   Tower (analog / digital)                                   | 9,998 sq. ft.1,145 / 954 ft.   | LeasedLeased     
|Ft. Myers - Naples, Florida   Studio and office facilities   Tower (analog / digital)                    | 8,623 sq. ft.1,496 / 1,496 ft. | LeasedLeased     
|Green Bay - Appleton, Wisconsin   Studio and office facilities   Tower (analog)(3)   Tower (digital)     | 7,500 sq. ft.659 ft.1,089 ft.  | LeasedOwnedLeased
|Champaign - Springfield - Decatur, Illinois   Studio and office facilities   Tower (analog / digital)(3) | 7,800 sq. ft.1,329 / 1,329 ft. | OwnedOwned       
|Madison, Wisconsin   Studio and office facilities   Tower (analog / digital)(3)                          | 9,600 sq. ft.1,362 / 1,270 ft. | LeasedOwned      

---

| | (1) | Tower
size represents signal radiance height above average terrain.
| | --- | -------------------------------------------------------------------

| | (2) | Represents
partnership interests in digital television tower.
| | --- | -------------------------------------------------------------

| | (3) | Tower
owned on leased property.
| | --- | -------------------------------

| | (4) | Station sold on April 4, 2006.
| | --- | ------------------------------

Item 3.Legal Proceedings

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

20



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

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

PART II

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

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

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

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

|      | First
Quarter | Second
Quarter | Third
Quarter | Fourth
Quarter
|----- | ------------- | -------------- | ------------- | --------------
|2005  |               |                |               |               
|High  |               |                | $             | 7.450         
|Low   |               |                |               | 4.760         
|Close |               |                |               | 5.270         
|2004  |               |                |               |               
|High  |               |                | $             | 10.210        
|Low   |               |                |               | 7.440         
|Close |               |                |               | 7.940         
|     

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

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

21



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# Item 6. Selected
Financial Data

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

|ACME Communications, Inc. and Subsidiaries
Consolidated Statement of Operations(In thousands, except per share data)
|--------------------------------------------------------------------------------------------------------------------
|
|
|Net revenues                                                                                                        
|Operating expenses:                                                                                                 
|Cost of service:                                                                                                    
|Programming, including program amortization                                                                         
|Other costs of service (excluding depreciation and amortization                                                     
|of $4,619, $4,581, $3,707, $3,103 and $8,382 for years ended                                                        
|December 31, 2005, 2004, 2003, 2002 and 2001, respectively)                                                         
|Selling, general and administrative expenses                                                                        
|Depreciation and amortization                                                                                       
|Abandoned acquisition-related costs                                                                                 
|Impairment of broadcast licenses                                                                                    
|Corporate expenses                                                                                                  
|Operating expenses                                                                                                  
|Operating loss                                                                                                      
|Other income (expenses):                                                                                            
|Interest income                                                                                                     
|Interest expense                                                                                                    
|Loss on early extinguishment of debt                                                                                
|Gain on sale of construction permit                                                                                 
|Other, net                                                                                                          
|Loss from continuing operations before income taxes and minority interest                                           
|Income tax benefit (expense), continuing operations                                                                 
|Loss from continuing operations before minority interest                                                            
|Minority interest                                                                                                   
|Loss from continuing operations                                                                                     
|Discontinued operations:                                                                                            
|Income (loss) from discontinued operations                                                                          
|Income tax benefit (expense)                                                                                        
|Income (loss) from discontinued operations                                                                          
|Net income (loss)                                                                                                   
|                                                                                                                    
|Net income (loss) per share, basic and diluted                                                                      
|Continuing operations                                                                                               
|Discontinued operations                                                                                             
|Net income (loss) per share                                                                                         
|                                                                                                                    
|Weighted average basic and diluted common shares outstanding                                                        
|                                                                                                                    
|Balance Sheet Data:                                                                                                 
|Total assets                                                                                                        
|Total debt (1)                                                                                                      
|Total stockholders' equity                                                                                          

---

| | (1) | Includes
our 12% senior secured discount notes and our 10 7/8% senior discount           notes
(both fully redeemed in 2003), revolving credit facility, second-lien term           note
and capital lease obligations.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

22



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

Overview

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

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

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

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

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

23



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

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

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

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

Results of Operations

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

25



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

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

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

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

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

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

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

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

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

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

# Liquidity and Capital
Resources

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

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

26



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

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

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

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

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

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

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

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

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

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

Contractual Cash
Obligations

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

|Year       | Senior
Credit
Facility &
Second Lien
Term Loan (1) | Program Rights
Obligations (2)(3) | Capital Lease
Obligations | Operating
Lease
Obligations (3) | Purchase
Obligations (3)(4) | Total
Contractual
Cash
Obligations
|---------- | -------------------------------------------------- | --------------------------------- | ------------------------- | ------------------------------- | --------------------------- | ----------------------------------
|2006       |                                                    |                                   | $                         | 18,500                          |                             | $                                 
|2007       |                                                    |                                   |                           | --                              |                             |                                   
|2008       |                                                    |                                   |                           | --                              |                             |                                   
|2009       |                                                    |                                   |                           | 34,540                          |                             |                                   
|2010       |                                                    |                                   |                           | --                              |                             |                                   
|Thereafter |                                                    |                                   |                           | --                              |                             |                                   
|           |                                                    |                                   |                           |                                 |                             |                                   
|Total      |                                                    |                                   | $                         | 53,040                          |                             | $                                 
|           |                                                    |                                   |                           |                                 |                             |                                   

---

| | (1) | Reflects
the terms of our March 2006 restructured credit facilities - see Note 14 to the consolidated financial statements.
| | --- | ---------------------------------------------------------------------------------------------------------------------------

| | (2) | Includes
commitments not recognized in our consolidated  financial statements,  as the underlying
programming is not yet available for broadcast.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------

| | (3) | Excludes
obligations of discontinued operations.
| | --- | ------------------------------------------------

| | (4) | Includes
 audience  measurement  service  agreements,  news service  licenses,  music license fees
and various  software license agreements.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------

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

Critical Accounting
Policies and Estimates

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

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Programming Rights

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

Impairment of Long-Lived
Asset Values

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

Revenue Recognition

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

Accounting for Goodwill
and Other Intangible Assets

Intangible
assets consist of broadcast licenses and goodwill.

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

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

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

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Impact of Recently
Adopted Accounting Pronouncements

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

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

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

New Accounting Standards
Not Yet Adopted

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

30



---

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

# Item 7A. Quantitative
and Qualitative Disclosures About Market Risk

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

31



---

# Item 8. Financial
Statements and Supplemental Data

|ACME COMMUNICATIONS, Inc. and SUBSIDIARIESINDEX TO FINANCIAL STATEMENTS                              
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|Report of Independent Registered Public Accounting Firm                                              
|Consolidated Balance Sheets as of December 31, 2005 and 2004                                         
|Consolidated Statements of Operations for the Years Ended December 31, 2005, 2004 and 2003           
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31,  2005, 2004 and 2003
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2005, 2004 and 2003           
|Notes to the Consolidated Financial Statements                                                       

32



---

# Report of Independent
Registered Accounting Firm

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

We
have audited the consolidated balance sheets of ACME Communications, Inc. and subsidiaries
as of December 31, 2005 and 2004, and the related consolidated statements of operations,
stockholders equity and cash flows for each of the years in the three-year period
ended December 31, 2005. In connection with our audits of the consolidated financial
statements, we have also audited the financial statement schedules I and II. These
consolidated financial statements and financial statement schedules are the responsibility
of the Companys management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement schedules based on our audits.

We
conducted our audits in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.

