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SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549



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FORM 10-Q



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(Mark One)

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



For the quarterly period ended June 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



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NextMedia Operating, Inc.

(Exact name of registrant as specified in its charter)



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|                                                                      |  |                                  
|--------------------------------------------------------------------- |  | ---------------------------------
|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)



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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 August 13, 2004 was 3,000. The Registrant has no other class of common stock outstanding.



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##### Table of Contents

TABLE OF CONTENTS



|        |  |         |  |                                                                                                 |  |   
|------- |  | ------- |  | ----------------------------------------------------------------------------------------------- |  | --
|PART I  |  |         |  |                                                                                                 |  |   
|        |  |         | 
|        |  | Item 1. |  | Unaudited Financial Statements                                                                  |  |   
|        |  |         | 
|        |  |         |  | Consolidated Balance Sheets as of December 31, 2003 and June 30, 2004                           |  | 3 
|        |  |         | 
|        |  |         |  | Consolidated Statements of Operations for the three and six months ended June 30, 2003 and 2004 |  | 4 
|        |  |         | 
|        |  |         |  | Consolidated Statements of Cash Flows for the six months ended June 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           |  | 18
|        |  |         | 
|        |  | Item 3. |  | Quantitative and Qualitative Disclosure About Market Risk                                       |  | 22
|        |  |         | 
|        |  | Item 4. |  | Controls and Procedures                                                                         |  | 22
|        |  |         | 
|PART II |  |         |  |                                                                                                 |  |   
|        |  |         | 
|        |  | Item 1. |  | Legal Proceedings                                                                               |  | 23
|        |  |         | 
|        |  | Item 2. |  | Changes in Securities                                                                           |  | 23
|        |  |         | 
|        |  | Item 3. |  | Defaults Upon Senior Securities                                                                 |  | 23
|        |  |         | 
|        |  | Item 4. |  | Submission of Matters of a Vote of Security Holders                                             |  | 23
|        |  |         | 
|        |  | Item 5. |  | Other Information                                                                               |  | 23
|        |  |         | 
|        |  | Item 6. |  | Exhibits and Reports on Form 8-K                                                                |  | 23



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##### Table of Contents

NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS

(In thousands)

(Unaudited)



|                                                                                                       |  |                   |         |   |               |   |         |  
|------------------------------------------------------------------------------------------------------ |  | ----------------- | ------- | - | ------------- | - | ------- | -
|                                                                                                       |  | December 31, 2003 |         |   | June 30, 2004 |  
|Assets                                                                                                 |  |                   |         |   |               |   |         |  
|Current assets:                                                                                        |  |                   |         |   |               |   |         |  
|Cash and cash equivalents                                                                              |  | $                 | 707     |   |               | $ | 925     |  
|Accounts receivable, net of allowance for doubtful accounts of $1,110 and $1,407, respectively         |  |                   | 16,452  |   |               |   | 17,001  |  
|Prepaid expenses and other current assets                                                              |  |                   | 3,209   |   |               |   | 2,681   |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total current assets                                                                                   |  |                   | 20,368  |   |               |   | 20,607  |  
|Property and equipment, net                                                                            |  |                   | 58,016  |   |               |   | 87,858  |  
|Other assets                                                                                           |  |                   | 12,247  |   |               |   | 9,314   |  
|Goodwill, net                                                                                          |  |                   | 63,590  |   |               |   | 59,274  |  
|Other intangibles, net                                                                                 |  |                   | 389,156 |   |               |   | 390,094 |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total assets                                                                                           |  | $                 | 543,377 |   |               | $ | 567,147 |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Liabilities and Stockholders Equity                                                                   |  |                   |         |   |               |   |         |  
|Current liabilities:                                                                                   |  |                   |         |   |               |   |         |  
|Accounts payable                                                                                       |  | $                 | 1,699   |   |               | $ | 1,458   |  
|Accrued expenses                                                                                       |  |                   | 17,484  |   |               |   | 5,806   |  
|Deferred revenue                                                                                       |  |                   | 516     |   |               |   | 1,291   |  
|Other                                                                                                  |  |                   | 1,825   |   |               |   | 1,996   |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total current liabilities                                                                              |  |                   | 21,524  |   |               |   | 10,551  |  
|Long-term debt                                                                                         |  |                   | 199,634 |   |               |   | 234,791 |  
|Deferred tax liability                                                                                 |  |                   | 26,858  |   |               |   | 33,023  |  
|Other long-term liabilities                                                                            |  |                   | 1,306   |   |               |   | 1,168   |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total liabilities                                                                                      |  |                   | 249,322 |   |               |   | 279,533 |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|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 |   |               |   | 350,520 |  
|Accumulated deficit                                                                                    |  |                   | (58,561 | ) |               |   | (62,907 | )
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total stockholders equity                                                                             |  |                   | 294,055 |   |               |   | 287,614 |  
|                                                                                                       |  |                   |         |   |               |   |         |  
|Total liabilities and stockholders equity                                                             |  | $                 | 543,377 |   |               | $ | 567,147 |  
|                                                                                                       |  |                   |         |   |               |   |         |  



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



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands)

(Unaudited)



|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------ | - | ------------------------- | - | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                                         |  | Three Months Ended June 30, |        |   | Six Months Ended June 30, |  
|                                                                                         |  | 2003                        |        |   | 2004                      |   |        | 2003 |  |   | 2004   |  
|Net revenue                                                                              |  | $                           | 27,695 |   |                           | $ | 29,215 |      |  | $ | 51,251 |   |  | $ | 53,606 |  
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                             | 16,608 |   |                           |   | 18,024 |      |  |   | 31,943 |   |  |   | 34,497 |  
|Corporate expenses                                                                       |  |                             | 2,443  |   |                           |   | 2,255  |      |  |   | 4,381  |   |  |   | 4,184  |  
|Depreciation and amortization                                                            |  |                             | 2,688  |   |                           |   | 3,425  |      |  |   | 5,037  |   |  |   | 6,812  |  
|Local marketing agreement fees                                                           |  |                             |       |   |                           |   | 30     |      |  |   |       |   |  |   | 60     |  
|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Total operating expenses                                                                 |  |                             | 21,739 |   |                           |   | 23,734 |      |  |   | 41,361 |   |  |   | 45,553 |  
|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Operating income                                                                         |  |                             | 5,956  |   |                           |   | 5,481  |      |  |   | 9,890  |   |  |   | 8,053  |  
|Interest expense, net                                                                    |  |                             | 5,756  |   |                           |   | 6,068  |      |  |   | 11,481 |   |  |   | 12,132 |  
|Write off of deferred finance costs due to extinguishment of debt                        |  |                             |       |   |                           |   | 1,541  |      |  |   |       |   |  |   | 1,541  |  
|Other (income) expense                                                                   |  |                             | 131    |   |                           |   | (66    | )    |  |   | 618    |   |  |   | (3,888 | )
|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Income (loss) before income taxes                                                        |  |                             | 69     |   |                           |   | (2,062 | )    |  |   | (2,209 | ) |  |   | (1,732 | )
|Provision for income taxes                                                               |  |                             | 3,054  |   |                           |   | 3,310  |      |  |   | 5,935  |   |  |   | 2,615  |  
|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  
|Net Loss                                                                                 |  | $                           | (2,985 | ) |                           | $ | (5,372 | )    |  | $ | (8,144 | ) |  | $ | (4,347 | )
|                                                                                         |  |                             |        |   |                           |   |        |      |  |   |        |   |  |   |        |  



