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, 2006

or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from                      to                     .

GRAY TELEVISION, INC.

(Exact Name of Registrant as Specified in Its Charter)

Georgia (State or Other Jurisdiction of Incorporation or Organization)		58-0285030 (I.R.S. Employer 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 Class A Common Stock (no par value) Common Stock (no par value)		Name of each exchange on which registered New York Stock Exchange 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, 2006: Class A and Common Stock; no par value –$259,035,713.

     The number of shares outstanding of the registrant’s classes of common stock as of February 27, 2006: Class A Common Stock; no par value – 5,753,020 shares; Common Stock, no par value – 42,044,065 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			14
Item 1B.		Unresolved Staff Comments			19
Item 2.		Properties.			20
Item 3.		Legal Proceedings.			24
Item 4.		Submission of Matters to a Vote of Security Holders.			24
Item 4A.		Executive Officers of the Registrant.			24
PART II
Item 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.			26
Item 6.		Selected Financial Data.			29
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations.			31
Item 7A.		Quantitative and Qualitative Disclosures about Market Risk.			46
Item 8.		Financial Statements and Supplementary Data.			48
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.			100
Item 9A.		Controls and Procedures.			100
Item 9B		Other Information.			100
PART III
Item 10.		Directors, Executive Officers and Corporate Governance.			100
Item 11.		Executive Compensation.			101
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.			101
Item 13.		Certain Relationships and Related Transactions, and Director Independence.			102
Item 14.		Principal Accountant Fees and Services.			102
Part IV
Item 15.		Exhibits and Financial Statement Schedules.			102
SIGNATURES					105
EX-21.1 SUBSIDIARIES OF THE REGISTRANT
EX-23.1 CONSENT OF MCGLADREY & PULLEN LLP
EX-23.2 CONSENT OF PRICEWATERHOUSECOOPERS LLP
EX-31.1 SECTION 302 CERTIFICATION OF CEO
EX-31.2 SECTION 302 CERTIFICATION OF CFO
EX-32.1 SECTION 906 CERTIFICATION OF CEO
EX-32.2 SECTION 906 CERTIFICATION OF 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, and its Class A common stock, no par value, 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 this Annual Report, the Company owns 36 television stations serving 30 television markets. 17 of the stations are affiliated with CBS Inc., or “CBS,” 10 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 22 markets with stations ranked #1 in local news audience and 23 markets with 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 2006 ratings reports. The combined TV station group reaches approximately 6.3% of total U.S. TV households. In addition, Gray currently operates 36 digital second channels including one affiliated with ABC, five affiliated with FOX, seven affiliated with The CW Network, LLC (“CW”) and 15 affiliated with Twentieth Television, Inc. (“MyNetworkTV” or “MyNet.”), plus six local news/weather channels and two independent channels in certain of its existing markets. With seventeen CBS affiliated stations, the Company is the largest independent owner of CBS affiliates in the country.

     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 33 television stations.

2006 Acquisitions

     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 $88.8 million, which included certain working capital adjustments and transaction fees. The Company financed this acquisition with borrowings under the Company’s senior credit facility.

The Company’s Stations and Their Markets

     The following is a list of all our owned and operated television stations. 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:

Primary Network

DMA

Primary

Secondary

Broadcast

Station

News

Rank

Network

Network

License

Rank in

Rank in

(a)

Market

Station

Affil.

Exp.

Affil.

Exp.

Expiration

DMA (b)

DMA (c)

60

Knoxville, TN

WVLT

CBS

12/31/14

MyNet.

12/31/08

08/01/05

(g)

2

2

63

Lexington, KY

WKYT

CBS

12/31/14

CW

09/17/14

08/01/05

(g)

1

1

65

Charleston/Huntington, WV

WSAZ

NBC

01/01/09

MyNet.

09/05/09

10/01/12

1

1

67

Wichita/Hutchinson, KS

KAKE

ABC

12/31/13

NA

NA

06/01/06

(g)

2

2

(Colby, KS)

KLBY (d)

ABC

12/31/13

NA

NA

06/01/06

(g)

2

2

(Garden City, KS)

KUPK (d)

ABC

12/31/13

NA

NA

06/01/06

(g)

2

2

75

Omaha, NE

WOWT

NBC

01/01/12

Indy

NA

06/01/06

(g)

1

1

85

Madison, WI

WMTV

NBC

01/01/12

News

NA

12/01/05

(g)

2

2

88

South Bend, IN

WNDU

NBC

12/31/10

NA

NA

08/01/13

1

1

94

Colorado Springs, CO

KKTV

CBS

12/31/14

MyNet.

09/05/09

04/01/06

(g)

1

2

95

Waco-Temple-Bryan, TX

KWTX

CBS

12/31/14

CW

12/31/14

08/01/06

(g)

1

1

(Bryan, TX)

KBTX (e)

CBS

12/31/14

CW

12/31/14

08/01/06

(g)

1

1

104

Lincoln/Hastings/Kearney, NE

KOLN

CBS

12/31/14

MyNet.

09/05/09

06/01/06

(g)

1

1

Grand Island, NE

KGIN (f)

CBS

12/31/14

NA

NA

06/01/06

(g)

1

1

107

Greenville/New Bern/

WITN

NBC

01/01/12

News

NA

12/01/04

(g)

2

1

Washington, NC

108

Tallahassee, FL/

WCTV

CBS

12/31/14

MyNet.

