##### Table of Contents

---

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



---



FORM 10-Q



---



(Mark One)

|x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ---------------------------------------------------------------------------------------



For the quarterly period ended September 30, 2004



OR



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



For the transition period from  to



Commission file number: 333-84416



---



NextMedia Operating, Inc.

(Exact name of registrant as specified in its charter)



---



|                                                                      |  |                                  
|--------------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                              |  | 84-154397                        
|(State or other jurisdiction of incorporation or organization)        |  | (IRS Employer Identification No.)
|                                                                      | 
|6312 S. Fiddlers Green Circle, Suite 360E Greenwood Village, Colorado |  | 80111                            
|(Address of principal executive offices)                              |  | (Zip Code)                       



(303) 694-9118

(Registrants telephone number, including area code)



Not Applicable

(Former name, former address and former fiscal year, if changed since last report)



---





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  x    No ̈



Indicate
by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).    Yes ̈No  x



The total number of shares of common stock, par value $.01 per share, outstanding as of November 12, 2004 was 3,000. The Registrant has no other class of common stock outstanding.



---



---

##### Table of Contents

TABLE OF CONTENTS



|        |  |         |  |                                                                                                       |  |   
|------- |  | ------- |  | ----------------------------------------------------------------------------------------------------- |  | --
|PART I  |  |        
|        |  |         | 
|        |  | Item 1. |  | Unaudited Financial Statements                                                                        |  |   
|        |  |         | 
|        |  |         |  | Consolidated Balance Sheets as of December 31, 2003 and September 30, 2004                            |  | 3 
|        |  |         | 
|        |  |         |  | Consolidated Statements of Operations for the three and nine months ended September 30, 2003 and 2004 |  | 4 
|        |  |         | 
|        |  |         |  | Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and 2004           |  | 5 
|        |  |         | 
|        |  |         |  | Notes to Consolidated Financial Statements                                                            |  | 6 
|        |  |         | 
|        |  | Item 2. |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                 |  | 16
|        |  |         | 
|        |  | Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                                             |  | 20
|        |  |         | 
|        |  | Item 4. |  | Controls and Procedures                                                                               |  | 20
|        | 
|PART II |  |        
|        |  |         | 
|        |  | Item 1. |  | Legal Proceedings                                                                                     |  | 21
|        |  |         | 
|        |  | Item 2. |  | Changes in Securities                                                                                 |  | 21
|        |  |         | 
|        |  | Item 3. |  | Defaults Upon Senior Securities                                                                       |  | 21
|        |  |         | 
|        |  | Item 4. |  | Submission of Matters of a Vote of Security Holders                                                   |  | 21
|        |  |         | 
|        |  | Item 5. |  | Other Information                                                                                     |  | 21
|        |  |         | 
|        |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                      |  | 21



2



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                       |  |                   |         |   |                    |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ------------------ | - | ------- | -
|                                                                                                       |  | December 31, 2003 |         |   | September 30, 2004 |  
|Assets                                                                                                 |  |                   |         |   |                    |   |         |  
|Current assets:                                                                                        |  |                   |         |   |                    |   |         |  
|Cash and cash equivalents                                                                              |  | $                 | 707     |   |                    | $ | 723     |  
|Accounts receivable, net of allowance for doubtful accounts of $1,111 and $1,508, respectively         |  |                   | 16,452  |   |                    |   | 18,083  |  
|Prepaid expenses and other current assets                                                              |  |                   | 3,209   |   |                    |   | 3,502   |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total current assets                                                                                   |  |                   | 20,368  |   |                    |   | 22,308  |  
|Property and equipment, net                                                                            |  |                   | 58,016  |   |                    |   | 87,409  |  
|Other assets                                                                                           |  |                   | 12,247  |   |                    |   | 8,696   |  
|Goodwill, net                                                                                          |  |                   | 63,590  |   |                    |   | 41,947  |  
|Other intangibles, net                                                                                 |  |                   | 389,156 |   |                    |   | 388,906 |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total assets                                                                                           |  | $                 | 543,377 |   |                    | $ | 549,266 |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Liabilities and Stockholders Equity                                                                   |  |                   |         |   |                    |   |         |  
|Current liabilities:                                                                                   |  |                   |         |   |                    |   |         |  
|Accounts payable                                                                                       |  | $                 | 1,699   |   |                    | $ | 2,094   |  
|Accrued expenses                                                                                       |  |                   | 17,484  |   |                    |   | 10,901  |  
|Deferred revenue                                                                                       |  |                   | 516     |   |                    |   | 1,017   |  
|Other                                                                                                  |  |                   | 1,825   |   |                    |   | 1,241   |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total current liabilities                                                                              |  |                   | 21,524  |   |                    |   | 15,253  |  
|Long-term debt                                                                                         |  |                   | 199,634 |   |                    |   | 229,870 |  
|Deferred tax liability                                                                                 |  |                   | 26,858  |   |                    |   | 28,893  |  
|Other long-term liabilities                                                                            |  |                   | 1,306   |   |                    |   | 930     |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total liabilities                                                                                      |  |                   | 249,322 |   |                    |   | 274,946 |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Commitments and contingencies (Note 8)                                                                 |  |                   |         |   |                    |   |         |  
|Stockholders equity:                                                                                  |  |                   |         |   |                    |   |         |  
|Common stock, par value $0.01 per share, 3,000 shares authorized, issued and outstanding, respectively |  |                   | 1       |   |                    |   | 1       |  
|Additional paid-in capital                                                                             |  |                   | 352,615 |   |                    |   | 350,540 |  
|Accumulated deficit                                                                                    |  |                   | (58,561 | ) |                    |   | (76,221 | )
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total stockholders equity                                                                             |  |                   | 294,055 |   |                    |   | 274,320 |  
|                                                                                                       |  |                   |         |   |                    |   |         |  
|Total liabilities and stockholders equity                                                             |  | $                 | 543,377 |   |                    | $ | 549,266 |  
|                                                                                                       |  |                   |         |   |                    |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



3



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)



|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | - | ------------------------------- | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                                         |  | Three Months Ended September 30, |         |   | Nine Months Ended September 30, |  
|                                                                                         |  | 2003                             |         |   | 2004                            |   |         | 2003 |  |   | 2004    |  
|Net revenue                                                                              |  | $                                | 27,783  |   |                                 | $ | 31,036  |      |  | $ | 79,034  |   |  | $ | 84,643  |  
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                                  | 17,170  |   |                                 |   | 18,235  |      |  |   | 49,113  |   |  |   | 52,732  |  
|Corporate expenses                                                                       |  |                                  | 1,938   |   |                                 |   | 2,057   |      |  |   | 6,319   |   |  |   | 6,242   |  
|Depreciation and amortization                                                            |  |                                  | 2,759   |   |                                 |   | 4,041   |      |  |   | 7,797   |   |  |   | 10,853  |  
|Impairment loss                                                                          |  |                                  |        |   |                                 |   | 16,999  |      |  |   |        |   |  |   | 16,999  |  
|Local marketing agreement fees                                                           |  |                                  | 12      |   |                                 |   | 324     |      |  |   | 12      |   |  |   | 384     |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Total operating expenses                                                                 |  |                                  | 21,879  |   |                                 |   | 41,656  |      |  |   | 63,241  |   |  |   | 87,210  |  
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                  |  |                                  | 5,904   |   |                                 |   | (10,620 | )    |  |   | 15,793  |   |  |   | (2,567  | )
|Interest expense, net                                                                    |  |                                  | 6,181   |   |                                 |   | 6,083   |      |  |   | 17,662  |   |  |   | 18,215  |  
|Write off of deferred finance costs due to extinguishment of debt                        |  |                                  |        |   |                                 |   |        |      |  |   |        |   |  |   | 1,541   |  
|Other (income) expense                                                                   |  |                                  | (19,852 | ) |                                 |   | 362     |      |  |   | (19,234 | ) |  |   | (3,526  | )
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before income taxes                                                        |  |                                  | 19,575  |   |                                 |   | (17,065 | )    |  |   | 17,365  |   |  |   | (18,797 | )
|Provision for (benefit from) income taxes                                                |  |                                  | 3,065   |   |                                 |   | (3,751  | )    |  |   | 9,000   |   |  |   | (1,136  | )
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  
|Net income (loss)                                                                        |  | $                                | 16,510  |   |                                 | $ | (13,314 | )    |  | $ | 8,365   |   |  | $ | (17,661 | )
|                                                                                         |  |                                  |         |   |                                 |   |         |      |  |   |         |   |  |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



