GRAY TELEVISION, INC.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark one)


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

For the quarterly period ended June 30, 2005 or


o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _________ to _________ .

Commission file number 1-13796

Gray Television, Inc.

(Exact name of registrant as specified in its charter)


Georgia		58-0285030

(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

4370 Peachtree Road, NE, Atlanta, Georgia		30319

(Address of principal executive offices)		(Zip code)

(404) 504-9828

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report.)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes þ No o

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.


Common Stock, (No Par Value)		Class A Common Stock, (No Par Value)

43,046,466 shares outstanding as of July 22, 2005		5,753,020 shares outstanding as of July 22, 2005

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

GRAY TELEVISION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)

(in thousands)


	June 30,			December 31,
	2005			2004
Assets:
Current assets:
Cash and cash equivalents	$	6,203		$	50,566
Trade accounts receivable, less allowance for doubtful accounts of $591 and $947 respectively		56,043			56,964
Inventories		909			1,101
Current portion of program broadcast rights, net		2,446			7,679
Related party receivable		1,334			1,411
Other current assets		3,409			2,188

Total current assets		70,344			119,909


Property and equipment:
Land		18,498			18,394
Buildings and improvements		38,194			37,225
Equipment		218,888			200,474

		275,580			256,093
Accumulated depreciation		(122,823	)		(113,884	)

		152,757			142,209

Deferred loan costs, net		10,135			12,101
Broadcast licenses		935,078			926,739
Goodwill		158,128			153,858
Other intangible assets, net		2,414			2,832
Investment in broadcasting company		13,599			13,599
Other		2,098			2,222

Total assets	$	1,344,553		$	1,373,469

See notes to condensed consolidated financial statements.

GRAY TELEVISION, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (Continued) (Unaudited)

(in thousands)


	June 30,			December 31,
	2005			2004
Liabilities and stockholders’ equity:
Current liabilities:
Trade accounts payable	$	3,492		$	3,276
Employee compensation and benefits		8,714			12,389
Current portion of accrued pension costs		5,854			2,685
Accrued interest		1,228			4,233
Other accrued expenses		12,874			7,710
Dividends payable		-0-			5,871
Federal and state income taxes		1,301			1,063
Current portion of program broadcast obligations		4,116			9,225
Acquisition related liabilities		774			1,231
Deferred revenue		2,252			2,386
Current portion of long-term debt		2,075			3,823

Total current liabilities		42,680			53,892

Long-term debt, less current portion		633,416			652,082
Program broadcast obligations, less current portion		591			852
Deferred income taxes		245,605			242,988
Other		5,545			6,415

Total liabilities		927,837			956,229


Commitments and contingencies (Note F)

Redeemable Serial Preferred Stock, no par value; cumulative; convertible; designated 5 shares, respectively, issued and outstanding 4 shares, respectively ($39,640 aggregate liquidation value, respectively)		39,047			39,003


Stockholders’ equity:
Common Stock, no par value; authorized 100,000 shares and 50,000 shares, respectively, issued 45,090 shares and 44,787 shares, respectively		405,789			402,162
Class A Common Stock, no par value; authorized 15,000 shares; issued 7,332 shares, respectively		11,037			11,037
Retained earnings		12,585			11,669
Accumulated other comprehensive loss, net of tax		(1,414	)		(1,414	)
Unearned compensation		(932	)		(1,056	)

		427,065			422,398

Treasury Stock at cost, Common Stock, 2,048 shares and 1,693 shares, respectively		(26,997	)		(21,934	)
Treasury Stock at cost, Class A Common Stock, 1,579 shares and 1,566 shares, respectively		(22,399	)		(22,227	)

Total stockholders’ equity		377,669			378,237

Total liabilities and stockholders’ equity	$	1,344,553		$	1,373,469

See notes to condensed consolidated financial statements.

GRAY TELEVISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)

(in thousands except for per share data)


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Operating revenues:
Broadcasting (less agency commissions)	$	67,988		$	71,235		$	126,297		$	133,144
Publishing and other		13,531			12,860			26,477			25,183

		81,519			84,095			152,774			158,327

Expenses:
Operating expenses before depreciation, amortization and (gain) loss on disposal of assets, net:
Broadcasting		39,585			37,053			78,279			74,451
Publishing and other		9,818			9,020			19,340			17,925
Corporate and administrative		4,082			2,163			6,728			4,536
Depreciation		5,888			5,870			11,702			11,672
Amortization of intangible assets		208			237			417			519
Amortization of restricted stock awards		98			94			196			189
(Gain) loss on disposal of assets, net		305			(626	)		339			(622	)

		59,984			53,811			117,001			108,670

Operating income		21,535			30,284			35,773			49,657
Miscellaneous income, net		158			262			453			407
Interest expense		(11,312	)		(10,474	)		(22,425	)		(20,935	)
Loss on early extinguishment of debt		(4,770	)		-0-			(4,770	)		-0-

Income before income taxes		5,611			20,072			9,031			29,129
Income tax expense		2,218			7,875			3,563			11,429

Net income		3,393			12,197			5,468			17,700
Preferred dividends (includes accretion of issuance cost of $22, $22, $44 and $44, respectively)		814			821			1,629			1,643

Net income available to common stockholders	$	2,579		$	11,376		$	3,839		$	16,057


Basic per share information:
Net income available to common stockholders	$	0.05		$	0.23		$	0.08		$	0.32

Weighted average shares outstanding		48,639			49,958			48,619			49,907


Diluted per share information:
Net income available to common stockholders	$	0.05		$	0.22		$	0.08		$	0.32

Weighted average shares outstanding		48,851			50,588			48,948			50,546


Dividends declared per share	$	0.03		$	0.03		$	0.06		$	0.06

See notes to condensed consolidated financial statements.

GRAY TELEVISION, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (Unaudited)

(in thousands except for number of shares)


																								Accumulated
	Class A								Retained			Class A						Common						Other
	Common Stock				Common Stock				Earnings			Treasury Stock						Treasury Stock						Comprehensive			Unearned
	Shares		Amount		Shares		Amount		(Deficit)			Shares			Amount			Shares			Amount			Income (Loss)			Compensation			Total
Balance at December 31, 2004		7,331,574	$	11,037		44,786,566	$	402,162	$	11,669			(1,565,754	)	$	(22,227	)		(1,693,150	)	$	(21,934	)	$	(1,414	)	$	(1,056	)	$	378,237

Net income		-0-		-0-		-0-		-0-		5,468			-0-			-0-			-0-			-0-			-0-			-0-			5,468

Comprehensive income																															5,468

Common Stock cash dividends ($0.06) per share		-0-		-0-		-0-		-0-		(2,923	)		-0-			-0-			-0-			-0-			-0-			-0-			(2,923	)
Preferred Stock dividends		-0-		-0-		-0-		-0-		(1,629	)		-0-			-0-			-0-			-0-			-0-			-0-			(1,629	)
Issuance of Common Stock:
401(k) plan		-0-		-0-		63,420		848		-0-			-0-			-0-			-0-			-0-			-0-			-0-			848
Non-qualified stock plan		-0-		-0-		234,830		2,303		-0-			-0-			-0-			-0-			-0-			-0-			-0-			2,303
Directors’ restricted stock plan		-0-		-0-		5,000		72		-0-			-0-			-0-			-0-			-0-			-0-			(72	)		-0-
Amortization of unearned compensation		-0-		-0-		-0-		-0-		-0-			-0-			-0-			-0-			-0-			-0-			196			196
Purchase of Common Stock		-0-		-0-		-0-		-0-		-0-			(12,800	)		(172	)		(354,900	)		(5,063	)		-0-			-0-			(5,235	)
Income tax benefits relating to stock plans		-0-		-0-		-0-		404		-0-			-0-			-0-			-0-			-0-			-0-			-0-			404


Balance at June 30, 2005		7,331,574	$	11,037		45,089,816	$	405,789	$	12,585			(1,578,554	)	$	(22,399	)		(2,048,050	)	$	(26,997	)	$	(1,414	)	$	(932	)	$	377,669

See notes to condensed consolidated financial statements.

