This discussion contains forward-looking statements. Actual results could differ materially from those anticipated by the forward-looking statements due to risks and uncertainties described in the section of this combined quarterly report on Form 10-Q entitled "Note Regarding Forward-Looking Statements" and in Item 1A to the 2008 Combined Form 10-K, as updated from time to time by the risk factors included in our Current Reports on Form 8-K and Quarterly Reports on Form 10-Q for the Company and Lamar Media filed after the 2008 Combined Form 10-K. You should carefully consider each of these risks and uncertainties in evaluating the Company's and Lamar Media's financial conditions and results of operations. Investors are cautioned not to place undue reliance on the forward-looking statements contained in this document. These statements speak only as of the date of this document, and the Company undertakes no obligation to update or revise the statements, except as may be required by law. Lamar Advertising Company
The following is a discussion of the consolidated financial condition and results of operations of the Company for the three and nine months ended September 30, 2009 and 2008. This discussion should be read in conjunction with the consolidated financial statements of the Company and the related notes included in this Form 10-Q.
OVERVIEW
The Company's net revenues are derived primarily from the sale of advertising on outdoor advertising displays owned and operated by the Company. The Company relies on sales of advertising space for its revenues, and its operating results are therefore affected by general economic conditions, as well as trends in the advertising industry. Advertising spending is particularly sensitive to changes in general economic conditions which affect the rates the Company is able to charge for advertising on its displays and its ability to maximize occupancy on its displays.
Since December 31, 2005, the Company has completed strategic acquisitions of outdoor advertising assets and site easements for an aggregate purchase price of approximately $632.9 million. The Company has historically financed its acquisitions and intends to finance its future acquisition activity, if any, from available cash, borrowings under its senior credit facility and the issuance of Class A common stock or debt securities. See "Liquidity and Capital Resources" below. As a result of acquisitions, the operating performances of individual markets and of the Company as a whole are not necessarily comparable on a year-to-year basis. Due to the current economic recession, however, the Company has significantly reduced its acquisition activity during 2009. Growth of the Company's business requires expenditures for maintenance and capitalized costs associated with the construction of new billboard displays, the replacement of damaged billboard displays, the entrance into and renewal of logo sign and transit contracts, and the purchase of real estate and operating equipment. The following table presents a breakdown of capitalized expenditures for the three months and nine months ended September 30, 2009 and 2008:

                                       Three months ended          Nine months ended
                                          September 30,              September 30,
                                         (in thousands)              (in thousands)
                                       2009           2008         2009         2008
       Total capital expenditures:
       Billboard - traditional       $   1,386      $  9,669     $  6,447     $  49,459
       Billboard - digital               3,345        34,928       11,592        84,964
       Logos                             1,205         1,365        3,276         4,481
       Transit                             113           261        3,123           609
       Land and buildings                  165         1,790          549         7,946
       Operating equipment               1,325         3,620        4,023        11,787

       Total capital expenditures    $   7,539      $ 51,633     $ 29,010     $ 159,246

RESULTS OF OPERATIONS
During the third quarter of 2009, the Company identified an error associated with the Company's lease escalation liability. As a result, the Company's direct advertising expense and the related accrued liability balances were misstated. In accordance with Staff Accounting Bulletin (SAB) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Qualifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the errors from qualitative and quantitative perspectives, and concluded the errors were immaterial to the prior periods. Consequently, the Company will revise its historical financial statements for fiscal 2007, fiscal 2008, fiscal 2009, and the quarters within fiscal 2008 and 2009, when they are published.