4



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                                     |  |                                 |         |   |      |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                     |  | Nine Months ended September 30, |        
|                                                                                     |  | 2003                            |         |   | 2004 |  
|Cash Flows From Operating Activities                                                 |  |                                 |         |   |      |   |         |  
|Net income (loss)                                                                    |  | $                               | 8,365   |   |      | $ | (17,661 | )
|Adjustments to reconcile net income (loss) to net cash used in operating activities: |  |                                 |         |   |      |   |         |  
|Depreciation and amortization                                                        |  |                                 | 7,797   |   |      |   | 10,853  |  
|Non-cash interest expense                                                            |  |                                 | 923     |   |      |   | 870     |  
|Provision for bad debt expense                                                       |  |                                 | 656     |   |      |   | 783     |  
|Non-cash compensation expense                                                        |  |                                 | 59      |   |      |   | 59      |  
|Impairment loss                                                                      |  |                                 |        |   |      |   | 16,999  |  
|Unrealized loss on interest rate swap                                                |  |                                 |        |   |      |   | 135     |  
|Provision for deferred taxes                                                         |  |                                 | 9,000   |   |      |   | (1,136  | )
|Other (gains) and losses, net                                                        |  |                                 | (19,487 | ) |      |   | (2,522  | )
|Changes in assets and liabilities, net of effect of acquisitions:                    |  |                                 |         |   |      |   |         |  
|Accounts receivable                                                                  |  |                                 | (2,201  | ) |      |   | (2,502  | )
|Prepaid expenses and other assets                                                    |  |                                 | (523    | ) |      |   | 725     |  
|Accounts payable and accrued expenses                                                |  |                                 | (6,400  | ) |      |   | (10,220 | )
|Deferred revenue                                                                     |  |                                 | 183     |   |      |   | 501     |  
|Other current liabilities                                                            |  |                                 | (57     | ) |      |   | (814    | )
|                                                                                     |  |                                 |         |   |      |   |         |  
|Net cash used in operating activities                                                |  |                                 | (1,685  | ) |      |   | (3,930  | )
|                                                                                     |  |                                 |         |   |      |   |         |  
|Cash Flows From Investing Activities                                                 |  |                                 |         |   |      |   |         |  
|Purchase of fixed assets                                                             |  |                                 | (3,961  | ) |      |   | (5,127  | )
|Payments for acquisitions, net of cash acquired                                      |  |                                 | (71,888 | ) |      |   | (23,552 | )
|Proceeds from sale of properties                                                     |  |                                 | 25,955  |   |      |   | 3,717   |  
|Proceeds from termination of interest rate swaps                                     |  |                                 |        |   |      |   | 1,600   |  
|                                                                                     |  |                                 |         |   |      |   |         |  
|Net cash used in investing activities                                                |  |                                 | (49,894 | ) |      |   | (23,362 | )
|                                                                                     |  |                                 |         |   |      |   |         |  
|Cash Flows From Financing Activities                                                 |  |                                 |         |   |      |   |         |  
|Proceeds from revolving credit facilities                                            |  |                                 | 44,000  |   |      |   | 39,000  |  
|Repayment of revolving credit facilities                                             |  |                                 | (33,000 | ) |      |   | (9,000  | )
|Equity capital contributions from Parent, net                                        |  |                                 | 27,100  |   |      |   |        |  
|Payments of financing related costs                                                  |  |                                 |        |   |      |   | (427    | )
|Dividend to parent                                                                   |  |                                 |        |   |      |   | (2,133  | )
|Other                                                                                |  |                                 | (336    | ) |      |   | (132    | )
|                                                                                     |  |                                 |         |   |      |   |         |  
|Net cash provided by financing activities                                            |  |                                 | 37,764  |   |      |   | 27,308  |  
|                                                                                     |  |                                 |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                                     |  |                                 | (13,815 | ) |      |   | 16      |  
|Cash and cash equivalents at beginning of period                                     |  |                                 | 14,446  |   |      |   | 707     |  
|                                                                                     |  |                                 |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                           |  | $                               | 631     |   |      | $ | 723     |  
|                                                                                     |  |                                 |         |   |      |   |         |  
|Supplemental Cash Flow Information                                                   |  |                                 |         |   |      |   |         |  
|Cash payments during the period for:                                                 |  |                                 |         |   |      |   |         |  
|Interest                                                                             |  | $                               | 22,049  |   |      | $ | 22,707  |  
|                                                                                     |  |                                 |         |   |      |   |         |  



The accompanying notes
are an integral part of these consolidated financial statements.



5



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



1. Interim Financial Data And Significant Accounting Policies



The accompanying consolidated unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information. Management
believes that the Company has made all adjustments necessary for a fair presentation of results of the interim periods and that these adjustments were of a normal and recurring nature. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted. The interim results of operations and cash flows are not necessarily indicative of the results that can
be expected for the fiscal year ending December 31, 2004, due to seasonality and other factors. You should read the consolidated financial statements in conjunction with the consolidated financial statements of NextMedia Operating, Inc. and the
notes thereto included in our annual report on Form 10-K, as filed with the Securities and Exchange Commission on March 30, 2004. In this quarterly report on Form 10-Q, references to the Company, we, our and
us refer to NextMedia Operating, Inc. and its subsidiaries, and the term NextMedia refers only to NextMedia Operating, Inc.



The balances of certain prior periods have been reclassified to conform to the current periods presentation.



2. Acquisitions and Dispositions



Part of the Companys operating strategy is to expand through prudent
acquisition of broadcasting and outdoor advertising properties. The Company acquired each of the advertising assets identified below to help achieve this objective. In seeking acquisition opportunities, the Company generally seeks: (i) assets in
markets with a demographic propensity for growth (i.e., population growth above average, above average growth in retail sales, etc.), (ii) markets where the Company believes it can assemble a group of assets generating over $1,000 in annual cash
flow from operations, and (iii) assets in markets where the Company believes it can become a leader in terms of ratings, revenue share, or number of advertising faces. Each of the acquisitions below meet at least one of these criteria.



In January 2004, in exchange for its outdoor advertising assets in New
York, New York and Baltimore, Maryland, the Company acquired outdoor advertising assets in Myrtle Beach, South Carolina valued at $43,600 resulting in a gain of approximately $1,834. The Company has accounted for the transaction as a business
combination in accordance with SFAS 141 at fair value. As a result of the exchange, certain of the Companys taxable temporary differences reversed resulting in a $3,800 income tax benefit during the first quarter of 2004. This benefit was
offset by $3,100 of tax expense related to other activity in the quarter and the Companys projected tax expense for the year. Because the Company does not expect that its deferred tax liabilities will reverse within its net operating loss
carry-forward period, the Company records additional deferred tax expense throughout the year to establish a valuation allowance against net operating loss carry-forwards generated by amortization of goodwill and indefinite lived intangibles that is
deductible for tax purposes but is not amortized for book purposes.



In February 2004, the Company completed its previously announced acquisition of WCCQ-FM licensed to Crest Hill, Illinois for $14,000 in cash. The Company funded the acquisition with borrowings under its senior credit facility.



In May 2004, the Company completed the previously announced acquisition of
WZCH-FM licensed to Dundee, Illinois, a suburb of Chicago, for $5,000. The Company funded the acquisition with cash borrowed under its senior credit facility.



In June 2004, in exchange for its outdoor advertising assets in New Jersey, the Company acquired outdoor advertising assets in New Haven, Connecticut
and Northern Colorado/Wyoming valued at approximately $40,000. As a result of the exchange, certain of the Companys taxable temporary differences reversed resulting in a $397 income tax expense during the second quarter of 2004.



The Company has accounted for the New Jersey exchange as a business
combination in accordance with SFAS No. 141 at fair value resulting in a gain of approximately $1,000 on the disposition of its assets in New Jersey. Under the terms of the exchange agreement, both parties remain liable for the loss or unfavorable
change in lease costs of all site leases disposed of by them or a breach of representation with respect to such site leases for a period of four months from June 30, 2004. The Company is currently assessing whether any such claims exist.
Additionally, for a period of one year from June 30, 2004, the parties remain liable for the loss based on non-renewal or unfavorable change in terms of all site leases disposed of by them which expire during the one year period or the loss of
advertising structures not properly located on such site leases. To the extent a claim for indemnification is made for site leases meeting any of the foregoing criteria, each party will be required to do one of the following: 1) make cash payments
equivalent to a multiple of the loss of cash flow for the lost sites, 2) substitute additional outdoor advertising assets with cash flow equivalent to that



6



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



of the lost sites, or 3) reduce the payments under site leases between the
parties by an amount equal to the loss of cash flow of the lost sites. As a result of the contingencies related to the transferred site leases, the Company has deferred the recognition of the $1,000 gain until such time as the contingency is
resolved. This deferred gain is included in other current liabilities in the consolidated balance sheet as of September 30, 2004. The purchase allocation is preliminary pending finalization of the estimated fair values of the acquired assets.



The Company has accrued exit costs of $850 in connection with
the disposal of its New Jersey market pursuant to the asset exchange and reduced the deferred gain by this amount. Employee severance comprised $709 of this amount with the remainder related primarily to lease buyouts. As of September 30, 2004, the
substantial majority of these amounts have been paid.



During
the third quarter, the Company entered into agreements to acquire five radio stations in Wilmington, North Carolina for $24,500 in cash. In addition, the Company simultaneously entered into a local marketing agreement (LMA) with respect
to the stations to be acquired. The Company believes that when it simultaneously enters into LMA agreements and acquisition agreements with respect to a group of assets, it creates a variable interest in the entities which own the assets to be
acquired. Pursuant to FIN 46, under certain circumstances, these variable interest entities (VIEs) would be consolidated in the financial statements of the Company. However, since the Wilmington assets subject to the LMA and acquisition
agreements do not constitute over 50% of the VIEs ongoing activities, the Company has not consolidated the VIE into its financial statements. The Company is awaiting certain changes to the terms of the related agreements which will facilitate
FCC approval of the acquisition. Upon the completion of these revised agreements, the Company may be required to consolidate these assets prior to its completion which is expected in the first quarter of 2005. The Company expects to fund the closing
of the acquisition with $24,500 of additional borrowings under its senior credit facility.



The results of operations of the assets acquired during the three and nine months ended September 30, 2004 have been included in the Companys income statement from the completion date of the applicable
acquisition. The results of operations of assets sold during the three and nine months ended September 30, 2004 have been excluded from the Companys income statement from the completion date of the applicable sale.