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

/s/ KPMG LLP

Los Angeles, California
April 7, 2006

33



---

|ACME Communications, Inc. and Subsidiaries
Consolidated Balance Sheets(in thousands, except share data)
|-------------------------------------------------------------------------------------------------------
|
|ASSETS                                                                                                 
|Current assets:                                                                                        
|Cash and cash equivalents                                                                              
|Restricted cash                                                                                        
|Accounts receivable, net                                                                               
|Current portion of programming rights                                                                  
|Prepaid expenses and other current assets                                                              
|Assets held for sale                                                                                   
|Total current assets                                                                                   
|Property and equipment, net                                                                            
|Programming rights, net of current portion                                                             
|Goodwill, net                                                                                          
|Broadcast licenses, net                                                                                
|Other assets                                                                                           
|Total assets                                                                                           
|                                                                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                   
|Current liabilities:                                                                                   
|Accounts payable                                                                                       
|Accrued liabilities                                                                                    
|Current portion of programming rights payable                                                          
|Current portion of obligations under lease                                                             
|Income taxes payable                                                                                   
|Notes payable under revolving credit facility                                                          
|Notes payable under second-lien term loan                                                              
|Liabilities held for sale                                                                              
|Total current liabilities                                                                              
|Programming rights payable, net of current portion                                                     
|Obligations under lease, net of current portion                                                        
|Other liabilities                                                                                      
|Deferred income taxes                                                                                  
|Notes payable under revolving credit facility                                                          
|Notes payable under second-lien term loan                                                              
|Total liabilities                                                                                      
|                                                                                                       
|Minority interest                                                                                      
|                                                                                                       
|Stockholders' equity:                                                                                  
|Preferred stock, $.01 par value; 10,000,000 shares authorized, no                                      
|shares issued or outstanding                                                                           
|Common stock, $.01 par value; 50,000,000 shares authorized,                                            
|16,772,415 shares issued and outstanding at December 31, 2005 and 2004                                 
|Additional paid-in capital                                                                             
|Accumulated deficit                                                                                    
|Less:  Treasury stock, at cost; 725,652 shares                                                         
|Total stockholders' equity                                                                             
|                                                                                                       
|Total liabilities and stockholders' equity                                                             
|                                                                                                       

See the notes to the consolidated financial statements

34



---

|ACME Communications, Inc. and Subsidiaries
         Consolidated Statement of Operations(In thousands, except per share data)
|-----------------------------------------------------------------------------------------------------------------------------
|
|
|Net revenues                                                                                                                 
|Operating expenses:                                                                                                          
|Cost of service:                                                                                                             
|Programming, including program amortization                                                                                  
|Other costs of service (excluding depreciation and                                                                           
|amortization of $4,619, $4,581 and $3,707 for years                                                                          
|ended December 31, 2005, 2004 and 2003,respectively)                                                                         
|Selling, general and administrative expenses                                                                                 
|Depreciation and amortization                                                                                                
|Abandoned acquisition-related costs                                                                                          
|Impairment of broadcast licenses                                                                                             
|Corporate expenses                                                                                                           
|Operating expenses                                                                                                           
|Operating loss                                                                                                               
|Other income (expenses):                                                                                                     
|Interest income                                                                                                              
|Interest expense                                                                                                             
|Loss on early extinguishment of debt                                                                                         
|Gain on sale of construction permit                                                                                          
|Other, net                                                                                                                   
|Loss from continuing operations before income taxes and minority interest                                                    
|Income tax expense, continuing operations                                                                                    
|Loss from continuing operations before minority interest                                                                     
|Minority interest                                                                                                            
|Loss from continuing operations                                                                                              
|Discontinued operations:                                                                                                     
|Income (loss) from discontinued operations                                                                                   
|Income tax benefit (expense)                                                                                                 
|Income (loss) from discontinued operations                                                                                   
|Net income (loss)                                                                                                            
|                                                                                                                             
|Net income (loss) per share, basic and diluted                                                                               
|Continuing operations                                                                                                        
|Discontinued operations                                                                                                      
|Net income (loss) per share                                                                                                  
|                                                                                                                             
|Weighted average basic and diluted common shares outstanding                                                                 
|                                                                                                                             

See the notes to the consolidated financial statements.

35



---

|ACME Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity(In thousands)
|--------------------------------------------------------------------------------------------------------
|
|Balance at December 31, 2002                                                                            
|Exercise of stock options                                                                               
|Amortization of deferred compensation                                                                   
|Net income                                                                                              
|                                                                                                        
|Balance at December 31, 2003                                                                            
|Exercise of stock options                                                                               
|Amortization of deferred compensation                                                                   
|Purchase of treasury stock, at cost                                                                     
|Net loss                                                                                                
|                                                                                                        
|Balance at December 31, 2004                                                                            
|Net loss                                                                                                
|Balance at December 31, 2005                                                                            

See the notes to the consolidated financial statements.

36



---

|ACME Communications, Inc. and Subsidiaries
     Consolidated Statement of Cash Flows(In thousands)
|--------------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:                                                             
|Net income (loss)                                                                                 
|Add:  loss (income) from discontinued operations                                                  
|Adjustments to reconcile income (loss) to net cash used in operating activities:                  
|Minority interest                                                                                 
|Provision for doubtful accounts receivable                                                        
|Depreciation and amortization                                                                     
|Impairment of broadcast license                                                                   
|Amortization of program rights                                                                    
|Abandonment of acquisition related costs                                                          
|Amortization of debt issuance costs                                                               
|Amortization of discount on 12% senior secured notes                                              
|Loss on early extinguishment of debt                                                              
|Amortization of deferred compensation                                                             
|Gain on sale of construction permit                                                               
|Deferred taxes                                                                                    
|Changes in assets and liabilities:                                                                
|Decrease in accounts receivables                                                                  
|(Increase) decrease  in prepaid expenses and other current assets                                 
|(Increase) decrease in other assets                                                               
|Increase (decrease) in accounts payable                                                           
|Increase (decrease)  in accrued liabilities                                                       
|Increase (decrease) in taxes payable                                                              
|Payments of programming rights payable                                                            
|Increase (decrease) in other liabilities                                                          
|Net cash used in operating activities                                                             
|Cash flows from investing activities:                                                             
|Purchase of property and equipment                                                                
|Purchases of and deposits for station interests                                                   
|Proceeds from sale of assets                                                                      
|Proceeds from sale of construction permit                                                         
|Net cash used in investing activities                                                             

See the notes to the consolidated financial statements.

37



---

|ACME Communications, Inc. and Subsidiaries
     Consolidated Statement of Cash Flows (continued)(In thousands)
|--------------------------------------------------------------------------------------------------------------
|
|
|Cash flows from financing activities:                                                                         
|Contributions by minority stockholer                                                                          
|Net borrowings under revolving credit facility                                                                
|Payments on revolving credit facility                                                                         
|Payment of financing costs on credit facilities                                                               
|Borrowings under 2nd lien facility                                                                            
|Redemption of notes                                                                                           
|Cash expenses associated with redemption of notes                                                             
|Cash restricted as escrow deposits and collateral under capital lease facilities                              
|Payments on capital lease obligations                                                                         
|Purchase of treasury stock                                                                                    
|Proceeds from the issuance of common stock                                                                    
|Net cash provided by (used in) financing activities                                                           
|                                                                                                              
|Increase (decrease) in net cash from continuing operations                                                    
|                                                                                                              
|Discontinued operations (revised - see Note 2):                                                               
|Net cash provided by (used in) operating activities                                                           
|Net cash provided by (used in) investing activities                                                           
|Net cash used in financing activities                                                                         
|Cash provided by (used in) discontinued operations                                                            
|                                                                                                              
|Increase (decrease) in cash                                                                                   
|Cash at beginning of period                                                                                   
|Cash at end of period                                                                                         
|                                                                                                              
|Cash payments for:                                                                                            
|Interest - continuing operations                                                                              
|Interest - allocated to discontinued operations                                                               
|Total interest payments                                                                                       
|Taxes                                                                                                         
|                                                                                                              
|Non-cash transactions:                                                                                        
|Program rights in exchange for program rights payable                                                         
|                                                                                                              

See the notes to the
 consolidated financial statements.

38



---

# ACME COMMUNICATIONS,
INC. AND SUBSIDIARIES

# NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# (1) Description of the
Business and Formation

Formation and Presentation

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

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

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

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

Nature of Business

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

|Station   | Channel | Marketplace                             | MarketRank(1) | NetworkAffiliation
|--------- | ------- | --------------------------------------- | ------------- | ------------------
|KUWB (2)  | 30      | Salt Lake City, Utah (2)                | 36            | WB                
|KWBQ/KWBR | 19/21   | Albuquerque-Santa Fe, New Mexico        | 46            | WB (3)            
|KASY      | 50      | Albuquerque-Santa Fe, New Mexico        | 46            | UPN (4)           
|WBXX      | 20      | Knoxville, Tennessee                    | 58            | WB (3)            
|WBDT      | 26      | Dayton, Ohio                            | 59            | WB (3)            
|WTVK      | 46      | Ft. Myers-Naples, Florida               | 66            | WB (3)            
|WIWB      | 14      | Green Bay-Appleton, Wisconsin           | 69            | WB (3)            
|WBUI      | 23      | Champaign-Springfield-Decatur, Illinois | 82            | WB (3)            
|WBUW      | 57      | Madison, Wisconsin                      | 85            | WB (3)            

39



---

---

| | (1) | based
on television households per Nielsen Market Research for the 2004           / 2005
season.
| | --- | ------------------------------------------------------------------------------------------------

| | (2) | Station sold on April 4, 2006 (See Note 14).
| | --- | --------------------------------------------

| | (3) | effective
September 2006, station becomes an affiliate of The CW Network
| | --- | ------------------------------------------------------------------------

| | (4) | effective
September 2006, station becomes an affiliate of MyNetworkTV
| | --- | ---------------------------------------------------------------------

# (2) Summary of
Significant Accounting Policies

Basis of Consolidation

The
Consolidated Financial Statements include the accounts of the Company and its
subsidiaries. All significant inter-company transactions have been eliminated.

