UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549
 
 
 FORM
10-K
 
 (Mark
One)
 xANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
 FORTHE FISCAL YEAR
ENDED DECEMBER 31, 2007
  OR
  oTRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
  FOR THE TRANSITION PERIOD
FROM TO
  Commission
file number:  000-27105
 
 ACME
COMMUNICATIONS, INC.
 (Exact name of registrant
as specified in its charter)
 
 Delaware
              
              33-0866283(State
      or other jurisdiction of
              
              (I.R.S.
      Employerincorporation
      or organization)
              
              Identification
      No.)
 2101
E. Fourth Street, Suite 202A, Santa Ana, California, 92705
 (Address
of principal executive offices) (Zip
Code)
 (714)
245-9499
 (Registrant’s
telephone number, including area code)
 
 None
 (Former
name, former address and former fiscal year, if changed since last
report)
 
  Securities
registered pursuant to Section 12(b) of the Act:
  Title
      of each class
              
              Name
      of each exchangeon
      which registeredCommon
      Stock,
                par
      value $.01 per share
              
              The
      NASDAQ Stock Market LLC
                (NASDAQ
      Global 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.
 [X]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or a smaller reporting
company.  See definitions of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act.
  Large accelerated
      filer [   ]
              Accelerated
      filer  [   ]
              Non-accelerated
      filer  [  ]
              Smaller reporting
      company  [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, 2007), the aggregate market value of the registrant’s common
stock held by non-affiliates of the registrant was $63,878,171 based on the
closing price of $5.01 per share on such date, as reported on the NASDAQ Stock
Market.  For the purposes of the foregoing calculation only, all of
the registrant's directors, executive officers and persons known to the
registrant to hold ten percent or greater of the registrant's outstanding common
stock have been excluded in that such persons may be deemed to be
affiliates.  This determination of affiliate status is not a
determination for other purposes.
 
 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 28, 2008Common
      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
      IncorporatedPortions
      of the Proxy Statement for the 2008
                Annual
      Meeting of Stockholders
              
              Part
      III
  
 
 ACME
COMMUNICATIONS, INC.
 ANNUAL
REPORT ON FORM 10-K
 TABLE
OF CONTENTS
 
 PagePART
      IItem
      1.
              Business
              1Item
      1A.
              Risk
      Factors
              14Item
      1B.
              Unresolved
      Staff Comments
              18Item
      2.
              Properties
              19Item
      3.
              Legal
      Proceedings
              19Item
      4.
              Submission
      of Matters to a Vote of Security Holders
              19PART
      IIItem
      5.
              Market
      for Registrant’s Common Equity, Related Stockholder Matters andIssuer
      Purchases of Equity Securities
              20Item
      6.
              Selected
      Financial Data
              **Item
      7.
              Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
              20Item
      8.
              Financial
      Statements
              28Item
      9.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
              49Item 9A(T).
              Controls
      and Procedures
              49Item
      9B.
              Other
      Information
              49PART
      IIIItem
      10.*
              Directors,
      Executive Officers and Corporate Governance
              50Item
      11.*
              Executive
      Compensation
              50Item
      12.*
              Security
      Ownership of Certain Beneficial  Owners and Managementand
      Related Stockholder Matters
              50Item
      13.*
              Certain
      Relationships and Related Transactions, and Director
      Independence
              51Item
      14.*
              Principal
      Accountant Fees and Services
              51PART
      IVItem
      15.
              Exhibits
              51Signatures
              
              52
 
 *
              Items
      incorporated by reference, in whole or in part, to our Proxy Statement to
      be filed pursuant to Regulation 14A relating to the 2008 Annual Meeting of
      Stockholders.**
              Not
      applicable.
  i
  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," "hopeful, " "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
Item 1A of 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.
 
 These
forward-looking statements speak only as of the date of this Annual Report on
Form 10-K.  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 (together, unless the
context otherwise requires, the "Company" or "we") owns and operates six
broadcast television stations (our “Continuing Stations”) in five medium-sized
markets across the United States, which includes a duopoly in the
Albuquerque-Santa Fe marketplace.  Five of these stations are network
affiliates of The CW Television Network and one station is a network affiliate
of MyNetworkTV. Our stations broadcast in markets that cover, in the aggregate,
approximately 2.2% of the total U.S. television households.  In
addition to our television stations, we also produce a three-hour weekday news
and lifestyle morning program, The Daily Buzz, which airs on all of our stations
and on over 140 television stations across the United States.
 
 Since 2003,
we have focused on reducing debt and attempting to monetize the value of our
station group through strategic station sales.  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 cash consideration of $275 million (the “Tribune Transaction”)
plus additional cash consideration in the amount of approximately $4.6 million
relating to KPLR’s closing-date working capital. In April 2006, we completed the
sale of 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.  In February 2007, we completed the sale of our
Ft. Myers – Naples, Florida station, WTVK, to Sun Broadcasting, Inc. (the “Sun
Transaction”) for $45.0 million in cash.  In October 2007, we
completed the sale of our Decatur station, WBUI, to Gocom Media of Illinois, LLC
for $4.0 million in cash.  We have accounted for the results of these
five stations as "discontinued operations" and our Continuing Stations represent
our continuing operations.
 
 Our stations
historically were affiliates of The WB Television Network and, in the case of
our second station in the Albuquerque-Santa Fe marketplace, an affiliate of
UPN.  On January 24, 2006, Warner Bros. and CBS jointly announced
that, effective September 2006, they would cease operations of their respective
networks, The WB and UPN, and create a new jointly-owned television network, The
CW Network (sometimes hereinafter referred to as “The CW”).
 
 In March
2006, after careful evaluation of each of the two new networks, we entered into
affiliation agreements with The CW for all of our then WB Network affiliated
stations.  We affiliated our second station in Albuquerque-Santa Fe,
our then UPN affiliate, with MyNetworkTV.
 
 Both The CW
and My Network TV launched in September 2006.  While most industry
observers anticipated that The CW would achieve stronger initial ratings than
either The WB or UPN individually achieved in the 2005/2006 season, the new
network’s ratings during their first full season actually declined compared to
the 2005/2006 season.  MyNetworkTV failed to produce any significant
ratings in its first full season and the performance of these two new networks
adversely affected our stations.
 
 Similar to
The WB Network’s approach, The CW focuses on younger demographics than the Big
Four networks (i.e. ABC, CBS, NBC and FOX).Accordingly,
we continue our strategy to focus much of our surrounding, non-network,
syndicated programming on shows that appeal to younger viewers.  In
addition, in some of our markets we broadcast local and regional sports
programming and in all of our markets we provide local news and weather updates
during our morning news show, The Daily Buzz. 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.
  1
 
 We believe
that medium-sized (“middle”) markets provide certain advantages such as fewer
competitors and lower operating costs compared to large markets. We continue to
focus on a strategy 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
sales and operating margins.
 
 We commenced
operations in 1997, and ACME Communications, Inc. was incorporated as our
holding company in Delaware in 1999 in connection with our initial public
offering.  Our executive office telephone number is (714)
245-9499.
 
 Our
Development, Strategy and Outlook
 
 We formed
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.
  Over the
past three years, the growth of television non-political advertising revenues
has slowed significantly – both in general and in our continuing
markets.  Political advertising demand continues to be strong in the
even, election years, but also continues to be spent almost exclusively at the
three older-skewing major networks’ – ABC, CBS and NBC - affiliated
stations.  Accordingly, our stations do not directly benefit from this
biennial spike in advertising demand.  We do, however, benefit
indirectly in that inventory levels at these stations is much tighter and we
typically are able to garner a higher share of non-political (or “regular”)
business.
 
 In 2007,
aggregate regular advertising revenues in our markets grew just under 1% over
2006 levels, following a decline in market revenues of 4.2% in 2006 and an
increase of 7.9% in 2005.
 While there
is expected to be significant political advertising demand in 2008, especially
in light of expected hotly contested presidential primaries and general
election, the major benefactors of this political advertising will again be
affiliates of ABC, CBS and NBC.  We are hopeful that our stations
might have an opportunity to attract some of this political demand as we
anticipate at least some of the national, state and local candidates making a
new effort to attract younger voters.  Regular business will be much
more dependent on the overall health of the national and local
economies.  Many economists have predicted that the country is headed
into a recession, led by high fuel prices, the continued fall-out of sub-prime
mortgages and turmoil in the equity and credit markets.  Our ability
to grow our revenues in 2008 depends upon, among other factors, the economic
health of our markets and our ability to increase viewership or market share at
our stations.
 
 We do not
intend to expand our portfolio of stations and will continue to attempt to sell
our stations to monetize shareholder value.  However, the current
merger and acquisition market for most media business, and television and radio
in particular, remains weak with fewer buyers and less financing available than
compared to recent years.  While we are hopeful that there will
eventually be opportunities to monetize our station assets at prices we consider
fair, such opportunities may take much longer to develop or may not materialize
at all.
 
 Programming
 
 Our current
programming includes:
 
 •
              The
      CW Network prime time programming (at five of our Continuing
      Stations);
 
 •
              The
      MyNetworkTV prime time programming (at one of our Continuing
      Stations);
 
 •
              The
      CW Network weekday afternoon
programming;
 
 2
  •
              Kids'
      WB! Saturday morning programming (at six of our Continuing
      Stations);
 
 •
              Syndicated
      programming;
 
 •
              The Daily Buzz, a
      three-hour morning news program (at all of our Continuing Stations);
      and
 
 •
              Local
      programming.
 
 Prime Time
Programming.In prime time, The CW Network has the youngest average age
of viewers compared with the other network broadcasters. Prime time programming
includes America’s Next Top
Model, Smallville, SupernaturalandEverybody Hates Chris. The
CW Network currently provides 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 current CW Network prime
time shows.
 
 Kids' WB!
Programming.Kids'
WB!, originally launched by The WB Network in September 1995, airs as a 5-hour
block on Saturday mornings on all of our CW affiliated
stations.  Programs in this program block include Tom and Jerry Tales, ShaggyandScooby-Doo
and The Spectacular
Spider-Man.
  Syndicated Programming.In
addition to The CW Network and MyNetworkTV 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 CW Network and
MyNetworkTV prime time programs. These syndicated programs include Family Guy, Two and a Half Men, That
70s Show, Friends, Seinfeld, Everybody Loves Raymond, King of Queens,
According to Jim, Will and Grace,andKing of the Hill.We have
secured future broadcast rights for certain of our stations toThe Office (fall 2009)and
second cycle rights to Everybody Loves Raymond, King of
Queensand That 70s
Show.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
morning news show. Effective January 1, 2004, we formed a new production entity,
The Daily Buzz, LLC and began jointly producing the program with Emmis
Television Broadcasting, L.P. (“Emmis”), a subsidiary of Emmis Communications
Corporation.  On March 14, 2007, we acquired Emmis’ 50% share of the
Daily Buzz, LLC and became the sole producer and owner of the
program.  The program currently airs on 146 stations, including all of
our CW Network affiliated stations and Emmis’ sole CW Network affiliate and on
The CW 100+ Cable Group (which airs on cable in more than 100 small markets
across the country), representing markets that cover, in the aggregate,
approximately 39% of U.S. households. The show is produced in Orlando, Florida,
and in addition to traditional news, weather and sports related stories,
contains entertainment, technology and lifestyle segments.
 
 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 30-minute nightly newscast on our
Dayton station and a 10-minute weeknight newscast on our Knoxville
station.  Both of these newscasts are produced for us by other network
affiliates in our markets.
  3
 
 Our
Stations and Markets
 
 The
following table provides general information concerning our Continuing
Stations:
 Number
      ofStation
              
              CommercialMarket
              Calls
      /
              
              Stations
      in
              Station
              Station
              ACMEMarketplace
              Rank
    (1)
              Channel
              Affiliation
              Market
    (2)
              Rank
    (3)
              Share
    (4)
              OperationAlbuquerque
      - Santa Fe, NM
              44
              KWBQ
      / 19/20
              CW
              6
              5
              5
              March
      1999KASY
      / 50
              MNT
              6
              6
              1
              November
      1999KWBR
      / 21
              CW
      (5)
              See
      (5)
              See
      (5)
              See
      (5)
              January
      2003Knoxville,
      TN
              58
              WBXX
      / 20
              CW
              5
              5
              6
              October
      1997Dayton,
      OH
              62
              WBDT
      / 26
              CW
              5
              5
              7
              June
      1999Green
      Bay - Appleton, WI
              70
              WIWB
      / 14
              CW
              6
              5
              4
              June
      1999Madison,
      WI
              85
              WBUW
      / 57
              CW
              5
              5
              3
              November
      2002
 
 (1)
              All
      television stations throughout the United States are grouped by Nielsen
      Media Research into 210 markets that are ranked in size according to the
      number of households with televisions in the market for the 2007/2008
      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 ratings rank, excluding Spanish-language stations, based on
      the average of the February, May and November 2007 major ratings periods,
      for adult viewers ages 18-49 on a Monday through Sunday, 5:00 p.m. to
      midnight basis, as measured by Nielsen Media
  Research.
 (4)
              Station
      share based on the average of the February, May and November 2007 major
      ratings periods, for adult viewers ages 18-49 on a Monday through Sunday,
      5:00 p.m. to midnight basis.
 (5)
              KWBR
      is a full-power satellite station of KWBQ, 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: 44
              TV
      Households: 677,740Total
      Age 2+ Population: 1,710,000
 
 Market Description.Thirty-three
percent of the total population of Albuquerque - Santa Fe is under 25 years of
age. The estimated median household income in the Albuquerque - Santa Fe market
is approximately $46,800 per year. Major employers in the market include Intel,
Motorola, General Electric, General Mills, Philips, Tempur-Pedic and Levi
Strauss.  The Albuquerque - Santa Fe marketplace has experienced
faster than average growth, having moved up in market rank over the past three seasonsfrom #47 in the 2004 / 2005 season to market rank #44 in the 2007 / 2008
season.
  KWBQ Station
Overview.We launched KWBQ in March 1999 with The WB Network prime time
programming and Kids' WB! In September 2006, the station became the market’s CW
Network affiliate.  In addition, the station's syndicated programming
(which generally can be aired on either KWBQ or on KASY) currently includes
Family Guy, Two and a Half
Men, Friends, Seinfeld, and That 70s Show.The station has
contracted for the future exclusive-market broadcast rights to the off-network
show The Office,which
begins airing in September 2009. Additionally, the station has contracted for
the future second-cycle rights to That 70s
Show.KWBQ delivered a 2006 / 2007 Season Average rating of
1.6 among adult viewers ages 18-49 for the 5 p.m. - midnight, Monday through
Sunday, time period – a 14% increase over the comparable Season Average rating
for the 2005 / 2006 broadcast season.
  4
 
 KASY Station
Overview.We began operating KASY, the then UPN affiliate in the market,
under an interim local marketing agreement (“LMA”) in November 1999 and closed
our purchase of the station in December 1999. The station was 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. In
September 2006, the station became the market’s MyNetworkTV
affiliate.  The station's syndicated programming includes Everybody Loves Raymond, The King of Queens,
King of the Hill, Judge Alex,  Judge Joe BrownandLaw and Order. Additionally,
the station has contracted for the future second-cycle rights to King of Queens and Everybody Loves
Raymond.  All of the future program rights negotiated for KWBQ
are also available to air on KASY. KASY delivered a 2006 / 2007 Season Average
rating of 0.3 among adult viewers ages 18-49 for the 5 p.m. - midnight, Monday
through Sunday, time period – a 40% decrease from the comparable Season Average
rating for the 2005 / 2006 broadcast season.
  WBXX:
Knoxville, Tennessee
 
 Designated
      Market Area: 58
              TV
      Households: 534,410Total
      Age 2+ Population: 1,243,000
 
 Market Description.Twenty-nine percent of the total population of Knoxville is under 25
years of age. The estimated median household income in the Knoxville market is
approximately $42,000 per year. Major employers in the market include the
University of Tennessee, TVA, Oakridge National Laboratories, Alcoa and Bush
Brothers and Company.
 
