UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549-1004



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FORM 10-Q



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(Mark One)

|[ x ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|----- | ----------------------------------------------------------------------------------------

For the quarterly period ended June 30, 2006

OR

|[   ] | 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:  333-53603-03

GRAHAM PACKAGING HOLDINGS COMPANY

(Exact name of registrant as specified in its charter)



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|Pennsylvania                                                   |  | 23-2553000                         
|-------------------------------------------------------------- |  | -----------------------------------
|(State or other jurisdication ofincorporation or organization) |  | (I.R.S. Employer Identificaton No.)



|2401 Pleasant Valley Road
York, Pennsylvania |  | 17402     
|-------------------------------------------- |  | ----------
|(Address of principal executive offices)     |  | (Zip Code)



|(717) 849-8500                                      
|----------------------------------------------------
|(Registrants telephone number, including area code)



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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 period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YesxNoo.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated fileroAccelerated fileroNon- accelerated filerx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YesoNox




1







GRAHAM PACKAGING HOLDINGS COMPANY



INDEX





|                               |    | Page Number                                                                                                             
|------------------------------ | -- | ------------------------------------------------------------------------------------------------------------------------
|PART I.  FINANCIAL INFORMATION |   
|                               |    |                                                                                                                         
|Item                           | 1: | Financial Statements:                                                                                                   
|                               |    |                                                                                                                         
|                               |    | CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)   At June 30, 2006 and December 31, 2005                             
|                               |    |                                                                                                                         
|                               |    | CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)   For the three and six months ended June 30, 2006 and 2005
|                               |    |                                                                                                                         
|                               |    | CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)   For the six months ended June 30, 2006 and 2005          
|                               |    |                                                                                                                         
|                               |    | NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)                                                        
|                               |    |                                                                                                                         
|Item                           | 2: | Managements Discussion and Analysis of Financial Condition and Results of Operations                                   
|                               |    |                                                                                                                         
|Item                           | 3: | Quantitative and Qualitative Disclosures About Market Risk                                                              
|                               |    |                                                                                                                         
|Item                           | 4: | Controls and Procedures                                                                                                 



|PART II. OTHER INFORMATION |    
|-------------------------- | ---
|                           |    
|Item                       | 1A:
|                           |    
|Item                       | 6: 
|                           |    
|Signature                  | 39 
|                           |    







2









PART I.  FINANCIAL INFORMATION

Item 1. Financial Statements



GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)





|                                                      |  | June 30,2006   |           | December 31,2005 |  
|----------------------------------------------------- |  | -------------- | --------- | ---------------- | -
|                                                      |  | (In thousands) |          
|ASSETS                                                |  |                |           |                  |  
|Current assets:                                       |  |                |           |                  |  
|Cash and cash equivalents                             |  | $              | 14,417    |                  | $
|Accounts receivable, net                              |  |                | 279,191   |                  |  
|Inventories                                           |  |                | 239,908   |                  |  
|Deferred income taxes                                 |  |                | 16,310    |                  |  
|Prepaid expenses and other current assets             |  |                | 56,733    |                  |  
|Total current assets                                  |  |                | 606,559   |                  |  
|Property, plant and equipment, net                    |  |                | 1,445,627 |                  |  
|Intangible assets, net                                |  |                | 81,659    |                  |  
|Goodwill                                              |  |                | 315,522   |                  |  
|Other non-current assets                              |  |                | 82,207    |                  |  
|Total assets                                          |  | $              | 2,531,574 |                  | $
|                                                      |  |                |           |                  |  
|LIABILITIES AND PARTNERS CAPITAL (DEFICIT)           |  |                |           |                  |  
|Current liabilities:                                  |  |                |           |                  |  
|Accounts payable                                      |  | $              | 202,051   |                  | $
|Accrued expenses                                      |  |                | 207,073   |                  |  
|Current portion of long-term debt                     |  |                | 29,400    |                  |  
|Total current liabilities                             |  |                | 438,524   |                  |  
|Long-term debt                                        |  |                | 2,533,364 |                  |  
|Deferred income taxes                                 |  |                | 22,418    |                  |  
|Other non-current liabilities                         |  |                | 44,562    |                  |  
|Commitments and contingent liabilities (see Note 12)  |  |                |          |                  |  
|Partners capital (deficit):                          |  |                |           |                  |  
|General partners                                      |  |                | (26,209   | )                |  
|Limited partners                                      |  |                | (502,362  | )                |  
|Notes and interest receivable for ownership interests |  |                | (3,198    | )                |  
|Accumulated other comprehensive income                |  |                | 24,475    |                  |  
|Total partners capital (deficit)                     |  |                | (507,294  | )                |  
|Total liabilities and partners capital (deficit)     |  | $              | 2,531,574 |                  | $







See accompanying notes to condensed consolidated financial statements.



3











GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)







|                                                        |  | Three Months EndedJune 30, |         | Six Months EndedJune 30, |  
|------------------------------------------------------- |  | -------------------------- | ------- | ------------------------ | -
|                                                        |  | 2006                       |         | 2005                     |  
|                                                        |  | (In thousands)             |        
|Net sales                                               |  | $                          | 653,282 |                          | $
|Cost of goods sold                                      |  |                            | 569,886 |                          |  
|Gross profit                                            |  |                            | 83,396  |                          |  
|Selling, general and administrative expenses            |  |                            | 33,205  |                          |  
|Impairment charges                                      |  |                            | 1,112   |                          |  
|Operating income                                        |  |                            | 49,079  |                          |  
|Interest expense, net                                   |  |                            | 54,025  |                          |  
|Other expense, net                                      |  |                            | 51      |                          |  
|(Loss) income before income taxes and minority interest |  |                            | (4,997  | )                        |  
|Income tax provision (benefit)                          |  |                            | 10,269  |                          |  
|Minority interest                                       |  |                            |        |                          |  
|Net (loss) income                                       |  | $                          | (15,266 | )                        | $
|                                                        |  |                            |         |                          |  
|Net (loss) income allocated to general partners         |  | $                          | (763    | )                        | $
|Net (loss) income allocated to limited partners         |  | $                          | (14,503 | )                        | $







See accompanying notes to condensed consolidated financial statements.





4









GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



|                                                                                |  | Six Months EndedJune 30, |         
|------------------------------------------------------------------------------- |  | ------------------------ | --------
|                                                                                |  | 2006                     |         
|                                                                                |  | (In thousands)           |         
|Operating activities:                                                           |  |                          |         
|Net loss                                                                        |  | $                        | (25,252 
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |                          |         
|Depreciation and amortization                                                   |  |                          | 100,711 
|Amortization of debt issuance fees                                              |  |                          | 7,302   
|Net loss on disposal of fixed assets                                            |  |                          | 1,094   
|Impairment charges                                                              |  |                          | 1,112   
|Stock compensation expense                                                      |  |                          | 140     
|Minority interest                                                               |  |                          |        
|Foreign currency transaction (gain) loss                                        |  |                          | (1,067  
|Interest receivable for ownership interests                                     |  |                          | (96     
|Changes in operating assets and liabilities, net of acquisitions of businesses: |  |                          |         
|Accounts receivable                                                             |  |                          | (26,286 
|Inventories                                                                     |  |                          | 48,549  
|Prepaid expenses and other current assets                                       |  |                          | (4,309  
|Other non-current assets                                                        |  |                          | (535    
|Other non-current liabilities                                                   |  |                          | 2,146   
|Accounts payable and accrued expenses                                           |  |                          | 49,150  
|Net cash provided by operating activities                                       |  |                          | 152,659 
|Investing activities:                                                           |  |                          |         
|Cash paid for property, plant and equipment                                     |  |                          | (93,771 
|Proceeds from sale of property, plant and equipment                             |  |                          | 5,096   
|Acquisitions of/investments in businesses, net of cash acquired                 |  |                          | (197    
|Net cash used in investing activities                                           |  |                          | (88,872 
|Financing activities:                                                           |  |                          |         
|Proceeds from issuance of long-term debt                                        |  |                          | 447,726 
|Payment of long-term debt                                                       |  |                          | (523,628
|Debt issuance fees                                                              |  |                          | (1,000  
|Net cash (used in) provided by financing activities                             |  |                          | (76,902 
|Effect of exchange rate changes                                                 |  |                          | 848     
|Decrease in cash and cash equivalents                                           |  |                          | (12,267 
|Cash and cash equivalents at beginning of period                                |  |                          | 26,684  
|Cash and cash equivalents at end of period                                      |  | $                        | 14,417  
|                                                                                |  |                          |         
|Supplemental disclosures                                                        |  |                          |         
|Cash paid for interest, net of amounts capitalized                              |  | $                        | 84,639  
|Cash paid for taxes                                                             |  |                          | 8,967   
|Non-cash investing and financing activities:                                    |  |                          |         
|Capital leases                                                                  |  |                          |        





See accompanying notes to condensed consolidated financial statements.



5





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)





|1. | Basis of Presentation
|-- | ---------------------

The accompanying unaudited condensed consolidated financial statements of Graham Packaging Holdings Company (Holdings), a Pennsylvania limited partnership, have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements.  All entities and assets owned by Holdings are referred to collectively with Holdings as the Company.  Graham Packaging Company, L.P., Holdings wholly-owned subsidiary, is referred to as the Operating Company.  In the opinion of the management of the Company (Management), all adjustments (consisting only of usual
recurring adjustments considered necessary for a fair presentation) are reflected in the condensed consolidated financial statements.  The condensed consolidated balance sheet as of December 31, 2005 is derived from audited financial statements.  The condensed consolidated financial statements and notes included in this report should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2005.  The results of operations for the six months ended June 30, 2006 are not necessarily indicative of the results to be expected for the full year ending December 31, 2006.

Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48  Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes and transitional requirements upon adoption of FIN 48.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently in the process of assessing the impact of the adoption of FIN 48 on its results of operations and financial position.

