Summary of AMERICAN COMMUNITY NEWSPAPERS INC.

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Cautionary Note Regarding Forward Looking Information The following discussion of our financial condition and results of operations should be read in conjunction with our historical consolidated financial statements and notes to those statements appearing in this report. Certain statements in this Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views regarding, among other things, our future growth, results of operations, performance and business prospects and opportunities, as well as other statements that are other than historical fact. Words such as "anticipate(s)," "expect(s)", "intend(s)", "plan(s)", "target(s)", "project(s)", "believe(s)", "will", "would", "seek(s)", "estimate(s)" and similar expressions are intended to identify such forward-looking statements.
Forward-looking statements are based on management's current expectations and beliefs and are subject to a number of known and unknown risks, uncertainties and other factors that could lead actual future growth, results of operations, performance and business prospects and opportunities to differ materially from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from our expectations include, but are not limited to the risks identified by us under the heading "Risk Factors" included in our Annual Report on Form 10-K for the year ended December 30, 2007 ("2007 Form 10-K"), as updated in this Form 10-Q. Such forward-looking statements speak only as of the date on which they are made. Except to the extent required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based. Overview
We are one of the largest community newspaper publishers in the United States, operating within four major U.S. markets: Minneapolis - St. Paul, Minnesota; Dallas, Texas; Northern Virginia (suburban Washington, D.C.); and Columbus, Ohio. Our goal is to be the preeminent provider of local content and advertising in any market we serve.
We were formed on March 18, 2005, to serve as a vehicle to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business. On July 7, 2005, we closed our initial public offering (the "Offering"), generating gross proceeds of $82,800,000. After deducting the underwriting discounts and commissions and the offering expenses, the total net proceeds to us from the offering were approximately $75,691,000, of which $73,764,000 was deposited into a trust fund (the "Trust Fund") for the benefit of stockholders holding shares purchased in the Offering. Such funds were to be held in trust until the earlier of the completion of a business combination and our liquidation.

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We entered into an Asset Purchase Agreement ("APA") with MOTV LLC ("MOTV," at the time known as American Community Newspapers LLC) on January 24, 2007 (subsequently amended on May 2, 2007) providing for the purchase by us of the business and substantially all of the assets of MOTV and the assumption by us of certain of MOTV's liabilities ("MOTV Acquisition"). MOTV Holding LLC (at the time known as ACN Holding LLC), the sole member of MOTV, was also a party to the APA. On June 20, 2007, we formed a wholly-owned subsidiary, American Community Newspapers LLC (the "Operating Company," at the time known as ACN OPCO LLC), to which we assigned our rights pursuant to the APA. On July 2, 2007, we utilized a combination of cash held in the Trust Fund, along with funds generated from newly issued preferred stock and loans (as described below), to effect the MOTV Acquisition. In connection with the closing of the MOTV Acquisition, we changed our name to American Community Newspapers Inc., and the Operating Subsidiary changed its name to American Community Newspapers LLC. The MOTV Acquisition was accounted for using the purchase method of accounting.
Simultaneously with the closing of the MOTV Acquisition, we closed three financing transactions which provided a portion of the funds used to affect the MOTV Acquisition and pay other expenses associated with such acquisition. We consummated a $125 million secured credit facility (the "Credit Facility") with the Bank of Montreal, Chicago Branch ("BMO"), as Administrative Agent, and other lenders identified therein ("Senior Lenders"). The Credit Facility consists of a revolving loan facility of up to $20 million ("Revolving Credit Facility") and a term loan facility of $105 million ("Term Loan Facility"), which includes $35 million in Term A Loans and $70 million in Term B Loans. We also consummated a $30 million unsecured term loan credit facility (the "Subordinated Credit Facility") with Ares Capital Corporation ("Ares", and together with Senior Lenders, the "Lenders"). Finally, we issued 42,193 shares of Series A Preferred Stock at a purchase price of $100 per share for aggregate gross proceeds of $4,219,300, with no discounts or commissions being charged ("Series A Preferred Stock," and together with the Credit Facility and Subordinated Credit Facility, the "2007 Financings").
A key element of our business strategy is geographic clustering of publications to realize operating efficiencies, revenue opportunities and provide consistent management. The clustering strategy has helped allow us to launch numerous new products in our existing clusters, leveraging off of our existing fixed cost base. We believe that these advantages, together with the generally lower overhead costs associated with operating in our markets, allow us to generate high operating profit margins and create an advantage against competitors and potential entrants in our markets.
We generate revenues principally from advertising, and to a smaller extent, from circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. In addition, circulation revenue from single copy and newspaper rack sales is recognized upon collection from the customer. The revenue for commercial printing is recognized upon delivery of the printed product to the customers. Deferred revenue arises as a normal part of business principally from advance circulation payments.
Factors affecting our advertising revenues include, among others, the size and demographic characteristics of the local population, local economic conditions in general