GRAY TELEVISION, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

(in thousands)


	Six Months Ended
	June 30,
	2005			2004
Operating activities
Net income	$	5,468		$	17,700
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		11,702			11,672
Amortization of intangible assets		417			519
Amortization of deferred loan costs		878			936
Amortization of bond discount		70			72
Amortization of restricted stock award		196			189
Amortization of program broadcast rights		5,657			5,515
Write off loan acquisition costs from early extinguishment of debt		2,684			-0-
Payments on program broadcast obligations		(5,668	)		(5,399	)
Supplemental employee benefits		(25	)		(22	)
Common Stock contributed to 401(k) Plan		848			952
Deferred income taxes		2,617			9,785
(Gain) loss on disposal of assets, net		339			(622	)
Other		705			-0-
Changes in operating assets and liabilities, net of business acquisitions:
Receivables, inventories and other current assets		602			536
Accounts payable and other current liabilities		(2,024	)		(2,145	)
Accrued interest		(3,005	)		(1,987	)
Income taxes payable		238			1,984

Net cash provided by operating activities		21,699			39,685


Investing activities
Acquisition of television businesses and licenses, net of cash acquired		(13,945	)		-0-
Purchases of property and equipment		(17,095	)		(15,807	)
Payments on acquisition related liabilities		(520	)		(1,160	)
Other		485			938

Net cash used in investing activities		(31,075	)		(16,029	)


Financing activities
Proceeds from borrowings on long-term debt		1,938			938
Repayments of borrowings on long-term debt		(22,421	)		(1,024	)
Deferred loan costs		(1,595	)		(811	)
Dividends paid, net of accreted preferred dividend		(10,381	)		(4,603	)
Income tax benefit relating to stock plans		404			-0-
Proceeds from issuance of common stock		2,303			1,658
Purchase of common stock		(5,235	)		-0-

Net cash used in financing activities		(34,987	)		(3,842	)

Increase (decrease) in cash and cash equivalents		(44,363	)		19,814
Cash and cash equivalents at beginning of period		50,566			11,947

Cash and cash equivalents at end of period	$	6,203		$	31,761

See notes to condensed consolidated financial statements.

GRAY TELEVISION, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE A—BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements of Gray Television, Inc. (“Gray”, “we”, “us”, “our” or “the Company”) have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair statement have been included. Operating results for the three-month and six-month periods ended June 30, 2005 are not necessarily indicative of the results that may be expected for the year ending December 31, 2005. For further information, refer to the consolidated financial statements and footnotes thereto included in Gray’s Annual Report on Form 10-K for the year ended December 31, 2004.

Stock-Based Compensation

The Company follows the provisions of FASB Statement No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). The provisions of SFAS No. 123 allow companies to either expense the estimated fair value of stock options or to continue to follow the intrinsic value method set forth in Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees”, (“APB 25”), but disclose the pro forma effects on net income had the fair value of the options been expensed. The Company has elected to continue to apply APB 25 in accounting for its stock option incentive plans.

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Gray’s pro forma information follows (in thousands, except per common share data):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net income available to common stockholders, as reported	$	2,579		$	11,376		$	3,839		$	16,057
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		-0-			-0-			-0-			-0-
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(666	)		(262	)		(855	)		(538	)

Net income available to common stockholders, pro forma	$	1,913		$	11,114		$	2,984		$	15,519


Net income per common share:
Basic, as reported	$	0.05		$	0.23		$	0.08		$	0.32
Basic, pro forma	$	0.04		$	0.22		$	0.06		$	0.31

Diluted, as reported	$	0.05		$	0.22		$	0.08		$	0.32
Diluted, pro forma	$	0.04		$	0.22		$	0.06		$	0.31

NOTE A—BASIS OF PRESENTATION (Continued)

Earnings Per Share

Gray computes earnings per share in accordance with FASB Statement No. 128, “Earnings Per Share” (“EPS”). The following table reconciles weighted average shares outstanding — basic to weighted average shares outstanding — diluted for the three months and six months ended June 30, 2005 and 2004 (in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Weighted average shares outstanding — basic		48,639		49,958		48,619		49,907
Stock options, warrants, convertible preferred stock and restricted stock		212		630		329		639

Weighted average shares outstanding — diluted		48,851		50,588		48,948		50,546

For the three months and six months ended June 30, 2005 and 2004, the Company generated net income; therefore, common stock equivalents related to employee stock-based compensation plans, warrants and convertible preferred stock were included in the computation of diluted earnings per share to the extent that their exercise costs and conversion prices exceeded market value. The number of antidilutive common stock equivalents excluded from diluted earnings per share for the respective periods are as follows (in thousands):

Three Months Ended

Six Months Ended

June 30,

2005

2004

2005

2004

Antidilutive common stock equivalents excluded from diluted earnings per share

4,674

4,732

4,557

4,723

Recent Accounting Pronouncements

Accounting Changes and Corrections of Errors — In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 154, (“SFAS No. 154”), Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 20. SFAS No. 154 replaces APB Opinion No. 20, Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. SFAS No. 154 applies to all voluntary changes in accounting principle. It also applies to changes required by an accounting pronouncement in the unusual instance that the pronouncement does not include specific transition provisions. When a pronouncement includes specific transition provisions, those provisions should be followed. SFAS No. 154 is effective for the Company in the first quarter of 2006.

Share-Based Payment — In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123, (“SFAS No. 123”) (revised 2005), Share-Based Payment (SFAS 123(R)), that addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for (a) equity instruments of the enterprise or (b) liabilities that are based on the fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. SFAS 123(R) eliminates the ability to account for share-based compensation transactions using the intrinsic value method under Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. The Company is currently evaluating SFAS 123(R) to determine which fair-value-based model and transitional provision it will follow upon adoption. The options for transition methods as prescribed in SFAS 123(R) include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption, while the modified retrospective method would record compensation expense for

NOTE A—BASIS OF PRESENTATION (Continued)

Recent Accounting Pronouncements (Continued)

stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS 123(R) will be effective for the Company beginning in its first quarter of fiscal 2006. Although the Company will continue to evaluate the application of SFAS 123(R), based on options issued and outstanding at present, the Company expects that the expense will be between $75,000 and $125,000 for the year ended December 31, 2006.

American Jobs Creation Act of 2004 — On October 22, 2004, the President signed the American Jobs Creation Act of 2004 (the “Act”). The Act provides a deduction for income from qualified domestic production activities, which will be phased in from 2005 through 2010. The Company is currently evaluating which of its operations may qualify as “qualified domestic production activities” under the Act and thus the financial effect that the Act may or may not have upon the Company.