The following unaudited pro forma income statement information has been
prepared as if the acquisitions made during the year ended December 31, 2003 and the nine months ended September 30, 2004 had occurred on January 1, 2003. The pro forma income statement information is not necessarily indicative of the results that
actually would have occurred if these acquisitions had been consummated on January 1, 2003.



|               |  |                                 |         |   |      |   |         |  
|-------------- |  | ------------------------------- | ------- | - | ---- | - | ------- | -
|               |  | Nine months ended September 30, |        
|               |  | 2003                            |         |   | 2004 |  
|Net revenues   |  | $                               | 80,696  |   |      | $ | 83,470  |  
|Total expenses |  |                                 | 92,586  |   |      |   | 103,742 |  
|               |  |                                 |         |   |      |   |         |  
|Net loss       |  | $                               | (11,890 | ) |      | $ | (20,272 | )
|               |  |                                 |         |   |      |   |         |  



3. Property and Equipment



Property and equipment consist of the following:



|                              |  |                  |  |                         |         |   |                          |   |         |  
|----------------------------- |  | ---------------- |  | ----------------------- | ------- | - | ------------------------ | - | ------- | -
|                              |  | Depreciable Life |  | As of December 31, 2003 |         |   | As of September 30, 2004 |  
|Land and improvements         |  |                 |  | $                       | 5,729   |   |                          | $ | 7,101   |  
|Construction in progress      |  |                 |  |                         | 870     |   |                          |   | 1,235   |  
|Buildings and improvements    |  | 20               |  |                         | 9,893   |   |                          |   | 10,732  |  
|Leasehold improvements        |  | 10               |  |                         | 1,833   |   |                          |   | 1,705   |  
|Broadcast equipment           |  | 520             |  |                         | 8,445   |   |                          |   | 9,312   |  
|Office equipment              |  | 7                |  |                         | 1,814   |   |                          |   | 1,953   |  
|Computer software and systems |  | 35              |  |                         | 1,930   |   |                          |   | 2,227   |  
|Tower and antennae            |  | 520             |  |                         | 4,931   |   |                          |   | 5,525   |  
|Vehicles                      |  | 3                |  |                         | 1,734   |   |                          |   | 2,358   |  
|Furniture and fixtures        |  | 7                |  |                         | 1,319   |   |                          |   | 1,425   |  
|Advertising displays          |  | 315             |  |                         | 34,654  |   |                          |   | 62,691  |  
|                              |  |                  |  |                         |         |   |                          |   |         |  
|                              |  |                  |  |                         | 73,152  |   |                          |   | 106,264 |  
|Less accumulated depreciation |  |                  |  |                         | (15,136 | ) |                          |   | (18,855 | )
|                              |  |                  |  |                         |         |   |                          |   |         |  
|                              |  |                  |  | $                       | 58,016  |   |                          | $ | 87,409  |  
|                              |  |                  |  |                         |         |   |                          |   |         |  



7



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



4. Intangible Assets



Intangible assets consist of the following:



|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- |  | ----------------------- | ------- | - | ------------------------ | - | ------- | -
|                                                                               |  | Estimated Useful Life |  | As of December 31, 2003 |         |   | As of September 30, 2004 |  
|Gross:                                                                         |  |                       |  |                         |         |   |                          |   |         |  
|FCC licenses                                                                   |  |                      |  | $                       | 285,755 |   |                          | $ | 303,088 |  
|Goodwill                                                                       |  |                      |  |                         | 64,434  |   |                          |   | 41,947  |  
|Advertising permits                                                            |  |                      |  |                         | 103,555 |   |                          |   | 70,928  |  
|Easements                                                                      |  |                      |  |                         | 2,595   |   |                          |   | 1,358   |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  | 115                  |  |                         | 11,441  |   |                          |   | 32,650  |  
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|                                                                               |  |                       |  | $                       | 467,780 |   |                          | $ | 449,971 |  
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|Less accumulated amortization:                                                 |  |                       |  |                         |         |   |                          |   |         |  
|FCC licenses                                                                   |  |                       |  | $                       | (8,758  | ) |                          | $ | (8,758  | )
|Goodwill                                                                       |  |                       |  |                         | (844    | ) |                          |   |        |  
|Advertising permits                                                            |  |                       |  |                         |        |   |                          |   |        |  
|Easements                                                                      |  |                       |  |                         |        |   |                          |   |        |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  |                       |  |                         | (5,432  | ) |                          |   | (10,360 | )
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|                                                                               |  |                       |  | $                       | (15,034 | ) |                          | $ | (19,118 | )
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|Net:                                                                           |  |                       |  |                         |         |   |                          |   |         |  
|FCC licenses                                                                   |  |                       |  | $                       | 276,997 |   |                          | $ | 294,330 |  
|Goodwill                                                                       |  |                       |  |                         | 63,590  |   |                          |   | 41,947  |  
|Advertising permits                                                            |  |                       |  |                         | 103,555 |   |                          |   | 70,928  |  
|Easements                                                                      |  |                       |  |                         | 2,595   |   |                          |   | 1,358   |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  |                       |  |                         | 6,009   |   |                          |   | 22,290  |  
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  
|                                                                               |  |                       |  | $                       | 452,746 |   |                          | $ | 430,853 |  
|                                                                               |  |                       |  |                         |         |   |                          |   |         |  



In the third Quarter
of 2004, as a result of deteriorating business conditions and performance below management expectations, the Company conducted an impairment evaluation of its alternative advertising market and related goodwill and identifiable intangible assets
pursuant to SFAS No. 142. As a result of this evaluation, the Company recorded a $16,999 non-cash impairment loss on goodwill related to this market. The non-cash impairment was caused primarily by deteriorating business conditions, which affected
market revenue and expenses. These weak market conditions adversely affected the cash flow projections used to determine the fair value of the market and resulted in the non-cash impairment.



The aggregate change in goodwill from December 31, 2003 to September 30, 2004
resulted mainly from the Companys third quarter impairment charge of $16,999 related to its alternative display market. The remaining change in goodwill resulted from the net effect of (i) an increase of $1,804 related to the acquisition of
WZCH-FM and (ii) a net decrease of $6,448 related to the Companys asset exchanges in the first and second quarter.



The aggregate change in FCC licenses from December 31, 2003 to September 30, 2004 resulted entirely from the Companys acquisition of radio assets
during that period. The aggregate reduction in easements resulted from the net effect of the Companys asset exchanges completed during the period. The exchanges also resulted in a net reduction of advertising permits of $34,459 offset by an
increase of $1,832 related to several small outdoor acquisitions.



Definite-lived Intangible Assets



The Company
has definite-lived intangible assets recorded that continue to be amortized in accordance with SFAS 142. These assets consist primarily of non-compete agreements and existing customer bases which are amortized over the respective estimated lives of
the assets. Total amortization expense from definite-lived intangible assets for the nine months ended September 30, 2004 was approximately $4,928. The most significant definite-lived intangible assets acquired by the Company are existing customer
bases which have relatively short useful lives due to customer turnover. Consequently, the Company applies an accelerated amortization methodology to these assets.



8



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



The following table presents managements estimate of
amortization expense for each of the five succeeding fiscal years for definite-lived intangibles as of the dates indicated:



|     |  |   |      
|---- |  | - | -----
|2004 |  | $ | 7,328
|2005 |  |   | 6,014
|2006 |  |   | 3,739
|2007 |  |   | 2,481
|2008 |  |   | 1,742



5. Accrued Expenses



Accrued expenses consist of the following:



|                                 |  |                         |        |                          |   |       
|-------------------------------- |  | ----------------------- | ------ | ------------------------ | - | ------
|                                 |  | As of December 31, 2003 |        | As of September 30, 2004
|Accrued compensation and bonuses |  | $                       | 1,198  |                          | $ | 1,250 
|Accrued commissions              |  |                         | 839    |                          |   | 851   
|Accrued interest                 |  |                         | 10,753 |                          |   | 5,337 
|Accrued property taxes           |  |                         | 352    |                          |   | 600   
|Accrued rents                    |  |                         | 643    |                          |   | 415   
|Unfavorable leases               |  |                         | 347    |                          |   | 167   
|Accrued franchise taxes          |  |                         | 331    |                          |   | 114   
|Accrued legal and professional   |  |                         | 1,044  |                          |   | 512   
|Net barter payable               |  |                         | 161    |                          |   | 225   
|Accrued insurance costs          |  |                         | 550    |                          |   | 213   
|Accrued music license fees       |  |                         | 572    |                          |   | 116   
|Other                            |  |                         | 694    |                          |   | 1,101 
|                                 |  |                         |        |                          |   |       
|                                 |  | $                       | 17,484 |                          | $ | 10,901
|                                 |  |                         |        |                          |   |       



6. Long-Term Debt



Long-term debt consists of the following:



|                          |  |                         |         |   |                          |   |         |  
|------------------------- |  | ----------------------- | ------- | - | ------------------------ | - | ------- | -
|                          |  | As of December 31, 2003 |         |   | As of September 30, 2004 |  
|Revolving Credit Facility |  | $                       | 2,000   |   |                          | $ | 32,000  |  
|Senior Subordinated Notes |  |                         | 200,000 |   |                          |   | 200,000 |  
|Unamortized discount      |  |                         | (2,366  | ) |                          |   | (2,130  | )
|                          |  |                         |         |   |                          |   |         |  
|Total long-term debt      |  | $                       | 199,634 |   |                          | $ | 229,870 |  
|                          |  |                         |         |   |                          |   |         |  



On April 9, 2004, the
Company terminated its existing senior credit facility and entered into a new $75,000 senior credit facility which matures five years from the date thereof. The Companys new senior credit facility contains customary restrictive covenants that,
among other things, limit the Companys ability to incur additional indebtedness and liens in connection therewith, pay dividends and make capital expenditures above specified limits. Under the new senior credit facility, the Company must
satisfy specified financial covenants, such as a maximum total leverage ratio, a maximum senior leverage ratio and a minimum ratio of consolidated EBITDA to consolidated net cash interest expense. As of September 30, 2004, the Company was in
compliance with all of these covenants. After taking into account these restrictive covenants, as of September 30, 2004, the Company had approximately $43,000 of borrowing capacity under its senior credit facility. As a result of the termination of
its former credit facility, the Company recorded a charge of $1,541 in the second quarter of 2004 to write off the associated deferred financing costs.



9



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



The Companys 10.75% senior subordinated notes due
2011 require the Company to make semi-annual interest payments of approximately $10,800 on January 1 and July 1 of each year. Since the Company made its July 1, 2004 interest payment on June 30, 2004, there was no accrued interest on the bonds at
June 30, 2004. The indenture governing the notes contains certain restrictive covenants that, among other things, limit the Companys ability to incur additional indebtedness and pay dividends. As of September 30, 2004, the Company was in
compliance with these covenants.



7. Commitments and Contingencies



As of November 12, 2004, the Company had $1,292 in
letters of credit outstanding as deposits to secure obligations.



