---

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# UNITED STATES  SECURITIES AND
EXCHANGE COMMISSION

# Washington, D.C. 20549

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# FORM 10-K/A

# (Amendment No.1)

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

For the fiscal year endedDECEMBER 31, 2006

Commission File
Number: 000-27105

ACME COMMUNICATIONS,
INC.

(Exact name of
registrant as specified in its charter)

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

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

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 exchange on which registered         
|-------------------------------------- |  | --------------------------------------------------
|Common 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) Exchange Act. of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.

Yes  [X]
          No  [  ]

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

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

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

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

Yes   [  ]
           No  [X]

As  of the last  business day of the  registrants
most  recently  completed  second  fiscal  quarter  (June 30,  2006),  the  aggregate  market value of the
registrants  common stock held by  non-affiliates  of the registrant was $55,730,689  based on a price of
$5.08 per share, as reported on the NASDAQ Stock Market.

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

|Class                                  |  | Outstanding at March 29, 2007                                
|-------------------------------------- |  | -------------------------------------------------------------
|Common Stock, $.01 par value per share |  | 16,772,415 shares (including 725,652 shares held in treasury)

DOCUMENTS INCORPORATED BY REFERENCE

|Document                                                                    |  | Parts Into Which Incorporated
|--------------------------------------------------------------------------- |  | -----------------------------
|Portions of the Proxy Statement for the 2007 Annual Meeting of Stockholders |  | Part III                     

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# EXPLANATORY NOTE

The Company is filing this Amendment
No. 1 (the Amendment) to its Annual Report on Form 10-K for the year ended
December 31, 2006 originally filed on March 30, 2007 to (1) remove the label
unaudited which was inadvertently included in the Companys balance sheet
on page 33 and (2) correct the date of KPMG LLPs report reference included in their
consent filed as Exhibit 23.1.

These are the only items that have
been amended, but for convenience, the Form 10-K is being amended and restated in this
Amendment. No other information is being amended by the Amendment.



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

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| | * | Items
incorporated by reference, in whole or in part, to our Proxy Statement to be filed
pursuant to Regulation 14A relating to the 2007 Annual Meeting of Stockholders
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------



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Forward-looking Statements

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

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

PART I

# Item 1. Business

ACME
Communications, Inc. and its wholly-owned subsidiaries (together, unless the context
otherwise requires, the Company or we) owns and operates broadcast
television stations in medium-sized markets across the United States. On February 16,
2007, we completed the sale of our station WTVK in the Ft. Myers  Naples, Florida
marketplace which left us with seven television stations (and a full-power satellite
station) in six markets (our Continuing Stations). Six of these Continuing
Stations are network affiliates of The CW Television Network and one station is a network
affiliate of MyNetworkTV. These Continuing Stations broadcast in markets that cover, in
the aggregate, approximately 2.6% of the total U.S. television households.

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 August 2005, we entered into an agreement to
sell our Salt Lake City station, KUWB, to subsidiaries of Clear Channel Communications,
Inc. (the Clear Channel Transaction) for $18.5 million in an all-cash
transaction. The Clear Channel Transaction was completed on April 4, 2006. In May 2006, we
entered into an agreement to sell our Ft. Myers  Naples, Florida station, WTVK, to
Sun Broadcasting, Inc. (the Sun Transaction) for $45.0 million in cash. The
Sun Transaction was completed on February 16, 2007. In accordance with U.S. generally
accepted accounting principles (GAAP), we have accounted for the results of
these four 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).

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

The
CW launched in September 2006, immediately following the closure of UPN and The WB Network
and included on its program schedule the better performing shows from each of The WB and
UPN networks. 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 the November 2006 ratings sweeps was essentially
unchanged from the prior networks November 2005 ratings.

Similar
to The WB Networks approach, The CW focuses on younger demographics than the Big
Four networks. Accordingly, we believe we will be able to continue our strategy to focus
much of our surrounding, non-network, syndicated programming on shows that appeal to
younger viewers. In addition, in 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. 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



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

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. We
believed then, and still believe today, that significant value will be created in aligning
ourself with emerging networks (i.e., The CW and MyNetworkTV) that, with respect to The
CW, enjoys significant financial, creative and distribution support from three large media
companies  Time Warner Inc., Viacom and the Tribune Company, and with respect to
MyNetworkTV, enjoys significant financial and creative support from another large media
company, News Corp.

By
the end of 1997 we had three stations on the air  KPLR serving St. Louis, KWBP
serving Portland, Oregon, and WBXX serving Knoxville. During 1998 we added another two
stations  KUWB, serving Salt Lake City and WTVK, serving the Ft. Myers 
Naples, Florida market  bringing our total stations on the air to five. In 1999, we
put a sixth station, KWBQ, serving the Albuquerque  Santa Fe market, on the air and
acquired another four stations  KASY serving Albuquerque  Santa Fe, WBDT
serving Dayton, WIWB serving Green Bay and WBUI, serving the Champagne  Springfield
 Decatur market. Together, these acquisitions were the major catalyst for our
initial public offering in September 1999.

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

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

The
broadcast television business in 2004 saw record-level political advertising, especially
in connection with the 2004 Presidential campaign and especially in key, battleground
states. Including political advertising, aggregate market revenues in our Continuing
Stations six markets were up 13%, while revenues excluding political advertising
were essentially unchanged from prior year levels. However, we, along with other WB
Network and UPN Network affiliates, did not greatly benefit from this record in political
advertising expenditures, as almost all of this advertising is targeted at the older
skewing news audiences of ABC, CBS and NBC affiliates, and we garnered less than a 1%
share of such political advertising revenues. Our revenue share of non-political revenues
for 2004 reached a high for our Continuing Stations of 9.0%.

Aggregate
2005 market revenues in our Continuing Stations markets, excluding political revenues,
were up appromximately 3% compared to 2004. Local advertising sales were significantly
stronger than national advertising sales, with a growth rate of 4.9% compared to a decline
of .6% for national ad revenue. The national growth rate, especially when viewed in the
context of 2004s record level political advertising which reduced the overall
advertising inventory available, thereby increasing prices for non-political advertisers,
reflected very weak demand. Our aggregate share of non-political advertising revenues in
our Continuing Stations markets decreased from 9.0% in 2004 to 8.6% in 2005. On a viewer
basis, our Continuing Stations average in-market share of viewers for the 2004 / 2005
broadcast season, based on a composite of key demographic categories of adult viewers
during the 5:00 p.m. to midnight daypart, was 8.1% compared to a 8.9% in-market
viewing share for the 2003 / 2004 period which equated to a 9% decrease. We believe
that most of this decrease was attributed to the decline, for the second straight season,
in the WB Networks prime-time ratings and the resulting effect on surrounding
dayparts.

In
2006, there was no rebound in non-political national advertising demand in our Continuing
Stations markets and local advertising demand grew only 1% compared to 2005.
However, due to strong biennial political advertising demand, which reduced advertising
inventory available for non-political advertisers in each market, we received some benefit
from our greater availability of advertising inventory (because political advertisers
generally do not advertise on our stations) and increased our market share of
non-political revenues during the year. Some of this natural biennial upside to our
Continuing Stations was offset by the fact that both The WB and UPN significantly reduced
their programming and promotion spending and efforts for these two lame duck networks
through the balance of the 2005 / 2006 broadcast season which further eroded our
viewership and ability to generate advertising revenues. But despite a 6% season-over-season decline in our
composite in-market viewership during the 5:00pm to midnight daypart, the tightened inventory for non-political advertising
allowed us to increase our Continuing Stations weighted average share of that
revenue from 8.6% in 2005 to 8.8% in 2006.

2



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Because
we do not expect significant political advertising demand in 2007, with the possible
exception of early presidential campaign expenditures, we believe that the major
benefactors of the 2006 political advertising windfall  i.e. ABC, CBS and NBC
affiliates  will again aggressively compete for an increase in their market share of
non-political advertising demand. We are hopeful that the ratings for The CW will increase
on a year-over-year basis as the network continues to establish its new identity and brand
with its targeted viewers. We expect that any increase in ratings and viewership will
translate to increased revenues for all of our CW affiliated stations.

We
believe that we are not well positioned to expand our portfolio of stations and that it is
likely that we will continue to attempt to sell our stations to monetize shareholder
value. We have already sold four stations, including the Sun Transaction, since reaching
our group high of eleven stations (not including our full-power satellite in the
Albuquerque  Santa Fe market) in late 2002. We believe that the recent sale of our
Ft. Myers  Naples station was important because it allowed us to repay all of the
outstanding debt under our senior credit agreement and thereby reduced our financial risk
going forward, which provides us the ability to be more patient in selling any of our
remaining Continuing Stations at prices we believe reflect fair value.

While
we are optimistic that there will eventually be opportunities to monetize our station
assets at prices we consider fair, we recognize that such opportunities may take much
longer to develop.

# Programming

Our
current programming includes:

  The
CW Network prime time programming (at six of our Continuing Stations);

  The
MyNetworkTV prime time programming (at one of our Continuing Stations);

  The
CW Network weekday afternoon programming;

  Kids'
WB! Saturday morning programming (at six of our Continuing Stations);

  syndicated
programming;

  The
Daily Buzz, a three-hour morning news program (at six of our Continuing Stations); and

  local
programming.

Prime
Time Programming.In prime time, The CW Network, has the youngest average of viewers
compared with the other network broadcasters. Prime time programming includes
Americas Next Top Model, 7th Heaven, Smallville, Gilmore Girls, 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 The Batman, Spider Riders and
Loonatics Unleashed.

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 That 70s Show, Friends, Seinfeld, Everybody Loves
Raymond, King of Queens, According to Jim, Will and Grace, Judge JudyandKing of
the Hill.We have secured future broadcast rights for certain of our stations toFamily Guy (fall 2008), Two and a Half Men (fall 2008)and second cycle rights to
Everybody Loves Raymondand That 70s Showand other shows.We have
multi-year contracts to air most of our syndicated programming.

The
Daily Buzz.In September 2002, we launched The Daily Buzz,a three-hour (6:00
 9:00 a.m. Eastern / Pacific Time) morning news show. Effective January 1, 2004, we
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 144 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 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.

3



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

# Our Stations and Markets

The
following table provides general information concerning our Continuing Stations:

|Marketplace                           | MarketRank (1) | StationCalls / Channel     | Affiliation | Number ofCommercialStations inMarket (2) | StationRank (3) | Station Share (4) | ACME Operation                     
|------------------------------------- | -------------- | -------------------------- | ----------- | ---------------------------------------- | --------------- | ----------------- | -----------------------------------
|Albuquerque - Santa Fe, NM            | 45             | KWBQ / 19KASY / 50KWBR /21 | WBUPNWB (5) | 66See (5)                                | 56See (5)       | 62See (5)         | March 1999November 1999January 2003
|Dayton, OH                            | 58             | WBDT / 26                  | WB          | 5                                        | 5               | 8                 | June 1999                          
|Knoxville, TN                         | 60             | WBXX / 20                  | WB          | 5                                        | 5               | 6                 | October 1997                       
|Green Bay - Appleton, WI              | 69             | WIWB / 14                  | WB          | 6                                        | 5               | 4                 | June 1999                          
|Champaign - Springfield - Decatur, IL | 82             | WBUI / 23                  | WB          | 6                                        | 5               | 4                 | June 1999                          
|Madison, WI                           | 85             | WBUW / 57                  | WB          | 5                                        | 5               | 3                 | November 2002                      

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| | (1) | All television stations throughout the United States are grouped into 210
               markets that are ranked in size according to the number of households with
               televisions in the market for the 2006/2007 season.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | (3) | Represents our stations rank, based on the average of the February, May
               and November 2006 major ratings periods, for adult viewers ages 18-49 on a Monday through
               Sunday, 5:00 p.m. to midnight basis.
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | (4) | Station share based on the average of the February, May and November 2006 major
               ratings periods, for adults 18-49 on a Monday through Sunday, 5:00 p.m. to midnight
               basis.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|Designated Market Area: 45         
Total Age 2+ Population: 1,684,000 | TV Households: 662,380
|---------------------------------------------------------------------- | ----------------------

Market
Description.Thirty-four 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 $38,300 per year. Major employers in the market
include Intel, Motorola, General Electric, General Mills, Philips, Tempur-Pedic and Levi
Strauss.

