SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

þ		Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2005 or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from __________ to __________.

Commission File Number 1-13796

GRAY TELEVISION, INC.

(Exact Name of Registrant as Specified in Its Charter)

Georgia		58-0285030
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)
4370 Peachtree Road, NE
Atlanta, GA		30319
(Address of Principal Executive Offices)		(Zip Code)

Registrant’s telephone number, including area code: (404) 504-9828

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

Title of each class		Name of each exchange on which registered
Class A Common Stock (no par value)		New York Stock Exchange
Common Stock (no par value)		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: NONE

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     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 the 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. o

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. (Check one).

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o

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

     The aggregate market value of the voting stock (based upon the closing sales price quoted on the New York Stock Exchange) held by non-affiliates as of June 30, 2005: Class A and Common Stock; no par value — $586,316,233.

     The number of shares outstanding of the registrant’s classes of common stock as of February 23,2006: Class A Common Stock; no par value — 5,752,845 shares; Common Stock, no par value — 43,051,781 shares

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the registrant’s definitive proxy statement for the annual meeting of shareholders to be filed with the Commission pursuant to Regulation 14A is incorporated by reference into Part III hereof.

 

 

Gray Television Inc.

INDEX

PART OR ITEM		DESCRIPTION		PAGE
PART I
Item 1.		Business			3
Item 1A.		Risk Factors			20
Item 1B.		Unresolved Staff Comments			25
Item 2.		Properties			26
Item 3.		Legal Proceedings			30
Item 4.		Submission of Matters to a Vote of Security Holders			32
Item 4A.		Executive Officers of the Registrant			32
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			34
Item 6.		Selected Financial Data			36
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			38
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk			54
Item 8.		Financial Statements and Supplementary Data			55
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			99
Item 9A.		Controls and Procedures			99
Item 9B		Other Information			99
PART III
Item 10.		Directors and Executive Officers of the Registrant			99
Item 11.		Executive Compensation			99
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			100
Item 13.		Certain Relationships and Related Transactions			100
Item 14.		Principal Accountant Fees and Services			101
Part IV
Item 15.		Exhibits and Financial Statement Schedules			101
SIGNATURES					105
EX-3.1 RESTATED ARTICLES OF INCORPORATION
EX-3.3 AMENDMENT TO BYLAWS OF GRAY TELEVISION DATED JANUARY 6, 1999
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF PRICEWATERHOUSECOOPERS LLP
EX-31.1 SECTION 302 CONSENT OF THE CEO
EX-31.2 SECTION 302 CONSENT OF THE CF0
EX-32.1 SECTION 906 CONSENT OF THE CEO
EX-32.2 SECTION 906 CONSENT OF THE CFO

PART 1

Item 1. Business.

     In this Annual Report, unless otherwise indicated, the words “Gray,” ”Company,” “our,” “us” and “we” refer to Gray Television, Inc. and its subsidiaries. Our discussion of the television stations that we own and operate does not include our interest in the stations owned by Sarkes Tarzian, Inc., which we refer to as “Tarzian.”

     The Company’s common stock, no par value, (the “Common Stock”) and its class A common stock, no par value, (the “Class A Common Stock’) have been listed and traded on The New York Stock Exchange (the “NYSE”) since September 24, 1996 and June 30, 1995, respectively. The ticker symbols are “GTN” for its Common Stock and “GTN.A” for its Class A Common Stock.

     Unless otherwise indicated, all station rank, in-market share and television household data herein are derived from reports prepared by A.C. Nielsen Company (“Nielsen”).

General

     As of the filing date of the Annual Report the Company owns 36 television stations serving 30 television markets. Seventeen of the stations are affiliated with CBS Inc., or “CBS,” ten are affiliated with the National Broadcasting Company, Inc., or “NBC”, eight are affiliated with the American Broadcasting Company, or “ABC” And one is affiliated with FOX Entertainment Group, Inc. or “FOX.” The combined station group has 24 stations ranked #1 in local news audience and 24 stations ranked #1 in overall audience within their respective markets based on the results of the average of the Nielsen November, July, May and February 2005 ratings reports. The combined TV station group reaches approximately 6.5% of total U.S. TV households. With seventeen CBS affiliated stations, the Company is the largest independent owner of CBS affiliates in the country. In addition, as of the date of this Annual Report, the Company also broadcasts eleven additional channels of programming in certain of its markets by multiplexing its digital broadcast spectrum.

     In 1993, the Company implemented a strategy to foster growth through strategic acquisitions and certain select divestitures. Since January 1, 1994, the Company’s significant acquisitions have included 32 television stations and the divestiture of two television stations.

     On December 30, 2005 the Company completed the spinoff of its Gray Publishing and GrayLink Wireless businesses. Following the spinoff, the Company’s business consists of one reportable segment, television broadcasting.

Acquisitions, Investments and Divestitures

2006 Acquisition

     On March 3, 2006, the Company completed the acquisition of the stock of Michiana Telecasting Corp., owner of WNDU-TV, the NBC affiliate in South Bend, Indiana, from the University of Notre Dame for $85 million in cash plus certain transaction fees. The Company financed this acquisition with borrowings under the Company’s senior credit facility.

2005 Spinoff

     On December 30, 2005, the Company completed the spinoff of all of the outstanding stock of Triple Crown Media., Inc. (“TCM”). Immediately prior to the spinoff, the Company contributed all of the

membership interests in Gray Publishing, LLC which owned and operated the Company’s Gray Publishing and GrayLink Wireless businesses and certain other assets, to TCM. In the spinoff, each of the holders of our common stock received one share of TCM Common stock for every ten shares of our common stock and each holder of our Class A common stock received one share of TCM common stock for every ten shares of our Class A common stock. As part of the spinoff, the Company received an approximate $44 million cash distribution from TCM, which Gray used to reduce its outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market under the symbol “TCMI.” The financial position and results of operations of the publishing and wireless businesses are reported in the Company’s consolidated balance sheet and statement of operations as Discontinued Operations for all periods presented.

2005 Acquisitions

     On November 30, 2005, the Company completed the acquisition of the assets of WSAZ-TV, the NBC affiliate in Charleston-Huntington, West Virginia from Emmis Communications Corp. for approximately $185.8 million in cash plus certain transaction fees. The Company financed this acquisition by borrowings under the company’s senior credit facility.

     On November 10, 2005, the Company completed the acquisition of the assets of WSWG-TV, the UPN affiliate serving the Albany, Georgia television market from P.D. Communications, LLC. for $3.75 million in cash. The Company used a portion of its cash on hand to fund this acquisition. Subsequent to the acquisition Gray obtained a CBS affiliation for this station.

     On January 31, 2005, the Company completed the acquisition of KKCO-TV from Eagle III Broadcasting, LLC for approximately $13.5 million plus certain transaction fees. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. The Company used a portion of its cash on hand to fully fund this acquisition.

     During 2005 the Company acquired an FCC license to operate a low power television station, WAHU-TV, in the Charlottesville, Virginia television market. The Fox broadcast network has agreed to an affiliation agreement to allow the Company to operate WAHU-TV as a FOX affiliate.

2004 Acquisition

     On August 17, 2004, the Company completed the acquisition of a FCC television license for WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation. Gray’s cost to acquire that FCC license was approximately $1 million. CBS, Inc. has agreed to a ten-year affiliation agreement to allow Gray to operate WCAV-TV as a CBS-affiliated station.

     Gray also has an FCC license to operate a low power television station, WVAW-TV, in the Charlottesville, Virginia television market. The American Broadcasting Company has agreed to an affiliation agreement expiring December 31, 2013 to allow Gray to operate WVAW-TV as an ABC affiliate.

2002 Acquisitions

     On October 25, 2002 the Company completed its acquisition of Stations Holding Company, Inc. (“Stations Holding”) by acquiring all of Stations Holding’s outstanding capital stock in a merger transaction. Effective with the completion of the transaction, Stations Holding changed its name to Gray MidAmerica Television, Inc. (“Gray MidAmerica Television”). With this transaction the Company acquired 15 network affiliated television stations serving 13 television markets. On December 18, 2002

the Company completed its acquisition of the assets of KOLO-TV, the ABC affiliate serving Reno, Nevada.

     The Company paid $516.5 million in aggregate cash consideration for Gray MidAmerica Television. This amount included a base purchase price of $502.5 million plus certain net working capital adjustments of approximately $5.7 million and fees of $8.3 million associated with the transaction. The Company funded the acquisition and related fees and expenses by issuing 30.0 million shares of Gray Common Stock to the public for net proceeds of $232.7 million, issuing additional debt totaling $275.0 million and cash on hand.

     For advisory services rendered by Bull Run Corp. (“Bull Run”) a related party, in connection with the acquisition of Gray MidAmerica Television, the Company paid to Bull Run an advisory fee of $5.0 million. This amount is included in the fees described above. The Company does not intend to engage Bull Run for any such advisory or similar services in the future.

     The Company paid $41.9 million in cash consideration for KOLO-TV. This purchase price included a base purchase price of $41.5 million and related fees of approximately $400,000. The Company financed this transaction by utilizing cash on hand and net proceeds of $34.9 million from the issuance of an additional 4.5 million shares of Gray Common Stock.

Acquisition of Investment in Sarkes Tarzian, Inc.

     On December 3, 2001, the Company exercised its option to acquire 301,119 shares of the outstanding common stock, $4.00 par value, of Sarkes Tarzian, Inc. (“Tarzian”) from Bull Run. Bull Run had purchased these same shares from U.S. Trust Company of Florida Savings Bank as Personal Representative of the Estate of Mary Tarzian (the “Estate”) in January 1999.

     The acquired shares of Tarzian represent 33.5% of the total outstanding common stock of Tarzian (both in terms of the number of shares of common stock outstanding and in terms of voting rights), but such investment represents 73% of the equity of Tarzian for purposes of dividends if paid as well as distributions in the event of any liquidation, dissolution or other sale of Tarzian.

     Gray paid $10 million to Bull Run to complete the acquisition of the 301,119 shares of Tarzian. The Company has previously capitalized and paid to Bull Run $3.2 million of costs associated with the Company’s option to acquire these shares. This investment has been accounted for under the cost method of accounting and reflected as a non-current other asset. The Company believes the cost method is appropriate to account for this investment given the existence of a single voting majority shareholder. The Company’s ownership of these shares is subject to certain litigation which is discussed in Item 3. Legal Proceedings.

The Company’s Stations and Their Markets

     The following is a list of all our owned and operated television stations as of March 3, 2006. In markets where we have satellite stations and stations that serve distant communities, certain figures relating to in market share of household viewing and television households have been combined:

																		FCC								Station				In Market
						FCC Assigned												License				Station				News				Share of				Television
DMA						Analog				Digital				Affiliation				Expiration				Rank in				Rank in				Household				Households (a)
Rank (a)		Market		Station		Channel				Channel				Network		Expiration		Date				DMA (b)				DMA (c)				Viewing (d)				(in thousands)
58		Knoxville, TN		WVLT			8				30			CBS		12/31/14			08/01/05	(h)			2				2				23	%			516
63		Lexington, KY		WKYT			27				13			CBS		12/31/14			08/01/05	(h)			1				1				35	%			479
64		Charleston-Huntington, WV		WSAZ			3				23			NBC		01/01/09			10/01/12				1				1				51	%			478
66		Wichita—Hutchinson, KS		KAKE			10				21			ABC		12/31/13			06/01/06				2				2				28	%			446
		(Colby, KS)		KLBY (e)			4				17			ABC		12/31/13			06/01/06				2				2
		(Garden City, KS)		KUPK (e)			13				18			ABC		12/31/13			06/01/06				2				2
75		Omaha, NE		WOWT			6				22			NBC		01/01/12			06/01/06				1				1				31	%			400
85		Madison, WI		WMTV			15				19			NBC		01/01/12			12/01/05	(h)			2				2				25	%			366
87		South Bend, IN		WNDU			16				42			NBC		12/31/10			08/01/13				1				1				35	%			333
93		Colorado Springs, CO		KKTV			11				10			CBS		12/31/14			04/01/06				1				2				37	%			315
94		Waco-Temple-Bryan, TX		KWTX			10				53			CBS		12/31/14			08/01/06				1				1				43	%			311
		(Bryan, TX)		KBTX (f)			3				50			CBS		12/31/14			08/01/06				1				1
103		Lincoln—Hastings		KOLN			10				25			CBS		12/31/14			06/01/06				1				1				53	%			274
		Kearney, NE		KGIN (g)			11				32			CBS		12/31/14			06/01/06				1				1
		(Grand Island, NE)
105		Greenville—New Bern		WITN			7				32			NBC		01/01/12			12/01/04	(h)			2				2				33	%			271
		—Washington, NC
109		Tallahassee, FL—		WCTV			6				46			CBS		12/31/14			04/01/05	(h)			1				1				57	%			261
		Thomasville, GA
110		Lansing, MI		WILX			10				57			NBC		01/01/12			10/01/05	(h)			2				1				34	%			257
112		Reno, NV		KOLO			8				9			ABC		12/31/13			10/01/06				1				1				31	%			264
115		Augusta, GA		WRDW			12				31			CBS		12/31/14			04/01/05	(h)			1				1				35	%			247
123		La Crosse— Eau		WEAU			13				39			NBC		1/1/12			12/01/05	(h)			1				1				34	%			224
		Claire, WI
133		Rockford, IL		WIFR			23				41			CBS		12/31/14			12/01/05	(h)			2				2				32	%			183
134		Wausau—Rhinelander, WI		WSAW			7				40			CBS		12/31/14			12/01/05	(h)			1				1				40	%			182
136		Topeka, KS		WIBW			13				44			CBS		12/31/14			06/01/06				1				1				49	%			171
147		Albany, GA		WSWG			44				43			CBS\UPN		8/31/07			04/01/13				N/A	(i)			N/A	(i)			N/A	(i)			152
157		Panama City, FL		WJHG			7				8			NBC		1/1/12			02/01/05	(h)			1				1				45	%			135
161		Sherman,TX—Ada, OK		KXII			12				20			CBS		12/31/14			08/01/06				1				1				66	%			124
172		Dothan, AL		WTVY			4				36			CBS		12/31/14			04/01/05	(h)			1				1				67	%			98
181		Harrisonburg, VA		WHSV			3				49			ABC		12/31/13			10/01/12				1				1				95	%			86
183		Bowling Green, KY		WBKO			13				33			ABC		12/31/13			08/01/05	(h)			1				1				83	%			75
184		Meridian, MS		WTOK			11				49			ABC		12/31/13			06/01/05	(h)			1				1				67	%			72
186		Charlottesville, VA		WCAV			19				19			CBS		08/15/14			10/01/12	(j)			2				2				10	%(j)			75
				WVAW			16							ABC		12/31/13			10/01/12	(j)			3				3
				WAHU			27							FOX		06/30/08			10/01/12	(j)			4				4
187		Grand Junction, CO		KKCO			11				12			NBC		7/30/06			04/30/08				1				1				38	%			65
190		Parkersburg, WV		WTAP			15				49			NBC		01/01/12			10/01/04	(h)			1				1				93	%			64
Note(k)		Hazard, KY		WYMT			57				12			CBS		12/31/14			08/01/05	(h)			1				1				31	%			189
																																			7,113	(l)

Television Industry Background

     There are currently a limited number of channels available for broadcasting in any one geographic area, and the license to operate a television station is granted by the FCC. Television stations which broadcast over the very high frequency (“VHF”) band (channels 2-13) of the spectrum generally have some competitive advantage over television stations which broadcast over the ultra-high frequency (“UHF”) band (channels above 13) of the spectrum, because the former usually have better signal coverage and operate at a lower transmission cost.

