The primary broadcasting operating expenses are employee compensation, related benefits and programming costs. In addition, the broadcasting operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of the broadcasting operations is fixed.
Recent Acquisition and Expansion Activity During 2007, we launched or rebranded four digital second channels including one CW and one My NetworkTV affiliate, as well as two local news/weather channels in certain of our existing markets. We launched these additional secondary channels in order to develop additional revenue streams while incurring minimal incremental expenses. During 2008, we discontinued two of our digital second channels.
On March 3, 2006, we completed the acquisition of the stock of Michiana Telecasting Corp., owner of WNDU-TV, the NBC affiliate in South Bend, Indiana, from the University of Notre Dame for $88.9 million, which included certain working capital adjustments and transaction fees. We financed this acquisition with borrowings under the senior credit facility.
In addition, during 2006, we launched or rebranded 36 digital second channels including one ABC, five FOX, seven CW and 15 MyNetworkTV affiliates plus six local news/weather channels and two "independent" channels in certain of its existing markets. We launched these additional secondary channels in order to develop additional revenue streams while incurring minimal incremental expenses. The rebranding of our existing UPN stations was necessary due to the merging of the UPN and WB networks into the CW network during 2006.
On November 30, 2005, we completed the acquisition of the assets of WSAZ-TV, Channel 3, the NBC affiliate serving the Charleston-Huntington, West Virginia market, from Emmis Communications Corp. for approximately $185.8 million. We used funds borrowed under the senior credit facility and a portion of our cash on hand to fund this acquisition.
On November 10, 2005, we completed the acquisition of the assets of WSWG-TV, the CBS affiliate serving Albany, Georgia from P.D. Communications, LLC for approximately $3.75 million plus related transaction costs. We used a portion of our cash on hand to fund this acquisition.
On July 1, 2005, we acquired a third FCC license to operate a second low power television station, WAHU-TV, in the Charlottesville, Virginia television market. WAHU-TV is a FOX network affiliate. Our original cost to acquire and/or construct the combined broadcast facilities of WCAV-TV, WVAW-TV and WAHU-TV was approximately $8.5 million.
On January 31, 2005 , we completed the acquisition of KKCO-TV for approximately $13.5 million. KKCO-TV, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. We used a portion of our cash on hand to fully fund this acquisition. 2005 Spinoff
On December 30, 2005, we completed the spinoff of all of the outstanding stock of TCM. Immediately prior to the spinoff, we contributed all of the membership interests in Gray Publishing, LLC, which owned and operated our Gray Publishing and GrayLink Wireless businesses and certain other assets, to TCM. In the spinoff, each of the holders of our common stock received one share of TCM common stock for every ten shares of our common stock and each holder of our Class A common stock received one share of TCM common stock for every ten shares of our Class A common stock. As part of

the spinoff, we received approximately $44.0 million in cash distributed from TCM, which we used to reduce our outstanding indebtedness on December 30, 2005. The financial position and results of operations of our former publishing and wireless businesses are reported in our consolidated balance sheet and statement of operations as discontinued operations for the year ended December 31, 2005. Please refer to Note B. "Discontinued Operations" of our audited consolidated financial statements included elsewhere herein. Revenues
Set forth below are the principal types of revenues earned by our broadcasting operations for the periods indicated and the percentage contribution of each to total revenues (dollars in thousands):

                                                         Year End December 31,
                                     2008                        2007                        2006
                                           Percent                     Percent                     Percent
                             Amount       of Total       Amount       of Total       Amount       of Total
Revenues:
Local                       $ 186,492          57.0 %   $ 200,686          65.3 %   $ 192,348          57.9 %
National                       68,417          20.9 %      77,365          25.2 %      78,492          23.6 %
Internet                       11,859           3.6 %       9,506           3.1 %       7,607           2.3 %
Political                      48,455          14.8 %       7,808           2.5 %      42,682          12.9 %
Retransmission consent          3,046           0.9 %       2,436           0.8 %       1,563           0.5 %
Production and other            8,155           2.5 %       8,719           2.8 %       8,356           2.5 %
Network compensation              752           0.3 %         768           0.3 %       1,089           0.3 %

Total                       $ 327,176         100.0 %   $ 307,288         100.0 %   $ 332,137         100.0 %