Reclassifications

Portions of prior year publishing revenue and expense in the accompanying condensed consolidated financial statements have been reclassified to conform to the 2005 presentation. For the three months and six months ended June 30, 2004, $258,000 and $754,000, respectively, of publishing revenue and expense that was previously recognized separately has been presented on a net basis. The reclassification does not affect operating income, net income or cash flows.

NOTE B—BUSINESS ACQUISITION

On January 31, 2005, the Company completed its acquisition of KKCO-TV, Channel 11 (“KKCO”) from Eagle III Broadcasting, LLC for a purchase price of $13.5 million plus related transaction costs of $700,000. Total cost was $14.2 million. KKCO, Channel 11 serves the Grand Junction, Colorado television market and is an NBC affiliate. The Company used a portion of its cash on hand to fully fund this acquisition.

The acquisition of KKCO has been accounted for under the purchase method of accounting. Under the purchase method of accounting, the results of operations of the acquired business are included in the accompanying condensed consolidated financial statements as of its acquisition date. The identifiable assets and liabilities of the

NOTE B—BUSINESS ACQUISITION (Continued)

acquired business are recorded at their estimated fair values with the excess of the purchase price over such identifiable net assets allocated to goodwill.

The following table summarizes the preliminary fair values of the assets acquired and the liabilities assumed at the date of acquisition for KKCO (in thousands):


	Amount
Accounts receivable	$	442
Current portion of program broadcast rights		35
Other current assets		44
Property and equipment		1,111
Intangible assets not subject to amortization:
Broadcast licenses		8,338
Goodwill		4,269
Trade payables and accrued expenses		(1	)
Current portion of program broadcast obligations		(35	)

Total purchase price including expenses	$	14,203

All of the goodwill recorded in association with the acquisition of KKCO is expected to be deductible for income tax purposes. Broadcast licenses and goodwill are indefinite lived intangible assets. KKCO contributed revenue of $715,000 and operating income of $54,000 to the Company’s operating results for the three months ended June 30, 2005. KKCO contributed revenue of $1.1 million and operating income of $93,000 to the Company’s operating results for the six months ended June 30, 2005.

NOTE C—LONG-TERM DEBT

On June 28, 2005, Gray amended its existing senior credit facility. The amended agreement has a maximum term of seven and one half years and the total amount available under the agreement is $400 million, consisting of a $100 million revolving facility, a $100 million term loan A facility and a $200 million term loan B facility. Gray may use the proceeds from the credit facilities for working capital, capital expenditures made in the ordinary course of business and for certain investments and acquisitions permitted under the facilities. The amended agreement contains affirmative and negative covenants that Gray must comply with, including (a) limitations on additional indebtedness, (b) limitations on liens, (c) limitations on the sale of assets, (d) limitations on guarantees, (e) limitations on investments and acquisitions, (f) limitations on the payment of dividends, (g) limitations on mergers, as well as other customary covenants. Also, Gray must not let its leverage ratio and senior leverage ratio exceed certain maximum limits and Gray can not let its interest coverage ratio or fixed charge ratio fall below certain minimum limits as such ratio is defined in the senior credit facility.

Simultaneous with amending its senior credit facility, Gray borrowed $376 million under the senior credit facility to retire all previous outstanding obligations under its previously existing senior credit facility. The previous senior credit facility originally provided for borrowing of up to $450 million, and consisted of a $375 million term facility and a $75 million revolving facility.

Gray paid out approximately $1.6 million in cash for the amendment of the senior credit facility and of this amount $1.2 million was capitalized as deferred financing costs which will be amortized to interest expense over the remaining life of the agreement. The remaining $370,126 was reported as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized a loss on early extinguishment of debt in the amount of $1.8 million. Therefore, the total loss on early extinguishment of debt related to the amendment of the senior credit facility was $2.2 million.

Gray’s interest rate is based on the lender’s base rate (generally reflecting the lender’s prime rate) plus the specified margin or a London Interbank Offered Rate (“LIBOR”) plus a specified margin. The specified margin for revolving and term loan A advances is determined by Gray’s debt leverage ratio as defined in the agreement.

NOTE C—LONG-TERM DEBT (Continued)


	Range of Applicable Margin			Range of Applicable Margin
	for Base Rate Advances			for LIBOR Rate Advances

Revolving and term A advances	0% to 0.25%			0.75% to 1.5%
Term B advances		0.25	%		1.5	%

Gray has elected to borrow these funds under its LIBOR option. The interest rate under this option is LIBOR plus the current margin of 1.25% for revolving and term loan A advances and a margin of 1.5% for term loan B advances. The amount outstanding under the senior credit facility as of June 30, 2005 is $376 million and is allocated as follows: revolving loan of $76 million, term loan A of $100 million and term loan B of $200 million. Available credit under the senior credit facility as of June 30, 2005, was $24 million.

During the six months ended June 30, 2005, Gray repurchased $21.5 million, face amount, of its Senior Subordinated Notes due 2011 (the “9 1/4% Notes”) in the open market. Associated with this repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued interest. Gray used cash on hand of $24.3 million for the repurchase of its 9 1/4% Notes which included amounts for the face amount of the 9 1/4% Notes, premium and accrued interest. As of June 30, 2005, Gray’s 9 1/4% Notes had a balance outstanding of $257.6 million excluding unaccreted discount of $0.9 million.

The 9 1/4% Notes are jointly and severally guaranteed (the “Subsidiary Guarantees”) by all of Gray’s subsidiaries (the “Subsidiary Guarantors”). The obligations of the Subsidiary Guarantors under the Subsidiary Guarantees is subordinated, to the same extent as the obligations of Gray in respect of the 9 1/4% Notes, to the prior payment in full of all existing and future senior debt of the Subsidiary Guarantors (which will include any guarantee issued by such Subsidiary Guarantors of any senior debt).

Gray is a holding company with no material independent assets or operations, other than its investment in its subsidiaries. The aggregate assets, liabilities, earnings and equity of the Subsidiary Guarantors are substantially equivalent to the assets, liabilities, earnings and equity of Gray on a consolidated basis. The Subsidiary Guarantors are, directly or indirectly, wholly owned subsidiaries of Gray and the Subsidiary Guarantees are full, unconditional and joint and several. All of the current and future direct and indirect subsidiaries of Gray are guarantors of the 9 1/4% Notes. Accordingly, separate financial statements and other disclosures of each of the Subsidiary Guarantors are not presented because Gray has no independent assets or operations, the guarantees are full and unconditional and joint and several and any subsidiaries of the parent company other than the Subsidiary Guarantors are minor. The senior credit facility is collateralized by substantially all of Gray’s existing and hereafter acquired assets except for real estate and the assets utilized in Gray’s publishing and paging business.

NOTE D—RETIREMENT PLANS

The following table provides the components of net periodic benefit cost for Gray’s pension plans for the three and six months ended June 30, 2005 and 2004, respectively (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Service cost	$	758		$	592		$	1,457		$	1,092
Interest cost		325			267			650			517
Expected return on plan assets		(222	)		(203	)		(472	)		(403	)
Loss amortization		139			28			239			28

Net periodic benefit cost	$	1,000		$	684		$	1,874		$	1,234

During the quarter ended June 30, 2005, Gray contributed $766,000 to its pension plans. During the remainder of 2005, Gray expects to contribute an additional $4.2 million to its pension plans.