     Television station revenues are primarily derived from local, regional and national advertising and, to a much lesser extent, from network compensation and revenues from studio and tower space rental and commercial production activities. Advertising rates are based upon a variety of factors, including a program’s popularity among the viewers an advertiser wishes to attract, the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Rates are also determined by a station’s overall ratings and in-market share, as well as the station’s ratings and share among particular demographic groups, which an advertiser may be targeting. Because broadcast stations rely on

advertising revenues, they are sensitive to cyclical changes in the economy. The sizes of advertisers’ budgets, which are affected by broad economic trends, affect the broadcast industry in general and the revenues of individual broadcast television stations.

     All television stations in the country are grouped by Nielsen, a national audience measuring service, into approximately 210 generally recognized television markets that are ranked in size according to various formulae based upon actual or potential audience. Each Designated Market Area (“DMA”) is an exclusive geographic area consisting of all counties in which the home-market commercial stations receive the greatest percentage of total viewing hours. Nielsen periodically publishes data on estimated audiences for the television stations in the various television markets throughout the country.

     Four major broadcast networks, ABC, NBC, CBS and FOX dominate broadcast television. Additionally, the United Paramount Network (“UPN”) and the Warner Brothers Network (“WB”) have announced a joint venture to replace their respective networks with a single network known as the CW network (or “CW’) which is currently expected to be operational in the fall of 2006. Affiliates of FOX have also announced the formation of a new network known as MyNetworkTV that is expected to be operational in the fall of 2006. An affiliate of FOX, CW or MyNetworkTV receives a smaller portion of each day’s programming from its network compared to an affiliate of ABC, NBC or CBS.

     The affiliation of a station with ABC, NBC or CBS has a significant impact on the composition of the station’s programming, revenues, expenses and operations. A typical affiliate of these networks receives the majority of each day’s programming from the network. This programming, along with cash payments (“network compensation”) in certain instances, is provided to the affiliate by the network in exchange for a substantial majority of the advertising time available for sale during the airing of network programs. The network then sells this advertising time and retains the revenues. The affiliate retains the revenues from time sold during breaks in and between network programs and programs the affiliate produces or purchases from non-network sources. In acquiring programming to supplement programming supplied by the affiliated network, the affiliates compete primarily with other affiliates and independent stations in their markets. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. In addition, a television station may acquire programming through barter arrangements. Under barter arrangements, a national program distributor may receive advertising time in exchange for the programming it supplies, with the station paying a reduced or no fee for such programming. Most successful commercial television stations obtain their brand identity from locally produced news programs.

     In contrast to a station affiliated with a network, a fully independent station purchases or produces all of the programming that it broadcasts, resulting in generally higher programming costs. An independent station, however, retains its entire inventory of advertising time and all the revenues obtained therefrom. As a result of the smaller amount of programming provided by its network, an affiliate of FOX, CW or MyNetworkTV must purchase or produce a greater amount of programming, resulting in generally higher programming costs. These affiliate stations, however, retain a larger portion of the inventory of advertising time and the revenues obtained therefrom compared to stations affiliated with the major networks.

     Cable-originated programming is a significant competitor for viewers of broadcast television programming, although no single cable programming network regularly attains audience levels amounting to more than a small fraction of any single major broadcast network. The advertising share of cable networks has increased as a result of the growth in cable penetration (the percentage of television households which are connected to a cable system). Notwithstanding such increases in cable viewership and advertising, over-the-air broadcasting remains the dominant distribution system for mass-market television advertising.

     The Company accounts for trade barter transactions involving the exchange of tangible goods or services with its customers. The revenue is recorded at the time the advertisement is broadcast and the expense is recorded at the time the goods or services are used. The revenue and expense associated with these transactions are based on the fair value of the assets or services received.

     In accordance with the Financial Accounting Standards Board’s Statement No. 63, Financial Reporting by Broadcasters, the Company does not account for barter revenue and related barter expense generated from network programming. The Company does not account for barter revenue and related barter expense generated from syndicated programming. Management of the Company believes that barter revenue and related expense generated from syndicated programming is immaterial. Furthermore, any such barter revenue recognized would then require the recognition of an equal amount of barter expense. The recognition of these amounts would have no effect upon net income.

Seasonality

     Broadcast advertising revenues are generally highest in the second and fourth quarters each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. In addition, broadcast advertising revenues are generally higher during even numbered years due to spending by political candidates, which spending typically is heaviest during the fourth quarter.

Network Affiliation of the Stations

     Each of the Company’s stations is affiliated with a major network pursuant to an affiliation agreement. Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network with which the station is affiliated. In return, the network has the right to sell a substantial majority of the advertising time during such broadcasts. In exchange for every hour that a station elects to broadcast network programming, the network may, in certain instances, pay the station a specific network compensation fee, which varies with the time of day. Typically, prime-time programming generates the highest hourly network compensation payments. Such payments are subject to increase or decrease by the network during the term of an affiliation agreement with provisions for advance notices and right of termination by the station in the event of a reduction in such payments. Although network affiliation agreements have historically been renewed by the Company and the respective networks, the Company can not guarantee that any agreements will be renewed in the future under their current terms. Network compensation has declined in recent years at certain of the Company’s television stations reflecting an ongoing phase out of network compensation. See the Broadcasting Summary table above for each of the Company’s television stations’ primary network affiliations and the expiration date of the current affiliation agreements.

     In addition, as of the date of this Annual Report, the Company also broadcasts eleven additional channels of programming in certain of its markets by multiplexing its digital broadcast spectrum. These multiplexed channels are in addition to the primary digital broadcast channel of each station which is affiliated with one of the three major networks. One of these channels is affiliated with FOX and the other ten are currently affiliated with UPN. For the ten channels currently affiliated with UPN, the Company is currently assessing the alternatives of affiliating with either of the newly announced CW or MyNetworkTV networks or programming the channel(s) independently. The Company can make no assurance whether any of its multiplexed digital channels will be affiliated with any network.

Competition

     Competition in the television industry exists on several levels: competition for audience, competition for programming (including news) and competition for advertisers. Additional factors that are material to a television station’s competitive position include signal coverage and assigned frequency.

     Audience. Stations compete for audience based on program popularity, which has a direct effect on advertising rates. A substantial portion of the daily programming on each of the Company’s stations is supplied by the affiliated network. During those periods, the stations are dependent upon the performance of the network programs to attract viewers. There can be no assurance that such programming will achieve or maintain satisfactory viewership levels in the future. Non-network time periods are programmed by the station with a combination of locally produced news, public affairs and other entertainment programming, including news and syndicated programs purchased for cash, cash and barter, or barter only.

     In addition, the development of methods of television transmission of video programming other than over-the-air broadcasting, and in particular cable television, has significantly altered competition for audience in the television industry. These other transmission methods can increase competition for a broadcasting station by bringing into its market distant broadcasting signals not otherwise available to the station’s audience and also by serving as a distribution system for non-broadcast programming.

     Other sources of competition include home entertainment systems, “wireless cable” services, satellite master antenna television systems, low power television stations, television translator stations, direct broadcast satellite (“DBS”) video distribution services and the internet.

     Programming. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Each station competes against the broadcast station competitors in its market for exclusive access to off-network reruns (such as Seinfeld) and first-run product (such as Oprah). Competition exists for exclusive news stories and features as well. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations.

     Advertising. Advertising rates are based upon the size of the market in which the station operates, a station’s overall ratings, a program’s popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic makeup of the market served by the station, the availability of alternative advertising media in the market area, aggressive and knowledgeable sales forces and the development of projects, features and programs that tie advertiser messages to programming. Advertising revenues comprise the primary source of revenues for the Company’s stations. The Company’s stations compete for such advertising revenues with other television stations and other media in their respective markets. The stations also compete for advertising revenue with other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, internet and local cable systems. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets.

Federal Regulation of the Company’s Business

     FCC Regulation. Television broadcasting is subject to the jurisdiction of the FCC under the Communications Act of 1934 (the “Communications Act”), as amended by, among other statutes, the Telecommunications Act of 1996 (the “1996 Telecommunications Act”). The Communications Act prohibits the operation of television broadcasting stations except under a license issued by the FCC and empowers the FCC, among other things, to issue, revoke and modify broadcasting licenses, determine the

locations of stations, regulate the equipment used by stations, adopt regulations to carry out the provisions of the Communications Act and impose penalties for violation of such regulations. The Communications Act prohibits the assignment of a license or the transfer of control of a licensee without prior approval of the FCC.

     License Grant and Renewal. Television broadcasting licenses generally are granted or renewed for a period of eight years, but may be renewed for a shorter period upon a finding by the FCC that the “public interest, convenience, and necessity” would be served thereby. Broadcast licenses are of paramount importance to the Company’s Television Broadcasting segment. The Communications Act requires a broadcast license to be renewed if the FCC finds that: (i) the station has served the public interest, convenience and necessity; (ii) there have been no serious violations of either the Communications Act or the FCC’s rules and regulations by the licensee; and (iii) there have been no other violations which, taken together, would constitute a pattern of abuse. At the time an application is made for renewal of a television license, parties in interest may file petitions to deny, and such parties, including members of the public, may comment upon the service the station has provided during the preceding license term and urge denial of the application. If the FCC finds that the licensee has failed to meet the above-mentioned requirements, it could deny the renewal application or grant a conditional approval, including renewal for a lesser term. The FCC will not consider competing applications contemporaneously with a renewal application. Only after denying a renewal application can the FCC accept and consider competing applications for the license. Although in substantially all cases broadcast licenses are renewed by the FCC even when petitions to deny are filed against license renewal applications, there can be no assurance that the Company’s stations’ licenses will be renewed. The Company is not aware of any facts or circumstances that could prevent the renewal of the licenses for its stations at the end of their respective license terms. See the dates through which the current licenses are effective in the Broadcasting Summary table included on page 5 of this Annual Report.

     Ownership Restrictions. Currently, the FCC’s broadcast ownership rules limit the ownership, operation or control of, as well as the “attributable” interests or voting power in: (1) television stations serving the same area; (2) television stations and daily newspapers serving the same area; and (3) television stations and radio stations serving the same area. The rules also limit the aggregate national audience reach of television stations that may be under common ownership, operation and control, or in which a single person or entity may hold office or have more than a specified interest or percentage of voting power. Pursuant to the 1996 Telecommunications Act and recent appropriations legislation, the FCC must review all of its broadcast ownership rules every four years to determine if they remain necessary in the public interest.

     The FCC completed a comprehensive review of its ownership rules in 2003, significantly relaxing restrictions on the common ownership of television stations, radio stations and daily newspapers within the same local market. However, the new rules have yet to take effect due to legal challenges. The outcome of FCC proceedings and legislative efforts and the ultimate landscape of FCC ownership regulation are in flux and may not be resolved for some time.

     Specifically, on June 24, 2004, a three-judge panel of the United States Court of Appeals for the Third Circuit released a split decision rejecting much of the Commission’s 2003 decision on media ownership regulations. While affirming the FCC in certain respects, the Third Circuit found fault with the Commission’s proposed new limits on media combinations, remanded them to the agency for further proceedings and extended a stay on the implementation of the new rules that it had imposed in September 2003. In January 2005, several parties filed petitions for Supreme Court review of the Third Circuit’s decision, but the Supreme Court declined to review the decision. As a result, the restrictions in place prior to the FCC’s 2003 decision generally continue to govern media transactions, pending completion of the agency proceedings on remand and/or further judicial review.

     The discussion below reviews the changes contemplated in the FCC’s 2003 decision and the Third Circuit’s response to the revised ownership regulations that the Commission adopted.

     Local TV Ownership Rule: In its 2003 decision, the FCC relaxed the local television ownership regulation by eliminating its “eight voices” test, which barred co-ownership of two TV stations in a local market unless at least eight independently owned, full-power television stations, or “voices,” remained. The modified rule would have permitted a company to own two commercial television facilities (a “duopoly”) in any market with at least five such stations. In the largest markets—those with at least 18 television stations—a company would, for the first time, be permitted to own three TV stations. So-called “triopolies” would be available only in a handful of the nation’s largest markets. Under the new rules, both duopolies and triopolies would be subject to the agency’s “top four” limitation, meaning that no more than one of the co-owned stations could be ranked among the top four in audience ratings. The new rules would have allowed parties to seek waivers of the ‘top four” restriction in markets with 11 or fewer stations.

     The Third Circuit upheld the FCC’s decision to retain a prohibition of common ownership of more than one top-four ranked station in a given market. However, the Court remanded for further consideration the other numerical limits applicable to same-market TV station combinations, and the “eight voices” requirement of the pre-2003 rules therefore remains in effect.

     Cross-Media Limits: The newspaper/broadcast cross-ownership rule, originally adopted in 1975, generally prohibited one entity from owning both a commercial broadcast station and a daily newspaper in the same community. The old radio/television cross-ownership rule allowed a party to own one TV station (or two, if permitted under the television duopoly rule) and a varying number of radio stations within a single market, depending on the number of independently owned media voices that would remain post combination. The cross-media limits (“CMLs”) adopted in the Commission’s 2003 decision would have supplanted both rules with three different categories of restrictions based on the number of commercial and noncommercial television stations in the relevant locale. First, in markets with three or fewer TV stations, the FCC would have prohibited any cross-ownership among TV stations, radio stations, and daily newspapers. Second, in markets with between four and eight TV stations, the agency would have permitted one of the following three combinations:

	•		one or more daily newspaper(s), one TV station, and up to 50 percent of the radio stations that would be permissible under the FCC’s separate local radio ownership limits for that community; or
	•		one or more daily newspaper(s), and as many radio stations as could be owned pursuant to the local radio ownership limits; or
	•		two TV stations (so long as ownership would be permissible under the duopoly rule) and as many radio stations as the local radio ownership limits would permit, but no daily newspapers.

