Summary of GRAY TELEVISION INC

Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Overview
Introduction
The following analysis of the financial condition and results of operations of Gray Television, Inc. ("we," "us" or "our") should be read in conjunction with our financial statements contained in this report and in our annual report filed on Form 10-K for the year ended December 31, 2007, or fiscal 2007. Overview
We own 36 television stations serving 30 television markets. Seventeen of the stations are affiliated with CBS, ten are affiliated with NBC, eight are affiliated with ABC and one is affiliated with FOX. The combined station group has 20 markets with stations ranked #1 in local news audience and 23 markets with stations ranked #1 in overall audience within their respective markets based on the results of the average of the Nielsen November, July, May and February 2007 ratings reports. Of the 30 markets that we serve, we operate the #1 or #2 ranked station in 29 of those markets. The combined TV station group reaches approximately 6.1% of total U.S. TV households. In addition, we currently operate 39 digital second channels including one affiliated with ABC, five affiliated with FOX, seven affiliated with CW and 16 affiliated with MyNetworkTV, plus eight local news/weather channels and two independent channels in certain of our existing markets. With 17 CBS affiliated stations, we are the largest independent owner of CBS affiliates in the United States.
Our operating revenues are derived primarily from broadcast and internet advertising, and from other sources such as production of commercials, tower rentals and from retransmission consent fees.
Broadcast advertising is sold for placement either preceding or following a television station's network programming and within local and syndicated programming. Broadcast advertising is sold in time increments and is priced primarily on the basis of a program's popularity among the specific audience an advertiser desires to reach, as measured by Nielsen. In addition, broadcast advertising rates are affected by the number of advertisers competing for the available time, the size and demographic makeup of the market served by the station and the availability of alternative advertising media in the market area. Broadcast advertising rates are the highest during the most desirable viewing hours, with corresponding reductions during other hours. The ratings of a local station affiliated with a major network can be affected by ratings of network programming.
Internet advertising is sold on our stations' websites. These advertisements are sold as banner advertisements on the websites, pre-roll advertisements or video and other types of advertisements.
Most advertising contracts are short-term, and generally run only for a few weeks. Approximately 72% of the net revenues of our television stations for the three-month period ended September 30, 2008 were generated from local advertising (including political advertising revenues), which is sold primarily by a station's sales staff directly to local accounts, and the remainder represented primarily by national advertising, which is sold by a station's national advertising sales representative. The stations generally pay commissions to advertising agencies on local, regional and national advertising and the stations also pay commissions to the national sales representative on national advertising.
Broadcast advertising revenues are generally highest in the second and fourth quarters each year, due in part to increases in advertising in the spring and in the period leading up to and including the holiday season. In addition, broadcast advertising revenues are generally higher during even numbered years due to spending by political candidates, whose spending typically is heaviest during the fourth quarter.
The primary broadcast operating expenses are employee compensation, related benefits and programming costs. In addition, the broadcast operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of the broadcast operations is fixed.

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Revenues
   Set forth below are the principal types of revenues, less agency commissions,
earned by us for the periods indicated and the percentage contribution of each
to our total revenues (dollars in thousands):

                                    Three Months Ended September 30,                           Nine Months Ended September 30,
                                   2008                         2007                          2008                          2007
                                         Percent                      Percent                       Percent                       Percent
                           Amount       of Total        Amount       of Total        Amount        of Total        Amount        of Total
Revenues:
Local                     $ 46,279           56.0 %    $ 47,761           64.9 %    $ 141,493           60.9 %    $ 146,467           65.7 %
National                    17,546           21.2 %      19,237           26.1 %       52,362           22.5 %       56,192           25.2 %
Internet                     2,954            3.6 %       2,505            3.4 %        8,631            3.7 %        6,830            3.1 %
Political                   13,065           15.8 %       1,450            2.0 %       21,089            9.1 %        5,181            2.3 %
Retransmission consent         762            0.9 %         501            0.7 %        2,209            1.0 %        1,443            0.6 %
Production and other         1,841            2.2 %       1,951            2.7 %        6,025            2.6 %        6,338            2.8 %
Network compensation           184            0.3 %         180            0.2 %          564            0.2 %          564            0.3 %