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and the economic condition of the retail segments of the communities that our publications serve. If the local economy, population or prevailing retail environment of a community we serve experiences a downturn, our publications, revenues and profitability in that market would be adversely affected. Our advertising revenues are also susceptible to negative trends in the general economy that affect consumer spending. The advertisers in our newspapers and other publications and related websites include many businesses that can be significantly affected by regional or national economic downturns and other developments.
Our advertising revenue tends to follow a seasonal pattern. Our first quarter is, historically, our weakest quarter of the year in terms of revenue. Correspondingly, our second and third fiscal quarters are, historically, our strongest quarters, because they include heavy seasonal and certain holiday advertising, including Easter, Mother's Day, Graduation, back to school and other special events. We expect that this seasonality will continue to affect our advertising revenue in future periods.
Our operating costs consist primarily of newsprint, labor and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.
We have not been significantly impacted by general inflationary pressures over the last several years. We anticipate that changing costs of newsprint, our basic raw material, may impact future operating costs. We are a member of a newsprint-buying consortium, which enables us to obtain favorable newsprint pricing. Price increases (or decreases) for our products are implemented when deemed appropriate by management. We continuously evaluate price increases, productivity improvements, sourcing efficiencies and other cost reductions to mitigate the impact of inflation. Additionally, we have taken steps to cluster our operations geographically, thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy. Other factors that affect our quarterly revenues and operating results include changes in the pricing policies of our competitors, the hiring and retention of key personnel, wage and cost pressures, distribution costs and general economic factors.
All dollar amounts in the following text are presented in thousands ($000s). Recent Developments
On July 1, 2008, we retained an advisor to provide financial advisory services. The advisor is assisting us in exploring strategic alternatives relating to, among other things, restructuring our long-term debt. We continue to work with our lenders on a solution to deleverage the Company. Any restructuring that reduces our outstanding debt is likely to have a substantial impact on our capital structure, including our common equity.
As of August 13, 2008, we are in violation of a financial covenant under each of the Credit Facility and Subordinated Credit Facility that requires us to remain below a certain maximum consolidated total debt leverage ratio (as defined in each facility). The Credit Facility's covenant requires that the ratio of consolidated debt to EBITDA for the trailing four quarters (each as calculated pursuant to the Credit Facility) not exceed 6.50 to 1.00 at June 29, 2008. As of June 29, 2008, our consolidated total debt leverage ratio was 7.33 to 1.00, based on consolidated total debt for purposes of the Credit Facility of $108,500 and trailing four quarter EBITDA of $14,802. The Subordinated Credit

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Facility's covenant requires that the ratio of consolidated debt to EBITDA for the trailing four quarters (each as calculated pursuant to the Subordinated Credit Facility) not to exceed 8.35 to 1.00 at June 29, 2008. As of June 29, 2008, our consolidated total debt leverage ratio was 9.68 to 1.00, based on consolidated total debt for purposes of the Subordinated Credit Facility of $143,317 and trailing four quarter EBITDA of $14,802. Violation of these financial covenants constitutes an event of default under the Credit Facility and the Subordinated Credit Facility ("Financial Covenant Defaults"). In addition, due to cross-default provisions under the Credit Facility, the Financial Covenant Default under the Subordinated Credit Facility constitutes an additional default under the Credit Facility ("Cross Default"). Additionally, on September 30, 2008, we failed to pay principal in the amount of $1,050 with respect to the Term A and the Term B Loans as required by the Credit Facility. Such failure to pay constitutes an additional event of default under the Credit Facility. As a consequence of these events of default, any interest due and payable under the Credit Facility shall be at a rate that is 2% in excess of the interest otherwise payable with respect to the applicable Loans ("Default Interest Rate"). Furthermore, under a cross default provision contained in the certificate of designations for the Company's Series A Preferred Stock, the imposition of Default Interest Rate under the Subordinated Credit Facility has caused the dividend rate on Series A Preferred Stock to increase by 2%. On August 13, 2008, the Company filed a Form 8-K reflecting a preliminary impairment charge related to goodwill and other intangibles of at least $69 million. Upon completing the impairment analysis in September 2008, we concluded that the carrying value of $202,926 for our net assets exceeded the $92,900 fair value of net assets by $110,026. As a result, we recorded a pretax, non-cash operating charge of $110,026 for the three months and six months ended June 29, 2008 related to goodwill and other intangibles. We had previously reported our intention to perform our annual impairment test during the second fiscal quarter of 2008. The Company's stock price and market capitalization, a reduced number of newspaper company acquisitions closing at historically low trading multiples, macroeconomic factors impacting the industry as a whole and the Company's recent and forecasted operating performance (including a year-over-year and quarter-over-quarter decline in revenue), along with other factors, impacted the Company's impairment analysis.
On November 30, 2007, we executed two interest rate swaps, one in the notional amount of $30,000 and one in the notional amount of $25,000, with a spot starting date of December 4, 2007. The interest rate swaps have identical terms of two years. Under these swaps, we paid an amount to the swap counterparty representing interest on a notional amount at a fixed rate of 3.91% and received an amount from the swap counterparty representing interest on the notional amount at a rate equal to the three-month LIBOR. We terminated the interest rate swap contracts on September 29, 2008 and incurred a total close-out fee of $655 which will be added to the outstanding debt.
On August 21, 2008, the Company received notice from the American Stock Exchange ("AMEX" now known as NYSE Alternext US LLC) staff indicating that the Company was not in compliance with certain of AMEX's continued listing standards, as set forth in Sections 134 and 1101 of the AMEX Company Guide, due to its failure to file its Form 10-Q for the fiscal quarter ended June 29, 2008 with the SEC. The Company was afforded the opportunity to submit a plan of compliance to AMEX and, on September 4, 2008, the Company did so. On September 23, 2008, AMEX notified the Company that it