Third, in local markets with nine or more TV stations, the Commission would have allowed any newspaper and broadcast cross-media combinations, so long as they complied with the local TV ownership rule and local radio ownership rule.

     Although the Third Circuit determined that the Commission’s decision to eliminate its outright ban on newspaper/broadcast cross-ownership was justified, the court also found that the new CMLs adopted by the agency were inconsistent and based on irrational assumptions. The CMLs consequently were remanded to the Commission for further consideration, and the former radio/TV cross-ownership limits as well as the newspaper/broadcast cross-ownership ban were left in place in the meantime.

     National Television Station Ownership Rule: In its 2003 decision, the FCC raised the national TV ownership cap—the percentage of national U.S. households that a single owner can reach through commonly owned television stations—from 35 percent to 45 percent. In that same decision, the Commission decided to retain the 50 percent “discount” that it currently grants to ultra-high frequency (“UHF”) stations, finding that the discount continues to be necessary to promote entry and competition among broadcast networks.

     This rule change sparked considerable controversy in Congress, eventually leading lawmakers to include a new limitation in an appropriations bill. On January 22, 2004, President Bush signed into law the Consolidated Appropriations Act of 2004. Section 629 of that legislation set the national TV ownership cap at 39 percent. The Third Circuit subsequently ruled that challenges before it to the national television ownership cap and UHF discount were moot.

     The FCC is expected to initiate proceedings to address the issues raised by the Third Circuit in 2006. Any new rules the FCC adopts would be subject to further judicial review.

     Attribution Rules. Under the FCC’s ownership rules, a direct or indirect purchaser of certain types of securities of the Company could violate FCC regulations if that purchaser owned or acquired an “attributable” interest in other media properties in the same areas as stations owned by the Company or in a manner otherwise prohibited by the FCC. Pursuant to FCC rules adopted in August 1999, as modified slightly on January 2001, the following relationships and interests generally are considered attributable for purposes of the agency’s broadcast ownership restrictions:

	•		All officers and directors of a licensee and its direct or indirect parent(s);
	•		Voting stock interests of at least five percent;
	•		Stock interests of at least 20 percent, if the holder is a passive institutional investor (investment companies, banks, insurance companies);
	•		Any equity interest in a limited partnership or limited liability company, unless properly “insulated” from management activities; and
	•		Equity and/or debt interests which in the aggregate exceed 33 percent of a licensee’s total assets, if the interest holder supplies more than 15 percent of the station’s total weekly programming, or is a same-market broadcast company or daily newspaper publisher.
	•		Time brokerage of a broadcast station by a same-market broadcast company.
	•		Same market radio joint sales agreements (in addition, the Commission is considering making same-market television joint sales agreements attributable.)

     To the best of the Company’s knowledge, no officer, director or 5% stockholder of the Company currently holds an attributable interest in another television station, radio station or daily newspaper that is inconsistent with the FCC’s ownership rules and policies or with ownership by the Company of its stations.

     Alien Ownership Restrictions. The Communications Act restricts the ability of foreign entities or individuals to own or hold interests in broadcast licenses. Foreign governments, representatives of foreign governments, non-citizens, representatives of non-citizens, and corporations or partnerships organized under the laws of a foreign nation are barred from holding broadcast licenses. Non-citizens, collectively, may directly or indirectly own or vote up to 20% of the capital stock of a licensee. In addition, a broadcast license may not be granted to or held by any corporation that is controlled, directly

or indirectly, by any other corporation more than 25% of whose capital stock is owned or voted by non-U.S. citizens if the FCC finds that the public interest will be served by the refusal or revocation of such license. The FCC has interpreted this provision of the Communications Act to require an affirmative public interest finding before a broadcast license may be granted to or held by any such corporation, and the FCC has made such an affirmative finding only in limited circumstances. The Company, which serves as a holding company for wholly-owned subsidiaries that are licensees for its stations, therefore may be restricted from having more than one-fourth of its stock owned or voted directly or indirectly by non-citizens, foreign governments, representatives of non-citizens or foreign governments, or foreign corporations.

     Programming and Operations. The FCC significantly reduced its regulation of the programming and other operations of broadcast stations a number of years ago, including elimination of formal ascertainment requirements and guidelines concerning the amounts of some types of programming and commercial matter that may be broadcast. There are, however, FCC rules and policies, and rules and policies of other federal agencies, that regulate matters such as network/affiliate relations, political advertising practices, obscene and indecent programming, accessibility of television programming to audience members who are visually or hearing disabled, children’s programming, employment practices, and other areas affecting the business or operations of broadcast stations.

     The Children’s Television Act of 1990 limits the permissible amount of commercial matter in children’s television programs and requires each television station to present educational and informational children’s programming. The FCC subsequently adopted stricter children’s programming requirements, including a requirement that television broadcasters provide a minimum of three hours of children’s educational programming per week. In addition, in September 2004, the FCC issued the first in what may be a series of “public interest” mandates relating to the implementation of digital television service (“DTV”) (which is discussed in detail below). Among other things, the Commission determined that the amount of children’s educational programming it would require a DTV broadcaster to air will increase proportionally with the number of free video programming streams broadcast simultaneously (or “multicast”) by the broadcaster. In addition, the FCC extended its existing limits on the duration and content of commercials aired during children’s programming to digital programming. The agency also established new restraints designed to address excessive “commercialization” of children’s fare on both analog and digital programming, including a ban on the airing of Internet addresses to web pages containing commercial content. In late 2005, certain advocacy groups and entertainment companies challenged these new rules in federal court. The groups thereafter reached an agreement on a recommendation to the FCC that, if adopted, would resolve their concerns with the FCC’s rules. The FCC has stated that it will seek public comment on the parties’ recommendation.

     In August 2003, then-FCC Chairman Michael Powell announced the opening of a proceeding to seek comment on a wide range of measures aimed at promoting “localism” in broadcasting. This initiative has resulted in the creation of a Localism Task Force to conduct studies to measure localism, organize a series of public hearings on localism around the country and offer recommendations to both the agency and Congress on how to promote localism in television and radio. In July 2004, the Commission released a wide-ranging Notice of Inquiry into broadcasters’ localism practices. The NOI asks whether additional regulation is necessary to ensure that licensees satisfy the programming needs and interests of their local audiences. Among other things, the Commission suggests imposing minimum requirements for the amount of time dedicated to local and national political programming. This proceeding remains pending, and the Company cannot predict its outcome.

     The FCC has stepped up its enforcement with respect to broadcast indecency issues over the past few years. In doing so, the Commission has explicitly stated its willingness to find licensees liable for repeated violations during a single program (which can lead to significantly increased fines) and issued warnings about possible license revocation proceedings for serious violations. The agency brought several significant indecency enforcement actions in 2004 and proposed a new rule requiring broadcasters

to retain copies of their programming for a limited time, purportedly to facilitate investigation into and prosecution of indecency violations. That proposal remains pending. In addition, Congress is considering legislation that would increase the penalties for broadcasting indecent material.

     EEO Rules. In October 2002, the FCC adopted new Equal Employment Opportunity (“EEO”) Rules that went into effect March 10, 2003. The new rules impose job information dissemination, recruitment and reporting requirements. Specifically, broadcasters must (1) widely disseminate information concerning each full-time job vacancy; (2) provide notice of each full-time job vacancy to recruitment organizations requesting notice; and (3) complete additional “recruitment initiatives,” such as participation in job fairs, scholarship programs and EEO training. The new rules also require licensees to file periodic reports relating to the EEO requirements. Broadcasters may be subject to random audits to ensure compliance with the new EEO rules and could be sanctioned for noncompliance.

     Cable and Satellite Transmission of Local Television Signals. The FCC has adopted various regulations to implement provisions of the Cable Television Consumer Protection and Competition Act of 1992, as amended by the 1996 Act, governing the relationship between broadcasters and cable operators. Among other matters, these regulations require cable systems to devote a specified portion of their channel capacity to the carriage of the signals of local television stations and permit TV stations to elect between “must carry rights” or a right to restrict or prevent cable systems from carrying the station’s signal without the station’s permission (“retransmission consent”). The Communications Act and FCC regulations also contain measures to facilitate competition among cable systems, telephone companies and other systems in the distribution of TV signals, video programming and other services. Each of the Company’s stations has elected “must carry” status on certain cable systems in its DMA. On other cable systems, the Company’s stations are in the process of negotiating or have entered into retransmission consent agreements. These elections and agreements will entitle the Company’s stations to carriage on those systems until at least December 31, 2008.

     In November 1999, Congress enacted the Satellite Home Viewer Improvement Act of 1999 (“SHVIA”), which established a copyright licensing system for limited distribution of television programming to DBS viewers and directed the FCC to initiate rulemaking proceedings to implement the new system. SHVIA also extended the current system of satellite distribution of distant network signals to unserved households (i.e., those that do not receive a Grade B signal from a local network affiliate).

     As part of the rulemakings required under SHVIA, the FCC established a market-specific requirement for mandatory carriage of local television stations. Similar to the obligations applicable to cable systems, the rules require satellite operators to carry all local broadcast signals in those markets in which they choose to provide any local signal, beginning January 1, 2002. Stations in affected markets were required to select either must carry or retransmission consent rights by October 1, 2005. This election is effective from January 1, 2006 to December 31, 2008. Further, under SHVIA, those broadcasters selecting retransmission consent (as opposed to must carry rights) originally were required to meet certain “good faith” requirements in negotiating for carriage rights until 2006.

     Shortly before SHVIA expired on December 31, 2004, Congress passed the Satellite Home Viewer Extension and Reauthorization Act of 2004 (“SHVERA”), which extends the compulsory copyright license for carriage of distant signals through December 31, 2009 and addresses a variety of other issues related to the carriage of broadcast television signals on DBS systems. Specifically, SHVERA requires satellite carriers to phase out the carriage of distant signals in markets where they carry local broadcast signals. The statute also permits satellite carriers to deliver the distant signal of a network station to consumers in unserved digital households (also referred to as “digital white areas”), but only if the local station affiliated with that network misses the FCC’s deadlines for increasing its digital signal power (also discussed below). In addition, the law extends to DBS operators the obligation to negotiate in good faith with respect to retransmission consent arrangements. Previously, only broadcasters were subject to the good faith requirement, which was scheduled to sunset on December 31, 2005 but will now sunset on

December 31, 2009. In February 2005, the FCC adopted rules relating to station eligibility for satellite carriage and subscriber eligibility for receiving signals, and which stations are entitled to “significantly viewed” status. In March 2005, the FCC adopted rules for carriage elections, unified retransmission consent negotiation, and a requirement that satellite carriers notify local broadcasters concerning carriage of significantly viewed signals. The Company cannot predict the impact of DBS service upon the Company’s business. It has, however, entered into retransmission consent agreements with EchoStar and DirectTV for the retransmission of its television stations’ signals into the local markets that they serve. These agreements run through 2008.

     Digital Television Service. In April 1997, the FCC adopted rules for implementing DTV service in the United States, which will improve the technical quality of television signals received by viewers and give television broadcasters the ability to provide new services, including high-definition television.

     On April 3, 1997, all broadcasters holding a license or construction permit for a full-power television station were assigned a second channel in order to provide either separate DTV programming or a simulcast of their analog programming. These second channels were assigned for an eight-year transition period scheduled to end in 2006. Stations were required to construct their DTV facilities and be on the air with a digital signal according to a schedule set by the FCC based on the type of station and the size of the market in which it is located. Generally, under current FCC rules each of the Company’s stations was required to construct DTV facilities and commence operations by May 2002. Except as noted below, all other commercial broadcasters were required to follow suit by May 1, 2002.

     At the end of the DTV transition period, analog television transmissions will cease and DTV channels will be reassigned to a smaller segment of the broadcasting spectrum comprising channels 2-51. Congress has set February 17, 2009 as the “hard date” by which television broadcasters must cease analog broadcasts and surrender their analog spectrum to the government.

     When the FCC adopted service rules for the digital television transition, it stated that it would periodically review the transition’s progress. In its first review, completed in 2001, the Commission decided to permit broadcasters to construct initial minimal DTV facilities (i.e., facilities that cover only their cities of license) while retaining interference protection for their allotted and maximized facilities.

     In September 2004, the FCC issued a decision in its second periodic review of the DTV transition, in which it revisited several of the issues addressed in 2001 and considered a number of new matters. Among other things, the decision:

	•		Set deadlines by which broadcasters operating with minimal (e.g., reduced power) DTV facilities must either provide DTV service to their full authorized coverage areas or else lose interference protection to the unserved areas. For top 4 network affiliated stations in the top 100 markets, the deadline was July 1, 2005; for all remaining commercial and non-commercial stations, the deadline is July 1, 2006.
	•		Established a multi-step process by which broadcasters may select their post-transition DTV channel within the core DTV spectrum (Channels 2-51); this process began in November 2004, with a goal of having all channel assignments finalized by the end of 2006.

     The FCC will continue to review the progress of DTV periodically and make adjustments to the transition schedule, as necessary.

     In January 2001, the FCC issued a preliminary decision regarding the carriage (“must carry”) rights of digital television broadcasters on local cable and certain DBS systems. The FCC determined the following:

	•		Digital-only television stations may immediately assert carriage rights on local cable systems;
	•		Television stations that return their analog spectrum and convert to digital operations are entitled to must carry rights; and
	•		A digital-only station asserting must carry rights is entitled only to carriage of a single programming stream and other “program-related” content, regardless of the number of programs it multicasts on its digital spectrum. 1

     In February 2005, the Commission (1) affirmed its prior tentative conclusion not to accord broadcasters the right to simultaneous carriage of broadcasters’ analog and digital signals; and (2) affirmed its prior determination that cable operators need not carry more than a single digital programming stream from any particular broadcaster.

     Several parties filed petitions for reconsideration of various parts of the FCC’s DTV must carry decisions. Some of those petitions remain pending before the Commission and the Company cannot predict what changes, if any, the FCC will make to its DTV must carry rules on reconsideration.

