This report contains forward-looking statements. These statements are subject to risks and uncertainties including those described in Item 1A under the heading "Risk Factors," and elsewhere in this Annual Report, that could cause actual results to differ materially from those projected in these forward-looking statements. The Company cautions investors 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 years ended December 31, 2012, 2011 and 2010. This discussion should be read in conjunction with the consolidated financial statements of the Company and the related notes.

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. Revenue growth is based on many factors that include the Company's ability to increase occupancy of its existing advertising displays; raise advertising rates; and acquire new advertising displays 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 that the Company is able to charge for advertising on its displays and its ability to maximize advertising sales or occupancy on its displays.

Historically, the Company made strategic acquisitions of outdoor advertising assets to increase the number of outdoor advertising displays it operates in existing and new markets. While the Company has significantly reduced its acquisition activity over the last three years, it will continue to evaluate and pursue strategic acquisition opportunities as they arise. The Company has financed its historical acquisitions and intends to finance any future acquisition activity from available cash, borrowings under its senior credit facility or the issuance of debt or equity securities. See "Liquidity and Capital Resources" below. During the year ended December 31, 2012, the Company completed acquisitions for a total cash purchase price of approximately $206 million, which included the purchase of NextMedia Outdoor, Inc. that closed October 31, 2012.

The Company's business requires expenditures for maintenance and capitalized costs associated with the construction of new 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 past three years:

                                           2012          2011          2010
                                                    (In thousands)
            Billboard - Traditional      $  29,061     $  34,425     $  9,506
            Billboard - Digital             42,134        41,250       13,214
            Logos                            8,704        10,141        8,483
            Transit                            259           817          876
            Land and buildings              12,797         4,501        2,531
            PP&E                            12,615        15,936        8,842

            Total capital expenditures   $ 105,570     $ 107,070     $ 43,452

We expect our capital expenditures to be approximately $100 million in 2013.

RESULTS OF OPERATIONS

The following table presents certain items in the Consolidated Statements of Operations as a percentage of net revenues for the years ended December 31, 2012, 2011 and 2010:

                                                    Year Ended December 31,
                                                2012         2011         2010
         Net revenues                            100.0 %      100.0 %      100.0 %
         Operating expenses:
         Direct advertising expenses              35.4         36.1         36.5
         General and administrative expenses      17.9         17.9         18.2
         Corporate expenses                        4.5          4.1          4.3
         Depreciation and amortization            25.0         26.4         28.6
         Operating income                         18.4         16.4         12.8
         Loss on extinguishment of debt            3.5           -           1.6
         Interest expense                         13.3         15.1         17.0
         Net income (loss)                         0.8          0.8         (3.7 )

Year ended December 31, 2012 compared to Year ended December 31, 2011

Net revenues increased $49.4 million or 4.4% to $1.18 billion for the year ended December 31, 2012 from $1.13 billion for the same period in 2011. This increase was attributable primarily to an increase in billboard net revenues of $39.1 million or 3.8% over the prior period, an increase in logo sign revenue of $3.7 million, which represents an increase of 6.5% over the prior period, and a $6.6 million increase in transit revenue, which represents an increase of 10.9% over the prior period.

For the year ended December 31, 2012, there was a $35.2 million increase in net revenues as compared to acquisition-adjusted net revenue for the year ended December 31, 2011. The $35.2 million increase in revenue primarily consists of a $28.0 million increase in billboard revenue, a $2.2 million increase in logo revenue and a $5.0 million increase in transit revenue over the acquisition-adjusted net revenue for the comparable period in 2011. This increase in revenue represents an increase of 3.1% over the comparable period in 2011. See "Reconciliations" below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $24.9 million or 3.8% to $682.9 million for the year ended December 31, 2012 from $658.0 million for the same period in 2011. There was an $18.3 million increase in operating expenses related to the operations of our outdoor advertising assets and a $6.6 million increase in corporate expenses.