Derivatives

During 2003, the Company entered into four interest rate swap agreements (three of which matured in the first quarter of 2006) under which the Company (for the remaining swap) receives variable interest based on the Eurodollar Rate (the applicable interest rate offered to banks in the London interbank eurocurrency market) and pays fixed interest at a weighted average rate of 2.80%, on $100.0 million of term loans. During 2004, the Company entered into four additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 3.89%, on $700.0 million of term loans. During 2005, the Company entered into three additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 4.43%,
on $225.0 million of term loans. The interest rate swaps are accounted for as cash flow hedges. The hedges are highly effective as defined in Statement of Financial Accounting Standards (SFAS) 133, Accounting for Derivative Instruments and Hedging Activities.  The effective portion of the cash flow hedges is recorded in other comprehensive income (OCI) and was an unrealized gain of $5.4 million and $1.6 million for the six months ended June 30, 2006 and 2005, respectively.  Failure to properly document the Companys interest rate swaps as effective hedges would result in income statement recognition of all or part of the cumulative $19.9 million unrealized gain recorded in accumulated OCI as of June 30, 2006.  Approximately 68% of the amount recorded within OCI as of June 30, 2006 is expected to be recognized in interest expense in the next twelve months.

Comprehensive Loss

Changes in fair value of derivatives designated and accounted for as cash flow hedges, additional minimum pension liability adjustments and foreign currency translation adjustments are included in OCI and added with net (loss) income to determine total comprehensive loss.



6





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







The components of accumulated other comprehensive income (loss) consisted of:



|                             |  | Cash FlowHedges |        | AdditionalMinimum PensionLiability |   | CumulativeTranslationAdjustments |   | Total |        
|---------------------------- |  | --------------- | ------ | ---------------------------------- | - | -------------------------------- | - | ----- | -------
|                             |  | (In thousands)  |       
|Balance at January 1, 2005   |  | $               | 3,385  |                                    | $ | (4,275                           | ) | $     | 20,798 
|Change                       |  |                 | 11,129 |                                    |   | (1,060                           | ) |       | (17,126
|                             |  |                 |        |                                    |   |                                  |   |       |        
|Balance at December 31, 2005 |  |                 | 14,514 |                                    |   | (5,335                           | ) |       | 3,672  
|Change                       |  |                 | 5,413  |                                    |   | (73                              | ) |       | 6,284  
|                             |  |                 |        |                                    |   |                                  |   |       |        
|Balance at June 30, 2006     |  | $               | 19,927 |                                    | $ | (5,408                           | ) | $     | 9,956  

Option Plans

In December 2004, the FASB issued SFAS 123(R), Share-Based Payment. SFAS 123(R) revises SFAS 123, Accounting for Stock-Based Compensation, and requires companies to expense the fair value of employee stock options and other forms of stock-based compensation. Under SFAS 123(R), companies are to (1) use fair value to measure stock-based compensation awards and (2) cease using the intrinsic value method of accounting, which Accounting Principles Board Opinion (APB) 25, Accounting for Stock Issued to Employees, allowed and resulted in no expense for many awards of stock options for which the exercise price of the option equaled the price of the underlying stock at the grant date. In addition, SFAS 123(R) retains the modified grant date model from SFAS 123. Under that model, compensation cost is measured at the fair value of an award on
the grant date and adjusted to reflect estimated forfeitures and the outcome of certain conditions. The fair value of an award is not re-measured after its initial estimation on the grant date (except in the case of a liability award or if the award is modified). The Company adopted SFAS 123(R) on January 1, 2006 using the prospective method.  In accordance with SFAS 123(R), the Company applied this statement prospectively to new awards and awards modified, repurchased or cancelled after January 1, 2006.  The adoption of SFAS 123(R) has not had a significant impact on the Companys results of operations or financial position.

The Company continued to account for equity based compensation to employees for awards outstanding as of January 1, 2006 using the intrinsic value method prescribed in APB 25.  SFAS 123 established accounting and disclosure requirements using a fair value based method of accounting for equity based employee compensation plans. The exercise prices of all units were equal to or greater than the fair market value of the units on the dates of the grants and, accordingly, no compensation cost has been recognized under the provisions of APB 25. Under SFAS 123, compensation cost is measured at the grant date based on the value of the award and is recognized over the service (or vesting) period. Had compensation cost for all option plans been determined under SFAS 123, based on the fair market value at the grant dates, the Companys pro forma net (loss) income for the three and six months ended
June 30, 2006 and 2005 would have been reflected as follows:



|            |  | Three Months Ended |         | Six Months Ended |  
|----------- |  | ------------------ | ------- | ---------------- | -
|            |  | June 30,           |         | June 30,         |  
|            |  | 2006               |         | 2005             |  
|            |  | (In thousands)     |        
|As reported |  | $                  | (15,266 | )                | $
|Pro forma   |  |                    | (15,493 | )                |  



There were no options granted during the six months ended June 30, 2006.  The weighted average fair value at date of grant for options granted during the six months ended June 30, 2005 was $7,748 per option.  The fair value of each option is estimated on the date of the grant using the Minimum Value option pricing model with the following weighted-average assumptions:



7





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|                                |  | Six Months EndedJune 30, 2005
|------------------------------- |  | -----------------------------
|Dividend yield                  |  | 0                            
|Expected volatility             |  | 0                            
|Risk free interest rate         |  | 3.65                         
|Expected option life (in years) |  | 4.5                          
|Forfeiture rate                 |  | N/A                          



A summary of the changes in the option units outstanding under the option plans as of June 30, 2006 is as follows:

|                               |  | UnitsUnderOption |   | WeightedAverageExercisePrice |        | WeightedAverageRemainingContractual Term(in years) |     | AggregateIntrinsic Value(in millions) |  
|------------------------------ |  | ---------------- | - | ---------------------------- | ------ | -------------------------------------------------- | --- | ------------------------------------- | -
|Outstanding at January 1, 2006 |  | 1,228.0          |   | $                            | 38,861 |                                                    |     |                                       |  
|Granted                        |  |                 |   |                              |       |                                                    |     |                                       |  
|Exercised                      |  |                 |   |                              |       |                                                    |     |                                       |  
|Forfeited                      |  | (12.5            | ) |                              | 51,579 |                                                    |     |                                       |  
|Outstanding at June 30, 2006   |  | 1,215.5          |   |                              | 38,729 |                                                    | 5.7 |                                       | $
|                               |  |                  |   |                              |        |                                                    |     |                                       |  
|Exercisable at June 30, 2006   |  | 670.8            |   |                              | 32,274 |                                                    | 4.0 |                                       |  

Inventory Cost

In November 2004, the FASB issued SFAS 151, Inventory Costs  an amendment of APB No. 43, Chapter 4, which is the result of its efforts to converge U.S. accounting standards for inventories with International Accounting Standards. SFAS 151 requires abnormal amounts of idle facility expense, freight, handling costs and wasted material (spoilage) to be recognized as current-period charges. It also requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities.  The Company adopted SFAS 151 on January 1, 2006 and the adoption of SFAS 151 has not had a significant impact on its results of operations or financial position.

Retirement Obligations

In March 2005, the FASB issued FIN 47, Accounting for Conditional Asset Retirement Obligations, an Interpretation of FASB No. 143.  This statement clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred, if the liabilitys fair value can be reasonably estimated.  The Company adopted FIN 47 on December 31, 2005 and the adoption of FIN 47 has not had a significant impact on its results of operations or financial position.

Reclassifications

Certain reclassifications have been made to the 2005 financial statements to conform to the 2006 presentation, including a reclassification to reflect as separate components of cash provided by operating activities, other non-current assets and other non-current liabilities, which were previously aggregated; accordingly, there was no impact on amounts presented for net cash provided by (used in) operating, investing and financing activities.



|2. | Debt Arrangements
|-- | -----------------



Long-term debt consisted of the following:





8





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|                                              |  | June 30,2006   |           | December 31,2005 |  
|--------------------------------------------- |  | -------------- | --------- | ---------------- | -
|                                              |  | (In thousands) |          
|Term loans                                    |  | $              | 1,827,870 |                  | $
|Revolving Credit Facility                     |  |                | 75,000    |                  |  
|Foreign and other revolving credit facilities |  |                | 4,999     |                  |  
|Senior Notes                                  |  |                | 250,000   |                  |  
|Senior Subordinated Notes                     |  |                | 375,000   |                  |  
|Capital leases                                |  |                | 28,312    |                  |  
|Other                                         |  |                | 1,583     |                  |  
|                                              |  |                | 2,562,764 |                  |  
|Less amounts classified as current            |  |                | 29,400    |                  |  
|                                              |  | $              | 2,533,364 |                  | $



In connection with the acquisition of the blow molded plastic container business of Owens-Illinois, Inc. (O-I Plastic) on October 7, 2004, the Operating Company, Holdings, GPC Capital Corp. I, Holdings wholly-owned subsidiary (CapCo I), and a syndicate of lenders entered into a first-lien credit agreement (the Credit Agreement) and a second-lien credit agreement (the Second-Lien Credit Agreement and, together with the Credit Agreement, the Credit Agreements). Pursuant to its terms, on April 18, 2006, the Credit Agreement was amended in order to, among other things, increase the Term Loan B facility provided under the Credit Agreement by $150.0 million.  Proceeds of the Amendment were used to pay down $100.0 million of the Second-Lien Credit Agreement, with the remaining $50.0 million being used to reduce outstanding borrowings
on the existing revolving credit facility provided for under the Credit Agreement.  The Credit Agreements consist of a senior secured Term Loan B to the Operating Company totaling $1,577.9 million, a second-lien term loan totaling $250.0 million (the Term Loans or Term Loan Facilities) and a $250.0 million revolving credit facility (the Revolving Credit Facility). The obligations of the Operating Company and CapCo I under the Credit Agreements are guaranteed by Holdings and certain other subsidiaries of Holdings.  The Term Loan B is payable in quarterly installments and requires payments of $15.6 million in 2006 and $16.0 million in each of 2007, 2008, 2009 and 2010 and $1,505.8 million in 2011. The second-lien term loan is payable in 2012. The Revolving Credit Facility expires on October 7, 2010. Interest on the Credit Agreement is payable at (a) the Alternate Base Rate (ABR) (the higher of the Prime Rate or the Federal
Funds Rate plus 0.50%) plus a margin ranging from 1.25% to 1.75%; or (b) the Eurodollar Rate (the applicable interest rate offered to banks in the London interbank eurocurrency market) plus a margin ranging from 2.00% to 2.75%. A commitment fee of 0.50% is due on the unused portion of the Revolving Credit Facility. Interest on the Second-Lien Credit Agreement is payable at (a) the ABR plus a margin of 3.25%; or (b) the Eurodollar Rate plus a margin of 4.25%. In addition, the Credit Agreements contain certain affirmative and negative covenants as to the operations and financial condition of the Company, as well as certain restrictions on the payment of dividends and other distributions to Holdings. As of June 30, 2006, the Company was in compliance with all covenants. The unused availability of the Revolving Credit Facility at June 30, 2006 was $165.6 million (as reduced by $9.4 million of outstanding letters of credit).