Total                     $ 82,631          100.0 %    $ 73,585          100.0 %    $ 232,373          100.0 %    $ 223,015          100.0 %

Results of Operations
Three Months Ended September 30, 2008 ("2008 three-month period") Compared To Three Months Ended September 30, 2007 ("2007 three-month period") Revenues. Total revenues increased $9.0 million, or 12%, to $82.6 million in the 2008 three-month period due primarily to increased political and internet advertising revenue in the current period partially offset by decreased local and national advertising revenues. The increase in political advertising revenue reflects increased advertising from political candidates in the 2008 general elections. Spending on political advertising during the 2008 three-month period was the strongest at our stations in Colorado, West Virginia, Wisconsin, Michigan and North Carolina, accounting for approximately 67% of the total political net revenue for the 2008 three-month period. Increased internet advertising revenue reflects our internet sales initiatives in each of our markets. The decrease in local and national revenue was largely due to the general weakness in the economy offset in part by $3.4 million of net revenue earned in the 2008 three-month period attributable to the broadcast of the 2008 Summer Olympics on our ten NBC stations.
Political advertising revenues increased $11.6 million, or 801%, to $13.1 million reflecting increased advertising from political candidates in the 2008 elections. Internet advertising revenues increased $449,000, or 18%, to $3.0 million reflecting increased website traffic in our markets. Local advertising revenues decreased approximately $1.5 million, or 3%, to $46.3 million. National advertising revenues decreased approximately $1.7 million, or 9%, to $17.5 million.
Broadcast expenses. Broadcasting expenses (before depreciation, amortization and gain on disposal of assets) increased $324,000, or 1%, to $49.9 million in the 2008 three-month period. This modest increase primarily reflects the impact of increased national sales representative commissions on the incremental political advertising revenues offset in part by a slight reduction in payroll related costs.
Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and gain on disposal of assets) decreased $178,000, or 5%, to $3.8 million in the 2008 three-month period. This decrease was primarily due to reduced incentive compensation related expenses. During the 2008 and 2007 three-month periods, we recorded non-cash stock-based compensation expense of $399,000 and $285,000, respectively.
Depreciation. Depreciation of property and equipment decreased $1.4 million, or 14%, to $8.6 million during the 2008 three-month period. The decrease in depreciation was the result of the large proportion of our stations' equipment, which was acquired in 2002, becoming fully depreciated in 2007.