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



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)



|                                                                            |  |                           |         |   |      |   |         |  
|--------------------------------------------------------------------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|                                                                            |  | Six Months ended June 30, |        
|                                                                            |  | 2003                      |         |   | 2004 |  
|Cash Flows From Operating Activities                                        |  |                           |         |   |      |   |         |  
|Net loss                                                                    |  | $                         | (8,144  | ) |      | $ | (4,347  | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                           |         |   |      |   |         |  
|Depreciation and amortization                                               |  |                           | 5,037   |   |      |   | 6,812   |  
|Non-cash interest expense                                                   |  |                           | 607     |   |      |   | 589     |  
|Provision for bad debt expense                                              |  |                           | 371     |   |      |   | 502     |  
|Non-cash compensation expense                                               |  |                           | 39      |   |      |   | 39      |  
|Unrealized loss on interest rate swap                                       |  |                           | 335     |   |      |   | 135     |  
|Provision for deferred taxes                                                |  |                           | 5,935   |   |      |   | 2,615   |  
|Other (gains) and losses                                                    |  |                           | 24      |   |      |   | (2,703  | )
|Changes in assets and liabilities, net of effect of acquisitions:           |  |                           |         |   |      |   |         |  
|Accounts receivable                                                         |  |                           | (2,405  | ) |      |   | (1,139  | )
|Prepaid expenses and other assets                                           |  |                           | (687    | ) |      |   | 1,026   |  
|Accounts payable and accrued expenses                                       |  |                           | (1,560  | ) |      |   | (15,874 | )
|Deferred revenue                                                            |  |                           | 172     |   |      |   | 774     |  
|Other current liabilities                                                   |  |                           | (60     | ) |      |   | 5       |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash used in operating activities                                       |  |                           | (336    | ) |      |   | (11,566 | )
|                                                                            |  |                           |         |   |      |   |         |  
|Cash Flows From Investing Activities                                        |  |                           |         |   |      |   |         |  
|Purchase of fixed assets                                                    |  |                           | (2,963  | ) |      |   | (3,632  | )
|Payments for acquisitions, net of cash acquired                             |  |                           | (68,767 | ) |      |   | (22,228 | )
|Deferred selling costs                                                      |  |                           | (239    | ) |      |   |        |  
|Proceeds from sale of properties                                            |  |                           | 5,463   |   |      |   | 3,751   |  
|Proceeds from termination of interest rate swaps                            |  |                           |        |   |      |   | 1,600   |  
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash used in investing activities                                       |  |                           | (66,506 | ) |      |   | (20,509 | )
|                                                                            |  |                           |         |   |      |   |         |  
|Cash Flows From Financing Activities                                        |  |                           |         |   |      |   |         |  
|Proceeds from revolving credit facilities                                   |  |                           | 44,000  |   |      |   | 39,000  |  
|Repayment of revolving credit facilities                                    |  |                           | (7,500  | ) |      |   | (4,000  | )
|Equity capital contributions from Parent, net                               |  |                           | 27,100  |   |      |   |        |  
|Payments of financing related costs                                         |  |                           | (32     | ) |      |   | (427    | )
|Dividend to parent                                                          |  |                           |        |   |      |   | (2,133  | )
|Other                                                                       |  |                           | (72     | ) |      |   | (147    | )
|                                                                            |  |                           |         |   |      |   |         |  
|Net cash provided by (used in) financing activities                         |  |                           | 63,496  |   |      |   | 32,293  |  
|                                                                            |  |                           |         |   |      |   |         |  
|Increase (decrease) in cash and cash equivalents                            |  |                           | (3,346  | ) |      |   | 218     |  
|Cash and cash equivalents at beginning of period                            |  |                           | 14,446  |   |      |   | 707     |  
|                                                                            |  |                           |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                  |  | $                         | 11,100  |   |      | $ | 925     |  
|                                                                            |  |                           |         |   |      |   |         |  
|Supplemental Cash Flow Information                                          |  |                           |         |   |      |   |         |  
|Cash payments during the period for:                                        |  |                           |         |   |      |   |         |  
|Interest                                                                    |  | $                         | 11,502  |   |      | $ | 22,135  |  
|                                                                            |  |                           |         |   |      |   |         |  



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



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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. Recent Accounting Pronouncements



In January 2003, the Financial Accounting Standards Board issued
Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities,. FIN 46 must be applied to interests in variable interest entities created before February 1, 2003 beginning in the first interim or annual period beginning
after March 15, 2004. For variable interest entities created after February 1, 2003, FIN 46 is effective for the first interim period after December 31, 2003. The adoption of FIN 46 has not had a material impact on our financial statements.



3. 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. 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 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 first quarter of 2004.



The Company has accounted for the transaction 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



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



agreement, both parties remain liable for the loss or unfavorable change
in terms of all site leases disposed by them for a period of four months from June 30, 2004. Additionally, for a period of one year from June 30, 2004, the parties remain liable for the loss or unfavorable change in terms of all site leases disposed
by them which expire during the one year period. To the extent a claim for indemnification is made for site leases meeting the foregoing criteria, each party will be required to either 1) make cash payments equivalent to the fair market value of the
lost sites, 2) substitute additional outdoor advertising assets with fair market value equivalent to that of the lost sites, or 3) make annual cash payments equal to the annual 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 June 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 June 30, 2004, none of these amounts have been paid.



Due to the foregoing acquisitions, the Company recorded approximately $6,852
of additional goodwill which was offset by reduction of $11,168 due to the Companys disposition.



The results of operations of the assets acquired during the three and six months ended June 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 six months ended June 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 six months ended June 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.



|               |  |                           |         |   |      |   |         |  
|-------------- |  | ------------------------- | ------- | - | ---- | - | ------- | -
|               |  | Six months ended June 30, |        
|               |  | 2003                      |         |   | 2004 |  
|Net revenues   |  | $                         | 29,468  |   |      | $ | 30,450  |  
|Total expenses |  |                           | 44,347  |   |      |   | 46,866  |  
|               |  |                           |         |   |      |   |         |  
|Net loss       |  | $                         | (14,879 | ) |      | $ | (16,416 | )
|               |  |                           |         |   |      |   |         |  