09/05/09

04/01/13

1

1

Thomasville, GA

110

Reno, NV

KOLO

ABC

12/31/13

Indy.

NA

10/01/06

(g)

1

1

112

Lansing, MI

WILX

NBC

01/01/12

News

NA

10/31/05

(g)

1

1

114

Augusta, GA

WRDW

CBS

12/31/14

MyNet

12/31/14

04/11/13

1

1

Indy

NA

127

La Crosse/Eau Claire, WI

WEAU

NBC

01/01/12

News

NA

12/01/05

(g)

1

1

133

Rockford, IL

WIFR

CBS

12/31/14

NA

NA

12/01/05

(g)

2

2

134

Wausau/Rhinelander, WI

WSAW

CBS

12/31/14

MyNet.

09/05/09

12/01/05

(g)

1

2

News

NA

138

Topeka, KS

WIBW

CBS

12/31/14

MyNet.

02/18/09

06/01/06

(g)

1

1

145

Albany, GA

WSWG

CBS

12/31/14

MyNet.

09/05/09

04/01/13

3

NA (h)

156

Panama City, FL

WJHG

NBC

01/01/12

NA

NA

02/01/05

(g)

1

1

161

Sherman,TX/Ada, OK

KXII

CBS

12/31/14

FOX

06/30/08

08/01/06

(g)

1

1

MyNet.

09/05/14

172

Dothan, AL

WTVY

CBS

12/31/14

CW

09/01/08

04/01/13

1

1

MyNet.

09/05/09

181

Harrisonburg, VA

WHSV

ABC

12/31/13

ABC

12/31/13

10/01/12

1

1

FOX

06/30/08

MyNet.

09/05/09

182

Charlottesville, VA

WCAV

CBS

12/31/14

NA

NA

10/01/12

(i)

2

2

WVAW

ABC

12/31/13

NA

NA

10/01/12

(i)

3

3

WAHU

FOX

06/30/08

MyNet.

09/05/09

10/01/12

(i)

4

4

Primary Network

DMA

Primary

Secondary

Broadcast

Station

News

Rank

Network

Network

License

Rank in

Rank in

(a)

Market

Station

Affil.

Exp.

Affil.

Exp.

Expiration

DMA (b)

DMA (c)

183

Bowling Green, KY

WBKO

ABC

12/31/13

FOX

06/30/08

08/01/05

(g)

1

1

CW

09/01/08

185

Meridian, MS

WTOK

ABC

12/31/13

FOX

06/30/08

06/01/05

(g)

1

1

CW

09/17/08

MyNet.

09/05/09

186

Grand Junction, CO

KKCO

NBC

07/30/06 (k)

CW

09/01/08

04/01/06

(g)

1

1

189

Parkersburg, WV

WTAP

NBC

01/01/12

FOX

06/30/08

10/01/04

(g)

1

1

MyNet.

09/05/09

(j)

Hazard, KY

WYMT

CBS

12/31/14

NA

NA

08/01/05

(g)

1

1

Television Industry Background

     Licenses to operate a television station are granted by the FCC. Historically, there have been a limited number of channels available for broadcasting in any one geographic area.

     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. FOX, the CW Network, LLC (“CW”) and Twentieth Television, Inc. (“MyNetworkTV”) provide their affiliates with a smaller portion of each day’s programming, compared to an affiliate of ABC, NBC and CBS.

Network Affiliation of the Stations

     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 will retain a fixed amount of advertising time within the program in exchange for the programming it supplies, with the station paying a fixed fee (or in certain instances 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, political parties and special interest groups and this spending typically is heaviest during the fourth quarter.

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 and/or satellite 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.

     Recent developments by many companies, including internet service providers, are expanding the variety and quality of broadcast content on the internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television, production studios for news and live content, as well as motion picture studios.

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 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

General

     The Company’s television broadcast operations are subject to the jurisdiction of the Federal Communications Commission (“FCC” or “Commission”) under the Communications Act of 1934, as amended (the “Communications Act”). Among other things, the Communications Act empowers the FCC to: (1) issue, revoke and modify broadcasting licenses; (2) regulate stations’ technical operations and equipment; and (3) impose penalties for violations of the Communications Act or FCC 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

     The FCC grants television station licenses for terms of up to eight years. Broadcast licenses are of paramount importance to the operations of the Company’s television stations. The Communications Act requires a broadcast license to be renewed if the FCC finds that: (1) the station has served the public interest, convenience and necessity; (2) there have been no serious violations of either the Communications Act or the FCC’s rules and regulations; and (3) there have been no other violations which, taken together, would constitute a pattern of abuse. Although in substantially all cases broadcast licenses are renewed by the FCC, 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 and the status of the renewal applications in the Broadcasting Summary table included on page 4 of this Annual Report. Under the Commission rules, a license expiration date is automatically extended pending review and grant of the renewal application.