In March 2004, the arbitration panel on the Companys previously disclosed dispute with PNE Media, LLC delivered an award that was favorable to the Company and, after certain set-offs, resulted in a net recovery of approximately $3,351
and a gain of approximately $2,132, net of legal expenses, which is recorded in other (income) expense in the first quarter of 2004. The arbitration award has been fully implemented.



The Company has certain contingencies related to the asset exchange completed in June 2004 as more fully explained in Note
3.



From time to time, the Company is subject to routine
litigation incident to its business. Management does not expect any of these matters to have a material adverse effect upon the Companys liquidity, results of operations or financial position.



The Company has no direct or indirect guarantees of indebtedness of others.



8. Taxes



The Company has significant amounts of indefinite-lived intangible assets which are not amortized for accounting purposes.
Accordingly, the Company records additional deferred tax expense throughout the year to establish a valuation allowance against net operating loss carry-forwards generated by amortization of these indefinite-lived intangibles for tax purposes. The
Company records the valuation allowance as we continue to expect that our deferred tax liabilities will not reverse within our net operating loss carry-forward period. For the nine months ended September 30, 2004, the Company has recorded
approximately $8,887 of deferred tax expense offset by $6,664 of deferred tax benefit related to the third quarter impairment loss and $3,359 of net deferred tax benefit related to its asset exchanges in the first and second quarters of 2004.



9. Segment Data



The Company has determined that two reportable operating segmentsradio
broadcasting and outdoor advertisingbest reflect the Companys current management and operations.



The radio broadcasting segment is comprised of radio stations and networks for which the Company is the licensee or for which the Company programs and
sells on-air advertising time under local marketing agreements. At September 30, 2004, the radio broadcasting segment included 66 radio stations owned or operated by the Company. All of these stations operate in domestic markets.



The outdoor advertising segment includes traditional outdoor advertising
displays, such as roadside bulletins, posters and transit displays that the Company owns or operates under lease arrangements, as well as advertising displays that the Company installs in public locations, including restaurants, health clubs, retail
stores and entertainment venues. At September 30, 2004, the outdoor advertising segment owned or operated over 5,000 outdoor displays and indoor advertising display faces in more than 3,000 retail locations across the United States. All of these
displays are located in domestic markets.



The accounting
policies of the segments are the same as those described in the summary of significant accounting policies in Note 1 to the Companys audited consolidated financial statements contained in the Companys annual report on Form 10-K as filed
with the SEC on March 30, 2004. There are no intersegment sales or transfers.



There are no customers that comprise greater than 10% of the consolidated revenues or receivables of the Company for the periods presented.



10



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|---------------------------------------------------------------- |  | ------------------------------- | ------- | - | ------------------------------ | - | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                                 |  | Three months endedSeptember 30, |         |   | Nine months endedSeptember 30, |  
|                                                                 |  | 2003                            |         |   | 2004                           |   |         | 2003 |  |   | 2004    |  
|Net revenue:                                                     |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Radio Broadcasting                                               |  | $                               | 19,033  |   |                                | $ | 21,211  |      |  | $ | 54,410  |   |  | $ | 57,798  |  
|Outdoor Advertising                                              |  |                                 | 8,750   |   |                                |   | 9,825   |      |  |   | 24,624  |   |  |   | 26,845  |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Consolidated                                                     |  |                                 | 27,783  |   |                                |   | 31,036  |      |  |   | 79,034  |   |  |   | 84,643  |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Market level expenses:                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Radio Broadcasting                                               |  |                                 | 11,562  |   |                                |   | 12,463  |      |  |   | 33,299  |   |  |   | 35,053  |  
|Outdoor Advertising                                              |  |                                 | 5,608   |   |                                |   | 5,772   |      |  |   | 15,814  |   |  |   | 17,679  |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Consolidated                                                     |  |                                 | 17,170  |   |                                |   | 18,235  |      |  |   | 49,113  |   |  |   | 52,732  |  
|Depreciation and amortization:                                   |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Radio Broadcasting                                               |  |                                 | 1,499   |   |                                |   | 1,238   |      |  |   | 4,469   |   |  |   | 3,647   |  
|Outdoor Advertising                                              |  |                                 | 1,260   |   |                                |   | 2,803   |      |  |   | 3,328   |   |  |   | 7,206   |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Consolidated                                                     |  |                                 | 2,759   |   |                                |   | 4,041   |      |  |   | 7,797   |   |  |   | 10,853  |  
|Impairment loss-outdoor                                          |  |                                 |        |   |                                |   | 16,999  |      |  |   |        |   |  |   | 16,999  |  
|Local marketing agreement fees-radio                             |  |                                 | 12      |   |                                |   | 324     |      |  |   | 12      |   |  |   | 384     |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Segment profit (loss):                                           |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Radio Broadcasting                                               |  |                                 | 5,960   |   |                                |   | 7,186   |      |  |   | 16,630  |   |  |   | 18,714  |  
|Outdoor Advertising                                              |  |                                 | 1,882   |   |                                |   | (15,749 | )    |  |   | 5,482   |   |  |   | (15,039 | )
|Corporate Expenses                                               |  |                                 | 1,938   |   |                                |   | 2,057   |      |  |   | 6,319   |   |  |   | 6,242   |  
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Operating income (loss)                                          |  |                                 | 5,904   |   |                                |   | (10,620 | )    |  |   | 15,793  |   |  |   | (2,567  | )
|Interest expense, net                                            |  |                                 | 6,181   |   |                                |   | 6,083   |      |  |   | 17,662  |   |  |   | 18,215  |  
|Write off of deferred finance cost due to extinguishment of debt |  |                                 |        |   |                                |   |        |      |  |   |        |   |  |   | 1,541   |  
|Other (income) expense                                           |  |                                 | (19,852 | ) |                                |   | 362     |      |  |   | (19,234 | ) |  |   | (3,526  | )
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  
|Income (loss) before taxes                                       |  | $                               | 19,575  |   |                                | $ | (17,065 | )    |  | $ | 17,365  |   |  | $ | (18,797 | )
|                                                                 |  |                                 |         |   |                                |   |         |      |  |   |         |   |  |   |         |  



|                           |  |                         |         |                          |   |        
|-------------------------- |  | ----------------------- | ------- | ------------------------ | - | -------
|                           |  | As of December 31, 2003 |         | As of September 30, 2004
|Total identifiable assets: |  |                         |         |                          |   |        
|Radio Broadcasting         |  | $                       | 357,810 |                          | $ | 375,839
|Outdoor Advertising        |  |                         | 185,567 |                          |   | 173,427
|                           |  |                         |         |                          |   |        
|Consolidated               |  | $                       | 543,377 |                          | $ | 549,266
|                           |  |                         |         |                          |   |        
|Goodwill, net:             |  |                         |         |                          |   |        
|Radio Broadcasting         |  | $                       | 26,628  |                          | $ | 28,432 
|Outdoor Advertising        |  |                         | 36,962  |                          |   | 13,515 
|                           |  |                         |         |                          |   |        
|Consolidated               |  | $                       | 63,590  |                          | $ | 41,947 
|                           |  |                         |         |                          |   |        



|                               |  |                                  |       |                                 |   |       |  |      |        |  |   |        
|------------------------------ |  | -------------------------------- | ----- | ------------------------------- | - | ----- |  | ---- | ------ |  | - | -------
|                               |  | Three months ended September 30, |       | Nine months ended September 30,
|                               |  | 2003                             |       | 2004                            |   | 2003  |  | 2004
|Addition to long-lived assets: |  |                                  |       |                                 |   |       |  |      |        |  |   |        
|Radio Broadcasting             |  | $                                | 782   |                                 | $ | 1,266 |  | $    | 63,743 |  | $ | 24,481 
|Outdoor Advertising            |  |                                  | 4,454 |                                 |   | 1,632 |  |      | 13,731 |  |   | 93,298 
|                               |  |                                  |       |                                 |   |       |  |      |        |  |   |        
|Consolidated                   |  | $                                | 5,236 |                                 | $ | 2,898 |  | $    | 77,474 |  | $ | 117,779
|                               |  |                                  |       |                                 |   |       |  |      |        |  |   |        



10. Supplemental Guarantor
Information



NextMedias senior subordinated notes
are guaranteed on a senior subordinated basis, jointly and severally, by all of NextMedias subsidiaries (the Guarantor Subsidiaries). NextMedia has collateralized its revolving credit facility by granting a first priority-perfected
pledge of its assets including, without limitation, the capital stock of NextMedia and its subsidiaries.



11



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



NextMedia Operating, Inc.