 Station Overview.We
launched WBXX in October 1997 as the market’s WB Network affiliate. In September
2006, the station became the market’s CW affiliate.  The station's
syndicated programming currently includes Family Guy, Friends, That 70s
Show, King of the
Hill, King of QueensandAccording to
Jim.In September 2004, the station began airing a weeknight
10-minute newscast produced by the number one rated news affiliate in the market
and that news product continues through today.  The station has
contracted for the second cycle rights of That 70s ShowandKing of
Queens.  WBXX delivered a 2006 / 2007 Season Average rating of
1.8 among adult viewers ages 18-49 for the 5 p.m. - midnight, Monday through
Sunday, time period – a 6% increase from the comparable Season Average rating
for the 2005 / 2006 broadcast season.
  WBDT:
Dayton, Ohio
 
 Designated
      Market Area: 62
              TV
      Households: 511,220Total
      Age 2+ Population: 1,211,000
 
 Market Description.Thirty-two percent of the total population of Dayton, Ohio is under 25
years of age. The estimated median household income in the Dayton market is
approximately $49,900 per year. Major employers in the market include Chrysler
Corp/Acustar Inc., General Motors, NCR, Reynolds & Reynolds and Lexis
Nexis.  The Dayton market continues to decline in ranking and fell
four spots from market #58 in the 2006/2007 season to market #62 in the
2007/2008.
 
 Station Overview.We acquired WBDT in June 1999. WBDT signed on the air in October 1980 and
became an affiliate of The WB Network when we acquired the station. In September
2006, the station became the market’s CW affiliate.  The station's
syndicated programming currently includes Family Guy, Two and a Half Men,
That 70s Show, Friends,
Everybody Loves Raymond, King of QueensandMalcolm in the Middle,and
the station has contracted for the second-cycle rights to Everybody Loves Raymond, That 70s
ShowandKing of
Queens. Beginning in September 2007, WBDT began a ten o’clock news in
partnership with the local NBC affiliate.  WBDT delivered a 2006 /
2007 Season Average rating of 2.1 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 2005 / 2006 broadcast
season.
  WIWB: Green Bay -
Appleton, Wisconsin
 
 Designated
      Market Area: 70
              TV
      Households: 439,940Total
      Age 2+ Population: 1,054,000
 
 Market Description.Thirty-one percent of the total population of Green Bay - Appleton is
under 25 years of age. The estimated median household income in the Green Bay -
Appleton market is approximately $52,300 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.
  5
 
 Station Overview.We acquired WIWB in June 1999. WIWB signed on the air in August 1998 and
became an affiliate of The WB Network when we acquired the
station.  In September 2006, the station became the market’s CW
affiliate.  The station's syndicated programming currently includes
Family Guy, That 70s Show, Friends, Everybody Loves
Raymond, King of Queensand Will &
Grace.  The station has contracted for the second-cycle rights
to That 70s Show, Everybody
Loves Raymondand King
of Queens. WIWB delivered a 2006 / 2007 Season Average rating of 1.1
among adult viewers ages 18-49 for the 5 p.m. - midnight, Monday through Sunday,
time period – a 22% increase over the comparable Season Average rating for the
2005 / 2006 broadcast season.
  WBUW:
Madison, Wisconsin
 
 Designated
      Market Area: 85
              TV
      Households: 372,990Total
      Age 2+ Population: 880,000
 
 Market Description.Thirty-one percent of the total population of Madison is under 25 years
of age. The estimated median household income in the Madison market is
approximately $64,700 per year. Madison is the state capital 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 Family Guy, That 70s Show, Friends,
King of Queensand Sex
in the City.  The station has contracted for the second-cycle
rights toThat 70s ShowandKing of
Queens. WBUW delivered a 2006 / 2007 Season Average rating of 0.8 among
adult viewers ages 18-49 for the 5 p.m. - midnight, Monday through Sunday time
period – essentially unchanged compared to the Season Average rating for the
2005 / 2006 broadcast season.
  Our
Affiliation Agreements
 
 Our five
Continuing Stations that are affiliates of the CW Network have affiliation
agreements which provide each station with the exclusive right to broadcast the
applicable networks’ programming in its respective market and have up to 10 year
terms that expire in September 2016.  Our affiliation agreement at our
one MyNetworkTV affiliate 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 approximately
14% of the commercial inventory in the Saturday morning block.
 
 Each of our
Continuing Stations affiliated with The CW is also subject to annual
compensation payments to The CW beginning with the 2008 / 2009 season. 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 compensation payment.  We expect
all of our stations 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
 
 Substantially all of
our television station 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.  Our revenues at The Daily Buzz consist of
both national advertising and sponsorship revenues and license fees charged to
licensees of the program.
  6
  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 63% of
our Continuing Stations’ advertising revenues in 2007, and 62% in
2006.
  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 37% of our Continuing
Stations’ advertising revenues in 2007 and 38% in 2006.  National spot
advertising primarily comes from:
 •
              new
      advertisers wishing to test a
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.
 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 CW
Network, MyNetworkTV 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 CW Network
      and MyNetworkTV.
 
 However,
because The CW and MyNetworkTV 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.
 
 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 Federal Communications Commission (“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 may lead to decreased
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.
  7
 
 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.
 
 Transition
to Digital
 
 As mandated
by the FCC, all broadcast television stations are required to cease broadcasting
on their current analog frequencies in February 2009 and return that spectrum
back to the FCC.  A broad campaign to educate consumers about their
need to replace their current television sets with digital ready sets or to
acquire government subsidized converter devices has been underway for some time
and is increasingly the subject of public service announcements.  Our
stations all currently simulcast our programming and commercials on our assigned
analog and digital channels and although we are uncertain how many television
households might not convert to digital televisions by the February 2009
conversion date, we have been encouraged by the significant growth in digital
television (“DTV”) penetration over the past year.  We do expect there
to be some savings in operational expenses, such as utilities and in some
instances, rent expense, when we cease our analog transmissions but these
expense savings might be more than offset by potentially reduced digital
television households.
 
 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.
  8
 
 License Grant, Renewal, Transfer and
Assignment.Our current licenses for our stations are or were scheduled
to expire on the following dates:
 
 Station
      (by market ranking)
              Expiration
      DateKWBQ
      / Albuquerque - Santa Fe
              October
      1, 2014KASY
      / Albuquerque - Santa Fe
              October
      1, 2006KRWB
      / Albuquerque - Santa Fe
              October
      1, 2014WBDT
      / Dayton
              October
      1, 2005WBXX
      / Knoxville
              August
      1, 2013WIWB
      / Green Bay – Appleton
              December
      1, 2005WBUW
      / Madison
              December
      1, 2005
 
 We have filed separate
renewal applications for each of those licenses that were scheduled to expire in
2005 and 2006 and renewal applications for our stations KASY, WBDT, WIWB and
WBUW 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 stations
affiliated with the WB Network (or its successor, the CW Network) until it
completes its investigation of indecency complaints relating to network
programming that was aired by most of its affiliates, including our
WB  (and now CW) 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. We
expect that these licenses will eventually be renewed by the
FCC.
  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 withstanding may petition the FCC to deny a broadcaster's application
for renewal of its license. 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 or, as the case may be, the proposed
transferee or assignee, including:
 
 •
              compliance
      with various rules limiting common ownership of media
      properties;
 
 •
              the
      character of the licensee or, as the case may be, the proposed transferee
      or assignee, 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 time 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.
  9
 
 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 television 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 "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 FCC’s
New Rules included a variety of changes to ownership limitations, including an
increase in 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.  That proceeding is still pending.
 
 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.  On June 21, 2006, the
FCC inaugurated a new rulemaking proceeding to respond to the court’s decision
on the New Rules and to conduct the quadrennial review of media ownership rules
mandated by the Communications Act.
  On February
4, 2008, the FCC issued a Report and Order concluding its review of the New
Rules in light of the court remand.  The FCC decided to authorize the
common ownership of a daily newspaper with a radio station or television station
in the top 20 DMAs if, in the case of a television station, the station is not
among the top four ranked stations and at least eight “major media voices” would
remain in the market after the transaction.  The FCC added that it
would consider waivers on a case-by-case basis in other markets for the common
ownership of a daily newspaper with a radio station or a television
station.  The FCC did not make any material change in any other rules
or policies.
  10
 
 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. To that end, licensees are required
to present programming that is responsive to community problems, needs and
interests and to maintain certain records demonstrating such responsiveness. In
the past, television broadcasters were required to place self-initiated
statements in their public inspection files every quarter to identify the public
interest programming aired in the previous quarter.  However, in light
of public complaints concerning those filings, the FCC adopted a new policy that
requires television broadcasters to file a standardized form with the FCC on a
quarterly basis that identifies the public interest programming aired in the
previous quarter.  The FCC also inaugurated a rulemaking proceeding
recently to determine whether processing guidelines and other measures should be
re-instituted or developed to ensure that a broadcaster’s programming adequately
serves the public interest. We cannot predict the outcome of this latter
proceeding and whether the Company will be adversely affected by any new rules
or policies adopted by the FCC.  In the meantime, any complaints from
viewers concerning a station's programming will continue to be considered by the
FCC when it evaluates the licensee's renewal application.
 
 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;
  11
  •
              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, the licensee of a television
station providing more than 15% of another television station's programming
under a local marketing agreement (“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. We
have, from time to time, entered 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 approvals (although
we would have to obtain any approval required under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976).
 
 FCC 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 an LMA or that we would receive
the revenue from the sale of advertising for such programming.
 
 Joint Sales
Agreements.  A joint sales agreement is an arrangement where
one station sells advertising time on another station.  The FCC’s New
Rules made 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 preliminary 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.  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 FCC also 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
(although the FCC has been willing to consider exceptions on a case-by-case
basis).
 
 On December
31, 2007, the FCC issued a Report and Order which resolved numerous outstanding
issues concerning the DTV transition and established final deadlines for
construction (based in part on the relationship of a station’s digital channel
with its analog channel).  The Report and Order also established
certain technical standards to govern interference among DTV stations and lifted
the freeze on the filing of modification applications as of August 19,
2008.
  12
 
 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).  Under the FCC’s Report and Order of December 31, 2007, we
will have to secure a construction permit for DTV facilities and complete
construction of those facilities by February 17, 2009.  If we do not
complete construction by that date, the station will have to be taken dark until
we can resume broadcasting with the DTV facilities approved by the
FCC.
 
 All of our
DTV facilities will provide additional spectrum for non-broadcast services and
the potential exists for new sources of revenue to be derived from that
additional spectrum. However, 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).  However, that decision was tempered
by a more recent Report and Order in which the FCC imposed obligations on cable
television systems to ensure that every cable consumer can continue to have
access to over-the-air television stations even if the consumer does not have a
television receiver capable of receiving DTV signals.
 
 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.
 
 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 Albuquerque - Santa Fe and
Knoxville markets. 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.
  13
 
 Closed
Captioning. With
certain exceptions, the Communications Act and FCC rules require that all analog
television programs aired after December 31, 2005 include closed
captioning.  Both the Communications Act and FCC rules provide a
procedure for requesting an exemption from that closed captioning
requirement.
  Other Regulatory and
Legislative Changes.Federal regulatory agencies and Congress from time
to time consider proposals for additional or revised laws and rules. For
example, Congress recently amended the Communications Act to increase
substantially the fines which the FCC can impose for the broadcast of indecent
material.  We cannot predict what changes will be adopted by Congress
or any federal regulatory agency or how such changes might affect
us.     Changes in applicable law and regulation 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, 2007, our continuing operations had 141 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
 
 Before
deciding to purchase, hold or sell our common stock, you should carefully
consider the risks described below, in addition to the other cautionary
statements and risks described elsewhere and the other information contained in
this Annual Report and in our other filings with the SEC, including our reports
on Forms 10-Q and 8-K.  The risks and uncertainties described below
are not the only ones we face.  Additional risks and uncertainties not
presently known to us or that we currently deem immaterial may also affect our
business.  If any of these known or unknown risks or uncertainties
actually occurs, it could have a material adverse effect on our business,
financial condition and results of operations.  In that event, the
market price for our common stock could decline and you may lose all or part of
your investment.
 