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accepted its plan of compliance and allowed it until November 19, 2008, to regain compliance with the continued listing standards.
On October 21, 2008 the Company announced that it notified AMEX of its intent to voluntarily delist its common stock, warrants and units from AMEX and that it intends to voluntarily deregister its common stock, warrants and units under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and cease filing reports with the SEC.
We anticipate that we will file a Form 25 with the SEC relating to the delisting of our common stock, warrants and units on or about October 31, 2008, with the delisting to be effective ten days thereafter. Accordingly, we anticipate that the last day of trading of our securities on NYSE Alternext will be on or about Tuesday, November 11, 2008.
On the effective date of the delisting, we plan to file a Form 15 to deregister our common stock, warrants and units under the Exchange Act. Upon the filing of the Form 15, the Company's obligation to file certain reports with the SEC, including Forms 10-K, 10-Q, and 8-K, will immediately be suspended. We expect that the deregistration will become effective 90 days after the date of filing of the Form 15 with the SEC.
We anticipate that following delisting, our common stock, warrants and units will be quoted on the Pink Sheets, a centralized electronic quotation service for over-the-counter securities, so long as market makers demonstrate an interest in trading in the Company's stock. However, we can give no assurance that trading in our securities will continue on the Pink Sheets or on any other securities exchange or quotation medium. Recently Issued Accounting Standards
A description of the new accounting pronouncements that we have adopted, or plan to adopt, may be found in Note 2 to the consolidated financial statements included with this Form 10-Q.
Pro Forma
On the following pages, we present our operating results on a pro forma basis for the three and six months ended July 1, 2007, in addition to presenting our historical operating results for the three and six months ended June 29, 2008. This pro forma presentation for these periods assumes that the MOTV Acquisition, the acquisitions effected by MOTV during 2007 and the 2007 Financings occurred at the beginning of the pro forma period. This pro forma presentation is not necessarily indicative of what our operating results would have actually been had the MOTV Acquisition, the acquisitions effected by MOTV during 2007 and the 2007 Financings occurred at the beginning of the pro forma period. However, on an actual basis, almost all significant fluctuations between the three and six months ended June 29, 2008 and July 1, 2007 occurred as a result of the MOTV Acquisition. This pro forma presentation is for comparison purposes as the Company had no significant operations for the six months ended July 1, 2007. Critical Accounting Policy Disclosure
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in

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accordance with generally accepted accounting principles in the United State of America ("GAAP"). The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
A summary of our significant accounting policies may be found in Note 2 of the consolidated financial statements included with this Form 10-Q. There have been no changes in critical accounting policies in the current year from those described in Note 2 of our consolidated financial statements for the year ended December 30, 2007.
Three Months Ended June 29, 2008 Compared to Three Months Ended July 1, 2007
(Pro Forma)
The discussion of our results of operations that follows is based upon our pro forma results of operations for (i) the thirteen (13) week period ended June 29, 2008, and (ii) the thirteen (13) week period ended July 1, 2007. These thirteen
(13) week periods are referred to as either "the thirteen weeks," "quarter ended" or "three months ended." The following table compares our actual and pro forma operating results for the three months ended June 29, 2008 and July 1, 2007.