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



4. Property and Equipment



Property and equipment consist of the following:



|                              |  |                  |  |                         |         |   |                    |   |         |  
|----------------------------- |  | ---------------- |  | ----------------------- | ------- | - | ------------------ | - | ------- | -
|                              |  | Depreciable Life |  | As of December 31, 2003 |         |   | As ofJune 30, 2004 |  
|Land and improvements         |  |                 |  | $                       | 5,729   |   |                    | $ | 7,101   |  
|Construction in progress      |  |                 |  |                         | 870     |   |                    |   | 850     |  
|Buildings and improvements    |  | 20               |  |                         | 9,893   |   |                    |   | 10,534  |  
|Leasehold improvements        |  | 10               |  |                         | 1,833   |   |                    |   | 1,664   |  
|Broadcast equipment           |  | 5  20           |  |                         | 8,445   |   |                    |   | 9,058   |  
|Office equipment              |  | 7                |  |                         | 1,814   |   |                    |   | 1,949   |  
|Computer software and systems |  | 3  5            |  |                         | 1,930   |   |                    |   | 2,101   |  
|Tower and antennae            |  | 5  20           |  |                         | 4,931   |   |                    |   | 5,462   |  
|Vehicles                      |  | 3                |  |                         | 1,734   |   |                    |   | 2,319   |  
|Furniture and fixtures        |  | 7                |  |                         | 1,319   |   |                    |   | 1,409   |  
|Advertising displays          |  | 3  15           |  |                         | 34,654  |   |                    |   | 62,202  |  
|                              |  |                  |  |                         |         |   |                    |   |         |  
|                              |  |                  |  |                         | 73,152  |   |                    |   | 104,649 |  
|Less accumulated depreciation |  |                  |  |                         | (15,136 | ) |                    |   | (16,791 | )
|                              |  |                  |  |                         |         |   |                    |   |         |  
|                              |  |                  |  | $                       | 58,016  |   |                    | $ | 87,858  |  
|                              |  |                  |  |                         |         |   |                    |   |         |  



5. Intangible Assets



Intangible assets consist of the following:



|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|------------------------------------------------------------------------------ |  | --------------------- |  | ----------------------- | ------- | - | ------------------- | - | ------- | -
|                                                                               |  | Estimated Useful Life |  | As of December 31, 2003 |         |   | As of June 30, 2004 |  
|Gross:                                                                         |  |                       |  |                         |         |   |                     |   |         |  
|FCC licenses                                                                   |  |                      |  | $                       | 285,755 |   |                     | $ | 303,038 |  
|Goodwill                                                                       |  |                      |  |                         | 64,434  |   |                     |   | 60,118  |  
|Advertising permits                                                            |  |                      |  |                         | 103,555 |   |                     |   | 70,326  |  
|Easements                                                                      |  |                      |  |                         | 2,595   |   |                     |   | 1,327   |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  | 1  15                |  |                         | 11,441  |   |                     |   | 32,604  |  
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|                                                                               |  |                       |  | $                       | 467,780 |   |                     | $ | 467,413 |  
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|Less, accumulated amortization:                                                |  |                       |  |                         |         |   |                     |   |         |  
|FCC licenses                                                                   |  |                       |  | $                       | (8,758  | ) |                     | $ | (8,758  | )
|Goodwill                                                                       |  |                       |  |                         | (844    | ) |                     |   | (844    | )
|Advertising permits                                                            |  |                       |  |                         |        |   |                     |   |        |  
|Easements                                                                      |  |                       |  |                         |        |   |                     |   |        |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  |                       |  |                         | (5,432  | ) |                     |   | (8,443  | )
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|                                                                               |  |                       |  | $                       | (15,034 | ) |                     | $ | (18,045 | )
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|Net:                                                                           |  |                       |  |                         |         |   |                     |   |         |  
|FCC licenses                                                                   |  |                       |  | $                       | 276,997 |   |                     | $ | 294,280 |  
|Goodwill                                                                       |  |                       |  |                         | 63,590  |   |                     |   | 59,274  |  
|Advertising permits                                                            |  |                       |  |                         | 103,555 |   |                     |   | 70,326  |  
|Easements                                                                      |  |                       |  |                         | 2,595   |   |                     |   | 1,327   |  
|Definite lived intangibles, primarily customer base and non-compete agreements |  |                       |  |                         | 6,009   |   |                     |   | 24,161  |  
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  
|                                                                               |  |                       |  | $                       | 452,746 |   |                     | $ | 449,368 |  
|                                                                               |  |                       |  |                         |         |   |                     |   |         |  



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



The aggregate change in goodwill, advertising permits, easements and FCC
licenses in the period from December 31, 2003 to June 30, 2004 resulted entirely from the Companys acquisitions and dispositions of radio and outdoor assets. There were no impairment losses recognized during the period and no reporting units
were disposed of.



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 customer base which are amortized over the respective estimated lives of the assets. Total amortization expense from definite-lived intangible
assets for the six months ended June 30, 2004 was approximately $3,010. 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. 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.



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



6. Accrued Expenses



Accrued expenses consist of the following:



|                                 |  |                         |        |                     |   |      
|-------------------------------- |  | ----------------------- | ------ | ------------------- | - | -----
|                                 |  | As of December 31, 2003 |        | As of June 30, 2004
|Accrued compensation and bonuses |  | $                       | 1,198  |                     | $ | 1,061
|Accrued commissions              |  |                         | 839    |                     |   | 860  
|Accrued interest                 |  |                         | 10,753 |                     |   | 114  
|Accrued property taxes           |  |                         | 352    |                     |   | 533  
|Accrued rents                    |  |                         | 643    |                     |   | 424  
|Unfavorable leases               |  |                         | 347    |                     |   | 120  
|Accrued franchise taxes          |  |                         | 331    |                     |   | 49   
|Accrued legal and professional   |  |                         | 1,044  |                     |   | 1,135
|Accrued insurance costs          |  |                         | 550    |                     |   | 255  
|Accrued music license fees       |  |                         | 572    |                     |   | 62   
|Other                            |  |                         | 855    |                     |   | 1,193
|                                 |  |                         |        |                     |   |      
|                                 |  | $                       | 17,484 |                     | $ | 5,806
|                                 |  |                         |        |                     |   |      



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



7. Long-Term Debt



Long-term debt consists of the following:



|                          |  |                         |         |   |                     |   |         |  
|------------------------- |  | ----------------------- | ------- | - | ------------------- | - | ------- | -
|                          |  | As of December 31, 2003 |         |   | As of June 30, 2004 |  
|Revolving Credit Facility |  | $                       | 2,000   |   |                     | $ | 37,000  |  
|Senior Subordinated Notes |  |                         | 200,000 |   |                     |   | 200,000 |  
|Unamortized discount      |  |                         | (2,366  | ) |                     |   | (2,209  | )
|                          |  |                         |         |   |                     |   |         |  
|Total long-term debt      |  | $                       | 199,634 |   |                     | $ | 234,791 |  
|                          |  |                         |         |   |                     |   |         |  



On April 9, 2004, the
Company terminated its existing senior credit facility and entered into a new $75,000 senior credit facility maturing in five years. 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 June 30, 2004, the Company was in compliance with all these
covenants. After taking into account these restrictive covenants, as of June 30, 2004, the Company had approximately $38,000 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.



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 June 30, 2004, the Company was in compliance with these covenants.



8. Commitments and Contingencies



As of July 10, 2004, the Company had $354 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.



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.



9. 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.



10. 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 June 30, 2004, the radio broadcasting segment included
61 radio stations owned and operated by the Company. All of these stations operate in domestic markets.