 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
 14
 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 operations have never generated positive operating cash
flow.
  Our
continuing operations have never generated positive cash flow and we have relied
upon either borrowings under our credit facilties or station sales to fund these
ongoing operations.
  All
but one of our television stations are affiliated with The CW Television
Network, making us vulnerable to this concentrated network
affiliation.
  Our
station group is highly dependent upon the success and continuation of The CW
Television Network.  If that network does not generate meaningful
numbers of viewers, our revenue will be adversely affected.  Also, if
the owners of that network were to cease operations of The CW, our stations
would be adversely affected and would likely have to be programmed as
independent, non-affiliated stations.  This would likely harm
our business and lead to lower valuations of our station assets.
 
 We may not
be able to generate sufficient cash flow to meet any future debt service
obligations or be able to refinance any borrowings under, or renew, our
revolving credit facility upon its maturity, forcing us to obtain
additional financings.
 
 Although we
repaid all of our then outstanding indebtedness when we completed the sale of
our Decatur, Illinois television station on October 25, 2007 and we had no
outstanding borrowings under our revolving credit facility as of December 31,
2007, we will likely continue to be a net borrower from time to time, even if at
a significantly lesser extent than we were before. In the event we
borrow additional funds, our business may not be able to generate sufficient
cash flow from operations in the future to pay our indebtedness or to fund our
other liquidity needs. Further, our revolving credit facility expires May 2009
and we might not be able to renew our revolving credit facility on commercially
reasonable terms, if at all, with the same lenders.
 
 If we are
unable to generate sufficient cash flow or refinance any borrowings under, or
renew, our indebtedness on commercially reasonable terms, we may have to seek to
restructure or replace any 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 from continuing operations
may makeit difficult to obtain restructured or replacement
financing.
  15
 
 The terms of
our senior credit agreement limit our operating flexibility 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 or restrict 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 ability to borrow under our senior credit
facility will be reduced because our maximum available borrowings are
calculated as a fixed percentage of the lender appraised values of our remaining
stations.
  We may
evaluate strategic alternatives to sell some or substantially all of our assets,
however we cannot assure you that any of these potential transactions will be
successfully completed.
 
 We continue
to evaluate strategic alternatives to sell some or substantially all of our
Company’s assets to maximize stockholder value.  The process 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 assets, the evaluation of strategic
alternative may adversely affect the Company.
 
 Our
financial results and operations may be adversely affected by the diversion of
management resources to the process of evaluating strategic alternatives and by
uncertainty regarding the outcome of the process.  For example, the
uncertainty of whether we will continue to own this Company or our stations in
the future could lead us to lose orfail to attract or
retain employees, customers or business partners.  There can be no
assurance that any such losses or distractions will not adversely affect the
operations or financial results of theCompany.
 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, many of our
syndication contracts require us to purchase all future network seasons of the
underlying program, irrespective of the impact on the financial performance of
the show when it airs on our stations(s).
 
 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.
  16
 
 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 our 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 or in the underlying
value of our broadcast licenses could lead to future impairments that could
negatively affect our operating results.
  Approximately
$61.2 million, or 60%, of our total assets as of December 31, 2007 consists
of unamortized intangible assets relating to our Continuing Stations. 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 an impairment
of certain of our broadcast licenses at our Continuing Stations of $5.3 million
for the year ended December 31, 2007 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.
 
 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, portable video devices 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.
  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.
  17
 
 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 or cell
phones) and the increasingly prevalent practice by some networks to make many of
their programs available over the internet, all of 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.  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 all television broadcasters, including us, to cease all
analog transmissions by February 17, 2009. According to industry reports,
at the end of 2007 over 50% of U.S. television households own digital television
sets, and that number is steadily increasing as the prices for these sets
continues to decline. 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
forfour licensesthat were scheduled to expire in 2005 and 2006.  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
 
 None.
  18
 
 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 and 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.
  Market
              
              ApproximateSize(1)
              
              OwnershipAlbuquerque
      - Santa Fe, New MexicoStudio
      and office facilities
              
              9,000
      sq. ft.
              
              LeasedTower
      (analog / digital)
              
              4,223
      / 4,223 ft.
              
              LeasedKnoxville,
      TennesseeStudio
      and office facilities
              
              8,000
      sq. ft.
              
              LeasedTower
      (analog / digital)(2)
              
              2,421
      / 2,359 ft.
              
              OwnedDayton,
      OhioStudio
      and office facilities
              
              9,998
      sq. ft.
              
              LeasedTower
      (analog / digital)
              
              1,145
      / 954 ft
              
              LeasedGreen
      Bay - Appleton, WisconsinStudio
      and office facilities
              
              7,500
      sq. ft.
              
              LeasedTower
      (analog)(2)
              
              659
      ft.
              
              OwnedTower
      (digital)
              
              1,089
      ft.
              
              LeasedChampaign
      - Springfield - Decatur , IllinoisLand
      and studio building (3)
              
              7,800
      sq. ft.
              
              OwnedMadison,
      WisconsinStudio
      and office facilities
              
              9,600
      sq. ft
              
              LeasedTower
      (analog / digital)(2)
              
              1,362
      / 1,270 ft.
              
              Owned
 ____________
 (1)
                Tower
      size represents signal radiance height above average
    terrain.
 (2)
              Tower
      owned on leased property.
 (3)
              Station
      sold on October 25, 2007, except for land and a studio building which are
      held for sale.
 
 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.
 
 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
2007.
  19
  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 Global Market under the symbol ACME. As of March
28, 2008, there were 28 stockholders of record, which does not include
beneficial owners holding shares through nominee names, and the closing price of
our common stock that day was $2.19.
  We did not
declare or pay any cash dividends or distributions on our common stock from our
inception through December 31, 2006. On February 16, 2007, in connection with
the completion of our Ft. Myers – Naples, Florida station sale, we declared a
special cash dividend of $0.50 per share of common stock.  The
dividend was paid on March 12, 2007 to holders of record as of the close of
business on February 26, 2007. We anticipate that we will declare future
dividends only to the extent of further asset sales.  Our current
senior credit facility allows us to pay dividends from excess sale proceeds and
to borrow up to $16.9 million under the facility to further pay
dividends.  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 high, low and closing prices of our common stock as reported by the NASDAQ
Stock Market, Inc. for each quarter of 2007 and 2006:
 
 First
                Quarter
              
              
              Second
                Quarter
              
              
              Third
                Quarter
              
              
              Fourth
                Quarter2007High
              
              $
              6.160
              
              
              $
              5.930
              
              
              $
              5.040
              
              
              $
              4.080Low
              
              
              4.950
              
              
              
              4.630
              
              
              
              3.790
              
              
              
              2.270Close
              
              
              5.700
              
              
              
              5.010
              
              
              
              3.870
              
              
              
              2.7302006High
              
              $
              4.470
              
              
              $
              5.740
              
              
              $
              5.750
              
              
              $
              5.990Low
              
              
              3.500
              
              
              
              4.070
              
              
              
              4.540
              
              
              
              4.860Close
              
              
              4.140
              
              
              
              5.080
              
              
              
              5.250
              
              
              
              5.020
  Item 7.Management's
Discussion and Analysis of Financial Condition and Results of
Operations
 
 Overview
 
 Since we
reached a high of eleven television stations in 2002, we have been seeking to
monetize shareholder value by the selective sale of our stations.  We
expect to continue to be sellers rather than buyers of television station
assets.
 
 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 April 2006, we sold our station KUWB-TV
serving the Salt Lake City marketplace to subsidiaries of Clear Channel
Communications, Inc. for an all-cash consideration of $18.5
million.  In May 2006, we entered into an agreement to sell our Ft.
Myers - Naples station, WTVK-TV, to Sun Broadcasting, Inc. for an all-cash
consideration of $45.0 million.  We completed the WTVK-TV transaction
on February 16, 2007.  On October 25, 2007, we completed the sale of
substantially all of the assets of station WBUI serving the Decatur marketplace
to Gocom Media of Illinois, LLC.  The net proceeds from the sale were
approximately $4.0 million.
 
 The results
relating to these five stations have been accounted for as discontinued
operations in accordance with U.S. generally accepted accounting principles
("GAAP").
 
 Our
Continuing Stations are regionally diverse and range in market size (based on
television households, as measured by Nielsen Media Research) from the 44th through
the 85th largest
in the nation. All but one of our stations are affiliates of The CW Television
Network. Our second station in the Albuquerque-Santa Fe marketplace is an
affiliate of MyNetworkTV. Our Continuing Stations have only been on the air, or
achieving measurable ratings, for 5-9 years.
  20
 
 We derive
revenues primarily from the sale of advertising time to local, regional and
national advertisers and, to a lesser extent, from program licensing fees
related to The Daily
Buzz.  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 Continuing Stations’ 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) for the
2005 / 2006 season, the last season for The WB and for UPN, was a
1.5.  This represented a decline compared to the prior season rating
due mostly to the decline in The WB Network’s prime-time ratings and the impact
that such a drop, in our highest viewed daypart, had upon the surrounding
dayparts.  The CW Network, which succeeded The WB and UPN networks,
launched in September 2006.  Five of our six Continuing Stations are
affiliated with The CW.  Most industry analysts believed, as we did,
that The CW Network would launch to better numbers than The WB Network and UPN
enjoyed the prior season, but it did not.  But despite a
season-over-season decline in prime-time ratings, we actually increased our 5:00
p.m. to midnight weighted average rating among adults aged 18-49 by nearly
2%.  During the November 2007 sweeps period, our weighted average adult
18-49 rating for the 5:00 p.m. to midnight daypart for adults 18-49 increased
nearly 3% compared to our rating for the November 2006 sweeps
period.
  Our
stations are generally ranked fifth (or in the case of our second station in the
Albuquerque-Santa Fe market, sixth) amongst commercial television stations 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 the past two 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 grown substantially.  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 2008 broadcast season should see
strong political advertising demand which, given the resulting pressure on our
competitors’ commercial inventory, should allow us to gain market revenue share
of regular (i.e. non-political) business.
 Similar to
the television advertising business in general, our revenues are usually
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 net 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
programming rights relating to syndicated programs as well as costs associated
with our morning news show, The Daily Buzz (which for
2006 was consolidated for the first six months and then accounted for using the
equity-method of accounting for the second six months; and for 2007 was
accounted for using the equity-method of accounting for the first three months
and then consolidated for the last nine months of the year) 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 our networks 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.
  21
  Results
of Operations
  Reclassifications
have been made to certain amounts previously reported resulting from
the 2007 sale of our Decatur station and the treatment of
the station as a discontinued operation.
 Year
Ended December 31, 2007 Compared to Year Ended December 31, 2006
 
 Effective
July 1, 2006, we deconsolidated The Daily Buzz, LLC as we ceased to be the
primary beneficiary of the venture.  Accordingly, we had only six
months of that revenue in 2006 compared to nine months of revenues for The Daily
Buzz in 2007 because in March, 2007, we became the sole owner of The Daily Buzz,
LLC and, effective April 1, 2007, began including its results in our results of
operations.  Accordingly, both our net revenues and operating expenses
related to The Daily Buzz are disproportionately higher in 2007 compared to 2006
as noted below.
 
 In 2007, net
revenues from continuing operations remained unchanged from the previous year at
$32.0 million, as a 4% decline of $1.1 million in net revenues at our stations
was offset by a 118% increase of $1.1 million in net revenues at The Daily
Buzz.  The decline in our station revenues was due to a commensurate
decline in our overall viewership levels among our key demographics as
non-political revenues in our market grew just under 1% over 2006
levels.  The growth in our revenues at The Daily Buzz was due to
increased advertising revenues, especially during the fourth quarter, due to new
advertisers attracted to the program by our investment in obtaining Nielsen
ratings data for the show, coupled with the fact that nine months of the
program’s results were consolidated in 2007 compared to only six months
consolidated in 2006.
 
 Programming
expenses for 2007 increased by 8% to $13.0 million compared to $12.0 million in
programming expenses for 2006. This increase during 2007 relates primarily to a
$569,000 increase in write-downs of program license rights to adjust to net
realizable value during 2007 coupled with the fact that the Daily Buzz
programming expenses were approximately $1.0 million higher when compared to
2006 due to the inclusion of nine months of those expenses in 2007 compared to
six months in 2006, net of a 5% decrease in the value attributable to barter
program costs.
  Other costs
of services for 2007 increased 1% or $73,000 mainly due to special promotion
grants received in 2006 from The CW to support its initial launch, which reduced
our promotion expenses incurred during 2006.
 
 Selling,
general and administrative expenses for 2007 decreased slightly by 1% to $11.8
million compared to $11.9 million in 2006.  The decrease is mainly due
to slightly lower sales commissions and sales incentives.
 
 Depreciation
and amortization expense for 2007 was $3.2 million compared to $3.5 million for
2006. This decrease relates primarily to more assets becoming fully depreciated
compared to new assets placed in service over the past year.
 
 During 2007,
following our valuation analysis pursuant to SFAS 142, we recorded a $5.3
million impairment charge of our broadcast licenses at our continuing stations,
compared to no impairment charge  in 2006.  The impairment
of our broadcast licenses is a direct result of a deterioration in the broadcast
marketplace mainly caused by a continued decline in advertising revenues, which
have, in turn, resulted in lower projected long-term market revenues and as such
a lower estimated current fair value of our broadcast licenses.
  Corporate
expenses for 2007 remained almost unchanged at $3.6 million when compared to
2006 as lower professional fees and insurance costs of approximately $100,000 in
2007 were offset by a death benefit awarded to the estate of a corporate officer
who passed away in May 2007.
 
 Our 2007
income tax benefit for continuing operations was $3.7 million compared to an
income tax expense of $2.0 million in 2006. The income tax benefit in 2007
relates primarily to the utilization of the continuing operations pre-tax losses
to offset discontinued pre-tax income and the tax on our income from
discontinued operations.  The income tax expense for 2006 relates
primarily to the deferred tax expense associated with the amortization of our
intangible assets for tax purposes.
 