Nine Months ended September 30, 2009 compared to Nine Months ended September 30, 2008
Net revenues decreased $125.3 million or 13.6% to $793.8 million for the nine months ended September 30, 2009 from $919.1 million for the same period in 2008. This decrease was attributable primarily to a decrease in billboard net revenues of $115.2 million or 13.8% over the prior period, a decrease in logo sign revenue of $0.4 million, which represents a decrease of 1.2% over the prior period, and a $9.7 million decrease in transit revenue, which represents a decrease of 20.6% over the prior period.
For the nine months ended September 30, 2009, there was a $139.0 million decrease in net revenues as compared to acquisition-adjusted net revenue for the nine months ended September 30, 2008. The $139.0 million decrease in revenue primarily consists of a $130.3 million decrease in billboard revenue and a $9.4 million decrease in transit revenue offset by a $0.7 million increase in logo revenue over the acquisition-adjusted net revenue for the comparable period in 2008. This $139.0 million decrease in revenue represents a decrease of 14.9% over the comparable period in 2008 and is attributable to the continuation of the general economic downturn which began in the fourth quarter of 2008. See "Reconciliations" below.
Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, decreased $61.6 million or 11.6% to $468.9 million for the nine months ended September 30, 2009 from $530.5 million for the same period in 2008. There was a $51.6 million decrease in operating expenses related to the operations of our outdoor advertising assets and a $10.0 million decrease in corporate expenses. The decrease in operating expenses was primarily due to the Company's increased efforts to reduce overall expenditures through lease renegotiations and cancellations, in addition to a 13% reduction in personnel expenses resulting from a reduction in work force.
Depreciation and amortization expense increased $15.3 million for the nine months ended September 30, 2009 as compared to the nine months ended September 30, 2008, primarily due to the acceleration of depreciation related to non performing structures dismantled during the period.
Due to the above factors, operating income decreased $77.8 million to $77.2 million for the nine months ended September 30, 2009 compared to $155.0 million for the same period in 2008.
Interest expense increased $17.2 million from $127.9 million for the nine months ended September 30, 2008 to $145.1 million for the nine months ended September 30, 2009, due to the issuance of $350 million in aggregate principal amount of 9 3/4% senior notes issued in March 2009 and the increase in interest rates as a result of the amendments to Lamar Media's senior credit facility in April 2009.
During the nine months ended September 30, 2009, Lamar recognized a gain of $3.7 million resulting from the partial extinguishment of it's 2 7/8% Convertible Notes due 2010 - Series B.
The decrease in operating income and the increase in interest expense, offset by the increase in the gain on extinguishment of debt resulted in a $92.3 million decrease in income before income taxes. This decrease in income resulted in a decrease in income tax expense of $43.2 million for the nine months ended September 30, 2009 over the same period in 2008. The effective tax rate for the nine months ended September 30, 2009 was 38.5%, which is lower than the statutory rate due to permanent differences resulting from non-deductible compensation expense related to stock options in accordance with Stock Compensation Awards Classified as Equity (formerly SFAS 123R) and other non-deductible expenses and amortization.
As a result of the above factors, the Company recognized a net loss for the nine months ended September 30, 2009 of $38.4 million, as compared to net income of $10.8 million for the same period in 2008.
Three Months ended September 30, 2009 compared to Three Months ended September 30, 2008