Ownership Rules

     The FCC’s broadcast ownership rules affect the number, type and location of broadcast and newspaper properties that the Company may hold or acquire. The rules now in effect limit the common 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. The FCC’s rules also define the types of positions and interests that are considered attributable for purposes of the ownership limits, and thus also apply to the Company’s principals and certain investors. Pursuant to the Communications 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, in 2004, the United States Court of Appeals for the Third Circuit rejected many of the Commission’s 2003 rule changes. The Court remanded the rules to the Commission for further proceedings and extended a stay on the implementation of the new rules. As a result, the ownership restrictions in place prior to the FCC’s 2003 decision generally continue to govern station ownership and media transactions, pending completion of the remand proceedings and/or further judicial review.

     In July 2006, the FCC issued a Further Notice of Proposed Rulemaking, which seeks comment on the issues remanded by the Third Circuit and fulfills the Commission’s obligation to review its media ownership rules every four years. The discussion below reviews the changes contemplated in the FCC’s 2003 decision, the Third Circuit’s response to the FCC’s rule revisions, and the issues set forth in the Further Notice.

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 ownership of two commercial television facilities (a “duopoly”) in markets with at least five stations and up to three stations in markets with at least 18 stations. In either case, no more than one of the co-owned stations could have been ranked among the top four in audience ratings. The Third Circuit upheld the top-four restriction, but remanded the other limits. Thus, the “eight voices” requirement of the pre-2003 rules remains in effect. The Further Notice seeks comment on what limits the FCC should retain and whether any restrictions should vary with market size.

Cross-Media Limits

     The newspaper/broadcast cross-ownership rule generally prohibits one entity from owning both a commercial broadcast station and a daily newspaper in the same community. The radio/television cross-ownership rule allows a party to own one or two TV stations and a varying number of radio stations within a single market. The cross-media limits adopted in the Commission’s 2003 decision would have

supplanted both rules with three categories of restrictions based on the number of full-power television stations in the market. The Third Circuit remanded the new cross-media limits to the Commission for further consideration, leaving the prior restrictions in place. The Further Notice seeks comment on a number of issues relating to cross-media ownership, including whether, and if so, how, the Commission should attempt to measure diversity in local markets and what, if any, limitations the FCC should maintain.

National Television Station Ownership Rule

     The maximum percentage (or “cap”) of U.S. households that a single owner can reach through commonly owned television stations is 39 percent. This limit was specified by Congress in 2004 and superseded the 45 percent figure proposed in the FCC’s 2003 decision. The Commission decided in 2003 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. The Third Circuit subsequently ruled that challenges before it to the national television ownership cap and UHF discount were moot. The national cap is not at issue in the Further Notice, but the Commission seeks comment on whether the FCC should retain the UHF discount, and if so for how long.

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. Pursuant to FCC rules, the following relationships and interests generally are considered attributable for purposes of broadcast ownership restrictions: (1) all officers and directors of a licensee and its direct or indirect parent(s); (2) voting stock interests of at least five percent; (3) voting stock interests of at least 20 percent, if the holder is a passive institutional investor (investment companies, banks, insurance companies); (4) any equity interest in a limited partnership or limited liability company, unless properly “insulated” from management activities; (5) 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, (6) time brokerage of a broadcast station by a same-market broadcast company; and (7) same market radio joint sales agreements (in addition, the Commission is considering making same-market television joint sales agreements attributable.)

     To 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 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 Operation.

     Rules and policies of the FCC and other federal agencies regulate certain programming practices and other areas affecting the business or operations of broadcast stations.

     The Children’s Television Act of 1990 limits commercial matter in children’s television programs and requires stations to present educational and informational children’s programming. Broadcasters have been required for several years to provide at least three hours of children’s educational programming per week on their analog channels. The FCC has determined that the amount of children’s educational programming a digital (“DTV”) broadcaster must air will increase proportionately with the number of free video programming streams it broadcast simultaneously (or “multicasts”).

     In July 2004, the Commission released a Notice of Inquiry regarding broadcast localism to evaluate whether additional regulation is necessary to ensure that licensees satisfy the needs and interests of local audiences. The FCC will include a summary of comments filed in response to the localism Notice in the recently-initiated media ownership proceeding (discussed above). The Company cannot predict whether the FCC will impose specific localism requirements.

     The FCC has increased its enforcement efforts regarding broadcast indecency and profanity over the past few years. In June 2006, the statutory maximum fine for broadcasting indecent material increased from $32,500 to $325,000. Litigation currently pending in the U.S. Courts of Appeal for the Second and Third Circuits might affect the FCC’s broadcast indecency policies, and the Company cannot predict the outcome of that litigation.

EEO Rules

     The FCC’s Equal Employment Opportunity (“EEO”) rules impose job information dissemination, recruitment, documentation and reporting requirements on broadcast station licensees. Broadcasters are 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 Signal.

     Under FCC regulations, cable systems must devote a specified portion of their channel capacity to the carriage of the signals of local television stations. Television stations may 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”). Each of Gray’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 generally entitle the Company’s stations to carriage on those systems until at least December 31, 2008.

     The FCC also has established a market-specific requirement for mandatory carriage of local television stations by direct broadcast satellite (“DBS”) operators similar to that applicable to cable systems, for those markets in which a DBS carrier provides any local signal. In addition, the FCC has adopted rules relating to station eligibility for DBS carriage and subscriber eligibility for receiving signals. There are also specific statutory requirements relating to satellite distribution of distant network signals to “unserved households” (i.e. households that do not receive a Grade B signal from a local network affiliate). The Company cannot predict the impact of DBS service upon the Company’s business. It has, however, entered into retransmission consent agreements with EchoStar through

December 31, 2008 and DirectTV through December 31, 2009 for the retransmission of its television stations’ signals into the local markets that they serve.