Substantially all domestic tangible and intangible assets of the Company are pledged as collateral pursuant to the terms of the Credit Agreements.

The acquisition of O-I Plastic and the related refinancing of the indebtedness of the Company also included the issuance of $250.0 million in Senior Notes of the Operating Company and $375.0 million in Senior Subordinated Notes of the Operating Company (collectively the Notes) (see Note 13). The Notes are unconditionally guaranteed, jointly and severally, by Holdings and domestic subsidiaries of the Operating Company and mature on October 7, 2012 (Senior Notes) and October 7, 2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable semi-annually at 9.875%.



|3. | Accounts Receivable, Net
|-- | ------------------------

The Company had sales to one customer, PepsiCo, which exceeded 10% of total sales for the six months ended June 30, 2006 and 2005.  The Companys sales to this customer were 18.3% and 19.2% of total sales for the



9





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





six months ended June 30, 2006 and 2005, respectively.  For the six months ended June 30, 2006 and 2005, approximately 100% and 98%, respectively, of the sales to PepsiCo were made in North America.



|4. | Inventories
|-- | -----------

Inventories consisted of the following:



|                        |  | June 30,2006   |         | December 31,2005 |  
|----------------------- |  | -------------- | ------- | ---------------- | -
|                        |  | (In thousands) |        
|Finished goods          |  | $              | 170,627 |                  | $
|Raw materials and parts |  |                | 69,281  |                  |  
|                        |  | $              | 239,908 |                  | $



|5. | Impairment Charges
|-- | ------------------

Due to changes in the ability to utilize certain assets in the United States in 2006 and 2005, the Company evaluated the recoverability of these assets. For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets. Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, resulting in impairment charges of $1.1 million for the three months ended June 30, 2006 and $1.1 million and $1.6 million for the six months ended June 30, 2006 and 2005, respectively.



|6. | Intangible Assets, Net
|-- | ----------------------

The gross carrying amount and accumulated amortization of the Companys intangible assets subject to amortization as of June 30, 2006 were as follows:



|                       |  | Gross CarryingAmount          |        | AccumulatedAmortization |   | Net     |   | Amortizationperiod |       
|---------------------- |  | ----------------------------- | ------ | ----------------------- | - | ------- | - | ------------------ | ------
|                       |  | (Dollar amounts in thousands) |        |                         |  
|Patented technology    |  | $                             | 23,635 |                         | $ | (3,897  | ) | $                  | 19,738
|Customer relationships |  |                               | 41,597 |                         |   | (4,223  | ) |                    | 37,374
|Licensing agreements   |  |                               | 28,000 |                         |   | (4,454  | ) |                    | 23,546
|Non-compete agreements |  |                               | 1,542  |                         |   | (541    | ) |                    | 1,001 
|Total                  |  | $                             | 94,774 |                         | $ | (13,115 | ) | $                  | 81,659



The gross carrying amount and accumulated amortization of the Companys intangible assets subject to amortization as of December 31, 2005 were as follows:



|                       |  | Gross CarryingAmount          |        | AccumulatedAmortization |   | Net    |   | Amortizationperiod |       
|---------------------- |  | ----------------------------- | ------ | ----------------------- | - | ------ | - | ------------------ | ------
|                       |  | (Dollar amounts in thousands) |        |                         |  
|Patented technology    |  | $                             | 23,169 |                         | $ | (2,822 | ) | $                  | 20,347
|Customer relationships |  |                               | 38,130 |                         |   | (2,787 | ) |                    | 35,343
|Licensing agreements   |  |                               | 28,000 |                         |   | (3,182 | ) |                    | 24,818
|Non-compete agreement  |  |                               | 1,500  |                         |   | (375   | ) |                    | 1,125 
|Total                  |  | $                             | 90,799 |                         | $ | (9,166 | ) | $                  | 81,633

Amortization expense for the six months ended June 30, 2006 and 2005 was $3.9 million and $3.3 million, respectively.



|7. | Goodwill
|-- | --------

The changes in the carrying amount of goodwill were as follows:

10





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|                                         |  | NorthAmericaSegment |         | EuropeSegment |   | SouthAmericaSegment |  | Total |       
|---------------------------------------- |  | ------------------- | ------- | ------------- | - | ------------------- |  | ----- | ------
|                                         |  | (In thousands)      |        
|Balance at December 31, 2005             |  | $                   | 288,158 |               | $ | 17,278              |  | $     | 11,735
|Foreign currency translation adjustments |  |                     | (2,342  | )             |   | 743                 |  |       | 64    
|Other adjustments                        |  |                     | (114    | )             |   |                    |  |       |      
|Balance at June 30, 2006                 |  | $                   | 285,702 |               | $ | 18,021              |  | $     | 11,799



|8. | Accrued Expenses
|-- | ----------------

Accrued expenses consisted of the following:



|                                           |  | June 30,2006   |         | December 31,2005 |  
|------------------------------------------ |  | -------------- | ------- | ---------------- | -
|                                           |  | (In thousands) |        
|Accrued employee compensation and benefits |  | $              | 58,650  |                  | $
|Accrued interest                           |  |                | 32,921  |                  |  
|Accrued sales allowance                    |  |                | 22,691  |                  |  
|Other                                      |  |                | 92,811  |                  |  
|                                           |  | $              | 207,073 |                  | $

For the year ended December 31, 2005, the Company incurred costs of employee termination benefits in the United States of $2.3 million, which included the legal liability of severing 16 employees, all of which were terminated as of June 30, 2006.  Substantially all of the cash payments for these termination benefits are expected to be made by December 31, 2007.  For the year ended December 31, 2005, the Company incurred costs of employee termination benefits in France of $3.8 million, which included the legal liability of severing 35 employees, 23 of which were terminated as of June 30, 2006.  Substantially all of the cash payments for these termination benefits are expected to be made by December 31, 2006.  Additional termination benefits were incurred in 2002 and 2003 in France and North America; the remaining cash payments for these benefits are expected to be made by December 31, 2007.

The following table reflects a rollforward of these costs, primarily included in accrued employee compensation and benefits (in thousands):



|                              | 2002/2003FranceReductionin Force |     | 2003NorthAmericaReductionin Force |   | 2005United StatesReductionin Force |   | 2005FranceReductionin Force |       | Total |  
|----------------------------- | -------------------------------- | --- | --------------------------------- | - | ---------------------------------- | - | --------------------------- | ----- | ----- | -
|Reserves at December 31, 2005 | $                                | 399 |                                   | $ | 472                                |   | $                           | 1,571 |       | $
|Increase in reserves          |                                  | 78  |                                   |   |                                   |   |                             | 101   |       |  
|Cash payments                 |                                  | (3  | )                                 |   | (111                               | ) |                             | (667  | )     |  
|Reserves at June 30, 2006     | $                                | 474 |                                   | $ | 361                                |   | $                           | 1,005 |       | $



|9. | Income Taxes
|-- | ------------

Holdings and the Operating Company, as limited partnerships, do not pay U.S. federal income taxes under the provisions of the Internal Revenue Code, as the applicable income or loss is included in the tax returns of the partners. However, certain U.S. subsidiaries acquired as part of O-I Plastic are corporations and are subject to U.S. federal and state income taxes. The Companys foreign operations are subject to tax in their local jurisdictions. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to reverse.



11





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|10. | Acquisitions
|--- | ------------

Purchase of Certain Tetra-Pak Operations

On March 24, 2005, the Company acquired certain operations from Tetra-Pak Inc., Tetra Pak Moulded Packaging Systems Limited, Tetra Pak S.R.L., Tetra Pak MPS N.V., Tetra Pak LTDA and Tetra Pak Paketleme Sanayi Ve Ticaret A.S. for a total purchase price (including acquisition-related costs) of $36.8 million. The acquisition was recorded under the purchase method of accounting and, accordingly, the results of the acquired operation are included in the financial statements of the Company beginning on March 24, 2005. The purchase price has been allocated to assets acquired and liabilities assumed based on fair values. The allocated fair value of assets acquired and liabilities assumed is summarized as follows (in thousands):





|Accounts receivable                       |  | $ | 2,916  | 
|----------------------------------------- |  | - | ------ | 
|Inventories                               |  |   | 915    | 
|Prepaid expenses and other current assets |  |   | 64     | 
|Total current assets                      |  |   | 3,895  | 
|Property, plant and equipment             |  |   | 26,023 | 
|Intangible assets                         |  |   | 3,980  | 
|Goodwill                                  |  |   | 4,676  | 
|                                          |  |   |        | 
|Total                                     |  |   | 38,574 | 
|Less liabilities assumed                  |  |   | 1,764  | 
|                                          |  |   |        | 
|Net cost of acquisition                   |  | $ | 36,810 | 

Pro Forma Information

The following table sets forth unaudited pro forma results of operations, assuming that the above acquisition had taken place at the beginning of each period presented:



|                                |  | Three Months Ended |     | Six Months Ended |  
|------------------------------- |  | ------------------ | --- | ---------------- | -
|                                |  | June 30,           |     | June 30,         |  
|                                |  | 2006               |     | 2005             |  
|                                |  | (In millions)      |    
|As reported  net sales         |  | $                  | 653 |                  | $
|Pro forma  net sales           |  |                    | 653 |                  |  
|                                |  |                    |     |                  |  
|As reported  net (loss) income |  |                    | (15 | )                |  
|Pro forma  net (loss) income   |  |                    | (15 | )                |  



These unaudited pro forma results have been prepared for comparative purposes only and include certain adjustments, such as adjustments to depreciation and amortization expense as a result of adjustments in the basis of fixed assets and intangible assets, increased interest expense on acquisition debt and related tax effects. They do not purport to be indicative of the results of operations which actually would have resulted had the combination been in effect at the beginning of each period presented, or of future results of operations of the entities.