Revenue Recognition

Revenue
from the sale of airtime related to advertising and contracted time is recognized at the
time of broadcast. The Company records such revenues net of commissions of advertising
agencies and national sales representatives.

Cash and Cash Equivalents

The
Company considers all highly liquid debt instruments purchased with an original maturity
of three months or less to be cash equivalents. Cash that is restricted and pledged as
collateral for capital lease obligations or is escrowed in connection with pending
acquisitions, including acquisitions of construction permits, is considered restricted
cash.

Accounts Receivable

Accounts
receivable are presented net of the related allowance for doubtful accounts which totaled
$708,000 and $714,000 at December 31, 2005 and 2004, respectively.

Concentration of Credit
Risk and Fair Value of Financial Instruments

Financial
instruments that potentially subject the Company to concentration of credit risk consist
primarily of accounts receivable and cash. Due to the short-term nature of these
instruments, the carrying value approximates the fair value. The Company believes that
concentrations of credit risk with respect to accounts receivable, which are unsecured,
are limited due to the Companys ongoing relationship with its clients and limited
exposure to any one customer. The Company provides its estimate of uncollectible accounts.
The Company has not experienced significant losses relating to accounts receivable.

The
carrying amounts reported in the consolidated balance sheets for receivables and accounts
payable approximate fair values because of the immediate or short-term maturity of these
financial instruments. The fair value of the Companys long-term debt, consisting of
notes payable under its revolving credit facility and its second-lien term loan, is
estimated at their aggregate carrying amount of $53.0 million since both notes have
floating interest rates that the Company believes are at current market.

Program Rights

Program
rights represent costs incurred for the right to broadcast certain features and syndicated
television programs. Program rights are stated, on a gross basis, at the lower of
amortized cost or estimated net realizable value. The cost of such program rights and the
corresponding liability are recorded when the initial program becomes available for
broadcast under the contract. Generally, program rights are amortized over the life of the
contract on a straight-line basis related to the usage of the program. Any reduction in
unamortized costs to net realizable value is included in amortization of program rights in
the accompanying Consolidated Statements of Income. During 2005, 2004 and 2003, the
Company recorded write-downs of $739,000, $594,000 and $325,000, respectively, for certain
programs where unamortized program rights exceeded estimated future net revenues.

The
portion of the program rights estimated to be amortized within one year and after one year
are reflected in the balance sheets as current and non-current assets, respectively. The
gross payments under these contracts that are due within one year and after one year are
similarly classified as current and non-current liabilities.

40



---

Property and Equipment

Property
and equipment are stated at cost. The cost of maintenance is expensed when incurred.
Depreciation and amortization are computed using the straight-line method over the
estimated useful lives of the respective assets, or for leasehold improvements, the
shorter of useful lives and the lease term. When property is retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the appropriate accounts and
any gain or loss is included in the results of current operations. The principal lives
used in determining depreciation rates of various assets are as follows:

|Buildings and Improvements    | 20 - 30 years
|----------------------------- | -------------
|Broadcast and other equipment | 3 - 20 years 
|Furniture and fixtures        | 5 - 7 years  
|Vehicles                      | 5 years      

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

Intangible Assets

Intangible
assets consist of broadcast licenses and goodwill.

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

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

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

Barter and Trade
Transactions

Revenue
and expenses associated with barter agreements in which broadcast time is exchanged for
programming rights are recorded at the estimated average rate of the airtime exchanged.
Barter revenue amounted to $3,807,000, $3,720,000 and $3,429,000 during the years ended
December 31, 2005, 2004 and 2003, respectively. Trade transactions, which represent the
exchange of advertising time for goods or services, are recorded at the estimated fair
value of the products or services received based on comparable cash transactions. Barter
and trade revenue is recognized when advertisements are broadcast. Merchandise or services
received from airtime trade sales are charged to expense or capitalized and expensed when
used.

41



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Advertising Expenses

The Company records advertising expense when the advertising is run. Production costs
associated with such advertising is expensed upon the initial air date of the advertising.
Advertising expense, which consists primarily of media costs, production costs and
promotion staff salaries and related costs, is included in Other Costs of Services and was
$2,184,000, $2,174,000 and $2,014,000 for the years ended December 31, 2005, 2004 and
2003, respectively.

Debt Discount

The
Company issued its 12% Senior Secured Discount Notes and 10 7/8% Senior Discount Notes at
a discount from the face value of the notes. The 10 7/8% Senior Discount Notes are fully
accreted and were redeemed by the Company on April 21, 2003. The Company accreted the
discount on the 12% Senior Secured Discount Notes using the level yield method. Upon the
early extinguishment of the 12% Senior Secured Notes in April and September 2003,
remaining unamortized discount amounting to $375,000 was recorded as an expense and is
included in the Companys loss relating to early extinguishment of debt.

Income Taxes

The
Company accounts for income taxes under the asset and liability method. Deferred tax
assets and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax assets and liabilities of
a change in tax rates is recognized in income in the period that includes the enactment
date.

Income (Loss) per Share

The
Company calculates income (loss) per share in accordance with SFAS No. 128, Earnings
Per Share. SFAS No. 128 requires a presentation of basic earnings per share
(EPS) and diluted EPS. Basic EPS includes no dilution and is computed by
dividing income available to common stockholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution from
securities that could share in the earnings of the Company. In calculating diluted EPS, no
potential shares of common stock are to be included in the computation when a loss from
continuing operations available to common stockholders exists. The statement requires dual
presentation of basic and diluted EPS by entities with complex capital structures.

Stock
options outstanding amounting to approximately 2.5 million, 2.4 million, and 2.4 million
shares at December 31, 2005, 2004, and 2003, respectively, were not included in the
computation of diluted EPS because to do so would have been antidilutive.

Comprehensive Income
(Loss)

The
Company has no other components of comprehensive income (loss) other than net income
(loss).

Accounting for Stock
Options

The
Company has adopted Statement of Financial Accounting Standards No. 123 (SFAS No.
123), Accounting for Stock-Based Compensation, which establishes a fair
value based method of accounting for stock-based compensation. SFAS No. 123 encourages but
does not require entities to adopt its provisions in place of the provisions of Accounting
Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock
Issued to Employees. SFAS No. 123 permits entities to recognize the expense of all
stock-based awards over the vesting period of the awards. The expense is calculated based
on the fair value at the date of grant. Alternatively, APB No. 25 requires that the
expense of stock-based employee compensation be recognized based on the difference, if
any, between the quoted market price of the stock and the amount the employee must pay to
acquire the stock. APB No. 25 specifies various dates to be used to determine the quoted
market price, depending on whether the terms of the stock-based compensation award are
fixed or variable. Under SFAS No. 123 if an entity elects to follow APB No. 25 it must
provide pro forma net income disclosure for employee stock option grants made, as if the
fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected
to apply the provisions of APB No. 25. Had the Company chosen to adopt the provisions of
Statement of Financial Accounting Standards No. 123, as amended by SFAS No. 148 
Accounting for Stock-Based Compensation  Transition and Disclosure, and
recognized compensation cost based upon the fair value of all options granted (including
those granted at or above fair market value) at the date of grant, the Companys net
loss (in thousands) and net loss per share for the years ended December 31, 2005, 2004 and
2003 would have been as follows:

42



---

|                                                                        |  | Years Ended December 31,
|----------------------------------------------------------------------- |  | ------------------------
|
|Net income (loss), as reported                                          |  |                         
|Add:  Stock-based  compensation  expense  included in net income (loss) |  |                         
|Deduct:  Total stock-based compensation expense determined under        |  |                         
|fair-value based method for all awards                                  |  |                         
|                                                                        |  |                         
|Pro forma net income (loss)                                             |  |                         
|                                                                        |  |                         
|Income (loss) per share, basic and diluted:                             |  |                         
|As reported                                                             |  |                         
|Pro forma                                                               |  |                         
|                                                                        |  |                         

The
fair value of the options granted were used to calculate the pro forma net income and net
income per common share above, on the date of grant, using the Black-Scholes option
pricing model with the following weighted average assumptions:

|                                                | 2005 | 2004 | 2003
|----------------------------------------------- | ---- | ---- | ----
|Dividend yield                                  |      |      |     
|Expected volatility                             |      |      |     
|Risk free interest rate                         |      |      |     
|Expected life (in months)                       |      |      |     
|Weighted average per share fair value of grants |      |      | $   

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

Investments

The Company has investments in non-consolidated affiliates, which are accounted for under
the equity method. The Company evaluates its investments to determine if an impairment has
occurred. Carrying values are adjusted to reflect realizable value, where necessary.

Treasury Stock

In 2004, the Companys Board of Directors approved stock repurchase programs and
the Company repurchased 725,652 shares of its common stock in the open market at an
aggregate cost of approximately $5,000,000 pursuant to such programs. The Company has
recorded these purchases, at cost, as treasury stock.