Digital Television Service.

     In 1997, the FCC adopted rules for implementing DTV service, which will improve the technical quality of television signals received by viewers and give broadcasters the ability to provide new services including high definition television. With certain limited exceptions, broadcasters holding licenses or construction permits for full-power television stations were temporarily assigned a second channel in order to provide either separate DTV programming or a simulcast of their analog programming. Currently, with one exception all full-power stations licensed to the Company are broadcasting digitally. WCAV(TV), Charlottesville, Virginia did not commence operations until 2005 and therefore was not assigned a second channel for digital operations. It will convert to digital operations on its currently assigned channel at the end of the digital transition.

     At the end of the DTV transition, currently scheduled for February 17, 2009, analog television transmissions will cease, television broadcasters will surrender their analog spectrum to the government, and DTV channels will be reassigned to a smaller segment of the broadcast spectrum.

     Broadcasters may use their digital spectrum to either provide a single DTV signal or “multicast” several program streams. Broadcasters also may use some of their digital spectrum to offer non-broadcast “ancillary” services (i.e. subscription video, data transfer or audio signals), provided such services do not interfere with mandatory free digital broadcasts, and subject to a requirement that they pay the government a fee of 5 percent of gross revenues received from such services. Under the FCC’s rules relating to “must carry” rights of digital broadcasters, which apply to cable and certain DBS systems: (1) broadcasters are not entitled to carriage of both their analog and their digital streams during the transition; (2) digital-only television stations are entitled to must-carry rights; and (3) a digital-only station asserting must carry rights is entitled only to carriage of a single programming stream and other “program-related” content even if it multicasts. In 2004, the Commission eliminated a requirement that broadcasters simulcast a certain percentage of the video programming of their analog channel on their DTV channel. The FCC noted, however, that it will continue to monitor the transition’s progress and, if necessary, re-impose the requirement at a later date.

     The FCC has adopted rules and procedures regarding 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.

     Beginning December 31, 2006, DTV broadcasters must comply with Emergency Alert System (“EAS”) rules and ensure that viewers of all programming streams can receive EAS messages.

     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.

     The foregoing does not purport to be a complete summary of the Communications Act, other applicable statutes, or the FCC’s rules, regulations or policies. Proposals for additional or revised regulations and requirements are pending before, and are considered by, Congress and federal regulatory agencies from time to time. The Company cannot predict the effect of existing and proposed federal legislation, regulations or policies on its business. Also, several of the foregoing matters are now, or may become, the subject of litigation, and the Company cannot predict the outcome of any such litigation or the effect on its business.

Employees

     As of February 28, 2007, the Company had 2,117 full-time employees, of which 2,091 were employees of the Company’s broadcast operations and 26 were corporate and administrative personnel. The Company has 117 full time employees and 29 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 and SOX Certification

     On June 2, 2006, 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 requires 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, 2006, the book value of our FCC licenses was $1.1 billion and the book value of our goodwill was $269.5 million in comparison to total assets of $1.6 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. Our affiliation agreements expire at various dates through 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 certain 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. Beginning in fiscal year 2007 network compensation will be less than $1 million per year and is considered immaterial by management. Furthermore, our affiliation agreements with CW and MyNetworkTV require the Company to make payments to those networks, rather than receiving payments from those networks. While these payments are not currently significant, there can be no assurances that such costs will not increase in the future.

Increases in cable and satellite 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/satellite penetration (the percentage of television households which are connected to a cable or satellite system). Increases in the advertising share of cable and satellite 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.

     Recent developments by many companies, including internet service providers, are expanding the variety and quality of broadcast content on the Internet. Internet companies have developed business relationships with companies that have traditionally provided syndicated programming, network television, production studios for news and live content, as well as motion picture studios.

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.

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 23% of total revenue came from the automotive category in 2006. 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.

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.

Any potential hostilities or terrorist attacks may affect our revenues and results of operations.

     We expect that if the United States engages in additional foreign hostilities or there is a terrorist attack against the United States, we may lose advertising revenue and incur increased broadcasting expenses due to pre-emption, delay or cancellation of advertising campaigns and the increased costs of providing coverage of such events. We cannot predict the extent and duration of any future, disruption to our programming schedule, the amount of advertising revenue that would be lost or delayed or the amount by which our broadcasting expenses would increase as a result. Any such loss of revenue and increased expenses could negatively affect our future results of operations.

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 February 28, 2007.