In March 2005, the Company executed a Purchase and Sale of Equity Interest and Joint Venture Termination Agreement under which the Company terminated the joint venture agreement with Industrias Innopack, S.A. de C.V. and acquired all of the equity interests held by Industrias Innopack, S.A. de C.V. in Graham Innopack de Mexico, S. de R.L. de C.V. (Graham Innopack) and the operating companies thereunder.  Closing of this transaction occurred on May 9, 2005, resulting in a payment by the Company of $13.9 million for the 49% interest in Graham Innopack that it did not previously own.



12





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|11. | Lease Commitments
|--- | -----------------

The Company is a party to various leases involving real property and equipment. Total rent expense for operating leases amounted to $14.1 million and $27.7 million for the three and six months ended June 30, 2006, respectively, and $11.8 million and $24.3 million for the three and six months ended June 30, 2005, respectively.



|12. | Contingencies
|--- | -------------

The Company is party to various litigation matters arising in the ordinary course of business. The ultimate legal and financial liability of the Company with respect to such litigation cannot be estimated with certainty, but management believes, based on its examination of these matters, experience to date and discussions with counsel, that ultimate liability from the Companys various litigation matters will not be material to the business, financial condition, results of operations or cash flows of the Company.

On July 9, 2002, the Company and Graham Engineering Corporation (Graham Engineering), an affiliated company, executed a First Amendment to the equipment sales, services and license agreement (the Equipment Sales Agreement) to, among other things, (i) permit the Company to purchase certain extrusion blow molding wheel systems from a third party under certain circumstances if Graham Engineering is provided the opportunity to bid on supplying the same equipment; (ii) clarify that the Companys exclusivity rights under the Equipment Sales Agreement do not apply to certain new generations of Graham Engineering equipment; (iii) in the event of the sale of Graham Engineering to a competitor, provide the Company the option to require the transfer of the existing agreement or obtain a perpetual, royalty-free license to make and use wheel equipment and components; (iv)
provide Graham Engineering with the ability to terminate the Equipment Sales Agreement if an arbitrator determines that the Company has purchased certain high output extrusion blow molding equipment from another supplier in breach of the Equipment Sales Agreement; and (v) obligate the Company, retroactive to January 1, 2002, and subject to certain credits and carry-forwards, to make payments for products and services to Graham Engineering in the amount of at least $12.0 million per calendar year, or else pay to Graham Engineering a shortfall payment.  The Company does not expect to be required to make a shortfall payment relative to its purchases for 2006.

Subsequently, on January 13, 2004, the parties executed a Second Amendment to the Equipment Sales Agreement.  Such amendment removed restrictions originally placed upon the Company with respect to the Companys use of Graham Engineering technology to manufacture containers at blow molding plants co-located with dairies or dairy-focused facilities.

The Equipment Sales Agreement terminates on December 31, 2007, unless mutually extended by the parties.



|13. | Condensed Guarantor Data
|--- | ------------------------

On October 7, 2004, the Operating Company and CapCo I co-issued $250.0 million aggregate principal amount of 8.5% Senior Notes due 2012 and $375.0 million aggregate principal amount of 9.875% Senior Subordinated Notes due 2014. The notes were issued under Indentures issued on October 7, 2004. Holdings and the domestic subsidiaries of the Operating Company have fully and unconditionally guaranteed these notes. These guarantees are both joint and several. Both the Operating Company and CapCo I are 100%-owned subsidiaries of Holdings.

The following unaudited condensed consolidating financial statements present the financial position, results of operations and cash flows of Holdings, the Operating Company, guarantor domestic subsidiaries of the Operating Company, non-guarantor subsidiaries and CapCo I.



13





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF JUNE 30, 2006

(In thousands)





|                                                  |  | GrahamPackagingHoldingsCompany |          | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |           | CapCo I |   | Eliminations |  | Consolidated |  
|------------------------------------------------- |  | ------------------------------ | -------- | --------------------------- | - | ---------- | - | -------------- | --------- | ------- | - | ------------ |  | ------------ | -
|ASSETS                                            |  |                                |          |                             |   |            |   |                |           |         |   |              |  |              |  
|Current assets:                                   |  |                                |          |                             |   |            |   |                |           |         |   |              |  |              |  
|Cash and cash equivalents                         |  | $                              |         |                             | $ | 4,568      |   | $              | 1         |         | $ | 9,848        |  | $            | 
|Accounts receivable, net                          |  |                                |         |                             |   | 91,289     |   |                | 119,710   |         |   | 68,192       |  |              | 
|Inventories                                       |  |                                |         |                             |   | 86,476     |   |                | 113,213   |         |   | 40,219       |  |              | 
|Deferred income taxes                             |  |                                |         |                             |   |           |   |                | 8,730     |         |   | 7,580        |  |              | 
|Prepaid expenses and other currentassets          |  |                                |         |                             |   | 26,926     |   |                | 6,810     |         |   | 22,997       |  |              | 
|Total current assets                              |  |                                |         |                             |   | 209,259    |   |                | 248,464   |         |   | 148,836      |  |              | 
|Property, plant and equipment, net                |  |                                |         |                             |   | 572,598    |   |                | 588,279   |         |   | 284,750      |  |              | 
|Intangible assets, net                            |  |                                |         |                             |   | 4,568      |   |                | 70,096    |         |   | 6,995        |  |              | 
|Goodwill                                          |  |                                |         |                             |   | 9,315      |   |                | 236,921   |         |   | 69,286       |  |              | 
|Net intercompany                                  |  |                                |         |                             |   | 1,131,763  |   |                |          |         |   |             |  |              | 
|Investment in subsidiaries                        |  |                                |         |                             |   | 401,568    |   |                | 293,484   |         |   |             |  |              | 
|Other non-current assets                          |  |                                |         |                             |   | 74,800     |   |                | 710       |         |   | 6,697        |  |              | 
|Total assets                                      |  | $                              |         |                             | $ | 2,403,871  |   | $              | 1,437,954 |         | $ | 516,564      |  | $            | 
|                                                  |  |                                |          |                             |   |            |   |                |           |         |   |              |  |              |  
|LIABILITIES AND PARTNERS CAPITAL (DEFICIT)       |  |                                |          |                             |   |            |   |                |           |         |   |              | 
|Current liabilities:                              |  |                                |          |                             |   |            |   |                |           |         |   |              |  |              |  
|Accounts payable                                  |  | $                              |         |                             | $ | 45,795     |   | $              | 112,748   |         | $ | 43,508       |  | $            | 
|Accrued expenses                                  |  |                                |         |                             |   | 103,156    |   |                | 52,123    |         |   | 51,794       |  |              | 
|Current portion of long-term debt                 |  |                                |         |                             |   | 26,070     |   |                |          |         |   | 3,330        |  |              | 
|Total current liabilities                         |  |                                |         |                             |   | 175,021    |   |                | 164,871   |         |   | 98,632       |  |              | 
|Long-term debt                                    |  |                                |         |                             |   | 2,532,709  |   |                |          |         |   | 655          |  |              | 
|Deferred income taxes                             |  |                                |         |                             |   |           |   |                | 9,880     |         |   | 12,538       |  |              | 
|Other non-current liabilities                     |  |                                |         |                             |   | 16,345     |   |                | 16,790    |         |   | 11,427       |  |              | 
|Investment in subsidiaries                        |  |                                | 320,204  |                             |   |            |   |                |          |         |   |              |  |              | 
|Net intercompany                                  |  |                                | 187,090  |                             |   |           |   |                | 902,112   |         |   | 42,561       |  |              | 
|Commitments and contingent liabilities            |  |                                |         |                             |   |           |   |                |          |         |   |             |  |              | 
|Partners capital (deficit)                       |  |                                | (507,294 | )                           |   | (320,204   | ) |                | 344,301   |         |   | 350,751      |  |              | 
|Total liabilities and partners capital (deficit) |  | $                              |         |                             | $ | 2,403,871  |   | $              | 1,437,954 |         | $ | 516,564      |  | $            | 