NOTE E—INFORMATION ON BUSINESS SEGMENTS

The Company operates in three business segments: broadcasting, publishing and paging. As of June 30, 2005, the broadcasting segment operates 31 television stations located in the United States. The publishing segment operates five daily newspapers located in Georgia and Indiana. The paging operations are located in Florida, Georgia and Alabama. The following tables present certain financial information concerning Gray’s three operating segments (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Operating revenues, net:
Broadcasting	$	67,988		$	71,235		$	126,297		$	133,144
Publishing		11,615			11,062			22,803			21,529
Paging		1,916			1,798			3,674			3,654

Total operating revenues	$	81,519		$	84,095		$	152,774		$	158,327


Operating income:
Broadcasting	$	19,219		$	27,205		$	30,950		$	44,092
Publishing		2,094			2,766			4,391			5,015
Paging		222			313			432			550

Total operating income		21,535			30,284			35,773			49,657
Miscellaneous income, net		158			262			453			407
Interest expense		(11,312	)		(10,474	)		(22,425	)		(20,935	)
Loss on early extinguishment of debt		(4,770	)		-0-			(4,770	)		-0-

Income before income taxes	$	5,611		$	20,072		$	9,031		$	29,129

Corporate and administrative expenses as well as amortization of restricted stock are allocated to operating income based on segment net revenues.

NOTE F—COMMITMENTS AND CONTINGENCIES

Tarzian Litigation

The Company has an equity investment in Sarkes Tarzian, Inc. (“Tarzian”) representing shares in Tarzian which were originally held by the estate of Mary Tarzian (the “Estate”). As described more fully below, the Company’s ownership of the Tarzian shares is subject to certain litigation.

On February 12, 1999, Tarzian filed suit in the United States District Court for the Southern District of Indiana against U.S. Trust Company of Florida Savings Bank as Personal Representative of the Estate, claiming that Tarzian had a binding and enforceable contract to purchase the Tarzian shares from the Estate. On February 3, 2003, the Court entered judgment on a jury verdict in favor of Tarzian for breach of contract and awarding Tarzian $4.0 million in damages. The Estate appealed the judgment and the Court’s rulings on certain post-trial motions, and Tarzian cross-appealed. On February 14, 2005, the U.S. Court of Appeals for the Seventh Circuit issued a decision concluding that no contract was ever created between Tarzian and the Estate, reversing the judgment of the District Court, and remanding the case to the District Court with instructions to enter judgment for the Estate. Tarzian’s petition for rehearing was denied by the Seventh Circuit, and Tarzian has petitioned the U.S. Supreme Court for certiorari. Tarzian also filed a motion for a new trial in the District Court based on the Estate’s alleged failure to produce certain documents in discovery, and on June 16, 2005, the Court denied Tarzian’s motion. On July 21, 2005, Tarzian filed a notice of appeal to the Seventh Circuit Court of Appeals from the District Court’s denial of its motion for new trial and entry of final judgment for the Estate. The Company cannot predict when the final resolution of this litigation will occur.

On March 7, 2003, Tarzian filed suit in the United States District Court for the Northern District of Georgia against Bull Run Corporation and the Company for tortious interference with contract and conversion. The lawsuit

NOTE F—COMMITMENTS AND CONTINGENCIES (Continued)

Tarzian Litigation (Continued)

alleges that Bull Run Corporation and Gray purchased the Tarzian shares with actual knowledge that Tarzian had a binding agreement to purchase the stock from the Estate. The lawsuit seeks damages in an amount equal to the liquidation value of the interest in Tarzian that the stock represents, which Tarzian claims to be as much as $75 million, as well as attorneys’ fees, expenses, and punitive damages. The lawsuit also seeks an order requiring the Company and Bull Run Corporation to turn over the stock certificates to Tarzian and relinquish all claims to the stock. The stock purchase agreement with the Estate would permit the Company to make a claim against the Estate in the event that title to the Tarzian Shares is ultimately awarded to Tarzian. There is no assurance that the Estate would have sufficient assets to honor any or all of such potential claims. The Company filed its answer to the lawsuit on May 14, 2003 denying any liability for Tarzian’s claims. On May 27, 2005, the Court issued an Order administratively closing the case pending resolution of Tarzian’s lawsuit against the Estate in Indiana federal court. The Company believes it has meritorious defenses and intends to vigorously defend the lawsuit. The Company cannot predict when the final resolution of this litigation will occur.

Related Party Receivable

Through a rights-sharing agreement with Host Communications, Inc. (“Host”), a wholly owned subsidiary of Bull Run Corporation (“Bull Run”), Gray participated jointly with Host in the marketing, selling and broadcasting of certain collegiate sporting events and in related programming, production and other associated activities related to the University of Kentucky. Certain executive officers and significant stockholders of Gray are also executive officers and significant stockholders of Bull Run Corporation.

The agreement commenced April 1, 2000 and terminated April 15, 2005. Gray shared the profit or loss from these activities with Host. Under that agreement, in certain circumstances, Gray was called upon to advance payment directly to the respective collegiate institution for a portion of certain upfront rights fees. Gray was given credit for any such advance payments when determining its share of income or loss from these activities. During 2003, Gray paid $1.5 million under this provision. No similar payments were made during 2004 or 2005. As of June 30, 2005 and December 31, 2004, Gray had $1.3 million and $1.4 million respectively, recorded as a related party receivable for payments made in 2003 and earlier years.

Host Commitment

On October 12, 2004, the University of Kentucky jointly awarded a new sports marketing agreement to Gray and Host. The new agreement commenced April 16, 2005 and has an initial term of seven years with the option to extend the license for three additional years. Aggregate license fees to be paid to the University of Kentucky over a full ten year term for the agreement will approximate $80.5 million. Gray and Host will share equally the cost of the license fees.

NOTE G —SUBSEQUENT EVENT

Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses

On August 2, 2005, Gray announced that our board of directors approved a plan to spin off our newspaper publishing business and our paging business to our shareholders, which will result in a newly created and separately traded public company named Triple Crown Media, Inc. (“TCM”). We expect that as a result of the spin-off, both Gray and TCM will be better able to focus financial and operational resources on their own business and executing their own strategic plan. In addition, we believe that both Gray and TCM will have greater strategic and financial flexibility to support future growth opportunities.

NOTE G —SUBSEQUENT EVENT (Continued)

Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses (Continued)

pro rata as a dividend to our stockholders. Upon completion of the spin-off, each common shareholder of Gray will receive as a dividend one share of common stock of TCM for every 10 shares of Gray common stock and for every 10 shares of Gray Class A common stock. No stockholder vote will be required to effect the spin-off, and no consideration will be required to be paid by our shareholders in order to receive the shares of common stock of TCM. On the date of the spin-off, TCM will distribute $40 million to us, which we intend to use to reduce our outstanding indebtedness. TCM will also be obligated reimburse Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

Planned Merger of Spun-off Company with Bull Run Corporation

On August 2, 2005, Gray also announced that TCM, BR Acquisition Corp., which is a wholly owned subsidiary of TCM, and Bull Run have entered into an agreement and plan of merger, pursuant to which Bull Run will be merged with and into BR Acquisition Corp. immediately following our spin-off of TCM. In the merger, each Bull Run shareholder will receive 0.0289 shares of TCM common stock for each share of Bull Run common stock owned. In the merger, Bull Run preferred stock held by non-affiliated holders will be redeemed for its current redemption value. Holders of preferred stock and other loans to Bull Run who are affiliates of Bull Run, including J. Mack Robinson, our current Chairman and Chief Executive Officer and Chairman of the Board of Bull Run, will receive shares of TCM common stock in exchange for shares of Bull Run series F preferred stock and accrued and unpaid dividends thereon; shares of TCM series A preferred stock in exchange for shares of Bull Run series D and series E preferred stocks and accrued and unpaid dividends thereon; and shares of TCM series B preferred stock in exchange for cash previously advanced to Bull Run. The agreement is subject to certain closing conditions, including an affirmative vote of Bull Run’s shareholders. On a combined basis, after the merger, current shareholders of Gray will own approximately 95% of the outstanding common stock of TCM and certain holders of Bull Run preferred stock and current holders of Bull Run common stock will hold the remaining 5%. TCM has received a long-term financing commitment from bank lenders that will accommodate the payment of the distribution to us and the refinancing of all of Bull Run’s bank and subordinated indebtedness. Bull Run’s common stock is traded on the Pink Sheets centralized quotation service for OTC securities under the symbol “BULL.PK”.