Approximate

Lease

Owned or

Size

Height(ft.)/

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Analog Power

Date

Knoxville, Tennessee, WVLT

Office and studio

Owned

18,000

—

—

Transmission tower site

Leased

Tower space

1,078/316 kw

6/1/2028

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

6/1/2010

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

—

8/31/2011

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

4/1/2032

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

—

Approximate

Lease

Owned or

Size

Height(ft.)/

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Analog Power

Date

Lincoln, Nebraska, KOLN

Office and studio

Owned

28,044

400

—

Grand Island, Nebraska, KGIN

Office and studio

Leased

3,616

—

12/1/2008

Transmission tower site

Owned

71

1069/316 kw

—

Heartwell, Nebraska, KGIN

Transmission Tower site

Owned

71

1,069/316 kw

—

Washington, North Carolina, WITN

Office and studio

Owned

19,600

198

—

Greenville, North Carolina, WITN

Office and studio

Leased

2,822

—

11/30/2007

Grifton, North Carolina, WITN

Transmitter building

Owned

4,190

2,000

—

Transmission tower site

Leased

9 acres

316 kw

1/1/2029

Tallahassee, Florida, WCTV

Office and studio (Halstead Blvd)

Owned

31,878

—

—

Transmission tower site (27 site)

Owned

10 acres

400

—

Metcalf, Georgia, WCTV

Transmission tower site

Owned

182 acres

2,000/100 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

2,304

2,000/316 kw

—

Easement

Panama City, Florida, WJHG

Office and studio

Owned

14,000

413

—

Youngstown, Florida, WJHG

Transmission tower site

Owned

17 acres

867/316 kw

—

/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

—

Approximate

Lease

Owned or

Size

Height(ft.)/

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Analog Power

Date

Wichita-Hutchinson, Kansas, KAKE

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

4/1/2007

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

—

Madison, Wisconsin, WMTV-TV

Office and Studio

Owned

16,485

(b)

—

—

Tower

Leased

—

1299/891 kw

5/1/2103

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

2/1/2059

Lansing, Michigan, WILX-TV

Office and Studio

Owned

13,700

—

—

Tower/Transmitter site

Leased

5,000

994/309 kw

10/1/2008

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

8/1/2017

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

2/1/2062

Dothan, Alabama WTVY-TV

Office and Studio

Leased

20,440

—

12/1/2010

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)

Approximate

Lease

Owned or

Size

Height(ft.)/

Expiration

Market Area, Station and Use

Leased

(sq. ft.)(a)

Analog Power

Date

Winchester, Virginia, WHSV-TV

Office and Studio

Leased

4,093

—

11/1/2023

Staunton, Virginia, WHSV-TV

Office and Studio

Leased

3,000

—

12/1/2016

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

12/1/2030

Transmitter building and improvements

Owned

1018 and 864

—

—

Charlottesville, VA, WCAV-TV

Office and Studio

Leased

8,900

—

4/1/2009

Transmission Tower / 2 Antennas

Leased

1,000

198/34.91

—

190/15.74

4/1/2009

Antennae for WAHU FOX

Leased

2,500

210/50 kw

5/1/2009

Grand Junction, CO, KKCO-TV

Office and Studio

Leased

4,000

—

4/30/2007

Tower/Transmitter site

Leased

—

300/155kw

12/31/2007

Transmitter building and improvements

Owned

800

—

—

Charleston, WV, WSAZ

Office and Studio – Charleston

Owned

6,468

—

—

Tower

Owned

—

180/1 kw

—

Huntingdon, 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

—

10/1/2009

Transmission Tower

Leased

—

960/1.7 mw

10/1/2009

Item 3. Legal Proceedings.

     The Company is subject to legal proceedings and claims in the normal course of its business. The Company does not believe, based on current knowledge, that any legal proceedings or claims are likely to have a material adverse effect on the Company’s financial position, results of operations or cash flows.

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 February 28, 2007:

     J. Mack Robinson, age 83, 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 has been 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 44, 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 has been 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 62, 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 46, 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 67, 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. He is a member of the ABA Forum Committee on Communications Law.

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, and its Class A common stock, no par value, 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
2006:
First Quarter		$	9.54			$	7.53			$	0.03			$	9.09			$	7.54			$	0.03
Second Quarter			8.63				5.15				0.03				8.22				5.60				0.03
Third Quarter			6.90				5.66				0.03				7.30				6.20				0.03
Fourth Quarter			7.42				5.76				0.03				8.35				6.50				0.03
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

     As of February 27, 2006, the Company had 42,044,065 outstanding shares of common stock held by approximately 2,085 stockholders and 5,753,020 outstanding shares of Class A common stock held by approximately 502 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’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.

Stock Performance Graph

     The following stock performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by reference into any other filing by Gray under the Securities Act of 1933, as amended or the Securities Exchange Act, except to the extent Gray specifically incorporates these graphs by reference therein.

     The following graphs compare the cumulative total return of the common stock and the Class A common stock from December 31, 2001 to December 31, 2006 as compared to the stock market total return indexes for (1) The New York Stock Exchange Market Index and (2) The New York Stock Exchange Industry Index based upon the Television Broadcasting Stations Index on December 31, 2001.

     The graphs assume the investment of $100 in the common stock and the Class A common stock, the New York Stock Exchange Market Index and the NYSE Television Broadcasting Stations Index on December 31, 2001. Dividends are assumed to have been reinvested as paid.