14





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING BALANCE SHEET

AS OF DECEMBER 31, 2005

(In thousands)





|                                                  |  | Graham Packaging HoldingsCompany |          | Graham PackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |           | CapCo I |   | Eliminations |  | Consolidated |  
|------------------------------------------------- |  | -------------------------------- | -------- | ---------------------------- | - | ---------- | - | -------------- | --------- | ------- | - | ------------ |  | ------------ | -
|ASSETS                                            |  |                                  |          |                              |   |            |   |                |           |         |   |              |  |              |  
|Current assets:                                   |  |                                  |          |                              |   |            |   |                |           |         |   |              |  |              |  
|Cash and cash equivalents                         |  | $                                |         |                              | $ | 11,307     |   | $              | 1         |         | $ | 15,376       |  | $            | 
|Accounts receivable, net                          |  |                                  |         |                              |   | 79,454     |   |                | 102,758   |         |   | 69,145       |  |              | 
|Inventories                                       |  |                                  |         |                              |   | 93,205     |   |                | 145,121   |         |   | 49,484       |  |              | 
|Deferred income taxes                             |  |                                  |         |                              |   |           |   |                | 8,730     |         |   | 4,339        |  |              | 
|Prepaid expenses and other current assets         |  |                                  |         |                              |   | 17,928     |   |                | 11,257    |         |   | 21,812       |  |              | 
|Total current assets                              |  |                                  |         |                              |   | 201,894    |   |                | 267,867   |         |   | 160,156      |  |              | 
|Property, plant and equipment, net                |  |                                  |         |                              |   | 562,817    |   |                | 597,196   |         |   | 283,447      |  |              | 
|Intangible assets, net                            |  |                                  |         |                              |   | 4,331      |   |                | 73,212    |         |   | 4,090        |  |              | 
|Goodwill                                          |  |                                  |         |                              |   | 9,240      |   |                | 236,921   |         |   | 71,010       |  |              | 
|Net intercompany                                  |  |                                  |         |                              |   | 1,221,017  |   |                |          |         |   |             |  |              | 
|Investment in subsidiaries                        |  |                                  |         |                              |   | 413,433    |   |                | 296,544   |         |   |             |  |              | 
|Other non-current assets                          |  |                                  |         |                              |   | 82,306     |   |                | 897       |         |   | 6,994        |  |              | 
|Total assets                                      |  | $                                |         |                              | $ | 2,495,038  |   | $              | 1,472,637 |         | $ | 525,697      |  | $            | 
|                                                  |  |                                  |          |                              |   |            |   |                |           |         |   |              |  |              |  
|LIABILITIES AND PARTNERS CAPITAL (DEFICIT)       |  |                                  |          |                              |   |            |   |                |           |         |   |              |  |              |  
|Current liabilities:                              |  |                                  |          |                              |   |            |   |                |           |         |   |              |  |              |  
|Accounts payable                                  |  | $                                |         |                              | $ | 68,294     |   | $              | 49,471    |         | $ | 59,835       |  | $            | 
|Accrued expenses                                  |  |                                  |         |                              |   | 85,270     |   |                | 45,876    |         |   | 45,286       |  |              | 
|Current portion of long-term debt                 |  |                                  |         |                              |   | 21,025     |   |                |          |         |   | 6,834        |  |              | 
|Total current liabilities                         |  |                                  |         |                              |   | 174,589    |   |                | 95,347    |         |   | 111,955      |  |              | 
|Long-term debt                                    |  |                                  |         |                              |   | 2,609,618  |   |                |          |         |   | 863          |  |              | 
|Deferred income taxes                             |  |                                  |         |                              |   |           |   |                | 11,031    |         |   | 11,562       |  |              | 
|Other non-current liabilities                     |  |                                  |         |                              |   | 17,451     |   |                | 12,626    |         |   | 11,046       |  |              | 
|Investment in subsidiaries                        |  |                                  | 306,620  |                              |   |           |   |                |          |         |   |             |  |              | 
|Net intercompany                                  |  |                                  | 187,090  |                              |   |           |   |                | 988,412   |         |   | 45,515       |  |              | 
|Commitments and contingent liabilities            |  |                                  |         |                              |   |           |   |                |          |         |   |             |  |              | 
|Partners capital (deficit)                       |  |                                  | (493,710 | )                            |   | (306,620   | ) |                | 365,221   |         |   | 344,756      |  |              | 
|Total liabilities and partners capital (deficit) |  | $                                |         |                              | $ | 2,495,038  |   | $              | 1,472,637 |         | $ | 525,697      |  | $            | 







15





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2006

(In thousands)





|                                                        |  | GrahamPackagingHoldingsCompany |         | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |   | Consolidated |  
|------------------------------------------------------- |  | ------------------------------ | ------- | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ | - | ------------ | -
|                                                        |  |                                |         |                             |   |            |   |                |         |         |   |              |   |              |  
|Net sales                                               |  | $                              |        |                             | $ | 277,596    |   | $              | 281,163 |         | $ | 116,162      |   | $            | 
|Cost of goods sold                                      |  |                                |        |                             |   | 233,700    |   |                | 254,624 |         |   | 103,201      |   |              | 
|Gross profit                                            |  |                                |        |                             |   | 43,896     |   |                | 26,539  |         |   | 12,961       |   |              | 
|Selling, general and administrative expenses            |  |                                |         |                             |   | 11,960     |   |                | 14,437  |         |   | 6,808        |   |              |  
|Impairment charges                                      |  |                                |        |                             |   | 1,112      |   |                |        |         |   |             |   |              | 
|Operating income                                        |  |                                |        |                             |   | 30,824     |   |                | 12,102  |         |   | 6,153        |   |              | 
|Interest expense, net                                   |  |                                |        |                             |   | 33,564     |   |                | 19,113  |         |   | 1,348        |   |              | 
|Other (income) expense, net                             |  |                                |        |                             |   | (548       | ) |                | (478    | )       |   | 1,077        |   |              | 
|Equity in loss of subsidiaries                          |  |                                | 15,266  |                             |   | 11,571     |   |                | 2,412   |         |   |             |   |              | 
|(Loss) income before income taxes and minority interest |  |                                | (15,266 | )                           |   | (13,763    | ) |                | (8,945  | )       |   | 3,728        |   |              | 
|Income tax provision                                    |  |                                |        |                             |   | 1,503      |   |                | 4,679   |         |   | 4,087        |   |              | 
|Net (loss) income                                       |  | $                              | (15,266 | )                           | $ | (15,266    | ) | $              | (13,624 | )       | $ | (359         | ) | $            | 







16





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(In thousands)





|                                                        |  | GrahamPackagingHoldingsCompany |         | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |   | Consolidated |  
|------------------------------------------------------- |  | ------------------------------ | ------- | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ | - | ------------ | -
|                                                        |  |                                |         |                             |   |            |   |                |         |         |   |              |   |              |  
|Net sales                                               |  | $                              |        |                             | $ | 555,103    |   | $              | 556,232 |         | $ | 227,778      |   | $            | 
|Cost of goods sold                                      |  |                                |        |                             |   | 469,317    |   |                | 514,417 |         |   | 203,473      |   |              | 
|Gross profit                                            |  |                                |        |                             |   | 85,786     |   |                | 41,815  |         |   | 24,305       |   |              | 
|Selling, general and administrative expenses            |  |                                |         |                             |   | 24,957     |   |                | 26,126  |         |   | 13,228       |   |              | 
|Impairment charges                                      |  |                                |        |                             |   | 1,112      |   |                |        |         |   |             |   |              | 
|Operating income                                        |  |                                |        |                             |   | 59,717     |   |                | 15,689  |         |   | 11,077       |   |              | 
|Interest expense, net                                   |  |                                |        |                             |   | 64,390     |   |                | 37,327  |         |   | 2,693        |   |              | 
|Other (income) expense, net                             |  |                                |        |                             |   | (888       | ) |                | (558    | )       |   | 1,534        |   |              | 
|Equity in loss of subsidiaries                          |  |                                | 25,252  |                             |   | 19,964     |   |                | 5,385   |         |   |             |   |              | 
|(Loss) income before income taxes and minority interest |  |                                | (25,252 | )                           |   | (23,749    | ) |                | (26,465 | )       |   | 6,850        |   |              | 
|Income tax provision (benefit)                          |  |                                |        |                             |   | 1,503      |   |                | (1,131  | )       |   | 6,865        |   |              | 
|Net (loss) income                                       |  | $                              | (25,252 | )                           | $ | (25,252    | ) | $              | (25,334 | )       | $ | (15          | ) | $            | 







17





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE THREE MONTHS ENDED JUNE 30, 2005

(In thousands)





|                                                        |  | GrahamPackagingHoldingsCompany |        | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |   | Consolidated |  
|------------------------------------------------------- |  | ------------------------------ | ------ | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ | - | ------------ | -
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |   |              |  
|Net sales                                               |  | $                              |       |                             | $ | 255,011    |   | $              | 289,360 |         | $ | 118,325      |   | $            | 
|Cost of goods sold                                      |  |                                |       |                             |   | 220,979    |   |                | 262,263 |         |   | 101,124      |   |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |   |              |  
|Gross profit                                            |  |                                |       |                             |   | 34,032     |   |                | 27,097  |         |   | 17,201       |   |              | 
|Selling, general and administrative expenses            |  |                                | 1      |                             |   | (264       | ) |                | 26,414  |         |   | 5,914        |   |              | 
|Operating (loss) income                                 |  |                                | (1     | )                           |   | 34,296     |   |                | 683     |         |   | 11,287       |   |              | 
|Interest expense, net                                   |  |                                |       |                             |   | 26,557     |   |                | 15,965  |         |   | 934          |   |              | 
|Other (income) expense, net                             |  |                                |       |                             |   | (1,979     | ) |                | (837    | )       |   | (80          | ) |              | 
|Equity in (earnings) loss of subsidiaries               |  |                                | (4,149 | )                           |   | 5,206      |   |                | (3,701  | )       |   |             |   |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |   |              |  
|Income (loss) before income taxes and minority interest |  |                                | 4,148  |                             |   | 4,512      |   |                | (10,744 | )       |   | 10,433       |   |              | 
|Income tax provision (benefit)                          |  |                                |       |                             |   | 363        |   |                | (5,878  | )       |   | 3,863        |   |              | 
|Minority interest                                       |  |                                |       |                             |   |           |   |                |        |         |   | 184          |   |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |   |              |  
|Net income (loss)                                       |  | $                              | 4,148  |                             | $ | 4,149      |   | $              | (4,866  | )       | $ | 6,386        |   | $            | 