Net revenues decreased $40.7 million or 13.0% to $271.8 million for the three months ended September 30, 2009 from $312.5 million for the same period in 2008. This decrease was attributable primarily to a decrease in billboard net revenues of $38.8 million or 13.7% over the prior period and a $2.7 million decrease in transit revenue over the prior period, which represents a decrease of 16.5% , offset by a $0.8 million increase in logo revenue over the prior period. For the three months ended September 30, 2009, there was a $40.3 million decrease in net revenues as compared to acquisition-adjusted net revenue for the three months ended September 30, 2008. The $40.3 million decrease in revenue primarily consists of a $39.1 million decrease in billboard revenue and a $2.3 million decrease in transit revenue offset by a $1.1 million increase in logo revenue over the acquisition-adjusted net revenue for the comparable period in 2008. This $40.3 million decrease in revenue represents a decrease of 12.9% over the comparable period in 2008 and is attributable to the continuation of the general economic downturn which began in the fourth quarter of 2008. See "Reconciliations" below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, decreased $27.5 million or 15.3% to $152.2 million for the three months ended September 30, 2009 from $179.7 million for the same period in 2008. There was a $24.7 million decrease in operating expenses related to the operations of our outdoor advertising assets and a $2.8 million decrease in corporate expenses. The decrease in operating expenses was primarily due to the Company's increased efforts to reduce overall expenditures through lease renegotiations and cancellations, in addition to a 13% reduction in personnel. Depreciation and amortization expense increased $3.0 million for the three months ended September 30, 2009, as compared to the three months ended September 30, 2008, primarily due to the acceleration of depreciation in non performing structures dismantled during the period.
Due to the above factors, operating income decreased $13.9 million to $39.3 million for the three months ended September 30, 2009 compared to $53.2 million for the same period in 2008.
Interest expense increased $9.7 million from $42.4 million for the three months ended September 30, 2008 to $52.1 million for the three months ended September 30, 2009 due to the issuance of $350 million in aggregate principal amount of 9 3/4% senior notes issued in March 2009 and the increase in interest rates as a result of the amendments to Lamar Media's senior credit facility in April 2009.
The decrease in operating income and increase in interest expense described above resulted in a $22.5 million increase in loss before income taxes. This increase in loss resulted in an increase in income tax benefit of $15.9 million for the three months ended September 30, 2009 over the same period in 2008, as adjusted. The effective tax rate for the three months ended September 30, 2009 was 57.0%.
As a result of the above factors, the Company recognized a net loss for the three months ended September 30, 2009 of $4.8 million, as compared to net income of $1.8 million for the same period in 2008. Reconciliations:
Because acquisitions occurring after December 31, 2007 (the "acquired assets") have contributed to our net revenue results for the periods presented, we provide 2008 acquisition-adjusted net revenue, which adjusts our 2008 net revenue for the three and nine months ended September 30, 2008 by adding to it the net revenue generated by the acquired assets prior to our acquisition of these assets for the same time frame that those assets were owned in the three and nine months ended September 30, 2009. We provide this information as a supplement to net revenues to enable investors to compare periods in 2009 and 2008 on a more consistent basis without the effects of acquisitions. Management uses this comparison to assess how well we are performing within our existing assets.
Acquisition-adjusted net revenue is not determined in accordance with GAAP. For this adjustment, we measure the amount of pre-acquisition revenue generated by the assets during the period in 2008 that corresponds with the actual period we have owned the assets in 2008 (to the extent within the period to which this report relates). We refer to this adjustment as "acquisition net revenue." Reconciliations of 2008 reported net revenue to 2008 acquisition-adjusted net revenue for each of the three and nine month periods ended September 30, as well as a comparison of 2008 acquisition-adjusted net revenue to 2009 reported net revenue for each of the three and nine month periods ended September 30, are provided below:
Reconciliation of Reported Net Revenue to Acquisition-Adjusted Net Revenue