Supplemental Combining Balance Sheet

December 31, 2003



|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|--------------------------------------------------------------------------------- |  | ------------------------- | ------- | ---------------------- | - | ------- | ------------------- |  | - | -------- | - |  | - | -------
|                                                                                  |  | NextMedia Operating, Inc. |         | Guarantor Subsidiaries |   |         | Eliminating Entries |  |   | Total   
|Assets                                                                            |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current assets:                                                                   |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Cash and cash equivalents                                                         |  | $                         | 1,138   |                        | $ | (431    | )                   |  | $ |         |   |  | $ | 707    
|Accounts receivable, net                                                          |  |                           | 11,181  |                        |   | 5,271   |                     |  |   |         |   |  |   | 16,452 
|Prepaid and other current assets                                                  |  |                           | 1,665   |                        |   | 1,544   |                     |  |   |         |   |  |   | 3,209  
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total current assets                                                              |  |                           | 13,984  |                        |   | 6,384   |                     |  |   |         |   |  |   | 20,368 
|Property and equipment, net                                                       |  |                           | 25,924  |                        |   | 32,092  |                     |  |   |         |   |  |   | 58,016 
|Intangibles, net                                                                  |  |                           | 30,569  |                        |   | 422,177 |                     |  |   |         |   |  |   | 452,746
|Other assets                                                                      |  |                           | 6,632   |                        |   | 807     |                     |  |   | 4,808    |   |  |   | 12,247 
|Investment in subsidiaries                                                        |  |                           | 447,196 |                        |   |        |                     |  |   | (447,196 | ) |  |   |       
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total assets                                                                      |  | $                         | 524,305 |                        | $ | 461,460 |                     |  | $ | (442,388 | ) |  | $ | 543,377
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Liabilities and Stockholders Equity                                              |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current liabilities:                                                              |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Accounts payable, accrued expenses and other current liabilities                  |  | $                         | 15,518  |                        | $ | 1,198   |                     |  | $ | 4,808    |   |  | $ | 21,524 
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total current liabilities                                                         |  |                           | 15,518  |                        |   | 1,198   |                     |  |   | 4,808    |   |  |   | 21,524 
|Long-term debt                                                                    |  |                           | 199,634 |                        |   |        |                     |  |   |         |   |  |   | 199,634
|Other long-term liabilities                                                       |  |                           | 15,098  |                        |   | 13,066  |                     |  |   |         |   |  |   | 28,164 
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities                                                                 |  |                           | 230,250 |                        |   | 14,264  |                     |  |   | 4,808    |   |  |   | 249,322
|Stockholders equity                                                              |  |                           | 294,055 |                        |   | 447,196 |                     |  |   | (447,196 | ) |  |   | 294,055
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities and stockholders equity                                        |  | $                         | 524,305 |                        | $ | 461,460 |                     |  | $ | (442,388 | ) |  | $ | 543,377
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|                                                                                 
|NextMedia Operating, Inc. Supplemental Combining Balance Sheet September 30,
2004
|                                                                                  |  |                           |         |                       
|                                                                                  |  | NextMedia Operating, Inc. |         | Guarantor Subsidiaries |   |         | Eliminating Entries |  |   | Total   
|Assets                                                                            |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current assets:                                                                   |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Cash and cash equivalents                                                         |  | $                         | 1,233   |                        | $ | (510    | )                   |  | $ |         |   |  | $ | 723    
|Accounts receivable, net                                                          |  |                           | 12,892  |                        |   | 5,191   |                     |  |   |         |   |  |   | 18,083 
|Prepaid and other current assets                                                  |  |                           | 603     |                        |   | 2,899   |                     |  |   |         |   |  |   | 3,502  
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total current assets                                                              |  |                           | 14,728  |                        |   | 7,580   |                     |  |   |         |   |  |   | 22,308 
|Property and equipment, net                                                       |  |                           | 26,769  |                        |   | 60,640  |                     |  |   |         |   |  |   | 87,409 
|Intangibles, net                                                                  |  |                           | 31,416  |                        |   | 399,436 |                     |  |   |         |   |  |   | 430,852
|Other assets                                                                      |  |                           | 8,594   |                        |   | 8,317   |                     |  |   | (8,214   | ) |  |   | 8,697  
|Investment in subsidiaries                                                        |  |                           | 453,915 |                        |   |        |                     |  |   | (453,915 | ) |  |   |       
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total assets                                                                      |  | $                         | 535,422 |                        | $ | 475,973 |                     |  | $ | (462,129 | ) |  | $ | 549,266
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Liabilities and Stockholders Equity                                              |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current liabilities:                                                              |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Accounts payable, accrued expenses and other current liabilities                  |  | $                         | 17,293  |                        | $ | 6,175   |                     |  | $ | (8,214   | ) |  | $ | 15,254 
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total current liabilities                                                         |  |                           | 17,293  |                        |   | 6,175   |                     |  |   | (8,214   | ) |  |   | 15,254 
|Long-term debt                                                                    |  |                           | 229,870 |                        |   |        |                     |  |   |         |   |  |   | 229,870
|Other long-term liabilities                                                       |  |                           | 13,939  |                        |   | 15,883  |                     |  |   |         |   |  |   | 29,822 
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities                                                                 |  |                           | 261,102 |                        |   | 22,058  |                     |  |   | (8,214   | ) |  |   | 274,946
|Stockholders equity                                                              |  |                           | 274,320 |                        |   | 453,915 |                     |  |   | (453,915 | ) |  |   | 274,320
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities and stockholders equity                                        |  | $                         | 535,422 |                        | $ | 475,973 |                     |  | $ | (462,129 | ) |  | $ | 549,266
|                                                                                  |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        



12



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



NextMedia Operating, Inc.

Supplemental Combining Statement of Operations

For the Three Months Ended September 30, 2003



|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | --------------------- | - | ------- | ------------------ |  | - | ------- | - |  | - | ------- | -
|                                                                                                                       |  | NextMedia Operating, Inc. |         |   | GuarantorSubsidiaries |   |         | EliminatingEntries |  |   | Total   |  
|Net revenue                                                                                                            |  | $                         | 19,034  |   |                       | $ | 8,749   |                    |  | $ |        |   |  | $ | 27,783  |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                               |  |                           | 11,561  |   |                       |   | 5,609   |                    |  |   |        |   |  |   | 17,170  |  
|Corporate expenses                                                                                                     |  |                           | 1,386   |   |                       |   | 552     |                    |  |   |        |   |  |   | 1,938   |  
|Depreciation and amortization                                                                                          |  |                           | 1,499   |   |                       |   | 1,260   |                    |  |   |        |   |  |   | 2,759   |  
|Local marketing agreement fee                                                                                          |  |                           | 12      |   |                       |   |        |                    |  |   |         |   |  |   | 12      |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                                                |  |                           | 4,576   |   |                       |   | 1,328   |                    |  |   |        |   |  |   | 5,904   |  
|Interest expense, net                                                                                                  |  |                           | 6,181   |   |                       |   |        |                    |  |   |        |   |  |   | 6,181   |  
|Other (income) expense                                                                                                 |  |                           | (813    | ) |                       |   | (19,039 | )                  |  |   |        |   |  |   | (19,852 | )
|Equity in (income) loss of subsidiaries                                                                                |  |                           | (20,367 | ) |                       |   |        |                    |  |   | 20,367  |   |  |   |        |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Income (loss) before provision for income taxes                                                                        |  |                           | 19,575  |   |                       |   | 20,367  |                    |  |   | (20,367 | ) |  |   | 19,575  |  
|Provision for income taxes                                                                                             |  |                           | 3,065   |   |                       |   |        |                    |  |   |         |   |  | $ | 3,065   |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                      |  | $                         | 16,510  |   |                       | $ | 20,367  |                    |  | $ | (20,367 | ) |  | $ | 16,510  |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|                                                                                                                      
|NextMedia Operating, Inc. Supplemental Combining Statement of Operations For the Three Months Ended September 30,
2004 | 
|                                                                                                                       |  |                           |         |  
|                                                                                                                       |  | NextMedia Operating, Inc. |         |   | GuarantorSubsidiaries |   |         | EliminatingEntries |  |   | Total   |  
|Net revenue                                                                                                            |  | $                         | 21,211  |   |                       | $ | 9,827   |                    |  | $ | (2      | ) |  | $ | 31,036  |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                               |  |                           | 12,465  |   |                       |   | 5,772   |                    |  |   | (2      | ) |  |   | 18,235  |  
|Corporate expenses                                                                                                     |  |                           | 1,318   |   |                       |   | 739     |                    |  |   |        |   |  |   | 2,057   |  
|Depreciation and amortization                                                                                          |  |                           | 1,238   |   |                       |   | 2,803   |                    |  |   |        |   |  |   | 4,041   |  
|Impairment loss                                                                                                        |  |                           |        |   |                       |   | 16,999  |                    |  |   |        |   |  |   | 16,999  |  
|Local marketing agreement fees                                                                                         |  |                           | 324     |   |                       |   |        |                    |  |   |        |   |  |   | 324     |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                                                |  |                           | 5,866   |   |                       |   | (16,486 | )                  |  |   |        |   |  |   | (10,620 | )
|Interest expense, net                                                                                                  |  |                           | 6,083   |   |                       |   |        |                    |  |   |        |   |  |   | 6,083   |  
|Other (income) expense                                                                                                 |  |                           | 348     |   |                       |   | 14      |                    |  |   |        |   |  |   | 362     |  
|Equity in loss of subsidiaries                                                                                         |  |                           | 16,500  |   |                       |   |        |                    |  |   | (16,500 | ) |  |   |        |  
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Income (loss) before provision for income taxes                                                                        |  |                           | (17,065 | ) |                       |   | (16,500 | )                  |  |   | 16,500  |   |  |   | (17,065 | )
|Provision for income taxes                                                                                             |  |                           | (3,751  | ) |                       |   |        |                    |  |   |        |   |  |   | (3,751  | )
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                      |  | $                         | (13,314 | ) |                       | $ | (16,500 | )                  |  | $ | 16,500  |   |  | $ | (13,314 | )
|                                                                                                                       |  |                           |         |   |                       |   |         |                    |  |   |         |   |  |   |         |  



13



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



NextMedia Operating, Inc.