Common Stock
Comparison of Cumulative Total Return
of One or More Companies, Peer Groups, Industry Indexes and/or
Broad Markets

			Fiscal Year Ending
	Company/Index/Market			12/31/2001					12/31/2002					12/31/2003					12/31/2004					12/31/2005					12/31/2006
	Gray Television Inc.				100.00					94.49					147.52					153.71					98.40					74.76
	TV Broadcasting Stations				100.00					82.07					109.03					109.20					105.60					130.47
	NYSE Market Index				100.00					81.69					105.82					119.50					129.37					151.57

Class A Common Stock
Comparison of Cumulative Total Return
of One or More Companies, Peer Groups, Industry Indexes and/or
Broad Markets

			Fiscal Year Ending
	Company/Index/Market			12/31/2001					12/31/2002					12/31/2003					12/31/2004					12/31/2005					12/31/2006
	Gray Television Cl A				100.00					85.86					110.61					104.99					67.91					62.74
	TV Broadcasting Stations				100.00					82.07					109.03					109.20					105.60					130.47
	NYSE Market Index				100.00					81.69					105.82					119.50					129.37					151.57

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,
		2006(1)				2005(2)				2004				2003				2002(3)
		(in thousands, except per share data)
Statements of Operations Data
Revenues (4)		$	332,137			$	261,553			$	293,273			$	243,061			$	146,714
Operating income			87,991				60,861				100,415				62,543				43,354
Loss on early extinguishment of debt (5)			(347	)			(6,543	)			—				—				(16,838	)
Income (loss) from continuing operations			11,711				4,604				36,517				7,538				(4,581	)
Income (loss) from discontinued publishing and wireless operations, net of income tax of $0, $3,253, $5,059, $5,672, and $4,664 respectively (6)			—				(1,242	)			7,768				6,486				(137	)
Cumulative effect of accounting change, net of income tax benefit of $8,674 (7)			—				—				—				—				(19,223	)
Net income (loss)			11,711				3,362				44,285				14,024				(23,941	)
Net income (loss) available to common stockholders			8,464				(2,286	)			41,013				10,737				(30,371	)
Net income (loss) from continuing operations available to common stockholders per common share:
Basic			0.17				(0.02	)			0.67				0.08				(0.50	)
Diluted			0.17				(0.02	)			0.66				0.08				(0.50	)
Net income (loss) available to common stockholders per common share:
Basic			0.17				(0.05	)			0.83				0.21				(1.37	)
Diluted			0.17				(0.05	)			0.82				0.21				(1.37	)
Cash dividends declared per common share (8)			0.12				0.12				0.24				0.08				0.08
Balance Sheet Data (at end of period):
Total assets		$	1,628,287			$	1,525,054			$	1,374,466			$	1,325,329			$	1,332,048
Long-term debt (including current portion)			851,654				792,509				655,905				655,846				658,096
Redeemable serial preferred stock			37,451				39,090				39,003				39,276				39,190
Total stockholders’ equity			379,754				380,996				378,237				362,775				373,366

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 Company owns 36 television stations serving 30 television markets. 17 of the stations are affiliated with CBS, 10 are affiliated with the NBC, eight are affiliated with the ABC and one is affiliated with FOX. The combined station group has 22 markets with stations ranked #1 in local news audience and 23 markets with 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 2006 ratings reports. The combined TV station group reaches approximately 6.3% of total U.S. TV households. In addition, Gray currently operates 36 digital second channels including one affiliated with ABC, five affiliated with FOX, seven affiliated with CW and 15 affiliated with MyNetworkTV, plus six local news/weather channels and two independent channels in certain of its existing markets. With seventeen CBS affiliated stations, the Company is the largest independent owner of CBS affiliates in the country.

     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 73% of the net revenues of the Company’s television stations for the year ended December 31, 2006, 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.

     The primary broadcasting 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.

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 $88.8 million, which included certain working capital adjustments and transaction fees. The Company financed this acquisition with borrowings under the Company’s senior credit facility.

     Also during 2006, Gray launched or re-branded 36 digital second channels including one ABC, five Fox, seven CW and 15 MyNetworkTV affiliates plus six local news/weather channels and two “independent” channels in certain of its existing markets. Gray has launched these additional secondary channels in order to develop additional revenue streams while incurring minimal incremental expenses. The rebranding of Gray’s existing UPN stations was necessary due to the merging of the UPN and WB networks into the CW network during 2006.

     On November 30, 2005, the Company completed the acquisition of the assets of WSAZ-TV, Channel 3, the NBC affiliate serving the 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 WSWG-TV, the CBS affiliate serving Albany, Georgia from P.D. Communications, LLC for approximately $3.75 million plus related transaction costs. The Company used a portion of its cash on hand to fund this acquisition.

     On July 1, 2005 the Company acquired a third FCC license to operate a second low power television station, WAHU-TV, in the Charlottesville, Virginia television market. WAHU-TV is a FOX network affiliate. Gray’s original cost to acquire and/or construct the combined broadcast facilities for these three stations was approximately $8.5 million.

     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 WNDU-TV occurring in 2006, and 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 year ended December 31, 2004 included elsewhere herein. The results for these stations are included in the results of operations for the years ended December 31, 2006 and 2005, respectively, beginning on their acquisition dates.

     On August 17, 2004, the Company completed the acquisition of an 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 $1.0 million. WCAV-TV is a CBS network affiliate. Gray also has an FCC license to operate a low power television station, WVAW-TV, in the Charlottesville, Virginia television market. WVAW-TV is an ABC network affiliate.

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 the Company’s common stock and each holder of the Company’s 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 $44.0 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.