     In addition, because it determined that the lack of DTV receiver capability in television sets was delaying the transition, the FCC has adopted a plan to phase in the inclusion of digital tuning and decoding devices in television sets. Specifically, the decision requires all new television sets and TV interface devices (VCRs, etc.) to include the capability of tuning and decoding over-the-air digital signals by 2007.

     Another major concern for the DTV transition involves the technical standards needed to ensure that digital television sets can connect to cable systems. On September 10, 2003, the FCC adopted “plug-and-play” rules for cable adaptability. Under these rules, consumers will be able to plug their cable directly into their digital televisions, without the need for a set-top box. These rules cover one-way programming only; the cable and electronics industries are working toward an agreement on two-way “plug-and-play” standards that would eliminate the need for set-top boxes for advanced services such as video on demand, impulse pay-per-view and cable operator-enhanced electronic programming guides. The Company cannot predict the outcome of those negotiations.

     On November 4, 2003, the Commission adopted protection against unauthorized copying and distribution of digital television programming in the form of a “broadcast flag.” A broadcast flag is a digital code that can be embedded into a digital broadcasting stream. This would have allowed a broadcaster, at its discretion, to prevent mass distribution of its digital signal over the Internet, without affecting consumers’ ability to make digital copies. On May 6, 2005, however, the United States Court of Appeals for the D.C. Circuit struck down the FCC’s broadcast flag requirements as beyond the agency’s statutory authority.

     Additionally, the FCC recently adopted rules and procedures to facilitate the digital conversion of Low Power Television (“LPTV”) stations, TV translator stations and TV booster stations. Under these rules, existing, LPTV and TV translator stations may convert to digital operations on their current channels. Alternatively, LPTV and translator licenses may seek a digital “companion” channel for their analog station operations. At a later date, the FCC will determine the date by which those stations obtaining a digital companion channel must surrender one of their channels.

     In November 2005, moreover, the FCC modified its rules to require all digital television broadcasters to participate in the Emergency Alert System.

     Broadcasters are permitted either to use their digital spectrum to provide a single HDTV signal or to multicast several program streams in lower resolution formats, known as standard definition television (“SDTV”). Broadcasters also may use some of their digital spectrum to provide non-broadcast “ancillary” services—such as subscription video, data transfer or audio signals—provided such services do not interfere with the mandatory free digital broadcasts. Stations using their DTV spectrum for subscription services must pay the government a fee of 5 percent of gross revenues received from such use of the digital spectrum. Because of the flexibility of the U.S. digital system, moreover, licensees are able to shift between different quality services (including data) in different time periods.

     Moreover, broadcasters currently are not required to provide a minimum amount of HDTV programming. Thus, licensees may use their digital channels according to their best business judgment, provided they continue to offer at least one free programming service with a resolution comparable to or better than today’s service. Network-affiliated DTV broadcasters in the top 30 television markets must broadcast a DTV signal at any time they broadcast an analog signal. All other stations currently must air a DTV signal for an amount of time equivalent to 75 percent of the time they provide an analog signal, increasing to 100 percent on April 1, 2005. The DTV signal must always be in operation during prime time hours.

     In addition, as discussed above, in September 2004, the FCC issued an order specifically addressing the children’s programming obligations of DTV broadcast licensees. Still under consideration in a proceeding initially launched during the Clinton Administration are such issues as whether a licensee’s public interest obligations attach to the DTV channel as a whole or to each program stream offered by the licensee; whether broadcasters should be required to report their public interest programming and activities on a quarterly basis; whether the Commission should establish more specific minimum public interest requirements for broadcasters; and how broadcasters could improve candidate access to television. The Company cannot predict the outcomes of these proceedings.

     As of the date of filing this Annual Report, the Company was in compliance with the FCC’s digital broadcasting requirements at all of its stations.

Employees

     As of March 3, 2006, the Company had 2,113 full-time employees, of which 2,089 were employees of the Company’s broadcast operations and 24 were corporate and administrative personnel. The Company has 185 full time employees and 37 part time employees that are represented by unions. The Company believes that its relations with its employees are satisfactory.

Available Information

     The Company’s Internet address is http://www.gray.tv. We make the following reports filed with the Securities and Exchange Commission (the “SEC”) available, free of charge, on our website under the heading “SEC Filings”:

	•		Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to the foregoing reports filed or furnished pursuant to Section 13 (a) or 15 (d) of the Exchange Act;
	•		Our proxy statements; and

•

Initial Statements of Beneficial Ownership of Securities on Form 3, Statements of Changes in Beneficial Ownership on Form 4 and Annual Statements of Beneficial Ownership on Form 5, in each case as filed by certain of our officers, directors and large stockholders pursuant to Section 16 of the Exchange Act.

     These filings are also available at the SEC’s website located at http://www.sec.gov. The public may read and copy any materials filed with the SEC at the SEC’s public reference room at 100 F Street, N.E., Washington, DC 20549. The public may obtain information on the Company from the SEC’s public reference room by calling the SEC at 1-800-SEC-0330.

     The foregoing reports are made available on the Company’s website as soon as practicable after they are filed with, or furnished to, the SEC. The information found on our web site is not part of this or any other report we file with or furnish to the SEC.

     The Company has adopted a Code of Ethics that applies to all of its directors, executive officers and employees. The Code is available on the Company’s website at http://www.gray.tv under the heading of Corporate Governance. If any waivers of the Code are granted, the waivers will be disclosed in a SEC filing on Form 8-K. The Company has also filed the Code as an exhibit to the Annual Report filed on Form 10-K for the year ended December 31, 2004 and is incorporated by reference to this report.

     The Company’s website also includes the Company’s Corporate Governance Principles, as well as the Charter of the Audit Committee, the Nominating and Corporate Governance Committee and the Compensation Committee.

     All such information is also available to any shareholder upon request by telephone at (229) 888-9378.

Certification with the New York Stock Exchange

     On May 27, 2005, the Company’s Chief Executive Officer filed with the New York Stock Exchange the annual written affirmation certifying the Company’s compliance with the New York Stock Exchange’s corporate governance listing standards as required by Listed Company Manual Rule 303A.12.

     The certifications of the Company’s Chairman and Chief Executive Officer and the Company’s Senior Vice President and Chief Financial Officer required by Section 302 of the Sarbanes-Oxley Act of 2002 are filed as Exhibits 31.1 and 31.2 to this Annual Report on Form 10-K.

Item 1A. Risk Factors.

Risks Related to Our Business

We depend on advertising revenues, which fluctuate as a result of a number of factors and also experience seasonal fluctuations.

     Our main source of revenue is sales of advertising time and space. Our ability to sell advertising time and space depends on:

	•		the health of the economy in the areas where our stations are located and in the nation as a whole;
	•		the popularity of our programming;
	•		changes in the makeup of the population in the areas where our stations are located;
	•		pricing fluctuations in local and national advertising;
	•		the activities of our competitors, including increased competition from other forms of advertising based mediums, particularly network, cable television, direct satellite television and the Internet;
	•		the outbreak and duration of hostilities or the occurrence of terrorist attacks and the duration and extent of network preemption of regularly scheduled programming and decisions by advertisers to withdraw or delay planned advertising expenditures as a result of military action or terrorist attacks; and
	•		other factors that may be beyond our control.

For example, a labor dispute or other disruption at a major national advertiser, or a recession in a particular market, would make it more difficult to sell advertising time and space and could reduce our revenue.

     In addition, our results are subject to seasonal fluctuations, which typically result in second and fourth quarter broadcast operating income being greater than first and third quarter broadcast operating income. This seasonality is primarily attributable to increased expenditures by advertisers in the spring and in anticipation of holiday season spending and an increase in viewership during this period. Furthermore, revenues from political advertising are significantly higher in even-numbered years.

Our flexibility is limited by the terms of our senior secured credit facilities.

          Our senior secured credit facility prevents us from taking certain actions and require us to meet certain tests. These limitations and tests include, without limitation, the following:

	•		limitations on liens;
	•		limitations on additional debt;
	•		limitations on dividends and distributions;
	•		limitations on management and consulting fees;
	•		limitations on stock repurchases;
	•		limitations on transactions with affiliates;
	•		limitations on guarantees;
	•		limitations on asset sales;
	•		limitations on sale-leaseback transactions;

	•		limitations on acquisitions;
	•		limitations on changes in our business;
	•		limitations on mergers and other corporate reorganizations;
	•		limitations on loans, investments and advances, including investments in joint ventures and foreign subsidiaries;
	•		financial ratio and condition tests; and
	•		increases in our cost of borrowings or inability or unavailability of additional debt or equity capital.

     These restrictions and tests may prevent us from taking action that could increase the value of our securities, or may require actions that decrease the value of our securities. In addition, we may fail to meet the tests and thereby default under such senior secured credit facility (particularly if the industry continues to soften and thereby reduce our advertising revenues). If we default on our obligations, creditors could require immediate payment of the obligations or foreclose on collateral. If this happened, we could be forced to sell assets or take other action that would reduce the value of our securities.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.

     Our ability to service our debt depends on our ability to generate significant cash flow in the future. This, to some extent, is subject to general economic, financial, competitive, legislative and regulatory factors as well as other factors that are beyond our control. We cannot assure you that our business will generate cash flow from operations, or that future borrowings will be available to us under our senior secured credit facility, or otherwise, in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. If we are not able to generate sufficient cash flow to service our debt obligations, we may need to refinance or restructure our debt, sell assets, reduce or delay capital investments, or seek to raise additional capital. Additional debt or equity financing may not be available in sufficient amounts or on terms acceptable to us, or at all. If we are unable to implement one or more of these alternatives, we may not be able to service our debt obligations.

We may be required to take an impairment charge on our goodwill and FCC licenses, which may have a material effect on the value of our total assets.

     As of December 31, 2005 the book value of our FCC licenses was $1.023 billion and the book value of our goodwill was $222.4 million in comparison to total assets of $1.525 billion. Not less than annually, we are required to evaluate our goodwill and FCC licenses to determine if the estimated fair value of these intangible assets is less than book value. If the estimated fair value of these intangible assets is less than book value, we will be required to record a non-cash expense to write down the book value of the intangible asset to the estimated fair value. We cannot make any assurances that any required impairment charges will not have a material effect on our total assets.

We must purchase television programming in advance but cannot predict if a particular show will be popular enough to cover its cost.

     One of our most significant costs is television programming. If a particular program is not popular in relation to its costs, we may not be able to sell enough advertising time to cover the costs of the program. Since we purchase programming content from others, we also have little control over the costs of programming. We usually must purchase programming several years in advance, and may have to commit to purchase more than one year’s worth of programming. In addition, we may replace programs that are

doing poorly before we have recaptured any significant portion of the costs we incurred, or fully expensed the costs for financial reporting purposes. Any of these factors could reduce our revenues or otherwise cause our costs to escalate relative to revenues.

We may lose a large amount of television programming if a network terminates its affiliation with us.

     Our business depends in large part on the success of our network affiliations. Each of our stations is affiliated with a major network pursuant to an affiliation agreement. Each affiliation agreement provides the affiliated station with the right to broadcast all programs transmitted by the network with which the station is affiliated. The NBC affiliation agreement for KKCO expires on July 30, 2006. Our other affiliation agreements expire between January 1, 2012 and December 31, 2014.

     If we do not enter into affiliation agreements to replace our expiring agreements, we may no longer be able to carry programming of the relevant network. This loss of programming would require us to obtain replacement programming, which may involve higher costs and which may not be as attractive to our target audiences. Furthermore, our concentration of CBS affiliates makes us sensitive to adverse changes in our business relationship with, and the general success of, CBS.

Network compensation is expected to decrease in future periods.

     Television station revenues are primarily derived from local, regional and national advertising and, to a much lesser extent, from network compensation. Cash payments are provided to us by networks in partial exchange for a substantial majority of the advertising time available for sale during the airing of network programs. Our network compensation has declined in recent years and will continue to decline in future years, reflecting an on-going phase-out by the networks of network compensation under our affiliation agreements.

Increases in cable viewership and advertising could result in a decrease in our advertising revenues.

     Cable-originated programming is a significant competitor for viewers of broadcast television programming. The advertising share of cable networks has increased as a result of the growth in cable penetration (the percentage of television households which are connected to a cable system). Increases in the advertising share of cable networks could result in a decrease in the advertising revenue at our television stations.

Competition from other broadcasters and other sources may cause our advertising sales to go down or our costs to go up.

     Competition in the television industry exists on several levels: competition for audience; competition for programming, including news; and competition for advertisers. Additional factors that are material to a television station’s competitive position include signal coverage and assigned frequency.

     Audience. Stations compete for audience based on program popularity, which has a direct effect on advertising rates. A substantial portion of the daily programming on each of our stations is supplied by the network affiliate. During those periods, the stations are totally dependent upon the performance of the network programs to attract viewers. There can be no assurance that this programming will achieve or maintain satisfactory viewership levels in the future. Non-network time periods are programmed by the station with a combination of self-produced news, public affairs and other entertainment programming, including news and syndicated programs purchased for cash, cash and barter, or barter only, and involve significant costs.

     In addition, the development of methods of television transmission of video programming other than over-the-air broadcasting and, in particular, cable television have significantly altered competition for audiences in the television industry. These other transmission methods can increase competition for a broadcasting station by bringing into its market distant broadcasting signals not otherwise available to the station’s audience and also by serving as a distribution system for non-broadcasting programming.

     Technological innovation and the resulting proliferation of programming alternatives, such as home entertainment systems, ‘‘wireless cable’’ services, satellite master antenna television systems, low power television stations, television translator stations, direct broadcast satellite, video distribution services, pay-per-view and the Internet, have fractionalized television viewing audiences and have subjected free over-the-air television broadcast stations to new types of competition.

     Programming. Competition for programming involves negotiating with national program distributors or syndicators that sell first-run and rerun packages of programming. Each station competes against the broadcast station competitors in its market for exclusive access to off-network reruns, such as Seinfeld, and first-run product, such as Oprah. Cable systems generally do not compete with local stations for programming, although various national cable networks from time to time have acquired programs that would have otherwise been offered to local television stations. Competition exists for exclusive news stories and features as well.