Supplemental Combining Statement of Operations

For the Nine Months Ended September 30, 2003



|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---------------------- | - | ------- | ------------------- |  | - | ------- | - |  | - | ------- | -
|                                                                                                                      |  | NextMedia Operating, Inc. |         |   | Guarantor Subsidiaries |   |         | Eliminating Entries |  |   | Total   |  
|Net revenue                                                                                                           |  | $                         | 54,410  |   |                        | $ | 24,624  |                     |  | $ |        |   |  | $ | 79,034  |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                              |  |                           | 33,299  |   |                        |   | 15,814  |                     |  |   |        |   |  |   | 49,113  |  
|Corporate expenses                                                                                                    |  |                           | 4,731   |   |                        |   | 1,588   |                     |  |   |        |   |  |   | 6,319   |  
|Depreciation and amortization                                                                                         |  |                           | 4,469   |   |                        |   | 3,328   |                     |  |   |        |   |  |   | 7,797   |  
|Local marketing agreement fees                                                                                        |  |                           | 12      |   |                        |   |        |                     |  |   |        |   |  |   | 12      |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                                               |  |                           | 11,899  |   |                        |   | 3,894   |                     |  |   |        |   |  |   | 15,793  |  
|Interest expense, net                                                                                                 |  |                           | 17,662  |   |                        |   |        |                     |  |   |        |   |  |   | 17,662  |  
|Other income                                                                                                          |  |                           | (213    | ) |                        |   | (19,021 | )                   |  |   |        |   |  |   | (19,234 | )
|Equity in (income) loss of subsidiaries                                                                               |  |                           | (22,915 | ) |                        |   |        |                     |  |   | (22,915 | ) |  |   |        |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Income (loss) before provision for income taxes                                                                       |  |                           | 17,365  |   |                        |   | 22,915  |                     |  |   | (22,915 | ) |  |   | 17,365  |  
|Provision for income taxes                                                                                            |  |                           | 9,000   |   |                        |   |        |                     |  |   |        |   |  |   | 9,000   |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                     |  | $                         | 8,365   |   |                        | $ | 22,915  |                     |  | $ | (22,915 | ) |  | $ | 8,365   |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|                                                                                                                     
|NextMedia Operating, Inc. Supplemental Combining Statement of Operations For the Nine Months Ended September 30,
2004 | 
|                                                                                                                      |  |                           |         |  
|                                                                                                                      |  | NextMedia Operating, Inc. |         |   | Guarantor Subsidiaries |   |         | Eliminating Entries |  |   | Total   |  
|Net revenue                                                                                                           |  | $                         | 57,798  |   |                        | $ | 26,847  |                     |  | $ | (2      | ) |  | $ | 84,643  |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                              |  |                           | 35,055  |   |                        |   | 17,679  |                     |  |   | (2      | ) |  |   | 52,732  |  
|Corporate expenses                                                                                                    |  |                           | 4,128   |   |                        |   | 2,114   |                     |  |   |        |   |  |   | 6,242   |  
|Depreciation and amortization                                                                                         |  |                           | 3,647   |   |                        |   | 7,206   |                     |  |   |        |   |  |   | 10,853  |  
|Impairment loss                                                                                                       |  |                           |        |   |                        |   | 16,999  |                     |  |   |        |   |  |   | 16,999  |  
|Local marketing agreement fees                                                                                        |  |                           | 384     |   |                        |   |        |                     |  |   |        |   |  |   | 384     |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Operating income (loss)                                                                                               |  |                           | 14,584  |   |                        |   | (17,151 | )                   |  |   |        |   |  |   | (2,567  | )
|Interest expense, net                                                                                                 |  |                           | 18,215  |   |                        |   |        |                     |  |   |        |   |  |   | 18,215  |  
|Write off of deferred finance costs due to extinguishment of debt                                                     |  |                           | 1,541   |   |                        |   |        |                     |  |   |        |   |  |   | 1,541   |  
|Other (income) expense                                                                                                |  |                           | 700     |   |                        |   | (4,226  | )                   |  |   |        |   |  |   | (3,526  | )
|Equity in loss of subsidiaries                                                                                        |  |                           | 12,925  |   |                        |   |        |                     |  |   | (12,925 | ) |  |   |        |  
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Income (loss) before provision for income taxes                                                                       |  |                           | (18,797 | ) |                        |   | (12,925 | )                   |  |   | 12,925  |   |  |   | (18,797 | )
|Provision for income taxes                                                                                            |  |                           | (1,136  | ) |                        |   |        |                     |  |   |        |   |  |   | (1,136  | )
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  
|Net income (loss)                                                                                                     |  | $                         | (17,661 | ) |                        | $ | (12,925 | )                   |  | $ | 12,925  |   |  | $ | (17,661 | )
|                                                                                                                      |  |                           |         |   |                        |   |         |                     |  |   |         |   |  |   |         |  



14



---

##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



NextMedia Operating, Inc.

Supplemental Combining Statement of Cash Flows

For the Nine Months Ended September 30, 2003



|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|--------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---------------------- | - | ------ | ------------------- |  | ----- | - |  | - | ------- | -
|                                                                                                                      |  | NextMedia Operating, Inc. |         |   | GuarantorSubsidiaries  |   |        | EliminatingEntries  |  | Total |  
|Net cash provided by (used in) operations                                                                             |  | $                         | (4,246  | ) |                        | $ | 2,561  |                     |  | $     |  |  | $ | (1,685  | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Investing Activities                                                                                  |  |                           |         |   |                        |   |        |                     |  |       |  |  |   |         |  
|Purchase of fixed assets                                                                                              |  |                           | (1,503  | ) |                        |   | (2,458 | )                   |  |       |  |  |   | (3,961  | )
|Payments for acquisitions, net of cash acquired                                                                       |  |                           | (71,888 | ) |                        |   |       |                     |  |       |  |  |   | (71,888 | )
|Deferred sellings costs                                                                                               |  |                           | (433    | ) |                        |   |       |                     |  |       |  |  |   | (433    | )
|Proceeds from sale of assets                                                                                          |  |                           | 26,388  |   |                        |   |       |                     |  |       |  |  |   | 26,388  |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in investing activities                                                                                 |  |                           | (47,436 | ) |                        |   | (2,458 | )                   |  |       |  |  |   | (49,894 | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Financing Activities                                                                                  |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Proceeds from revolving credit facilities                                                                             |  |                           | 44,000  |   |                        |   |       |                     |  |       |  |  |   | 44,000  |  
|Repayment of revolving credit facilities                                                                              |  |                           | (33,000 | ) |                        |   |       |                     |  |       |  |  |   | (33,000 | )
|Capital contributions from Parent                                                                                     |  |                           | 27,100  |   |                        |   |       |                     |  |       |  |  |   | 27,100  |  
|Other                                                                                                                 |  |                           | (336    | ) |                        |   |       |                     |  |       |  |  |   | (336    | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash provided by financing activities                                                                             |  |                           | 37,764  |   |                        |   |       |                     |  |       |  |  |   | 37,764  |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net decrease in cash                                                                                                  |  |                           | (13,917 | ) |                        |   | 102    |                     |  |       |  |  |   | 13,815  |  
|Cash at beginning of period                                                                                           |  |                           | 14,951  |   |                        |   | (505   | )                   |  |       |  |  |   | 14,446  |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash at end of period                                                                                                 |  | $                         | 1,034   |   |                        | $ | (403   | )                   |  |       |  |  | $ | 631     |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|                                                                                                                     
|NextMedia Operating, Inc. Supplemental Combining Statement of Cash Flows For the Nine Months Ended September 30,
2004 | 
|                                                                                                                      |  |                           |         |  
|                                                                                                                      |  | NextMedia Operating, Inc. |         |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  | Total |  
|Net Cash used in operations                                                                                           |  | $                         | (2,337  | ) |                        | $ | (1,593 | )                   |  | $     |  |  | $ | (3,930  | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Investing Activities                                                                                  |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Purchase of fixed assets                                                                                              |  |                           | (3,289  | ) |                        |   | (1,838 | )                   |  |       |  |  |   | (5,127  | )
|Payments for acquisitions, net of cash acquired                                                                       |  |                           | (23,552 | ) |                        |   |       |                     |  |       |  |  |   | (23,552 | )
|Proceeds from sale of assets                                                                                          |  |                           | 398     |   |                        |   | 3,319  |                     |  |       |  |  |   | 3,717   |  
|Interest rate swap termination proceeds                                                                               |  |                           | 1,600   |   |                        |   |       |                     |  |       |  |  |   | 1,600   |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in investing activities                                                                                 |  |                           | (24,843 | ) |                        |   | 1,481  |                     |  |       |  |  |   | (23,362 | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Financing Activities                                                                                  |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Proceeds from revolving credit facilities                                                                             |  |                           | 39,000  |   |                        |   |       |                     |  |       |  |  |   | 39,000  |  
|Repayment of revolving credit facilities                                                                              |  |                           | (9,000  | ) |                        |   |       |                     |  |       |  |  |   | (9,000  | )
|Dividends to parent                                                                                                   |  |                           | (2,133  | ) |                        |   |       |                     |  |       |  |  |   | (2,133  | )
|Payments of financing related costs                                                                                   |  |                           | (427    | ) |                        |   |       |                     |  |       |  |  |   | (427    | )
|Other                                                                                                                 |  |                           | (132    | ) |                        |   |       |                     |  |       |  |  |   | (132    | )
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in financing activities                                                                                 |  |                           | 27,308  |   |                        |   |       |                     |  |       |  |  |   | 27,308  |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net decrease in cash                                                                                                  |  |                           | 128     |   |                        |   | (112   | )                   |  |       |  |  |   | 16      |  
|Cash at beginning of period                                                                                           |  |                           | 1,137   |   |                        |   | (430   | )                   |  |       |  |  |   | 707     |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash at end of period                                                                                                 |  | $                         | 1,265   |   |                        | $ | (542   | )                   |  | $     |  |  | $ | 723     |  
|                                                                                                                      |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  



15



---

##### Table of Contents

ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview



Our business consists of two out-of-home media divisions: radio broadcasting and outdoor advertising. Our radio broadcasting business consists of radio
stations for which we provide programming and sell on-air advertising time. Our outdoor advertising business includes traditional outdoor advertising displays, such as bulletins and posters, as well as alternative advertising displays that we
install in public locations, including restaurants, health clubs, retail stores and entertainment venues.



Radio Broadcasting Division



We derive our radio broadcast revenues primarily from the sale of advertising time to local and national advertisers. Our radio division operating expenses consist primarily of employee salaries and commissions, programming expenses,
advertising and promotional expenses, rental for studio premises, rental of transmission tower space and music license royalty fees. We seek to control these expenses by centralizing certain functions, such as finance, accounting, legal, human
resources and management information systems and the overall programming management function and by requiring adherence to strict cost controls at the station level.



Our radio advertising revenues generally reflect the advertising rates that our radio stations can charge and the number of
advertisements that we can broadcast without jeopardizing listener levels and resulting ratings. We typically base our advertising rates upon demand for a stations advertising inventory and its ability to attract audiences in targeted
demographic groups, as well as upon the number of stations competing in the market.



Most of our markets are mid-sized or suburban markets, which typically attract a larger percentage of advertising revenues from local, rather than national, advertising.