43



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Use of Estimates in the
Preparation of Financial Statements

The
preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and expenses
during the reporting period. These estimates include the allowance for doubtful accounts,
the net realizable value of programming rights and the valuation allowance on deferred tax
assets. Actual and future results could differ from those estimates. In addition, changes
in market conditions or stations actual or expected performance could materially affect future
estimated fair values of the Companys stations or of the estimated fair value of the
Companys intangible assets.

Reclassifications

In
addition to the reclassifications made to report discontinued operations resulting from
the Tribune Transaction and the Clear Channel Transaction, certain amounts previously
reported may have been reclassified to conform to the 2005 financial statement
presentation.

In
2005 the Company has separately disclosed the operating, investing and financing portion
of the cash flows attributable to its discontinued operations, which in prior periods were
reported on a combined basis as a single amount.

# (3) Discontinued
Operations

On
December 27, 2002, the Company entered into agreements to sell two of its stations,
KPLR-TV (St. Louis) and KWBP-TV (Portland, Oregon) to subsidiaries of the Tribune Company.
The Tribune Transaction closed on March 21, 2003. On August 8, 2005, the Company entered
into an agreement to sell its station, KUWB-TV (Salt Lake City) to subsidiaries of Clear
Channel Communications Inc. for $18.5 million in an all cash transaction. The Clear
Channel Transaction was completed on April 4, 2006 (see Note 14). The Companys
consolidated financial statements for all periods presented have been adjusted to reflect
the operations of these three stations as discontinued operations in accordance with SFAS
No.144.

Interest  expense  related to debt required
 to be repaid as a result of the sale or, in the case of the Tribune  Transaction,  the
debt assumed by the buyer,  comprised  solely of capital lease  obligations,  has been allocated to discontinued  operations.  No other
interest expense has been allocated to discontinued operations.

Summarized financial information, in thousands,
for the three stations operations is as follows:

Assets held for sale:

|                                            | December 31,2005 | December 31,2004
|------------------------------------------- | ---------------- | ----------------
|Programming rights                          |                  |                 
|Property and equipment, net                 |                  |                 
|Intangible assets, net (broadcast licenses) |                  |                 
|Other assets                                |                  |                 
|Assets held for sale                        |                  |                 
|                                            |                  |                 

Liabilities held for sale:

|                        | December 31,2005 | December 31,2004
|----------------------- | ---------------- | ----------------
|Programming liabilities |                  |                 
|                        |                  |                 

44



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Selected operating results were as follows:

|                                              | For the Years Ended December 31,
|--------------------------------------------- | --------------------------------
|
|Net revenues                                  |                                 
|                                              |                                 
|Loss from discontinued operations, before     |                                 
|gain on sale and income tax benefit (expense) |                                 
|Gain on sale                                  |                                 
|Income tax benefit (expense)                  |                                 
|                                              |                                 
|Income (loss) from discontinued operations    |                                 
|                                              |                                 

The
2005 gain on sale of $1,617,000 represents additional contingent consideration received by
the Company from Tribune in December 2005 relating to Tribunes use of KPLRs
prior tax net operating losses. There is approximately $4.3 million in additional KPLR tax
net operating losses that, if utilized by Tribune, could result in an additional future
contingent consideration to the Company of approximately $1.5 million.

In
2004, in conjunction with the completion of its 2003 state income tax returns, the Company
determined that its current tax liability at December 31, 2003 relating to the 2003
Tribune Transaction was understated by approximately $411,000. The expense, if properly
recorded in 2003, would have decreased the annual net income per share for 2003 by $.02.
As the impact to annual financial statements for 2003 was not material, the Company
recorded additional tax expense of $411,000 for discontinued operations in 2004.

# (4) Property and
Equipment

Property
and equipment consist of the following:

|                                                | December 31,
|----------------------------------------------- | ------------
|
|
|Land                                            |             
|Buildings and improvements                      |             
|Broadcast and other equipment                   |             
|Furniture and fixtures                          |             
|Vehicles                                        |             
|Construction in process                         |             
|Total property and equipment, at cost           |             
|Less: Accumulated depreciation and amortization |             
|Net property and equipment                      |             

Property
and equipment for our station KUWB in Salt Lake City is included in the consolidated
balance sheet in Assets held for sale as disclosed in Note 3 
Discontinued Operations.

Included
in property and equipment at both December 31, 2005 and 2004 are assets subject to capital
leases with a total cost of $1,122,000 and associated accumulated depreciation of $485,000
and $363,000 at December 31, 2005 and 2004, respectively. The construction in process
account includes miscellaneous broadcast and studio equipment not yet placed into service.

# (5) Unit Offering and
12% Senior Secured Discount Notes

45



---

On
September 30, 1997, ACME Intermediate, a wholly-owned subsidiary, issued (the Unit
Offering) 71,634 membership units (the Units) (representing 8% of the
ACME Intermediates outstanding membership equity) and $71,634,000 (par value at
maturity) in 12% senior secured discount notes due 2005 (the Intermediate
Notes). Cash interest on the Intermediate Notes was payable semi-annually in
arrears, commencing with the six-month period ending March 31, 2003. The net proceeds from
the Unit Offering, after the deduction of underwriter fees and other related offering
costs, were $38.3 million and were received by the Company on September 30, 1997. The
Company allocated approximately $4.2 million of such net proceeds to minority interest,
$35.6 million to the Intermediate Notes and $1.5 million to prepaid financing costs 
the latter which was amortized over the eight-year term of the Intermediate Notes. On
September 30, 1999, the Company reacquired all of the minority interest in exchange for
its common stock in connection with its initial public offering. On April 21, 2003, the
Company used proceeds from the Tribune Transaction to redeem $41.6 million of the
Intermediate Notes and on September 30, 2003, using borrowings under its senior credit
facility, redeemed the remaining $30.0 million of the Intermediate Notes. The Company
recorded a loss on extinguishment of this debt of approximately $4.3 million during 2003.
The loss was based on the difference between the reacquisition price and the net carrying
amount, as defined by Accounting Principles Board Opinion No. 26.

# (6) 10 7/8% Senior
Discount Notes

On
September 30, 1997, ACME Television issued 10 7/8% senior discount notes due 2004 (the
Television Notes) with a face value of $175,000,000 and received $127,370,000
in gross proceeds from such issuance. The Television Notes provided for semi-annual cash
interest payments starting on March 31, 2001.

On
April 21, 2003, the Company used the proceeds from the Tribune Transaction to redeem 100%
of the Television Notes and recorded a loss on extinguishment of debt of approximately
$6.8 million related to these notes. The loss was based on the difference between the
reacquisition price and the net carrying amount, as defined by Accounting Principles Board
Opinion No. 26, Early Extinguishment of Debt.

# (7) Notes Payable Under
Revolving Credit Facility and Second-Lien Term Loan

In
February 2002, ACME Television (ATV) established a revolving credit facility
with Foothill Capital Corporation, as both agent and lender (the Foothill
Facility). The facility, which is secured by all of ATVs station assets,
allowed for borrowings up to $30 million and contained financial covenants. In May 2002,
the facility was increased to $40 million via the placement of additional syndication. ATV
had the option to borrow at an interest rate determined by either a base rate (Wells Fargo
Banks prime rate) plus 3.00 percentage points, or at the LIBOR rate plus 4.25
percentage points.

In
November 2004, the Foothill Facility was amended to (a) increase maximum borrowings
thereunder to $60.0 million, (b) reduce the borrowing rate, (c) modify and eliminate
certain financial covenants and (d) extend the maturity date to November 2008. Concurrent
with that amendment, ATV entered into a $20.0 million Second-Lien Term Loan
(SLTL) agreement. The SLTL bears interest at LIBOR plus 7.00% and is due in
May 2009. The agreement contains similar covenants as contained in the Foothill Facility.

At
December 31, 2005, the ATV had outstanding borrowings of $33.0 million under the Foothill
Facility at a weighted average interest rate of 9.3%. Borrowings available under the
Foothill Facility at December 31, 2005 were $18.6 million. At December 31, 2005,
ATVs interest rate on its $20.0 million outstanding SLTL borrowings was 12.2%. ATV
was not in compliance with the minimum earnings before interest, income taxes,
depreciation and amortization covenants contained in both the Foothill Facility and the
STLT agreements at December 31, 2005.

Both
the Foothill Facility and the SLTL restrict the distribution of any dividends or assets
from ATV to its direct or indirect parents. The net assets of ATV at December 31, 2005
were approximately $53.0 million.

Costs
associated with the procuring and amending the Companys credit facilities, including
loan fees and related professional fees, are included in long-term other assets and are
amortized on a straight-line basis over the term, including amended terms, of the
facilities.

On
March 29, 2006, ATV restructured its credit facilities and on April 4, 2006, the STLT was
repaid in full and terminated from proceeds of the Clear Channel Transaction (see Note
14).