 Our income
from discontinued operations in 2007, net of income tax, was approximately $22.0
million compared to $2.1 million in 2006.  Our income in 2007 includes
the gain on the Sun Transaction of $27.9 million and income from station WTVK
for the approximate 46 days we owned the station up to the date of its sale, net
of losses from our Decatur station which includes a $33,000 loss on the sale of
the Decatur station.  The income in 2006 reflects the gain on the
Clear Channel Transaction of $5.9 million and the operating income from station
WTVK, net of losses from station WBUI and higher interest expense on higher
outstanding debt.  Our income tax expense for discontinued operations
was $2.3 million for 2007 compared to an income tax expense of $395,000 in
2006.
 
 Liquidity
and Capital Resources
  On March
29, 2006, we restructured our revolving credit facility (the “Revolver”) and our
second-lien term loan (the “SLTL”). The amendments to our Revolver and SLTL
reduced our prepayment penalties, eliminated all financial covenants effective
December 31, 2005, reset the maximum advances under the Revolver to the lesser
of $60.0 million or 50% of the aggregate appraised STAC (“start-up stations with
affiliation agreements”) and allowed us to borrow $10.0 million that same date
to reduce the outstanding borrowings on our higher interest rate SLTL from $20.0
million to $10.0 million. In addition, upon the successful completion of the
Clear Channel Transaction, the amendment extended the maturity date for the
Revolver to May 2009, allowed up to $20.0 million in stock repurchases and
required us to repay from the Clear Channel Transaction the final $10.0 million
in outstanding balances under our SLTL and terminate that
agreement.
 22
 
 On April 4, 2006, we
completed the Clear Channel Transaction and repaid the remaining balances under
the SLTL. The remaining $8.5 million of the $18.5 million proceeds from the
Clear Channel Transaction were used to reduce our outstanding borrowings under
our Revolver.
  On
February 16, 2007, we completed the Sun Transaction and completely repaid the
then outstanding borrowings and accrued interest under the Revolver of $37.2
million. That same day we declared a $0.50 dividend per common share that was
paid on March 12, 2007 to holders of record at the close of business on February
26, 2007.  The aggregate dividend was $8.0 million and we used
approximately $7.0 million of the remaining proceeds from the Sun Transaction
along with approximately $1.0 million in new borrowings under the senior credit
facility to make that dividend payment.
  On
May 30, 2007, we voluntarily elected to permanently reduce our advance rate from
45% of appraised STAC value to 20% of appraised STAC value which resulted in a
reduction in our maximum allowed borrowings from $39.9 million to approximately
$17.7 million and also reduced our borrowing rates by 250 basis
points.
  On
October 25, 2007, we completed the Gocom Transaction and repaid all of our then
outstanding borrowings of $2.8 million under our Revolver. We believe that any
cash requirements to fund our operations, taxes and capital expenditures will be
provided in the short-term by cash on hand and to the extent required, by
borrowings under our revolving credit facility, which immediately following the
completion of the Gocom transaction and repayment of outstanding borrowings had
an available credit line of  $16.9 million.
  On
December 31, 2006, the borrowings outstanding under our Revolver were $36.6
million at a weighted average annual interest rate 10.5% and we were in
compliance with all of the agreement’s terms, conditions and
covenants.  At December 31, 2007, we had no outstanding borrowings
under the Revolver and our available credit was approximately $16.9
million.
  Depending
on the growth in our revenues during 2008 compared to 2007, we may need to
borrow during the coming year to help fund working capital needs and capital
expenditures, the latter which are estimated to be approximately $500,000 in
calendar 2008.  Although our amended Revolver contains no financial
covenants, it does contain 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.  We
do not expect to be a significant borrower, if a borrower at all, during 2008
and as such, even though our lenders could declare a MAC, we do not believe, nor
do we anticipate, that the lenders would do so given our long-standing
relationship with them and the inherent risk that such an action might create
for them.
  Net cash
used in operating activities was $1.1 million for the twelve months of 2007
compared to net cash used in operating activities of $738,000 for
2006.  The increase in cash flow usage of $383,000 relates to a
decrease in net revenues and higher program rights payments at our Continuing
Stations during 2007.
 Net
cash provided by investing activities was $45.9 million for the twelve months of
2007 compared to cash flow provided by investing activities of $20.1 million for
2006.  The 2007 cash flow includes $44.0 million in net proceeds from
the Sun Transaction, $4.0 million in net proceeds from the Gocom Transaction,
net of $1.8 million in capital expenditures, principally related to new
commercial playback systems at all of our stations and our Daily Buzz facility
move.  The 2006 cash flow included $18.4 million in net proceeds from
the Clear Channel Transaction, and $1.2 million from the sale of our CarSoup
investment, net of $558,000 in capital expenditures.
  Net
cash used in financing activities was $44.6 million for the twelve months of
2007 as we repaid all of the then current outstanding debt under our senior
credit facility on the completion of the Sun Transaction but subsequently
reborrowed $2.7 million to partially fund our $8.0 million dividend payment made
in March 2007 and to fund ongoing working capital needs. Net cash used in
financing activities was $16.2 million for the twelve months of 2006, which
relates primarily to the repayment of our debt from the proceeds of the sale of
our Salt Lake City station.
  23
  Net cash
used in operating activities of our discontinued operations for the twelve
months of 2007 was $320,000 compared to $1.7 million used in operating
activities for 2006.  Because the sum of the net proceeds from the
Gocom, Sun Transaction and the Clear Channel Transaction exceeded our
outstanding borrowings for 2007 and 2006 and the loan agreements in place at the
time required us to repay outstanding debt first with those proceeds, all
interest expense through October 25, 2007, the date our Gocom Transaction was
completed, has been attributed to discontinued operations.  The
reduced cash used in operating activities reflects primarily reduced interest
expense net of reduced operating profits at WTVK (which was owned for less than
two months in 2007 compared to the full year in 2006) and increased losses at
WBUI (which was owned for nearly 10 months in 2007 compared to the full year of
2006).
 
 Net cash
used in investing activities in our discontinued operations was $29,000 in 2007
compared to $77,000 used in investing activities in 2006 on reduced capital
expenditures.
  Net cash
used in financing activities in our discontinued operations was $44,000 in 2007
compared to $1.3 million used in 2006.  The $1.3 million decrease
relates primarily to decreased prepaid financing fees paid in 2007 compared to
the significant fees paid in March 2006 in connection with the amendment of our
revolver and SLTL.
 
 At December
31, 2007, amounts due under all capital lease facilities totaled $846,000
bearing an implicit average interest rate of 5.31% per annum. We expect to incur
approximately $500,000 in additional miscellaneous capital expenditures in 2008,
a decrease over our 2007 expenditures when we replaced the commercial playback
systems at five of our six Continuing Stations (one station’s commercial
playback systems was replaced in 2006) and relocated our Daily Buzz
studio.
 
 At December
31, 2007, we had $891,000 of unrestricted cash and negative working capital of
$164,000. Apart from any proceeds that might be generated as a result of future
station sales, it may be necessary for us to borrow under our Revolver if the
cash generated from our station operations does not offset our projected capital
expenditures, cash corporate expenses and any 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 Revolver.  Our
Revolver requires lender approval for any station acquisitions.  Since
our Revolver has 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.  Furthermore, our senior credit facility matures in May 2009
and we expect that we will have to negotiate an extension to that agreement or
find a replacement facility prior to that maturity date.
 
 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 consolidated 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 programming rights, bad debts, intangible
assets (including our broadcast licenses and goodwill), 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 materially 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.
  Revenue
Recognition and Allowance for Doubtful Accounts Receivable
  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.
  24
 
 Programming
Rights
  Our
programming rights are stated, on a gross basis, at the lower of amortized cost
or estimated realizable value. Generally, programming 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
operations. 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 2007 and
2006, we recorded write-downs of programming rights due to impairments for our
Continuing Stations of $1.2 million and $675,000, respectively.  The
increase in the 2007 write-down was due primarily to write-downs related to
King of the Hilland,
to a lesser extent, Malcolm in
the Middle in two of our markets.
  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, 2007 and December 31, 2006, 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 upon
evaluations, the Company determined that due primarily to a decline in market
conditions at some continuing stations, certain of its broadcast licenses had
become impaired and a $5.3 million impairment charge was recorded for the year
ended December 31, 2007.  This impairment resulted from the carrying
value of the broadcast licenses exceeding their fair values and is included in
accumulated amortization.
  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
recorded a $100,000 write down of our WBUI’s station’s studio building and land,
which was not subject to the sale to Gocom and which are classified in our
accompanying balance sheet as assets held for sale as of December 31,
2007.  Other than the above write-down, the write-down on our
programming rights and broadcast licenses as disclosed above, we do not have any
other impairment related to long-lived assets for 2007 or 2006. 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.
  Stock-Based
Compensation
  In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123 (revised
2004), “Share-Based Payment” (“SFAS No. 123R”). SFAS No. 123R supersedes
APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and amends
SFAS No. 95, “Statement of Cash Flows.” Generally, the fair value approach
in SFAS No. 123R is similar to the fair value approach described in SFAS
No. 123. In 2005, we used the Black-Scholes formula to estimate the fair
value of stock options granted to employees. We adopted SFAS No. 123R,
using the modified-prospective method, beginning January 1, 2006.
  25
  Using the
Black-Scholes formula to estimate the fair value of stock-based compensation
requires the input of subjective assumptions. These assumptions include
estimating the length of time employees will retain their vested stock options
before exercising them, risk free interest rates, our dividend yield and the
volatility of our common stock price over the expected term. Changes in the
subjective assumptions can materially affect the estimate of fair value of
stock-based compensation and consequently, the related amount recognized on our
consolidated statements of operations.
 
 Income
Taxes
  We account
for income taxes in accordance with the provisions of SFAS No. 109,
“Accounting for Income Taxes.” SFAS No. 109 requires an asset and liability
approach which requires the recognition of deferred tax assets and deferred tax
liabilities for the expected future tax consequences of temporary differences
between the carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. In making such determination, a
review of all available positive and negative evidence must be considered,
including scheduled reversal of deferred tax liabilities, projected future
taxable income, tax planning strategies, and recent financial
performance.
  We provide
for income taxes based on our estimate of federal and state liabilities. Our
estimates may include, among other items, effective rates for state and local
income taxes, allowable tax credits, estimates related to depreciation and
amortization expense allowable for tax purposes and the tax deductibility of
certain other items.
  Our
estimates are based on the information available to us at the time that we
prepare our income tax provision. We generally file our annual income tax
returns several months after our year end. Income tax returns are subject to
audit by federal, state, and local governments, generally years after the
returns are filed. These returns could be subject to material adjustments or
differing interpretations of the tax laws.
  Effective
January 1, 2007, we adopted FASB Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement
No. 109.” We are subject to U.S. federal income tax as well as income tax
of multiple state jurisdictions. We believe our tax return positions are fully
supported, but tax authorities may challenge certain positions, which may not be
fully sustained. We assess our income tax positions and recorded tax benefits
for all years subject to examination based upon management’s evaluation of the
facts, circumstances, and information available at the reporting date. For
uncertain tax positions where it is more likely than not that a tax benefit will
be sustained, we record the greatest amount of tax benefit that has a greater
than 50.0% probability of being realized upon effective settlement with a taxing
authority that has full knowledge of all relevant information. For uncertain
income tax positions where it is more likely than not that a tax benefit will
not be sustained, no tax benefit has been recognized in the consolidated
financial statements.
  Recent
Accounting Pronouncements
  In March 2008,
the FASB issued SFAS No. 161, Disclosure about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No.
133.This Statement changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 133 and its related interpretations, and (c) how
derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged.  We do not expect this
pronouncement will have a significant impact on our consolidated financial
statements.
 In
December 2007, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 141(R), Business Combinations (SFAS No. 141(R)), which
replaces SFAS No. 141, Business Combinations, requires an acquirer to
recognize the assets acquired, the liabilities assumed, and any non-controlling
interest in the acquiree at the acquisition date, measured at their fair values
as of that date, with limited exceptions. This Statement also requires the
acquirer in a business combination achieved in stages to recognize the
identifiable assets and liabilities, as well as the non-controlling interest in
the acquiree, at the full amounts of their fair values. SFAS No. 141(R)
makes various other amendments to authoritative literature intended to provide
additional guidance or to confirm the guidance in that literature to that
provided in this Statement. This Statement applies prospectively to business
combinations for which the acquisition date is on or after the beginning of the
first annual reporting period beginning on or after December 15, 2008. We
do not expect this pronouncement to have a significant impact on our
consolidated financial statements.
 
 26
  In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements (SFAS No. 160), which amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. SFAS No. 160 establishes accounting and reporting standards
that require the ownership interests in subsidiaries not held by the parent to
be clearly identified, labeled and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. This
statement also requires the amount of consolidated net income attributable to
the parent and to the non-controlling interest to be clearly identified and
presented on the face of the consolidated statement of income. Changes in a
parent’s ownership interest while the parent retains its controlling financial
interest must be accounted for consistently, and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary must be initially measured at fair value. The gain or loss on the
deconsolidation of the subsidiary is measured using the fair value of any
non-controlling equity investment. The Statement also requires entities to
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. This
Statement applies prospectively to all entities that prepare consolidated
financial statements and applies prospectively for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15, 2008.
We
do not expect this pronouncement to have a significant impact on our
consolidated financial statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—Including an amendment of FASB
Statement No. 115 (SFAS No. 159), which is effective for fiscal years
beginning after November 15, 2007. SFAS No. 159 permits the Company to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS
No. 159 is effective for fiscal year 2008 but early adoption is permitted.
We are currently evaluating the impact, if any, that the adoption of SFAS
No. 159 will have on our consolidated financial statements.
  In September
2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value
and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, the year beginning January 1, 2008 for
the Company.  The FASB has proposed a deferral of the provisions of
SFAS No. 157 relating to nonfinancial assets and liabilities that would delay
implementation until January 1, 2009.  SFAS No. 157 is not expected to
materially affect how we determine fair value, but may result in additional
disclosures.
  In September
2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)”, (“SFAS 158”).
SFAS 158 requires recognition of the overfunded or underfunded status of a
benefit postretirement plan in the statement of financial position, as well as
recognition of changes in that funded status through comprehensive income in the
year in which they occur. SFAS 158 also requires a change in the
measurement of a plan’s assets and benefit obligations as of the end date of the
employer’s fiscal year. SFAS 158 is effective for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. As we never had any
defined benefit plans or unfunded liabilities, the adoption of this standard did
not have any impact on our consolidated financial statements.
  In
September 2006, the SEC issued Staff Accounting Bulletin 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides
guidance on the consideration of effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. The SEC staff believes registrants must quantify errors using both a
balance sheet and income statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 is effective for
the first annual period ending after November 15, 2006 with early
application encouraged. The adoption of SAB 108 had no effect on our
consolidated financial statements.
  27
  Item
8. Financial
Statements
 
 ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 INDEX
TO FINANCIAL STATEMENTS
 
 PageReport
      of Independent Registered Public Accounting Firm
              29Consolidated
      Balance Sheets as of December 31, 2007 and 2006
              30Consolidated
      Statements of Operations for the Years Ended December 31, 2007 and
      2006
              31Consolidated
      Statements of Stockholders' Equity for the Years Ended December 31, 2007
      and 2006
              32Consolidated
      Statements of Cash Flows for the Years Ended December 31, 2007 and
      2006
              33Notes
      to Consolidated Financial Statements
              35
   28
 
 Report
of Independent Registered Public Accounting Firm
 
 
 The Board
of Directors and Stockholders
 ACME
Communications, Inc.
   We have
audited the accompanying consolidated balance sheets of ACME Communications,
Inc. and subsidiaries as of December 31, 2007 and 2006, and the related
consolidated statements of operations, stockholders’ equity and cash flows for
the years then ended. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an
opinion on these consolidated financial statements 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 audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of their
internal control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.  An
audit also includes examining, on a test basis, evidence supporting the amounts
and disclosures in the consolidated financial statements, 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, 2007 and 2006, and the results of their
operations and their cash flows for the years then ended in conformity with U.S.
generally accepted accounting principles.