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                                                                             Unaudited
                                                                           (In thousands)
                                                                         Three Months Ended
                                               June 29, 2008         July 1, 2007                Period change
                                                  Actual               Pro Forma              $                 %
Revenues:
Advertising                                   $        15,773        $      18,685        $   (2,912 )           -15.6 %
Circulation                                               676                  774               (98 )           -12.7 %
Commercial printing and other                             762                  636               126              19.8 %

Total revenues                                         17,211               20,095            (2,884 )           -14.4 %

Operating costs and expenses:
Operating                                               7,706                8,567              (861 )           -10.1 %
Selling, general and administrative                     5,886                6,240              (354 )            -5.7 %
Depreciation and amortization                           2,230                3,480            (1,250 )           -35.9 %
Impairment of goodwill and other
intangible assets                                     110,026                    -           110,026

                                                      125,848               18,287           107,561             588.2 %

Operating income (loss)                              (108,637 )              1,808          (110,445 )        -6,108.7 %

Interest expense                                       (3,363 )             (2,287 )          (1,076 )            47.0 %
Other (expense) income                                    532                    -               532                 -


(Loss) income from operations before
income taxes                                         (111,468 )               (479 )        (110,989 )        23,171.0 %
Income tax benefit                                      2,319                    -             2,319                 -


Net (loss) income                             $      (109,149 )      $        (479 )      $ (108,670 )        22,686.8 %


(Loss) earnings per share:
Basic and diluted:                            $         (7.46 )      $       (0.03 )      $    (7.43 )        22,686.8 %


Weighted average shares outstanding                14,623,445           14,623,445                 -

Advertising Revenue. The advertising revenue compared to prior year pro forma revenue decrease was due in large part to a revenue decline in all markets that our publications serve. We have realized classified advertising declines in retail, automobile, real estate and employment sectors which are associated with a decline in the economy in the markets we serve. Retail advertising, a majority of which is derived from local merchants, is down $946, or 10.2%, from last year. Real estate revenue declines of $871, or 34.7%, relate to advertising of home sales and improvements. Automobile revenue declines of $101, or 18.9%, relate to individual and dealership advertising for vehicle sales and servicing. Employment revenue has declined $548, or 26.6%, from the same period last year.

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Internet advertising revenue has increased $73, or 17.2%, over last year. The increase was the result of new internet advertising products launched across all of our websites, as well as increased visitors and page views from the prior year period.
Circulation Revenue. The circulation revenue compared to prior year pro forma circulation revenue decrease was primarily due to a decrease of $74 from our Columbus operations. We are reaching an increasingly larger share of the market through our online website growth and our controlled distribution strategy. Circulation revenue represents a small percentage of our revenue, 3.9% for the quarter ended June 29, 2008, due to our focus on controlled distribution products.
Commercial Printing and Other Revenue. The commercial printing revenue compared to prior year pro forma commercial printing revenue increase was primarily due to obtaining new commercial printing jobs in our Columbus and Dallas operations. Operating Costs. The operating costs compared to prior year pro forma operating cost have decreased in line with revenue reductions. Newsprint usage declined $206, or 13.4%, which helped offset newsprint costs increase of $72, or 4.7%, from the same period last year. Other pro forma operating costs, which principally consist of labor, were down $637 in 2008, due to decreased headcount levels.
Selling, General and Administrative Expenses. The selling, general and administrative expense compared to prior year proforma selling, general and administrative expense decrease was the result of declines in pro forma local display and pro forma classified advertising sales expense related to the revenue decrease described above. Other decreases were across multiple general and administrative expense categories due to cost containment initiatives put in place by management during 2007 combined with the realization of staffing synergies associated with the acquisition of the Columbus newspaper group in April 2007.
Depreciation and Amortization. The depreciation and amortization compared to prior year pro forma depreciation and amortization decrease was primarily due to impairment of intangibles discussed below. The pro forma amount includes a $2,373 pro forma adjustment as if the MOTV acquisition had occurred at the beginning of the period.
Impairment of Goodwill and Other Intangible Assets. The Company performed its assessment of fair value of goodwill and other intangible assets for the quarter ended June 29, 2008. As a result of this review, the Company determined that the carrying value of the Company exceeded its fair value and therefore incurred an impairment charge against operations of $110,026. Further information regarding the impairment charge is set forth below under the heading entitled "Impairment."
Interest Expense. The interest expense compared to prior year pro forma interest expense increase was due to increased debt levels.
Three Months Ended June 29, 2008 Compared to Three Months Ended June 30, 2007 The discussion of our results of operations that follows is based upon our historical results of operations for (i) the thirteen (13) week period ended June 29, 2008, and (ii) the thirteen (13) week period ended June 30, 2007. These thirteen (13) week periods

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are referred to as either "the thirteen weeks", "quarter ended" or "three months ended". The majority of the changes are the result of the MOTV Acquisition which occurred on July 2, 2007.
The following table compares our results for the three months ended June 29, 2008 and June 30, 2007.

                                                                              Unaudited
                                                                           (In thousands)
                                                                         Three Months Ended
                                               June 29, 2008         July 1, 2007                 Period change
                                                  Actual                Actual                 $                  %
Revenues:
Advertising                                   $        15,773        $           -        $     15,773                -
. . .