The radio broadcast industry typically experiences seasonal revenue
fluctuations due primarily to fluctuations in advertising expenditures by local and national advertisers, with revenues typically being the lowest in the first calendar quarter of each year. A radio stations operating results in any period
also may be affected by advertising and promotional expenditures that do not necessarily produce revenues in the period in which the expenditures are made.



Outdoor Advertising Division



We derive our outdoor advertising revenues primarily through contracts with local and national advertisers. Our outdoor division operating expenses
consist primarily of employee salaries and commissions, rental of sites for advertising displays, costs for installation of advertising frames, maintenance and shipping costs, printing of advertisements and production costs.



Our outdoor advertising revenues reflect advertising rates prevailing in the
relevant market, the location of our displays and our available inventory. We generally base our advertising rates on a particular displays exposure, or number of impressions delivered, relative to the demographics of the
particular market and its location within that market. Our outdoor advertising display contracts typically have terms ranging from one month to one year.



We estimate the number of impressions delivered by an outdoor display, for example, by estimating the number of individuals viewing the site during a
defined period. We apply a similar formula for determining advertising rates for our other display products. Because roadside bulletin displays are large and generate a higher number of impressions than other outdoor products, advertising rates for
bulletins are significantly higher than those for our other outdoor and alternative display products.



Factors Affecting Comparability



We commenced operations in late-1999 when our predecessor by merger completed its first acquisition. Our results of operations from period to period are not comparable because of the impact of the various acquisitions and dispositions that
we have completed, as well as our rapid build-up in personnel in anticipation of additional acquisitions. Moreover, our expected growth through acquisitions is likely to continue to limit the comparability of our results of operations.



16



---

##### Table of Contents

Results of Operations



The following table presents certain summary historical financial data in dollars and as a percentage of net revenues for the periods indicated on a
consolidated basis and for each of our out-of-home media divisions:



|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|---------------------------------------------------------------------------------------- |  | -------------------------------- | ------- | ------------------------------- | - | ----- | ---- | - | ------- | - |  | ----- |  | - | ------- | - | ---- | ----- |  | - | ------- | - |  | -----
|                                                                                         |  | Three Months Ended September 30, |         | Nine Months Ended September 30,
|                                                                                         |  | 2003                             |         |                                 | % |       | 2004 |   |         | % |  | 2003  |  |   | %       |   | 2004 |       |  | %
|                                                                                         |  | (dollars in thousands)          
|Consolidated Operating Data:                                                             |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Net revenue                                                                              |  | $                                | 27,783  |                                 |   | 100.0 |      | $ | 31,036  |   |  | 100.0 |  | $ | 79,034  |   |      | 100.0 |  | $ | 84,643  |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                                  | 17,170  |                                 |   | 61.8  |      |   | 18,235  |   |  | 58.8  |  |   | 49,113  |   |      | 62.1  |  |   | 52,732  |   |  | 62.3 
|Corporate expenses                                                                       |  |                                  | 1,938   |                                 |   | 7.0   |      |   | 2,057   |   |  | 6.6   |  |   | 6,319   |   |      | 8.0   |  |   | 6,242   |   |  | 7.4  
|Depreciation and amortization                                                            |  |                                  | 2,759   |                                 |   | 9.9   |      |   | 4,041   |   |  | 13.0  |  |   | 7,797   |   |      | 9.9   |  |   | 10,853  |   |  | 12.8 
|Impairment loss                                                                          |  |                                  |        |                                 |   |      |      |   | 16,999  |   |  | 54.8  |  |   |        |   |      |      |  |   | 16,999  |   |  | 20.1 
|Local marketing agreement fees                                                           |  |                                  | 12      |                                 |   |      |      |   | 324     |   |  | 1.0   |  |   | 12      |   |      |       |  |   | 384     |   |  | 0.5  
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Operating income (loss)                                                                  |  |                                  | 5,904   |                                 |   |       |      |   | (10,620 | ) |  |       |  |   | 15,793  |   |      |       |  |   | (2,567  | ) |  |      
|Interest expense, net                                                                    |  |                                  | 6,181   |                                 |   |       |      |   | 6,083   |   |  |       |  |   | 17,662  |   |      |       |  |   | 18,215  |   |  |      
|Write-off of deferred finance costs due to extinguishment of debt                        |  |                                  |        |                                 |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   | 1,541   |   |  |      
|Other (income) expense, net                                                              |  |                                  | (19,852 | )                               |   |       |      |   | 362     |   |  |       |  |   | (19,234 | ) |      |       |  |   | (3,526  | ) |  |      
|Provision for income taxes                                                               |  |                                  | 3,065   |                                 |   |       |      |   | (3,751  | ) |  |       |  |   | 9,000   |   |      |       |  |   | (1,136  | ) |  |      
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Net income (loss)                                                                        |  | $                                | 16,510  |                                 |   |       |      | $ | (13,314 | ) |  |       |  | $ | 8,365   |   |      |       |  | $ | (17,661 | ) |  |      
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Radio Broadcasting Operating Data:                                                       |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Net revenue                                                                              |  | $                                | 19,033  |                                 |   | 100.0 |      | $ | 21,211  |   |  | 100.0 |  | $ | 54,410  |   |      | 100.0 |  | $ | 57,798  |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                                  | 11,562  |                                 |   | 60.7  |      |   | 12,463  |   |  | 58.8  |  |   | 33,299  |   |      | 61.2  |  |   | 35,053  |   |  | 60.7 
|Depreciation and amortization                                                            |  |                                  | 1,499   |                                 |   | 7.9   |      |   | 1,238   |   |  | 5.8   |  |   | 4,469   |   |      | 8.2   |  |   | 3,647   |   |  | 6.3  
|Local marketing agreement fees                                                           |  |                                  | 12      |                                 |   |      |      |   | 324     |   |  | 1.5   |  |   | 12      |   |      |      |  |   | 384     |   |  | 0.7  
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Segment operating income                                                                 |  | $                                | 5,960   |                                 |   |       |      | $ | 7,186   |   |  |       |  | $ | 16,630  |   |      |       |  | $ | 18,714  |   |  |      
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Outdoor Advertising Operating Data:                                                      |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Net revenue                                                                              |  | $                                | 8,750   |                                 |   | 100.0 |      | $ | 9,825   |   |  | 100.0 |  | $ | 24,624  |   |      | 100.0 |  | $ | 26,845  |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                                  | 5,608   |                                 |   | 64.1  |      |   | 5,772   |   |  | 58.7  |  |   | 15,814  |   |      | 64.2  |  |   | 17,679  |   |  | 65.9 
|Depreciation and amortization                                                            |  |                                  | 1,260   |                                 |   | 14.4  |      |   | 2,803   |   |  | 28.5  |  |   | 3,328   |   |      | 13.5  |  |   | 7,206   |   |  | 26.8 
|Impairment loss                                                                          |  |                                  |        |                                 |   |      |      |   | 16,999  |   |  | NM    |  |   |        |   |      |      |  |   | 16,999  |   |  | NM   
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      
|Segment operating income (loss)                                                          |  | $                                | 1,882   |                                 |   |       |      | $ | (15,749 | ) |  |       |  | $ | 5,482   |   |      |       |  | $ | (15,039 | ) |  |      
|                                                                                         |  |                                  |         |                                 |   |       |      |   |         |   |  |       |  |   |         |   |      |       |  |   |         |   |  |      

---

NM = Not meaningful



Comparison of Three Months Ended September 30, 2004 to Three Months Ended September 30,
2003



Net Revenue.Consolidated net revenue
increased $3.2 million to $31.0 million in 2004 from $27.8 million in 2003. Radio net revenue increased $2.2 million to $21.2 million in 2004 from $19.0 million in 2003. Outdoor advertising net revenues increased $1.0 million to $9.8 million in 2004
from $8.8 million in 2003. Third quarter revenue increased approximately $1.9 million due to acquisitions in 2003 and 2004. The remaining increase was attributable to organic growth in the assets operated as of September 30, 2004. Due to completed
acquisitions and local marketing agreements, management expects revenue in the fourth quarter of 2004 to exceed revenue achieved in the fourth quarter of 2003.



Market Level Expenses.Consolidated market level expenses increased $1.0 million to $18.2 million in 2004 from $17.2 million in 2003. Radio
market level expenses increased $903,000 to $12.5 million in 2004 from $11.6 million in 2003. Outdoor advertising market level expenses increased $164,000 to $5.8 million in 2004 from $5.6 million in 2003. These increases were attributable primarily
to our completion of acquisitions in 2003 and 2004. As a percentage of net revenues, consolidated market level expenses decreased from 61.8% to 58.8% due to the acquisition of assets with higher operating leverage than our historical average.



Corporate Expenses. Corporate expenses increased
slightly to $2.1 million in 2004 from $1.9 million in 2003. As a percentage of net revenues, corporate expenses declined from 7.0% to 6.6%.



17



---

##### Table of Contents

Depreciation and Amortization.Consolidated depreciation and amortization increased $1.2 million
to $4.0 million in 2004 from $2.8 million in 2003. Radio depreciation and amortization decreased $261,000 to $1.2 million in 2004 from $1.5 million in 2003. Outdoor advertising depreciation and amortization increased $1.5 million to $2.8 million in
2004 from $1.3 million in 2003. The increase in outdoor depreciation and amortization was attributable to acquisitions during 2003 and 2004 which resulted in the addition of depreciable fixed assets and definite-lived intangibles which are amortized
over their useful lives.



Impairment loss. In the third
quarter of 2004, we performed an interim impairment analysis of its alternative advertising market because year-to-date operating results indicated that an impairment may have occurred. As a result of deteriorating business conditions, we have
recorded a $17.0 million impairment loss to reduce the carrying value of the markets assets to their estimated fair value.



Interest and Other Income (Expense) Net.Interest expense, net, decreased slightly to $6.1 million in 2004 from $6.2 million in 2003. Other income
(expense), net decreased to a $362,000 loss in 2004 from $19.9 million in revenue for 2003. The prior year period included an $18.9 million gain related to the disposition of WJTW-FM.