18





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS

FOR THE SIX MONTHS ENDED JUNE 30, 2005

(In thousands)





|                                                        |  | GrahamPackagingHoldingsCompany |        | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |  | Consolidated |  
|------------------------------------------------------- |  | ------------------------------ | ------ | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ |  | ------------ | -
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |  |              |  
|Net sales                                               |  | $                              |       |                             | $ | 498,188    |   | $              | 565,026 |         | $ | 234,789      |  | $            | 
|Cost of goods sold                                      |  |                                |       |                             |   | 435,693    |   |                | 504,572 |         |   | 200,963      |  |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |  |              |  
|Gross profit                                            |  |                                |       |                             |   | 62,495     |   |                | 60,454  |         |   | 33,826       |  |              | 
|Selling, general and administrative expenses            |  |                                | 1      |                             |   | 27,308     |   |                | 27,288  |         |   | 11,763       |  |              | 
|Impairment charges                                      |  |                                |       |                             |   | 1,605      |   |                |        |         |   |             |  |              | 
|Operating (loss) income                                 |  |                                | (1     | )                           |   | 33,582     |   |                | 33,166  |         |   | 22,063       |  |              | 
|Interest expense, net                                   |  |                                |       |                             |   | 53,583     |   |                | 30,813  |         |   | 1,834        |  |              | 
|Other (income) expense, net                             |  |                                |       |                             |   | (1,907     | ) |                | (784    | )       |   | 132          |  |              | 
|Equity in loss (earnings) of subsidiaries               |  |                                | 7,387  |                             |   | (11,118    | ) |                | (7,184  | )       |   |             |  |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |  |              |  
|(Loss) income before income taxes and minority interest |  |                                | (7,388 | )                           |   | (6,976     | ) |                | 10,321  |         |   | 20,097       |  |              | 
|Income tax provision                                    |  |                                |       |                             |   | 411        |   |                | 981     |         |   | 7,382        |  |              | 
|Minority interest                                       |  |                                |       |                             |   |           |   |                |        |         |   | 728          |  |              | 
|                                                        |  |                                |        |                             |   |            |   |                |         |         |   |              |  |              |  
|Net (loss) income                                       |  | $                              | (7,388 | )                           | $ | (7,387     | ) | $              | 9,340   |         | $ | 11,987       |  | $            | 







19





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2006

(In thousands)





|                                                              |  | GrahamPackagingHoldingsCompany |   | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |   | Consolidated |  
|------------------------------------------------------------- |  | ------------------------------ | - | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ | - | ------------ | -
|                                                              |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Operating activities:                                         |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Net cash provided by operating activities                     |  | $                              |  |                             | $ | 116,341    |   | $              | 26,470  |         | $ | 9,848        |   | $            | 
|                                                              |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Investing activities:                                         |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Net cash paid for property, plant and equipment               |  |                                |  |                             |   | (50,022    | ) |                | (26,470 | )       |   | (12,183      | ) |              | 
|Acquisition of/investment in a business, net of cash acquired |  |                                |  |                             |   | (195       | ) |                |        |         |   | (2           | ) |              | 
|Net cash used in investing activities                         |  |                                |  |                             |   | (50,217    | ) |                | (26,470 | )       |   | (12,185      | ) |              | 
|                                                              |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Financing activities:                                         |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Proceeds from issuance of long-term debt                      |  |                                |  |                             |   | 428,720    |   |                |        |         |   | 19,006       |   |              | 
|Payment of long-term debt                                     |  |                                |  |                             |   | (500,583   | ) |                |        |         |   | (23,045      | ) |              | 
|Debt issuance fees                                            |  |                                |  |                             |   | (1,000     | ) |                |        |         |   |             |   |              | 
|Net cash used in financing activities                         |  |                                |  |                             |   | (72,863    | ) |                |        |         |   | (4,039       | ) |              | 
|                                                              |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Effect of exchange rate changes                               |  |                                |  |                             |   |           |   |                |        |         |   | 848          |   |              | 
|Decrease in cash and cash equivalents                         |  |                                |  |                             |   | (6,739     | ) |                |        |         |   | (5,528       | ) |              | 
|Cash and cash equivalents at beginning of period              |  |                                |  |                             |   | 11,307     |   |                | 1       |         |   | 15,376       |   |              | 
|Cash and cash equivalents at end of period                    |  | $                              |  |                             | $ | 4,568      |   | $              | 1       |         | $ | 9,848        |   | $            | 







20





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





GRAHAM PACKAGING HOLDINGS COMPANY

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS ENDED JUNE 30, 2005

(In thousands)





|                                                                |  | GrahamPackagingHoldingsCompany |   | GrahamPackagingCompany,L.P. |   | Guarantors |   | Non-Guarantors |         | CapCo I |   | Eliminations |   | Consolidated |  
|--------------------------------------------------------------- |  | ------------------------------ | - | --------------------------- | - | ---------- | - | -------------- | ------- | ------- | - | ------------ | - | ------------ | -
|                                                                |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Operating activities:                                           |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Net cash provided by operating activities                       |  | $                              |  |                             | $ | 1,276      |   | $              | 49,448  |         | $ | 12,089       |   | $            | 
|                                                                |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Investing activities:                                           |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Net cash paid for property, plant and equipment                 |  |                                |  |                             |   | (68,922    | ) |                | (49,437 | )       |   | (16,888      | ) |              | 
|Acquisitions of/investments in businesses, net of cash acquired |  |                                |  |                             |   | (15,330    | ) |                | (10     | )       |   | (2,138       | ) |              | 
|Net cash used in investing activities                           |  |                                |  |                             |   | (84,252    | ) |                | (49,447 | )       |   | (19,026      | ) |              | 
|                                                                |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Financing activities:                                           |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Proceeds from issuance of long-term debt                        |  |                                |  |                             |   | 550,406    |   |                |        |         |   | 27,212       |   |              | 
|Payment of long-term debt                                       |  |                                |  |                             |   | (465,201   | ) |                |        |         |   | (27,122      | ) |              | 
|Debt issuance fees                                              |  |                                |  |                             |   | (809       | ) |                |        |         |   |             |   |              | 
|Net cash provided by financing activities                       |  |                                |  |                             |   | 84,396     |   |                |        |         |   | 90           |   |              | 
|                                                                |  |                                |   |                             |   |            |   |                |         |         |   |              |   |              |  
|Effect of exchange rate changes                                 |  |                                |  |                             |   |           |   |                |        |         |   | (1,466       | ) |              | 
|Increase (decrease) in cash and cash equivalents                |  |                                |  |                             |   | 1,420      |   |                | 1       |         |   | (8,313       | ) |              | 
|Cash and cash equivalents at beginning of period                |  |                                |  |                             |   | 1,080      |   |                |        |         |   | 21,051       |   |              | 
|Cash and cash equivalents at end of period                      |  | $                              |  |                             | $ | 2,500      |   | $              | 1       |         | $ | 12,738       |   | $            | 











21





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|14. | Comprehensive Loss
|--- | ------------------

Comprehensive loss for the three and six months ended June 30, 2006 and 2005 was as follows:



|                                     |  | Three Months Ended |         | Six Months Ended |  
|------------------------------------ |  | ------------------ | ------- | ---------------- | -
|                                     |  | June 30,           |         | June 30,         |  
|                                     |  | 2006               |         | 2005             |  
|                                     |  | (In thousands)     |        
|Net (loss) income                    |  | $                  | (15,266 | )                | $
|Changes in fair value of derivatives |  |                    | 2,122   |                  |  
|Additional minimum pension liability |  |                    | (78     | )                |  
|Cumulative translation adjustments   |  |                    | 4,022   |                  |  
|Comprehensive loss                   |  | $                  | (9,200  | )                | $





22





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|15. | Segment Information
|--- | -------------------

The Company is organized and managed on a geographical basis in three operating segments:  North America, Europe and South America. Segment information for the three and six months ended June 30, 2006 and 2005, representing the reportable segments currently utilized by the chief operating decision maker, was as follows:



|                                             |  |                                   |  | NorthAmerica |                 | Europe |   | South America |   | Eliminations |        | Total |  
|-------------------------------------------- |  | --------------------------------- |  | ------------ | --------------- | ------ | - | ------------- | - | ------------ | ------ | ----- | -
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|                                             |  |                                   |  |              | (In  thousands) |       
|Net sales (b) (c)                            |  | Three  months ended June 30, 2006 |  | $            | 580,384         |        | $ | 59,000        |   | $            | 14,011 |       | $
|                                             |  | Three  months ended June 30, 2005 |  |              | 565,405         |        |   | 63,865        |   |              | 15,466 |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 1,152,325       |        |   | 116,954       |   |              | 29,123 |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 1,104,092       |        |   | 130,421       |   |              | 30,761 |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Operating income                             |  | Three  months ended June 30, 2006 |  |              | 43,771          |        |   | 4,783         |   |              | 525    |       |  
|                                             |  | Three  months ended June 30, 2005 |  |              | 38,715          |        |   | 5,873         |   |              | 1,677  |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 75,489          |        |   | 9,343         |   |              | 1,651  |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 74,579          |        |   | 10,551        |   |              | 3,680  |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Depreciation and                             |  | Three  months ended June 30, 2006 |  |              | 48,330          |        |   | 5,197         |   |              | 1,064  |       |  
|amortization (d)                             |  | Three  months ended June 30, 2005 |  |              | 50,719          |        |   | 4,921         |   |              | 847    |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 95,740          |        |   | 10,090        |   |              | 2,183  |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 100,092         |        |   | 9,859         |   |              | 1,686  |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Impairment charges                           |  | Three months  ended June 30, 2006 |  |              | 1,112           |        |   |              |   |              |       |       |  
|                                             |  | Three  months ended June 30, 2005 |  |              |                |        |   |              |   |              |       |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 1,112           |        |   |              |   |              |       |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 1,605           |        |   |              |   |              |       |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Interest expense, net (d)                    |  | Three  months ended June 30, 2006 |  |              | 53,021          |        |   | 819           |   |              | 185    |       |  
|                                             |  | Three  months ended June 30, 2005 |  |              | 42,759          |        |   | 396           |   |              | 301    |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 102,485         |        |   | 1,516         |   |              | 409    |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 84,815          |        |   | 893           |   |              | 522    |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Other (income) expense, net                  |  | Three  months ended June 30, 2006 |  |              | (401            | )      |   | 331           |   |              | 121    |       |  
|                                             |  | Three  months ended June 30, 2005 |  |              | (2,875          | )      |   | (368          | ) |              | 346    |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | (534            | )      |   | 376           |   |              | 246    |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | (2,738          | )      |   | (404          | ) |              | 582    |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Income tax provision                         |  | Three  months ended June 30, 2006 |  |              | 8,028           |        |   | 2,008         |   |              | 233    |       |  
|(benefit)                                    |  | Three  months ended June 30, 2005 |  |              | (3,999          | )      |   | 1,978         |   |              | 369    |       |  
|                                             |  | Six months  ended June 30, 2006   |  |              | 2,736           |        |   | 3,987         |   |              | 514    |       |  
|                                             |  | Six months  ended June 30, 2005   |  |              | 4,192           |        |   | 3,840         |   |              | 742    |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Identifiable assets (b)(c)                   |  | As of June  30, 2006              |  |              | 2,587,568       |        |   | 324,897       |   |              | 71,094 |       |  
|                                             |  | As of  December 31, 2005          |  |              | 2,638,141       |        |   | 298,318       |   |              | 68,131 |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Goodwill                                     |  | As of June  30, 2006              |  |              | 285,702         |        |   | 18,021        |   |              | 11,799 |       |  
|                                             |  | As of  December 31, 2005          |  |              | 288,158         |        |   | 17,278        |   |              | 11,735 |       |  
|                                             |  |                                   |  |              |                 |        |   |               |   |              |        |       |  
|Net cash paid for property,                  |  | Six months  ended June 30, 2006   |  |              | 78,229          |        |   | 7,198         |   |              | 3,252  |       |  
|plant and equipment,  excluding acquisitions |  | Six months  ended June 30, 2005   |  |              | 123,205         |        |   | 9,392         |   |              | 2,650  |       |  