46



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# (8) Commitments and
Contingencies

Obligations Under
Operating Leases

The
Company is obligated under non-cancelable operating leases for office space, office
equipment, broadcast equipment and tower sites. Future minimum lease payments under
non-cancelable operating leases as of December 31, 2005 are:

|           | Continuing Operations | Discontinued Operations
|---------- | --------------------- | -----------------------
|
|2006       |                       |                        
|2007       |                       |                        
|2008       |                       |                        
|2009       |                       |                        
|2010       |                       |                        
|Thereafter |                       |                        
|           |                       |                        
|Total      |                       |                        
|           |                       |                        

Total
rental expense for continuing operations under operating leases for the twelve months
ended December 31, 2005, 2004 and 2003 was approximately $1,659,000, $1,586,000 and
$1,319,000, respectively. Total rental expense for discontinued operations under operating
leases for the twelve months ended December 31, 2005, 2004 and 2003 was approximately
$211,000, $210,000 and $409,000, respectively.

Obligations Under Capital
Leases

As
of December 31, 2005, certain equipment was leased under capital equipment facilities.
Future minimum lease payments for our continuing operations under capital leases as of
December 31, 2005 are:

|Year                                    | In thousands
|--------------------------------------- | ------------
|2006                                    |             
|2007                                    |             
|2008                                    |             
|2009                                    |             
|2010                                    |             
|Thereafter                              |             
|Total minimum lease payments            |             
|Less: Amount representing interest      |             
|Present value of minimum lease payments |             
|Less: Current portion                   |             
|Long-term portion                       |             

Programming Rights Payable

Commitments
for programming rights that have been executed, but which have not been recorded in the
accompanying consolidated financial statements, as the underlying programming is not yet
available for broadcast, were approximately $22,389,000 for our continuing operations and
$6,615,000 for our discontinued operations as of December 31, 2005.

Maturities
on the Companys programming rights payable (including commitments not recognized in
the accompanying consolidated financial statements due to the lack of current availability
for broadcast) for each of the next five years are:

47



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|Year       | Continuing Operations | Discontinued Operations
|---------- | --------------------- | -----------------------
|
|2006       |                       |                        
|2007       |                       |                        
|2008       |                       |                        
|2009       |                       |                        
|2010       |                       |                        
|Thereafter |                       |                        
|           |                       |                        
|Total      |                       |                        
|           |                       |                        

Other Commitments

The Company has other commitments for goods and services not included in its
consolidated balance sheet, including various employment agreements, agreements for
ratings services, license fees for websites and for ratings-based affiliation fees to The
WB Network. In March 2006, the Company stations entered into long-term affiliation
agreements with The CW and MyNetworkTV (see Note 14).

The
Company has entered into independent agreements with applicants for construction permits
in the Lexington, KY and the Richmond, VA markets. While the Company believes the chances
that these construction permits being approved and issued by the Federal Communications
Commission are remote, if they are, the Company has an obligation to acquire them from the
applicants for $3.0 million in the case of the Lexington construction permit and $8.2
million in the case of the Richmond construction permit.

Legal Proceedings

The
Company is currently, and from time to time, involved in litigation incidental to the
conduct of our business. The Company is not currently a party to any lawsuit or proceeding
that it believes would have a material adverse effect on its financial condition, results
of operations or liquidity.

Contingent Gain

In connection with the Tribune Transaction, the Company is entitled to receive
additional proceeds if and when the net tax loss carryovers generated through the date of
the sale by the Companys Missouri entities sold to Tribune are utilized by them in
Tribunes future tax returns. The maximum amount of these additional proceeds, which
due to the uncertainty of their utilization has not been recorded by the Company, is
approximately $1.5 million.

# (9) Income Taxes

The
income tax expense (benefit) consists of the following:

|                                    | Year ended December 31,
|----------------------------------- | -----------------------
|
|
|Continuing Operations:              |                        
|Current:                            |                        
|Federal                             |                        
|State                               |                        
|Total current tax expense (benefit) |                        
|Deferred:                           |                        
|Federal                             |                        
|State                               |                        
|Total deferred tax expense          |                        
|Total income tax expense            |                        
|                                    |                        
|Discontinued Operations:            |                        
|Current:                            |                        
|Federal                             |                        
|State                               |                        
|Total current tax expense           |                        
|Deferred:                           |                        
|Federal income taxes benefit        |                        
|State income taxes benefit          |                        
|Total deferred tax expense benefit  |                        
|Total income tax expense (benefit)  |                        
|                                    |                        

48



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The differences
between the income tax expense for continuing operations and income taxes computed using
the U.S. Federal statutory income tax rates (34%) consist of the following:

|                                               | Year ended December 31,
|---------------------------------------------- | -----------------------
|
|
|Tax benefit at U.S. Federal rate               |                        
|State income taxes, net of Federal tax benefit |                        
|Nondeductible expenses                         |                        
|Increase in valuation allowance                |                        
|Other                                          |                        
|                                               |                        
|Income tax expense                             |                        
|                                               |                        

The
change in valuation allowance for each of the above years has been allocated to
continuing operations and the remainder has been allocated to discontinued operations.

The
tax effects of temporary differences that give rise to significant portions of the
deferred tax assets and liabilities are summarized as follows:

|                                    | December 31,
|----------------------------------- | ------------
|
|
|Deferred tax assets:                |             
|Accrued vacation                    |             
|AMT credits                         |             
|Bad debt and other reserves         |             
|Deferred income                     |             
|Deferred compensation               |             
|Intangible amortization             |             
|Net operating loss carryforward     |             
|Other                               |             
|Total deferred tax assets           |             
|Less: valuation allowance           |             
|Deferred tax assets                 |             
|                                    |             
|Deferred tax liabilities:           |             
|Property and equipment depreciation |             
|Intangible amortization             |             
|Other                               |             
|Deferred tax liabilities            |             
|Net deferred income tax liabilities |             
|                                    |             

49



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In
assessing the realizability of deferred tax assets, management considered whether it is
more likely than not that some portions or all deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent on the generation of future
taxable income during the periods in which the differences become tax deductible. Based on
the level of historical taxable income and projections for future taxable income over the
periods in which the deferred tax assets are deductible, management believes that it is
not more likely than not that the deferred tax assets will be realized. Accordingly the
Company has recorded a valuation allowance of $30.4 million as of December 31, 2005. At
December 31, 2005, the Company had, for federal and state tax purposes, net operating loss
carryforwards of approximately $79.2 million that expire at various dates through 2025.
The Internal Revenue Code substantially restricts the ability of a corporation to utilize
existing net operating losses and credits in the event of an ownership change.
Therefore, the Companys net operating loss carryforwards for federal income tax
purposes may be limited if changes in ownership occur.

# (10) Related Party
Transactions

All
but one of our stations have entered into affiliation agreements and, from time to time,
related marketing arrangements with The WB Network. Jamie Kellner, our Chairman of the
Board and Chief Executive Officer, was also the co-chairman and co-chief executive officer
of The WB Network until June 2004.

The
Company licenses exclusive rights to automobile related websites in most of its markets
from CarSoup of Minnesota, Inc (CarSoup). The Company owns 30% of the
outstanding common stock of CarSoup and records its investment in CarSoup using the equity
accounting method. The license fees paid to CarSoup, net of shared ancillary revenue
received by the Company from CarSoup, was approximately $378,000, $354,000 and $392,000
for the years ended December 31, 2005, 2004 and 2003, respectively.

(11)
Defined Contribution Plan

In
1998, the Company established a 401(k) defined contribution plan (the Plan)
which covers all eligible employees (as defined in the Plan). Participants are allowed to
make non-forfeitable contributions up to 50% of their annual salary, but may not exceed
the annual maximum contribution limitations established by the Internal Revenue Service.
The Company currently matches 50% of the amounts contributed by each participant but does
not match participants contributions in excess of 6% of their compensation per pay
period. The Company contributed and expensed $245,000, $235,000 and $228,000 to the Plan
for the years ended December 31, 2005, 2004 and 2003, respectively.

# (12) Stock Option
Compensation

Our
1999 Stock Incentive Plan provides additional means to attract, motivate, reward and
retain key personnel. The Compensation Committee of the Board of Directors (the plan
administrator) has the authority to grant different types of stock and cash incentive
awards and to select participants. While only stock options and restricted stock awards
are contemplated at this time, other forms of awards may be granted to give us flexibility
to structure future incentives. Our employees, officers, directors, and consultants may be
selected to receive awards under the plan.

A
maximum of 4,200,000 shares of our common stock may be issued under the plan,
(approximately 25% of our current outstanding shares). The number of shares subject to
stock options and stock appreciation rights granted under the plan to any one person in a
calendar year cannot exceed 1,000,000 shares. The number of shares subject to all awards
granted under the plan to any one person in a calendar year cannot exceed 1,000,000
shares. Performance-based awards payable solely in cash that are granted under the plan to
any one person in a calendar year cannot provide for payment of more than $1,000,000.