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



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 June 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.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|---------------------------------------------------------------- |  | -------------------------- | ------ | ---- | ------------------------ | ------ | ---- |  | - | ------ | - |  | - | ------ | -
|                                                                 |  | Three months endedJune 30, |        |      | Six months endedJune 30, |       
|                                                                 |  | 2003                       |        | 2004 |                          |        | 2003 |  |   | 2004   |  
|Net revenue:                                                     |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Radio Broadcasting                                               |  | $                          | 19,472 |      | $                        | 20,186 |      |  | $ | 35,377 |   |  | $ | 36,587 |  
|Outdoor Advertising                                              |  |                            | 8,223  |      |                          | 9,029  |      |  |   | 15,874 |   |  |   | 17,019 |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Consolidated                                                     |  |                            | 27,695 |      |                          | 29,215 |      |  |   | 51,251 |   |  |   | 53,606 |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Market level expenses:                                           |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Radio Broadcasting                                               |  |                            | 11,515 |      |                          | 11,763 |      |  |   | 21,738 |   |  |   | 22,589 |  
|Outdoor Advertising                                              |  |                            | 5,093  |      |                          | 6,261  |      |  |   | 10,205 |   |  |   | 11,908 |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Consolidated                                                     |  |                            | 16,608 |      |                          | 18,024 |      |  |   | 31,943 |   |  |   | 34,497 |  
|Depreciation and amortization:                                   |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Radio Broadcasting                                               |  |                            | 1,422  |      |                          | 1,218  |      |  |   | 2,970  |   |  |   | 2,409  |  
|Outdoor Advertising                                              |  |                            | 1,266  |      |                          | 2,207  |      |  |   | 2,067  |   |  |   | 4,403  |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Consolidated                                                     |  |                            | 2,688  |      |                          | 3,425  |      |  |   | 5,037  |   |  |   | 6,812  |  
|Local marketing agreement fees-radio                             |  |                            |       |      |                          | 30     |      |  |   |       |   |  |   | 60     |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Segment profit:                                                  |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Radio Broadcasting                                               |  |                            | 6,535  |      |                          | 7,175  |      |  |   | 10,669 |   |  |   | 11,529 |  
|Outdoor Advertising                                              |  |                            | 1,864  |      |                          | 561    |      |  |   | 3,602  |   |  |   | 708    |  
|Corporate Expenses                                               |  |                            | 2,443  |      |                          | 2,255  |      |  |   | 4,381  |   |  |   | 4,184  |  
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Operating income                                                 |  |                            | 5,956  |      |                          | 5,481  |      |  |   | 9,890  |   |  |   | 8,053  |  
|Interest expense, net                                            |  |                            | 5,756  |      |                          | 6,068  |      |  |   | 11,481 |   |  |   | 12,132 |  
|Write off of deferred finance cost due to extinguishment of debt |  |                            |       |      |                          | 1,541  |      |  |   |       |   |  |   | 1,541  |  
|Other (income) expense                                           |  |                            | 131    |      |                          | (66    | )    |  |   | 618    |   |  |   | (3,888 | )
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  
|Income (loss) before taxes                                       |  | $                          | 69     |      | $                        | (2,062 | )    |  | $ | (2,209 | ) |  | $ | (1,732 | )
|                                                                 |  |                            |        |      |                          |        |      |  |   |        |   |  |   |        |  



|                           |  |                         |         |                     |   |        
|-------------------------- |  | ----------------------- | ------- | ------------------- | - | -------
|                           |  | As of December 31, 2003 |         | As of June 30, 2004
|Total identifiable assets: |  |                         |         |                     |   |        
|Radio Broadcasting         |  | $                       | 357,810 |                     | $ | 375,526
|Outdoor Advertising        |  |                         | 185,567 |                     |   | 191,621
|                           |  |                         |         |                     |   |        
|Consolidated               |  | $                       | 543,377 |                     | $ | 567,147
|Goodwill, net:             |  |                         |         |                     |   |        
|Radio Broadcasting         |  | $                       | 26,628  |                     | $ | 28,433 
|Outdoor Advertising        |  |                         | 36,962  |                     |   | 30,841 
|                           |  |                         |         |                     |   |        
|Consolidated               |  | $                       | 63,590  |                     | $ | 59,274 



|                               |  |                             |       |                           |   |        |  |      |        |  |   |        
|------------------------------ |  | --------------------------- | ----- | ------------------------- | - | ------ |  | ---- | ------ |  | - | -------
|                               |  | Three months ended June 30, |       | Six months ended June 30,
|                               |  | 2003                        |       | 2004                      |   | 2003   |  | 2004
|Addition to long-lived assets: |  |                             |       |                           |   |        |  |      |        |  |   |        
|Radio Broadcasting             |  | $                           | 967   |                           | $ | 7,138  |  | $    | 62,962 |  | $ | 23,215 
|Outdoor Advertising            |  |                             | 2,919 |                           |   | 44,580 |  |      | 9,277  |  |   | 91,666 
|                               |  |                             |       |                           |   |        |  |      |        |  |   |        
|Consolidated                   |  | $                           | 3,886 |                           | $ | 51,718 |  | $    | 72,239 |  | $ | 114,881
|                               |  |                             |       |                           |   |        |  |      |        |  |   |        



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



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.



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
|                                                                 |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        



13



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NEXTMEDIA OPERATING, INC. AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

(Dollars in thousands)



NextMedia Operating, Inc.

Supplemental Combining Balance Sheet

June 30, 2004



|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|------------------------------------------ |  | ------------------------- | ------- | ---------------------- | - | ------- | ------------------- |  | - | -------- | - |  | - | -------
|                                           |  | NextMedia Operating, Inc. |         | Guarantor Subsidiaries |   |         | Eliminating Entries |  |   | Total   
|Assets                                     |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current assets:                            |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Cash and cash equivalents                  |  | $                         | 1,580   |                        | $ | (655    | )                   |  | $ |         |   |  | $ | 925    
|Accounts receivable, net                   |  |                           | 12,005  |                        |   | 4,996   |                     |  |   |         |   |  |   | 17,001 
|Prepaid and other current assets           |  |                           | 601     |                        |   | 2,080   |                     |  |   |         |   |  |   | 2,681  
|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total current assets                       |  |                           | 14,186  |                        |   | 6,421   |                     |  |   |         |   |  |   | 20,607 
|Property and equipment, net                |  |                           | 26,688  |                        |   | 61,170  |                     |  |   |         |   |  |   | 87,858 
|Goodwill and intangibles, net              |  |                           | 31,734  |                        |   | 417,634 |                     |  |   |         |   |  |   | 449,368
|Other                                      |  |                           | 1,925   |                        |   | 675     |                     |  |   | 6,714    |   |  |   | 9,314  
|Investment in subsidiaries                 |  |                           | 469,155 |                        |   |        |                     |  |   | (469,155 | ) |  |   |       
|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total assets                               |  | $                         | 543,688 |                        | $ | 485,900 |                     |  | $ | (462,441 | ) |  | $ | 567,147
|Liabilities and Stockholders Equity       |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Current liabilities                        |  | $                         | 3,579   |                        | $ | 258     |                     |  | $ | 6,714    |   |  | $ | 10,551 
|Long-term debt                             |  |                           | 234,791 |                        |   |        |                     |  |   |         |   |  |   | 234,791
|Other long-term liabilities                |  |                           | 17,704  |                        |   | 16,487  |                     |  |   |         |   |  |   | 34,191 
|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities                          |  |                           | 256,074 |                        |   | 16,745  |                     |  |   | 6,714    |   |  |   | 279,533
|Stockholders equity                       |  |                           | 287,614 |                        |   | 469,155 |                     |  |   | (469,155 | ) |  |   | 287,614
|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        
|Total liabilities and stockholders equity |  | $                         | 543,688 |                        | $ | 485,900 |                     |  | $ | (462,441 | ) |  | $ | 567,147
|                                           |  |                           |         |                        |   |         |                     |  |   |          |   |  |   |        



NextMedia Operating,
Inc.