4



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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 Friends, Seinfeld, That 70s
ShowandKing of Queens.The station has contracted for the future
exclusive-market broadcast rights to popular off-network shows such as Family Guyand Two and a Half Menwhich begin airing in September 2007. Additionally, the
station has contracted for the future second-cycle rights to That 70s Show, King of
Queensand toEverybody Loves Raymond.KWBQ delivered a 2005 / 2006 Season
Average rating of 1.4 among adult viewers ages 18-49 for the 5 p.m.  midnight,
Monday through Sunday, time period  a 58% increase over the comparable Season
Average rating for the 2004 / 2005 broadcast season.

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, King of the Hilland Judge Joe
Brown. All of the future program rights negotiated for KWBQ are also available to air
on KASY. KASY delivered a 2005 / 2006 Season Average rating of 0.5 among adult viewers
ages 18-49 for the 5 p.m.  midnight, Monday through Sunday, time period  a 32%
decrease from the comparable Season Average rating for the 2004 / 2005 broadcast season.

WBDT: Dayton, Ohio

|Designated Market Area: 58        
Total Age 2+ Population: 1,265,000 | TV Households: 531,120
|--------------------------------------------------------------------- | ----------------------

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
$46,100 per year. Major employers in the market include Chrysler Corp/Acustar Inc.,
General Motors, NCR, Reynolds & Reynolds and Lexis Nexis.

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 That 70s Show, Friends, Everybody Loves Raymond, King of
QueensandMalcolm in the Middle,and the station has contracted for the future
exclusive-market broadcast rights to popular shows such as Family Guy and Two
and a Half Men,both of which begin airing in September 2007 and for the second-cycle
rights to Everybody Loves Raymond, That 70s ShowandKing of Queens. WBDT
delivered a 2005 / 2006 Season Average rating of 2.2 among adult viewers ages 18-49 for
the 5 p.m.  midnight, Monday through Sunday, time period  an 18% increase over
the comparable Season Average rating for the 2004 / 2005 broadcast season.

WBXX: Knoxville, Tennessee

|Designated Market Area: 60         
Total Age 2+ Population: 1,220,000 | TV Households: 523,010
|---------------------------------------------------------------------- | ----------------------

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 $37,700 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 Friends, That 70s Show, King of the
Hill, Friend, King of QueensandAccording to Jim.In September 2004,
the station began airing a weeknight 10-minute newscast produced by the number one news
affiliate in the market and that news product continues through today. The station has
contracted for the future exclusive-market broadcast rights to Family Guy,which
begins airing in September 2007, and to the second cycles of That 70s ShowandKing of Queens. In October 2002, Knoxville became Nielsens 54th
metered market. WBXX delivered a 2005 / 2006 Season Average rating of 1.7 among adult
viewers ages 18-49 for the 5 p.m.  midnight, Monday through Sunday, time period
 a 22% decrease from the comparable Season Average rating for the 2004 / 2005
broadcast season.

WIWB: Green Bay 
Appleton, Wisconsin

|Designated Market Area: 69        
Total Age 2+ Population: 1,052,000 | TV Households: 434,760
|--------------------------------------------------------------------- | ----------------------

5



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Market
Description.Thirty-two 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 $38,820 per year. Major employers in the market include
Fort James Corporation, the Oneida Tribe of Indians of Wisconsin, Schneider National,
Humana, Shopko Stores, American Medical Security, Bellin Memorial Hospital and Procter
& Gamble Paper Products.

Station
Overview.We acquired WIWB in June 1999. WIWB signed on the air in August 1998 and
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 That 70s Show, Friends, Everybody Loves Raymond, King of
Queensand Will & Grace. The station has contracted for the future
exclusive-market broadcast rights to popular shows such as Family Guy, which begins
in September 2007 and for the second-cycle rights to That 70s Show, Everybody Loves
Raymondand King of Queens. WIWB delivered a 2005 / 2006 Season Average rating
of 0.9 among adult viewers ages 18-49 for the 5 p.m.  midnight, Monday through
Sunday, time period  a 24% decrease over the comparable Season Average rating for
the 2004 / 2005 broadcast season.

WBUI: Champaign 
Springfield  Decatur, Illinois

|Designated Market Area: 82      
Total Age 2+ Population: 884,000 | TV Households: 378,150
|----------------------------------------------------------------- | ----------------------

Market
Description.Thirty-three percent of the total population of Champaign 
Springfield  Decatur is under 25 years of age. The estimated median household income
in the Champaign  Springfield  Decatur market is approximately $33,100 per
year. Major employers in the market include ADM, Staleys, Caterpillar, Mueller,
Illinois Power, Kraft and the University of Illinois.

Station
Overview.We acquired WBUI in June 1999. WBUI signed on the air in May 1984 and 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, That 70s Show, Friends, Everybody Loves Raymond, King of
QueensandMalcolm in the Middle.The station has contracted for the future
exclusive market broadcast rights to the second-cycles of That 70s Show,
Everybody Loves RaymondandKing of Queens.WBUI delivered a 2005 / 2006 Season
Average rating of 0.9 among adult viewers ages 18-49 for the 5 p.m.  midnight,
Monday through Sunday, time period  a 16% decrease from the comparable Season
Average rating for the 2004 / 2005 broadcast season.

WBUW: Madison, Wisconsin

|Designated Market Area: 85       
Total Age 2+ Population: 876,000 | TV Households: 369,220
|------------------------------------------------------------------ | ----------------------

Market
Description.Thirty-two percent of the total population of Madison is under 25 years
of age. The estimated median household income in the Madison market is approximately
$41,900 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 That 70s Show, Friends, King of Queensand Sex in the
City. The station has contracted for the exclusive market broadcast rights to the
popular show Family Guy,which will began airing in September 2007 and for the
second-cycle rights to That 70s ShowandKing of Queens. WBUW delivered a
2005 / 2006 Season Average rating of 0.8 among adult viewers ages 18-49 for the 5 p.m.
 midnight, Monday through Sunday time period  a 20% increase over the
comparable Season Average rating for the 2004 / 2005 broadcast season.

# Our Affiliation
Agreements

Six
of our seven Continuing Stations are affiliated with The CW Network and one station 
KASY serving the Albuquerque-Santa Fe marketplace  is affiliated with MyNetworkTV.
The CW Network and MyNetworkTV are new broadcast television networks that launched in
September 2006. Our network affiliation agreements provide each station with the exclusive
right to broadcast the applicable networks programming in its respective market. Our
affiliation agreements with The CW have up to 10 year terms that expire in September 2016.
Our affiliation agreement with MyNetworkTV has a five year term that expires in September
2011.

6



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

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 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

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

Local
Advertising.Local advertising revenues are generated by both local merchants and
service providers and by regional and national businesses and advertising agencies located
in a particular designated market area. Local advertising revenues represented 60% of our
Continuing Stations advertising revenues in 2006 and 2005 and 56% in 2004.

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 40% of our Continuing Stations advertising revenues
in 2006 and 2005 and 44% in 2004. 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.

From
inception to June 30, 2006, we consolidated the results of The Daily Buzz into our
financial statements  from inception through December 31, 2003 as a wholly-owned
subsidiary and from January 1, 2004 through June 30, 2006 as a variable interest entity.
Effective July 1, 2006, we determined that we were no longer the primary beneficiary of
The Daily Buzz venture and it was deconsolidated at that date. Accordingly, for the six
months ended December 31, 2006, we recorded our 50% equity in The Daily Buzzs
operating results using the equity method of accounting.

# 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

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 
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 is likely to
decrease viewership of commercials and, as a result, lower television advertising demand.
Additionally, an increasing number of network programs are becoming available to download,
on a fee basis, to consumers computers or handheld devices and this trend threatens
to further erode traditional viewership of local broadcasters. While these download fees
represent new and growing revenue streams to the networks, as of yet, local broadcast
affiliates are not sharing in any of those revenues.

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

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

# Federal Regulation of
Television Broadcasting

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

  to
issue, revoke and modify broadcast licenses;

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

  to
regulate the equipment used by stations; and

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

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

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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 Date 
|---------------------------------------- | ----------------
|KWBQ / Albuquerque - Santa Fe            | October 1, 2014 
|KASY / Albuquerque - Santa Fe            | October 1, 2006 
|KWBR / Albuquerque - Santa Fe            | October 1, 2014 
|WBDT / Dayton                            | October 1, 2005 
|WBXX / Knoxville                         | August 1, 2013  
|WTVK / Ft. Myers - Naples (1)            | February 1, 2013
|WIWB / Green Bay - Appleton              | December 1, 2005
|WBUI / Champaign - Decatur - Springfield | December 1, 2005
|WBUW / Madison                           | December 1, 2005

---

| | (1) | Station
sold on February 16, 2007.
| | --- | ----------------------------------

We
have filed separate renewal applications for each of those licenses that were scheduled to
expire in 2005 and 2006. Those renewal applications are still pending before the FCC. To
some extent, the delay may be occasioned by the FCCs apparent decision not to renew
licenses for 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.

A
party must obtain a construction permit from the FCC to build a new television station.
Once a station is constructed and commences broadcast operations, the permittee receives a
license which must be renewed by the FCC at the end of each license term (which may be as
long as eight years under current law). The FCC grants renewal of a broadcast license if
it finds that the station has served the public interest, convenience, and necessity,
there have been no serious violations by the licensee of the Communications Act or FCC
rules and policies, and there have been no other violations of the Communications Act and
FCC rules and policies which, taken together, would constitute a pattern of abuse. If the
FCC finds that a licensee has failed to meet these standards, the FCC may deny renewal,
condition renewal, or impose some other sanction (such as forfeiture). Any party with
standing may petition the FCC to deny a broadcasters application for renewal 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,
including:

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

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

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

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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.

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 "failing" station under FCC rules and policies;

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

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

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

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

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

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

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

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

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

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

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

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

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

At
this juncture, no predictions can be made as to whether or when the New Rules (at least
with respect to television) will be retained or changed and, if so, how any new rules will
affect the Company. It is possible, however, that the FCC could make changes in its rules
(which may or may not include some or all of the New Rules) that will adversely affect the
Company and our ability to buy new television stations or sell our existing television
stations.

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

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

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

  political
advertising;

  children's
programming;

  the
broadcast of obscene or indecent programming;

  sponsorship
identification; and

  technical
operations.

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

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

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

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

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

  the
number of active channels on the cable system;

  the
location and size of the cable system; and

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

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

Local
Marketing Agreements.Under the FCCs current rules (as well as the New Rules),
the licensee of a television station providing more than 15% of another television
stations programming under a 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. The FCC also adopted a grandfathering policy providing that local marketing
agreements that are in compliance with the previous FCC rules and policies and were
entered into before November 5, 1996, would be permitted to continue in force until the
FCC concludes its biennial review of regulations in 2004. Local marketing agreements
entered into after November 5, 1996 but prior to the adoption of the new FCC rules in 1999
were grandfathered until August 2001.

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 and other governmental approvals.

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

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Joint
Sales Agreements. A joint sales agreement is an arrangement where one station sells
advertising time on another station. The FCCs New Rules 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 table of allotments for digital television. Under the
table, all eligible broadcasters with a full-power television station were allocated a
separate channel for digital television operation. However, on September 7, 2004, the FCC
issued a Report and Order which initiated a process to refine that table of allotments so
that all digital television stations will operate on Channels 2 through 51, which are
identified by the FCC as the core channels. The Report and Order also adopted
a procedure that will enable television stations to make certain elections about which
channel they would like to use for digital television. The FCC has issued numerous
decisions and public notices concerning the development of the new table of allotments for
digital television, and it is anticipated that the new table of allotments will be
completed sometime later this year. The FCC 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).

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

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

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

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

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

Satellite
Home Viewer Act. The Satellite Home Viewer Act, which was renewed and expanded by
federal law in December 2004, and related FCC regulations allow satellite carriers to
deliver broadcast programming to subscribers who are unable to obtain television network
programming over the air from local television stations. Congress later amended the act to
facilitate the ability of satellite carriers to provide subscribers with programming from
both local and non-local television stations (regardless of the subscribers ability
to receive the television signals over the air). The FCC has adopted rules to implement
certain of those legislative changes and is conducting rulemaking proceedings to implement
others. A principal component of the new regulation requires satellite carriers to carry
the analog signals of all local television stations in a market if they carry one. We have
taken advantage of that regulation to require carriage of our stations on satellite
systems in the 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.