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. (“the Company” or “Gray”) should be read in conjunction with Gray’s financial statements contained in this report and in Gray’s Form 10-K for the year ended December 31, 2004.

Overview

The Company derives its revenues primarily from its television broadcasting operations and to a lesser extent, from its newspaper publishing and paging operations. The operating revenues of the Company’s television stations are derived from broadcast advertising revenues and, to a much lesser extent, from ancillary services such as production of commercials and tower rentals as well as compensation paid by the networks to the stations for broadcasting network programming. The operating revenues of the Company’s newspaper publishing operations are derived from advertising, circulation and classified revenue. Paging revenue is derived primarily from the sale of pagers, cellular telephones and related services. Certain information concerning the relative contributions of the Company’s television broadcasting, publishing and paging operations is provided in Note E. “Information on Business Segments” to the Company’s unaudited consolidated financial statements included elsewhere herein.

In the Company’s broadcasting operations, 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.

Most broadcast advertising contracts are short-term, and generally run only for a few weeks. Approximately 67% of the net revenues of the Company’s television stations for the six months ended June 30, 2005, 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 consumer advertising in the spring and retail advertising 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, which spending typically is heaviest during the fourth quarter. The Company received significant political advertising revenue during the prior year.

The Company’s publishing operations’ advertising contracts are generally entered into annually and provide for a commitment as to the volume of advertising to be purchased by an advertiser during the year. The publishing operations’ advertising revenues are primarily generated from local advertising and are generally highest in the second and fourth quarters of each year.

The Company’s paging subscribers either own pagers, thereby paying solely for the use of the Company’s paging services, or lease pagers, thereby paying a periodic charge for both the pagers and the paging services. The terms of the lease contracts are month-to-month, three months, six months or twelve-months in duration. Paging revenues are generally equally distributed throughout the year.

The broadcasting operations’ primary operating expenses are employee compensation, related benefits and programming costs. The publishing operations’ primary operating expenses are employee compensation, related benefits and newsprint costs. The paging operations’ primary operating expenses are employee compensation and communications costs. In addition, the broadcasting, publishing and paging operations incur overhead expenses, such as maintenance, supplies, insurance, rent and utilities. A large portion of the operating expenses of the broadcasting, publishing and paging operations is fixed, although the Company has experienced significant variability in its newsprint costs in recent years.

Plan for Spin-off of Our Newspaper Publishing and Wireless Businesses

We currently conduct our newspaper publishing business and wireless business through our subsidiary Gray Publishing, LLC and its subsidiaries. Under the proposed spin-off, we will contribute all of the membership interests of Gray Publishing, LLC and certain other assets to TCM. We will then distribute 100% of TCM’s common stock pro rata as a dividend to our stockholders. Upon completion of the spin-off, each common shareholder of Gray will receive as a dividend one share of common stock of TCM for every 10 shares of Gray common stock and for every 10 shares of Gray Class A common stock. No stockholder vote will be required to effect the spin-off, and no consideration will be required to be paid by our shareholders in order to receive the shares of common stock of TCM. On the date of the spin-off, TCM will distribute $40 million to us, which we intend to use to reduce our outstanding indebtedness. TCM will also be obligated reimburse Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

Planned Merger of Spun-off Company with Bull Run Corporation

Acquisition of KKCO-TV

Broadcasting, Publishing and Paging Revenues

Set forth below are the principal types of revenues earned by Gray’s broadcasting, publishing and paging operations for the periods indicated and the percentage contribution of each to Gray’s total revenues (dollars in thousands):


	Three Months Ended June 30,										Six Months Ended June 30,
	2005					2004					2005					2004
			Percent					Percent					Percent					Percent
	Amount		of Total			Amount		of Total			Amount		of Total			Amount		of Total
Broadcasting net revenues:
Local	$	44,980		55.2	%	$	42,021		50.0	%	$	84,123		55.1	%	$	79,379		50.1	%
National		18,793		23.1			18,803		22.4			34,065		22.3			35,046		22.1
Network compensation		1,407		1.7			2,501		3.0			3,050		2.0			4,911		3.1
Political		687		0.8			5,422		6.4			980		0.6			8,956		5.7
Production and other		2,121		2.6			2,488		2.9			4,079		2.7			4,852		3.1

	$	67,988		83.4	%	$	71,235		84.7	%	$	126,297		82.7	%	$	133,144		84.1	%


Publishing and other net revenues:
Retail	$	6,205		7.6	%	$	5,991		7.1	%	$	12,252		8.0	%	$	11,512		7.3	%
Classified		3,631		4.5			3,323		4.0			7,132		4.7			6,495		4.1
Circulation		1,359		1.7			1,508		1.8			2,773		1.8			3,062		1.9
Paging lease, sales and service		1,916		2.3			1,798		2.1			3,674		2.4			3,654		2.3
Other		420		0.5			240		0.3			646		0.4			460		0.3

	$	13,531		16.6	%	$	12,860		15.3	%	$	26,477		17.3	%	$	25,183		15.9	%


Total	$	81,519		100.0	%	$	84,095		100.0	%	$	152,774		100.0	%	$	158,327		100.0	%

Results of Operations

Three Months Ended June 30, 2005 Compared To Three Months Ended June 30, 2004

Revenues. Total revenues for the three months ended June 30, 2005 decreased 3% to $81.5 million as compared to the same period of the prior year.

	•		Local broadcasting advertising revenues, excluding political advertising revenues, increased 7% to $45.0 million from $42.0 million. Approximately 33% of this increase is attributable to results from Gray’s launch of four UPN second channels in four of its existing television markets since June 30, 2004, results of WCAV, Charlottesville, VA which began operations in August 2004 and the acquisition of KKCO on January 31, 2005 offset in part by the sale of the Company’s satellite uplink operations on December 31, 2004. We attribute the remaining increase in non-political local broadcasting advertising revenues to a moderate increase in demand for commercial time by local advertisers. National broadcasting advertising revenues were unchanged at $18.8 million. Political advertising revenues decreased to $687,000 from $5.4 million reflecting the cyclical influence of the 2004 Presidential election. Network compensation revenue decreased 44% to $1.4 million due to lower revenue from newly renewed network affiliation agreements. Total broadcasting revenues decreased 5% to $68.0 million. The decrease in broadcasting revenues reflects decreased political advertising revenues and network compensation partially offset by increased non-political local broadcasting advertising revenues as discussed above.