     Advertising. Advertising rates are based upon the size of the market in which the station operates, a station’s overall ratings, a program’s popularity among the viewers that an advertiser wishes to attract, the number of advertisers competing for the available time, the demographic makeup of the market served by the station, the availability of alternative advertising media in the market area, aggressive and knowledgeable sales forces and the development of projects, features and programs that tie advertiser messages to programming. Advertising revenues comprise the primary source of revenues for our stations. Our stations compete for advertising revenues with other television stations in their respective markets. The stations also compete for advertising revenues with other media, such as newspapers, radio stations, magazines, outdoor advertising, transit advertising, yellow page directories, direct mail, Internet and local cable systems. Competition for advertising dollars in the broadcasting industry occurs primarily within individual markets.

     Deregulation. Recent changes in law have also increased competition. The Telecommunications Act of 1996 created greater flexibility and removed some limits on station ownership. The prices for stations have risen as a result. Telephone, cable and some other content providers are also free to provide video services in competition with us. Other proposed legislation would relax existing prohibitions on the simultaneous ownership of telephone and cable businesses. As a result of these changes, new companies are able to enter our markets and compete with us.

     Future technology under development. Cable providers and direct broadcast satellite companies are developing new techniques that allow them to transmit more channels on their existing equipment. These so-called ‘‘video compression techniques’’ will reduce the cost of creating channels, and may lead to the division of the television industry into ever more specialized niche markets. Video compression is available to us as well, but competitors who target programming to such sharply defined markets may gain an advantage over us for television advertising revenues. Lowering the cost of creating channels may also encourage new competitors to enter our markets and compete with us for advertising revenue.

Materiality of a Single Advertising Category Could Adversely Affect Our Business

     We derive a material portion of our ad revenue from the automotive industry. For example, approximately 26% of total revenue came from the automotive category in 2005. If automotive-related advertising revenue decreases, or if revenue from another ad category that constitutes a material portion

of our stations’ revenue in a particular period were to decrease, our business and operating results could be adversely affected.

The phased-in introduction of digital television will continue to require us to incur capital and operating costs and may expose us to increased competition.

     The conversion from analog to digital television services in the United States may have the following effects on us:

     Capital and operating costs. We will incur costs to replace equipment in our stations in order to provide digital television. Even with the flexible operating requirements, some of our stations will also incur increased utilities costs as a result of converting to digital operations. We cannot be certain we will be able to increase revenues to offset these additional costs.

     Conversion and programming costs. In addition to incurring costs to convert our stations from the current analog format to digital format, we also may incur additional costs to obtain programming for the additional channels made available by digital technology. Increased revenues from the additional channels may not make up for the conversion costs and additional programming expenses. Also, multiple channels programmed by other stations could increase competition in our markets.

We are subject to the ongoing internal control provisions of Section 404 of the Sarbanes-Oxley Act of 2002. Identification of material weaknesses in internal controls, if identified, could indicate a lack of proper controls to generate accurate financial statements.

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 and related SEC rules, we are required to furnish a report of management’s assessment of the effectiveness of our internal controls as part of our Annual Report on Form 10-K. Our auditors are required to attest to and report on management’s assessment, as well as provide a separate opinion. To issue our report, we document our internal control design and the testing processes that supports our evaluation and conclusion, and then we test and evaluate the results. There can be no assurance, however, that we will be able to remediate material weaknesses, if any, that may be identified in future periods, or maintain all of the controls necessary for continued compliance. There likewise can be no assurance that we will be able to retain sufficient skilled finance and accounting personnel, especially in light of the increased demand for such personnel among publicly traded companies.

Pending litigation could adversely affect our ownership interest in Tarzian.

     Our equity investment in Tarzian represents shares which were originally held by the estate of Mary Tarzian, which we refer to as the Estate. Tarzian filed a complaint against the Estate claiming that Tarzian had a binding and enforceable contract to purchase these shares from the Estate. In addition, we were subject to a complaint filed by Tarzian claiming tortious interference with contract and seeking damages equal to the liquidation value of the shares. Although this case has been administratively closed, it is ongoing pending the final resolution of the litigation against the Estate. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit. Although the action has been adjudged on appeal in favor of the Estate, we cannot predict when the final resolution of this case, or the companion action against us for tortious interference, will occur.

Our inability to integrate acquisitions successfully would adversely affect us.

     We have acquired 33 television stations since January 1, 1994 and in the future we may make additional acquisitions. In order to integrate successfully the businesses we acquire we will need to

coordinate the management and administrative functions and sales, marketing and development efforts of each company. Combining companies presents a number of challenges, including integrating the management of companies that may have different approaches to sales and service, and the integration of a number of geographically separated facilities. In addition, integrating acquisitions requires substantial management time and attention and may distract management from our day-to-day business. If we cannot successfully integrate the businesses we have acquired and any future acquisitions, our business and results of operations could be adversely affected.

Risks Related to Regulatory Matters

Federal regulation of the broadcasting industry limits our operating flexibility.

     The FCC regulates our business, just as it does all other companies in the broadcasting industry. We must request and obtain FCC approval whenever we need a new license, seek to renew or assign a license, purchase a new station or transfer the control of one of our subsidiaries that holds a license. Our FCC licenses are critical to our operations; we cannot operate without them. We cannot be certain that the FCC will renew these licenses in the future or approve new acquisitions.

     Federal legislation and FCC rules have changed significantly in recent years and can be expected to continue to change. These changes may limit our ability to conduct our business in ways that we believe would be advantageous and may therefore affect our operating results.

The FCC’s duopoly restrictions limit our ability to own and operate multiple television stations in the same market and our ability to own and operate a television station and newspaper in the same market.

     The FCC’s ownership rules generally prohibit us from owning or having ‘‘attributable interests’’ in television stations located in the same markets in which our stations are licensed. Accordingly, our ability to expand through acquisitions of additional stations in markets where we presently are operating is constrained by those rules. Under current FCC cross-ownership rules, we also are not allowed to own and operate a television station and a newspaper in the same market.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

     The Company’s principal executive offices are located at 4370 Peachtree Road, NE, Atlanta, Georgia, 30319. The Company’s administrative office is located at 126 North Washington St., Third Floor, Albany, Georgia, 31701.

     The types of properties required to support television stations include offices, studios, transmitter sites and antenna sites. A station’s studios are generally housed with its offices in business districts. The transmitter sites and antenna are generally located in elevated areas to provide optimal signal strength and coverage.

     The following table sets forth certain information regarding the Company’s television stations and related properties as of March 9, 2006.

Owned

Approximate

Height(ft.)/

Lease

or

Size

Analog

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Power

Date

Knoxville, Tennessee, WVLT Office and studio

Owned

18,000

—

Transmission tower site

Leased

Tower space

1,078/316 kw

6/2028

Lexington, Kentucky, WKYT Office and studio

Owned

34,500

Transmission tower site

Owned

1,510/60 kw

—

Hazard, Kentucky, WYMT Office and studio

Owned

21,200

—

—

Transmission tower site

Leased

1,029/263 kw

6/2010

Transmitter buildings and improvements

Owned

816 and 864

—

Waco, Texas, KWTX Office and studio

Owned

34,000

—

—

Moody, Texas, KWTX Transmission tower site

Owned

856

1,679/209 kw

—

Killeen, Texas, KWTX Office Space

Leased

3,000

07/2006

Tower Relay

Owned

109

—

Bryan, Texas, KBTX Office and studio

Owned

13,000

—

Transmission tower

Owned

374

Grimes County, Texas, KBTX Transmission tower site

Leased

1,300

1,705/70 kw

03/2023

Calvert, Texas, KBTX Transmission Tower

Owned

80 and 96

252

Falls County, Texas, KBTX Transmission Tower

Owned

128

200

Beaver Crossing, Nebraska, KOLN Transmission tower site

Owned

120 acres

1,500/302 kw

—

Lincoln, Nebraska, KOLN Office and studio

Owned

28,044

400

Heartwell, Nebraska, KOLN Transmission Tower site

Owned

71

1,069/316 kw

Grand Island, Nebraska, KGIN Office and studio

Leased

3,616

12/2008

Transmission tower site

Owned

71

1,069/316kw

Owned

Approximate

Height(ft.)/

Lease

or

Size

Analog

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Power

Date

Washington, North Carolina, WITN Office and studio

Owned

19,600

198

—

Greenville, North Carolina, WITN Office and studio

Leased

2,822

—

11/2006

Grifton, North Carolina, WITN Transmitter building

Owned

4,190

2,000

—

Transmission tower site

Leased

9 acres

316 kw

01/2029

Tallahassee, Florida, WCTV Office and studio

Owned

20,000

—

Transmission tower site

Leased

37 acres

400

12/2014

Tallahassee, Florida, WCTV Office and studio (Halstead Blvd)

Owned

29,000

—

Transmission tower site (27 site)

Owned

10 acres

900

—

Metcalf, Georgia, WCTV Transmission tower site

Owned

182 acres

2,000/96 kw

—

North Augusta, South Carolina, WRDW Office and studio

Owned

17,000

501/20 kw

—

Beech Island, South Carolina, WRDW Transmission tower site

Owned

143 acres

1,454/750 kw

—

1,591/316 kw

Eau Claire, Wisconsin, WEAU Office and studio

Owned

16,116

961

—

Township of Fairchild, Wisconsin, WEAU

Owned

Transmitter building and transmission site

With easement

2,304

2,000/316 kw

Panama City, Florida, WJHG Office and studio

Owned

14,000

413

—

Youngstown, Florida, WJHG Transmission tower site

Owned

17 acres

867/316kw 52 kw

—

digital

Sherman, Texas, KXII Office and studio

Owned

12,813

202

—

Madill, Oklahoma, KXII Transmission tower site

Owned

1,200

1,694/316 kw

—

Ardmore, Oklahoma, KXII Studio and offices

Owned

3,000

60

Paris, Texas, KXII Translator Tower

Owned

60

300/10 kw

—

Wichita-Hutchinson, Kansas, KAKE-TV Office and Studio

Owned

46,762

—

—

Tower/Transmitter site

Owned

2,176

1,079/316 kw

—

Colby, Kansas, KLBY-TV Tower/Transmitter site

Leased

1,000

768/100 kw

04/2007

Garden City, Kansas, KUPK-TV Office and Studio

Owned

1,831

—

—

Tower/Transmitter site

Owned

4,655

880/224 kw

—

Omaha, Nebraska, WOWT-TV Office and Studio

Owned

58,829

528/100 kw

—

Tower/Transmitter site

Owned

2,500

1,342/100 kw

—

Owned

Approximate

Height(ft.)/

Lease

or

Size

Analog

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Power

Date

Madison, Wisconsin, WMTV-TV Office and Studio

Owned

16,485

(b)

—

—

Tower

Leased

1299/891 kw

5/2103

Transmitter site

Owned

—

South Bend, Indiana, WNDU-TV Office and studio building

Owned

39,800

Office and studio property

Leased

12.4 Acres

Transmission tower site

Owned

56 Acres

1,072/5000kw

2021

Colorado Springs-Pueblo, Colorado, KKTV Office and Studio

Owned

30,465

—

—

Tower/Transmitter site

Leased

800

350/234 kw

02/2059

Lansing, Michigan, WILX-TV Office and Studio

Owned

13,700

—

—

Tower/Transmitter site

Leased

5,000

994/309 kw

10/2008

Rockford, Illinois, WIFR-TV Office and Studio

Owned

15,858

(b)

—

—

Tower/Transmitter site

Owned

729/562 kw

—

Wausau-Rhinelander, WI WSAW-TV Office and Studio

Owned

24,400

—

—

Tower/Transmitter site

Leased

1,440

650/316 kw

08/2017

Translator Tower site – Sayner, WI

Owned

144

495/1kw

—

Topeka, Kansas, WIBW-TV Office and Studio

Owned

19,800

—

—

Tower/Transmitter site

Leased

2,338

1,249/316 kw

02/2062

Dothan, Alabama WTVY-TV Office and Studio

Leased

20,440

—

12/2010

Bonifay, FL WTVY-TV Tower/Transmitter site

Owned

2,500

1,880/100 kw

—

Harrisonburg, Virginia, WHSV-TV Office and Studio

Leased

18,000

—

04/2018

(c)

Tower/Transmitter site

Leased

2,016

337/8.32 kw

12/2001

(d)

Bowling Green, Kentucky, WBKO-TV Office and Studio

Owned

17,598

—

—

Tower/Transmitter site

Owned

1,175

603/316 kw

—

Meridian, Mississippi, WTOK-TV Office and Studio

Owned

34,061

—

—

Tower/Transmitter site

Owned

1,504

319/316 kw

—

Parkersburg, West Virginia, WTAP-TV Office and Studio

Owned

17,500

—

—

Tower/Transmitter site

Owned

3,600

460/216 kw

—

Reno, Nevada, KOLO-TV Office and studio

Owned

20,600

—

—

Transmission tower site

Leased

80/20kw

12/2030

Transmitter building and improvements

Owned

1018 and 864

—

Charlottesville, VA, WCAV-TV Office and Studio

Leased

8,900

04/2009

Transmission Tower / 2 Antennas

Leased

1,000

198/34.91 kw

190/15.74 kw

04/2009

Antennae for WAHU FOX

Leased

2,500

210/50 kw

04/2009

Owned

Approximate

Height(ft.)/

Lease

or

Size

Analog

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Power

Date

Grand Junction, CO, KKCO-TV Office and Studio

Leased

4,000

4/30/2006

Tower/Transmitter site

Leased

300/155kw

12/31/2006

Transmitter building and improvements

Owned

800

Charleston, WV, WSAZ Office and Studio – Charleston

Owned

6,468

Tower

Owned

180/1 kw

Huntington, WV, WSAZ Office and Studio

Owned

24,476

Tower

Owned

1061/42.7 kw

Tower

Owned

1061/724 kw

Moultrie, GA, WSWG Office

Owned

6,000

Office

Leased

170

10/2009

Transmission Tower

Leased

960/1.7 mw

10/2009

Item 3. Legal Proceedings.

Settlement of Income Tax Matter

     In October 2001, the Company received a notice of deficiency from the Internal Revenue Service (the “IRS”) with respect to its 1996 and 1998 federal income tax returns. The notice of deficiency alleged that the Company recognized a significant amount of taxable gain from the sale of certain assets in 1996 in connection with a business acquisition from First American Media, Inc. The notice of deficiency also alleged that the Company’s 1996 acquisition of certain assets from First American Media, Inc. should be characterized for tax purposes as an acquisition of stock. On January 18, 2002, the Company filed a petition to contest the matter in the United States Tax Court.