Depreciation and amortization expense decreased $3.6 million for the year ended December 31, 2012 as compared to the year ended December 31, 2011, primarily due to a reduction in the number of non-performing structures that were dismantled during the period as compared to the year ended December 31, 2012.

The Company recorded a gain on disposition of assets of $13.8 million for the year ended December 31, 2012, which includes a gain of $9.8 million related to two asset swap transactions during the year.

Due to the above factors, operating income increased $31.3 million to $217.7 million for the year ended December 31, 2012 compared to $186.4 million for the same period in 2011.

During the year ended December 31, 2012, the Company recognized a $41.6 million loss on debt extinguishment related to the early extinguishment of Lamar Media's 6 5/8% Senior Subordinated Notes due 2015, 6 5/8% Senior Subordinated Notes due 2015-Series B and 6 5/8% Senior Subordinated Notes due 2015-Series C (collectively, the "6 5/8% Senior Subordinated Notes") and the prepayment of $295 million of the Term B Loan under Lamar Media's senior credit facility. Approximately $23.2 million of the loss is a non-cash expense attributable to the write off of unamortized debt issuance fees and unamortized discounts associated with the retired debt. See - "Uses of Cash - Tender Offers and Debt Repayment" for more information.

Interest expense decreased approximately $14.0 million from $171.1 million for the year ended December 31, 2011 to $157.1 million for the year ended December 31, 2012, due to the reduction in total debt outstanding as well as a decrease in interest rates resulting from the Company's recent refinancing transactions. See -"Uses of Cash - Tender Offers and Debt Repayment" for more information.

The increase in operating income and decrease in interest expense offset by the loss on extinguishment of debt discussed above resulted in a $4.1 million increase in net income before income taxes. The Company recorded income tax expense of $9.5 million for the year ended December 31, 2012. The effective tax rate for the year ended December 31, 2012 was 49.1%, which is higher than the statutory rate due to permanent differences resulting from non-deductible expenses and amortization, primarily non-deductible compensation expense related to stock based compensation calculated in accordance with ASC718.

As a result of the above factors, the Company recognized net income for the year ended December 31, 2012 of $9.8 million, as compared to net income of $8.6 million for the same period in 2011.

Reconciliations:

Because acquisitions occurring after December 31, 2010 (the "acquired assets") have contributed to our net revenue results for the periods presented, we provide 2011 acquisition-adjusted net revenue, which adjusts our 2011 net revenue for the year ended December 31, 2011 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 year ended December 31, 2012. We provide this information as a supplement to net revenues to enable investors to compare periods in 2012 and 2011 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 2011 that corresponds with the actual period we have owned the assets in 2012 (to the extent within the period to which this report relates). We refer to this adjustment as "acquisition net revenue."

Reconciliations of 2011 reported net revenue to 2011 acquisition-adjusted net revenue for the year ended December 31, 2012 as well as a comparison of 2011 acquisition-adjusted net revenue to 2012 reported net revenue for the year ended December 31, 2012, are provided below:

Comparison of 2012 Reported Net Revenue to 2011 Acquisition-Adjusted Net Revenue



                                                  Year ended
                                                 December 31,
                                             2012            2011
                                                (in thousands)
                Reported net revenue      $ 1,182,901     $ 1,133,487
                Acquisition net revenue            -           14,257

                Adjusted totals           $ 1,182,901     $ 1,147,744

Year ended December 31, 2011 compared to Year ended December 31, 2010

Net revenues increased $41.2 million or 3.8% to $1.13 billion for the year ended December 31, 2011 from $1.09 billion for the same period in 2010. This increase was attributable primarily to an increase in billboard net revenues of $31.0 million, or 3.1%, over the prior period, a $2.4 million increase in transit revenue, or 4.2%, over the prior period and a $7.9 million increase in logo revenue, or 15.9%, over the prior period.

Of the $31.0 million increase in billboard net revenue $8.2 million was generated by adding approximately 240 new digital display panels and approximately $22.8 million was a result of increased rate and occupancy, over the comparable period in 2010. The $7.9 million increase in logo revenue consists of a $4.0 million increase due to changes in logo contracts and an increase in internal growth of $3.9 million.