	•		Publishing and other revenues consists primarily of Gray’s newspaper publishing and paging operations. Publishing revenues increased 5% to $11.6 million. Classified and retail advertising revenue were the

primary contributors to the increase in publishing revenues. Classified advertising revenue increased 9% to $3.6 million and retail advertising increased 4% to $6.2 million. The increases in retail advertising revenue reflect, in part, the expansion of circulation at the suburban Atlanta newspapers compared to the prior period. The increases in classified revenue was due largely to increases in help wanted advertising. Circulation revenue decreased largely due to a decrease in the number of subscriptions at Gray’s newspapers located in Albany, Georgia and Goshen, Indiana. Paging revenues increased 7% to $1.9 million. The Company had approximately 36,000 and 47,000 units in service at June 30, 2005 and 2004, respectively. The number of units in service decreased due to increased competition from other communication services and products such as cellular telephones. Competition from these products is expected to continue in the future.

Operating expenses. Operating expenses increased 11% to $60.0 million as compared to the same period of the prior year.

	•		Broadcasting expenses, before depreciation, amortization and loss on disposal of assets increased 7% to $39.6 million. The primary reason for the increase in broadcast expenses was due to increases in payroll expense. Approximately 50% of this increase is attributable to operating expenses relating to Gray’s launch of four UPN second channels in four of its existing television markets since June 30, 2004, expenses of WCAV, Charlottesville, VA which began operations in August 2004 and expenses of KKCO, acquired on January 31, 2005, offset, in part, by the sale of the Company’s satellite uplink operations on December 31, 2004. We attribute the remaining increase to routine increases in payroll and benefits costs.

	•		Publishing and other expenses, before depreciation, amortization and loss on disposal of assets, increased 9% to $9.8 million. The increase was primarily the result of increased payroll expense reflecting the expansion of circulation at the suburban Atlanta newspapers compared to the prior period and to a lesser degree an increase in the cost of newsprint reflecting both increases in pricing as well as consumption due to the expanded circulation compared to the prior period.

	•		Corporate and administrative expenses, before depreciation, amortization and loss on disposal of assets increased 89% to $4.1 million in the three months ended June 30, 2005. Legal and other professional service fees increased approximately $1.5 million over the second quarter of 2004 and such increase is primarily attributable to professional services associated with Gray’s previously announced proposed spin-off of its Publishing and Paging businesses. In addition, consulting service fees increased in the second quarter of 2005 reflecting approximately $163,000 of audience research studies commissioned for various television markets in which the company operates. The prior period did not include similar expenses. Upon consummation of the spin-off transactions Triple Crown Media will reimburse Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

	•		Amortization of intangible assets was $208,000 for the three months ended June 30, 2005, as compared to $237,000 for the same period of the prior year, a decrease of 12%. The decrease in amortization expense was due to certain definite lived intangible assets, that were acquired in 2002, becoming fully amortized.

	•		Loss on disposal of assets, net was $305,000 for the three months ended June 30, 2005, as compared to a gain on disposal of assets of $626,000 for the same period of the prior year. The loss in the current year was principally the result of the disposal of paging assets. The gain in the prior year is due to a net gain on insurance settlements related to certain broadcast towers damaged in 2003 and to the sale of a building not utilized in operations.

Interest expense. Interest expense increased 8% to $11.3 million. This increase is primarily attributable to higher average interest rates in 2005 compared to 2004. The combined average interest rates on the Company’s senior credit facility and 9 1/4% Notes were 6.95% and 6.21% for the three months ended June 30, 2005 and 2004, respectively. The increase in interest rates was partially offset by the repurchase and extinguishment of $21.5 million of Gray’s 9 1/4% Notes during the second quarter of 2005.

Loss on early extinguishment of debt. Gray reported a loss on early extinguishment of debt in the amount of $4.8 million which related to two events: the repurchase by Gray of a portion of its 9 1/4% Notes and the amendment of Gray’s senior credit facility.

Gray repurchased $21.5 million, face amount, of its 9 1/4% Notes in the open market. Associated with this repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued interest.

On June 28, 2005, Gray amended its senior credit facility. Gray paid out approximately $1.6 million in cash for the amendment of the senior credit facility and of this amount $1.2 million was capitalized as deferred financing costs which will be amortized to interest expense over the remaining life of the agreement. The remaining $370,126 was reported as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized a loss on early extinguishment of debt in the amount of $1.8 million. The total loss on early extinguishment of debt related to the amendment of the senior credit facility was $2.2 million.

Income tax expense. An income tax expense of $2.2 million was recorded for the three months ended June 30, 2005 as compared to an income tax expense of $7.9 million for the three months ended June 30, 2004. The decreased expense in the current year as compared to that of the prior year was attributable to having decreased income in the current period as compared to the prior period. The effective income tax rate was approximately 39% for the current year and prior year periods.

Six months ended June 30, 2005 Compared To the Six months ended June 30, 2004

Revenues. Total revenues for the six months ended June 30, 2005 decreased 4% to $152.8 million as compared to the same period of the prior year.

	•		Local broadcasting advertising revenues, excluding political advertising revenues, increased 6% to $84.1 million from $79.4 million. Approximately 35% of this increase is attributable to results from Gray’s launch of four UPN second channels in four of its existing television markets since June 30, 2004, results of WCAV, Charlottesville, VA which began operations in August 2004 and the acquisition of KKCO on January 31, 2005 offset in part by the sale of the Company’s satellite uplink operations on December 31, 2004. We attribute the remaining increase in non-political local broadcasting advertising revenues to a moderate increase in demand for commercial time by local advertisers. National broadcasting advertising revenues decreased 3% to $34.1 million from $35.0 million due to a decrease in demand from national advertisers. Political advertising revenues decreased to $980,000 from $9.0 million reflecting the cyclical influence of the 2004 Presidential election. Network compensation revenue decreased 38% to $3.1 million due to lower revenue from newly renewed network affiliation agreements. Total broadcasting revenues decreased 5% over the same period of the prior year to $126.3 million. The decrease in broadcasting revenues reflects decreased political advertising revenues, national advertising revenues and network compensation, partially offset by increased non-political local broadcasting advertising revenues as discussed above.

	•		Publishing and other revenues consists primarily of Gray’s newspaper publishing and paging operations. Publishing revenues increased 6% to $22.8 million. Retail advertising revenue and classified advertising revenue were the primary contributors to the increase in publishing revenues. Retail advertising increased 6% and classified advertising revenue increased 10% reflecting, in part, the expansion of circulation at the suburban Atlanta newspapers compared to the prior period. Circulation revenue decreased largely due to a decrease in the number of subscriptions at Gray’s newspapers located in Albany, Georgia and Goshen, Indiana. Paging revenues increased 1% to $3.7 million. The Company had approximately 36,000 and 47,000 units in service at June 30, 2005 and 2004, respectively. The number of units in service decreased due to increased competition from other communication services and products such as cellular telephones. Competition from these products is expected to continue in the future.

Operating expenses. Operating expenses increased 8% to $117.0 million as compared to the same period of the prior year.

	•		Broadcasting expenses, before depreciation, amortization and loss on disposal of assets increased 5% to $78.3 million. Approximately 52% of this increase is attributable to operating expenses relating to Gray’s launch of four UPN second channels in four of its existing television markets since June 30, 2004, expenses of WCAV, Charlottesville, VA which began operations in August 2004 and expenses of KKCO, acquired on January 31, 2005, offset, in part, by the sale of the Company’s satellite uplink operations on December 31, 2004. We attribute the remaining increase to routine increases in payroll and benefits costs.