     In January 2004, the Company settled its litigation with the IRS regarding all deficiencies related to the IRS’ audit of the Company’s 1996 and 1998 federal income tax returns. The settlement required no cash payments from the Company. The Company agreed in the settlement to forego certain claimed depreciation and amortization deductions relating to the 1996 through 1999 tax years, which in turn resulted in a reduction of the federal income tax net operating loss carryforwards by approximately $16.3 million. During the three months ended December 31, 2003, the Company recorded a non-cash charge to decrease its deferred tax assets by approximately $5.8 million to reflect this settlement. During 2004 and as a result of the settlement, the Company collected a previously claimed federal tax cash refund of approximately $1.1 million, plus statutory interest, that related to 1996.

Other Legal Proceedings

     The Company is not a party to any legal proceedings in which an adverse outcome would have a material adverse effect, either individually or in the aggregate, upon the Company except as described below.

Investment in Broadcasting Company

     The Company has an equity investment in Sarkes Tarzian, Inc. (“Tarzian”) representing shares in Tarzian which were originally held by the estate of Mary Tarzian (the “Estate”). As described more fully below, the Company’s ownership of the Tarzian shares is subject to certain litigation.

     On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. The Estate appealed the judgment and the Court’s rulings on certain post-trial motions, and Tarzian cross-appealed. On February 14, 2005, the U.S. Court of Appeals for the Seventh Circuit issued a decision concluding that no contract was ever created between Tarzian and the Estate, reversing the judgment of the District Court, and remanding the case to the District Court with instructions to enter judgment for the Estate. Tarzian’s petition for rehearing was denied by the Seventh Circuit Court of Appeals, and the U.S. Supreme Court denied Tarzian’s petition for certiorari. Tarzian also filed a motion for a new trial in the District Court based on the Estate’s alleged failure to produce certain documents in discovery. The District Court denied Tarzian’s motion, and on February 24, 2006, the Seventh Circuit Court of Appeals affirmed the District Court’s ruling. Tarzian has not petitioned for rehearing and has 90 days from the date of the Seventh Circuit’s opinion in which to petition the U.S. Supreme Court for certiorari. The Company cannot predict when the final resolution of this litigation will occur.

     On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern District of Georgia against Bull Run Corporation and the Company for tortious interference with contract and conversion. The lawsuit alleges that Bull Run Corporation and the Company purchased the Tarzian shares with actual knowledge that Tarzian had a binding agreement to purchase the stock from the Estate. The lawsuit seeks damages in an amount equal to the liquidation value of the interest in Tarzian that the stock represents, which Tarzian claims to be as much as $75 million, as well as attorneys’ fees, expenses, and punitive damages. The lawsuit also seeks an order requiring the Company and Bull Run Corporation to turn over the stock certificates to Tarzian and relinquish all claims to the stock. The stock purchase agreement with the Estate would permit the Company to make a claim against the Estate in the event that title to the Tarzian Shares is ultimately awarded to Tarzian. There is no assurance that the Estate would have sufficient assets to honor any or all of such potential claims. The Company filed its answer to the lawsuit on May 14, 2003 denying any liability for Tarzian’s claims. On May 27, 2005, the Court issued an Order administratively closing the case pending resolution of Tarzian’s lawsuit against the Estate in Indiana federal court. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit. The Company cannot predict when the final resolution of this litigation will occur.

Item 4. Submission of Matters to a vote of Security Holders.

     No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered.

Item 4A. Executive Officers of the Registrant.

     Set forth below is certain information with respect to the executive officers of the Company as of March 8, 2006:

     J. Mack Robinson, age 82, has been our Chairman and Chief Executive Officer since September 2002. Prior to that, he was our President and Chief Executive Officer since 1996. He has served as one of our directors since 1993. He is the Chairman of the Executive Committee of our board of directors. Mr. Robinson is Chairman Emeritus of Triple Crown Media, Inc. since December 30, 2005 and previously served as Chairman of the Board of Bull Run Corporation from 1994 through 2005, Chairman of the Board and President of Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since 1958, President of Atlantic American Corporation, an insurance holding company, from 1988 until 1995 and Chairman of the Board of Atlantic American Corporation since 1974. Mr. Robinson also serves as a director of the following companies: Bankers Fidelity Life Insurance Company, American Independent Life Insurance Company, Georgia Casualty & Surety Company, American Southern Insurance Company and American Safety Insurance Company. He is a director emeritus of Wachovia Corporation. Mr. Robinson is the husband of Mrs. Harriett J. Robinson and the father-in-law of Mr. Hilton H. Howell, Jr., both members of our board of directors.

     Hilton H. Howell, Jr., age 43, has been our Vice Chairman since September 2002. Prior to that, he was our Executive Vice President since September 2000. He has served as one of our directors since 1993. He is a member of the Executive Committee of our board of directors. He has served as President and Chief Executive Officer of Atlantic American Corporation, an insurance holding company, since 1995 and Executive Vice President from 1992 to 1995. He has been Executive Vice President and General Counsel of Delta Life Insurance Company and Delta Fire and Casualty Insurance Company since 1991, and Vice Chairman of Bankers Fidelity Life Insurance Company and Georgia Casualty & Surety Company since 1992. He is a director of Triple Crown Media, Inc. since December 30, 2005 and was previously a director, Vice President and Secretary of Bull Run Corporation, from 1994 through 2005. Mr. Howell also serves as a director of the following companies: Atlantic American Corporation, Bankers Fidelity Life Insurance Company, Delta Life Insurance Company, Delta Fire and Casualty Insurance Company, Georgia Casualty & Surety Company, American Southern Insurance Company, American Safety Insurance Company, Association Casualty Insurance Company and Association Risk Management General Agency. He is the son-in-law of Mr. J. Mack Robinson and Mrs. Harriett J. Robinson, both members of our board of directors.

     Robert S. Prather, Jr., age 61, has served as our President and Chief Operating Officer since September 2002. Prior to that, he served as our Executive Vice President — Acquisitions since 1996. He has served as one of our directors since 1993. He is a member of the Executive Committee of our board of directors. He has served as Chairman of Triple Crown Media, Inc. since December 30, 2005 and was previously a director, Vice President and Secretary of Bull Run Corporation, from 1994 through 2005. He serves as an advisory director of Swiss Army Brands, Inc., and serves on the Board of Trustees of the Georgia World Congress Center Authority and also serves as a member of the Board of Directors for Gabelli Asset Management and Victory Ventures, Inc.

     James C. Ryan, age 45, has served as our Senior Vice President and Chief Financial Officer since September 2002. Prior to that, he was our Vice President and Chief Financial Officer since October 1998.

He was the Chief Financial Officer of Busse Broadcasting Corporation from 1987 until it was acquired by the Company in 1998.

     Robert A. Beizer, age 66, has served as our Vice President for Law and Development and Secretary since 1996. From June 1994 to February 1996 he was of counsel to Venable, Baetjer, Howard & Civiletti, a law firm, in its regulatory and legislative practice group. From 1990 to 1994, Mr. Beizer was a partner in the law firm of Sidley & Austin and was head of their communications practice group in Washington, D.C. He is a past president of the Federal Communications Bar Association and has served as a member of the American Bar Association House of Delegates.

PART II

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

     The Company’s common stock, no par value (the “Common Stock”), and its class A common stock, no par value (the “Class A Common Stock”), have been listed and traded on The New York Stock Exchange (the “NYSE”) since September 24, 1996 and June 30, 1995, respectively. Prior to September 16, 2002, the Common Stock was named class B common stock.

     The following table sets forth the high and low sale prices of the Common Stock and the Class A Common Stock as well as the cash dividend declared for the periods indicated. The high and low sales prices of the Common Stock and the Class A Common Stock are as reported by the NYSE.

		Common Stock												Class A Common Stock
										Cash Dividends												Cash Dividends
										Declared Per												Declared Per
		High				Low				Share				High				Low				Share
2005:
First Quarter		$	15.74			$	13.61			$	0.03			$	14.00			$	11.99			$	0.03
Second Quarter			14.66				10.58				0.03				13.44				10.30				0.03
Third Quarter			13.59				10.10				0.03				12.22				9.80				0.03
Fourth Quarter			9.41				7.65				0.03				8.66				7.43				0.03
2004:
First Quarter		$	16.22			$	13.52			$	0.03			$	15.99			$	13.42			$	0.03
Second Quarter			16.19				13.62				0.03				14.98				12.10				0.03
Third Quarter			13.95				11.20				0.03				13.12				10.66				0.03
Fourth Quarter			15.74				12.00				0.15				14.41				10.90				0.15

     As of February 23, 2006, the Company had 43,051,781 outstanding shares of Common Stock held by approximately 2,026 stockholders and 5,753,020 outstanding shares of Class A Common Stock held by approximately 222 stockholders. The number of stockholders includes stockholders of record and individual participants in security position listings as furnished to the Company pursuant to Rule 17Ad-8 under the Exchange Act.

     The Company has paid a cash dividend on its Common Stock since its initial offering in 1996 and on its Class A Common Stock since 1967. The Company declared a special dividend of 12 cents per share in the fourth quarter of 2004. The Company’s Articles of Incorporation provide that each share of Common Stock is entitled to one vote and each share of Class A Common Stock is entitled to 10 votes. The Articles of Incorporation require that the Common Stock and the Class A Common Stock receive dividends on a pari passu basis. There can be no assurance of the Company’s ability to continue to pay any dividends on either class of common stock.

     The Company’s senior credit facility and its 9¹/4% Notes due 2011 each contain covenants that restrict the amount available to the Company to pay cash dividends on its capital stock. However, the Company does not believe that such covenants currently limit its ability to pay dividends at the recent quarterly rate of $0.03 per share. In addition to the foregoing, the declaration and payment of dividends on the Common Stock and the Class A Common Stock are subject to the discretion of the Board of Directors. Any future payments of dividends will depend on the earnings and financial position of the Company and such other factors as the Board of Directors deems relevant. See Note E. Long-term Debt

to the Company’s audited consolidated financial statements included elsewhere herein for further discussion of restrictions on the Company’s ability to pay dividends.

Issuer Purchases of Equity Securities

     The following tables provide information about Gray’s repurchase of its common stock (ticker: GTN) and its class A common stock (ticker: GTN.A) during the quarter ended December 31, 2005.

Issuer Purchases of Common Stock and Class A Common Stock

																Maximum Number
												Total Number of				of Shares that
												Shares Purchased				May Yet Be
		NYSE		Total Number				Average				as Part of				Purchased Under
		Ticker		of Shares				Price Paid				Publicly				the Plans or
Period		Symbol		Purchased				per Share(1)				Announced Plans				Programs (2)
October 1, 2005 through		GTN			130,000			$	10.01				130,000
October 31, 2005:		GTN.A			-0-			$	00.00				-0-				1,712,400
November 1, 2005 through		GTN			-0-			$	00.00				-0-
November 30, 2005:		GTN.A			-0-			$	00.00				-0-				1,712,400
December 1, 2005 through		GTN			-0-			$	00.00				-0-
December 31, 2005:		GTN.A			-0-			$	00.00				-0-				1,712,400
Total					130,000			$	10.01				130,000				1,712,400

Equity Compensation Plan Information

     See “Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters — Equity Compensation Plan Information” for disclosure regarding the Company’s equity compensation plans.

Item 6. Selected Financial Data.

     Set forth below is certain selected historical consolidated financial data of the Company. This information should be read in conjunction with the Company’s audited consolidated financial statements and related notes thereto appearing elsewhere herein and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

		Year Ended December 31,
		2005(2)				2004				2003				2002(1)				2001
		(in thousands except per share data)
Statements of Operations Data
Revenues (3)		$	261,553			$	293,273			$	243,061			$	146,714			$	106,430
Operating income			60,861				100,415				62,543				43,354				9,089
Loss on early extinguishment of debt (4)			(6,543	)			-0-				-0-				(16,838	)			-0-
Income (loss) from continuing operations			4,604				36,517				7,538				(4,581	)			(17,968	)
Income (loss) from discontinued publishing and wireless operations, net of income tax of $3,253, $5,059, $5,672, $4,664, and $3,014, respectively (5)			(1,242	)			7,768				6,486				(137	)			(4,650	)
Cumulative effect of accounting change, net of income tax benefit of $8,674 (6)			-0-				-0-				-0-				(19,223	)			-0-
Net income (loss)			3,362				44,285				14,024				(23,941	)			(13,318	)
Net income (loss) available to common stockholders			(2,286	)			41,013				10,737				(30,371	)			(13,934	)
Net income (loss) from continuing operations available to common stockholders per common share:
Basic			(0.02	)			0.67				0.08				(0.50	)			(1.19	)
Diluted			(0.02	)			0.66				0.08				(0.50	)			(1.19	)
Net income (loss) available to common stockholders per common share:
Basic			(0.05	)			0.83				0.21				(1.37	)			(0.89	)
Diluted			(0.05	)			0.82				0.21				(1.37	)			(0.89	)
Cash dividends per common share (7)			0.12				0.24				0.08				0.08				0.08
Balance Sheet Data (at end of period):
Total assets		$	1,525,054			$	1,374,466			$	1,325,329			$	1,332,048			$	830,056
Long-term debt (including current portion)			792,509				655,905				655,846				658,096				551,258
Redeemable serial preferred stock			39,090				39,003				39,276				39,190				-0-
Total stockholders’ equity			380,996				378,237				362,775				373,366				142,196

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

Executive Overview

Introduction

     The following analysis of the financial condition and results of operations of Gray Television, Inc. (the “Company”) should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included elsewhere herein.

Overview

     The operating revenues of the Company’s television stations are derived primarily from broadcast advertising revenues and, to a much lesser extent, from ancillary services such as production of commercials and tower rentals as well as compensation paid by the networks to the stations for broadcasting network programming.

     Broadcast advertising is sold for placement either preceding or following a television station’s network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program’s popularity among the specific audience an advertiser desires to reach, as measured by Nielsen. In addition, broadcast advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can be affected by ratings of network programming.

     Most broadcast advertising contracts are short-term, and generally run only for a few weeks. Approximately 68% of the net revenues of the Company’s television stations for the year ended December 31, 2005, were generated from local advertising (including political advertising revenues), which is sold primarily by a station’s sales staff directly to local accounts, and the remainder represented primarily by national advertising, which is sold by a station’s national advertising sales representative. The stations generally pay commissions to advertising agencies on local, regional and national advertising and the stations also pay commissions to the national sales representative on national advertising.