Net revenues for the year ended December 31, 2011, as compared to acquisition-adjusted net revenue for the year ended December 31, 2010, increased $36.4 million or 3.3% primarily as a result of increased rate and occupancy, as compared to the same period in 2010. See "Reconciliations" below.

Operating expenses, exclusive of depreciation and amortization and gain on sale of assets, increased $13.0 million, or 2.0%, to $658.0 million for the year ended December 31, 2011 from $645.0 million for the same period in 2010. There was a $6.2 million decrease in non-cash compensation expense related to equity based compensation, offset by a $16.2 million increase in operating expenses related to the cost of operating the Company's core assets and a $3.0 million increase in corporate expenses.

Depreciation and amortization expense decreased $13.1 million for the year ended December 31, 2011 as compared to the year ended December 31, 2010. The decrease is primarily a result of the reduction in the number of non performing structures dismantled during 2011 as compared to the same period in 2010.

Due to the above factors, operating income increased $46.9 million to $186.4 million for year ended December 31, 2011 compared to $139.5 million for the same period in 2010.

Interest expense decreased $14.9 million from $186.0 million for the year ended December 31, 2010 to $171.1 million for the year ended December 31, 2011 primarily resulting from the reduction in total debt outstanding as well as a decrease in interest rates resulting from the refinancing of the Company's senior credit facility during 2010.

During the period ended December 31, 2011, the Company repurchased an aggregate principal amount of $47,900 of its outstanding 6 5/8% Senior Subordinated Notes. The Company repurchased the 6 5/8% Senior Subordinated Notes at an average price of 98.5% of the original amount of the notes through open-market transactions. As a result of the repurchases, the Company recorded a $0.7 million loss on early extinguishment of debt for the year ended December 31, 2011 of which approximately $1.4 million was a non-cash expense related to the previously capitalized unamortized debt issuance fees and discounts. During the comparable period in 2010, the Company recognized a $17.4 million loss on the early extinguishment of debt resulting from its 2010 refinancing transactions. Approximately $12.6 million of the 2010 loss is a non-cash expense attributable to the write off of unamortized debt issuance fees related to the tender offer to repurchase Lamar Media's 7 1/4% Senior Subordinated Notes due 2013 (the "7 1/4% Senior Subordinated Notes") and refinancing of its senior credit facility. The remaining $4.8 million represented the net cash loss related to the tender offer and extinguishment of the 7 1/4% Senior Subordinated Notes.

The increase in operating income and decrease in interest expense and loss on extinguishment of debt resulted in a $78.7 million increase in net income before income taxes. The increase in net income for the period resulted in an increase in income tax expense as compared to the same period during 2010. The effective tax rate for the year ended December 31, 2011 was 43.6%, which is higher than the statutory rate due to permanent differences resulting from non-deductible compensation expense related to stock options in accordance with ASC 718 and other non-deductible expenses and amortization.

As a result of the above factors, the Company recognized net income for the year ended December 31, 2011 of $8.6 million, as compared to a net loss of $40.1 million for the same period in 2010.

Reconciliations:

Because acquisitions occurring after December 31, 2009 (the "acquired assets") have contributed to our net revenue results for the periods presented, we provide 2010 acquisition-adjusted net revenue, which adjusts our 2010 net revenue 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 2011. We provide this information as a supplement to net revenues to enable investors to compare periods in 2011 and 2010 on a more consistent basis without the effects of acquisitions. Management uses this comparison to assess how well our core assets are performing.

Acquisition-adjusted net revenue is not determined in accordance with generally accepted accounting principles (GAAP). For this adjustment, we measure the amount of pre-acquisition revenue generated by the acquired assets during the period in 2010 that corresponds with the actual period we have owned the acquired assets in 2011 (to the extent within the period to which this report relates). We refer to this adjustment as "acquisition net revenue."