Supplemental Combining Statement of Operations

For the Three Months Ended June 30, 2003



|                                                                                         |  |                           |        |   |                        |   |                     |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---------------------- | - | ------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                         |  | NextMedia Operating, Inc. |        |   | Guarantor Subsidiaries |   | Eliminating Entries |  |   | Total  |  
|Net revenue                                                                              |  | $                         | 19,472 |   |                        | $ | 8,223               |  | $ |       |   |  | $ | 27,695 |  
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                           | 11,515 |   |                        |   | 5,093               |  |   |       |   |  |   | 16,608 |  
|Corporate expenses                                                                       |  |                           | 1,885  |   |                        |   | 558                 |  |   |       |   |  |   | 2,443  |  
|Depreciation and amortization                                                            |  |                           | 1,422  |   |                        |   | 1,266               |  |   |       |   |  |   | 2,688  |  
|                                                                                         |  |                           |        |   |                        |   |                     |  |   |        |   |  |   |        |  
|Operating income (loss)                                                                  |  |                           | 4,650  |   |                        |   | 1,306               |  |   |       |   |  |   | 5,956  |  
|Interest expense, net                                                                    |  |                           | 5,756  |   |                        |   |                    |  |   |       |   |  |   | 5,756  |  
|Other (income) expense                                                                   |  |                           | 121    |   |                        |   | 10                  |  |   |       |   |  |   | 131    |  
|Equity in earnings of subsidiaries                                                       |  |                           | (1,296 | ) |                        |   |                    |  |   | 1,296  |   |  |   |       |  
|                                                                                         |  |                           |        |   |                        |   |                     |  |   |        |   |  |   |        |  
|Income (loss) before provision for income taxes                                          |  |                           | 69     |   |                        |   | 1,296               |  |   | (1,296 | ) |  |   | 69     |  
|Provision for income taxes                                                               |  |                           | 3,054  |   |                        |   |                    |  |   |       |   |  |   | 3,054  |  
|                                                                                         |  |                           |        |   |                        |   |                     |  |   |        |   |  |   |        |  
|Net income (loss)                                                                        |  | $                         | (2,985 | ) |                        | $ | 1,296               |  | $ | (1,296 | ) |  | $ | (2,985 | )
|                                                                                         |  |                           |        |   |                        |   |                     |  |   |        |   |  |   |        |  



14



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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 June 30, 2004



|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|--------------------------------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---------------------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                                                |  | NextMedia Operating, Inc. |        |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  |   | Total  |  
|Net revenue                                                                                                     |  | $                         | 20,186 |   |                        | $ | 9,031  |                     |  | $ | (2     | ) |  | $ | 29,215 |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                        |  |                           | 11,765 |   |                        |   | 6,261  |                     |  |   | (2     | ) |  |   | 18,024 |  
|Corporate expenses                                                                                              |  |                           | 1,480  |   |                        |   | 775    |                     |  |   |       |   |  |   | 2,255  |  
|Depreciation and amortization                                                                                   |  |                           | 1,218  |   |                        |   | 2,207  |                     |  |   |       |   |  |   | 3,425  |  
|Local marketing agreement fees                                                                                  |  |                           | 30     |   |                        |   |       |                     |  |   |       |   |  |   | 30     |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Operating income (loss)                                                                                         |  |                           | 5,693  |   |                        |   | (212   | )                   |  |   |       |   |  |   | 5,481  |  
|Interest expense, net                                                                                           |  |                           | 6,068  |   |                        |   |       |                     |  |   |       |   |  |   | 6,068  |  
|Write off of deferred finance costs due to extinguishment of debt                                               |  |                           | 1,541  |   |                        |   |       |                     |  |   |       |   |  |   | 1,541  |  
|Other (income) expense                                                                                          |  |                           | 154    |   |                        |   | (220   | )                   |  |   |       |   |  |   | (66    | )
|Equity in loss of subsidiaries                                                                                  |  |                           | (8     | ) |                        |   |       |                     |  |   | 8      |   |  |   |       |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Income (loss) before provision for income taxes                                                                 |  |                           | (2,062 | ) |                        |   | 8      |                     |  |   | (8     | ) |  |   | (2,062 | )
|Provision for income taxes                                                                                      |  |                           | 3,310  |   |                        |   |       |                     |  |   |       |   |  |   | 3,310  |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                               |  | $                         | (5,372 | ) |                        | $ | 8      |                     |  | $ | (8     | ) |  | $ | (5,372 | )
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|                                                                                                               
|NextMedia Operating, Inc. Supplemental Combining Statement of Operations For the Six Months Ended June
30, 2003 | 
|                                                                                                                |  |                           |        |  
|                                                                                                                |  | NextMedia Operating, Inc. |        |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  |   | Total  |  
|Net revenue                                                                                                     |  | $                         | 35,377 |   |                        | $ | 15,874 |                     |  | $ |       |   |  | $ | 51,251 |  
|Market level expenses, exclusive of depreciation and amortization shown separately below                        |  |                           | 21,738 |   |                        |   | 10,205 |                     |  |   |       |   |  |   | 31,943 |  
|Corporate expenses                                                                                              |  |                           | 3,345  |   |                        |   | 1,036  |                     |  |   |       |   |  |   | 4,381  |  
|Depreciation and amortization                                                                                   |  |                           | 2,970  |   |                        |   | 2,067  |                     |  |   |       |   |  |   | 5,037  |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Operating income (loss)                                                                                         |  |                           | 7,324  |   |                        |   | 2,566  |                     |  |   |       |   |  |   | 9,890  |  
|Interest expense, net                                                                                           |  |                           | 11,481 |   |                        |   |       |                     |  |   |       |   |  |   | 11,481 |  
|Other income                                                                                                    |  |                           | 600    |   |                        |   | 18     |                     |  |   |       |   |  |   | 618    |  
|Equity in earnings of subsidiaries                                                                              |  |                           | (2,548 | ) |                        |   |       |                     |  |   | 2,548  |   |  |   |       |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Income (loss) before provision for income taxes                                                                 |  |                           | (2,209 | ) |                        |   | 2,548  |                     |  |   | (2,548 | ) |  |   | (2,209 | )
|Provision for income taxes                                                                                      |  |                           | 5,935  |   |                        |   |       |                     |  |   |       |   |  |   | 5,935  |  
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Net income (loss)                                                                                               |  | $                         | (8,144 | ) |                        | $ | 2,548  |                     |  | $ | (2,548 | ) |  | $ | (8,144 | )
|                                                                                                                |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  