Risk Factors
The broadcast television industry is reliant primarily on advertising revenues and faces increased competition. For a discussion of other factors that may affect our business, see "Item 1A. Risk Factors" on page 15 of this Annual Report.
Results of Operations
Year Ended December 31, 2008 ("2008") Compared to Year Ended December 31, 2007
("2007")
Revenue. Total revenues increased $19.9 million, or 6%, to $327.2 million reflecting increased cyclical political advertising revenues. Political advertising revenues increased $40.7 million, or 521%, to $48.5 million reflecting the cyclical influence of the 2008 elections. Local advertising revenues, excluding political advertising revenues, decreased $14.2 million, or 7%, to $186.5 million. National advertising revenues, excluding political advertising revenues, decreased $9.0 million, or 12%, to $68.4 million. Internet advertising revenues, excluding political advertising revenues, increased $2.4 million, or 25%, to $11.9 million reflecting increased website traffic and internet sales initiatives in each of our markets. The increase in political advertising revenue reflects 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 a significant portion of the total political net revenue for the year ended December 31, 2008. The decrease in local and national revenue was largely due to the general weakness in the economy and due to the change in networks broadcasting the Super Bowl. During 2008, we earned approximately $130,000 of net revenue relating to the 2008 Super Bowl broadcast on our six Fox channels compared to approximately

$750,000 of net revenue relating to the 2007 Super Bowl broadcast on our 17 CBS channels during 2007. The decrease in local and national revenue was offset in part by $3.4 million of net revenue earned during 2008 attributable to the broadcast of the 2008 Summer Olympics on our ten NBC stations.
Operating expense. Broadcast expenses (before depreciation, amortization, impairment and (gain) loss on disposal of assets) decreased $0.1 million, or approximately 0%, to $199.6 million. This modest decrease primarily reflects the impact of increased national sales representative commissions on the incremental political advertising revenues and increased syndicated programming expenses offset partially by decreases in payroll and other operating expenses. We recorded an impairment expense related to our syndicated television programming $601,400 in 2008. Employee payroll and related expenses decreased due to a reduction in our number of employees in 2008 compared to 2007. As of December 31, 2008 and 2007, we employed 2,253 and 2,425 total employees in our broadcast operations which included full-time and part-time employees. This reduction in total employees is a decrease of 7.1% or 172 total employees.
Corporate and administrative expense. Corporate and administrative expenses (before depreciation, amortization, impairment and (gain) loss on disposal of assets) decreased $1.0 million, or 7%, to $14.1 million. During 2008, corporate payroll expenses decreased by $950,000 compared to 2007 due primarily to a decrease in incentive based compensation. Corporate and administrative expenses included non-cash stock-based compensation expense during the years ended 2008 and 2007 of $1.5 million and $1.2 million, respectively.
Depreciation. Depreciation of property and equipment totaled $34.6 million and $38.6 million for 2008 and 2007, respectively. The decrease in depreciation was the result of a large proportion of our stations' equipment, which was acquired in 2002, becoming fully depreciated.
Amortization of intangible assets. Amortization of intangible assets was $0.8 million for 2008 as compared to $0.8 million for 2007. Amortization expense remained consistent to that of the prior year as a result of no acquisitions or disposals of definite lived intangible assets in the current year.
Impairment of goodwill and broadcast licenses. During 2008, we recorded a non-cash impairment expense of $338.7 million resulting from a write down of $98.6 million in the carrying value of our goodwill and a write down of $240.1 million in the carrying value of our broadcast licenses. The write down of our goodwill and broadcast licenses related to seven stations and 23 stations, respectively. We tested our unamortized intangible assets for impairment at December 31, 2008. As of this testing date, we believe events had occurred and circumstances changed that more likely than not reduce the fair value of our broadcast licenses and goodwill below their carrying amounts. These events which accelerated in the fourth quarter of 2008 included: (a) the continued decline of the price of our common stock and Class A common stock;
(b) the decline in the current selling prices of television stations; (c) the decline in local and national advertising revenues excluding political advertising revenue; and (d) the decline in the operating profit margins of some of our stations. We did not record a similar impairment expense in the prior year. Interest expense. Interest expense decreased $13.1 million, or 20%, to $54.1 million for 2008 compared to 2007. This decrease is primarily attributable to lower average debt balances in 2008 compared to 2007 and lower average interest rates. The total average debt balance was $868.3 million and $913.0 million for 2008 and 2007, respectively. The average interest rates were 5.9% and 7.1% for 2008 and 2007, respectively. These average interest rates are for the respective period and not the respective ending balance sheet dates. They include the effects of our interest rate swap agreements. Loss on Early Extinguishment of Debt. In 2007, 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. The effective tax rate increased to 35.5% for 2008 from 35.1% for 2007. The effective tax rates differ from the statutory rate due to the following items:

                                                   Year Ended December 31,
                                                     2008             2007
          Statutory tax rate                          35.0 %          35.0 %
          State income taxes                           3.7 %           4.1 %
          Change in valuation allowance                0.1 %          (1.2 )%
          Reserve for uncertain tax positions         (0.2 )%         (2.8 )%
          Goodwill impairment                         (3.0 )%          0.0 %
          Other                                       (0.1 )%          0.0 %

                                                      35.5 %          35.1 %

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006 ("2006") Revenues. Total revenues decreased $24.8 million, or 7%, to $307.3 million reflecting reduced cyclical political advertising revenues. Political advertising revenues decreased $34.9 million, or 82% to $7.8 million reflecting the cyclical influence of the 2006 elections. Local advertising revenues, excluding political advertising revenues, increased $8.4 million, or 4%, to $200.7 million. National advertising revenues, excluding political advertising revenues, decreased $1.1 million, or 1%, to $77.4 million. Internet advertising revenues, excluding political advertising revenues, increased $1.9 million, or 25%, to $9.5 million reflecting increased website traffic and internet sales initiatives in each of our markets. Network compensation revenue decreased $0.3 million, or 29%, to $0.8 million due to lower revenue from network affiliation agreements that were renewed in recent years. The decrease in political advertising revenues was partially offset by an increase of $2.0 million in non-political advertising revenue resulting from operating WNDU-TV for 12 months in 2007 compared to 10 months in 2006. We acquired WNDU-TV in 2006. The decrease in political advertising revenues was also partially offset by increased non-political advertising revenue from our expanded digital second channels.
Operating expenses. Broadcast expenses (before depreciation, amortization and loss on disposal of assets) increased $8.2 million, or 4%, to $199.7 million due primarily to increases in the operating expenses of our primary channels totaling $5.1 million which primarily reflects routine increases in payroll, programming and promotion costs. Approximately $578,000 of this increase was the result of our operation of WNDU-TV for 12 months in 2007, compared to 10 months in 2006. The remaining $3.1 million increase is the result of additional costs associated with the expansion of the number of our digital second channels to 40 during 2007 as described above.
Corporate and administrative expenses. Corporate and administrative expenses, before depreciation, amortization and (gain) loss on disposal of assets were unchanged, totaling $15.1 million in each of 2007 and 2006. During 2007, corporate payroll expenses increased by $479,000 compared to 2006 due primarily to routine compensation increases. The increase in payroll costs was largely offset by decreases of $447,000 in professional and other services. Corporate and administrative expenses included non-cash stock-based compensation expense during 2007 and 2006 of $1.2 million and $1.1 million, respectively.

Depreciation. Depreciation of property and equipment increased $4.5 million, or 13%, to $38.6 million for 2007 as compared to 2006, respectively. The increase in depreciation was due to acquired stations and newly acquired equipment.
Amortization of intangible assets. Amortization of intangible assets decreased $1.7 million, or 66%, to $0.8 million for 2007 as compared to 2006. The decrease in amortization expense was due to definite lived intangible assets of stations acquired in prior years, becoming fully amortized, partially offset by amortization of intangible assets acquired with the purchase of WNDU-TV in 2006.
Interest expense. Interest expense increased $0.4 million, or 1%, to $67.2 million for 2007 compared to 2006. This increase is primarily attributable to higher average debt balances in 2007 compared to 2006 partially offset by lower average interest rates. The total average debt balance was $913.0 million and $814.8 million for 2007 and 2006, respectively. The average interest rates were 7.1% and 7.5% for 2007 and 2006, respectively. These average interest rates are for the respective period and not the respective ending balance sheet dates. They include the effects of our interest rate swap agreements.
Loss on Early Extinguishment of Debt. In 2007, 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. The effective tax rate decreased to 35.1% for 2007 from 45.6% for 2006. The effective tax rates differ from the statutory rate due to the following items:

                                                   Year Ended December 31,
                                                    2007              2006
         Statutory tax rate                          35.0 %             35.0 %
         State income taxes                           4.1 %              6.2 %
         Change in valuation allowance               (1.2 )%             1.0 %
         Reserve for uncertain tax positions         (2.8 )%             0.0 %
         Other                                        0.0 %              3.4 %

                                                     35.1 %             45.6 %

Liquidity and Capital Resources

General
   The following tables present data that we believe is helpful in evaluating
our liquidity and capital resources (in thousands):

                                                          Year Ended December 31,
                                                            2008             2007
  Net cash provided by operating activities             $     73,675       $  28,360
  Net cash used in investing activities                      (16,340 )       (25,662 )
  Net cash (used in) provided by financing activities        (42,024 )         7,899

  Increase in cash and cash equivalents                 $     15,311       $  10,597


                                                                 December 31,
                                                             2008             2007
  Cash and cash equivalents                             $     30,649       $  15,338
  Long-term debt including current portion              $    800,380       $ 925,000
  Preferred stock                                       $     92,183       $       -
  Borrowing ability under our senior credit facility    $     12,262       $  38,189

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 December 31, 2008, we anticipate that through the use of our available loss carryforwards we will not pay significant amounts of federal income taxes in the next several years. However, we estimate that we will pay state income taxes in certain states over the next several years.
We believe that current cash balances, cash flows from operations and any available funds under the revolving credit line of our senior credit facility will be adequate to provide for our capital expenditures, debt service and working capital requirements. However, our senior credit facility contains restrictive covenants that include a leverage ratio test. As of December 31, 2008, we are in compliance with all covenants under the senior credit facility. In the future, if we are unable to maintain compliance with these covenants, including the leverage ratio test, we would use reasonable efforts to seek an amendment or waiver to our senior credit facility. However, in such circumstances, we could provide no assurances that any amendment or waiver would be obtained nor of its terms. On March 31, 2009, we amended our senior credit facility. For details of the amendment, see Note N. "Subsequent Event - Long-term Debt Amendment" included elsewhere herein for discussion of the amended terms.
We did not fund the Series D Perpetual Preferred Stock cash dividend payment due on January 15, 2009 that had accumulated for the fourth quarter of 2008. If three consecutive cash dividends payments with respect to the Series D Perpetual Preferred Stock remain unfunded the dividend rate will increase from 15% per annum to 17% per annum. While any Series D Perpetual Preferred Stock dividend payments are in arrears, we are prohibited from repurchasing, declaring and/or paying any cash dividend with respect to any equity securities having liquidation preferences equivalent to or junior in ranking to the liquidation preferences of the Series D Perpetual Preferred Stock including our common stock and Class A common stock. We can provide no assurances when any future cash payments will be made on any accumulated and unpaid Series D Perpetual Preferred Stock cash dividends presently in arrears or that become in arrears in the future. See Note G. "Preferred Stock" of our audited consolidated financial statements included elsewhere herein for further information concerning the Series D Perpetual Preferred Stock.

Under the revolver portion of our senior credit facility, the maximum credit available under the facility is $100.0 million. The amount that we can draw upon the revolver is limited by the restrictive covenants of our senior credit facility and our Series D Perpetual Preferred Stock. As of December 31, 2008 and 2007 and pursuant to these restrictive covenants, we could have drawn $12.3 million and $38.2 million, respectively, of the $100 million maximum amount under the agreement.
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 increased $45.3 million to $73.7 million for 2008 compared to net cash provided of $28.4 million for the prior year. The increase in cash provided by operations was due primarily to several factors including: an increase in revenues of $19.9 million; a decrease in corporate expenses of $1.0 million and a net change in current operating assets and liabilities of $5.3 million.
Net cash used in investing activities decreased $9.4 million to $16.3 million for 2008 compared to $25.7 million for the prior year. The decrease in cash used in investing activities was largely due to decreases in capital expenditures for 2008 of $8.5 million.
Net cash (used in) provided by financing activities decreased $49.9 million to a use of $42.0 million for 2008 compared to an amount provided of $7.9 million for the prior year. This decrease was due primarily to the repayment of our senior credit facility partially offset by issuance of our . . .