     Broadcast advertising revenues are generally highest in the second and fourth quarters each year, due in part to increases in consumer advertising in the spring and retail advertising in the period leading up to and including the holiday season. In addition, broadcast advertising revenues are generally higher during even numbered years due to spending by political candidates, which spending typically is heaviest during the fourth quarter. Consistent with this trend the Company has not received significant political advertising revenue during the current year.

     The broadcasting operations’ primary operating expenses are employee compensation, related benefits and programming costs. In addition, the broadcasting operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of the broadcasting operations is fixed.

2005 Spinoff

     On December 30, 2005, the Company completed the spinoff of all of the outstanding stock of Triple Crown Media., Inc. (“TCM”). Immediately prior to the spinoff, the Company contributed all of the membership interests in Gray Publishing, LLC which owned and operated the Company’s Gray

Publishing and GrayLink Wireless businesses and certain other assets, to TCM. In the spinoff, each of the holders of our common stock received one share of TCM Common stock for every ten shares of our common stock and each holder of our Class A common stock received one share of TCM common stock for every ten shares of our Class A common stock. As part of the spinoff, the Company received an approximate $44 million cash distribution from TCM, which Gray used to reduce its outstanding indebtedness on December 30, 2005. TCM is now quoted on the Nasdaq National Market under the symbol “TCMI.” The financial position and results of operations of the publishing and wireless businesses are reported in the Company’s consolidated balance sheet and statement of operations as discontinued operations for all periods presented. Please refer to Note B. Discontinued Operations to the Company’s audited consolidated financial statements included elsewhere herein.

Recent Acquisition Activity

     On March 3, 2006, the Company completed the acquisition of the stock of Michiana Telecasting Corp., owner of WNDU-TV, the NBC affiliate in South Bend, Indiana, from the University of Notre Dame for $85 million in cash plus certain transaction fees. The Company financed this acquisition with borrowings under the Company’s senior credit facility.

     On November 30, 2005, the Company completed the acquisition of the assets of WSAZ-TV, Channel 3, the NBC affiliate serving the in Charleston-Huntington, West Virginia market, from Emmis Communications Corp for approximately $185.8 million. The Company used funds borrowed under its senior credit facility and a portion of its cash on hand to fund this acquisition.

     On November 10, 2005, the Company completed the acquisition of the assets of WVAG-TV, the UPN affiliate serving Albany, Georgia from P.D. Communications, LLC for approximately $3.75 million. The Company used a portion of its cash on hand to fund this acquisition. Subsequent to the acquisition the Company re-named the station WSWG-TV.

     On January 31, 2005, the Company completed the acquisition of KKCO-TV for approximately $13.5 million. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. The Company used a portion of its cash on hand to fully fund this acquisition. Due to the acquisitions of WSAZ-TV, WSWG-TV and KKCO-TV occurring in 2005, the operating results of these stations are not reflected in the Company’s Consolidated Financial Statements as of and for the years ended December 31, 2004, and 2003 included elsewhere herein. The results for these stations are included in the results of operations for the year ended December 31, 2005 beginning on their acquisition dates.

     On August 17, 2004, the Company completed the acquisition of a FCC television license for WCAV-TV, Channel 19, in Charlottesville, Virginia from Charlottesville Broadcasting Corporation. Gray’s cost to acquire that FCC license was approximately $1 million. CBS, Inc. has agreed to a ten-year affiliation agreement to allow Gray to operate WCAV-TV as a CBS-affiliated station. Gray also has an FCC license to operate a low power television station, WVAW-TV, also in the Charlottesville, Virginia television market. The American Broadcasting Company has agreed to an affiliation agreement expiring December 31, 2013 to allow Gray to operate WVAW-TV as an ABC affiliate. Additionally during 2005 the Company also acquired an FCC license to operate another low power television license, WAHU-TV, also in the Charlottesville, Virginia television market. The Fox broadcast network has agreed to an affiliation agreement to allow the Company to operate WAHU-TV as a FOX affiliate. WCAV-TV and WVAW-TV began broadcasting in August 2004 and WAHU-TV’s license was acquired on July 1, 2005. Gray’s total cost to acquire and/or construct the combined broadcast facilities for these three stations was approximately $8.5 million.

Net Revenues

     Set forth below are the principal types of revenues earned by the Company’s broadcasting operations for the periods indicated and the percentage contribution of each to total revenues (dollars in thousands):

		Year Ended December 31,
		2005								2004								2003
		Amount				%				Amount				%				Amount				%
Net Revenues:
Local		$	174,568				66.7	%		$	160,648				54.8	%		$	150,105				61.8	%
National			70,825				27.1	%			70,817				24.1	%			70,798				29.1	%
Network compensation			5,095				2.0	%			9,951				3.4	%			8,378				3.5	%
Political			2,862				1.1	%			41,706				14.2	%			5,668				2.3	%
Production and other			8,203				3.1	%			10,151				3.5	%			8,112				3.3	%
		$	261,553				100.0	%		$	293,273				100.0	%		$	243,061				100.0	%

Results of Operations of the Company

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

     Revenues. Total broadcasting revenues decreased 11% over the same period of the prior year to $261.6 million. Local broadcasting advertising revenues, increased 9% to $174.6 million from $160.6 million. Since January 1, 2004 the Company has launched UPN second channels in six of its existing television markets, built television station WCAV-TV in Charlottesville, VA which commenced broadcast operations in August, 2004, acquired television stations KKCO-TV, Grand Junction, CO on January 31, 2005, WSWG-TV, Albany GA on November 10, 2005 and WSAZ-TV, Charleston - Huntington, WV on November 30, 2005 and sold the Company’s satellite uplink operations on December 31, 2004. These transactions account for approximately one-third, or $5.0 million of the Company’s overall increase in local broadcasting advertising revenues. For the stations continuously operated since January 1, 2004 local broadcasting advertising revenues, excluding political advertising revenues increased 6% or $9.0 million due to increased demand for commercial time by local advertisers. National broadcasting advertising revenues of $70.8 million were consistent between the years ended December 31, 2005 and 2004. The transactions discussed above account for approximately $1.6 million of the total national broadcasting advertising. National advertising for the stations and second channels continuously operated since January 1, 2004 decreased approximately 2% or $1.6 million due to decreased demand for commercial time by national advertisers. Political advertising revenues decreased to $2.9 million from $41.7 million reflecting the cyclical influence of the 2004 Presidential election. In addition, in the 2004 period Gray recorded approximately $3.0 million of broadcast revenue associated with the broadcast of the 2004 Summer Olympics. There was no such similar Olympic broadcast in the current year. Network compensation revenue decreased 49% to $5.1 million from $10.0 million due to lower revenue from renewed network affiliation agreements. However, under the terms of the affiliation agreements, Gray’s cash payments received or receivable in excess of revenue recognized in accordance with generally accepted accounting principles approximated $2.8 million for the year ended December 31, 2005. In the same period of the prior year, the network compensation revenue and the related cash payments received or receivable were approximately equal in their respective amounts.

     Operating expenses. Broadcasting expenses, before depreciation, amortization and loss on disposal of assets increased 2% to $161.9 million from $158.3 million. For the stations continuously operated since January 1, 2004 broadcast expenses decreased approximately 1%, or $1.8 million. This decrease in existing broadcast expenses was due primarily to reduced payroll expenses, including station incentive bonus expense, reduced commissions to national sales representatives reflecting the lower political revenue discussed above and reduced legal and consulting services. The six new UPN second channels,

WCAV-TV and the newly acquired stations (KKCO-TV, WSWG-TV and WSAZ-TV) incurred approximately $8.5 million in operating expenses for the year ended December 31, 2005.

     Corporate and administrative expenses. Corporate and administrative expenses before depreciation, amortization and loss on disposal of assets decreased 1% to $11.5 million from $11.7 million in the year ended December 31, 2005 as compared to the same period in 2004.

     Depreciation. Depreciation of property and equipment totaled $24.5 million and $22.0 million for the years ended December 31, 2005 and 2004, respectively. The increase in depreciation was due to newly acquired equipment.

     Amortization of intangible assets. Amortization of intangible assets was $1.0 million for the year ended December 31, 2005, as compared to $920,000 for the year ended December 31, 2004. The increase in amortization expense was due to definite lived intangible assets that were acquired in 2005.

     Amortization of restricted stock awards. Amortization of restricted stock awards decreased 24% to $391,000 for the year ended December 31, 2005 compared to $512,000 for the year ended December 31, 2004. Amortization of restricted stock awards decreased due to the grant and complete amortization of a 10,000 share restricted stock award in 2004. The Company awarded 5,000 and 15,000 shares of restricted stock in 2005 and 2004 respectively. These shares were awarded to its board of directors and president.

     Loss on disposal of assets. A loss on disposal of assets of $1.4 million was recorded for the year ended December 31, 2005, as opposed to a gain on disposal of assets of $496,000 for the year ended December 31, 2004. These amounts reflect disposals of equipment during the respective periods.

     Miscellaneous income, net. Miscellaneous income, net decreased $421,000 to $558,000 in the year ended December 31, 2005 compared to $1.0 million in the year ended December 31, 2004. Included in miscellaneous income was interest income of $468,000 in the year ended December 31, 2005 and $818,000 in the year ended December 31, 2004. The majority of this interest income was received from interest on the Company’s cash and cash equivalents balances.

     Interest expense. Interest expense increased $4.5 million to $46.5 million in the year ended December 31 2005 compared to $42.0 million in the year ended December 31, 2004. This increase is primarily attributable to higher average interest rates in 2005 compared to 2004 and increases in amounts borrowed under the Company’s Senior Credit Facility to fund recent acquisitions. The total average debt balance was $670.0 million and $656.9 million for the years ended December 31, 2005 and 2004, respectively. The total average interest rates were 6.79% and 6.08% for the years ended December 31, 2005 and 2004, respectively.

     Loss on Early Extinguishment of Debt. Gray reported a loss on early extinguishment of debt in the amount of $6.5 million which related to four events: the repurchase by Gray of a portion of its 9¹/4% Notes, two amendments of Gray’s senior credit facility, first on June 28, 2005 and again on November 22, 2005, and other costs related to abandoned refinancing activities:

	•		Gray repurchased $21.5 million, face amount, of its 91/4% Notes in the open market. Associated with this repurchase, Gray recorded a loss upon early extinguishment of debt of $2.6 million which included a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted discount of $74,000. Upon repurchase of Gray’s 91/4% Notes, Gray paid $749,000 in accrued interest.
	•		On June 28, 2005, Gray amended its senior credit facility. Gray paid out approximately $1.6 million in cash for the amendment of the senior credit facility and of this amount $1.2 million was

			capitalized as deferred financing costs which will be amortized to interest expense over the remaining life of the agreement. The remaining $370,000 was reported as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized a loss on early extinguishment of debt in the amount of $1.8 million. The total loss on early extinguishment of debt related to the June 2005 amendment of the senior credit facility was $2.2 million.
	•		On November 22, 2005, Gray amended its senior credit facility. Gray paid out approximately $5.6 million in cash for the amendment of the senior credit facility and of this amount $5.5 million was capitalized as deferred financing costs which will be amortized to interest expense over the remaining life of the agreement. The remaining $81,000 was reported as a loss on early extinguishment of debt. $873,000 of previously capitalized cost was also reported as a loss on early extinguishment of debt. The total loss on early extinguishment of debt related to the November 2005 amendment was $954,000.
	•		During 2005 the Company incurred and subsequently wrote off approximately $817,000 in professional and other costs incurred to explore other means of refinancing portions of its indebtedness.

     Income tax expense. The effective tax rate increased to 44.7% for the year ended December 31, 2005 from 38.5% for the year ended December 31, 2004. Income tax expense for 2005 increased as a percentage of pre-tax income primarily as a result of higher income tax valuation allowances against state net operating loss carryforwards. See H. Income Taxes to the Company’s audited consolidated financial statements included herein for further discussions of this matter.

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

     Revenues. Broadcasting revenues increased 21% over the same period of the prior year to $293.3 million. The increase in broadcasting revenues reflects increased political advertising revenues as well as increased non-political broadcasting advertising revenues. Political advertising revenues increased to $41.7 million from $5.7 million. Political advertising revenues for 2004 primarily reflect the cyclical influence of the 2004 Presidential election. Excluding political advertising revenues, local broadcasting advertising revenues increased 7% to $160.7 million from $150.1 million and national broadcasting advertising revenues remained at $70.8 million. We attribute the increases in non-political local broadcasting advertising revenues to improved economic conditions and broad based demand for commercial time by local advertisers in the markets in which we operate. We believe that commercial time used for political advertising limited, in part, the amount of commercial time available for sale by the Company to national advertisers during the year ended December 31, 2004.

     Operating expenses. Broadcast operating expenses for all stations, before depreciation and amortization, increased 9% to $158.3 million. Payroll expense, excluding incentive based compensation, increased $4.8 million due to an increase in the number of employees, annual salary increases for existing employees and employee benefit costs. The increase in the number of employees is primarily attributable to the commencement of broadcast operations at WCAV-TV, the Company’s new station located in Charlottesville, Virginia which began operations in August of 2004. Employee incentive based compensation increased $1.4 million as a result of increased revenues produced by the Company’s broadcast stations. Professional services increased $2.8 million including a $1.7 million increase in sales commissions paid to national sales representative firms which is attributable to the increase in political advertising in 2004.

     Corporate and administrative expenses. Corporate and administrative expenses, before depreciation and amortization, increased 38% to $11.7 million due primarily to increased employee payroll expense and other professional service expenses. Payroll expense, excluding incentive based compensation, increased approximately $249,000 due to the addition of certain staff, payroll increases and increased employee benefits for existing personnel. Employee incentive based compensation increased by approximately $1 million as a result of the improved operating results of the Company. The increase in professional fees is due primarily to increased accounting costs of approximately $1.0 million incurred in our efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002.

     Depreciation. Depreciation of property and equipment totaled $22.0 million and $19.7 million for the years ended December 31, 2004 and 2003, respectively. The increase in depreciation was due to newly acquired equipment.

     Amortization of intangible assets. Amortization of intangible assets was $920,000 for the year ended December 31, 2004, as compared to $5.2 million for the same period of the prior year, a decrease of $4.3 million, or 82%. The decrease in amortization expense was due to certain definite lived intangible assets that were acquired in 2002, becoming fully amortized.