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Interest expense. Interest expense decreased $4.2 million, or 25%, to $12.6 million for the 2008 three-month period. This decrease is primarily attributable to lower average interest rates and by decreases in average total debt outstanding. Average interest rates have decreased due to a decrease in market interest rates on our senior credit facility and the redemption of our 9.25% senior subordinated notes (the "9.25% Notes") on April 18, 2007. Our total debt balance has decreased as a result of our regularly scheduled principal payments and our $65.0 million, $23.0 million and $10.0 million voluntary prepayments of our senior credit facility on June 26, 2008, July 15, 2008 and October 3, 2008, respectively. We obtained the funds used for these voluntary prepayments from the issuance of our Series D Perpetual Preferred Stock as well as from results of operations. Our average debt balance was $831.8 million and $934.0 million during the 2008 three-month period and the 2007 three-month period, respectively. The average interest rates, exclusive of our interest rate swap agreements, on our total debt balances were 4.3% and 6.9% during the 2008 and 2007 three-month periods, respectively. The decline in interest rates is partially offset by the effect of our interest rate swap agreements, through which we converted $465.0 million of our total debt to a fixed rate.
Income tax expense or benefit. We recognized an income tax expense of $3.3 million in the 2008 three-month period compared to an income tax benefit of $2.5 million in the 2007 three-month period. The effective income tax rate was 41% for the 2008 three-month period and 38% for the 2007 three-month period. The effective income tax rate for the 2008 three-month period increased as a percentage of pre-tax income primarily as a result of adjustments to state net operating loss carryforwards and adjustments to our accruals of state tax reserves for uncertain tax positions.
Nine Months Ended September 30, 2008 ("2008 nine-month period") Compared To Nine Months Ended September 30, 2007 ("2007 nine-month period") Revenues. Total revenues increased $9.4 million, or 4%, to $232.4 million in the 2008 nine-month period reflecting increased political advertising revenue and internet advertising revenue offset by decreased local and national advertising revenues. Political advertising revenues increased $15.9 million, or 307%, to $21.1 million reflecting increased advertising from political candidates in the 2008 primary and general elections. Spending on political advertising was the strongest at our stations in Colorado, West Virginia, Wisconsin, Michigan and North Carolina, accounting for approximately 60% of the total political net revenue for the 2008 nine-month period. Internet advertising revenues increased $1.8 million, or 26%, to $8.6 million reflecting increased website traffic and internet sales initiatives in our markets. Local advertising revenues decreased approximately $5.0 million, or 3%, to $141.5 million. National advertising revenues decreased approximately $3.8 million, or 7%, to $52.4 million. The decrease in local and national revenue was partially due to reduced advertising revenues resulting from the change in networks broadcasting the Super Bowl. During the 2008 nine-month period, we earned approximately $130,000 of net revenue relating to the Super Bowl broadcast on our six FOX channels compared to earning approximately $750,000 of net revenue during the 2007 nine-month period relating to the 2007 Super Bowl broadcast on our 17 CBS channels. The decrease in local and national revenue was offset in part by $3.4 million of net revenue earned in the 2008 nine-month period attributable to the broadcast of the 2008 Summer Olympics on our ten NBC stations.
Broadcast expenses. Broadcasting expenses (before depreciation, amortization and gain on disposal of assets) increased $0.9 million, or 1%, to $148.4 million in the 2008 nine-month period. This modest increase primarily reflects the impact of increased national sales representative commissions on the incremental political advertising revenues.
Corporate and administrative expenses. Corporate and administrative expenses (before depreciation, amortization and gain on disposal of assets) decreased $1.6 million, or 13%, to $10.0 million. The decrease was due primarily to decreases in incentive compensation related expense. During each of the 2008 nine-month period and the 2007 nine-month period, we recorded non-cash stock-based compensation expense of $1.1 million, respectively.
Depreciation. Depreciation of property and equipment decreased $3.2 million, or 11%, to $26.2 million for the 2008 nine-month period. The decrease in depreciation was the result of the large proportion of our stations' equipment, which was acquired in 2002, becoming fully depreciated in fiscal 2007.
(Gain) loss on disposal of assets. Gain on disposal of assets increased $1.5 million to $1.3 million during the 2008 nine-month period as compared to the comparable period in the prior year. The Federal Communications