15



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##### 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 Six Months Ended June 30, 2004



|                                                                                         |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|---------------------------------------------------------------------------------------- |  | ------------------------- | ------ | - | ---------------------- | - | ------ | ------------------- |  | - | ------ | - |  | - | ------ | -
|                                                                                         |  | NextMedia Operating, Inc. |        |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  |   | Total  |  
|Net revenue                                                                              |  | $                         | 36,587 |   |                        | $ | 17,021 |                     |  | $ | (2     | ) |  | $ | 53,606 |  
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                           | 22,591 |   |                        |   | 11,908 |                     |  |   | (2     | ) |  |   | 34,497 |  
|Corporate expenses                                                                       |  |                           | 2,810  |   |                        |   | 1,374  |                     |  |   |       |   |  |   | 4,184  |  
|Depreciation and amortization                                                            |  |                           | 2,409  |   |                        |   | 4,403  |                     |  |   |       |   |  |   | 6,812  |  
|Local marketing agreement fees                                                           |  |                           | 60     |   |                        |   |       |                     |  |   |       |   |  |   | 60     |  
|                                                                                         |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Operating income (loss)                                                                  |  | $                         | 8,717  |   |                        | $ | (664   | )                   |  | $ |       |   |  | $ | 8,053  |  
|Interest income expense, net                                                             |  |                           | 12,132 |   |                        |   |       |                     |  |   |       |   |  |   | 12,132 |  
|Write off deferred finance costs due to extinguishment of debt                           |  |                           | 1,541  |   |                        |   |       |                     |  |   |       |   |  |   | 1,541  |  
|Other (income) loss                                                                      |  |                           | 352    |   |                        |   | (4,240 | )                   |  |   |       |   |  |   | (3,888 | )
|Equity in loss of subsidiaries                                                           |  |                           | (3,576 | ) |                        |   |       |                     |  |   | 3,576  |   |  |   |       |  
|                                                                                         |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Income (loss) before provision for income taxes                                          |  |                           | (1,732 | ) |                        |   | 3,576  |                     |  |   | (3,576 | ) |  |   | (1,732 | )
|Provision for income taxes                                                               |  |                           | 2,615  |   |                        |   |       |                     |  |   |       |   |  |   | 2,615  |  
|                                                                                         |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  
|Net income (loss)                                                                        |  | $                         | (4,347 | ) |                        | $ | 3,576  |                     |  | $ | (3,576 | ) |  | $ | (4,347 | )
|                                                                                         |  |                           |        |   |                        |   |        |                     |  |   |        |   |  |   |        |  



NextMedia Operating,
Inc.

Supplemental Combining Statement of Cash Flows

For the Six Months Ended June 30, 2003



|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|----------------------------------------------- |  | ------------------------- | ------- | - | ---------------------- | - | ------ | ------------------- |  | ----- | - |  | - | ------- | -
|                                                |  | NextMedia Operating, Inc. |         |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  | Total |  
|Net cash provided by (used in) operations       |  | $                         | (2,438  | ) |                        | $ | 2,102  |                     |  | $     |  |  | $ | (336    | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Investing Activities            |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Purchase of fixed assets                        |  |                           | (962    | ) |                        |   | (2,001 | )                   |  |       |  |  |   | (2,963  | )
|Payments for acquisitions, net of cash acquired |  |                           | (68,767 | ) |                        |   |       |                     |  |       |  |  |   | (68,767 | )
|Deferred sellings costs                         |  |                           | (239    | ) |                        |   |       |                     |  |       |  |  |   | (239    | )
|Proceeds from sale of assets                    |  |                           | 5,463   |   |                        |   |       |                     |  |       |  |  |   | 5,463   |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in investing activities           |  |                           | (64,505 | ) |                        |   | (2,001 | )                   |  |       |  |  |   | (66,506 | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Financing Activities            |  |                           |         |   |                        |   |        |                     |  |       |  |  |   |         |  
|Proceeds from revolving credit facilities       |  |                           | 44,000  |   |                        |   |       |                     |  |       |  |  |   | 44,000  |  
|Repayment of revolving credit facilities        |  |                           | (7,500  | ) |                        |   |       |                     |  |       |  |  |   | (7,500  | )
|Capital contributions from Parent               |  |                           | 27,100  |   |                        |   |       |                     |  |       |  |  |   | 27,100  |  
|Payments of financing related costs             |  |                           | (32     | ) |                        |   |       |                     |  |       |  |  |   | (32     | )
|Other                                           |  |                           | (72     | ) |                        |   |       |                     |  |       |  |  |   | (72     | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash provided by financing activities       |  |                           | 63,496  |   |                        |   |       |                     |  |       |  |  |   | 63,496  |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net decrease in cash                            |  |                           | (3,447  | ) |                        |   | 101    |                     |  |       |  |  |   | (3,346  | )
|Cash at beginning of period                     |  |                           | 14,951  |   |                        |   | (505   | )                   |  |       |  |  |   | 14,446  |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash at end of period                           |  | $                         | 11,504  |   |                        | $ | (404   | )                   |  | $     |  |  | $ | 11,100  |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  



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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 Six Months Ended June 30, 2004



|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|----------------------------------------------- |  | ------------------------- | ------- | - | ---------------------- | - | ------ | ------------------- |  | ----- | - |  | - | ------- | -
|                                                |  | NextMedia Operating, Inc. |         |   | Guarantor Subsidiaries |   |        | Eliminating Entries |  | Total |  
|Net Cash used in operations                     |  | $                         | (9,358  | ) |                        | $ | (2,208 | )                   |  | $     |  |  | $ | (11,566 | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Investing Activities            |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Purchase of fixed assets                        |  |                           | (2,263  | ) |                        |   | (1,369 | )                   |  |       |  |  |   | (3,632  | )
|Payments for acquisitions, net of cash acquired |  |                           | (22,228 | ) |                        |   |       |                     |  |       |  |  |   | (22,228 | )
|Proceeds from sale of assets                    |  |                           | 399     |   |                        |   | 3,352  |                     |  |       |  |  |   | 3,751   |  
|Interest rate swap termination proceeds         |  |                           | 1,600   |   |                        |   |       |                     |  |       |  |  |   | 1,600   |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in investing activities           |  |                           | (22,492 | ) |                        |   | 1,983  |                     |  |       |  |  |   | (20,509 | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash Flows From Financing Activities            |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Proceeds from revolving credit facilities       |  |                           | 39,000  |   |                        |   |       |                     |  |       |  |  |   | 39,000  |  
|Repayment of revolving credit facilities        |  |                           | (4,000  | ) |                        |   |       |                     |  |       |  |  |   | (4,000  | )
|Dividends to parent                             |  |                           | (2,133  | ) |                        |   |       |                     |  |       |  |  |   | (2,133  | )
|Payments of financing related costs             |  |                           | (427    | ) |                        |   |       |                     |  |       |  |  |   | (427    | )
|Other                                           |  |                           | (147    | ) |                        |   |        |                     |  |       |  |  |   | (147    | )
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net cash used in financing activities           |  |                           | 32,293  |   |                        |   |        |                     |  |       |  |  |   | 32,293  |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Net decrease in cash                            |  |                           | 443     |   |                        |   | (225   | )                   |  |       |  |  |   | 218     |  
|Cash at beginning of period                     |  |                           | 1,137   |   |                        |   | (430   | )                   |  |       |  |  |   | 707     |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  
|Cash at end of period                           |  | $                         | 1,580   |   |                        | $ | (655   | )                   |  | $     |  |  | $ | 925     |  
|                                                |  |                           |         |   |                        |   |        |                     |  |       |   |  |   |         |  



17



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##### 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.