Reconciliations of 2010 reported net revenue to 2010 acquisition-adjusted net revenue as well as a comparison of 2010 acquisition-adjusted net revenue to 2011 net revenue are provided below:

Comparison of 2011 Net Revenue to 2010 Acquisition-Adjusted Net Revenue



                                                  Year ended
                                                 December 31,
                                             2011            2010
                                                (in thousands)
                Reported net revenue      $ 1,133,487     $ 1,092,291
                Acquisition net revenue            -            4,817

                Adjusted totals           $ 1,133,487     $ 1,097,108

LIQUIDITY AND CAPITAL RESOURCES

Overview

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. Any cash requirements of the Company, therefore, must be funded by distributions from Lamar Media.

Sources of Cash

Total Liquidity at December 31, 2012. As of December 31, 2012 we had approximately $301.2 million of total liquidity, which is comprised of approximately $58.9 million in cash and cash equivalents and approximately $242.3 million of availability under the revolving portion of our senior credit facility. We are currently in compliance with all applicable restrictive covenants under the senior credit facility and we would remain in compliance after giving effect to borrowing the full amount available to us under the revolving portion of the senior credit facility.

Cash Generated by Operations. For the years ended December 31, 2012, 2011, and 2010 our cash provided by operating activities was $375.9 million, $318.8 million and $322.8 million, respectively. While our net income was approximately $9.8 million for the year ended December 31, 2012, the Company generated cash from operating activities of $375.9 million during 2012 primarily due to adjustments needed to reconcile net income to cash provided by operating activities, which includes depreciation and amortization of $296.1 million. We generated cash flows from operations during 2012 in excess of our cash needs for operations and capital expenditures as described herein. We used the excess cash generated principally to reduce our outstanding indebtedness and fund our acquisitions. See - "Cash Flows" for more information.

During 2013, the Company intends to use excess cash on hand primarily to reduce outstanding indebtedness.

Credit Facilities. On February 9, 2012, Lamar Media entered into a restatement agreement with respect to its existing senior credit facility in order to fund a new $100 million Term loan A facility and to make certain covenant changes to the senior credit facility, which was entered into on April 28, 2010, as amended on June 11, 2010, November 18, 2010 and February 9, 2012 (the "senior credit facility"), for which JPMorgan Chase Bank, N.A. serves as administrative agent. The senior credit facility consists of a $250 million revolving credit facility, a $270 million term loan A-1 facility, a $30 million term loan A-2 facility, a $100 million term loan A-3 facility, a $575 million term loan B facility and a $300 million incremental facility, which may be increased by up to an additional $200 million, based upon our satisfaction of a senior debt ratio test (as described below), of less than or equal to 3.25 to 1. Lamar Media is the borrower under the senior credit facility, except with respect to the $30 million term loan A-2 facility for which Lamar Media's wholly-owned subsidiary, Lamar Advertising of Puerto Rico, Inc. is the borrower. We may also from time to time designate additional wholly-owned subsidiaries as subsidiary borrowers under the incremental loan facility that can borrow up to $110 million of the incremental facility. Incremental loans may be in the form of additional term loan tranches or increases in the revolving credit facility. Our lenders have no obligation to make additional loans to us, or any designated subsidiary borrower, under the incremental facility, but may enter into such commitments in their sole discretion.

As of December 31, 2012, Lamar Media had approximately $242.3 million of unused capacity under the revolving credit facility included in the senior credit facility and the aggregate balance outstanding under the senior credit facility was $384.7 million.

Note Offerings. On October 30, 2012, Lamar Media completed an institutional private placement of $535 million aggregate principal amount of 5% Senior Subordinated Notes due 2023 (the "5% Senior Subordinated Notes"). The institutional private placement resulted in net proceeds to Lamar Media, after the payment fees and expenses, of approximately $527.1 million. Lamar Media used the proceeds of this offering to (i) repurchase in full its remaining 6 5/8% Senior Subordinated Notes due 2015-Series B and remaining 6 5/8% Senior Subordinated Notes due 2015-Series C, (ii) to fund the acquisition of NextMedia Outdoor, Inc., which closed on October 31, 2012 and (iii) to repay $295 million of the Term B loan outstanding under our senior credit facility.