	•		Publishing and other expenses, before depreciation, amortization and loss on disposal of assets, increased 8% to $19.3 million. The increase was primarily the result of increased payroll expense reflecting the expansion of circulation at the suburban Atlanta newspapers compared to the prior period and to a lesser degree an increase in the cost of newsprint reflecting both increases in pricing as well as consumption due to the expanded circulation compared to the prior period.

	•		Corporate and administrative expenses, before depreciation, amortization and loss on disposal of assets increased 48% to $6.7 million in the six months ended June 30, 2005. Legal and other professional service fees increased approximately $1.4 million over the first half of 2004 and such increase is primarily attributable to professional services associated with Gray’s proposed spin-off of its Publishing and Paging businesses. Audit fees increased approximately $425,000 over the comparable period of 2004. In addition, consulting service fees increased in the second quarter of 2005 reflecting approximately $252,000 of audience research studies commissioned for various television markets in which the company operates. The prior period did not include similar expenses. Upon consummation of the spin-off transactions Triple Crown Media will reimburse Gray for approximately 75% of the professional service costs and expenses incurred by Gray related to the spin-off transactions.

	•		Amortization of intangible assets was $417,000 for the six months ended June 30, 2005, as compared to $519,000 for the same period of the prior year, a decrease of $102,000 or 20%. The decrease in amortization expense was due to certain definite lived intangible assets becoming fully amortized.

	•		Loss on disposal of assets, net was $339,000 for the six months ended June 30, 2005, as compared to a gain on disposal of assets of $622,000 for the same period of the prior year. The loss in the current year was principally the result of the disposal of paging assets. The gain in the prior year is due to a net gain on insurance settlements related to certain broadcast towers damaged in 2003 and to the sale of a building not utilized in operations.

Interest expense. Interest expense increased $1.5 million to $22.4 million. This increase is primarily attributable to higher average interest rates in 2005 compared to 2004. The combined average interest rates on the Company’s senior credit facility and the 9 1/4% Notes were 6.71% and 6.10% for the six months ended June 30, 2005 and 2004, respectively. The increase in interest rates was partially offset by the repurchase and extinguishment of $21.5 million of Gray’s 9 1/4% Notes during the second quarter of 2005.

recognized a loss on early extinguishment of debt in the amount of $1.8 million. The total loss on early extinguishment of debt related to the amendment of the senior credit facility was $2.2 million.

Income tax expense. An income tax expense of $3.6 million was recorded for the six months ended June 30, 2005 as compared to an income tax expense of $11.4 million for the six months ended June 30, 2004. The decreased expense in the current year as compared to that of the prior year was attributable to having decreased income in the current period as compared to the prior period. The effective income tax rate was approximately 39% for the current year and prior year periods.

Liquidity and Capital Resources

General

The following tables present certain data that Gray believes is helpful in evaluating its liquidity and capital resources (in thousands).


	Six Months Ended June 30,
	2005			2004
Net cash provided by operating activities	$	21,699		$	39,685
Net cash used in investing activities		(31,075	)		(16,029	)
Net cash used in financing activities		(34,987	)		(3,842	)

Net increase (decrease) in cash and cash equivalents	$	(44,363	)	$	19,814


	As of
	June 30, 2005		December 31, 2004
Cash and cash equivalents	$	6,203	$	50,566
Long-term debt including current portion		635,491		655,905
Preferred stock		39,047		39,003
Available credit under senior credit agreement		24,000		71,250

Gray and its subsidiaries file a consolidated federal income tax return and such state or local tax returns as are required. Although Gray expects to earn taxable operating income for the foreseeable future, it anticipates that through the use of its available loss carryforwards it will not pay significant amounts of federal or state income taxes in the next several years.

Management believes that current cash balances, cash flows from operations and available funds under its senior credit facility will be adequate to provide for Gray’s capital expenditures, debt service, cash dividends and working capital requirements for the foreseeable future.

Management does not believe that inflation in past years has had a significant impact on Gray’s 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 decreased $18.0 million. The decrease was due primarily to a decrease in net income, deferred income taxes and changes in operating assets and liabilities.

Net cash used in investing activities increased $15.0 million. The increase was due primarily to the completion of the acquisition of a television station representing a use of cash totaling $13.9 million and increased purchases of property and equipment of $1.3 million.

Net cash used in financing activities increased $31.1 million. The Company repurchased 354,900 shares of Common Stock for $5.1 million and 12,800 shares of Class A Common Stock for $0.2 million. Gray also amended its senior credit facility and repurchased a portion of its 9 1/4% Notes. These transactions are described in more detail below. No similar purchases were made in the prior year. Dividends paid increased $5.8 million due to the payment in January 2005 of a special dividend that was declared in the fourth quarter of 2004.

Capital Expenditures

Set forth below is the Company’s capital expenditure activity for the six months ended June 30, 2005 and 2004 (in thousands):


	2005
	Non Digital		Digital		Total
Capital expenditure payments made during the six months ended June 30, 2005	$	12,096	$	4,999	$	17,095


	2004
	Non Digital		Digital		Total
Capital expenditure payments made during the six months ended June 30, 2004	$	7,767	$	8,040	$	15,807

The Company will increase the power output of its digital broadcast signals of certain stations. These enhancements will be phased in by July 2006 to meet certain FCC regulations. In July 2005 the Company purchased a building and certain broadcast equipment in Tallahasssee, Florida for $4.75 million. Gray currently intends to relocate the studio facilities of its Tallahassee, Floridia television station to the newly purchased building before the end of 2005.

Debt

Gray paid approximately $1.6 million in cash for the amendment of the senior credit facility and of this amount $1.2 million was capitalized as deferred financing costs which will be amortized to interest expense over the remaining life of the agreement. The remaining $370,126 was reported as a loss on early extinguishment of debt. Furthermore, Gray wrote off deferred financing costs and recognized a loss on early extinguishment of debt in the amount of $1.8 million. Therefore, the total loss on early extinguishment of debt related to the amendment of the senior credit facility was $2.2 million. As a result of the amendment, on an annual basis we anticipate a savings of $1.4 million in interest expense. For additional information concerning the amendment, see Note C. “Long-Term Debt” to Gray’s unaudited condensed consolidated financial statements included elsewhere herein.

During the six months ended June 30, 2005, Gray repurchased $21.5 million, face amount, of its Senior Subordinated Notes due 2011 (the “9 1/4% Notes”) in the open market. Associated with this repurchase, Gray recorded an early extinguishment of debt of $2.6 million which included a premium of $2.0 million, the write off of unamortized deferred finance costs of $485,000 and an unaccreted discount of $74,000. Upon repurchase of Gray’s 9 1/4% Notes, Gray paid $749,000 in accrued interest. Gray used cash previously held in its investment account in the amount of $24.3 million for the repurchase of its 9 1/4% Notes which included amounts for the face amount of the 9 1/4% Notes, premium and accrued interest. As a result of these repurchases and extinguishments, on an annual basis we anticipate a savings of $2.0 million in interest expense. As of June 30, 2005, Gray’s 9 1/4% Notes had a balance outstanding of $257.6 million excluding unaccreted discount of $0.9 million.

