Our consolidated financial statements reflect the operations, assets and liabilities of the Puerto Rico operations and the operations of Banks Broadcasting as discontinued for all periods presented. The assets and liabilities of Banks Broadcasting are shown as held for sale as of December 31, 2008 and 2007 and the assets and liabilities of our Puerto Rico operations are shown as held for sale as of December 31, 2006, which were sold in 2007.

Executive Summary

We own and operate and/or program 27 television stations in 17 mid-sized markets. Our operating revenues are derived primarily from the sale of advertising time to local, national and political advertisers and, to a much lesser extent, from digital revenues, network compensation, barter and other revenues. The economic downturn has adversely affected local and national advertising across all of our stations, which has impacted our overall results of operations for 2008. We recorded a net loss of $830.4 million for the year ended December 31, 2008, compared to net income of $53.7 million and net loss of $234.5 million for the years ended December 31, 2007 and 2006, respectively. The substantial loss in 2008 was primarily due to aggregate impairment charges we recorded of approximately $1.0 billion during the year ended December 31, 2008 for our broadcast licenses, goodwill and broadcast equipment, principally due to the following: a) the decline in advertising revenues, b) the decline in operating profits of our stations, including the stations in our joint venture with NBC Universal; and c) higher discount rates due to the current economic environment and credit crisis. Additionally, the impairment charge includes $8.7 million for the write off of certain broadcast assets that have become obsolete as a result of the DTV transition.

The following are some of our operating highlights for 2008 compared to 2007:

· Our gross local advertising revenues decreased by 9% in 2008 compared to 2007, primarily due to the television advertising marketplace decline in our local markets resulting from the economic downturn. Local advertising revenues represented 59%, 64% and 56% of total advertising revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

· Our gross national advertising revenues decreased by 16% for 2008 compared to 2007, which was also primarily due to the television advertising marketplace decline in our local markets resulting from the economic downturn. National advertising revenues represented 30%, 34% and 32% of total advertising revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

· Advertising categories for which local and national advertising sales decreased for 2008 compared to 2007 were automotive, retail, restaurants, media/telecommunications, services, financial services and entertainment. Advertising categories for which revenues increased for 2008 included political, home improvement and health and beauty. The automotive category, which represented 24% of our local and national advertising sales for 2008, decreased by 21% compared to 2007.

· Our gross political advertising revenues were $47.0 million for 2008 compared to $6.1 million in 2007 and $58.1 million in 2006. Political elections generally occur in even years resulting in significant changes in political advertising revenues between odd years (2005 and 2007) and even years (2006 and 2008). Political advertising revenues represented 11%, 2% and 12% of total advertising revenues for the years ended December 31, 2008, 2007 and 2006, respectively.

· Our digital revenues, which include revenues generated by our retransmission consent fees and Internet web sites, increased 95% to $29.1 million in 2008, compared to $14.9 million in 2007 and $7.2 million in 2006. Total page views for our web sites were 563.6 million for the year ended December 31, 2008, compared to 427.1 million in 2007, representing a 32% increase. Unique visitors for our web sites were 65.3 million for the year ended December 31, 2008, compared to 47.8 million for 2007, representing a 37% increase.

· We reached new retransmission consent agreements in 2008 for both our analog and high-definition channels with cable, satellite television and telecommunication companies representing 89% of the total television households that subscribe to these program services within our markets.

· During the fourth quarter of 2008, we effected a restructuring that included a workforce reduction and the cancellation of certain syndicated television program contracts. The total charge for the plan was $12.9 million, including $4.3 million for a workforce reduction of 144 employees and $8.6 million for the cancellation of the contracts.

· During the fourth quarter of 2008, due to the continued decline in operating profits of the NBC Universal joint venture, and the inability to recover our carrying amount of the investment, we recorded a loss of $53.6 million to write-off our entire equity investment in this joint venture.

· During 2008, our total debt decreased by $89.4 million. This decrease was due to a) our second quarter purchase of $125 million of our 2.50% Exchangeable Senior Subordinated Debentures, all of which were tendered to us, b) our fourth quarter purchase of a notional amount of $19.4 million and $6.7 million of our 6½% Senior Subordinated Notes and 6½% Senior Subordinated Notes - Class B, respectively; and c) repayment of $77 million of our outstanding term loans. These decreases were partially offset by $135 million of borrowings under our credit facility and the accretion of the discount of our 6½% Senior Subordinated Notes - Class B. Our cash and cash equivalents balance at December 31, 2008 was $20.1 million.

Our results for the past three years also reflect our acquisition during 2007 and 2006 of the following businesses and assets:

· As part of the November 30, 2005 Emmis transaction, we began providing programming, sales and other related services under a local marketing agreement to WBPG-TV, the CW affiliate serving Mobile/Pensacola and we secured a purchase option for $3.0 million to acquire the station from Emmis upon FCC approval. On July 7, 2006, we completed the acquisition of the operating assets of WBPG-TV, including the FCC license.