/s/
      MAYER HOFFMAN MCCANN
      P.C.MAYER HOFFMAN MCCANN
      P.C.
                
                Los
      Angeles, California
                March 28, 2008




29




ACME
      Communications, Inc. and SubsidiariesConsolidated
      Balance Sheets(In
      thousands, except share data)December
      31,
              
              
              December
      31,2007
              
              
              2006ASSETSCurrent
      assets:Cash
      and cash equivalents
              
              $
              891
              
              
              $
              1,113Restricted
      cash
              
              
              50
              
              
              
              50Accounts
      receivable, net
              
              
              6,453
              
              
              
              7,878Current
      portion of programming rights
              
              
              5,975
              
              
              
              5,400Prepaid
      expenses and other current assets
              
              
              226
              
              
              
              332Assets
      held for sale
              
              
              268
              
              
              
              25,429Total
      current assets
              
              
              13,863
              
              
              
              40,202Property
      and equipment, net
              
              
              14,446
              
              
              
              15,701Programming
      rights, net of current portion
              
              
              12,077
              
              
              
              14,715Goodwill,
      net
              
              
              14,720
              
              
              
              14,720Broadcast
      licenses, net
              
              
              46,518
              
              
              
              51,775Other
      assets
              
              
              355
              
              
              
              2,131Total
      assets
              
              $
              101,979
              
              
              $
              139,244LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      liabilities:Accounts
      payable
              
              $
              2,671
              
              
              $
              3,261Accrued
      liabilities
              
              
              4,936
              
              
              
              5,043Current
      portion of programming rights payable
              
              
              6,437
              
              
              
              5,963Current
      portion of obligations under lease
              
              
              46
              
              
              
              50Income
      taxes payable
              
              
              252
              
              
              
              151Notes
      payable under revolving credit facility
              
              
              ---
              
              
              
              36,550Liabilities
      held for sale
              
              
              ---
              
              
              
              6,562Total
      current liabilities
              
              
              14,342
              
              
              
              57,580Programming
      rights payable, net of current portion
              
              
              13,528
              
              
              
              15,605Obligations
      under lease, net of current portion
              
              
              800
              
              
              
              845Other
      liabilities
              
              
              228
              
              
              
              33Deferred
      income taxes
              
              
              9,964
              
              
              
              9,751Total
      liabilities
              
              
              38,862
              
              
              
              83,814Commitments
      and contingencies (Note
      6)Stockholders'
      equity:Preferred
      stock, $0.01 par value; 10,000,000 shares authorized, noshares
      issued or outstanding
              
              
              ---
              
              
              
              ---Common
      stock, $0.01 par value; 50,000,000 shares authorized,16,772,415
      shares issued and 16,046,763 outstanding atDecember
      31, 2007 and December 31, 2006
              
              
              168
              
              
              
              168Additional
      paid-in capital
              
              
              132,857
              
              
              
              132,440Accumulated
      deficit
              
              
              (64,908
              )
              
              
              (72,178
              )Less:  Treasury
      stock, at cost; 725,652 shares
              
              
              (5,000
              )
              
              
              (5,000
              )Total
      stockholders' equity
              
              
              63,117
              
              
              
              55,430Total
      liabilities and stockholders' equity
              
              $
              101,979
              
              
              $
              139,244






See the
accompanying notes to the consolidated financial statements.




30




ACME
      Communications, Inc. and SubsidiariesConsolidated
      Statements of Operations(In
      thousands, except per share data)For
      the Years Ended December 31,2007
              
              
              2006Net
      revenues
              
              $
              32,000
              
              
              $
              32,038Operating
      expenses:Cost
      of service:Programming,
      including program amortization
              
              
              13,047
              
              
              
              12,036Other
      costs of service (excluding depreciation andamortization
      of $3,172 and $3,469 for the yearsended
      December 31, 2007 and 2006, respectively)
              
              
              5,248
              
              
              
              5,175Selling,
      general and administrative expenses
              
              
              11,820
              
              
              
              11,933Depreciation
      and amortization
              
              
              3,202
              
              
              
              3,503Abandoned
      acquisition-related costs
              
              
              ---
              
              
              
              177Impairment
      of broadcast licenses
              
              
              5,257
              
              
              
              ---Corporate
      expenses
              
              
              3,589
              
              
              
              3,621Operating
      expenses
              
              
              42,163
              
              
              
              36,445Operating
      loss
              
              
              (10,163
              )
              
              
              (4,407
              )Other
      income (expenses):Interest,
      net
              
              
              (43
              )
              
              
              55Gain
      on sale of assets
              
              
              ---
              
              
              
              69Equity
      in income (loss) of unconsolidated affiliates
              
              
              (251
              )
              
              
              (435
              )Loss
      from continuing operations before income taxesand
      minority interest
              
              
              (10,457
              )
              
              
              (4,718
              )Income
      tax benefit (expense)
              
              
              3,734
              
              
              
              (2,036
              )Loss
      from continuing operations before minority interest
              
              
              (6,723
              )
              
              
              (6,754
              )Minority
      interest
              
              
              ---
              
              
              
              463Loss
      from continuing operations
              
              
              (6,723
              )
              
              
              (6,291
              )Discontinued
      operations (Note 3):Income
      from discontinued operations before income taxes
              
              
              24,304
              
              
              
              2,507Income
      tax expense
              
              
              (2,288
              )
              
              
              (395
              )Income
      from discontinued operations
              
              
              22,016
              
              
              
              2,112Net
      income (loss)
              
              $
              15,293
              
              
              $
              (4,179
              )Net
      income (loss) per share, basic and dilutedContinuing
      operations
              
              $
              (0.42
              )
              
              $
              (0.39
              )Discontinued
      operations
              
              
              1.37
              
              
              
              0.13Net
      income (loss) per share
              
              $
              0.95
              
              
              $
              (0.26
              )Weighted
      average basic and diluted common shares outstanding
              
              
              16,047
              
              
              
              16,047






See the
accompanying notes to the consolidated financial statements.




31




ACME
      Communications, Inc. and SubsidiariesConsolidated
      Statements of Stockholders' Equity(In
      thousands)Additional
              
              
              
              
              
              
              
              
              TotalCommon
      Stock
              
              
              Paid-in
              
              
              Accumulated
              
              
              Treasury
              
              
              Stockholders'Shares
              
              
              Amount
              
              
              Capital
              
              
              Deficit
              
              
              Stock
              
              
              EquityBalance
      at December 31, 2005
              
              
              16,772
              
              
              $
              168
              
              
              $
              132,038
              
              
              $
              (67,999
              )
              
              $
              (5,000
              )
              
              $
              59,207Stock-based
      compensation
              
              
              ---
              
              
              
              ---
              
              
              
              402
              
              
              
              ---
              
              
              
              ---
              
              
              
              402Net
      loss
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (4,179
              )
              
              
              ---
              
              
              
              (4,179
              )Balance
      at December 31, 2006
              
              
              16,772
              
              
              
              168
              
              
              
              132,440
              
              
              
              (72,178
              )
              
              
              (5,000
              )
              
              
              55,430Stock-based
      compensation
              
              
              ---
              
              
              
              ---
              
              
              
              417
              
              
              
              ---
              
              
              
              ---
              
              
              
              417Cash
      dividends
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              (8,023
              )
              
              
              ---
              
              
              
              (8,023
              )Net
      income
              
              
              ---
              
              
              
              ---
              
              
              
              ---
              
              
              
              15,293
              
              
              
              ---
              
              
              
              15,293Balance
      at December 31, 2007
              
              
              16,772
              
              
              $
              168
              
              
              $
              132,857
              
              
              $
              (64,908
              )
              
              $
              (5,000
              )
              
              $
              63,117






See the
accompanying notes to the consolidated financial statements.




32




ACME
      Communications, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows(In
      thousands)For
      the Years Ended December 31,2007
              
              
              2006Cash
      flows from operating activities:Net
      income (loss)
              
              $
              15,293
              
              
              $
              (4,179
              )Less:  Income  from
      discontinued operations, net of income tax
              
              
              (22,016
              )
              
              
              (2,112
              )Adjustments
      to reconcile income (loss) to net cash used in operating
      activities:Minority
      interest income
              
              
              ---
              
              
              
              (463
              )Equity
      in losses of unconsolidated affiliates
              
              
              251
              
              
              
              435Provision
      for doubtful accounts receivable
              
              
              215
              
              
              
              232Depreciation
      and amortization
              
              
              3,202
              
              
              
              3,503Amortization
      of program rights
              
              
              6,942
              
              
              
              6,527Amortization
      of prepaid financing costs
              
              
              67
              
              
              
              ---Abandonment
      of acquisition related costs
              
              
              ---
              
              
              
              177Stock-based
      compensation
              
              
              393
              
              
              
              328Gain
      on sale of assets
              
              
              ---
              
              
              
              (69
              )Impairment
      of broadcast licenses
              
              
              5,257
              
              
              
              ---Deferred
      income taxes
              
              
              213
              
              
              
              1,881Changes
      in assets and liabilities:Increase
      in accounts receivables
              
              
              (372
              )
              
              
              (662
              )Decrease
      in prepaid expenses and other current assets
              
              
              80
              
              
              
              158Decrease
      (increase) in other assets
              
              
              230
              
              
              
              (122
              )Increase
      (decrease) in accounts payable
              
              
              (115
              )
              
              
              475Decrease
      in accrued liabilities
              
              
              (284
              )
              
              
              (609
              )Increase
      (decrease) in income taxes payable
              
              
              (4,037
              )
              
              
              60Payments
      of programming rights payable
              
              
              (6,635
              )
              
              
              (6,345
              )Increase
      in other liabilities
              
              
              195
              
              
              
              47Net
      cash used in continuing operating activities
              
              
              (1,121
              )
              
              
              (738
              )Cash
      flows from investing activities:Purchase
      of property and equipment
              
              
              (1,827
              )
              
              
              (558
              )Investment
      in unconsolidated subsidiaries
              
              
              (155
              )
              
              
              (137
              )Proceeds
      from sale of CarSoup investment
              
              
              ---
              
              
              
              1,195Proceeds
      from sale of assets - discontinued operations
              
              
              47,875
              
              
              
              19,617Net
      cash provided by investing activities
              
              
              45,893
              
              
              
              20,117
   See
the accompanying notes to the consolidated financial
statements.
  33
  ACME
      Communications, Inc. and SubsidiariesConsolidated
      Statements of Cash Flows - Continued(In
      thousands)For
      the Years Ended December 31,2007
              
              
              2006Cash
      flows from financing activities:Cash
      contributions by joint venture partner
              
              $
              ---
              
              
              $
              332Borrowings
      under revolving credit facility
              
              
              3,950
              
              
              
              21,910Payments
      on revolving credit facility
              
              
              (40,500
              )
              
              
              (18,400
              )Payments
      on second-lien credit facility
              
              
              ---
              
              
              
              (20,000
              )Payments
      on capital lease obligations
              
              
              (49
              )
              
              
              (47
              )Payment
      of dividend
              
              
              (8,023
              )
              
              
              ---Net
      cash used in financing activities
              
              
              (44,622
              )
              
              
              (16,205
              )Increase
      in net cash from continuing operations
              
              
              150
              
              
              
              3,174Reconsolidation
      of The Daily Buzz, LLC at March 31, 2007
              
              
              21
              
              
              
              ---Deconsolidation
      of The Daily Buzz, LLC at July 1, 2006
              
              
              ---
              
              
              
              (79
              )Discontinued
      operations:Net
      cash used in operating activities
              
              
              (320
              )
              
              
              (1,706
              )Net
      cash used in investing activities
              
              
              (29
              )
              
              
              (77
              )Net
      cash used in financing activities
              
              
              (44
              )
              
              
              (1,340
              )Net
      cash used in discontinued operations
              
              
              (393
              )
              
              
              (3,123
              )Decrease
      in cash and cash equivalents
              
              
              (222
              )
              
              
              (28
              )Cash
      and cash equivalents at beginning of year
              
              
              1,113
              
              
              
              1,141Cash
      and cash equivalents at end of year
              
              $
              891
              
              
              $
              1,113Cash
      payments for:Interest
              
              $
              1,125
              
              
              $
              5,045Taxes
              
              $
              560
              
              
              $
              96Non-cash
      transactions:Program
      rights in exchange for program rights payable (continuing
      operations)
              
              $
              5,038
              
              
              $
              13,471






See
the accompanying notes to the consolidated financial
statements.