Gray makes semiannual interest payments on the 9 1/4% Notes of $12.95 million on June 15^th and December 15^th. Interest payments on the senior credit facility are made on varying dates throughout the year.

Related Party Receivable

certain collegiate sporting events and in related programming, production and other associated activities related to the University of Kentucky. Certain executive officers and significant stockholders of Gray are also executive officers and significant stockholders of Bull Run Corporation.

Host Commitment

Other

During the quarter ended June 30, 2005, Gray contributed $766,000 to its pension plans. During the remainder of 2005, Gray expects to contribute an additional $4.2 million to its pension plans.

Critical Accounting Policies

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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. Gray considers its 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 Gray’s Annual Report on Form 10-K for the year ended December 31, 2004.

Recent Accounting Pronouncements

currently evaluating SFAS 123(R) to determine which fair-value-based model and transitional provision it will follow upon adoption. The options for transition methods as prescribed in SFAS 123(R) include either the modified prospective or the modified retrospective methods. The modified prospective method requires that compensation expense be recorded for all unvested stock options and restricted stock as the requisite service is rendered beginning with the first quarter of adoption, while the modified retrospective method would record compensation expense for stock options and restricted stock beginning with the first period restated. Under the modified retrospective method, prior periods may be restated either as of the beginning of the year of adoption or for all periods presented. SFAS 123(R) will be effective for the Company beginning in its first quarter of fiscal 2006. Although the Company will continue to evaluate the application of SFAS 123(R), based on options issued and outstanding at present, the Company expects that the expense will be between $75,000 and $125,000 for the year ended December 31, 2006.

Cautionary Note Regarding Forward-Looking Statements

This quarterly report on Form 10-Q contains “forward-looking statements.” When used in this report, the words “believes,” “expects,” “anticipates,” “should”, “estimates” and similar words and expressions are generally intended to identify forward-looking statements, but some of those statements may use other phrasing. Statements that describe Gray’s future strategic plans, goals or objectives are also forward-looking statements. Readers of this report are cautioned that any forward-looking statements, including those regarding the intent, belief or current expectations of Gray or 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 in the forward-looking statements as a result of various factors including, but not limited to, (i) general economic conditions in the markets in which Gray operates, (ii) competitive pressures in the markets in which Gray operates, (iii) the effect of future legislation or regulatory changes on Gray’s operations and (iv) certain other risks relating to our business, including, our dependence on advertising revenues, our need to acquire non-network television programming, the impact of a loss of any of our FCC broadcast licenses, increased competition and capital costs relating to digital advanced television, pending litigation and our significant level of intangible assets, (v) our high debt levels, and (vi) other factors described from time to time in our SEC filings. The forward-looking statements included in this report are made only as of the date hereof. Gray disclaims any obligation to update such forward-looking statements to reflect subsequent events or circumstances, except as required by law.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Gray believes that the market risk of its financial instruments as of June 30, 2005 has not materially changed since December 31, 2004. The market risk profile on December 31, 2004 is disclosed in Gray’s Annual Report on Form 10-K for the year ended December 31, 2004.

Item 4. Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of management, including the Chief Executive Officer (“CEO”) and the Chief Financial Officer (“CFO”), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and the CFO have concluded that Gray’s disclosure controls and procedures are effective to ensure that information required to be disclosed by Gray in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and to ensure that such information is accumulated and communicated to Gray’s management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosures. There were no changes in Gray’s internal control over financial reporting during the second quarter of 2005 identified in connection with this evaluation that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The information contained in Note F — “Commitments and Contingencies” to Gray’s unaudited Condensed Consolidated Financial Statements filed as part of this Quarterly Report on Form 10-Q is incorporated herein by reference.

Item 4. Submission of Matters to a Vote of Security Holders

The following matters were voted upon at the 2005 Annual Meeting of Shareholders of the Company, on May 4, 2005, and votes were cast as indicated.

(a) The following directors were elected:


Nominee	Common Stock Votes				Class A Votes
	For		Withheld		For		Withheld
Richard L. Boger		32,876,884		900,341		52,612,610		361,330
Ray M. Deaver		17,010,880		16,766,345		51,411,570		1,562,370
T. L. Elder		32,880,854		896,371		52,612,610		361,330
Hilton H. Howell, Jr.		32,586,843		1,190,382		52,613,390		360,550
William E. Mayher, III		32,880,681		896,544		52,612,610		361,330
Zell B. Miller		33,178,225		599,000		52,605,860		368,080
Howell W. Newton		32,829,004		948,221		52,612,610		361,330
Hugh Norton		31,777,386		1,999,839		52,604,020		369,920
Robert S. Prather, Jr.		32,596,248		1,180,977		52,613,400		360,540
Harriett J. Robinson		32,393,590		1,383,635		52,599,300		374,640
J. Mack Robinson		32,857,894		919,331		52,613,180		360,760

Item 6. Exhibits


Exhibit 10.1		Separation and Distribution Agreement by and between Gray Television Inc. and Triple Crown Media, Inc. dated as of August 2, 2005


Exhibit 10.2		Agreement and Plan of Merger by and among Triple Crown Media, Inc., BR Acquisition Corp. and Bull Run Corporation dated as of August 2, 2005


Exhibit 10.3		Tax Sharing Agreement by and between Gray Television, Inc. and Triple Crown Media, Inc. dated as of August 2, 2005


Exhibit 10.4		Letter Agreement by and among Gray Television Inc. and Bull Run Corporation dated as of August 2, 2005.


Exhibit 31.1		Rule 13 (a) — 14(a) Certificate of Chief Executive Officer


Exhibit 31.2		Rule 13 (a) — 14(a) Certificate of Chief Financial Officer


Exhibit 32.1		Section 1350 Certificate of Chief Executive Officer


Exhibit 32.2		Section 1350 Certificate of Chief Financial Officer


	GRAY TELEVISION, INC. (Registrant)
Date: August 8, 2005	By:	/s/ James C. Ryan
		James C. Ryan,
		Senior Vice President and Chief Financial Officer

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		PAGE
PART I.	FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed consolidated balance sheets (Unaudited) — June 30, 2005 and December 31, 2004		3

	Condensed consolidated statements of operations (Unaudited) — Three months and six months ended June 30, 2005 and 2004		5

	Condensed consolidated statement of stockholders’ equity and comprehensive income (Unaudited) — Six months ended June 30, 2005		6

	Condensed consolidated statements of cash flows (Unaudited) — Six months ended June 30, 2005 and 2004		7

	Notes to condensed consolidated financial statements (Unaudited) — June 30, 2005		8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		16

Item 3.	Quantitative and Qualitative Disclosure About Market Risk		25

Item 4.	Controls and Procedures		25

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings		26

Item 4.	Submission of Matters to a Vote of Security Holders		26

Item 6.	Exhibits		26

SIGNATURES			27
EX-10.1 SEPERATION AND DISTRIBUTION AGREEMENT
EX-10.2 AGREEMENT AND PLAN OF MERGER
EX-10.3 TAX SHARING AGREEMENT
EX-10.4 LETTER AGREEMENT, BULL RUN CORPORATION
EX-31.1 SECTION 302 CERTIFICATION OF THE CEO
EX-31.2 SECTION 302 CERTIFICATION OF THE CFO
EX-32.1 SECTION 906 CERTIFICATION OF THE CEO
EX-32.2 SECTION 906 CERTIFICATION OF THE CFO