Income Tax. We record deferred tax expense throughout the year to establish a valuation allowance against net
operating loss carry-forwards generated by amortization of indefinite-lived intangibles that are deductible for tax purposes, but are no longer amortized for book purposes. We record this valuation allowance as we continue to expect that our
deferred tax liabilities will not reverse within our net operating loss carry-forward period. We do not have any current income taxes. For the three months ended September 30, 2004, we recorded approximately $2,912 of deferred tax expense offset by
$6,664 of deferred tax benefit related to the third quarter impairment loss.



Net Income (loss). Consolidated net loss increased $29.8 million to $13.3 million in 2004 from $16.5 million of net income in 2003 as a result of the factors described above.



Comparison of Nine Months Ended September 30, 2004 to Nine Months Ended September 30,
2003



Net Revenues.Consolidated net revenues
increased $5.6 million to $84.6 million in 2004 from $79.0 million in 2003. Radio net revenues increased $3.4 million to $57.8 million in 2004 from $54.4 million in 2003. Outdoor advertising net revenues increased $2.2 million to $26.8 million in
2004 from $24.6 million in 2003. Net revenue increased $5.2 million due to acquisitions in 2003 and 2004. The remaining increase was attributable to organic growth in radio and traditional outdoor advertising assets operated as of September 30, 2004
offset by declines in alternative advertising revenue resulting from deteriorating operating conditions in that business.



Market Level Expenses.Consolidated market level expenses increased $3.6 million to $52.7 million in 2004 from $49.1 million in 2003. Radio market
level expenses increased $1.8 million to $35.1 million in 2004 from $33.3 million in 2003. Outdoor advertising market level expenses increased $1.9 million to $17.7 million in 2004 from $15.8 million in 2003. These increases were attributable
primarily to our completion of acquisitions in 2003 and 2004. As a percentage of net revenues, consolidated market level expenses increased slightly from 62.1% to 62.3%.



Corporate Expenses. Corporate expenses decreased slightly to $6.2 million in 2004 from $6.3 million in 2003. As a
percentage of net revenues, corporate expenses declined from 8.0% to 7.4% because the growth in revenue did not require a proportional increase in corporate costs.



Depreciation and Amortization.Consolidated depreciation and amortization increased $3.1 million to $10.9 million in
2004 from $7.8 million in 2003. Radio depreciation and amortization decreased $822,000 to $3.6 million in 2004 from $4.5 million in 2003. The decrease in radio depreciation and amortization is attributable to declining amortization related to aging
customer base intangible assets which were acquired through acquisition. Outdoor advertising depreciation and amortization increased $3.9 million to $7.2 million in 2004 from $3.3 million in 2003. The increase in outdoor depreciation and
amortization was attributable to acquisitions during 2003 and 2004 which resulted in the addition of depreciable fixed assets and definite-lived intangibles which are amortized over their useful lives.



Interest and Other Income (Expense) Net.Interest expense, net,
increased to $18.2 million in 2004 from $17.7 million in 2003 due to indebtedness incurred in connection with our acquisitions and slightly higher effective interest rates on our debt. Other income (expense), net decreased from a $19.2 million gain
in 2003 to a $3.5 million gain in 2004. The prior year period included an $18.9 million gain related to the disposition of WJTW-FM.



Income Tax. We record deferred tax expense throughout the year to establish a valuation allowance against net operating loss carry-forwards
generated by amortization of indefinite lived intangibles that are deductible for tax purposes, but are no longer amortized for book purposes. We record this valuation allowance as we continue to expect that our deferred tax liabilities will not



18



---

##### Table of Contents

reverse within out net operating loss carry-forward period. We do not have any current income taxes. For the nine months
ended September 30, 2004, we recorded approximately $8,887 of deferred tax expense offset by $6,664 of deferred tax benefit related to the third quarter impairment loss and $3,359 of net deferred tax benefit related to its asset exchanges in the
first and second quarters of 2004.



Net Income (loss).
Consolidated net loss increased $26.1 million to $17.7 million in 2004 from $8.4 million of net income in 2003 as a result of the factors described above.



Liquidity and Capital Resources



Our cash and cash equivalents balance at September 30, 2004 was approximately $723,000 compared to $707,000 at December 31, 2003.



Net cash used in operating activities was $3.9 million and $1.7 million for
the nine months ended September 30, 2004 and 2003, respectively. The increase in our net cash used in operating activities was due primarily to the funding of working capital related to the Companys LMA in Wilmington, North Carolina.



Net cash provided by financing activities was $27.3 million
for the nine months ended September 30, 2004 compared to $37.8 million for the nine months ended September 30, 2003. During the nine months ended September 30, 2004, there was less acquisition activity involving cash consideration compared to the
same period in the prior year; consequently, there was less financing activity. Net cash used in investing activities was $23.4 million and $49.9 million for the nine months ended September 30, 2004 and 2003, respectively. These cash flows primarily
reflect expenditures for acquisitions and capital expenditures.



Sources
and Uses of Funds



We use a significant portion of our
capital resources to consummate acquisitions. Through September 30, 2004, we funded our acquisitions from the following sources: equity capital contributions of approximately $354.0 million from our indirect parent, NextMedia Investors, funded by
equity investments from several private investment funds and our senior management, and aggregate borrowings, net of repayments, of approximately $229.9 million. We expect to obtain financing for future acquisitions through the incurrence of debt,
additional equity contributions, internally generated funds or a combination of the foregoing. There can be no assurance, however, that external financing will be available to us on terms we consider favorable or that cash flow from operations will
be sufficient to fund our ongoing liquidity requirements.



On
April 9, 2004, we terminated our existing senior credit facility and entered into a new $75.0 million senior credit facility maturing five years from the date thereof. Our senior credit facility contains customary restrictive covenants that, among
other things, limit our ability to incur additional indebtedness and liens in connection therewith, pay dividends and make capital expenditures above specified limits. Under the senior credit facility, we must satisfy specified financial covenants,
such as a maximum total leverage ratio, a maximum senior leverage ratio and a minimum ratio of consolidated EBITDA to consolidated net cash interest expense. As of September 30, 2004, we were in compliance with all of these covenants. After taking
into account these restrictive covenants, as of September 30, 2004, we had approximately $43.0 million of borrowing capacity under our senior credit facility.



Capital expenditures for the nine months ended September 30, 2004 increased slightly to $5.1 million from $4.0 million for the nine months ended
September 30, 2003. The following table sets forth our capital expenditures for the nine months ended September 30, 2004. Recurring capital expenditures are related to the maintenance of our existing broadcast facilities and outdoor structures.
Non-recurring capital expenditures are related primarily to radio signal upgrades and facility consolidations. Revenue producing capital expenditures are related to the construction of new outdoor structures which management believes will generate
future revenue.



|                           |  |                                      |      
|-------------------------- |  | ------------------------------------ | -----
|                           |  | Nine Months Ended September 30, 2004
|                           |  | (in thousands)                      
|Recurring                  |  | $                                    | 2,511
|Non-recurring              |  |                                      | 1,556
|Revenue producing          |  |                                      | 1,060
|                           |  |                                      |      
|Total capital expenditures |  | $                                    | 5,127
|                           |  |                                      |      



Our 10.75% senior
subordinated notes due 2011 require us to make semi-annual interest payments of approximately $10.8 million on January 1 and July 1 of each year. The indenture governing the notes contains certain restrictive covenants that, among other things,
limit our ability to incur additional indebtedness and pay dividends. As of September 30, 2004, we were in compliance with these covenants.



19



---

##### Table of Contents

We believe that cash from operations and available borrowings under our senior credit facility will be
sufficient to permit us to meet our financial obligations and to fund our existing operations for the next twelve months.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK



Our long-term debt has a fixed interest rate; consequently, we do not believe we are currently exposed to any material interest rate or market risk in connection with our remaining long-term debt.



ITEM 4. CONTROLS AND PROCEDURES



Based on their evaluation of our disclosure controls and procedures conducted as of the end of the period covered by this report on Form 10-Q, our principal executive officer and principal financial officer have concluded that, as of the
date of their evaluation, our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) promulgated under the Securities Exchange Act of 1934, as amended) are effective.



There have been no significant changes in our internal controls or in other
factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this quarterly report on Form 10-Q.



20



---

##### Table of Contents

PART II



ITEM 1. LEGAL PROCEEDINGS



We currently are not a
party to any material lawsuit or proceeding.



ITEM 2. CHANGES IN SECURITIES



None.



ITEM 3. DEFAULTS UPON SENIOR SECURITIES



None.



ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS



None.



ITEM 5. OTHER INFORMATION



None.



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.



|(a) | Exhibits
|--- | --------



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                       
|31.1*       |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2*       |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|32.1*       |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2*       |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|* | Filed herewith
|- | --------------



|(b) | Reports on Form 8-K
|--- | -------------------



None.



21



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



|                        |  |                                        |  |                                                                                       
|----------------------- |  | -------------------------------------- |  | --------------------------------------------------------------------------------------
|                        |  | NEXTMEDIA OPERATING, INC. (Registrant)
|                        |  |                                       
|DATE: NOVEMBER 12, 2004 |  | By:                                    |  | /s/ STEVEN DINETZ                                                                     
|                        |  |                                        |  | Steven Dinetz, Chief Executive Officer and President (Principal Executive Officer)    
|                        |  |                                       
|DATE: NOVEMBER 12, 2004 |  | By:                                    |  | /s/ SEAN R. STOVER                                                                    
|                        |  |                                        |  | Sean R. Stover, Chief Financial Officer (Principal Financial Officer)                 
|                        |  |                                       
|DATE: NOVEMBER 12, 2004 |  | By:                                    |  | /s/ SCHUYLER HANSEN                                                                   
|                        |  |                                        |  | Schuyler Hansen, Chief Accounting Officer and Treasurer (Principal Accounting Officer)



22



---

##### Table of Contents

Exhibit Index



|            |  |                                                                                                                                                   
|----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                       
|31.1        |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|31.2        |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                               
|            | 
|32.1        |  | Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|            | 
|32.2        |  | Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



23