34




ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS







(1)
Formation and Description of the Business





Formation
and Presentation




The
Company commenced operations in 1997 and ACME Communications, Inc. was formed as
the Company’s  holding company on July 23, 1999, in preparation for
and in conjunction with an initial public offering of its
stock.




On March 21,
2003 the Company completed the sale of its station KPLR, serving the St. Louis
marketplace, to the Tribune Company (the “Tribune Transaction”). On April 4,
2006, the Company completed the sale of station KUWB, serving the Salt Lake City
marketplace, to Clear Channel Broadcasting, Inc. (the “Clear Channel
Transaction”). On February 16, 2007, the Company completed the sale of station
WTVK, serving the Ft. Myers – Naples, Florida marketplace, to Sun Broadcasting,
Inc. (the “Sun Transaction”). On June 14, 2007, the Company entered into an
agreement to sell station WBUI serving the Champagne-Springfield-Decatur
marketplace to Gocom Media of Illinois, LLC (the “Gocom Transaction”). The Gocom
Transaction was completed on October 25, 2007. In accordance with U.S. generally
accepted accounting principles, the accompanying statement of operations and
cash flows reflect the results of stations KPLR, KUWB, WTVK and WBUI as
discontinued operations for all periods presented.




The
accompanying consolidated financial statements are presented for ACME
Communications, Inc. (“ACME” or the “Company”) and its wholly-owned
subsidiaries, including The Daily Buzz, LLC. All significant intercompany
accounts and transactions have been eliminated for all periods presented.
Segment information is not presented since all of the Company’s revenues are
attributed to a single reportable segment.




The Company
adopted the provisions of Financial Accounting Standards Board (“FASB”)
Interpretation No. 46R (“FIN 46R”), “Consolidation of Variable Interest
Entities”, effective January 1, 2004. On that same date, the Company’s joint
venture (The Daily Buzz, LLC) 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 was required to
contribute the next $750,000 in capital equipment purchased by the venture and
based thereon, the Company included The Daily Buzz, LLC in its consolidated
financial statements. Effective July 1, 2006, when Emmis completed its matching
capital contribution, the Company was no longer deemed the primary beneficiary
and deconsolidated the venture. In March 2007, the Company acquired all of
Emmis’ interest in the venture and reconsolidated the venture effective March
31, 2007 using the equity-method of accounting for its results of operations for
the first quarter of 2007. Effective April 1, 2007, the Company included the
results of The Daily Buzz in its consolidated results of
operations.





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”). As of December 31, 2007, ACME Television, through its wholly-owned
subsidiaries, owned and operated the following seven commercially licensed,
full-power, broadcast television stations located throughout the United States,
including KWBR in Roswell, New Mexico, the Company’s satellite station of
KWBQ:




Station
      - Channel
            
            Market
            
            Market
              Ranking
      (1)
            
            Network
              AffiliationKWBQ
      – 19 / KWBR - 21
            
            Albuquerque
      – Santa Fe, NM
            
            44
            
            CWKASY
      - 50
            
            Albuquerque
      – Santa Fe, NM
            
            44
            
            MNTWBXX
      - 20
            
            Knoxville,
      TN
            
            58
            
            CWWBDT
      - 26
            
            Dayton,
      OH
            
            62
            
            CWWIWB
      - 14
            
            Green
      Bay – Appleton, WI
            
            70
            
            CWWBUW
      - 57
            
            Madison,
      WI
            
            85
            
            CW





(1) based on
television households per Nielsen Market Research for the 2007 / 2008 broadcast
season.
  35


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(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 $810,000 and $711,000 at December 31, 2007 and 2006,
respectively.  The Company does not charge interest on past due
receivables.





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 debt, consisting
of notes payable under its revolving credit facility, was estimated at their
aggregate carrying amount of $36.6 million as of December 31, 2006 since the
notes have floating interest rates that the Company believed were at current
market.  The Company did not have any outstanding notes payable as of
December 31, 2007.





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 operations. During 2007 and 2006, the
Company recorded write-downs of $1,244,000 and $675,000, 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 is reflected in the consolidated 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.




36


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
   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 or 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 yearsBroadcast
      and other equipment
              3 -
      20 yearsFurniture
      and fixtures
              5 -
      7 yearsVehicles
              5
      years


The
carrying values of the Company’s property and equipment 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, the Company recorded a $100,000
impairment charge related to its WBUI’s station’s studio building and
land  in 2007 which is presented as assets held for sale as of
December 31, 2007.  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, 2007 and December 31, 2006, 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
upon evaluations, the Company determined that due primarily to a decline in
market conditions certain of its broadcast licenses had become impaired and
recorded a $5,257,000 impairment charge on its broadcast licenses for its
continuing operations for the year ended December 31, 2007. No impairment charge
was recorded for its continuing operations for the year ended December 31,
2006.  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, which the Company believes approximates fair value. Barter revenue
amounted to $2,992,000 and $3,153,000, during the years ended December 31, 2007
and 2006, 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.




37


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
   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
$1,934,000 and $1,814,000, for the years ended December 31, 2007 and 2006,
respectively.
 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.  Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or
all of the deferred tax asset will not be realized.
  In June
2006, the FASB issued Interpretation (FIN) No. 48,Accounting for Uncertainty in
Income Taxes, which defines the threshold for recognizing the benefits of
tax return positions in the financial statements as “more-likely-than-not” to be
sustained by the taxing authority. A tax position that meets the
“more-likely-than-not” criterion shall be measured at the largest amount of
benefit that is more than 50% likely of being realized upon ultimate settlement.
FIN 48 applies to all tax positions accounted for under SFAS No. 109,Accounting for Income Taxes
”. FIN 48 is effective for fiscal years beginning after December 15,
2006. The Company has
reviewed its tax positions and determined that an adjustment to the tax
provision is not considered necessary nor is a reserve for the income taxes
required.


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 (loss) 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 amounted to 2,358,346 and 2,463,846 shares at December 31,
2007, and 2006, respectively and were not included in the computation of diluted
EPS because an inclusion of such shares 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




On
January 1, 2006, the Company adopted FASB Statement No. 123(R),
Share-Based Payment (“SFAS 123(R)”) using a modified prospective transition
method. Accordingly, because the Company has adopted a prospective method, prior
periods have not been restated.
  There
were no stock options granted or any other type of share-based issuances during
the twelve months ended December 31, 2007 and
2006.  For the twelve months ended December 31, 2007 and
2006 stock-based compensation expense for continuing operations was
$393,000 and $328,000, respectively.  Stock-based compensation expense
for discontinued operations was $24,000 and $74,000 for the twelve months ended
December 31, 2007 and 2006, respectively.  The stock-based
compensation expense for the twelve months ended December 31, 2007 included a
cumulative catch-up of $35,000 of additional compensation expense recognized due
to the Company’s change in estimate of the forfeiture rate for certain of its
grants.
  As of
December 31 2007, there was $156,000 of total unrecognized compensation
cost related to unvested stock options which does not include the effect of
future grants of equity compensation, if any. Of the total $156,000, the Company
expects to recognize approximately $143,000 in 2008 and $13,000 in
2009.
  The following assumptions were used in the
Black-Scholes option-pricing model to value options granted during the year
ended December 31, 2006.


2006Expected
      life (months)
            
            
            36Expected
      forfeiture rate
            
            
            0
            %Volatility
      factor
            
            
            79.60
            %Risk-free
      interest rate
            
            
            4.57
            %




38


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


The expected
life of options granted was estimated based on the vesting
period.  The expected volatility factor was based on historical
volatility over the period equal to the stock option’s expected life. The
risk-free interest rate is based on the U.S. treasury yield curve in effect at
the date of the grant for a period equal to the expected term of the
option.




Interest
in The Daily Buzz, LLC





In March
2007, the Company acquired the remaining 50% interest in The Daily Buzz, LLC
from Emmis for $1 and became the sole owner of the venture.  The
transaction was treated as a step acquisition and as of March 31, 2007, the
Company reconsolidated the venture’s balance sheet into its consolidated
financial statements.  The fair value of the assets acquired via
Emmis’ 50% interest were approximately $336,000 and the fair value of the
liabilities assumed, including Emmis’ share of projected operating losses
through August 31, 2007, were $449,000.  No goodwill was recorded in
this acquisition.  As the operating results of The Daily Buzz, LLC
from the date of the acquisition of Emmis’ interest through March 31, 2007 were
not material, the Company used the equity method of accounting to reflect its
share of the venture’s operating results for the entire three months ended March
31, 2007 and effective April 1, 2007 reconsolidated the operating
results.





Use
of Estimates in the Preparation of Financial Statements




The
preparation of consolidated 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 consolidated
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
materially 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, including the Company’s
broadcast licenses and goodwill.




Reclassifications
  Reclassifications
have been made to certain amounts previously reported resulting from the
Company’s 2007 sale of its Decatur station and the treatment of the station
as a discontinued operation.
  Recent
Accounting Pronouncements
  In March 2008,
the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial
Accounting Standards(“SFAS”) No. 161,
Disclosure about Derivative Instruments and Hedging Activities, an amendment of
FASB Statement No. 133.This Statement changes the disclosure
requirements for derivative instruments and hedging activities. Entities are
required to provide enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged items
are accounted for under Statement 133 and its related interpretations, and (c)
how derivative instruments and related hedged items affect an entity’s financial
position, financial performance, and cash flows.  This Statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 15, 2008, with early application
encouraged.  The Company does not
expect the adoption of SFAS No. 161 to have a material effect on its
consolidated financial statements.
  In
December 2007, the FASB issued SFAS No. 141(R), Business Combinations
(SFAS No. 141(R)), which replaces SFAS No. 141, Business Combinations,
requires an acquirer to recognize the assets acquired, the liabilities assumed,
and any non-controlling interest in the acquiree at the acquisition date,
measured at their fair values as of that date, with limited exceptions. This
Statement also requires the acquirer in a business combination achieved in
stages to recognize the identifiable assets and liabilities, as well as the
non-controlling interest in the acquiree, at the full amounts of their fair
values. SFAS No. 141(R) makes various other amendments to authoritative
literature intended to provide additional guidance or to confirm the guidance in
that literature to that provided in this Statement. This Statement applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008.  The Company does not expect the adoption of
SFAS No. 141(R) to have a material effect on its consolidated financial
statements.
  39
 ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
   In
December 2007, the FASB issued SFAS No. 160, Non-controlling Interests
in Consolidated Financial Statements (SFAS No. 160), which amends
Accounting Research Bulletin No. 51, Consolidated Financial Statements, to
improve the relevance, comparability, and transparency of the financial
information that a reporting entity provides in its consolidated financial
statements. SFAS No. 160 establishes accounting and reporting standards
that require the ownership interests in subsidiaries not held by the parent to
be clearly identified, labeled and presented in the consolidated statement of
financial position within equity, but separate from the parent’s equity. This
statement also requires the amount of consolidated net income attributable to
the parent and to the non-controlling interest to be clearly identified and
presented on the face of the consolidated statement of income. Changes in a
parent’s ownership interest while the parent retains its controlling financial
interest must be accounted for consistently, and when a subsidiary is
deconsolidated, any retained non-controlling equity investment in the former
subsidiary must be initially measured at fair value. The gain or loss on the
deconsolidation of the subsidiary is measured using the fair value of any
non-controlling equity investment. The Statement also requires entities to
provide sufficient disclosures that clearly identify and distinguish between the
interests of the parent and the interests of the non-controlling owners. This
Statement applies prospectively to all entities that prepare consolidated
financial statements and applies prospectively for fiscal years, and interim
periods within those fiscal years, beginning on or after December 15,
2008.  The Company does not expect the adoption of SFAS No. 160 to
have a material effect on its consolidated financial statements.
  In
February 2007, the FASB issued SFAS No. 159, The Fair Value Option for
Financial Assets and Financial Liabilities—including an amendment of FASB
Statement No. 115 (SFAS No. 159), which is effective for fiscal years
beginning after November 15, 2007. SFAS No. 159 permits the Company to
choose to measure many financial instruments and certain other items at fair
value. The objective is to improve financial reporting by providing entities
with the opportunity to mitigate volatility in reported earnings caused by
measuring related assets and liabilities differently without having to apply
complex hedge accounting provisions. SFAS No. 159 is expected to expand the
use of fair value measurement, which is consistent with the FASB’s long-term
measurement objectives for accounting for financial instruments. SFAS
No. 159 is effective for fiscal year 2008 but early adoption is permitted.
The Company is currently evaluating the impact, if any, that the adoption of
SFAS No. 159 will have on its consolidated financial
statements.
 In September
2006, the FASB issued SFAS No. 157, "Fair Value Measures" ("SFAS 157").
SFAS 157 defines fair value, establishes a framework for measuring fair value
and enhances disclosures about fair value measures required under other
accounting pronouncements, but does not change existing guidance as to whether
or not an instrument is carried at fair value. SFAS 157 is effective for fiscal
years beginning after November 15, 2007, the year beginning January 1, 2008 for
the Company. The FASB has proposed a deferral of the provisions of SFAS No. 157
relating to nonfinancial assets and liabilities that would delay implementation
by the Company until January 1, 2009.  SFAS No. 157 is not expected to
materially affect how the Company determines fair value, but may result in
additional disclosures.
  In September
2006, the FASB issued SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB
Statements No. 87, 88, 106 and 132(R)”, (“SFAS 158”).
SFAS 158 requires recognition of the overfunded or underfunded status of a
benefit postretirement plan in the statement of financial position, as well as
recognition of changes in that funded status through comprehensive income in the
year in which they occur. SFAS 158 also requires a change in the
measurement of a plan’s assets and benefit obligations as of the end date of the
employer’s fiscal year. SFAS 158 is effective for fiscal years ending after
December 15, 2006, except for the measurement date provisions, which are
effective for fiscal years ending after December 15, 2008. As the Company has
never had any defined benefit plans or unfunded liabilities, the adoption of
this standard did not have any impact on the Company’s consolidated financial
statements.
  In
September 2006, the SEC issued Staff Accounting Bulletin 108, “Considering
the Effects of Prior Year Misstatements when Quantifying Misstatements in
Current Year Financial Statements” (“SAB 108”). SAB 108 provides
guidance on the consideration of effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. The SEC staff believes registrants must quantify errors using both a
balance sheet and income statement approach and evaluate whether either approach
results in quantifying a misstatement that, when all relevant quantitative and
qualitative factors are considered, is material. SAB 108 is effective for
the first annual period ending after November 15, 2006 with early
application encouraged. The adoption of SAB 108 had no effect on the Company’s
consolidated financial statements.