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. On December 30, 2005, we timely requested for an
exemption from the closed captioning requirement for certain programs which are broadcasts
on KASY-TV, KWBQ-TV, and WIWB-TV. Those exemption requests are still pending at the FCC.

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, 2006, our continuing operations had 186 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.

14



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# Item 1A. Risk Factors

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

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

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

  national
and local economic conditions;

  industry-specific
economic conditions;

  whether
political advertising is weak in a given year;

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

  the
activities of our competitors.

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

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

All
of our Continuing Stations are relatively new in their markets and are still developing.
Some of them have never generated positive cash flow from operations and the group has
never generated positive cash flow from operations.

The
developmental nature of our Continuing Stations poses risks to stockholders, including the
following:

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

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

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

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 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 our debt service obligations, forcing us to
refinance all or a portion of our indebtedness, sell assets or obtain additional
financing.

15



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Although
we repaid all of our then outstanding indebtedness when we completed the sale of our Ft.
Myers  Naples, Florida television station on February 16, 2007, we will likely
continue to be a net borrower, even if at a significant lesser extent than we were before
that transaction closed. 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. As a result, we may need to refinance all or a portion of our indebtedness, on or
before maturity, sell assets or obtain additional financing. We may not be able to
refinance any of our indebtedness on commercially reasonable terms, if at all. If we are
unable to generate sufficient cash flow or refinance our indebtedness on commercially
reasonable terms, we may have to seek to restructure or replace our remaining debt
obligations, which could have a material adverse effect on our results of operations and
financial condition and the price of our Common Stock and the market, if any, for our
debt. Furthermore, our history of operating and net losses may make it difficult to obtain
restructured or replacement financing.

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
declining percentage, based on number of stations owned at any given time, of lender
appraised station values.

We may evaluate strategic
alternatives to sell some or substantially all of our Companys assets, however we
cannot assure you that 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 Companys assets, the evaluation of strategic alternative
may adversely affect the Company

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

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

16



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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 on our air.

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.

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
$69.2 million, or 50%, of our total assets as of December 31, 2006 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 impairments of our broadcast licenses of $27,000, $3.6 million and
$3.0 million for the years ended December 31, 2006, 2005 and 2004, respectively, due
to lower valuations for certain of our stations FCC broadcast licenses.

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

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

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.

17



---

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.

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

FCC regulation of our business could adversely affect our licenses.

Our
operations are subject to extensive regulation by the FCC. Our licenses, which provide us
with the rights to broadcast our programming, are subject to periodic renewal by the FCC.
We have from time to time violated certain rules of the FCC and these violations, while
unintentional, could adversely affect our license renewal and lead to fines assessed by
the FCC or further sanctions. We have currently filed separate renewal applications for
our five licenses that were scheduled to expire in 2005 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.

18



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# Item 1B. Unresolved
Staff Comments

None.

# Item 2.Properties

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

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

---

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

| | (2) | Tower
owned on leased property.
| | --- | -------------------------------

| | (3) | Station sold on February 16, 2007.
| | --- | ----------------------------------

# 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.

19



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

No
matter was submitted to a vote of the security holders during the fourth quarter of 2006.

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,
2007, there were 33 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 $5.54.

We
have not declared or paid any cash dividends or distributions on our common stock since
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. On February 20,
2007, the Company repaid all of its then current outstanding debt and accrued interest
totaling $37.2 million. 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 $20.0 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 2006 and 2005:

|      |  |  |   |      
|----- |  |  | - | -----
|2006  |  |  |   |      
|High  |  |  | $ | 4.470
|Low   |  |  |   | 3.500
|Close |  |  |   | 4.140
|2005  |  |  |   |      
|High  |  |  | $ | 7.450
|Low   |  |  |   | 4.760
|Close |  |  |   | 5.270

# Item 6. Selected
Financial Data

Following is the Companys
selected consolidated financial data for the past five years. In accordance with
generally accepted accounting principles, operating results relating to our St.
Louis and Portland stations, which were sold in 2003, our Salt Lake City station, which
was sold in April 2006 and our Ft. Myers-Naples station, which was subject to a sale as of
December 31, 2006 and was sold on February 16, 2007, are accounted for as discontinued
operations. This data is derived from our audited Consolidated Financial Statements
and should be read in conjunction with the Consolidated Financial Statements and
Notes thereto (located at Item 8 of this filing) and with Managements
Discussion and Analysis of Financial Condition and Results of Operations
(located at Item 7 of this filing).

20



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|ACME Communications, Inc. and Subsidiaries
Consolidated Statements of Operations(In thousands, except per share data)
|---------------------------------------------------------------------------------------------------------------------
|
|
|Net revenues                                                                                                         
|Operating expenses:                                                                                                  
|Cost of service:                                                                                                     
|Programming, including program amortization                                                                          
|Other costs of service (excluding depreciation and amortization of                                                   
|$3,942, $4,263,  $4,119, $3,225 and $2,767 for the years ended                                                       
|December 31, 2006, 2005, 2004, 2003 and 2002, respectively)                                                          
|Selling, general and administrative expenses                                                                         
|Depreciation and amortization                                                                                        
|Abandoned acquisition-related costs                                                                                  
|Impairment of broadcast licenses                                                                                     
|Corporate expenses                                                                                                   
|Operating expenses                                                                                                   
|Operating loss                                                                                                       
|Other income (expenses):                                                                                             
|Interest income                                                                                                      
|Gain on sale of assets                                                                                               
|Equity in income (loss) of unconsolidated affiliates                                                                 
|Other                                                                                                                
|Loss from continuing operations before income taxes and minority interest                                            
|Income tax expense                                                                                                   
|Loss from continuing operations before minority interest                                                             
|Minority interest                                                                                                    
|Loss from continuing operations                                                                                      
|Discontinued operations (Note 3):                                                                                    
|Income (loss) from discontinued operations                                                                           
|Income tax benefit (expense)                                                                                         
|Income (loss) from discontinued operations                                                                           
|Net Income (loss)                                                                                                    
|                                                                                                                     
|Net income (loss) per share, basic and diluted                                                                       
|Continuing operations                                                                                                
|Discontinued operations                                                                                              
|Net income (loss) per share                                                                                          
|                                                                                                                     
|Weighted average basic and diluted common shares outstanding                                                         
|                                                                                                                     
|Balance Sheet Data:                                                                                                  
|Total assets                                                                                                         
|Total debt (1)                                                                                                       
|Total stockholders' equity                                                                                           

---

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

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

Overview

21



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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 continue to more likely 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. The results relating
to these four 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) from the 45th 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 6-8
years.

We
derive revenues primarily from the sale of advertising time to local, regional and
national advertisers and, through July 1, 2006  the date we deconsolidated the
venture, 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), grew steadily until
the 2003 / 2004 season, when our weighted average rating fell to a 1.7 from the previous
seasons 1.8 rating. Our weighted average rating for the 2004 / 2005 season declined
again to 1.5. Our weighted average rating for the 2005 / 2006 season, the last season for
The WB and for UPN, held steady from the previous season at a 1.5. Our loss in in-market
viewing shares for this same time period and demographic was less severe than our
broadcast competitors who, as a group, also experienced rating declines. We believe that
the ratings declines for the periods through the 2005 / 2006 season, while not limited to
our prime-time daypart, were attributable mostly to the decline in The WB Networks
prime-time ratings and the impact that such a drop, in our highest viewed daypart, had
upon the surrounding dayparts. The CW Network, which succeeded The WB and UPN networks,
launched in September 2006. Six of our seven Continuing Stations are affiliated with The
CW. Most industry analysts believed, as did we, that The CW Network would launch to better
numbers than The WB Network and UPN enjoyed the prior season, but it did not. In the
November 2006 sweeps, our weighted average ratings for our Continuing Stations in this
5:00 p.m.  midnight period among adult viewers ages 18-49 decreased 5% from the
November 2005 ratings period. On a broader, composite demographic basis for the same time
period, however, our share of viewers relative to our local commercial in-market
competitors actually increased during the November 2006 sweeps by 1% compared to our
November 2005 sweeps results.

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 much of the past three years  competition from market
leaders, generally the ABC, CBS, NBC and Fox affiliated stations, increases as these
stations become more aggressive in their pricing to maintain their revenue share. Over the
past several years, biennial political spending in the even years has 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 2007 broadcast season should see strong competition from the market leader stations as
they seek to minimize the reduction in revenue in 2007 compared to higher 2006 revenues
inflated by strong political advertising revenue.

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.

22



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Our
primary ongoing operating expenses are costs of services, selling, general and
administrative expenses, corporate expenses, depreciation and amortization and expenses
related to impairments in our broadcast licenses. Costs of services include programming
costs, which consist primarily of amortization of broadcast rights relating to syndicated
programs as well as costs associated with our morning news show, The Daily Buzz
(which, as of January 1, 2004, became jointly produced by us and Emmis and then, beginning
July 1, 2006 was deconsolidated) 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.

In
the fall of 2000, we began to experience a noticeable slowdown in non-political advertiser
demand. By December 2000, it was clear that there was a dramatic weakness in demand
affecting all media-related companies and there were broader indications that the U.S.
economy was in a slowdown. This weak demand continued through all of 2001, and the
resultant effect of the events of September 11, 2001 only made a tough year worse. By
industry accounts, 2001 television revenues declined approximately 13-15% compared to
2000, the steepest decline in the last 50 years. Nearly every publicly traded television
broadcaster, including us, posted year-over-year declines in advertising revenues.
Advertising demand began to rebound early in 2002 and non-political advertising for that
year was up 5% over 2001 levels in our Continuing Stations markets. In March 2003,
Operation Freedom commenced in Iraq and advertising demand was adversely affected for
several weeks, but despite that disruption, non-political advertising revenues in 2003 for
our Continuing Station markets grew a respectable 4% over 2002 levels. While most expected
that the calendar year 2004 would reflect an improved operating environment compared to
2003, despite record breaking political advertising, non-political advertising revenues
were essentially unchanged from 2003 levels. In 2005, non-political local advertising demand
was very solid, averaging an annual increase compared to 2004 of 4.9% in our continuing
markets. National advertising, however, was very weak, and actually declined 0.6% compared
to 2004 in our continuing markets despite the record political spending in 2004, which
increased the non-political advertising rates due to decreased inventory for such ads. In
2006, strong political advertising drove overall market revenue growth by 14%
over the prior year in our markets. However, we did not participate
meaningfully in political revenues, and non-political advertising revenues for 2006
remained unchanged from 2005 levels. We do not believe that 2007 non-political revenues in
our marketplaces will increase more than 1-2% (and we believe in the first quarter of 2007
non-political revenues are actually down compared to the first quarter of 2006) which will
make it difficult for us to grow our revenues in 2007 apart from any ratings gains we may
experience from The CW Network.

Results of Operations

Year Ended December 31,
2006 compared to Year Ended December 31, 2005

In 2006, net revenues from continuing operations increased 2% to $34.8
million from $34.2 million in 2005. Our station group achieved a 4% increase in net
revenues as overall viewership levels among our key demographics grew just slightly during
the calendar year. While there was robust political advertising in our markets, we did not
attract much of that incremental spending, and the non-political advertising revenues in
our markets were unchanged compared to 2005 levels. 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 a full
year of revenues for The Daily Buzz in 2005, and net revenues for The Daily Buzz in our
consolidated results declined 46%. Effective March 14, 2007, we became the sole owner of
The Daily Buzz, LLC and will begin including its results in our consolidated results of
operations.

Programming
expenses for 2006 decreased by 11% to $13.3 million compared to $14.8 million in
programming expenses for 2005. This decrease was due primarily to the deconsolidation of
The Daily Buzz effective July 1, 2006 (the 2006 year includes only six months of expense
related to the show and this accounts for most of the decline in programming costs
compared to 2005) and a decline in music license fees, net of a $472,000 increase in
write-downs of program license rights to adjust to net realizable value.

Other
costs of services for 2006 increased 3% to $5.9 million from $5.7 million in 2005,
principally due to higher promotion expenses to launch The CW Network in the fall of 2006.

Selling,
general and administrative expenses for 2006 increased 2% to $13.2 million compared to
$12.9 million in 2005 primarily due to stock-based compensation expense of $165,000
recognized in 2006 in accordance with SFAS 123R and higher property related expenses.