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 End December 31,
		2006								2005								2004
						Percent								Percent								Percent
		Amount				of Total				Amount				of Total				Amount				of Total
Broadcasting net revenues:
Local		$	199,940				60.2	%		$	174,568				66.7	%		$	160,648				54.8	%
National			78,492				23.6	%			70,825				27.1	%			70,817				24.1	%
Network compensation			1,089				0.3	%			5,095				2.0	%			9,951				3.4	%
Political			42,682				12.9	%			2,862				1.1	%			41,706				14.2	%
Production and other			9,934				3.0	%			8,203				3.1	%			10,151				3.5	%
Total		$	332,137				100.0	%		$	261,553				100.0	%		$	293,273				100.0	%

Risk Factors

     The broadcast television industry is reliant primarily on advertising revenues and faces increased competition. For a discussion of other factors that may affect our business, see “Risk Factors”on page 14 of this Annual Report.

Results of Operations of the Company

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

     Revenues. Total revenues increased $70.5 million, or 27%, to $332.1 million reflecting, in part, the acquisition of television stations and expansion of operations discussed above. Political advertising revenues increased to $42.7 million from $2.9 million reflecting the cyclical influence of the 2006 elections. Local advertising revenues, excluding political advertising revenues, increased 14% or approximately $25.3 million. National advertising revenues, excluding political advertising revenues, increased 11% or approximately $7.7 million. Local and national advertising was influenced, in part, by the proportion of the total available advertising time utilized by political announcements. Network compensation revenue decreased 78% to $1.1 million from $5.1 million due to lower revenue from network affiliation agreements that were renewed in recent years.

     Operating expenses. Broadcast expenses (before depreciation, amortization and loss on disposal of assets) increased $29.6 million, or 18%, to $191.5 million due primarily to the acquisition of WNDU and WSAZ and due to the expansion of operations as discussed above. The acquisitions of WNDU-TV and WSAZ-TV resulted in an increase in broadcast expenses of $17.4 million. Excluding the acquisitions of WNDU-TV and WSAZ-TV, payroll related expenses increased approximately 4% or $4.6 million. This increase was due primarily to routine compensation increases at Gray’s existing stations and approximately $1.3 million of payroll related expenses attributable to modest staffing increases at each station to support the operation of the new digital second channels. Excluding the acquisitions of WNDU-TV and WSAZ-TV, non-payroll related expenses increased approximately 13% or $7.7 million. This increase was largely due to an incremental increase in non-payroll expenses for the digital second channels of $1.7 million; increases in market research expenses of $1.1 million; increases in national representation firm sales commissions of $1.5 million; increases in electric utilities of $651,000 and increases in the cost of syndicated programming of $718,000.

     Corporate and administrative expenses. Corporate and administrative expenses, before depreciation, amortization and loss on disposal of assets increased 27% to $15.1 million from $11.9 million due, in part, to incremental increases in payroll expense of $807,000, incremental increases in legal fees of $973,000 and incremental increases in consulting expense of $221,000. The 2006 period also includes an aggregate of approximately $1.1 million of non-cash expenses recorded in connection with restricted stock awards and the Company’s adoption on January 1, 2006 of SFAS 123(R) which relates to the new accounting rules for expensing stock based compensation. The corresponding period of 2005 contains $391,000 of non-cash expenses associated with restricted stock awards.

     Depreciation. Depreciation of property and equipment totaled $34.1 million and $24.5 million for the years ended December 31, 2006 and 2005, respectively. The increase in depreciation was due to acquired stations and newly acquired equipment.

     Amortization of intangible assets. Amortization of intangible assets was $2.5 million for the year ended December 31, 2006, as compared to $1.0 million for the year ended December 31, 2005. The increase in amortization expense was due to definite lived intangible assets of stations acquired in 2006 and 2005.

     Interest expense. Interest expense increased $20.3 million to $66.8 million in the year ended December 31, 2006 compared to $46.5 million in the year ended December 31, 2005. This increase is primarily attributable to higher average interest rates in 2006 compared to 2005 and increases in amounts borrowed under the Company’s senior credit facility to fund acquisitions. The total average debt balance was $814.8 million and $670.0 million for the years ended December 31, 2006 and 2005, respectively. The total average interest rates were 7.63% and 6.79% for the years ended December 31, 2006 and 2005, respectively.

     Loss on Early Extinguishment of Debt. The Company reported a loss on early extinguishment of debt in the amount of $347,000, which related to the repurchase of $4.7 million, face amount, of its 9¹/4% Senior Subordinated Notes (the “9¹/4% Notes”) in the open market. The loss included a premium of $246,000, the write off of unamortized deferred finance costs of $88,000 and an unaccreted discount of $13,000.

     Income tax expense. The effective tax rate increased to 45.6% for the year ended December 31, 2006 from 44.7% for the year ended December 31, 2005. Income tax expense for 2006 increased as a percentage of pre-tax income primarily as a result of higher income tax valuation allowances against state net operating loss carryforwards.

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 digital 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 the Company also recorded approximately $3.0 million of broadcast revenue associated with the broadcast of the 2004 Summer Olympics. 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, the Company’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 were equal to the related cash payments received or receivable.

     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 digital second channels, WCAV-TV and the stations acquired in 2005 (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 2% to $11.9 million from $12.2 million in the year ended December 31, 2005 as compared to the same period in 2004. The decrease was due, in part, to the decrease in restricted stock. 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.