(3)
Discontinued Operations





As described
in Note (1), the Company’s stations KPLR, serving the St. Louis marketplace
(sold on March 21, 2003), KUWB, serving the Salt Lake City marketplace (sold on
April 4, 2006), WTVK serving the Ft. Myers-Naples marketplace (sold on February
16, 2007) and WBUI serving the Champagne-Springfield-Decatur marketplace (sold
on October 25, 2007) have been treated as discontinued operations.




Since the
proceeds from the sale of the Company’s discontinued operations exceeded, in the
aggregate, the Company’s outstanding debt and that debt was required to be
repaid from the proceeds, the Company has allocated all interest expense to
discontinued operations for all periods presented with the exception of interest
expense incurred subsequent to the closure of the Company’s most recent sale of
its WBUI station on October 25, 2007, which has been included in income from
continuing operations in the accompanying consolidated financial
statements.  Also, since the debt under the Company’s senior credit
facility of $36.6 million at December 31, 2006 was required to be repaid with
the proceeds from the Sun Transaction, it was classified as a current
liability.




40


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS




Summarized
financial information, in thousands, relating to the operations of these four stationsis as follows:




December
      31,
              
              
              December
      31,2007
              
              
              2006Assets
      held for sale:Programming
      rights - current
              
              $
              ---
              
              
              $
              1,450Programming
      rights - long-term
              
              
              ---
              
              
              
              2,485Property
      and equipment, net
              
              
              268
              
              
              
              4,796Goodwill,
      net (including at corp)
              
              
              ---
              
              
              
              1,863Broadcast
      licenses, net
              
              
              ---
              
              
              
              14,835Assets
      held for sale
              
              $
              268
              
              
              $
              25,429Liabilities
      held for sale:Programming
      liabilities - current
              
              $
              ---
              
              
              $
              1,589Programming
      liabilities - long-term
              
              
              ---
              
              
              
              2,653Deferred
      income taxes
              
              
              ---
              
              
              
              2,320Liabilities
      held for sale
              
              $
              ---
              
              
              $
              6,562Net
      assets held for sale
              
              $
              268
              
              
              $
              18,867
  Selected
operating results were as follows:







Twelve
      Months EndedDecember
      31,2007
              
              
              2006Net revenues
              
              $
              2,914
              
              
              $
              12,199Loss from operations, before gain on sale andincome tax expense
              
              
              (3,567
              )
              
              
              (4,928
              )Gain on sale of assets
              
              
              27,871
              
              
              
              7,435Income tax expense
              
              
              (2,288
              )
              
              
              (395
              )Income from discontinued operations
              
              $
              22,016
              
              
              $
              2,112




The 2007
gain on sale includes the gain on the Sun Transaction of $27,904,000 net of a
$33,000 loss relating to the Gocom Transaction.




The 2006
gain on sale includes $5,913,000 on the sale of the Company’s Salt Lake City
station to Clear Channel and $1,522,000 in additional contingent consideration
received by the Company from the Tribune Company relating the Tribune
Transaction and its use of KPLR’s prior tax net operating losses
(“NOLs”).




41




ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(4)
Property and Equipment




Property and
equipment consist of the following:




December
      31,2007
              
              
              2006(in
      thousands)Buildings
      and improvements
              
              $
              3,455
              
              
              $
              3,276Broadcast
      and other equipment
              
              
              35,395
              
              
              
              32,768Furniture
      and fixtures
              
              
              619
              
              
              
              511Vehicles
              
              
              164
              
              
              
              142Construction
      in process
              
              
              48
              
              
              
              5Total
      property and equipment, at cost
              
              
              39,681
              
              
              
              36,702Less:
      Accumulated depreciation and amortization
              
              
              (25,235
              )
              
              
              (21,001
              )Net
      property and equipment
              
              $
              14,446
              
              
              $
              15,701




Property
and equipment for the Company’s stations WTVK in Ft. Myers – Naples, Florida and
WBUI in Decatur, Illinois is included in the consolidated balance sheet as of
December 31, 2007 and 2006 in “Assets held for sale” as disclosed in Note 3 –
Discontinued Operations.




Included in property and
equipment at both December 31, 2007 and 2006 are assets subject to capital
leases with a total cost of $1,122,000 and associated accumulated depreciation
of $704,000 and $596,000 at December 31, 2007 and 2006, respectively. The
construction in process account includes miscellaneous broadcast and studio
equipment not yet placed into service.





(5)
Notes Payable Under Revolving Credit Facility and Second-Lien Term
Loan




On March
29, 2006, the Company restructured its revolving credit facility (the
“Revolver”) and its second-lien term loan (the “SLTL”). The amendments to its
Revolver and its SLTL reduced the Company’s prepayment penalties, eliminated all
financial covenants effective December 31, 2005, reset the maximum advances
under the Revolver to the lesser of $60.0 million or 50% of the aggregate
appraised STAC (“start-up stations with affiliation agreements”) and allowed the
Company to borrow $10.0 million that same date to reduce the outstanding
borrowings on its higher interest rate SLTL from $20.0 million to $10.0 million.
In addition, upon the successful completion of the Clear Channel Transaction,
the amendment extended the maturity date for the Revolver to May 2009, allowed
up to $20.0 million in stock repurchases and required the Company to repay from
the Clear Channel Transaction the final $10.0 million in outstanding balances
under its SLTL and terminate that agreement.




On April
4, 2006, the Company completed the Clear Channel Transaction and repaid the
remaining balances under the SLTL. The remaining $8.5 million of the $18.5
million proceeds from the Clear Channel Transaction were used to reduce the
outstanding borrowings under the Revolver.




On February
16, 2007, the Company completed the Sun Transaction and completely repaid the
then outstanding borrowings and accrued interest under the Revolver of $37.2
million. That same day the Company declared a $0.50 dividend per common share
that was paid on March 12, 2007 to holders of record at the close of business on
February 26, 2007.  The aggregate dividend was $8.0 million and the
Company used approximately $7.0 million of the remaining proceeds from the Sun
Transaction along with approximately $1.0 million in new borrowings under the
senior credit facility to make that dividend payment.




On May 30,
2007, the Company voluntarily elected to permanently reduce its advance rate
from 45% of appraised STAC value to 20% of appraised STAC value which resulted
in a reduction in the Company’s maximum allowed borrowings from $39.9 million to
approximately $17.7 million and also reduced the Company’s borrowing rates by
250 basis points.




On October
25, 2007, the Company completed the Gocom Transaction and repaid all of its then
outstanding borrowings of $2.8 million under the Revolver.




42


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






At December
31, 2006, the Company had borrowings of $36.6 million under its senior credit
facility at a weighted average annual interest rate of 10.5% and was in
compliance with all the covenants contained in the loan agreement.  At
December 31, 2007, the Company had no outstanding borrowings under its revolving
credit facility and available credit was approximately $16.9 million and was in
compliance with all the covenants contained in the loan
agreement.





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, which approximates the
effective interest method, over the term, including amended terms, of the
facilities.





(6)
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, 2007 are:




In
      thousands2008
              
              $
              1,2142009
              
              
              1,0742010
              
              
              9182011
              
              
              8592012
              
              
              822Thereafter
              
              
              2,187Total
              
              $
              7,074


Total rental
expense for continuing operations under operating leases for the twelve months
ended December 31, 2007 and 2006 was approximately $1,201,000 and $1,232,000,
respectively. Total rental expense for discontinued operations under operating
leases for the twelve months ended December 31, 2007 and 2006 was approximately
$95,000 and $498,000, respectively.





Obligations
Under Capital Leases




As of
December 31, 2007, certain equipment was leased under capital equipment
facilities. Future minimum lease payments for the Company’s continuing
operations under capital leases as of December 31, 2007 are:


In
      thousands2008
            
            $
            872009
            
            
            852010
            
            
            852011
            
            
            852012
            
            
            85Thereafter
            
            
            741Total
      minimum lease payments
            
            
            1,168Less:
      Amount representing interest
            
            
            (322
            )Present
      value of minimum lease payments
            
            
            846Less:
      Current portion
            
            
            (46
            )Long-term
      portion
            
            $
            800




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 $8,947,000
for the Company’s continuing operations.  There were no such
commitments for the Company’s discontinued operations as of December 31,
2007.


43


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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:




In
      thousands2008
                
                $
                6,5372009
                
                
                6,7432010
                
                
                6,2742011
                
                
                4,4232012
                
                
                2,671Thereafter
                
                
                2,267Program
      rights payable maturities
                
                $
                28,915
  Other
Commitments





The
Company has other commitments for goods and services not included in its
consolidated balance sheet, including its network affiliation agreements with
The CW and MyNetworkTV networks, agreements for ratings services and license
fees for websites.  Those commitments for continuing operations for
the next five years are as follows:




In
      thousands2008
              
              $
              3,2582009
              
              
              2,9102010
              
              
              2,7532011
              
              
              1,8752012
              
              
              6Thereafter
              
              
              61Total
              
              $
              10,863




Legal
Proceedings




The
Company is currently, and from time to time, involved in ordinary routine
litigation incidental to the conduct of its 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.




44


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
   (7)
Income Taxes
  The
income tax (benefit) expense consists of the following:


Year
      ended December 31,2007
            
            
            2006(In
      thousands)Continuing
      Operations:Current:Federal
            
            $
            (3,329
            )
            
            $
            ---State
            
            
            (618
            )
            
            
            155Total
      current tax (benefit) expense
            
            
            (3,947
            )
            
            
            155Deferred:Federal
            
            $
            177
            
            
            $
            1,566State
            
            
            36
            
            
            
            315Total
      deferred tax expense
            
            
            213
            
            
            
            1,881Total
      income tax (benefit) expense
            
            $
            (3,734
            )
            
            $
            2,036Discontinued
      Operations:Current:Federal
            
            $
            3,838
            
            
            $
            ---State
            
            
            770
            
            
            
            ---Total
      current tax expense
            
            
            4,608
            
            
            
            ---Deferred:Federal
            
            $
            (1,932
            )
            
            $
            329State
            
            
            (388
            )
            
            
            66Total
      deferred tax (benefit) expense
            
            
            (2,320
            )
            
            
            395Total
      income tax expense
            
            $
            2,288
            
            
            $
            395




The
differences between the income tax (benefit) 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 31,2007
            
            
            2006(In
      thousands)Tax
      benefit at U.S. federal statutory rate
            
            $
            (3,555
            )
            
            $
            (1,604
            )State
      income taxes, net of federal tax benefit
            
            
            (384
            )
            
            
            310Increase
      in valuation allowance
            
            
            189
            
            
            
            3,279Other
            
            
            16
            
            
            
            51Income
      tax (benefit) expense
            
            $
            (3,734
            )
            
            $
            2,036


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


45




ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


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





Year
      ended December 31,2007
            
            
            2006(In
      thousands)Deferred
      tax assets:Accrued
      vacation
            
            $
            155
            
            
            $
            140AMT
      credits
            
            
            1,048
            
            
            
            1,048Bad
      debt and other reserves
            
            
            310
            
            
            
            218Deferred
      income
            
            
            159
            
            
            
            46Sales
      incentives
            
            
            159
            
            
            
            155Deferred
      compensation
            
            
            1,192
            
            
            
            1,033Intangible
      amortization
            
            
            338
            
            
            
            565Net
      operating loss carryforward
            
            
            24,524
            
            
            
            34,333Other
            
            
            8
            
            
            
            9Total
      deferred tax assets
            
            
            27,893
            
            
            
            37,547Less:
      valuation allowance
            
            
            (26,441
            )
            
            
            (34,384
            )Deferred
      tax assets
            
            
            1,452
            
            
            
            3,163Deferred
      tax liabilities:Property
      and equipment depreciation
            
            
            (1,333
            )
            
            
            (3,163
            )Intangible
      amortization
            
            
            (9,964
            )
            
            
            (9,751
            )Other
            
            
            (119
            )
            
            
            ---Deferred
      tax liabilities
            
            
            (11,416
            )
            
            
            (12,914
            )Net
      deferred income tax liabilities
            
            $
            (9,964
            )
            
            $
            (9,751
            )




In addition
to the deferred taxes reflected in the table above, the Company included within
“Liabilities held for sale” as of December 31, 2006 net non-current deferred
income tax liability of $2,320,000.




In
assessing the realizability of deferred tax assets, management considered
whether it is more likely than not that some portion 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 $26.4 million and $34.4 million,
respectively as of December 31, 2007 and 2006.  The Company will
utilize approximately $23.5 million in net operating loss carryforwards against
2007 taxable income and at December 31, 2007, the Company had, for federal and
state tax purposes, net operating loss carryforwards of approximately $64.2
million that expire at various dates through 2026. 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.




(8)
Related Party Transactions




The Company
licensed exclusive rights to automobile related websites in most of its markets
from CarSoup of Minnesota, Inc (“CarSoup”) through December 31,
2005.  The Company owned 30% of the outstanding common stock of
CarSoup until it sold that interest back to CarSoup in April
2006.  The Company recorded 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 for the year ended December 31, 2006.





(9) 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 $186,000 and $216,000, to the Plan for the years ended December 31,
2007 and 2006, respectively.




46


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(10)
Stock Option Compensation




The
Company’s 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 the Company’s flexibility to structure
future incentives. The Company’s employees, officers, directors, and consultants
may be selected to receive awards under the plan.




A maximum of
4,200,000 shares of the Company’s common stock may be issued under the plan,
(approximately 25% of the Company’s current outstanding shares). As of December
31, 2007, 4,177,585 shares are reserved and available for future exercises of
stock options. 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 the Company’s 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.