18



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##### 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 June 30, |        | Six Months Ended June 30,
|                                                                                         |  | 2003                        |        |                           | % |       | 2004 |   |        | % |  | 2003  |  |   | %      |   | 2004 |       |  | %
|                                                                                         |  | (dollars in thousands)     
|Consolidated Operating Data:                                                             |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Net revenue                                                                              |  | $                           | 27,695 |                           |   | 100.0 |      | $ | 29,215 |   |  | 100.0 |  | $ | 51,251 |   |      | 100.0 |  | $ | 53,606 |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                             | 16,608 |                           |   | 60.0  |      |   | 18,024 |   |  | 61.7  |  |   | 31,943 |   |      | 62.3  |  |   | 34,497 |   |  | 64.4 
|Corporate expenses                                                                       |  |                             | 2,443  |                           |   | 8.8   |      |   | 2,255  |   |  | 7.7   |  |   | 4,381  |   |      | 8.5   |  |   | 4,184  |   |  | 7.8  
|Depreciation and amortization                                                            |  |                             | 2,688  |                           |   | 9.7   |      |   | 3,425  |   |  | 11.7  |  |   | 5,037  |   |      | 9.8   |  |   | 6,812  |   |  | 12.7 
|Local marketing agreement fees                                                           |  |                             |       |                           |   |      |      |   | 30     |   |  | 0.1   |  |   |       |   |      |      |  |   | 60     |   |  | 0.1  
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Operating income                                                                         |  |                             | 5,956  |                           |   | 21.5  |      |   | 5,481  |   |  | 18.8  |  |   | 9,890  |   |      | 19.3  |  |   | 8,053  |   |  | 15.0 
|Interest expense, net                                                                    |  |                             | 5,756  |                           |   |       |      |   | 6,068  |   |  |       |  |   | 11,481 |   |      |       |  |   | 12,132 |   |  |      
|Write-off of deferred finance costs due to extinguishment of debt                        |  |                             |       |                           |   |       |      |   | 1,541  |   |  |       |  |   |       |   |      |       |  |   | 1,541  |   |  |      
|Other (income) expense, net                                                              |  |                             | 131    |                           |   |       |      |   | (66    | ) |  |       |  |   | 618    |   |      |       |  |   | (3,888 | ) |  |      
|Income tax expense                                                                       |  |                             | 3,054  |                           |   |       |      |   | 3,310  |   |  |       |  |   | 5,935  |   |      |       |  |   | 2,615  |   |  |      
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Net loss                                                                                 |  | $                           | (2,985 | )                         |   |       |      | $ | (5,372 | ) |  |       |  | $ | (8,144 | ) |      |       |  | $ | (4,347 | ) |  |      
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Radio Broadcasting Operating Data:                                                       |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Net revenue                                                                              |  | $                           | 19,472 |                           |   | 100.0 |      | $ | 20,186 |   |  | 100.0 |  | $ | 35,377 |   |      | 100.0 |  | $ | 36,587 |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                             | 11,515 |                           |   | 59.1  |      |   | 11,763 |   |  | 58.3  |  |   | 21,738 |   |      | 61.4  |  |   | 22,589 |   |  | 61.7 
|Depreciation and amortization                                                            |  |                             | 1,422  |                           |   | 7.3   |      |   | 1,218  |   |  | 6.0   |  |   | 2,970  |   |      | 8.4   |  |   | 2,409  |   |  | 6.6  
|Local marketing agreement fees                                                           |  |                             |       |                           |   |      |      |   | 30     |   |  | 0.1   |  |   |       |   |      |      |  |   | 60     |   |  | 0.2  
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Segment operating income                                                                 |  | $                           | 6,535  |                           |   | 33.6  |      | $ | 7,175  |   |  | 35.5  |  | $ | 10,669 |   |      | 30.2  |  | $ | 11,529 |   |  | 31.5 
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Outdoor Advertising Operating Data:                                                      |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Net revenue                                                                              |  | $                           | 8,223  |                           |   | 100.0 |      | $ | 9,029  |   |  | 100.0 |  | $ | 15,874 |   |      | 100.0 |  | $ | 17,019 |   |  | 100.0
|Market level expenses, exclusive of depreciation and amortization shown separately below |  |                             | 5,093  |                           |   | 61.9  |      |   | 6,261  |   |  | 69.3  |  |   | 10,205 |   |      | 64.3  |  |   | 11,908 |   |  | 70.0 
|Depreciation and amortization                                                            |  |                             | 1,266  |                           |   | 15.4  |      |   | 2,207  |   |  | 24.4  |  |   | 2,067  |   |      | 13.0  |  |   | 4,403  |   |  | 25.9 
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      
|Segment operating income                                                                 |  | $                           | 1,864  |                           |   | 22.7  |      | $ | 561    |   |  | 6.2   |  | $ | 3,602  |   |      | 22.7  |  | $ | 708    |   |  | 4.2  
|                                                                                         |  |                             |        |                           |   |       |      |   |        |   |  |       |  |   |        |   |      |       |  |   |        |   |  |      



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



Net Revenue.Consolidated net revenue increased $1.5 million to $29.2 million in 2004 from $27.7 million in 2003. Radio net revenue increased $714,000 to $20.2 million in 2004 from $19.5 million in 2003. Outdoor advertising net
revenues increased $806,000 to $9.0 million in 2004 from $8.2 million in 2003. Due to a relatively soft national, alternative advertising environment, growth in radio and traditional outdoor assets was offset by declines in our alternative
advertising business. Consequently, revenues generated by assets owned and operated in both periods was approximately flat and the increase was due primarily to our completion of acquisitions in 2003 and 2004. Should this trend in alternative
advertising continue, we may incur an impairment charge related to our alternative advertising assets. The current carrying value of the long-term alternative advertising assets is approximately $18.9 million. Due to completed acquisitions and local
marketing agreements, management expects revenue in the third and fourth quarters of 2004 to exceed revenue of the third and fourth quarters of 2003.