Each
share limit and award under the plan is subject to adjustment for certain changes in our
capital structure, reorganizations and other extraordinary events. Shares subject to
awards that are not paid or exercised before they expire or are terminated are available
for future grants under the plan.

Stock
option activity during the years ended December 31, 2005, 2004 and 2003 consisted of the
following:

50



---

|                                             | Year Ended December 31,
|-------------------------------------------- | -----------------------
|
|
|Stock options outstanding, beginning of year |                        
|Options granted:                            
|2005 at $5.72 to $7.00                       |                        
|2004 at $7.99                                |                        
|2003 at $7.25 to $7.69 per share             |                        
|Options forfeited or  terminated             |                        
|Options exercised                            |                        
|Stock options outstanding, end of year       |                        
|Stock options exercisable, end of year       |                        
|Options available for grant, end of year     |                        

On
August 8, 2005, the Company issued stock options for 907,500 shares to executive employees
(other than the Companys Chief Executive, Chief Operating and Chief Financial
Officer) at an average exercise price of $6.50 per share in exchange for the termination
of 432,000 shares at an average exercise price of $7.55 per share. The closing price of
the Companys stock that day was $4.22 per share. The forfeited shares were fully
vested and the new shares vest over three years. The exchange of shares represents an
effective repricing and is therefore subject to variable compensation accounting. Since
the exercise prices for the new shares are in excess of the closing price of the
Companys stock at December 31, 2005, no compensation expense has been recorded in
the accompanying consolidated statement of operations. The incremental value of the new options in
excess of the value of the forfeited shares at the new grant date is being amortized over
the three-year expected life for purposes of the above pro forma calculations.

The
following table summarizes information concerning outstanding and exercisable options at
December 31, 2005:

|Exercise
Price  | Options
Outstanding | Weighted
Average
Remaining
Life | Weighted
Average
Exercise
Price | Number
Exercisable | Weighted
Average
Exercise
Price
|--------------- | ------------------- | ------------------------------- | ------------------------------- | ------------------ | -------------------------------
|$5.720 - $6.000 |                     | 481,000                         |                                 | 9.57               | $                              
|$6.350 - $7.990 |                     | 506,400                         |                                 | 9.30               | $                              
|$9.125          |                     | 10,200                          |                                 | 4.87               | $                              
|$15.00 - $18.00 |                     | 183,500                         |                                 | 3.66               | $                              
|$23.00 - $24.88 |                     | 1,285,596                       |                                 | 3.77               | $                              

The Company applies  Accounting  Principles  Board Opinion No. 25 and related  interpretations,  in accounting for its stock option
plan.  Accordingly,  no  compensation  cost has been recognized for options granted at or above fair market value at the time of grant.
For the grants  that were made at an option  price  lower than fair  market  value at the time of grant,  compensation  expense  was as
follows:

|Continuing Operations
|---------------------
|
|
|2005                 
|2004                 
|2003                 

51



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# (13) Selected Quarterly
Data (Unaudited)

|                          | Q-1 | Q-2 | Q-3 | Q-4    | Year
|------------------------- | --- | --- | --- | ------ | ----
|
|2005                      |     |     |     |        |     
|Net revenues              |     |     | $   | 9,643  |     
|Operating loss            |     |     |     | (1,973 | )   
|Net loss                  |     |     |     | (4,578 | )   
|Net loss per common share |     |     |     | (0.29  | )   
|                          |     |     |     |        |     
|2004                      |     |     |     |        |     
|Net revenues              |     |     | $   | 9,208  |     
|Operating loss            |     |     |     | (1,708 | )   
|Net loss                  |     |     |     | (3,352 | )   
|Net loss per common share |     |     |     | (0.20  | )   
|                          |     |     |     |        |     

The
Company has reclassified the results of operations of its Salt Lake City station to
discontinued operations for all quarters presented. The Salt Lake City station is subject
to a sale which is expected to close in early April 2006.

# (14) Subsequent Events

Credit Facility
Restructure and Completion of Clear Channel Transaction

On
March 29, 2006, the Company completed the restructuring of its credit facilities, entering
into the Third Amended and Restated Loan and Security Agreement (the Amended
Foothill Facility) with its senior facility lenders and amending the Second Lien
Loan and Security Agreement. The Amended Foothill Facility eliminates all financial
covenants effective December 31, 2005, provides for an initial $10 million borrowing to
reduce the Companys outstanding balance on its SLTL and resets its maximum borrowings
to the lesser of $60 million or 50% of our stations aggregate appraised
STAC (start-up station with affiliation contract) values, which are lower than
the fair value of our station group. Furthermore, upon the
completion of the Clear Channel Transaction, the amendment allows $10 million of the $18.5 million sale
proceeds to be used to pay down the rest of the SLTL (with the remaining $8.5 million of
the proceeds to be used to reduce the outstanding borrowings under the Amended Foothill
Facility), allows up to $20 million in stock repurchases and extends the facilitys
maturity to May 2009. The Companys amendment to the SLTL eliminates all financial
covenants effective December 31, 2005, reduces the prepayment penalty and requires that
$10 million of the Clear Channel Transaction proceeds be used to repay and terminate the
facility. The Company did not file its 2005 annual audited
financial statements with the lenders by the due date required
and the lenders extended the due date until April 14th, 2006.

The
Clear Channel Transaction was completed on April 4, 2006 and on that date the SLTL was
repaid in full and terminated and the Company reduced its outstanding borrowings under
Amended Foothill Facility by the approximate $8.5 million balance of the Clear Channel
Transaction proceeds. These repayments of $18.5 million from the proceeds of the Clear
Channel Transaction have been classified on our balance sheet as current liabilities as of
December 31, 2005. Based on the current STAC value of the Companys remaining
stations, our maximum borrowings post the Clear Channel Transaction are approximately $56
million. Our availability as of April 4, 2006 under the revolver, net of approximately
$1.9 million associated with lender reserves for projected six-month cash interest
payments was approximately $16.9 million.

Network Affiliation
Agreements

On January 24, 2006, Warner Bros.
Entertainment and CBS Corporation jointly announced that they would cease operations of
their respective networks, The WB and UPN, in September 2006 at the conclusion of the
current broadcast season. They concurrently announced the formation of a new
network, The CW, which will be a 50/50 joint venture that will launch in September 2006.
The CW Networks programming will include popular shows currently airing on The WB
and UPN. In March 2006, the Company entered into long-term affiliation agreements with The
CW for all of its WB Network affiliated stations.

On February 22, 2006, Fox announced
that it was launching a new network, MyNetworkTV, in September 2006. On March 10, 2006,
the Companys station KASY serving the Albuquerque-Santa Fe marketplace and currently
a UPN affiliate, entered into a five year affiliation agreement with MyNetworkTV.

52



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# ITEM 9. Changes In and
Disagreements with Accountants on Accounting and Financial Disclosure

Not applicable.

# ITEM 9A. Controls and
Procedures

Conclusion Regarding the
Effectiveness of Disclosure Control and Procedures

Disclosure
controls and procedures are designed to ensure that information required to be disclosed
in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the required time periods. As of
December 31, 2005, the end of the period covered by this report, the Company carried out
an evaluation under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective. The
Company reviews its disclosure controls and procedures, on an ongoing basis, and may from
time to time make changes aimed at enhancing their effectiveness and to ensure that they
evolve with the Companys business.

In
addition, no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth
quarter of our fiscal year ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

Because
of the inherent limitations, internal control over financial reporting may not prevent or
detect all misstatements. Therefore, even those systems, controls and procedures
determined to be effective can only provide reasonable assurance with respect to financial
statement preparation and presentation.

# ITEM 9B. Other
Information

On March 29, 2006 the Company restructured its credit facilities.

On April 4, 2006 the Company completed the Clear Channel Transaction.

53



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PART III

# ITEM 10. Directors and
Executive Officers of the Registrant

# Executive Officers of
the Registrant

The
following table sets forth information about our executive officers at December 31, 2005:

|Name            | Age(1) | Position                                                         
|--------------- | ------ | -----------------------------------------------------------------
|Jamie Kellner   | 58     | Chairman of the Board and Chief Executive Officer                
|Douglas Gealy   | 45     | President and Chief Operating Officer and Director               
|Thomas Allen    | 53     | Executive Vice President and Chief Financial Officer and Director
|Edward Danduran | 53     | Vice President and Controller                                    

---

| | (1) | as of March 30, 2006
| | --- | --------------------

Jamie
Kellner is a founder of ACME and has served as our Chief Executive Officer and Chairman of
the Board since 1997. Mr. Kellner co-founded The WB Network in 1993 and served as its
Chairman and Chief Executive Officer from 1994 until June 2004. Mr. Kellner was President
of Fox Broadcasting Company from its inception in 1986 to 1993. Mr. Kellner also served as
Chairman and Chief Executive Officer of Turner Networks, a division of AOL-Time Warner,
from March 2001 to February 2003.