                                       Three months ended       Nine months ended
                                       September 30, 2008      September 30, 2008
                                         (in thousands)          (in thousands)
   Reported net revenue               $            312,516     $           919,111
   Acquisition net revenue                            (431 )                13,671

   Acquisition-adjusted net revenue   $            312,085     $           932,782

Comparison of 2009 Reported Net Revenue to 2008 Acquisition-Adjusted Net Revenue

                                    Three months ended           Nine months ended
                                       September 30,               September 30,
                                    2009          2008          2009          2008
                                      (in thousands)              (in thousands)
        Reported net revenue      $ 271,766     $ 312,516     $ 793,750     $ 919,111
        Acquisition net revenue           -          (431 )           -        13,671

        Adjusted totals           $ 271,766     $ 312,085     $ 793,750     $ 932,782

LIQUIDITY AND CAPITAL RESOURCES
Overview
In light of the worsening economic climate in the fourth quarter of 2008 that has continued in 2009 we have taken certain steps to reduce our overall operating expenses. These steps include reducing operating expenses and non-essential capital expenditures and significantly reducing acquisition activity. As part of the overall reductions in operating expenses, the Company reduced its workforce from approximately 3,500 to 3,050, which represents a decrease of approximately 13%.
The Company has historically satisfied its working capital requirements with cash from operations and borrowings under its senior credit facility. The Company's wholly owned subsidiary, Lamar Media Corp., is the principal borrower under the senior credit facility and maintains all corporate cash balances. Sources of Cash
Total Liquidity at September 30, 2009. As of September 30, 2009, Lamar Media had approximately $235.8 million in total liquidity that consisted of approximately $47.7 million in cash and the ability to fully access its revolving senior credit facility in the amount of $188.1 million while remaining in compliance with covenant restrictions.
Cash Generated by Operations. For the nine months ended September 30, 2009 and 2008 our cash provided by operating activities was $191.4 million and $237.7 million, respectively. While our net loss was approximately $38.4 million for the nine months ended
September 30, 2009, we generated cash from operating activities of $191.4 million during that same period, primarily due to non-cash adjustments needed to reconcile net loss to cash provided by operating activities of $266.8 million, which primarily consisted of depreciation and amortization of $252.8 million and amortization included in interest expense of $15.7 million. In addition, there was an increase in working capital of $37.0 million. We expect to generate cash flows from operations during 2009 in excess of our cash needs for operations and capital expenditures as described herein. We expect to use the excess cash generated principally for reducing outstanding indebtedness. Note Offerings. On March 27, 2009, Lamar Media completed an institutional private placement of $350 million in aggregate principal amount (approximately $314.9 million in gross proceeds) of 9 3/4% Senior Notes due 2014 (the "9 3/4% Notes"). The institutional private placement resulted in net proceeds to Lamar Media of approximately $306.5 million. The 9 3/4% Notes were sold within the United States only to qualified institutional buyers in reliance on Rule 144A under the Securities Act of 1933, as amended (the "Securities Act"), and outside the United States only to non-U.S. persons in reliance on Regulation S under the Securities Act.
The 9 3/4% Notes mature on April 1, 2014 and bear interest at a rate of 9 3/4% per annum, which is payable semi-annually on April 1 and October 1 of each year, beginning October 1, 2009. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. The terms of the indenture will, among other things, limit Lamar Media's and its restricted subsidiaries' ability to
(i) incur additional debt and issue preferred stock; (ii) make certain distributions, investments and other restricted payments; (iii) create certain liens; (iv) enter into transactions with affiliates; (v) have the restricted subsidiaries make payments to Lamar Media; (vi) merge, consolidate or sell substantially all of Lamar Media's or the restricted subsidiaries' assets; and
(vii) sell assets. These covenants are subject to a number of exceptions and qualifications. Lamar Media may redeem up to 35% of the aggregate principal amount of the 9 3/4% Notes, at any time and from time to time, at a price equal to 109.75% of the aggregate principal amount so redeemed, plus accrued and unpaid interest thereon (including additional interest, if any), with the net cash proceeds of certain public equity offerings completed before April 1, 2012. At any time prior to April 1, 2014, Lamar Media may redeem some or all of the 9 3/4% Notes at a price equal to 100% of the principal amount plus a make-whole premium. In addition, if the Company or Lamar Media undergoes a change of control, Lamar Media may be required to make an offer to purchase each holder's 9 3/4% Notes at a price equal to 101% of the principal amount of the Notes, plus accrued and unpaid interest (including additional interest, if any), up to, but not including the repurchase date. Lamar Media distributed all of the proceeds of this offering, after the payment of fees and expenses, to Lamar Advertising in order to enable the Company to repurchase some or all of its outstanding 2 7/8% Convertible Notes due 2010 - Series B, or to fund repayment of the Company's convertible notes at maturity. See "Uses of Cash - Tender Offers" below.