23





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued







|(a) | To eliminate intercompany balances, which include investments in the operating segments and inter-segment receivables and payables.                                                                                                                                                                                                                                                                                                                                                                                                                                                
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | The Companys net sales for Europe include sales in France which totaled approximately $13.1 million and $16.3 million for the three months ended June 30, 2006 and 2005, respectively, and $26.1 million and $36.4 million for the six months ended June 30, 2006 and 2005, respectively.  Identifiable assets in France totaled approximately $125.6 million and $114.1 million as of June 30, 2006 and December 31, 2005, respectively.                                                                                                                                         
|(c) | The Companys net sales for North America include sales in Mexico which totaled approximately $37.4 million and $34.3 million for the three months ended June 30, 2006 and 2005, respectively, and $69.9 million and $64.2 million for the six months ended June 30, 2006 and 2005, respectively.  Identifiable assets in Mexico totaled approximately $146.0 million and $165.5 million as of June 30, 2006 and December 31, 2005, respectively. Approximately all of the North America reportable segments remaining net sales and identifiable assets are in the United States.
|(d) | Includes amortization of debt issuance fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       



Product Net Sales Information

The following is supplemental information on net sales by product category:



|                        |  | Three Months Ended |         | Six Months Ended |  
|----------------------- |  | ------------------ | ------- | ---------------- | -
|                        |  | June 30,           |         | June 30,         |  
|                        |  | 2006               |         | 2005             |  
|                        |  | (In thousands)     |        
|Food and Beverage       |  | $                  | 407,941 |                  | $
|Household               |  |                    | 111,935 |                  |  
|Automotive Lubricants   |  |                    | 67,643  |                  |  
|Personal Care/Specialty |  |                    | 65,763  |                  |  
|Total Net Sales         |  | $                  | 653,282 |                  | $



|16. | Pension Plans
|--- | -------------

The components of net periodic pension cost for the Companys U.S. defined benefit pension plans consisted of the following:



|                                         |  | Three Months Ended |       | Six Months Ended |  
|---------------------------------------- |  | ------------------ | ----- | ---------------- | -
|                                         |  | June 30,           |       | June 30,         |  
|                                         |  | 2006               |       | 2005             |  
|                                         |  | (In thousands)     |      
|Components of net periodic pension cost: |  |                    |       |                  |  
|Service cost                             |  | $                  | 2,597 |                  | $
|Interest cost                            |  |                    | 1,061 |                  |  
|Expected return on plan assets           |  |                    | (994  | )                |  
|Net amortization and deferral            |  |                    | 285   |                  |  
|Net periodic pension cost                |  | $                  | 2,949 |                  | $





24





GRAHAM PACKAGING HOLDINGS COMPANY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)-Continued





The increase in net periodic pension cost in the first half of 2006 was primarily attributable to higher interest costs in 2006 as a result of a reduction in the discount rate, partially offset by higher expected returns on plan assets as a result of increased pension contributions in 2005.

The Company previously disclosed in its financial statements for the year ended December 31, 2005 that it expected to contribute $9.8 million to its pension plans in 2006. As of June 30, 2006, $1.0 million of contributions to its pension plans has been made, with the balance of $8.8 million to be made by December 31, 2006.

The Company recognized $0.8 million of expense for its 401(k) plans in the second quarter of 2006 and 2005, and $1.7 million in the first half of 2006 and 2005.







25









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



CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

All statements other than statements of historical facts included in this Report on Form 10-Q, including statements regarding the future financial position, economic performance and results of operations of the Company, as well as the Companys business strategy, budgets and projected costs and plans and objectives of management for future operations, and the information referred to under Quantitative and Qualitative Disclosures About Market Risk (Part I, Item 3), are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as may, expect, intend, estimate, anticipate, believe, or continue or similar terminology. These forward-looking statements are not historical facts, and are based on current
expectations, estimates and projections about the Companys industry, managements beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond the Companys control.  Accordingly, readers are cautioned that any such forward-looking statements are not guarantees of future performance and are subject to certain risks, uncertainties and assumptions that are difficult to predict.  Although the Company believes that the expectations reflected in such forward-looking statements are reasonable as of the date made, expectations may prove to have been materially different from the results expressed or implied by such forward-looking statements.  Unless otherwise required by law, the Company also disclaims any obligation to update its view of any such risks or uncertainties or to announce publicly the result of any revisions to the forward-looking statements made in this report.  Readers should carefully review the risks
and uncertainties under Risk Factors(Part I, Item 1A) in the Annual Report on Form 10-K of Graham Packaging Holdings Company (Holdings) for the fiscal year ended December 31, 2005. All forward-looking statements attributable to the Company, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements set forth in this paragraph.



Overview

Management believes the Company is a worldwide leader in the design, manufacture and sale of customized blow molded plastic containers for the branded food and beverage, household, personal care/specialty and automotive lubricants product categories and, as of the end of June 2006, operated 85 manufacturing facilities throughout North America, Europe and South America. The Companys primary strategy is to operate in select markets that will position it to benefit from the growing conversion to value-added plastic packaging from more commodity packaging.

Management believes that critical success factors to the Companys business are its ability to:



| | develop its own proprietary technologies that provide a meaningful competitive advantage in the marketplace;                                                                                                  
|- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | maintain relationships with and serve the complex packaging demands of its customers which include some of the worlds largest branded consumer products companies;                                           
| | forecast trends in the packaging industry across product lines and geographic territories (including those specific to the rapid conversion of packaging products from glass, metal and paper to plastic); and
| | make investments in plant and technology necessary to satisfy the three factors mentioned above.                                                                                                              





26









Management believes that the area with the greatest opportunity for growth continues to be in producing containers for the food and beverage product category because of the continued conversion to plastic packaging, including the demand for containers for juices, juice drinks, nutritional beverages, sports drinks, teas, yogurt drinks, snacks, beer and other food products. Since much of the growth in this area has been in the sale of smaller sized containers, over the past few years, the Company has experienced an overall mix shift toward smaller containers. Based on research prepared by Packaging Strategies and internal estimates, management believes the Company has become a leader in the value-added segment for hot-fill PET juice containers.  Management also believes the Company has recently become a leading participant in the rapidly growing market of yogurt drinks and nutritional
beverages where the Company manufactures containers using polyolefin resins. From the beginning of 2003 through June 30, 2006, the Company has invested over $1,050.0 million in capital expenditures, which includes approximately $658.0 million of purchase price allocations related to the acquisition of the blow molded plastic container business of Owens-Illinois, Inc. (O-I Plastic), in the food and beverage product category. For the last twelve months ended June 30, 2006, the Companys sales of containers for the food and beverage product category grew to $1,476.1 million from $573.0 million in 2003.

The Companys household container product category is a product category whose growth in prior years was fueled by conversions from powders to liquids for such products as detergents, household cleaners and automatic dishwashing detergent. Powdered products are typically packaged in paper based containers such as fiber wound cans and paperboard cartons. The growth of this product category now tends to follow gross domestic product (GDP) growth as liquids have gained a predominant share of these products. The Companys strongest position is in fabric care, where management believes the Company is a leader in plastic container design and manufacture. It should be noted the fabric care industry is now offering some brands in a concentrated formula which could affect the growth in this product category.  The Company has continually upgraded its machinery, principally in the
United States, to new, larger, more productive blow molders in order to standardize production lines, improve flexibility and reduce manufacturing costs.

The Companys North American one quart motor oil container product category is in a mature industry. Unit volume in the one quart motor oil industry decreased approximately 7% in 2005 as compared to 2004.  Annual volumes declined an average of approximately 1% to 2% in prior years. Management believes that the future rate of decline of the domestic one quart motor oil container product category will be at a higher rate than the historical rate as the product category continues to migrate towards the quick-lube market and larger multi-quart packages.  The expected rate of decline in one quart motor oil containers is anticipated to be 8% to 10% per year over the next few years.

The Companys personal care/specialty product category is a product category that grows, in general, with GDP and is driven by new product launch and relaunch cycles.  Based on the volume of its sales to many major suppliers of personal care/specialty products, management believes the Company is among the leading suppliers in this product category which includes products for the hair care, skin care, oral care and specialty markets. Management believes that the Companys leading supply position results from its commitment to and reputation in new product development and flexible manufacturing processes and operations.