Depreciation
and amortization expense for 2006 was $4.0 million compared to $4.3 million for 2005. This
decrease relates primarily to more assets reaching full depreciation than those being
added during the latter part of 2005 and 2006.

We
wrote off $177,000 and $872,000 in 2006 and 2005, respectively, in costs associated with
our efforts to secure construction permits for television stations in the Lexington,
Kentucky and Richmond, Virginia markets as we determined that such permits were not likely
to be issued by the FCC due to short-spacing signal issues.

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Impairment
of broadcast licenses for 2006 was $27,000 compared to an impairment expense of $3.6
million in 2005. Both impairment charges reflected lower valuations for certain of our
stations FCC licenses.

Corporate
expenses for 2006 decreased 8% to $3.6 million from $3.9 million in 2005 principally due
to lower professional fees due to lower costs associated with Section 404 of the
Sarbanes-Oxley Act since we became a non-accelerated filer in December 2005.

We
incurred income tax expense of $2.0 million in 2006 compared to income tax expense of
$725,000 in 2005. The income tax expense in both years primarily relate to deferred tax
liabilities associated with amortization of intangibles for tax purposes in excess of
impairment write-downs for book purposes. The tax expense was significantly lower in 2005
due to the $3.6 million impairment of broadcast licenses in 2005.

Our
income from discontinued operations in 2006 was approximately $3.5 million before tax
expense of $395,000 compared to a pre-tax loss of $5.0 million in 2005. The income in 2006
includes a $5.9 million gain on the sale of our Salt Lake City station, $1.5 million in
additional proceeds from the buyer of our St. Louis stations due to their usage of that
stations tax net operating losses (tax NOLs), net of operating income of
$1.7 million and interest expense of $5.7 million. The 2005 loss includes $1.1 million
operating losses and $5.5 million in interest, net of $1.6 million in additional
consideration for the buyers 2005 usage of our St. Louis stations tax NOLs.
The operating losses of our discontinued operations were favorably impacted by improved
operating results at our Ft. Myers  Naples station and the sale of our Salt Lake
City station, which was not profitable, in April 2006.

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

In
2005 our net revenues increased 1% to $34.2 million from $33.8 million in 2004. This
increase was driven by a 186%, or $1.1 million, increase in net revenues for our The
Daily Buzz venture compared to 2004, net of a 2% decrease in net revenues at our
stations on lower ratings and revenue shares.

Programming
expenses increased 12% to $14.8 million compared to the prior years programming
expense of $13.2 million. This increase was attributable primarily to our continued
investment in programming, including Malcolm in the Middle which launched in
syndication in September 2004 at four of our stations, a 20% increase in our The Daily
Buzz production costs (largely driven by increased news costs related to our increased
licensing revenue) and a year-over-year increase of $194,000 in the write-downs of program
rights to adjust to net realizable value.

Other
costs of services increased 5% to $5.7 million compared to a prior year expense of $5.4
million. This increase was primarily attributable to increased utilities and operating
lease expenses relating to the roll-out of digital transmissions at several of our
stations during the last half of 2004.

Selling,
general and administrative expenses for 2005 decreased 2% to $12.9 million compared to
$13.1 million in 2004 due to lower sales and traffic system software installation expenses
and lower compensation expense due to unfilled sales department vacancies.

Depreciation
and amortization expense for 2005 was $4.3 million compared to $4.2 million for 2004 as
continued capital expenditures to convert to HDTV was mostly offset by assets becoming
fully depreciated during the year.

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

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

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

We
incurred income tax expense of $725,000 million in 2005 compared to income tax expense of $1.3
million in 2004. The income tax expense in both years primarily relate to deferred tax
liabilities associated with amortization of intangibles for tax purposes.

24



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Our
loss from discontinued operations in 2005 was approximately $5.4 million compared to a
loss of $7.1 million in 2004. These losses are comprised of operating losses at our
stations in Salt Lake City and Ft. Myers  Naples and interest expense, which is
being totally allocated to discontinued operations because the proceeds from the sale of
these two stations exceeds the outstanding debt and is required to be used to repay that
debt. Our station operating losses in 2005 were less than in 2004 due to improved results
at our Ft. Myers  Naples station and due to our Salt Lake City losses being shared
by Clear Channel effective August 2005 in connection with their purchase of the station.
In addition, the 2005 loss is net of $1.6 million in additional consideration received
from Tribune in connection with its use of tax net operating losses from the Tribune
Transaction.

# Liquidity and Capital
Resources

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

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

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

The
senior credit facility, as amended, allows for borrowings up to a maximum of the lower of
$60 million or a percentage of our stations aggregate appraised STAC
(start-up station with an affiliation contract sold on compressed time
frames) values, which are lower than the fair value of our station group. The percentage
advance rate is 45% based on our Continuing Stations and declines to 20% if we ever sell
down to three or fewer stations. Our interest rates on borrowing is based on the advance
rate, and is 5.00% over LIBOR at the 45% advance rate and 2.50% over LIBOR at the lowest,
20%, advance rate.

We
amended our senior credit facility on February 15, 2007 to allow us to pay dividends to
our stockholders from any proceeds of station sales in excess of then outstanding
borrowings or from new borrowings under the credit agreement of up to $20.0 million.

On
February 16, 2007, we completed the Sun Transaction and used the majority of the proceeds
from that sale to repay all of the then outstanding debt and accrued interest under our
senior credit facility of $37.2 million. Our availability under the revolver, immediately
following the closing and net of approximately $863,000 associated with lender reserves
for projected six-month cash interest payments, was approximately $38.7 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.

We  expect that we will need to borrow  during the
coming year to help fund  capital  expenditures  estimated  to be  approximately  $1.5 million in calendar
2007.  Although our amended  senior credit  facility  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.  Accordingly,
if a MAC occurs in the future,  we might not have access to funds under our senior credit  facility  which
may be necessary for us to meet our obligations,  including cash interest payable to the lenders,  as they
become due. If we fail to meet such  obligations  as they  become due,  the lenders  could claim a default
and accelerate all amounts due under the senior credit facility.

Net
cash used in operating activities was $389,000 for 2006 compared to net cash used in
operating activities of $3.9 million for 2005. This decrease in use of cash of $3.5
million was primarily due to reduced cash-based operating losses, including lower
corporate expenses, reduced programming payments for our construction permit markets and
reduced working capital usage.

25



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Net
cash provided by investing activities was $20.2 million for 2006 which included $18.4
million in net proceeds from the sale of our Salt Lake City station, $1.5 million in additional
consideration from Tribune on their use of station KPLRs tax NOLs and $1.2 million
in net proceeds from the sale of our interest in CarSoup. Net cash provided by investing
activities was $1.2 million for 2005, which included $1.6 million in additional
consideration from Tribune related to their 2005 use of station KPLRs tax NOLs and
$1.5 million in proceeds from the sale of our Flint construction permit. Our capital
expenditures for 2006 and 2005 were $620,000 and $1.9 million, respectively on reduced
HDTV related projects.

Net
cash used in financing activities during 2006 was $16.2 million, which relates primarily
to the repayment of our debt from the proceeds of the sale of our Salt Lake City station.
Net cash provided by financing activities for 2005 was $9.3 million which consisted of
approximately $8.5 million in borrowings and $887,000 in cash contributions from our
minority interest partner in The Daily Buzz.

In
our discontinued operations, net cash used in operating activities in 2006 was
approximately $2.3 million compared to $6.3 million used in operating activities for 2005.
Because the sum of the expected net proceeds from the Sun Transaction and the actual net
proceeds from the Clear Channel Transaction exceeded our outstanding borrowings for 2006
and 2005 and the loan agreements in place at the time required us to repay outstanding
debt first with those proceeds, all interest expense has been attributed to discontinued
operations. The reduced cash used in operating activities reflects the combined effect of
improved profits at our Ft. Myers  Naples station, reduced losses at our Salt Lake
City station, which was sold in April 2006, and reduced working capital usage.

Net
cash used in investing activities in our discontinued operations was $15,000 in
2006 compared to $286,000 used in investing activities in 2005 on reduced capital
expenditures.

Net
cash used in financing activities in our discontinued operations was $1.3 million in 2006
compared to $633,000 used in 2005. The $707,000 increase relates primarily to increased
prepaid financing fees paid in connection with the March 2006 amendment of our revolver
and second-lien term loan agreements.

At
December 31, 2006, amounts due under all capital lease facilities totaled $895,000 bearing
an implicit average interest rate of 5.29% per annum. We expect to incur approximately
$1.5 million in additional miscellaneous capital expenditures in 2007, an increase over
our 2006 expenditures, as we are replacing the commercial playback systems at six of our
seven Continuing Stations in 2007 (one stations commercial playback systems was
replaced in 2006).

At
December 31, 2006, we had $1.1 million of unrestricted cash and negative working capital
of $22.6 million, including the $36.6 million note payable under our revolving credit
agreement classified as a current liability in connection with the sale of our Ft. Myers
 Naples station. Apart from any proceeds that might be generated as a result of
station sales, it will be necessary for us to continue to borrow under our senior credit
facility as the cash generated from our station operations will not offset our projected
capital expenditures, cash corporate expenses and cash interest costs during at least the
next twelve months. We do not believe it is likely that the FCC will grant the
construction permit applications in either Lexington or Richmond, but if they were to be
granted, the license acquisition for Lexington could be funded, under certain conditions,
through our revolving credit facility. Our senior credit facility requires lender approval
for any station acquisitions. Since our new credit facility 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.

Contractual Cash
Obligations

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

|Year       |  | Senior
Credit
Facility (1) |   | Program Rights
Obligations (2)(3) |  | Capital Lease
Obligations |        | Operating
Lease Obligations (3) |   | Purchase
Obligations (3)(4) |  | Total
Contractual Cash Obligations
|---------- |  | -------------------------- | - | --------------------------------- |  | ------------------------- | ------ | ------------------------------- | - | --------------------------- |  | ----------------------------------
|2007       |  |                            | $ | 36,550                            |  | $                         | 7,001  |                                 | $ | 49                          |  | $                                 
|2008       |  |                            |   | --                                |  |                           | 7,796  |                                 |   | 45                          |  |                                   
|2009       |  |                            |   | --                                |  |                           | 7,449  |                                 |   | 47                          |  |                                   
|2010       |  |                            |   | --                                |  |                           | 6,134  |                                 |   | 49                          |  |                                   
|2011       |  |                            |   | --                                |  |                           | 3,695  |                                 |   | 51                          |  |                                   
|Thereafter |  |                            |   | --                                |  |                           | 4,320  |                                 |   | 654                         |  |                                   
|           |  |                            |   |                                   |  |                           |        |                                 |   |                             | 
|Total      |  |                            | $ | 36,550                            |  | $                         | 36,395 |                                 | $ | 895                         |  | $                                 
|           |  |                            |   |                                   |  |                           |        |                                 |   |                             | 

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| | (1) | Amount
 shown as being  repaid in 2007 due to  February  16,  2007  completion  of the Sun
Transaction.
| | --- | -------------------------------------------------------------------------------------------------------

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

| | (3) | Excludes
 obligations of  discontinued  operations as these have been or will be assumed by the
buyers of the discontinued operations.
| | --- | --------------------------------------------------------------------------------------------------------------------------------------

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

In
addition to the above contractual obligations, we expect that our capital expenditures for
2007 will be approximately $1.5 million.

Critical Accounting
Policies and Estimates

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

Revenue Recognition

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

Programming Rights

Our
programming rights are stated, on a gross basis, at the lower of amortized cost or
estimated realizable value. We evaluate estimated realizable value of programming rights
based on current usage and revenue performance and projected future revenue and usage of
such programs. Changes in our programming schedule could impact the estimated realizable
value of programming. In addition, estimates of future revenue performance relate to the
number of advertising spots we sell and the amount generated from such sales. A decrease
in the number of spots sold or the amount for such sales could also impact our estimated
realizable value. During 2006, 2005 and 2004, we recorded write-downs of program rights
due to impairments for our Continuing Stations of $1,044,000, $572,000 and $376,000,
respectively. The increase in the 2006 write-down was due primarily to write-downs related
to Malcolm in the Middle and, to a lesser extent, The Drew Carey Show 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.