     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 equipment acquired in 2005.

     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.

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

	•		The Company 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 the 91/4% Notes, the Company paid $749,000 in accrued interest.
	•		On June 28, 2005, the Company amended its senior credit facility. The Company 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, the Company 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, the Company amended its senior credit facility. The Company 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.

Liquidity and Capital Resources

General

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

		Year Ended December 31,
		2006				2005
Net cash provided by operating activities		$	79,860			$	50,482
Net cash used in investing activities			(129,305	)			(245,925	)
Net cash provided by financing activities			44,871				154,192
Decrease in cash and cash equivalents		$	(4,574	)		$	(41,251	)

		December 31,
		2006				2005
Cash and cash equivalents		$	4,741			$	9,315
Long-term debt including current portion		$	851,654			$	792,509
Preferred stock		$	37,451			$	39,090
Available credit under senior credit agreement		$	97,000			$	58,500

     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, 2006, 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. However, the Company has chosen to refinance its outstanding indebtedness. See Note N. Subsequent Event to the accompanying audited consolidated financial statements for further information.

     The Company’s senior credit facility provides it with a $150.0 million term loan A facility; a $350.0 million term loan B facility; and a $100.0 million revolving credit facility. The senior credit facility also provides for up to $400.0 million in incremental credit facilities upon the consent of the lenders. In order to fund the 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 and other corporate purposes.

     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 credit 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 credit agreement). The indenture under which the 9¹/4% Notes were issued also contains 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 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.

     The Company generated $79.9 million of net cash from operations during 2006 compared to $50.5 million for 2005. The increase was due largely to the addition of WSAZ and WNDU as well as additional advertising revenue at the Company’s existing stations.

     The Company used $129.3 in investing activities during 2006 compared to $245.9 million during 2005. The amount used decreased primarily due to the Company’s use of $85.3 million primarily to purchase WNDU-TV in 2006, compared to the use of $208.3 million to purchase KKCO-TV, WSWG-TV and WSAZ-TV and the FCC license for WAHU-TV in 2005. Cash used to purchase property plant and equipment totaled $41.1 million and $37.2 million during the years ended December 31, 2006 and 2005, respectively.

     Net cash provided by financing activities was $44.9 million in the year ended December 31, 2006. Proceeds from borrowings on long term debt primarily to finance the Company’s acquisition of WNDU-TV as well as for general operating purposes were $135.8 million in 2006. Partial repayments of long term debt in 2006 totaled $76.7 million. Dividends paid in 2006 included $6.8 million in regular quarterly dividends on the Company’s common and preferred stocks. Net cash provided by financing activities was $154.2 million in the year ended December 31, 2005. Proceeds from borrowings on long term debt primarily to finance the Company’s acquisitions of KKCO-TV, WSWG-TV and WSAZ-TV as well as for general operating purposes were $229.4 million in 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 $7.2 million of bank, legal, accounting and other costs in 2005. Dividends paid in 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 special common stock dividend which was declared in 2004 but not paid until 2005. The Company received a distribution in connection with the spinoff of its publishing and wireless businesses on December 30, 2005 in the amount of $44.0 million.

     During the year ended December 31, 2006, the Company purchased 902,200 shares of the Company’s common stock at an average price of $6.21 per share for cost of $5.6 million. During the year ended December 31, 2005, the Company purchased 528,400 shares of the Company’s common stock for an average price of $12.89 per share and purchased 12,800 shares of the Company’s Class A common stock for $13.37 per share for a combined cost of $7.0 million.

Digital Television Conversion

     The FCC required that all commercial stations begin broadcasting a digital signal. The Company paid approximately $9.5 million and $9.6 million for digital transmission equipment capital expenditures for the years ending December 31, 2006 and 2005, respectively. As of December 31, 2006, the Company has accrued $2.2 million in HDTV costs to be paid in 2007. The Company is in compliance with the FCC’s digital broadcasting requirements at all of its stations.

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 generally accepted accounting principals (“GAAP”). The discount rate selected for determining benefit obligations as of December 31, 2006, was 6.00% which reflects the results of this yield curve analysis. The discount rate used for determining benefit obligations for the year ended December 31, 2005 was 5.75%. 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 7.00% for our invested pension assets. Actual asset returns for these trusts were approximately 9.20% in 2006 and 5.20% 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.

     During the years ended December 31, 2006 and 2005, the Company contributed $3.1 million and $5.0 million, respectively, to all three of its pension plans and anticipates making a contribution of $3.0 million in the year ended December 31, 2007.

     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. For all syndicated television contracts the Company records an asset and corresponding liability for payments to be made for the entire “off network” contract periods and for only the current year of the “first run” contract periods. Only the payments in the current year of the “first run” contracts are recorded on the current balance sheet, because the programs for the later years of the contract period have not been produced and delivered to the Company. 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, 2006.

     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
2007		$	637			$	1,176			$	3,071			$	4,884
2008			—				902				9,951				10,853
2009			—				648				8,732				9,380
2010			—				477				6,954				7,431
2011			—				242				2,746				2,988
Thereafter			—				1,781				376				2,157
		$	637			$	5,226			$	31,830			$	37,693