Credit Facilities. As of September 30, 2009, Lamar Media had approximately $188.1 million of unused capacity under the revolving credit facility included in its senior credit facility. The senior credit facility was effective September 30, 2005 and was comprised of a $400.0 million revolving senior credit facility and a $400.0 million term facility. We have also borrowed $789.0 million in term loans as a result of incremental borrowings (Series A through Series F) during 2006 and 2007 under the incremental facility included in our senior credit facility. In addition to those incremental borrowings, the existing incremental facility permitted Lamar Media to request that its lenders enter into commitments to make additional term loans, up to a maximum aggregate amount of $500.0 million. The aggregate balance outstanding under our senior credit facility September 30, 2009 was $1.12 billion.
On April 2, 2009, Lamar Media Corp. entered into Amendment No. 4 ("Amendment No. 4") to its existing senior credit facility dated as of September 30, 2005 together with its subsidiary guarantors, its subsidiary borrowers, the Company, and JPMorgan Chase Bank, N.A., as Administrative Agent ("JPMorgan") to, among other things: (i) reduce the amount of the revolving credit commitments available thereunder from $400 million to $200 million; (ii) increase the interest rate margins for the revolving credit facility and term loans under the Credit Agreement; (iii) make certain changes to the provisions regarding mandatory prepayments of loans; (iv) amend certain financial covenants; and
(v) cause Lamar Media and the subsidiary guarantors to pledge additional collateral of Lamar Media and its subsidiaries, including certain owned real estate properties, to secure loans made under the Credit Agreement. Amendment No. 4 and the changes it made to the Credit Agreement were effective as of April 6, 2009. Amendment No. 4 also reduced our incremental loan facility from $500.0 million to $300.0 million. The incremental facility permits Lamar Media to request that its lenders enter into commitments to make additional term loans, up to a maximum aggregate amount of $300 million. Lamar Media's lenders have no obligation to make additional loans out of the $300 million incremental facility, but may enter into such commitments at their sole discretion. Factors Affecting Sources of Liquidity
Internally Generated Funds. The key factors affecting internally generated cash flow are general economic conditions, specific economic conditions in the markets where the Company conducts its business and overall spending on advertising by advertisers.
Credit Facilities and Other Debt Securities. Lamar must comply with certain covenants and restrictions related to its credit facilities and its outstanding debt securities.
Restrictions Under Debt Securities. Currently Lamar Media has outstanding $385.0 million 7 1/4% Senior Subordinated Notes due 2013 issued in December 2002 and June 2003, (the "7 1/4% Notes"), $400.0 million 6 5/8% Senior Subordinated Notes due 2015 issued August 2005, $216 million 6 5/8% Senior Subordinated Notes due 2015 - Series B issued in August 2006, $275 million 6 5/8% Senior Subordinated Notes due 2015 Series-C issued in October 2007 (collectively, the "6 5/8% Notes") and $350.0 million 9 3/4% Notes. The indentures relating to Lamar Media's outstanding notes restrict its ability to incur indebtedness but permit the incurrence of indebtedness (including indebtedness under its senior credit facility), (i) if no default or event of default would result from such incurrence and (ii) if after giving effect to any such incurrence, the leverage ratio (defined as total consolidated debt to trailing four fiscal quarter EBITDA (as defined in the indentures)) would be less than (a) 6.5 to 1 pursuant to the 7 1/4% Notes and 9 3/4% Notes indenture, and (b) 7.0 to 1, pursuant to the 6 5/8% Notes indentures. In addition to debt incurred under the provisions described in the preceding sentence, the indentures relating to Lamar Media's outstanding notes permit Lamar Media to incur indebtedness pursuant to the following baskets:
• up to $1.3 billion of indebtedness under its senior credit facility;

• currently outstanding indebtedness or debt incurred to refinance outstanding debt;

• inter-company debt between Lamar Media and its subsidiaries or between subsidiaries;

• certain purchase money indebtedness and capitalized lease obligations to acquire or lease property in the ordinary course of business that cannot exceed the greater of $20 million or 5% of Lamar Media's net tangible assets; and

• additional debt not to exceed $40 million.

Restrictions Under Senior Credit Facility. Lamar Media is required to comply with certain covenants and restrictions under its senior credit agreement. If the Company fails to comply with these tests, all obligations under the senior credit facility, including our revolving credit facility, may be accelerated. At September 30, 2009 and currently Lamar Media is in compliance with all such tests.
Lamar Media must be in compliance with the following financial ratios under its senior credit facility:

• a total debt ratio, defined as total consolidated debt to EBITDA, as defined below, for the most recent four fiscal quarters as set forth below:

Period                                                                         Ratio
Amendment No. 4 Effective Date through and including March 31, 2009         7.25 to 1.00
Thereafter through and including June 30, 2009                              7.50 to 1.00
Thereafter through and including June 30, 2010                              7.75 to 1.00
Thereafter through and including December 31, 2010                          7.50 to 1.00
Thereafter through and including March 31, 2011                             7.00 to 1.00
Thereafter through and including June 30, 2011                              6.75 to 1.00
Thereafter through and including September 30, 2011                         6.25 to 1.00
Thereafter                                                                  6.00 to 1.00

• a senior debt ratio, defined as total senior debt to EBITDA, as defined below, for the most recent four fiscal quarters as set forth below:

Period                                                                         Ratio
Amendment No. 4 Effective Date through and including March 31, 2009         4.00 to 1.00
Thereafter through and including March 31, 2010                             4.25 to 1.00
Thereafter through and including September 30, 2010                         4.00 to 1.00
Thereafter through and including December 31, 2010                          3.75 to 1.00
Thereafter through and including March 31, 2011                             3.50 to 1.00
Thereafter through and including September 30, 2011                         3.25 to 1.00
Thereafter through and including December 30, 2011                          3.00 to 1.00
Thereafter                                                                  2.00 to 1.00

• a fixed charges coverage ratio, defined as EBITDA, (as defined below), for the most recent four fiscal quarters to the sum of (1) the total payments of principal and interest on debt for such period, plus (2) capital expenditures made during such period, plus (3) income and franchise tax payments made during such period, plus (4) dividends, of greater than 1.05 to 1.

. . .