27



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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, 2006, December 31, 2005 and December 31, 2004, 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 certain stations, certain of its broadcast licenses had
become impaired and a $27,000, $3.6 million and $3.0 million impairment expense was
recorded for the years ended December 31, 2006, 2005 and 2004, respectively. These
impairments resulted from the carrying value of the broadcast licenses exceeding their
fair values and are 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, other than the write-down on programming rights and
broadcast licenses as disclosed above, we do not have any other impairment related to
long-lived assets for 2006, 2005 or 2004. 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.

Impact of Recently
Adopted Accounting Pronouncements

On
January 1, 2006, we adopted Statement of Financial Accounting Standard (SFAS) No. 123R,
Share-Based Payment(SFAS 123R).  SFAS 123R requires us to expense the fair
value of grants of various stock-based compensation programs over the vesting period of
the awards.  We elected to adopt SFAS 123R using the Modified Prospective
Application transition method which does not result in the restatement of previously
issued consolidated financial statements.  For additional information regarding our
accounting under SFAS 123R, see Note 10. Stock Option Compensationin the notes to
our consolidated financial statements.

In
July 2006, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 48, Accounting for Uncertainty in Income Taxes
(FIN 48), which clarifies the accounting for uncertainty in income taxes
recognized in the financial statements in accordance with the FASBs Statement No.
109, Accounting for Income Taxes (FAS 109). FIN 48 provides
guidance on the financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods, disclosures and
transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The
Company does not expect the adoption of this standard to have any material impact on the
Companys financial position, results of operations or cash flows, however.

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 No. 157 is effective for fiscal years beginning
after November 15, 2007, the year beginning January 1, 2008 for the Company. The Company
is still in the process of evaluating the requirements of SFAS 157 and has not yet
determined the impact, if any, on the Companys consolidated financial statements.

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. The Company adopted SFAS No.
158 for the year ended December 31, 2006, but since 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 as of December 31, 2006
had no effect on the Companys consolidated financial statements.

28



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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) which is effective the first fiscal year that begins after November 15,
2007. SFAS 159 permits us 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. We do not expect SFAS 159 to have a material impact on our
consolidated financial statements. We will adopt SFAS 159 effective January 1, 2008.

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

Our
senior credit facility has variable interest rates. Accordingly, our interest expense
could be materially affected by future fluctuations in the applicable interest rate. At
December 31, 2006, we had outstanding borrowings of $36.6 million at an average interest
rate of 10.5% per annum. Based on the outstanding indebtedness as of December 31, 2006, a
one percent change in our borrowing rates would change our annual interest expense by
approximately $366,000.

29



---

# Item 8. Financial
Statements and Supplemental Data

|ACME COMMUNICATIONS, INC. AND SUBSIDIARIES
     INDEX TO FINANCIAL STATEMENTS                        
|-----------------------------------------------------------------------------------------------------
|                                                                                                     
|Report of Independent Registered Public Accounting Firm                                              
|Report of Predecessor Independent Registered Public Accounting Firm                                  
|Consolidated Balance Sheets as of December 31, 2006 and 2005                                         
|Consolidated Statements of Operations for the Years Ended December 31, 2006, 2005 and 2004           
|Consolidated Statements of Stockholders' Equity for the Years Ended December 31,  2006, 2005 and 2004
|Consolidated Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and 2004           
|Notes to the Consolidated Financial Statements                                                       

30



---

# Report of Independent
Registered Public Accounting Firm

The Board of Directors
and Stockholders ACME Communications, Inc.

We have audited the accompanying
consolidated balance sheet of ACME Communications, Inc. and subsidiaries as of December
31, 2006, and the related consolidated statements of operations, stockholders
equity, and cash flows for the year 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 audit.

We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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, 2006,
and the results of their operations and their cash flows for the year 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, 2007

31



---

# Report of Independent Registered
Public Accounting Firm

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

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

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

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

/s/ KPMG LLP

Los Angeles, CaliforniaApril 7, 2006 except for Note 3,which is as of March 30, 2007

32



---

|ACME Communications, Inc. and Subsidiaries
Consolidated Balance Sheets(in thousands, except share data)
|-------------------------------------------------------------------------------------------------------
|
|ASSETS                                                                                                 
|Current assets:                                                                                        
|Cash and cash equivalents                                                                              
|Restricted cash                                                                                        
|Accounts receivable, net                                                                               
|Current portion of programming rights                                                                  
|Prepaid expenses and other current assets                                                              
|Assets held for sale                                                                                   
|Total current assets                                                                                   
|Property and equipment, net                                                                            
|Programming rights, net of current portion                                                             
|Goodwill, net                                                                                          
|Broadcast licenses, net                                                                                
|Other assets                                                                                           
|Total assets                                                                                           
|                                                                                                       
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                   
|Current liabilities:                                                                                   
|Accounts payable                                                                                       
|Accrued liabilities                                                                                    
|Current portion of programming rights payable                                                          
|Current portion of obligations under lease                                                             
|Income taxes payable                                                                                   
|Notes payable under revolving credit facility                                                          
|Notes payable under second-lien term loan                                                              
|Liabilities held for sale                                                                              
|Total current liabilities                                                                              
|Programming rights payable, net of current portion                                                     
|Obligations under lease, net of current portion                                                        
|Other liabilities                                                                                      
|Deferred income taxes                                                                                  
|Notes payable under revolving credit facility                                                          
|Notes payable under second-lien term loan                                                              
|Total liabilities                                                                                      
|                                                                                                       
|Minority interest                                                                                      
|                                                                                                       
|Commitments and Contingencies (see Note 6)                                                             
|Stockholders' equity:                                                                                  
|Preferred stock, $.01 par value; 10,000,000 shares                                                     
|authorized, no shares issued or outstanding                                                            
|Common stock, $.01 par value; 50,000,000 shares authorized, 16,772,415                                 
|shares issued and 16,046,763 outstanding at December 31, 2006 and 2005 respectively                    
|Additional paid-in capital                                                                             
|Accumulated deficit                                                                                    
|Less:  Treasury stock, at cost; 725,652 shares                                                         
|Total stockholders' equity                                                                             
|                                                                                                       
|Total liabilities and stockholders' equity                                                             
|                                                                                                       

See the notes to the consolidated financial statements

33



---

|ACME Communications, Inc. and Subsidiaries
         Consolidated Statements of Operations(In thousands, except per share data)
|------------------------------------------------------------------------------------------------------------------------------
|
|
|Net revenues                                                                                                                  
|Operating expenses:                                                                                                           
|Cost of service:                                                                                                              
|Programming, including program amortization                                                                                   
|Other costs of service (excluding depreciation and                                                                            
|amortization of $3,942, $4,263 and $4,119 for the years                                                                       
|ended December 31, 2006, 2005 and 2004, respectively)                                                                         
|Selling, general and administrative expenses                                                                                  
|Depreciation and amortization                                                                                                 
|Abandoned acquisition-related costs                                                                                           
|Impairment of broadcast licenses                                                                                              
|Corporate expenses                                                                                                            
|Operating expenses                                                                                                            
|Operating loss                                                                                                                
|Other income (expenses):                                                                                                      
|Interest income                                                                                                               
|Gain on sale of assets                                                                                                        
|Equity in income (loss) of unconsolidated affiliates                                                                          
|Loss from continuing operations before income taxes and minority interest                                                     
|Income tax expense                                                                                                            
|Loss from continuing operations before minority interest                                                                      
|Minority interest                                                                                                             
|Loss from continuing operations                                                                                               
|Discontinued operations (Note 3):                                                                                             
|Income (loss) from discontinued operations                                                                                    
|Income tax expense                                                                                                            
|Income (loss) from discontinued operations                                                                                    
|Net loss                                                                                                                      
|                                                                                                                              
|Net income (loss) per share, basic and diluted                                                                                
|Continuing operations                                                                                                         
|Discontinued operations                                                                                                       
|Net loss per share                                                                                                            
|                                                                                                                              
|Weighted average basic and diluted common shares outstanding                                                                  
|                                                                                                                              

See the notes to the consolidated financial statements

34



---

|ACME Communications, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity(In thousands)
|--------------------------------------------------------------------------------------------------------
|
|
|
|Balance at December 31, 2003                                                                            
|Exercise of stock options                                                                               
|Amortization of deferred compensation                                                                   
|Purchase of treasury stock, at cost                                                                     
|Net loss                                                                                                
|                                                                                                        
|Balance at December 31, 2004                                                                            
|Net loss                                                                                                
|                                                                                                        
|Balance at December 31, 2005                                                                            
|Stock-based compensation                                                                                
|Net loss                                                                                                
|                                                                                                        
|Balance at December 31, 2006                                                                            

See the notes to the consolidated financial statements

35



---

|ACME Communications, Inc. and Subsidiaries
     Consolidated Statements of Cash Flows(In thousands)
|---------------------------------------------------------------------------------------------------
|
|
|Cash flows from operating activities:                                                              
|Net loss                                                                                           
|Add (less):  Loss (income)  from discontinued operations                                           
|Adjustments to reconcile income (loss) to net cash used in operating activities:                   
|Minority interest                                                                                  
|Equity in (income) losses of unconsolidated affiliates                                             
|Provision for doubtful accounts receivable                                                         
|Depreciation and amortization                                                                      
|Impairment of broadcast license                                                                    
|Amortization of program rights                                                                     
|Abandonment of acquisition related costs                                                           
|Stock-based compensation                                                                           
|Gain on sale of assets                                                                             
|Deferred income taxes                                                                              
|Changes in assets and liabilities:                                                                 
|(Increase) decrease in accounts receivables                                                        
|(Increase) decrease in prepaid expenses and other current assets                                   
|(Increase) decrease in other assets                                                                
|Increase (decrease) in accounts payable                                                            
|Increase (decrease) in accrued liabilities                                                         
|Increase (decrease) in income taxes payable                                                        
|Payments of programming rights payable                                                             
|Increase (decrease) in other liabilities                                                           
|Net cash used in operating activities                                                              
|Cash flows from investing activities:                                                              
|Purchase of property and equipment                                                                 
|Investment in construction permit                                                                  
|Investments in unconsolidated subsidiaries                                                         
|Deconsolidation of The Daily Buzz, LLC                                                             
|Proceeds from sale of assets                                                                       
|Proceeds from sale of assets - discontinued operations                                             
|Net cash provided by (used in) investing activities                                                

See the notes to the consolidated financial statements

36



---

|ACME Communications, Inc. and Subsidiaries
     Consolidated Statements of Cash Flows(Continued)(In thousands)
|--------------------------------------------------------------------------------------------------------------
|
|
|Cash flows from financing activities:                                                                         
|Cash contributions by minority stockholder                                                                    
|Borrowings under revolving credit facility                                                                    
|Payments on revolving credit facility                                                                         
|Payments on second-lien  credit facility                                                                      
|Cash restricted under capital lease facilities                                                                
|Payments on capital lease obligations                                                                         
|Purchase of treasury stock                                                                                    
|Proceeds from issuance of common stock                                                                        
|Net cash
provided by (used in) financing activities                                                           
|                                                                                                              
|Increase in net cash from continuing operations                                                               
|Discontinued operations:                                                                                      
|Net cash used in operating activities                                                                         
|Net
cash used in investing activities                                                                         
|Net cash used in financing activities                                                                         
|Cash used in discontinued operations                                                                          
|                                                                                                              
|Increase (decrease) in cash                                                                                   
|Cash at beginning of period                                                                                   
|Cash at end of period                                                                                         
|                                                                                                              
|Cash payments for:                                                                                            
|Interest (allocated to discontinued operations)                                                               
|Taxes                                                                                                         
|                                                                                                              
|Non-cash transactions:                                                                                        
|Program rights in exchange for program rights payable                                                         
|                                                                                                              

See the notes to the consolidated financial statements

37



---

# ACME COMMUNICATIONS,
INC. AND SUBSIDIARIESNOTES TO CONSOLIDATED
FINANCIAL STATEMENTS

# (1) Description of the
Business and Formation

Formation and Presentation

We
commenced our business in 1997 and ACME Communications, Inc. was formed as our holding
company on July 23, 1999, in preparation for and in conjunction with an initial public
offering of its stock.