Market Level Expenses.Consolidated market level expenses increased $1.4 million to $18.0 million in 2004 from $16.6 million in 2003. Radio market
level expenses increased $248,000 to $11.8 million in 2004 from $11.5 million in 2003. Outdoor



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advertising market level expenses increased $1.2 to $6.3 million in 2004 from $5.1 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 from 60.0% to 61.7 % due to approximately $200,000 of non-recurring legal expense incurred in
the outdoor division and investment in developmental projects such as station moves and new outdoor sign construction.



Corporate Expenses. Corporate expenses decreased $188,000 to $2.3 million in 2004 from $2.4 million in 2003. This decrease was due primarily to
severance costs associated with the reduction of corporate staff in the prior year. As a percentage of net revenues, corporate expenses declined from 8.8% to 7.7%.



Depreciation and Amortization.Consolidated depreciation and amortization increased $737,000 to $3.4 million in 2004
from $2.7 million in 2003. Radio depreciation and amortization decreased 204,000 to $1.2 million in 2004 from $1.4 million in 2003. Outdoor advertising depreciation and amortization increased $941,060 to $2.2 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.



Interest and Other Income (Expense) Net.Interest
expense, net, increased to $6.1 million in 2004 from $5.8 million in 2003 due to indebtedness incurred in connection with our acquisitions and slightly higher effective interest rates on our borrowings. Other income (expense), net increased to a
$66,000 gain in 2004 primarily as a result of gains related to small outdoor asset dispositions.



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.



Net Loss. Consolidated net loss increased $2.4 million to $5.4 million in 2004 from $3.0 million in 2003 as a result of the factors described
above.



Comparison of Six Months Ended June 30, 2004 to Six Months Ended
June 30, 2003



Net Revenues.Consolidated net
revenues increased $2.3 million to $53.6 million in 2004 from $51.3 million in 2003. Radio net revenues increased $1.2 million to $36.6 million in 2004 from $35.4 million in 2003. Outdoor advertising net revenues increased $1.1 million to $17.0
million in 2004 from $15.9 million in 2003. Due to a relatively soft national, alternative advertising environment, growth in radio and traditional outdoor assets was offset by declines in our alternative advertising business. Consequently, revenues
generated by assets owned and operated in both periods was approximately flat, and the increase was due primarily to our completion of acquisitions in 2003 and 2004. Should this trend in alternative advertising continue, we may incur an impairment
charge related to our alternative advertising assets. The current carrying value of the long-term alternative advertising assets is approximately $18.9 million.



Market Level Expenses.Consolidated market level expenses increased $2.6 million to $34.5 million in 2004 from $31.9 million in 2003. Radio
market level expenses increased $851,000 to $22.6 million in 2004 from $21.7 million in 2003. Outdoor advertising market level expenses increased $1.7 to $11.9 million in 2004 from $10.2 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 from 62.3% to 64.4% due to approximately $200,000 of non-recurring legal expense incurred in the outdoor division and
investment in developmental projects such as station moves and new outdoor sign construction.



Corporate Expenses. Corporate expenses decreased $197,000 to $4.2 million in 2004 from $4.4 million in 2003. This decrease was due primarily to severance costs of approximately $400,000 associated with the
reduction of corporate staff during the six months ended June 30, 2003. As a percentage of net revenues, corporate expenses declined from 8.5% to 7.8% because the growth in revenue did not require a proportional increase in corporate costs.



Depreciation and Amortization.Consolidated
depreciation and amortization increased $1.8 million to $6.8 million in 2004 from $5.0 million in 2003. Radio depreciation and amortization decreased $561,000 to $2.4 million in 2004 from $3.0 million in 2003. Outdoor advertising depreciation and
amortization increased $2.3 million to $4.4 million in 2004 from $2.1 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.



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Interest and Other Income (Expense) Net.Interest expense, net, increased to $12.1 million in 2004
from $11.5 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 increased to a $3.9 million gain in 2004 primarily as a result of a
non-cash gain on our asset exchange in January 2004.



We record
deferred tax expense to establish a valuation allowance for deferred tax assets created 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.



Net Loss. Consolidated net loss decreased $3.8
million to $4.3 million in 2004 from $8.1 million in 2003 as a result of the factors described above.



Liquidity and Capital Resources



Our cash and cash equivalents balance at June 30, 2004 was approximately $925,000 compared to $707,000 at December 31, 2003. On June 30, 2004, we paid our semi-annual interest payment of approximately $10.8 million on our 103⁄4% senior
subordinated notes. Consequently, our June 30, 2004 cash, debt, and accrued interest balances reflect this activity.



Net cash used in operating activities was $11.6 million and $336,000 for the six months ended June 30, 2004 and 2003, respectively. The increase in our
net cash used in operating activities was due primarily to the payment of the Companys semi-annual interest payment on its 103/4% senior subordinated notes on June 30, 2004. In the prior year, the payment was made on July 1, 2003.



Net cash provided by financing activities was $32.3 million for the six months ended June 30, 2004 compared to $63.5 million for the six months ended June
30, 2003. During the six months ended June 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 $20.5 million and $66.5 million for the six months ended June 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 June 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 $234.8 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 in five years. 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 June 30, 2004, we were in compliance with all of these covenants. After taking into account these restrictive covenants, as of June 30,
2004, we had approximately $38.0 million of borrowing capacity under our senior credit facility.



Capital expenditures in the six months ended June 30, 2004 increased slightly to $3.6 million from $3.0 million for the six months ended June 30, 2003.
The following table sets forth our capital expenditures for the six months ended June 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.



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|                           |  |                               |      
|-------------------------- |  | ----------------------------- | -----
|                           |  | Six MonthsEnded June 30, 2004
|                           |  | (in thousands)               
|Recurring                  |  | $                             | 1,745
|Non-recurring              |  |                               | 1,083
|Revenue producing          |  |                               | 804  
|                           |  |                               |      
|Total capital expenditures |  | $                             | 3,632
|                           |  |                               |      



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 June 30, 2004, we were in compliance with these covenants.



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.



Recent Accounting Pronouncements



In January
2003, the Financial Accounting Standards Board issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities. FIN 46 must be applied to interests in variable interest entities created before February 1, 2003
beginning in the first interim or annual period beginning after March 15, 2004. For variable interest entities created after February 1, 2003, FIN 46 is effective for the first interim period after December 31, 2003. The adoption of FIN 46 has not
had a material impact on our financial statements.



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.



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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.



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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: AUGUST 13, 2004 |  | By:                                    |  | /s/ STEVEN DINETZ                                                                     
|                      |  |                                        |  | Steven Dinetz, Chief Executive Officer and President (Principal Executive Officer)    
|                      |  |                                       
|DATE: AUGUST 13, 2004 |  | By:                                    |  | /s/ SEAN R. STOVER                                                                    
|                      |  |                                        |  | Sean R. Stover, Chief Financial Officer (Principal Financial Officer)                 
|                      |  |                                       
|DATE: AUGUST 13, 2004 |  | By:                                    |  | /s/ SCHUYLER HANSEN                                                                   
|                      |  |                                        |  | Schuyler Hansen, Chief Accounting Officer and Treasurer (Principal Accounting Officer)



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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.



25