     Amortization of restricted stock awards. Amortization of restricted stock awards increased 13% to $512,000. Amortization of restricted stock awards increased due to the granting of additional restricted stock in the current year. The Company awarded 15,000 and 145,000 shares of restricted stock in 2004 and 2003, respectively. These shares were awarded to its board of directors and president.

     Gain on disposal of assets. A gain on disposal of assets of $496,000 was recorded for the year ended December 31, 2004, as opposed to a loss on disposal of assets of $1.0 million for the year ended December 31, 2003. These amounts reflect disposals of equipment during the respective periods.

     Miscellaneous income, net. Miscellaneous income, net increased to $1.0 million in the year ended December 31, 2004. Included in miscellaneous income for 2004 was interest income of $818,000. The majority of this interest income was received from interest on the Company’s cash and cash equivalents balances. The company recorded less interest income in the year ended December 31, 2003 due to lower cash balances

     Interest expense. Interest expense decreased $1.3 million to $42.0 million. This decrease is primarily attributable to lower average interest rates in 2004 compared to 2003. The total average debt balance was $656.9 million and $657.0 million for the years ended December 31, 2004 and 2003, respectively. The total average interest rates were 6.08% and 6.16% for the years ended December 31, 2004 and 2003, respectively.

     Income tax expense. The effective tax rate decreased to 38.5% from 60.7%. Income tax expense for 2003 included an additional $5.0 million in expense resulting from settlement of litigation with the IRS relating to the acquisition of certain television assets in 1996. See Note I. Income Taxes to the Company’s audited consolidated financial statements included herein for further discussions of this matter.

Liquidity and Capital Resources

General

     The following tables present certain data that the Company believes is helpful in evaluating the Company’s liquidity and capital resources (in thousands):

		Year Ended December 31,
		2005				2004
Net cash provided by operating activities		$	50,482			$	102,736
Net cash used in investing activities			(245,925	)			(37,552	)
Net cash provided by (used in) financing activities			154,192				(26,565	)
Net increase (decrease) in cash and cash equivalents		$	(41,251	)		$	38,619

		December 31,
		2005				2004
Cash and cash equivalents		$	9,315			$	50,566
Long-term debt including current portion			792,509				655,905
Redeemable serial preferred stock			39,090				39,003
Available credit under senior credit agreement			58,500				71,250

     The Company and its subsidiaries file a consolidated federal income tax return and such state or local tax returns as are required. Although the Company may earn taxable operating income, as of December 31, 2005 the Company anticipates that through the use of its available loss carryforwards it will not pay significant amounts of federal or state income taxes in the next several years.

     Management believes that current cash balances, cash flows from operations and available funds under its senior revolving credit facility will be adequate to provide for the Company’s capital expenditures, debt service, cash dividends and working capital requirements for the foreseeable future.

     The senior credit facility provides the Company with a $150 million term loan A facility; a $350 million term loan B facility; and a $100 million revolving credit facility. The credit facility also provides for up to $400 million in incremental credit facilities upon the consent of the lenders. In order to fund the pending acquisition of WNDU-TV the Company, in January 2006, requested and the lenders consented to provide $100.0 million under the incremental credit facility. The Company used these funds to complete the acquisition of WNDU-TV on March 3, 2006.

     The senior credit facility is collateralized by substantially all of the assets, excluding real estate, of the Company and its subsidiaries. In addition, the Company’s subsidiaries are joint and several guarantors of the obligations and the Company’s ownership interests in its subsidiaries are pledged to collateralize the obligations. The agreement contains certain restrictive provisions which include but are not limited to, requiring the Company to maintain certain financial ratios and limits upon the Company’s ability to incur additional indebtedness, make certain acquisitions or investments, sell assets or make other restricted payments, including dividends, (all as are defined in the loan agreement). The senior subordinated notes also contain similar restrictive provisions limiting the Company’s ability to, among other things, incur additional indebtedness, make certain acquisitions or investments, sell assets or make certain restricted payments that include but are not limited to purchases or redemptions of the Company’s capital stock.

     Management does not believe that inflation in past years has had a significant impact on the Company’s results of operations nor is inflation expected to have a significant effect upon the Company’s business in the near future.

     Net cash provided by operating activities decreased $52.3 million. The decrease was primarily the result of a decrease in net income of $40.9 million from reduced political advertising in a non presidential election year. Significant adjustments to reconcile net income to net cash provided by operating activities included a decrease of $19.8 million in non – cash deferred taxes resulting from changes in timing differences between the Company’s reported income and the Company’s taxable income; an increase of $3.6 million for the non-cash write off of loan acquisition costs associated with two amendments to the Company’s senior credit facility and repurchase of a portion of the Company’s senior subordinated notes; an increase of a $3.2 million for the non-cash FCC license impairment expense to write down the value of the FCC license associated with the Company’s discontinued wireless communication business; and $2.4 million increase in deferred network compensation revenue

     Net cash used in investing activities increased $208.4 million to $245.9 million during the year ended December 31, 2005. The amount used increased primarily due to the Company’s use of $208.3 million to purchase KKCO-TV, WSWG-TV and WSAZ-TV and the FCC license for WAHU-TV. Cash used to purchase property plant and equipment totaled $37.2 million, $36.3 million and $22.3 million during the years ended December 31, 2005, 2004 and 2003 respectively. During the year ended December 31, 2003 the Company used $8.4 million to pay purchase obligations related to acquisitions in prior years.

     Net cash provided by financing activities was 154.2 million. Proceeds from borrowings on long term debt primarily to finance the Company’s acquisitions of television stations as well as for general operating purposes were $229.4 million in the year ended December 31, 2005. Partial repayments of Long term debt in 2005 totaled $93.0 million. The two amendments of the Company’s senior credit facility caused the company to incur in the year ended December 31, 2005 $7.2 million of bank, legal, accounting and other costs. Dividends paid in the year ended December 31, 2005 included $9.0 million in regular quarterly dividends on the Company’s common and preferred stocks as well as an additional $5.9 million common stock dividend which was declared in 2004 but not paid until 2005. The Company received a distribution from the spinoff of its publishing and wireless businesses received on December 30, 2005 in the amount of $44.0 million.

     During the year ended December 31, 2005, the Company purchased 12,800 shares of the Company’s Class A Common Stock and 528,400 shares of the Company’s Common Stock for a total of $7.0 million. During the year ended December 31, 2004, the Company purchased 65,000 shares of the Company’s Class A Common Stock and 1,681,400 shares of the Company’s Common Stock for a total of $22.4 million. Also during the year ended December 31, 2003, the Company purchased warrants for the purchase of 1,106,250 shares of the Company’s Class A Common Stock and 100,000 shares of the Company’s Common Stock. The total cost of the Common Stock and warrants was $22.5 million. The purchases of the stock and the warrants during 2004 and 2003 were funded from cash on hand.

Digital Television Conversion

     The FCC required that all commercial stations begin broadcasting a digital signal. The Company paid approximately $9.6 million and $11.8 million for digital transmission equipment capital expenditures for the years ending December 31, 2005 and 2004, respectively. The Company is in compliance with the FCC’s digital broadcasting requirements at all of its stations.

     In the future, the Company may increase the power output of its digital broadcast signals of certain stations. These enhancements will be phased in by July 2006 to meet certain FCC regulations. As of the date of filing this Annual Report, the Company estimates that it will pay $7.9 million for these capital expenditures to comply with this new FCC requirement during 2006.

Settlement of Internal Revenue Service Audit

     In January 2004, the Company settled its litigation with the IRS regarding the IRS’ audit of the Company’s 1996 and 1998 federal income tax returns. The settlement required no cash payments from the Company. The Company agreed in the settlement to forego certain claimed depreciation and amortization deductions relating to the 1996 through 1999 tax years, which in turn resulted in a reduction of the Company’s then federal income tax net operating loss carryforwards by approximately $16.3 million. During 2004 and as a result of the settlement, the Company collected a previously claimed federal tax cash refund for 1996 of approximately $1.1 million, plus statutory interest.

Retirement Plan

     The Company has an active defined benefit pension plan that it considers its primary pension plan and this plan covers substantially all full-time employees. Retirement benefits are based on years of service and the employees’ highest average compensation for five consecutive years during the last ten years of employment. The Company’s funding policy is consistent with the funding requirements of existing federal laws and regulations under the Employee Retirement Income Security Act of 1974.

     A discount rate is selected annually to measure the present value of the benefit obligations. In determining the selection of a discount rate, we estimated the timing and amounts of expected future benefit payments and applied a yield curve developed to reflect yields available on high-quality bonds. The yield curve is based on an externally published index specifically designed to meet the criteria of GAAP. The discount rate selected as of December 31, 2005, was 5.75% which reflects the results of this yield curve analysis and are unchanged from December 31, 2004. Our assumption regarding expected return on plan assets reflects asset allocations, investment strategy and the views of investment managers, as well as historical experience. We use an assumed return of 7.0% for our invested pension assets. Actual asset returns for these trusts were approximately 4.9% in 2004 and 5.2% in 2005. Other significant assumptions include inflation, salary growth, retirement rates, and mortality rates. Our inflation assumption is based on an evaluation of external market indicators. The salary growth assumptions reflect our long-term actual experience, the near-term outlook and assumed inflation. Compensation increases over the latest five year period have been in line with assumptions. Retirement and mortality rates are based on actual plan experience.

     Because the spinoff of the Company’s former publishing and wireless businesses resulted in a curtailment of benefits to those plan participants the Company anticipates that its pension expense will decrease from the $3.7 million recognized for the year ended December 31, 2005 to $3.3 million for the year ended December 31, 2006.

     During the years ended December 31, 2005 and 2004, the Company contributed $5.0 million and $1.8 million, respectively, to all three of its pension plans and anticipates making a contribution of $3.1 million in the year ended December 31, 2006.

     See Note J. Retirement Plans to the Company’s audited consolidated financial statements included elsewhere herein for further information concerning the Company’s retirement plans.

Off-Balance Sheet Arrangements

     The Company has various operating lease commitments for equipment, land and office space. The Company also has commitments for various syndicated television programs and for digital television (“DTV”) equipment.

     The Company has two types of syndicated television program contracts: first run programs and off network reruns. The first run programs are programs such as Oprah and the off network programs are programs such as Seinfeld. A difference between the two types of syndicated television programming is that the first run programs have not been produced at the time the contract is signed and the off network programs have been produced. The amounts for syndicated television programming in the table below are for contracts that are not recorded on the Company’s balance sheet as of December 31, 2005.

     Future minimum payments under operating leases with initial or remaining noncancelable lease terms in excess of one year, obligations for syndicated television programs as described above and commitments for DTV equipment that had been ordered but not yet been received are as follows (in thousands):

										Syndicated
		DTV				Operating				Television
Year		Equipment				Lease				Programming				Total
2006		$	3,110			$	1,348			$	3,635			$	8,093
2007			-0-				1,064				9,889				10,953
2008			-0-				865				9,011				9,876
2009			-0-				612				8,010				8,622
2010			-0-				416				6,329				6,745
Thereafter			-0-				765				3,198				3,963
		$	3,110			$	5,070			$	40,072			$	48,252

     The DTV equipment, operating lease and syndicated television programming amounts in the table above are estimates of commitments that are in addition to liabilities accrued for on the Company’s balance sheet as of December 31, 2005.

     Through a rights-sharing agreement with Host Communications, Inc. (“Host”), a wholly owned subsidiary of TCM and a related party, the Company participated jointly with Host in the marketing, selling and broadcasting of certain collegiate sporting events and in related programming, production and other associated activities related to the University of Kentucky. This initial agreement commenced April 1, 2000 and terminated April 15, 2005. The Company shared with Host the profit or loss from these activities. Individual revenues and expenses under this agreement were not separately recorded in the Company’s statement of operations; rather the net amount received was included in broadcasting revenues. The Company’s operating results for 2005, 2004 and 2003 include net income from these activities of $123,356, $101,475 and $104,396. As a result of the rights-sharing agreement, in certain circumstances, the Company could be called upon for payment of a share of certain upfront rights fees. During 2003, the Company paid $1.5 million to Host as an advance under this provision. No similar payments were made in 2004 or 2005. As of December 31, 2005, Host owed to the Company $1.0 million from the advance in 2003, $332,000 of undistributed earnings from this rights-sharing agreement as well as $310,000 unrelated to the first rights-sharing agreement for a total of $1.6 million. As of December 31, 2005 and 2004, the Company had $1.6 million and $1.4 million respectively, recorded as a related party receivable. Between January 1, 2006 and February 17, 2006, the Company received payments totaling $1.6 for full payment of this related party receivable. Certain executive officers and significant stockholders of Gray are also executive officers and significant stockholders of TCM.

     On October 12, 2004, the University of Kentucky jointly awarded a second sports marketing agreement to the Company and Host. The new agreement commenced on April 16, 2005 and has an initial term of seven years with the option to extend the license for three additional years. Aggregate license fees to be paid to the University of Kentucky over a full ten year term for the agreement will approximate $80.5 million. The Company and Host will share equally the cost of the license fees. Under

the new sports marketing agreement, the Company paid $1.8 million to the University of Kentucky and recognized a loss of $137,000 during 2005.

Tabular Disclosure of Contractual Obligations as of December 31, 2005 (in thousands)

		Payment due by period
						Less than												More than
						1 Year				1-3 Years				3-5 Years				5 Years
Contractual Obligations		Total				(2006)				(2007-2008)				(2009-2010)				(after 2010)
Long-term debt obligations (1)		$	793,320			$	3,577			$	14,756			$	37,157			$	737,830
Cash interest on long-term debt obligations (2)			333,718				54,419				108,015				105,298				65,986
Mandatorily redeemable serial preferred stock(3)			39,640				-0-				-0-				-0-				39,640
Cash dividends on mandatorily redeemable serial preferred stock(4)			20,783				3,171				6,477				6,738				4,397
Capital lease obligations (5)			15				11				4				-0-				-0-
Operating lease obligations (6)			5,070				1,348				1,929				1,028				765
Purchase obligations currently accrued (7)			5,356				4,423				933				-0-				-0-
Purchase obligations not currently accrued (8)			3,110				3,110				-0-				-0-				-0-
Programming obligations currently accrued (9)			11,351				10,391				856				78				26
Programming obligations not currently accrued (10)			40,072				3,635				18,900				14,339				3,198
Acquisition related liabilities(11)			5,960				4,033				745				731				451
Obligation to University of Kentucky (12)			76,092				7,326				15,702				15,401				37,663
Total		$	1,334,487			$	95,444			$	168,317			$	180,770			$	889,956