On
December 27, 2002, the Company announced that it had entered into transactions to sell its
stations KPLR-TV serving the St. Louis marketplace, and KWBP-TV serving the Portland,
Oregon marketplace, to subsidiaries of the Tribune Company (the Tribune
Transaction). The Tribune Transaction was completed on March 21, 2003. On August 4,
2005, the Company announced that it had entered into an agreement to sell its station KUWB
serving the Salt Lake City marketplace to subsidiaries of Clear Channel Communications
(the Clear Channel Transaction). The Clear Channel Transaction was completed
on April 4, 2006. On May 12, 2006, the Company announced that it had entered into an
agreement to sell its station WTVK serving the Ft. Myers  Naples, Florida
marketplace to Sun Broadcasting, Inc. (the Sun Transaction). The Sun
Transaction was completed on February 16, 2007 (see Note 12). In accordance with U.S.
generally accepted accounting principles, the statements of operations and cash flows
reflect the results of these four stations as discontinued operations for all periods
presented and the balance sheets at December 31, 2006 and 2005 reflect the related assets
being sold and liabilities being assumed as assets and liabilities held for sale.

The
Company adopted the provisions of FASB Interpretation No. 46R (FIN 46R),
Consolidation of Variable Interest Entities, effective January 1, 2004. On
that same date, the Companys joint venture with Emmis Communications
(Emmis) to produce The Daily Buzz, a weekday morning three-hour
television news show, became effective. Under the agreement, the Company made an initial
contribution of property and equipment with an agreed fair value and book value of
$750,000 and Emmis is required to contribute the next $750,000 in capital equipment
purchased by the venture. Effective July 1, 2006, upon the equalization of those
contributions, the Company determined that it was no
longer the primary beneficiary and deconsolidated The Daily Buzz, LLC.
Accordingly, as of that date, the Company began accounting for its investment
in The Daily Buzz using the equity method of accounting.

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

Nature of Business

ACME
Communications, Inc. is a holding company with no independent operations other than
through its indirect wholly-owned subsidiary, ACME Television, LLC (ACME
Television). As of December 31, 2006, ACME Television, through its wholly-owned
subsidiaries, owned and operated the following nine 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 | Marketplace                             | MarketRank (1) | NetworkAffiliation
|--------- | ------- | --------------------------------------- | -------------- | ------------------
|KWBQ/KWBR | 19/21   | Albuquerque-Santa Fe, New Mexico        | 45             | CW                
|KASY      | 50      | Albuquerque-Santa Fe, New Mexico        | 45             | MNT               
|WBDT      | 26      | Dayton, Ohio                            | 58             | CW                
|WBXX      | 20      | Knoxville, Tennessee                    | 60             | CW                
|WTVK (2)  | 46      | Ft. Myers-Naples, Florida               | 64             | CW                
|WIWB      | 14      | Green Bay-Appleton, Wisconsin           | 69             | CW                
|WBUI      | 23      | Champaign-Springfield-Decatur, Illinois | 82             | CW                
|WBUW      | 57      | Madison, Wisconsin                      | 85             | CW                

---

| | (1) | based
on television households per Nielsen Market Research for the 2006 / 2007 broadcast season.
| | --- | ------------------------------------------------------------------------------------------------

| | (2) | station
sold on February 16, 2007 (see Note 12).
| | --- | ------------------------------------------------

38



---

# (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
$711,000 and $793,000 at December 31, 2006 and 2005, 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, is estimated at their aggregate carrying
amount of $36.6 million since the notes have floating interest rates that the Company
believes are at current market.

Program Rights

Program
rights represent costs incurred for the right to broadcast certain features and syndicated
television programs. Program rights are stated, on a gross basis, at the lower of
amortized cost or estimated net realizable value. The cost of such program rights and the
corresponding liability are recorded when the initial program becomes available for
broadcast under the contract. Generally, program rights are amortized over the life of the
contract on a straight-line basis related to the usage of the program. Any reduction in
unamortized costs to net realizable value is included in amortization of program rights in
the accompanying consolidated statements of operations. During 2006, 2005 and 2004, the
Company recorded write-downs of $1,044,000, $572,000 and $376,000, 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.

Property and Equipment

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

39



---

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

The
carrying values of our 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, we have not recorded any impairment related to
property and equipment for 2006, 2005 or 2004. 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, 2006, December 31, 2005 and December 31, 2004, 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 certain stations, certain of its broadcast licenses had become impaired and
a $27,000, $3,612,000 and $2,999,000 impairment expense was recorded at December 31,
2006, 2005 and 2004, respectively. These impairments resulted from the carrying value of
the broadcast licenses exceeding their fair values.

Barter and Trade
Transactions

Revenue
and expenses associated with barter agreements in which broadcast time is exchanged for
programming rights are recorded at the estimated average rate of the airtime exchanged,
which the Company believes approximates fair value. Barter revenue amounted to $3,411,000,
$3,236,000 and $3,237,000 during the years ended December 31, 2006, 2005 and 2004,
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.

Advertising Expenses

The Company records advertising expense when the advertising is run. Production costs
associated with such advertising is expensed upon the initial air date of the advertising.
Advertising expense, which consists primarily of media costs, production costs and
promotion staff salaries and related costs, is included in Other Costs of Services and was
$2,071,000, $1,988,000 and $1,956,000 for the years ended December 31, 2006, 2005 and
2004, respectively.

40



---

Income Taxes

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

Income (Loss) per Share

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

Stock
options outstanding amounting to approximately 2.5 million, 2.5 million, and 2.4 million
shares at December 31, 2006, 2005, and 2004, respectively, were not included in the
computation of diluted EPS because to do so would have been antidilutive.

Comprehensive Income
(Loss)

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

Accounting for Stock
Options

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. For the year ended December 31, 2006, the adoption of SFAS
123(R) resulted in incremental stock-based compensation expense and a decrease in
income before income taxes of $402,000, and an increase in net loss of $402,000. The
$402,000 stock-based compensation expense was included in selling, general and
administrative expenses ($165,000), in corporate expenses ($178,000) and in discontinued
operations ($59,000). The incremental stock-based compensation expense caused both basic
and diluted loss per share to increase by $0.02 for the year ended December 31, 2006.

As
of December 31 2006, there was $523,000 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 $523,000, we expect to recognize approximately
62% in 2007, 35% in 2008 and 3% in 2009.

Prior
to the adoption of SFAS 123(R), the Company applied Accounting Principles Board Opinion
No. 25, Stock Issued to Employees(APB 25), to account for its
stock-based awards, and the disclosure-only provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, as amended (SFAS 123), to present
stock-based compensation disclosure. Under APB 25, because the exercise price of the
Companys employee stock options equaled the market price of the underlying stock on
the date of grant, the stock options had no intrinsic value and therefore no compensation
expense was recognized. The following table details the pro forma effects on net loss and
loss per share for the years ended December 31, 2005 and 2004 had compensation
expense been recorded based on the fair value method under SFAS 123, utilizing the
Black-Scholes option valuation model:

41



---

|                                                                           
|---------------------------------------------------------------------------
|2005                                                                       
|Loss, as reported                                                          
|Add:  Stock-based  compensation  expense  included in net loss, as reported
|Deduct:  Total stock-based compensation expense determined under           
|fair-value based method for all awards                                     
|                                                                           
|Pro forma net loss                                                         
|                                                                           
|Loss per share, basic and diluted:                                         
|As reported                                                                
|Pro forma                                                                  
|                                                                           

The
following assumptions were used in the Black Scholes option-pricing model to value options
granted during the years ended December 31, 2006, 2005 and 2004:

|                          |  |  | 
|------------------------- |  |  | 
|Expected life (in months) |  |  | 
|Expected forfeiture rate  |  |  | 
|Volatility factor         |  |  | 
|Risk free interest rate   |  |  | 
|Dividend yield            |  |  | 

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.

Investments

The Company has investments in non-consolidated affiliates, including as of July 1, 2006,
The Daily Buzz, which are accounted for under the equity method. The Company evaluates its
investments to determine if an impairment has occurred. Carrying values are adjusted to
reflect realizable value, where necessary.

Treasury Stock

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

Use of Estimates in the
Preparation of Financial Statements

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

(3)
Discontinued Operations

42



---

On
December 27, 2002, the Company entered into agreements to sell two of its stations,
KPLR-TV (St. Louis) and KWBP-TV (Portland, Oregon) to subsidiaries of the Tribune Company.
The Tribune Transaction closed on March 21, 2003. On August 8, 2005, the Company entered
into an agreement to sell its station, KUWB-TV (Salt Lake City) to subsidiaries of Clear
Channel Communications Inc. for $18.5 million in an all cash transaction. The Clear
Channel Transaction was completed on April 4, 2006. On May 12, 2006, the Company entered
into an agreement to sell its station, WTVK (Ft. Myers  Naples, FL) to Sun
Broadcasting, Inc. for $45.0 million in an all cash transaction. The Sun Transaction
closed on February 16, 2007 (see Note 12). The Companys consolidated financial
statements for all periods presented have been reclassified to reflect the operations of
these four stations as discontinued operations in accordance with SFAS No.144.

Since
the proceeds from the sale of our discontinued operations exceeded, in the aggregate, our
outstanding debt and that debt was required, or in the case of the Sun Transaction, will
be required, to be repaid from the proceeds, the Company has allocated all interest
expense to discontinued operations for all periods presented. Also, since the debt under
its senior credit facility of $36.6 million at December 31, 2006 is required to be repaid
with the proceeds from the Sun Transaction, it has been classified as a current liability.

Summarized
financial information, in thousands, relating to the four stations operations is as
follows:

Assets
held for sale:

|                           
|---------------------------
|Programming rights         
|Property and equipment, net
|Goodwill, net              
|Broadcast licenses, net    
|Other assets               
|Assets held for sale       
|                           

Liabilities
held for sale:

|                         
|-------------------------
|Programming liabilities  
|Deferred income taxes    
|                         
|Liabilities held for sale
|                         

Selected operating results were as follows:

|                                          
|------------------------------------------
|2006                                      
|Net revenues                              
|                                          
|Loss from discontinued operations, before 
|gain on sale and income tax expense       
|Gain on sale                              
|Income tax expense                        
|                                          
|Income (loss) from discontinued operations
|                                          

43



---

The
2006 gain on sale includes $5,913,000 on the sale of our 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). The 2005 and 2004 gains of $1,617,000 and
$127,000 represent the amount of the Tribune Companys payments for NOLs used by them
in calendar 2005 and 2004, respectively.

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

# (4) Property and
Equipment

Property
and equipment consist of the following:

|                                               
|-----------------------------------------------
|2006                                           
|(In thousands)                                 
|Land                                           
|Buildings and improvements                     
|Broadcast and other equipment                  
|Furniture and fixtures                         
|Vehicles                                       
|Construction in process                        
|Total property and equipment, at cost          
|Less: Accumulated depreciation and amortization
|Net property and equipment                     

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

Included
in property and equipment at both December 31, 2006 and 2005 are assets subject to capital
leases with a total cost of $1,122,000 and associated accumulated depreciation of $596,000
and $485,000 at December 31, 2006 and 2005, 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

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

In
November 2004, the Foothill Facility was amended to (a) increase maximum borrowings
thereunder to $60.0 million, (b) reduce the borrowing rate, (c) modify and eliminate
certain financial covenants and (d) extend the maturity date to November 2008. Concurrent
with that amendment, ATV entered into a $20.0 million Second-Lien Term Loan
(SLTL) agreement. The SLTL, which was repaid and terminated in 2006, bore
interest at LIBOR plus 7.00% and had an original maturity date of November 2008. The agreement contained similar
covenants as contained in the Foothill Facility.

44



---

In
March 2006, ATV completed the restructuring of its credit facilities, entering into the
Third Amended and Restated Loan and Security Agreement (the Amended Foothill
Facility) with its senior facility lenders and amending the Second Lien Loan and
Security Agreement. The Amended Foothill Facility eliminated all financial covenants
effective December 31, 2005, allowed ATV to borrow $10 million to reduce its outstanding
balance on its SLTL and reset its maximum borrowings to the lesser of $60 million or 50%
of our stations aggregate appraised STAC (start-up station with
affiliation contract sold in a compressed time period) values, which are lower than the
fair value of our station group. The amendment also allowed ATV to use $10 million of the
$18.5 million sale proceeds from the Clear Channel Transaction to pay down the rest of the
SLTL (with the remaining $8.5 million of the proceeds to be used to reduce the outstanding
borrowings under the Amended Foothill Facility) and terminate the SLTL, allowed up to $20
million in stock repurchases and extended the facilitys maturity to May 2009. In
April 2006, the Company completed the Clear Channel Transaction, repaid all outstandings
borrowings under the SLTL and terminated that agreement, and paid down the Amended Foothill Facility
with the remaining $8.5 million in proceeds.