· In the first quarter of 2007 we completed the acquisition of KASA-TV, the FOX affiliate in Albuquerque, from Raycom Media for approximately $55.0 million in cash. We previously operated the station pursuant to a local marketing agreement effective September 15, 2006. The acquisition added a television duopoly in the 44th largest television market, where we also own KRQE-TV, the local CBS affiliate which produces 25 hours of local news each week, including the market's #1 late news broadcast. The geographic market spans some 180,000 square miles and is one of the three largest in the country.

Critical Accounting Policies, Estimates and Recently Issued Accounting Pronouncements

Certain of our accounting policies, as well as estimates we make, are critical to the presentation of our financial condition and results of operations since they are particularly sensitive to our judgment. Some of these policies and estimates relate to matters that are inherently uncertain. The estimates and judgments we make affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities. On an on-going basis, we evaluate our estimates, including those related to intangible assets, bad debts, program rights, income taxes, stock-based compensation, pensions, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, and it is possible that such differences could have a material impact on our consolidated financial statements. The accounting policies and estimates discussed below are particularly critical to understanding our consolidated financial statements. For additional information about these and other accounting policies, see Note 1 to our consolidated financial statements included elsewhere in this report. We have discussed each of these critical accounting policies and related estimates with the Audit Committee of our Board of Directors.

Valuation of long-lived assets and intangible assets

Approximately $547.3 million, or 64%, of our total assets as of December 31, 2008 consisted of indefinite lived intangible assets. Intangible assets principally include broadcast licenses and goodwill. If the fair value of these assets is less than the carrying value, we may be required to record an impairment charge.

As required by FAS 142, we test the impairment of our broadcast licenses annually or whenever events or changes in circumstances indicate that such assets might be impaired. The impairment test consists of a comparison of the fair value of broadcast licenses with their carrying amount on a station-by-station basis using a discounted cash flow valuation method, assuming a hypothetical startup scenario.

Also as required by FAS 142, we test the impairment of our goodwill annually or whenever events or changes in circumstances indicate that goodwill might be impaired. The first step of the goodwill impairment test compares the fair value of a station with its carrying amount, including goodwill. The fair value of a station is determined through the use of a discounted cash flow analysis. The valuation assumptions used in the discounted cash flow model reflect historical performance of the station and prevailing values in the markets for broadcasting properties. If the fair value of the station exceeds its carrying amount, goodwill is not considered impaired. If the carrying amount of the station exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill. The implied fair value of goodwill is determined by performing an assumed purchase price allocation, using the station's fair value (as determined in the first step described above) as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess but not more than the carrying value of goodwill.

We recorded an impairment charge of $297.0 million during the second quarter of 2008 that included an impairment to the carrying values of our broadcast licenses of $185.7 million, relating to 19 of our television stations; and an impairment to the carrying values of our goodwill of $111.3 million, relating to 8 of our television stations. As required by FAS 142, we tested for impairment our indefinite lived intangible assets at June 30, 2008, between the required annual tests, because we believed events had occurred and circumstances changed that would more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. These events included: a) the continued decline of the price of our class A common stock; b) the decline in the current selling prices of television stations; c) the lower growth in advertising revenues; and d) the decline in the operating profit margins of some of our stations. We used the same assumptions as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2007, except for the adjustments that are detailed in the table below. The increase in the discount rate reflected the volatility of stock prices of public companies within the media sector. The changes in the market growth rates and operating profit margins reflected the general economic pressures impacting both the national and a number of local economies, and specifically, national and local advertising expenditures in the markets where our stations operate.

As required by FAS 142, we also performed our annual test for impairment of broadcast licenses and goodwill as of December 31, 2008, 2007 and 2006. As a result of these annual tests we recorded an additional impairment charge in the fourth quarter of 2008 of $723.5 million, excluding an $8.7 million charge for the write-off of certain broadcast assets, that have become obsolete as a result of the DTV transition, includes a goodwill impairment charge of $309.6 million and an impairment charge of $413.9 million related to our broadcast licenses. This was due to the continued economic recession that started in December 2007, the decline in advertising revenues and the more recent financial credit crisis. The assumptions used in the valuation testing have certain subjective components including anticipated future operating results and cash flows based on our own internal business plans as well as future expectations about general economic and local market conditions.

We recorded an impairment charge of $318.1 million during the second quarter of 2006 that included a broadcast license impairment charge of $222.8 million relating to 15 of our television stations and a goodwill impairment charge of $95.3 million. As required by FAS 142, we tested our indefinite lived intangible assets as of June 30, 2006, which was between annual tests, because we believed that, based upon the continued decline in the trading price of our class A common stock, it was more likely than not that the fair value of our reporting units would fall below their carrying amounts. We used market information not available as of December 31, 2005 to calculate the fair value of our broadcast licenses and reporting units. The impairment tests as of June 30, 2006 used the same assumptions as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2005, with the exception of the discount rate, the market growth rate and the operating profit margins, as detailed in the table below.