Douglas
Gealyis a founder of ACME and has served as our President and Chief Operating Officer
and as a member of our Board since 1997. Since December of 1996, Mr. Gealy has been
involved in development activities for ACME. Before founding ACME, Mr. Gealy served for
one year as Executive Vice President of Benedek Broadcasting Corporation. From 1991 to
1996, Mr. Gealy was a Vice President and General Manager of WCMH and its local marketing
agreement, WWHO, both in Columbus, Ohio, and following the acquisition of these stations
by NBC, served as President and General Manager of these stations.

Thomas
Allenis a founder of ACME and has served as our Executive Vice President and Chief
Financial Officer and as a member of our Board since 1997. Since June 1996, Mr. Allen has
been involved in development activities for ACME. From August 1993 to May 1996, Mr. Allen
was the Chief Operating Officer and Chief Financial Officer for Virgin Interactive
Entertainment, Inc. Before that Mr. Allen served as Senior Vice President and Chief
Financial Officer of the Fox Broadcasting Company from 1986 to 1993.

Edward
Danduranhas been our Vice President and Controller since July 1997. From November
1995 until April 1997, Mr. Danduran was a Financial Consultant for Virgin Interactive
Entertainment, Inc. From 1989 to 1995, Mr. Danduran was the Chief Financial Officer of
Phoneby, a business communications company.

The remaining portion of the
information required by Item 10 is incorporated by reference to our Proxy Statement to be
filed pursuant to Regulation 14A relating to the 2006 Annual Meeting of Stockholders.

# ITEM 11.Executive
Compensation

Item incorporated by reference to our
Proxy Statement to be filed pursuant to Regulation 14A relating to the 2006 Annual Meeting
of Stockholders.

# ITEM 12.Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item incorporated by reference to our
Proxy Statement to be filed pursuant to Regulation 14A relating to the 2006 Annual Meeting
of Stockholders.

# ITEM 13. Certain
Relationships and Related Transactions

Item incorporated by reference to our
Proxy Statement to be filed pursuant to Regulation 14A relating to the 2006 Annual Meeting
of Stockholders.

54



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# ITEM 14.Principal
Accountant Fees and Services

Item incorporated by reference to our
Proxy Statement to be filed pursuant to Regulation 14A relating to the 2006 Annual Meeting
of Stockholders.

PART IV

# ITEM 15. Exhibits and
Financial Statement Schedules

1.    
          FINANCIAL STATEMENTS  As listed in the Index to Financial Statements on
          page 32 hereof.

2.    
          FINANCIAL STATEMENT SCHEDULES

The following financial statement
schedules are included in Item 15 (d):

Schedule
I  Condensed Financial Information of ACME Communications, Inc. (Parent Company):


Balance Sheet as of December 31, 2005 and 2004.

 Statements
of Operations for the years ended December 31, 2005, 2004 and, 2003.


Statements of Stockholders Equity for the years ended December 31, 2005, 2004 and,
2003.


Statements of Cash Flows for the years ended December 31, 2005, 2004 and, 2003.


Notes to the Condensed Financial Statements

Schedule
II  Valuation and Qualifying Accounts

All
other schedules have been omitted since the required information is not present or not
present in amounts sufficient to require submission of the schedule, or because the
information required is included in the consolidated financial statements or the notes
thereto, included in Item 8 herewith.

3. Index to Exhibits filed as part of this report

As
listed in the Exhibit Index beginning on page 63 hereof.

55



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SIGNATURES

Pursuant to the requirements of
Sections 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

|April 7, 2006 |  | ACME Communications, Inc.
By:/s/ Thomas D. Allen
Thomas D. Allen
Executive Vice President &
  Chief Financial Officer
|------------- |  | ---------------------------------------------------------------------------------------------------------------------

Pursuant to the requirements of the
Securities Exchange Act of 1934, this Annual Report on Form 10-K has been signed by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated.

Each Person whose signature appears below hereby authorizes Douglas E. Gealy
and Thomas D. Allen, or either of them, as attorneys-in-fact to sign on behalf, individually, and in the capacity stated below, and to file all amendments and/or supplements to this Annual Report on Form 10-K

|Signature                                   | Capacity                                                                                                   | Date         
|------------------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------
|/s/ Jamie Kellner
Jamie Kellner             | Chairman of the Board and Chief Executive Officer(Principal Executive Officer)                             | April 7, 2006
|/s/ Douglas Gealy
Douglas Gealy             | President, Chief Operating Officer and Director                                                            | April 7, 2006
|/s/ Thomas D. Allen
Thomas D. Allen         | Executive Vice President, Chief Financial Officer(Principal Financial and Accounting Officer) and Director | April 7, 2006
|/s/ James Collis
James Collis               | Director                                                                                                   | April 7, 2006
|/s/ Thomas Embrescia
Thomas Embrescia       | Director                                                                                                   | April 7, 2006
|/s/ Michael G. Corrigan
Michael G. Corrigan | Director                                                                                                   | April 7, 2006
|/s/ John E. Conlin
John E. Conlin           | Director                                                                                                   | April 7, 2006
|/s/ Brian McNeill
Brian McNeill             | Director                                                                                                   | April 7, 2006
|                                            |                                                                                                            |              

56



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# Schedule I

|ACME Communications, Inc.
(Parent Company)
Condensed Financial Information
Balance Sheets(in thousands, except for share data)
|------------------------------------------------------------------------------------------------------------------------------
|
|ASSETS                                                                                                                        
|                                                                                                                              
|Current assets:                                                                                                               
|Cash and cash equivalents                                                                                                     
|Total current assets                                                                                                          
|Investment in and advances to subsidiaries                                                                                    
|Total assets                                                                                                                  
|                                                                                                                              
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                          
|Liabilities                                                                                                                   
|                                                                                                                              
|Stockholders' equity:                                                                                                         
|Preferred stock, $.01 par value; 10,000,000 shares authorized, no                                                             
|shares issued or outstanding                                                                                                  
|Common stock, $.01 par value; 50,000,000 shares authorized,                                                                   
|16,772,415 shares issued and outstanding at December 31, 2005                                                                 
|and December 31, 2004, respectively                                                                                           
|Additional paid-in capital                                                                                                    
|Accumulated deficit                                                                                                           
|Less: Treasury stock, at cost, 725,652 shares                                                                                 
|Total stockholders' equity                                                                                                    
|Total liabilities and stockholders' equity                                                                                    
|                                                                                                                              

See notes to condensed financial statements.

57



---

# Schedule I (Continued)

|ACME Communications, Inc. (Parent Company)
         Condensed Statement of Operations(In thousands)
|---------------------------------------------------------------------------------------------------
|
|
|Interest income                                                                                    
|Income before equity in the net income (loss) of subsidiaries                                      
|Equity in the net income (loss) of subsidiaries                                                    
|Net income (loss)                                                                                  

See notes to condensed financial statements.

58



---

# Schedule I (Continued)

|ACME Communications, Inc.(Parent Company) 
Condensed Statements of Stockholders' Equity(In thousands)
|-----------------------------------------------------------------------------------------------------
|
|Balance at December 31, 2002                                                                         
|Exercise of stock options                                                                            
|Amortization of deferred compensation                                                                
|Net income                                                                                           
|                                                                                                     
|Balance at December 31, 2003                                                                         
|Exercise of stock options                                                                            
|Amortization of deferred compensation                                                                
|Purchase of treasury stock, at cost                                                                  
|Net loss                                                                                             
|                                                                                                     
|Balance at December 31, 2004                                                                         
|Net loss                                                                                             
|Balance at December 31, 2005                                                                         

See notes to the condensed financial statements.

59



---

# Schedule I (Continued)

|ACME Communications, Inc.(Parent Compnay)
   Condensed Statement of Cash Flows(In thousands)
|--------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:                                                       
|Net income (loss)                                                                           
|Adjustments to reconcile net loss to net cash provided by                                   
|operating activities:                                                                       
|Equity in net (income) loss of subsidiary                                                   
|Changes in assets and liabilities                                                           
|Decrease in accounts payable                                                                
|Net cash provided by (used in) operating activities                                         
|Cash flows provided by investing activities:                                                
|Investments in and advances to subsidiaries                                                 
|Net cash used in investing activities                                                       
|Cash flows from financing activities:                                                       
|Proceeds from stock option exercises                                                        
|Net cash provided by financing activities                                                   
|                                                                                            
|Net increase (decrease) in cash                                                             
|Cash and cash equivalents at beginning of period                                            
|Cash and cash equivalents at end of period                                                  
|                                                                                            
|Supplemental disclosures of
     cash flow information:                                     
|Cash Payments for:                                                                          
|Interest                                                                                    
|Taxes                                                                                       
|                                                                                            

See notes to condensed financial statements.