At
December 31, 2006, ATV had outstanding borrowings of $36.6 million under its senior credit
facility at a weighted average interest rate of 10.50% 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 over the term, including amended terms, of the
facilities.

On
February 15, 2007, ATV amended its credit agreement to allow for cash dividends to be paid
from any sale proceeds in excess of then current outstanding borrowings and also to use up
to $20.0 million in borrowings under the agreement to pay dividends (see Note 12).

# (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, 2006 are:

|              
|--------------
|(In thousands)
|2007          
|2008          
|2009          
|2010          
|2011          
|Thereafter    
|              
|Total         
|              

Total
rental expense for continuing operations under operating leases for the twelve months
ended December 31, 2006, 2005 and 2004 was approximately $1,232,000, $1,240,000 and
$1,196,000, respectively. Total rental expense for discontinued operations under operating
leases for the twelve months ended December 31, 2006, 2005 and 2004 was approximately
$498,000, $629,000 and $600,000, respectively.

Obligations Under Capital
Leases

As
of December 31, 2006, certain equipment was leased under capital equipment facilities.
Future minimum lease payments for our continuing operations under capital leases as of
December 31, 2006 are:

45



---

|                                        |  | In thousands
|--------------------------------------- |  | ------------
|2007                                    |  |             
|2008                                    |  |             
|2009                                    |  |             
|2010                                    |  |             
|2011                                    |  |             
|Thereafter                              |  |             
|Total minimum lease payments            |  |             
|Less: Amount representing interest      |  |             
|Present value of minimum lease payments |  |             
|Less: Current portion                   |  |             
|Long-term portion                       |  |             

Programming Rights Payable

Commitments
for programming rights that have been executed, but which have not been recorded in the
accompanying consolidated financial statements, as the underlying programming is not yet
available for broadcast, were approximately $12,872,000 for our continuing operations and
$2,333,000 for our discontinued operations as of December 31, 2006.

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 thousands)                   
|2007                             
|2008                             
|2009                             
|2010                             
|2011                             
|Thereafter                       
|                                 
|Program rights payable maturities
|                                 

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, various employment agreements, agreements for ratings services,
license fees for websites Those commitments for continuing operations for the next five years are as follows:

|           |  | In thousands
|---------- |  | ------------
|2007       |  |             
|2008       |  |             
|2009       |  |             
|2010       |  |             
|2011       |  |             
|Thereafter |  |             
|Total      |  |             

46



---

The
Company has entered into independent agreements with applicants for construction permits
in the Lexington, KY and the Richmond, VA markets. While the Company believes the chances
that these construction permits being approved and issued by the Federal Communications
Commission are remote, if they are, the Company has an obligation to acquire them from the
applicants for $2.0 million in the case of the Lexington construction permit and $8.2
million in the case of the Richmond construction permit.

Legal Proceedings

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

(7) 
Income Taxes

The
income tax expense consists of the following:

|                          
|--------------------------
|2006                      
|(In thousands)            
|Continuing Operations:    
|Current:                  
|Federal                   
|State                     
|Total current tax expense 
|Deferred:                 
|Federal                   
|State                     
|Total deferred tax expense
|Total income tax expense  
|                          
|Discontinued Operations:  
|Current:                  
|Federal                   
|State                     
|Total current tax expense 
|Deferred:                 
|Federal                   
|State                     
|Total deferred tax expense
|                          
|Total income tax expense  
|                          

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

|                                               | Year ended December 31,
|---------------------------------------------- | -----------------------
|                                               | 2006                   
|                                               | (In thousands)         
|Tax benefit at U.S. federal statutory rate     |                        
|State income taxes, net of federal tax benefit |                        
|Nondeductible expenses                         |                        
|Increase in valuation allowance                |                        
|Income tax expense                             |                        

47



---

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

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

|                                    | December 31,  
|----------------------------------- | --------------
|                                    | 2006          
|                                    | (In thousands)
|Deferred tax assets:                |               
|Accrued vacation                    |               
|AMT credits                         |               
|Bad debt and other reserves         |               
|Deferred income                     |               
|Sales incentives                    |               
|Deferred compensation               |               
|Intangible amortization             |               
|Net operating loss carryforward     |               
|Other                               |               
|Total deferred tax assets           |               
|Less: valuation allowance           |               
|Deferred tax assets                 |               
|Deferred tax liabilities:           |               
|Property and equipment depreciation |               
|Intangible amortization             |               
|Sales incentives                    |               
|Deferred tax liabilities            |               
|Net deferred income tax liabilities |               

In
addition to the deferred taxes reflected in the table above, the Company included within
Liabilities held for sale as of December 31, 2006 and 2005 net non-current
deferred income tax liabilities of $2,320,000 and $1,924,000, respectively.

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 $34.4 million as of December 31, 2006. At
December 31, 2006, the Company had, for federal and state tax purposes, net operating loss
carryforwards of approximately $89.8 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, were approximately $378,000 and $354,000 for
the years ended December 31, 2005 and 2004.

(9) 
Defined Contribution Plan

48



---

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 $216,000, $245,000 and $235,000 to the Plan
for the years ended December 31, 2006, 2005 and 2004, respectively.

# (10) Stock Option
Compensation

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

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

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

A
summary of the status of the Companys Stock Incentive Plan, and changes for the
years ended December 31, 2006, 2005 and 2004 is presented below (not in thousands):

|                                 | 
|-------------------------------- | 
|Outstanding at December 31, 2003 | 
|Granted                          | 
|Exercised                        | 
|Forfeited                        | 
|Outstanding at December 31, 2004 | 
|Granted                          | 
|Exercised                        | 
|Forfeited                        | 
|Outstanding at December 31, 2005 | 
|Granted                          | 
|Exercised                        | 
|Forfeited                        | 
|Outstanding at December 31, 2006 | 
|                                 | 
|Exercisable at December 31, 2004 | 
|Exercisable at December 31, 2005 | 
|Exercisable at December 31, 2006 | 
|                                 | 

The
following table summarizes information about stock options outstanding and exercisable at
December 31, 2006 (not in thousands):

49



---

|                              | Options
     Outstanding                               
|----------------------------- | -------------------------------------------------------
|Range of Exercise
     Prices | Number of Options
     Outstanding at December 31, 2006
|$4.89                         |                                                        
|$5.720 - $6.000               |                                                        
|$6.95 - $7.99                 |                                                        
|$9.13                         |                                                        
|$15.00 - $18.00               |                                                        
|$23.00 - $24.88               |                                                        
|Total                         |                                                        

|                              | Options
     Exercisable                               
|----------------------------- | -------------------------------------------------------
|Range of Exercise
     Prices | Number of Options
     Outstanding at December 31, 2006
|$4.89                         |                                                        
|$5.720 - $6.000               |                                                        
|$6.95 - $7.99                 |                                                        
|$9.13                         |                                                        
|$15.00 - $18.00               |                                                        
|$23.00 - $24.88               |                                                        
|Total                         |                                                        

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, $1.92 and $5.03 for the years ended
December 31, 2006, 2005 and 2004, respectively. No options were exercised during the
years ended December 31, 2006 or 2005. The total fair value of shares vested during
the year ended December 31, 2006 was $459,000. The total fair value of shares vested
during the year ended December 31, 2005 was $942,000.

(11)
Selected Quarterly Data (Unaudited)

|                                         
|-----------------------------------------
|(In thousands, except for per share data)
|2006                                     
|Net revenues                             
|Operating loss                           
|Net income (loss)                        
|Net income (loss) per common share       
|                                         
|2005                                     
|Net revenues                             
|Operating loss                           
|Net loss                                 
|Net loss per common share                
|                                         

The
Company has reclassified the results of operations of its Salt Lake City and Ft. Myers
 Naples, Florida stations to discontinued operations for all quarters presented. The
Ft. Myers  Naples station was sold on February 16, 2007 (see Note 12).

# (12) Subsequent Events

Amendment of Senior
Credit Agreement and Declaration of Special Dividend

50



---

On
February 15, 2007, the Company amended it senior credit agreement to allow it to pay cash
dividends to stockholders from proceeds from station sales in excess of the then outstanding borrowings and to borrow up to $20.0
million to make additional dividends. On February 16, 2007, the Companys board of
directors declared a special cash dividend of $0.50 per common share to holders of record as of
the close of business on February 26, 2007. The dividend, which totaled approximately $8.0
million, was paid on March 12, 2007.

Completion of the Sun
Transaction

On
February 16, 2007, the Company completed the Sun Transaction and on February 20, 2007 used
the majority of those proceeds to repay all of the $37.2 million in outstanding borrowings and accrued interest under its
senior credit facility. The maximum borrowing available under the credit facility was
thereupon reduced to $39.6 million due to the removal of station WTVKs value from
the collateral pool upon which the lenders base their maximum advances.

The Daily Buzz, LLC

On
March 14, 2007, the Company entered into an agreement with Emmis Television Broadcasting,
L.P. (Emmis), its partner in The Daily Buzz, LLC venture, and reacquired
Emmis 50% share of the venture for $1. Emmis also agreed to make a final capital
contribution to the venture in an amount of $150,000, which approximates their 50% share
of the losses expected for the quarter ended March 31, 2007. On a go-forward basis, the
Company will fully control the operations of the venture and be solely responsible for its
funding and losses.

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

On
October 12 2006, KPMG LLP (KPMG) was advised that the firms services as
auditors of the Company were terminated. The decision was approved by the Audit Committee
of the Board of Directors of the Company.

The
audit reports of KPMG on the consolidated financial statements of ACME Communications,
Inc. as of and for the years ended December 31, 2005 and 2004 did not contain an adverse
opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty,
audit scope or accounting principle. The audit reports of KPMG on managements
assessment of the effectiveness of internal control over financial reporting and the
effectiveness of internal control over financial reporting as of December 31, 2004 did not
contain an adverse opinion or disclaimer of opinion, and was not qualified or modified as
to uncertainty, audit scope or accounting principles.

In
connection with the audits of the Companys consolidated financial statements for
each of the fiscal years ended December 31, 2005 and 2004 there were: (1) no disagreements
between the Company and KPMG on any matters of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of KPMG, would have caused KPMG to make reference in
connection with their opinion to the subject matter of the disagreement, and (2) no
reportable events.

The
Company has engaged Mayer Hoffman McCann, P.C. (MHM) to serve as its new
independent registered certified public accountants. Prior to the engagement of MHM to
provide the audit of the Companys financial statements and the review of interim
filings, the Company did not consult MHM regarding any matter requiring disclosure under
Item 304(a)(2) of Regulation S-K.

# ITEM 9A. Controls and
Procedures

Conclusion Regarding the
Effectiveness of Disclosure Control and Procedures

Disclosure
controls and procedures are designed to ensure that information required to be disclosed
in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the required time periods. As of
December 31, 2006, the end of the period covered by this report, the Company carried out
an evaluation under the supervision and with the participation of our Chief Executive
Officer and Chief Financial Officer of the effectiveness of our disclosure controls and
procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that our disclosure controls and procedures were effective. The
Company reviews its disclosure controls and procedures, on an ongoing basis, and may from
time to time make changes aimed at enhancing their effectiveness and to ensure that they
evolve with the Companys business.

In
addition, no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Securities Exchange Act of 1934) occurred during the fourth
quarter of our fiscal year ended December 31, 2006 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.

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

51



---

# ITEM 9B. Other
Information

None.

PART III

# ITEM 10. Directors and
Executive Officers of the Registrant

# Executive Officers of
the Registrant

The
following table sets forth information about our executive officers at December 31, 2006:

|
|
|
|
|
|

---

| | (1) | as of March 29, 2007
| | --- | --------------------

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.

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

The
remaining portion of the information required by Item 10 is incorporated by reference to
our Proxy Statement to be filed pursuant to Regulation 14A relating to the 2007 Annual
Meeting of Stockholders.