There were no events during 2007 to warrant the performance of an interim impairment test of our indefinite lived intangible assets. Additionally, there were no additional impairment charges recorded as of December 31, 2007 and 2006.

We based the valuation of broadcast licenses on the following average industry-based assumptions:

                                   December                            December        December
                                   31, 2008        June 30, 2008       31, 2007        31, 2006        June 30, 2006
Market revenue growth                  1.0%              1.2%              1.8%            2.8%              2.6%
Operating profit margins               26.6%             31.5%             33.2%           32.8%             32.7%
Discount rate                          11.0%             9.0%              8.0%            8.0%              8.0%
Tax rate                               38.3%             38.4%             38.4%           38.2%             37.8%
Capitalization rate                    1.8%              2.2%              2.2%            2.1%              2.1%

Regarding potential changes to these assumptions and the potential impact on the December 31, 2008 carrying values of our broadcast licenses, if we were to decrease the market revenue growth by 1% and by 2%, we would incur an additional impairment of our broadcast licenses of $74.5 million and $135.6 million, respectively. If we were to decrease the operating profit margins by 5% and 10% from the projected operating profit margins, we would incur an additional impairment of our broadcast licenses of $142.4 million and $284.9 million, respectively. If we were to increase the discount rate used in the valuation calculation by 1% and 2%, we would incur an additional impairment of our broadcast licenses of $73.0 million and $131.9 million, respectively.

We based the valuation of goodwill on the following assumptions based on our internal projections:

                                   December                            December        December
                                   31, 2008        June 30, 2008       31, 2007        31, 2006        June 30, 2006
Market revenue growth                  1.0%              1.2%              1.8%            2.8%              2.6%
Operating profit margins               34.0%             39.7%             42.8%           39.0%             39.0%
Discount rate                          14.5%             11.5%             10.0%           10.0%             10.0%
Tax rate                               38.2%             38.6%             38.5%           38.3%             38.3%
Capitalization rate                    1.9%              2.3%              2.1%            2.1%              2.1%

Regarding potential changes to these assumptions and the potential impact on the December 31, 2008 carrying value of our goodwill, if we were to decrease the market revenue growth by 1% and by 2% of the projected growth rate, the enterprise value of our reporting units would not change. If we were to decrease the operating profit margins by 5% and 10% from the projected operating profit margins, the enterprise value of our reporting units would decrease by $43.6 million and $72.7 million, respectively. If we were to increase the discount rate used in the valuation calculation by 1% and 2%, the enterprise value of our reporting units would decrease by $18.3 million and $36.2 million, respectively.

In addition, we would then be required to take these enterprise values to the second step of the goodwill impairment test. The second step of the goodwill impairment test compares the implied fair value of goodwill with the carrying amount of that goodwill ($117.2 million at December 31, 2008). The implied fair value of goodwill is determined by a notional reperformance of the purchase price allocation using the station's fair value as the purchase price. If the carrying amount of goodwill exceeds the implied fair value, an impairment loss would be recognized in an amount equal to the excess.

Network affiliations

Other broadcast companies may use different assumptions in valuing acquired broadcast licenses and their related network affiliations than those that we use. These different assumptions may result in the use of valuation methods that can result in significant variances in the amount of purchase price allocated to these assets by these broadcast companies.

We believe that the value of a television station is derived primarily from the attributes of its broadcast license. These attributes have a significant impact on the audience for network programming in a local television market compared to the national viewing patterns of the same network programming. These attributes and their impact on audiences can include:

· the scarcity of broadcast licenses assigned by the FCC to a particular market determines how many television networks and other program sources are viewed in a particular market;

· the length of time the broadcast license has been broadcasting. Television stations that have been broadcasting since the late 1940s, are viewed more often than newer television stations;

· the quality of the broadcast signal and location of the broadcast station within a market (i.e. the value of being licensed in the smallest city within a tri-city market has less value than being licensed in the largest city);

· the audience acceptance of the local news programming and community involvement of the local television station. The local television station's news programming that attracts the largest audience in a market generally will provide a larger audience for its network programming; and

· the quality of the other non-network programming carried by the television station. A local television station's syndicated programming that attracts the largest audience in a market generally will provide larger audience lead-ins to its network programming.

A local television station can be the top-rated station in a market, regardless of the national ranking of its affiliated network, depending on the factors or attributes listed above. ABC, CBS, FOX and NBC, each have affiliations with local television stations that have the largest primetime audience in the local market in which the station operates regardless of the network's primetime rating.