60



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# ACME Communications,
Inc.

# (Parent Company)

# Notes to Condensed
Financial Information

1. Formation and Basis of
Presentation

Pursuant to
the rules and regulations of the Securities and Exchange Commission, the Condensed
Financial Statements of ACME Communications, Inc., do not include all of the information
and notes normally included with financial statements prepared in accordance with
generally accepted accounting principles. It is therefore suggested that these Condensed
Financial Statements be read in conjunction with the Consolidated Financial Statements
and Notes thereto included at Item 8 of this filing.

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

During 2002, the Companys
subsidiaries, accounted for on the equity method, entered into transactions to sell their
St. Louis and Portland stations. The sales were completed on March 21, 2003. On August 4,
2005, the Companys subsidiary announced that it had entered into an agreement to
sell its Salt Lake City station. That sale closed on April 4, 2006 (see Note 14 in the
Consolidated Financial Statements included in Item 8 of this filing). The results of
operations for these stations have been reported as discontinued operations in the
consolidated financial statements.

The
accompanying condensed financial statements are presented for ACME Communications, Inc.

2. Cash Dividends

There
have been no cash dividends declared by the Company.

3. Revolving Credit
Facility, Second-Lien Term Loan and Restricted Assets

The
Companys wholly-owned indirect subsidiary, ACME Television, LLC, is a borrower under
a revolving credit facility and a second-lien term loan, both of which restrict the
distribution of any dividends or assets from ACME Television to its direct or indirect
parents. The net assets of ACME Television at December 31, 2005 were approximately $53.0
million.

4. Reclassifications

Certain
amounts previously reported have been reclassified to conform to the 2004 financial
statement presentation.

61



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# Schedule II

# ACME Communications,
Inc.

# VALUATION AND
QUALIFYING ACCOUNTS

# For The Years Ended
December 31, 2004 and 2003 and 2002(In thousands)

|Allowance for
Doubtful Accounts | Balance at
Beginning
of Period | Additions
Charged to
Expense | Deductions | Transfer to
Assets Held
For Sale | Balance at
End of
Period
|------------------------------- | ------------------------------ | ---------------------------- | ---------- | -------------------------------- | ------------------------
|Year ended December 31, 2005    |                                |                              | $          | 839                              |                         
|Year ended December 31, 2004    |                                |                              | $          | 770                              |                         
|Year ended December 31, 2003    |                                |                              | $          | 920                              |                         

62



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# EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                                                                                             
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 (1)       | Form of Restated Certificate of Incorporation of ACME Communications, Inc.                                                                                                                                                              
|3.2 (1)       | Form of Restated Bylaws of ACME Communications, Inc.                                                                                                                                                                                    
|4.1 (1)       | Form of Stock Certificate of ACME Communications, Inc.                                                                                                                                                                                  
|10.1 (2)      | Employment Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Douglas Gealy.                                                                                                                                
|10.2 (2)      | Employment Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Thomas Allen.                                                                                                                                 
|10.3 (2)      | Consulting Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Jamie Kellner.                                                                                                                                
|10.4 (3)      | Employment Agreement, dated October 21, 2004 by and between ACME Communications,
Inc. and Edward Danduran.                                                                                                                              
|10.5 (4)      | Employment Agreement, dated October 21, 2004 by and between ACME Communications,
Inc. and Edward Danduran.                                                                                                                              
|10.5 (4)      | Loan and Security Agreement by and among ACME Television, LLC, the Lenders that
are signatories thereto and Fortress Credit Corp., as Arranger and Administrative Agent, dated November 8, 2004.                                        
|10.6 (5)      | 1999 Stock Incentive Plan                                                                                                                                                                                                               
|10.7 (6)      | Stock Purchase Agreement among ACME Communications, Inc., ACME Television, LLC and
Tribune Broadcasting Company dated December 27, 2002.                                                                                                
|10.8 (6)      | Asset Purchase Agreement among ACME Communications, Inc., ACME Television of
Oregon, LLC, ACME Television, Licenses of Oregon, Tribune Broadcasting Company and
Tribune Radio Denver, Inc. dated December 27, 2002.                     
|10.9 (1)      | Form of Registration Rights Agreement, by and among ACME Communications, Inc. and
parties on the signature page thereto.                                                                                                                
|10.10 (7)     | First Amendment to
Employment Agreement between Douglas Gealy and ACME
Communications, Inc. dated August 26, 2003.                                                                                                                      
|10.11 (7)     | First Amendment to Employment Agreement between Thomas Allen and ACME
Communications, Inc. dated August 26, 2003.                                                                                                                       
|10.12 (7)     | First Amendment to
Consulting Agreement between Jamie Kellner and ACME
Communications, Inc. dated August 26, 2003.                                                                                                                      
|10.14 (8)     | Form of Indemnification Agreement for Executive Officers and Directors                                                                                                                                                                  
|10.15 (3)     | First Amendment to the Second Amended and Restated Loan Agreement by and among
ACME Television, LLC, the Lenders that are signatories thereto and Wells Fargo
Foothill, Inc., as Arranger and Administrative Agent, dated March 9, 2005.
|10.16 (9)     | Asset Purchase Agreement Dated August 8, 2005 between ACME Television of Utah,
     LLC, ACME Television Licenses of Utah, LLC, Clear Channel Broadcasting, Inc. and
Clear Channel Broadcasting Licenses, Inc.                          
|10.17 (9)     | Second Amendment to the Loan and Security Agreement by and among ACME Television,
LLC, the Lenders that are signatories thereto and Fortress Credit Corp., as
Arranger and Administrative Agent, dated November 7, 2005.                

63



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|10.18      | Agreement between ACME Television, LLC and The CW Network dated March 9, 2006.**                                                                                                                                                                                                   
|---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.19      | Agreement between ACME Television of New Mexico, LLC and MyNetworkTV dated March
10, 2006.                                                                                                                                                                                         
|10.20 (10) | Third Amendment to the Second Amended and Restated Loan and Security Agreement by and among ACME Television,
                 LLC, the Lenders that are signatories thereto and Fortress Credit Corp., as
                 Arranger and Administrative Agent, dated March 28, 2006.
|10.21 (10) | Third Amended and Restated Loan Agreement by and among ACME Television, LLC, the
                 Lenders that are signatories thereto and Wells Fargo Foothill, Inc., as Arranger
                 and Administrative Agent, dated March 28, 2006.                                
|23.1       | Consent of KPMG LLP.                                                                                                                                                                                                                                                               
|24.1       | Power of Attorney (contained on "Signatures" page).                                                                                                                                                                                                                                
|31.1       | Certification of Chief Executive Officer pursuant to Rules 13a-14(a) under the
Securities and Exchange Act of 1934, as amended                                                                                                                                                     
|31.2       | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) under the
Securities and Exchange Act of 1934, as amended                                                                                                                                                     
|32         | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                                          

| |  | 
| |  | 

| | (1) | Incorporated
 by  reference  to the  Registration  Statement  for  ACME  Communications,  Inc.  on
Form  S-1,  File No. 333-84191, filed on September 29, 1999.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (2) | Incorporated
by reference to ACME Communications, Inc.s Annual Report on Form 10-K for the year
ended December 31, 1999.
| | --- | -------------------------------------------------------------------------------------------------------------------------

| | (3) | Incorporated
by reference to ACME Communications, Inc.s Annual Report on           Form 10-K for
the year ended December 31, 2004.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | (4) | Incorporated
by reference to ACME Communications, Inc.s Current Report on Form 8-K filed on
November 12, 2004.
| | --- | ---------------------------------------------------------------------------------------------------------------

| | (5) | Incorporated
by reference to ACME Communications, Inc.s Registration Statement on Form S-8 filed
on April 12, 2002.
| | --- | --------------------------------------------------------------------------------------------------------------------

| | (6) | Incorporated
by reference to ACME Communications, Inc.s Current Report on Form 8-K filed on
December 31, 2002.
| | --- | ---------------------------------------------------------------------------------------------------------------

| | (7) | Incorporated
by reference to ACME Communications, Inc.s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2003.
| | --- | --------------------------------------------------------------------------------------------------------------------------------

| | (8) | Incorporated
by reference to ACME Communications, Inc.s Annual Report on           Form 10-K for
the year ended December 31, 2003.
| | --- | -----------------------------------------------------------------------------------------------------------------------------------

| | (9) | Incorporated
by reference to ACME Communications, Inc.s Quarterly Report           on Form 10-Q
for the quarter ended September 30, 2005
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------

| | (10) | Incorporated
by reference to ACME Communications, Inc.s Report on on Form 8-K
filed on April 7, 2006
| | ---- | -----------------------------------------------------------------------------------------------------

| | ** | portions of the exhibit have been omitted pursuant to the Companys request for
confidential treatment.
| | -- | -------------------------------------------------------------------------------------------------------

64