# ITEM 11. Executive
Compensation

Item
incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A
relating to the 2007 Annual Meeting of Stockholders.

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

Item
incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A
relating to the 2007 Annual Meeting of Stockholders.

52



---

# ITEM 13. Certain
Relationships and Related Transactions, and Director Independence

Item
incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A
relating to the 2007 Annual Meeting of Stockholders.

# ITEM 14. Principal
Accountant Fees and Services

Item
incorporated by reference to our Proxy Statement to be filed pursuant to Regulation 14A
relating to the 2007 Annual Meeting of Stockholders.

PART IV

# ITEM 15. Exhibits and
Financial Statement Schedules

1.    
          FINANCIAL STATEMENTS

As
listed in the Index to Financial Statements on page 30 hereof.

2.    
          FINANCIAL STATEMENT SCHEDULES

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

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


Balance Sheet as of December 31, 2006 and 2005.

 Statements
of Operations for the years ended December 31, 2006, 2005 and, 2004.


Statements of Stockholders Equity for the years ended December 31, 2006, 2005 and,
2004.


Statements of Cash Flows for the years ended December 31, 2006, 2005 and, 2004.

  Notes
to the Condensed Financial Statements

Schedule II - Valuation and Qualifying Accounts

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

3.    
          Index to Exhibits filed as part of this report

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

53



---

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.

|Date: April 9, 2007 |  | ACME Communications, Inc.

By:  /s/ Thomas D. Allen
        Thomas D. Allen
        Executive VP &
Chief Financial Officer
|------------------- |  | --------------------------------------------------------------------------------------------------------------------------

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

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

|Signature                           | Capacity                                                                                                   | Date         
|----------------------------------- | ---------------------------------------------------------------------------------------------------------- | -------------
|*
Jamie Kellner                     | Chairman of the Board and Chief Executive Officer(Principal Executive Officer)                             | April 9, 2007
|*
Douglas Gealy                     | President, Chief Operating Officer and Director                                                            | April 9, 2007
|/s/ Thomas D. Allen
Thomas D. Allen | Executive Vice President, Chief Financial Officer(Principal Financial and Accounting Officer) and Director | April 9, 2007
|*
James Collis                      | Director                                                                                                   | April 9, 2007
|*
Thomas Embrescia                  | Director                                                                                                   | April 9, 2007
|*
Michael G. Corrigan               | Director                                                                                                   | April 9, 2007
|*
John E. Conlin                    | Director                                                                                                   | April 9, 2007
|*
Brian McNeill                     | Director                                                                                                   | April 9, 2007
|*
Fredrick Wasserman                | Director                                                                                                   | April 9, 2007
|/s/ Thomas D. Allen
Thomas D. Allen | * Attorney in Fact                                                                                         | April 9, 2007
|                                    |                                                                                                            |              

54



---

# Report of Independent
Registered Public Accounting Firm on Schedules

The Board of Directors and
Stockholders ACME Communications, Inc.

We
have audited the  consolidated  financial  statements of ACME  Communications,  Inc. as
of December 31, 2006 and for the year ended and have  issued our  report  thereon  dated
 March 28,  2007.  Our audit was conducted for the purpose of forming an opinion on the
basic financial  statements  taken as a whole.  The information  included  in  the
 accompanying   Schedule  I  -  Condensed  Financial  Information  of  ACME
Communications,  Inc.  (Parent  Company) on pages 56-61 and Schedule II - Valuation and  Qualifying
 Accounts on page 62 are presented for purposes of complying with the Securities  and
Exchange  Commission's  rules and are not required part of the basic financial
 statements.  Such  information as of and for the year ended December 31,  2006 has been
 subjected  to the  auditing  procedures  applied  in the audit of the basic  financial
statements  and,  in our  opinion,  are fairly  stated in all  material  respects in
relation to the basic financial statements taken as a whole.

/s/ MAYER HOFFMAN MCCANN P.C.
MAYER HOFFMAN MCCANN P.C.
Los Angeles, California 
March 28, 2007

55



---

# Schedule I

|ACME Communications, Inc.
(Parent Company)
Condensed Financial Information
Balance Sheets(in thousands, except for share data)
|------------------------------------------------------------------------------------------------------------------------------
|
|ASSETS                                                                                                                        
|                                                                                                                              
|Current assets:                                                                                                               
|Cash and cash equivalents                                                                                                     
|Total current assets                                                                                                          
|Investment in and advances to subsidiaries                                                                                    
|Total assets                                                                                                                  
|                                                                                                                              
|LIABILITIES AND STOCKHOLDERS' EQUITY                                                                                          
|Liabilities                                                                                                                   
|                                                                                                                              
|Stockholders' equity:                                                                                                         
|Preferred stock, $.01 par value; 10,000,000 shares authorized, no                                                             
|shares issued or outstanding                                                                                                  
|Common stock, $.01 par value; 50,000,000 shares authorized, 16,772,415 shares                                                 
|issued and 16,046,763 outstanding at December 31, 2006 and 2005 respectively                                                  
|Additional paid-in capital                                                                                                    
|Accumulated deficit                                                                                                           
|Less: Treasury stock, at cost, 725,652 shares                                                                                 
|Total stockholders' equity                                                                                                    
|Total liabilities and stockholders' equity                                                                                    
|                                                                                                                              

See notes to condensed financial statements.

56



---

# Schedule I (Continued)

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

See notes to condensed financial statements.

57



---

# Schedule I (Continued)

|ACME Communications, Inc.(Parent Company) 
Condensed Financial Information Statements of Stockholders' Equity(In thousands)
|---------------------------------------------------------------------------------------------------------------------------
|
|
|
|Balance at December 31, 2003                                                                                               
|Exercise of stock options                                                                                                  
|Amortization of deferred compensation                                                                                      
|Purchase of treasury stock, at cost                                                                                        
|Net loss                                                                                                                   
|                                                                                                                           
|Balance at December 31, 2004                                                                                               
|Net loss                                                                                                                   
|                                                                                                                           
|Balance at December 31, 2005                                                                                               
|Stock-based compensation                                                                                                   
|Net loss                                                                                                                   
|                                                                                                                           
|Balance at December 31, 2006                                                                                               

See notes to the condensed financial statements.

58



---

# Schedule I (Continued)

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

See notes to condensed financial statements.

59



---

# ACME Communications,
Inc.(Parent Company)Notes to Condensed
Financial Information

(1) Formation and Basis
of Presentation

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

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

During
2002, the Companys subsidiaries, accounted for on the equity method, entered into
transactions to sell their St. Louis and Portland stations. The sales were completed on
March 21, 2003. On August 4, 2005, the Companys subsidiary entered into an agreement
to sell its Salt Lake City station. That sale closed on April 4, 2006. On May 12, 2006,
the Companys subsidiary entered into an agreement to sell its Ft. Myers 
Naples, Florida station. That sale closed on February 16, 2007 (see Note 12 in the
Consolidated Financial Statements included in Item 8 of this filing). The results of
operations for these stations have been reported as discontinued operations in the
consolidated financial statements.

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

(2) Cash Dividends

There
have been no cash dividends declared by the Company from its inception through December
31, 2006. On February 16, 2007, the Company declared a special dividend of $0.50 per share
of common stock (see Note (4)  Subsequent Events).

(3) Revolving Credit
Facility and Restricted Assets

The
Companys wholly-owned indirect subsidiary, ACME Television, LLC, is a borrower under
a revolving credit facility which limits the distribution of any dividends or assets from
ACME Television to its direct or indirect parents. ACME Television, LLC was in compliance
with all the covenants contained in the loan agreement. The Company is a signatory of that
debt agreement solely for the purpose of making certain negative covenants and not as a
guarantor. The net assets of ACME Television at December 31, 2006 were approximately $50.8
million.

(4) Subsequent Events

Amendment of Senior
Credit Agreement and Declaration of Special Dividend

On
February 15, 2007, the Companys subsidiary, ACME Television, LLC, amended it senior
credit agreement to allow it to pay dividends to stockholders from proceeds from station
sales and to borrow up to $20.0 million to make additional dividends. On February 16,
2007, the Companys board of directors declared a special cash dividend of $0.50 per
common share to holders of record as of the close of business on February 26, 2007. The
dividend, which totaled approximately $8.0 million, was paid on March 12, 2007.

Completion of the Sun
Transaction

On
February 16, 2007, the Companys subsidiaries, ACME Television of Florida, LLC and
ACME Television Licenses of Florida, LLC completed the sale of substantially all of the
assets of station WTVK serving the Ft. Myers  Naples, Florida marketplace and on
February 20, 2007 used the majority of those proceeds to repay all of the $37.2 million in
outstanding borrowings and accrued interest under ACME Televisions senior credit facility.

60



---

The Daily Buzz, LLC

On
March 14, 2007, a subsidiary of the Company entered into an agreement with Emmis
Television Broadcasting, L.P. (Emmis), the subsidiarys partner in The
Daily Buzz, LLC venture, and reacquired Emmis 50% share of the venture for $1. Emmis
also agreed to make a final capital contribution to the venture in an amount of $150,000,
which approximates their 50% share of the losses expected for the quarter ended March 31,
2007. As a result, the Company will, through its subsidiary, fully control the operations
of the venture and be solely responsible for its funding and losses.

61



---

# Schedule II

# ACME Communications,
Inc.

# VALUATION AND
QUALIFYING ACCOUNTS

# For The Years Ended
December 31, 2006 and 2005 and 2004(In thousands)

|Allowance for
             Doubtful Accounts |  | Balance at
             Beginning
             of Period |   | Additions
             Charged to
             Expense |  | Deductions |     | Adjustment
             Due to
             Deconsolidation |   | Balance at
             End of
             Period | 
|-------------------------------------------- |  | -------------------------------------------------------- | - | ------------------------------------------------------ |  | ---------- | --- | ----------------------------------------------------------- | - | -------------------------------------------------- | 
|Year ended December 31, 2006                 |  |                                                          | $ | 793                                                    |  | $          | 264 |                                                             | $ | 306                                                | 
|Year ended December 31, 2005                 |  |                                                          | $ | 839                                                    |  | $          | 355 |                                                             | $ | 401                                                | 
|Year ended December 31, 2004                 |  |                                                          | $ | 770                                                    |  | $          | 347 |                                                             | $ | 278                                                | 

62



---

# EXHIBIT INDEX

|ExhibitNumber | Description                                                                                                                                                                                                                             
|------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 (1)       | Form of Restated Certificate of Incorporation of ACME Communications, Inc.                                                                                                                                                              
|3.2 (1)       | Form of Restated Bylaws of ACME Communications, Inc.                                                                                                                                                                                    
|4.1 (1)       | Form of Stock Certificate of ACME Communications, Inc.                                                                                                                                                                                  
|10.1 (2)      | Employment Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Douglas Gealy.                                                                                                                               
|10.2 (2)      | Employment Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Thomas Allen.                                                                                                                                
|10.3 (2)      | Consulting Agreement, dated October 5, 1999, by and between ACME Communications,
Inc. and Jamie Kellner.                                                                                                                               
|10.4 (3)      | Employment Agreement, dated October 21, 2004 by and between ACME Communications,
Inc. and Edward Danduran.                                                                                                                             
|10.5 (4)      | 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 Second Amended and Restated Loan Agreement by and among
ACME Television, LLC, the Lenders that are signatories thereto and Wells Fargo
Foothill, Inc., as Arranger and Administrative Agent, dated March 9, 2005.
|10.15 (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.                          

63



---

|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.         
|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.
|21         | Subsidiaries of ACME Communications, Inc.                                                                                                                                                                                                                   
|23.1       | Consent of KPMG LLP, Independant Registered Public Accounting Firm.                                                                                                                                                                                         
|23.2       | 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) under the
Securities and Exchange Act of 1934, as amended                                                                                                                              
|31.2       | Certification of Chief Financial Officer pursuant to Rules 13a-14(a) under the
Securities and Exchange Act of 1934, as amended                                                                                                                              
|32         | Certificate of Chief Executive Officer and Chief Financial Officer pursuant to
Section 906 of Sarbanes-Oxley Act of 2002.                                                                                                                                   

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

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

64



---

| | (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.
| | ---- | -------------------------------------------------------------------------------------------------------------------------

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

| |  | denotes
management contract or compensatory plan or arrangement.
| | - | ----------------------------------------------------------------

65