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Commission (the "FCC") has mandated that all broadcasters operating microwave facilities on certain frequencies in the 2 GHz band relocate to other frequencies and upgrade their equipment. The spectrum being vacated by broadcasters has been reallocated to third parties who, as part of the overall FCC-mandated spectrum reallocation project, must provide affected broadcasters with new digital microwave replacement equipment at no cost to the broadcaster and also reimburse them for certain associated out-of-pocket expenses. During the 2008 nine-month period, we recognized a gain of $1.3 million on the disposal of assets primarily associated with the spectrum reallocation project. We did not recognize any gains or losses on the disposal of assets associated with the spectrum reallocation project for the comparable period in the prior year.
Interest expense. Interest expense decreased $8.8 million, or 17%, to $41.8 million for the 2008 nine-month period. This decrease is partially attributable to lower average interest rates and partially attributable to decreases in average total debt outstanding. Average interest rates have decreased due to a decrease in market interest rates on our senior credit facility and the redemption of our 9.25% Notes on April 18, 2007. In the 2007 nine-month period, our total average debt balance increased as a result of our redemption of our Series C Preferred Stock on May 22, 2007 and the incurrance of costs associated with the redemption of our 9.25% Notes on April 18, 2007. The redemption of our Series C Preferred Stock and our 9.25% Notes were financed through additional borrowings on our senior credit facility. In the 2008 nine-month period, we issued 1,000 shares of our Series D Perpetual Preferred Stock and used the proceeds to make voluntary prepayments on the senior credit facility during the year of $88 million in addition to regularly scheduled principal payments of $6.6 million. Our average debt balance was $886.5 million and $907.5 million during the 2008 nine-month period and the 2007 nine-month period, respectively. The average interest rates, exclusive of our interest rate swap agreements, on our total debt balances were 4.9% and 7.1% during the 2008 nine-month period and the 2007 nine-month period, respectively. The decline in interest rates is partially offset by the effect of our interest rate swap agreements, through which we converted $465.0 million of our total debt to a fixed rate.
Loss on early extinguishment of debt. During the 2007 nine-month period, we replaced our former senior credit facility with a new senior credit facility and redeemed our 9.25% Notes. As a result of these transactions, we recorded a loss on early extinguishment of debt of $6.5 million related to the senior credit facility and $16.4 million related to the redemption of the 9.25% Notes. The loss related to the redemption of the 9.25% Notes included $11.8 million in premiums, the write-off of $4.0 million in deferred financing costs and $614,000 in unamortized bond discount.
Income tax expense or benefit. We recognized an income tax expense of $2.8 million in the 2008 nine-month period compared to an income tax benefit of $14.0 million in the 2007 nine-month period. The effective income tax rate was 41% for the 2008 nine-month period and 36% for the 2007 nine-month period. The effective income tax rate for the 2008 nine-month period increased primarily as a result of adjustments to state net operating loss carryforwards and adjustments to our accruals of state tax reserves for uncertain tax positions.

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Liquidity and Capital Resources
General
   The following table presents data that we believe is helpful in evaluating
our liquidity and capital resources (in thousands).

                                                                       Nine Months Ended September 30,
                                                                        2008                     2007
Net cash provided by operating activities                         $         36,692         $         11,919
Net cash used in investing activities                                      (12,144 )                (22,575 )
Net cash (used in) provided by financing activities                         (7,311 )                  7,148

Increase (decrease) in cash and cash equivalents                  $         17,237         $         (3,508 )




                                                                                      As of
                                                                   September 30, 2008        December 31, 2007
Cash and cash equivalents                                          $         32,575          $         15,338
Long-term debt including current portion                           $        830,446          $        925,000
Preferred stock                                                    $         91,883          $              -
Credit commitment under senior credit facility                     $        100,000          $        100,000