A summary of
the status of the Company’s Stock Incentive Plan, and changes for the years
ended December 31, 2007, and 2006 is presented below (not in
thousands):




Weighted
      AverageOptions
            
            
            Exercise
      PriceOutstanding
      at December 31, 2005
            
            
            2,466,696
            
            
            $
            15.87Granted
            
            
            20,000
            
            
            
            4.89Exercised
            
            
            ---
            
            
            
            ---Forfeited
            
            
            (22,850
            )
            
            
            11.25Outstanding
      at December 31, 2006
            
            
            2,463,846
            
            
            $
            15.82Granted
            
            
            ---
            
            
            
            ---Exercised
            
            
            ---
            
            
            
            ---Forfeited
            
            
            (105,500
            )
            
            
            18.62Outstanding
      at December 31, 2007
            
            
            2,358,346
            
            
            $
            15.70Exercisable
      at December 31, 2006
            
            
            1,875,846
            
            
            $
            18.76Exercisable
      at December 31, 2007
            
            
            2,154,762
            
            
            $
            16.58




47


ACME
COMMUNICATIONS, INC. AND SUBSIDIARIES
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS






The following table
summarizes information about stock options outstanding and exercisable at
December 31, 2007 (not in thousands):




Options
      OutstandingWeighted
              
              
              Intrinsic
      Value of
              
              
              WeightedNumber
              
              
              Average
              
              
              In
      the Money
              
              
              AverageRange
      of Exercise
              
              
              Outstanding
      at
              
              
              Remaining
              
              
              Outstanding
      Options at
              
              
              ExercisePrices
              
              
              December
      31, 2007
              
              
              Contractual
      Life
              
              
              December
      31, 2007
              
              
              Price$
              4.89
              
              
              
              
              
              
              20,000
              
              
              
              8.97
              
              
              $
              -
              
              
              $
              4.89$
              5.72
              
              
              $
              6.00
              
              
              
              481,000
              
              
              
              7.57
              
              
              
              -
              
              
              
              5.98$
              6.95
              
              
              $
              7.99
              
              
              
              485,900
              
              
              
              7.42
              
              
              
              -
              
              
              
              7.03$
              9.13
              
              
              
              
              
              
              
              4,200
              
              
              
              2.87
              
              
              
              -
              
              
              
              9.13$
              15.00
              
              
              $
              18.00
              
              
              
              138,000
              
              
              
              1.66
              
              
              
              -
              
              
              
              15.78$
              23.00
              
              
              $
              24.88
              
              
              
              1,229,246
              
              
              
              1.76
              
              
              
              -
              
              
              
              23.112,358,346
              
              
              
              4.17
              
              
              $
              -
              
              
              $
              15.70
  Options
      ExercisableWeighted
              
              
              Intrinsic
      Value of
              
              
              WeightedNumber
              
              
              Average
              
              
              In
      the Money
              
              
              AverageRange
      of Exercise
              
              
              Exercisable at
              
              
              Remaining
              
              
              Exercisable Options
      at
              
              
              ExercisePrices
              
              
              December
      31, 2007
              
              
              Contractual
      Life
              
              
              December
      31, 2007
              
              
              Price$
              4.89
              
              
              
              
              
              
              
              10,000
              
              
              
              8.97
              
              
              $
              -
              
              
              $
              4.89$
              5.72
              
              
              $
              6.00
              
              
              
              380,458
              
              
              
              7.57
              
              
              
              -
              
              
              
              5.98$
              6.95
              
              
              $
              7.99
              
              
              
              392,858
              
              
              
              7.38
              
              
              
              -
              
              
              
              7.03$
              9.13
              
              
              
              
              
              
              
              4,200
              
              
              
              2.87
              
              
              
              -
              
              
              
              9.13$
              15.00
              
              
              $
              18.00
              
              
              
              138,000
              
              
              
              1.66
              
              
              
              -
              
              
              
              15.78$
              23.00
              
              
              $
              24.88
              
              
              
              1,229,246
              
              
              
              1.76
              
              
              
              -
              
              
              
              23.112,154,762
              
              
              
              3.84
              
              
              $
              -
              
              
              $
              16.58


Under SFAS
No. 123(R), options are valued at their date of grant and then expensed
over their vesting period. The values of the Company’s options were calculated
at the date of grant using the Black-Scholes option-pricing model. The weighted
average fair value per share of the options granted was $2.65, for the year
ended December 31, 2006.  No options were granted during the year
ended December 31, 2007 and no options were exercised during the years ended
December 31, 2007 or 2006. The total fair value of shares vested during the
years ended December 31, 2007 and 2006 was $441,000 and $459,000,
respectively.


48




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





None.





ITEM
9A(T).Controls
and Procedures




(a)
Evaluation of Disclosure Controls and Procedures




Our
management, with the participation of our chief executive officer and chief
financial officer, carried out an evaluation of the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 (the "Exchange Act") Rules 13a-15(e) and 15d-15(e)) as of the end of the
period covered by this report (the "Evaluation Date"). Based upon that
evaluation, the chief executive officer and chief financial officer concluded
that as of the Evaluation Date, our disclosure controls and procedures are
effective to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act (i) is recorded,
processed, summarized and reported, within the time periods specified in the
SEC's rules and forms and (ii) is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required
disclosure.




Our
management, including our chief executive officer and chief financial officer,
does not expect that our disclosure controls and procedures or our internal
controls will prevent all errors and all fraud. A control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations in all control systems, no evaluation of controls
can provide absolute assurance that all control issues and instances of fraud,
if any, within ACME have been detected.




(b)
Management's Report on Internal Control Over Financial Reporting




Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act). Internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of our financial
reporting and preparation of financial statements for external purposes in
accordance with U.S. generally accepted accounting
principles.  Internal control over financial reporting includes
maintaining records that in reasonable detail accurately and fairly reflect our
transactions; providing reasonable assurance that transactions are recorded as
necessary for preparation of our financial statements in accordance with U. S.
generally accepted accounting principles; providing reasonable assurance that
our receipts and expenditures are made in accordance with authorizations of our
management and directors; and providing reasonable assurance that unauthorized
acquisition, use or disposition of our assets that could have a material effect
on our financial statements would be prevented or detected on a timely
basis.  Because of its inherent limitations, internal control over
financial reporting is not intended to provide absolute assurance that a
misstatement of our financial statements would be prevented or detected. Our
management assessed the effectiveness of our internal control over financial
reporting as of December 31, 2007. In making this assessment, our management
used the criteria set forth in Internal Control-Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on
this assessment, our management has concluded that, as of December 31, 2007, our
internal control over financial reporting is effective based on these criteria
to provide reasonable assurance regarding the reliability of financial reporting
and preparation of financial statements for external reporting purposes in
accordance with U.S. generally accepted accounting principles. This annual
report does not include an attestation report of our independent registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by our independent registered
public accounting firm pursuant to temporary rules of the SEC that permit us to
provide only management's report in this annual report.


(c)
Changes in Internal Control Over Financial Reporting




There were
no changes in our internal control over financial reporting that occurred during
the most recent completed fiscal quarter covered by this report that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.




ITEM
9B. Other
Information




None.




49




PART
III





ITEM
10. Directors, Executive
Officers and Corporate Governance





Executive
Officers





The
following table sets forth information about our executive officers at December
31, 2007:





Name
            Age
      (1)
            PositionJamie
      Kellner
            60
            Chairman
      of the Board and Chief Executive OfficerDouglas
      Gealy
            47
            President,
      Chief Operating Officer and DirectorThomas
      Allen
            55
            Executive
      Vice President, Chief Financial Officer and
  Director





(1) as of
March 28, 2008





Jamie Kellneris 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 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.




The
remaining portion of the information required by Item 10 is incorporated by
reference to the information under the captions "Proposal One: Election of
Directors," “Executive Officers,” "Corporate Governance, Board Composition and
Board Committees" and "Section 16(a) Beneficial Ownership Reporting Compliance"
appearing in our Proxy Statement to be filed pursuant to Regulation 14A relating
to the 2008 Annual Meeting of Stockholders.


ITEM
11. Executive
Compensation
  The
information required by Item 11 is incorporated by reference to the information
under the caption "Executive Compensation" appearing in our Proxy Statement to
be filed pursuant to Regulation 14A relating to the 2008 Annual Meeting of
Stockholders.
  ITEM 12.Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters




The
information required by Item 12 is incorporated by reference to the information
under the captions "Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters" and "Securities Authorized for
Issuance Under Equity Compensation Plans" appearing in our Proxy Statement to be
filed pursuant to Regulation 14A relating to the 2008 Annual Meeting of
Stockholders.




50





ITEM
13. Certain Relationships and
Related Transactions and Director Independence




The
information required by Item 13 is incorporated by reference to the information
under the captions "Certain Relationships and Related Person Transactions,"
"Proposal One: Election of Directors" and "Corporate Governance, Board
Composition and Board Committees" appearing in our Proxy Statement to be filed
pursuant to Regulation 14A relating to the 2008 Annual Meeting of
Stockholders.





ITEM
14. Principal Accountant Fees
and Services




The
information required by Item 14 is incorporated by reference to the information
under the captions "Principal Accountant Fees and Services," and "Audit
Committee Pre-Approval of Audit and Permissible Non-Audit Services of
Independent Auditors" appearing in our Proxy Statement to be filed pursuant to
Regulation 14A relating to the 2008 Annual Meeting of Stockholders.




PART
IV





ITEM
15. Exhibits




1. Index to
Exhibits filed as part of this report





As listed in
the Exhibit Index beginning on page
53hereof.




51




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.




ACME
      Communications, Inc.March
      31, 2008
              By:
              /s/ Thomas D. AllenThomas
      D. AllenExecutive
      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 his 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
            
            Chairman
      of the Board and Chief Executive Officer
            
            March
      31, 2008Jamie
      Kellner
            
            (Principal
      Executive Officer)/s/ Douglas E. Gealy
            
            President
      and Chief Operating Officer
            
            March
      31, 2008Douglas
      E. Gealy
            
            Director/s/ Thomas D. Allen
            
            Executive
      Vice President, Chief Financial Officer
            
            March
      31, 2008Thomas
      D. Allen
            
            (Principal
      Financial and Accounting Officer)  and Director/s/ Thomas Embrescia
            
            Director
            
            March
      31, 2008Thomas
      Embrescia/s/ Michael G. Corrigan
            
            Director
            
            March
      31, 2008Michael
      G. Corrigan/s/ John E. Conlin
            
            Director
            
            March
      31, 2008John
      E. Conlin/s/ Brian
      McNeill
            
            Director
            
            March
      31, 2008Brian
      McNeill/s/ Frederick G. Wasserman
            
            Director
            
            March
      31, 2008Frederick
      G. Wasserman




52




EXHIBIT
INDEX





Exhibit
              Number
            Description3.1
      (1)
            Restated
      Certificate of Incorporation of ACME Communications,
  Inc.3.2
      (17)
            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)
            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. +10.13
      (8)
            Form
      of Indemnification Agreement for Executive Officers and Directors.
      +10.14
      (3)
            First
      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 March 9,
  2005.10.15
      (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.10.16
      (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.


10.17
      (10)
            Agreement
      between ACME Television, LLC and The CW Network dated March 9, 2006.
      **10.18
      (10)
            Agreement
      between ACME Television of New Mexico, LLC and MyNetworkTV dated March 10,
      2006.10.19
      (11)
            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 29, 2006.10.20
      (11)
            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 29,
  2006.




53




10.21
      (12)
            Asset
      Purchase Agreement Dated May 12, 2006 between ACME Television of Florida,
      LLC, ACME Television Licenses of Florida, LLC and Sun Broadcasting,
      Inc.10.22
      (13)
            Second
      Amendment to Consulting Agreement between Jamie Kellner and ACME
      Communications, Inc. dated August 10, 2006. +10.23
      (13)
            Second
      Amendment to Employment Agreement between Douglas E. Gealy and ACME
      Communications, Inc. dated August 10, 2006. +10.24
      (13)
            Second
      Amendment to Employment Agreement between Thomas D. Allen and ACME
      Communications, Inc. dated August 10, 2006. +10.25
      (14)
            First
      Amendment to the 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 August
      30, 2006.10.26
      (15)
            Second
      Amendment to the 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 February
      15, 2007.10.27
      (16)
            Asset
      Purchase Agreement Dated June 14, 2007 by and among Gocom Media of
      Illinois, LLC, ACME Television of Illinois, LLC and ACME Television,
      Licenses of Illinois, LLC.21
            Subsidiaries
      of ACME Communications, Inc.23.1
            Consent
      of Mayer Hoffman McCann, P.C.24.1
            Power
      of Attorney (contained on "Signatures" page).31.1
            Certification
      of Chief Executive Officer pursuant to Rules 13a-14(a) or 15d-14(a)
      under the Securities and Exchange Act of 1934, as amended, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.31.2
            Certification
      of Chief Financial Officer pursuant to Rules 13a-14(a) or 15d-14(a)
      under the Securities and Exchange Act of 1934, as amended, as adopted
      pursuant to Section 302 of the Sarbanes-Oxley Act of
  2002.32
            Certificate
      of Chief Executive Officer and Chief Financial Officer pursuant to 18
      U.S.C. Section 1350, as adopted 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 Annual Report on Form 10-K for
      the year ended December 31, 2005.(11)
                Incorporated
      by reference to ACME Communications, Inc.’s Report on Form 8-K filed on
      April 7, 2006.(12)
                Incorporated
      by reference to ACME Communications, Inc.’s Quarterly Report on Form 10-Q
      for the quarter ended March 31, 2006.(13)
                Incorporated
      by reference to ACME Communications, Inc.’s Quarterly Report on Form 10-Q
      for the quarter ended June 30, 2006.(14)
                Incorporated
      by reference to ACME Communications, Inc.’s Quarterly Report on Form 10-Q
      for the quarter ended September 30, 2006.(15)
                Incorporated
      by reference to ACME Communications, Inc.’s Current Report on Form 8-K
      filed on February 22, 2007.(16)
                Incorporated
      by reference to the report on Form 8-K filed by ACME Communications, Inc.
      on June 20, 2007.(17)
                Incorporated
      by reference to the report on Form 8-K filed by ACME Communications, Inc.
      on December 5, 2007.**
                portions
      of the exhibit have been omitted pursuant to the Company’s request for
      confidential treatment.+
                denotes








54