Some broadcasting companies believe that network affiliations are an important component of the value of a station. These companies believe that stations are popular because they have been affiliating with networks from the inception of network broadcasts, stations with network affiliations have the most successful local news programming and the network affiliation relationship enhances the audience for local syndicated programming. As a result, these broadcasting companies allocate a significant portion of the purchase price for any station that they may acquire to the network affiliation relationship.

We generally have acquired broadcast licenses in markets with a number of commercial television stations equal to or less than the number of television networks seeking affiliates. The methodology we used in connection with the valuation of the stations acquired is based on our evaluation of the broadcast licenses and the characteristics of the markets in which they operated. We believed that in substantially all our markets we would be able to replace a network affiliation agreement with little or no economic loss to our television station. As a result of this assumption, we ascribed no incremental value to the incumbent network affiliation in substantially all our markets in which we operate beyond the cost of negotiating a new agreement with another network and the value of any terms that were more favorable or unfavorable than those generally prevailing in the market. Other broadcasting companies have valued network affiliations on the basis that it is the affiliation and not the other attributes of the station, including its broadcast license, which contributes to the operating performance of that station. As a result, we believe that these broadcasting companies include in their network affiliation valuation amounts related to attributes that we believe are more appropriately reflected in the value of the broadcast license or goodwill.

In future acquisitions, the valuation of the broadcast licenses and network affiliations may differ from those attributable to our existing stations due to different facts and circumstances for each station and market being evaluated.

Valuation allowance for deferred tax assets

We record a valuation allowance to reduce our deferred tax assets to an amount that is more likely than not to be realized. While we have considered future taxable income and feasible tax planning strategies in assessing the need for a valuation allowance, in the event that we were to determine that we would not be able to realize all or part of our deferred tax assets in the future, an adjustment to the deferred tax asset would be charged to income in the period in which such a determination was made.

Revenue recognition

We recognize advertising and other program-related revenue during the period in which advertising or programs are aired on our television stations or carried by our Internet web sites. We recognize retransmission consent fees in the period in which these services are performed.

Stock-based compensation

We estimate the fair value of stock-based awards using a Black-Scholes valuation model, consistent with the provisions of FAS 123R, "Share-Based Payment" ("FAS 123R"). The Black-Scholes model requires us to make assumptions and judgments about the variables to be assumed in the calculation, including the option's expected life, the price volatility of the underlying stock and the number of stock-based awards that are expected to be forfeited. The expected life represents the weighted average period of time that options granted are expected to be outstanding giving consideration to vesting schedules and our historical exercise patterns. Price volatility is based on historical trends for our class A common stock and the common stock of peer group companies engaged in the broadcasting business. Expected forfeitures are estimated using our historical experience. If future changes in estimates differ significantly from our current estimates, our future stock-based compensation expense and results of operations could be materially impacted.

The following table presents the stock-based compensation expense included in the consolidated statements of income and recognized as follows (in thousands):

                                                        Year Ended December 31,
                                                     2008         2007         2006
     Employee stock purchase plans                 $     19     $    (36 )   $    109
     Employee stock option plans                      3,111        3,834        1,278
     Restricted stock unit awards                     1,384        2,374        6,258
     Modifications to stock option agreements             9         (313 )      1,297
     Share-based compensation expense before tax      4,523        5,859        8,942
     Income tax benefit (@ 35% statutory rate)       (1,583 )     (2,051 )     (3,130 )
     Net stock-based compensation expense          $  2,940     $  3,808     $  5,812

We have not yet recognized compensation expense relating to these unvested employee stock options and stock awards of $7.4 million in the aggregate, which will be recognized over a weighted-average future period of approximately 1.4 to 3.2 years.

Retirement plan

We have a defined benefit retirement plan covering certain of our employees. Our pension benefit obligations and related costs are calculated using actuarial concepts in accordance with FAS 87 "Employer's Accounting for Pensions" ("FAS 87"). We adopted FAS 158 "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements 87, 88, 106 and 132R" ("FAS 158") and recorded the unfunded status of our plan as of December 31, 2006.

We have provided a defined benefit retirement plan to our employees who do not receive matching contributions from our Company to their 401(k) Plan accounts. Our defined benefit plan is a non-contributory plan under which we have made contributions either to a) traditional plan participants based on periodic actuarial valuations, which are expensed over the expected average remaining service lives of current employees, or b) cash balance plan participants based on 5% of each participant's eligible compensation.

We contributed $3.0 million, $3.0 million and $1.6 million to our pension plan for years ended December 31, 2008, 2007 and 2006, respectively. We anticipate contributing approximately $0.4 million to our pension plan in 2009 although we currently have no minimum funding requirements as defined by ERISA and federal tax laws.

Pension plan assumptions:

Weighted-average assumptions used to estimate our pension benefit obligation and to determine our net periodic pension benefit cost, and the actual long-term rate of return on plan assets:

. . .