We file a consolidated federal income tax return and such state or local tax returns as are required. Although we may earn taxable operating income in future years, as of September 30, 2008, we anticipate that through the use of our available loss carryforwards we will not pay significant amounts of federal or state income taxes in the next several years.
We believe that current cash balances, cash flows from operations and available funds under our senior credit facility will be adequate to provide for our capital expenditures, debt service, cash dividends and working capital requirements for the foreseeable future.
We do not believe that inflation has had a significant impact on our results of operations nor is inflation expected to have a significant effect upon our business in the near future.
Net cash provided by operating activities was $36.7 million in the 2008 nine-month period compared to $11.9 million in the 2007 nine-month period. The increase in cash provided by operations is primarily due to an increase in revenue of $9.4 million, a decrease in payments on program obligations of $2.7 million and a decrease of $5.0 million for a payment made to acquire certain broadcast rights under a sports marketing agreement. In the 2008 nine-month period, we did not enter into a similar sports marketing agreement.
Net cash used in investing activities was $12.1 million in the 2008 nine-month period compared to $22.6 million for the 2007 nine-month period. The decrease in cash used in investing activities was largely due to decreased spending for equipment.
Net cash used in financing activities in the 2008 nine-month period was $7.3 million. Net cash provided by financing activities in the 2007 nine-month period was $7.1 million. During the 2008 nine-month period, we received net proceeds of $91.6 million from the issuance of 1,000 shares of Series D Perpetual Preferred Stock and used those funds as well as other funds on hand to reduce our long-term debt balance by a net amount of $94.6 million. In addition, during the 2008 nine-month period, we used $4.3 million to pay dividends (of which $1.4 million reflects the payment in January 2008 of the dividends that were declared in the fourth quarter of fiscal 2007). During the 2007 nine-month period, we used $16.2 million to refinance our long-term debt and $37.9 million to redeem our Series C Preferred Stock. In addition, during the 2007 nine-month period, we used $5.5 million to purchase shares of our common stock and $7.7 million to pay dividends (of which $2.2 million reflects the payment in January 2007 of the dividends that were declared in the fourth quarter of the fiscal year ended December 31, 2006).

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Our senior credit facility contains affirmative and restrictive covenants that we must comply with. As of September 30, 2008, we were in compliance with these covenants.
Senior Credit Facility
The amount outstanding under our senior credit facility as of September 30, 2008 was $830.4 million comprised solely of the term loan facility. The revolving credit facility did not have an outstanding balance as of September 30, 2008. The available credit commitment under the revolving credit facility as of September 30, 2008 was $100.0 million. The amount available to us for borrowing under this credit commitment is limited by our leverage ratio covenant as stated in our senior credit facility. Subsequent Event
On October 3, 2008 we used cash on hand to make a voluntary permanent reduction of $10 million to the outstanding balance of our term loan under our senior credit facility. After applying this voluntary prepayment, the total outstanding balance on our term loan was $820.4 million and we had no amounts outstanding under our revolving credit facility. See "Note C Long-Term Debt" for further discussion of our revised long-term debt maturity schedule. Capital Expenditures
Capital expenditures in the 2008 nine-month period and the 2007 nine-month period were $11.9 million and $21.9 million, respectively. The 2007 nine-month period included, in part, capital expenditures for the purchase of land and buildings in two markets and the commencement of broadcasting local news in high definition digital format in another market. The 2008 nine-month period did not contain comparable projects.
Other
During the 2008 nine-month period, we contributed $2.9 million to our pension plans. During the remainder of fiscal 2008, we expect to contribute an additional $789,000 to our pension plans. Critical Accounting Policies
The preparation of financial statements in conformity with U.S. GAAP requires management to make judgments and estimations that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. We consider our accounting policies relating to intangible assets and income taxes to be critical policies that require judgments or estimations in their application where variances in those judgments or estimations could make a significant difference to future reported results. These critical accounting policies and estimates are more fully disclosed in our Annual Report on Form 10-K for fiscal 2007. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. When used in this Quarterly Report, the words "believes," "expects," "anticipates," "estimates" and similar words and expressions are generally intended to identify forward-looking statements. Statements that describe our future strategic plans, goals or objectives are also forward-looking statements. Readers of this Quarterly Report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of our management, are not guarantees of future performance, results or events and involve risks and uncertainties, and that actual results and events may differ materially from those contained in the forward-looking statements as a result of various factors including, but not limited to, those listed in Item 1A of our Annual Report on Form 10-K for fiscal 2007 and the other factors described from time to time in our filings with the Securities and Exchange Commission (the "SEC"). The forward-looking statements included in this Quarterly Report are made only as of the date hereof. We undertake no obligation to update such forward-looking statements to reflect subsequent events or circumstances, except as required by law.

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