On February 9, 2012, Lamar Media completed an institutional private placement of $500 million aggregate principal amount of 5 7/8% Senior Subordinated Notes, due 2022 (the "5 7/8% Senior Subordinated Notes"). The institutional private placement resulted in net proceeds to Lamar Media of approximately $489 million. The Company used the proceeds of this offering, after the payment of fees and expenses together with approximately $99 million of net proceeds from its term loan A-3 facility to repurchase $583.1 million of its outstanding 6 5/8% Senior Subordinated Notes, as described below under the heading " - Uses of Cash - Tender Offers and Debt Repayment".

On April 22, 2010, Lamar Media completed an institutional private placement of $400 million aggregate principal amount of 7 7/8% Senior Subordinated Notes due 2018 the ("7 7/8% Senior Subordinated Notes"). The institutional private placement resulted in net proceeds to Lamar Media of approximately $392 million. The Company used the proceeds of the offering, after the payment of fees and expenses, to repurchase all of its outstanding 7 1/4% Senior Subordinated Notes, as described below under the heading "- Uses of Cash - Tender Offers and Debt Repayment".

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 the senior credit facility and its outstanding debt securities.

Restrictions Under Debt Securities. Lamar must comply with certain covenants and restrictions related to its outstanding debt securities. Currently Lamar Media has outstanding approximately $350 million 9 3/4% Senior Notes due 2014 issued in March 2009 (the "9 3/4% Senior Notes), $400 million 7 7/8% Senior Subordinated Notes issued in April 2010, $500 million 5 7/8% Senior Subordinated Notes issued in February 2012 and $535 million 5% Senior Subordinated Notes issued in October 2012.

The indentures relating to Lamar Media's outstanding notes restrict its ability to incur additional indebtedness but permit the incurrence of indebtedness (including indebtedness under the 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 9 3/4% Senior Notes indenture, and (b) 7.0 to 1, pursuant to the 7 7/8% Senior Subordinated Notes, 5 7/8% Senior Subordinated Notes and 5% Senior Subordinated Notes indentures. Currently, Lamar Media is not in default under the indentures of any of its outstanding notes and, therefore, would be permitted to incur additional indebtedness subject to the foregoing provisions.

In addition to debt incurred under the provisions described in the preceding paragraph, the indentures relating to Lamar Media's outstanding notes permit Lamar Media to incur indebtedness pursuant to the following baskets:

• up to $1.4 billion of indebtedness under the senior credit facility allowable under the 9 3/4% Senior Notes indenture (up to $1.5 billion of indebtedness under the senior credit facility allowable under the 7 7/8% Senior Subordinated Notes, 5 7/8% Senior Subordinated Notes and 5% Senior Subordinated Notes indentures);

• 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 $50 million or 5% of Lamar Media's net tangible assets; and

• additional debt not to exceed $50 million ($75 million under the 7 7/8% Senior Subordinated Notes, 5 7/8% Senior Subordinated Notes and 5% Senior Subordinated Notes indentures).

Restrictions under Senior Credit Facility. Lamar Media is required to comply with certain covenants and restrictions under the senior credit facility. If the Company fails to comply with these tests, the long term debt payments may be accelerated. At December 31, 2012, and currently, we were in compliance with all such tests under the senior credit facility. We are subject to the following financial ratios:

• a total holdings debt ratio, defined as total consolidated debt of Lamar Advertising Company and its restricted subsidiaries as of any date to EBITDA, as defined below, for the most recent four fiscal quarters then ended as set forth below:

        Period                                                   Ratio
        March 31, 2012 through and including March 30, 2013   6.25 to 1.00
        From and after March 31, 2013                         6.00 to 1.00

• a senior debt ratio, defined as total consolidated senior debt of Lamar . . .