As of June 30, 2006, the Company operated 29 manufacturing facilities outside of the United States in Argentina, Belgium, Brazil, Canada, Ecuador, England, Finland, France, Hungary, Mexico, the Netherlands, Poland, Spain, Turkey and Venezuela. Over the past few years, the Company has expanded its international operations with the addition of new plants in France, Belgium, Spain, Poland, Mexico and Argentina, as well as the acquisition of O-I Plastic, which included plants in Ecuador, England, Finland, Mexico, the Netherlands and Venezuela, and the acquisition of certain Tetra-Pak operations on March 24, 2005, which included plants in Brazil, Belgium and Turkey.

For the six months ended June 30, 2006, 73.1% of the Companys net sales were generated by the top twenty customers, the majority of which were under long-term contracts with terms up to ten years; the remainder of which were customers with whom the Company has been doing business for over 20 years on average. Prices under these arrangements are typically tied to market standards and, therefore, vary with market conditions. In general, the contracts are requirements contracts that do not obligate the customer to purchase any given amount of product from the Company. The Company had sales to one customer, PepsiCo, which exceeded 10% of total sales for the six months ended June 30, 2006 and 2005. The Companys sales to PepsiCo were 18.3% and 19.2% of total sales for



27







the six months ended June 30, 2006 and 2005, respectively. For the six months ended June 30, 2006 and 2005, approximately 100% and 98%, respectively, of the sales to PepsiCo were made in North America.

Based on industry data, the following table summarizes average market prices per pound of polyethylene terephthalate (PET) and high-density polyethylene (HDPE) resins in the United States during the three and six months ended June 2006 and 2005:



|     |  | Three Months Ended |      | Six Months Ended |  
|---- |  | ------------------ | ---- | ---------------- | -
|     |  | June               |      | June             |  
|     |  | 2006               |      | 2005             |  
|PET  |  | $                  | 0.71 |                  | $
|HDPE |  | $                  | 0.67 |                  | $



In general, the Companys dollar gross profit is substantially unaffected by fluctuations in the prices of PET and HDPE resins, the primary raw materials for the Companys products, because industry practice and the Companys agreements with its customers permit substantially all resin price changes to be passed through to customers by means of corresponding changes in product pricing. Consequently, the Company believes that its cost of goods sold, as well as other expense items, should not be analyzed solely on a percentage of net sales basis. A sustained increase in resin prices, to the extent that those costs are not passed on to the end-consumer, would make plastic containers less economical for the Companys customers and could result in a slower pace of conversions to plastic containers.

Holdings and Graham Packaging Company, L.P., Holdings wholly-owned subsidiary (the Operating Company), as limited partnerships, do not pay U.S. federal income taxes under the provisions of the Internal Revenue Code, as the applicable income or loss is included in the tax returns of the partners. However, certain U.S. subsidiaries acquired as part of O-I Plastic are corporations and are subject to U.S. federal and state income taxes. The Companys foreign operations are subject to tax in their local jurisdictions. Deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary
differences are expected to reverse.



Results of Operations

The following tables set forth the major components of the Companys net sales and such net sales expressed as a percentage of total net sales:



|                |  | Three Months Ended    |       | Six Months Ended |      
|--------------- |  | --------------------- | ----- | ---------------- | -----
|                |  | June 30,              |       | June 30,         |      
|                |  | 2006                  |       | 2005             |      
|                |  | (Dollars in millions) |      
|North America   |  | $                     | 580.3 |                  | 88.8 
|Europe          |  |                       | 59.0  |                  | 9.0  
|South America   |  |                       | 14.0  |                  | 2.2  
|Total Net Sales |  | $                     | 653.3 |                  | 100.0





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|                        |  | Three Months Ended    |       | Six Months Ended |      
|----------------------- |  | --------------------- | ----- | ---------------- | -----
|                        |  | June 30,              |       | June 30,         |      
|                        |  | 2006                  |       | 2005             |      
|                        |  | (Dollars in millions) |      
|Food and Beverage       |  | $                     | 407.9 |                  | 62.4 
|Household               |  |                       | 111.9 |                  | 17.1 
|Automotive Lubricants   |  |                       | 67.7  |                  | 10.4 
|Personal Care/Specialty |  |                       | 65.8  |                  | 10.1 
|Total Net Sales         |  | $                     | 653.3 |                  | 100.0





Three Months Ended June 30, 2006 Compared to Three Months Ended June 30, 2005

Net Sales.Net sales for the three months ended June 30, 2006 increased $8.6 million, or 1.3%, to $653.3 million from $644.7 million for the three months ended June 30, 2005. The increase in sales was primarily due to an increase in resin pricing and volume, net of changes in mix and price erosion. Container units sold increased 4.6%. On a geographic basis, sales for the three months ended June 30, 2006 in North America increased $14.9 million, or 2.6%, from the three months ended June 30, 2005, primarily due to an increase in resin pricing and higher container units sold of 4.9%, net of changes in mix and price erosion.North American sales in the food and beverage product category contributed $34.0 million to the increase, while the household product category, the automotive lubricants product
category and the personal care/specialty product category decreased $6.6 million, $2.8 million and $9.7 million, respectively.  Container units sold in North America increased in the food and beverage product category by 11.7% and decreased in the household, automotive lubricants and personal care/specialty product categories by 7.2%, 11.6% and 8.1%, respectively.  Sales for the three months ended June 30, 2006 in Europe decreased $4.9 million, or 7.7%, from the three months ended June 30, 2005.  The decrease in sales was primarily due to an overall mix shift to smaller containers.  Container units sold in Europe increased 3.1% compared to the same period last year.  Sales for the three months ended June 30, 2006 in South America decreased $1.4 million, or 9.1%, from the three months ended June 30, 2005.  The decrease in sales was primarily due to an overall mix shift to smaller containers, partially offset by favorable exchange rate changes of $0.9 million.

Gross Profit.Gross profit for the three months ended June 30, 2006 increased $5.1 million to $83.4 million from $78.3 million for the three months ended June 30, 2005. Gross profit for the three months ended June 30, 2006 increased $7.2 million in North America, offset by decreases in Europe and South America of $1.1 million and $1.0 million, respectively, when compared to the three months ended June 30, 2005.  The increase in gross profit was primarily due to a net decrease in non-recurring charges of $3.2 million, a net decrease in project costs of $4.9 million, a favorable impact from changes in foreign currency exchange rates of $0.2 million and a net decrease in depreciation and amortization expense (principally due to the finalization of the fixed asset valuation for O-I Plastic in the third quarter of 2005 resulting in a reduction in the fixed asset
valuation) of $4.3 million, partially offset by a net decrease in gross profit related to ongoing business of $7.5 million.  The non-recurring charges included expenses incurred in 2006 and 2005 related to the integration of O-I Plastic and restructuring and other non-recurring expenses; additional expenses were incurred in 2006 related to the hurricanes in the United States in the second half of 2005.

Selling, General & Administrative Expenses.Selling, general and administrative expenses for the three months ended June 30, 2006 increased $1.1 million to $33.2 million from $32.1 million for the three months ended June 30, 2005. The increase was primarily due to increases in North America in legal expenses, professional service fees, recruitment expenses, non-recurring charges and depreciation expense, partially offset by compensation-related expenses.  The non-recurring charges were $5.7 million and $5.2 million for the three months ended June 30, 2006 and 2005, respectively, comprised of expenses relating to an aborted acquisition, the integration of O-I Plastic, global reorganization costs and other costs.  Selling, general and administrative expenses as a percent of sales increased to 5.1% of sales for the three months ended June 30, 2006 from 5.0% of
sales for the three months ended June 30, 2005.



29









Impairment Charges.Impairment charges for the three months ended June 30, 2006 were $1.1 million as compared to no impairment charges for the three months ended June 30, 2005.  In 2006, due to a change in the ability to utilize certain assets in the United States, the Company evaluated the recoverability of these assets.  For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets.  Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with Statement of Financial Accounting Standards (SFAS) 144, Accounting for the Impairment or Disposal of Long-Lived Assets, resulting in impairment charges of $1.1 million for the three months ended June 30, 2006.

Interest Expense, Net. Interest expense, net increased $10.5 million to $54.0 million for the three months ended June 30, 2006 from $43.5 million for the three months ended June 30, 2005.  The increase was primarily related to an increase in interest rates (average 90-day LIBOR increased from 3.28% for the three months ended June 30, 2005 to 5.21% for the three months ended June 30, 2006) and average debt levels for the three months ended June 30, 2006.

Income Tax Provision (Benefit).Income tax provision was $10.3 million for the three months ended June 30, 2006 as compared to income tax benefit of $1.7 million for the three months ended June 30, 2005.  The change of $12.0 million was primarily related to the establishment of a valuation allowance on a portion of the tax benefit due to taxable losses in North America.

Net (Loss) Income.Primarily as a result of the factors discussed above, net loss was $15.3 million for the three months ended June 30, 2006 compared to net income of $4.1 million for the three months ended June 30, 2005.



Six Months Ended June 30, 2006 Compared to Six Months Ended June 30, 2005

Net Sales.Net sales for the six months ended June 30, 2006 increased $33.0 million, or 2.6%, to $1,298.3 million from $1,265.3 million for the six months ended June 30, 2005. The increase in sales was primarily due to an increase in resin pricing and volume, net of changes in mix and price erosion. Container units sold increased 4.9%. On a geographic basis, sales for the six months ended June 30, 2006 in North America increased $48.2 million, or 4.4%, from the six months ended June 30, 2005, primarily due to an increase in resin pricing and higher container units sold of 5.6%, net of changes in mix and price erosion.North American sales in the food and beverage product category, the household product category and the automotive lubricants product category contributed $53.3 million, $6.9
million and $0.9 million, respectively, to the increase, while the personal care/specialty product category decreased $12.9 million.  Container units sold in North America increased in the food and beverage product category by 11.5% and decreased in the automotive lubricants and personal care/specialty product categories by 7.4% and 7.7%, respectively, while container units sold in North America in the household product category remained the same.  Sales for the six months ended June 30, 2006 in Europe decreased $13.5 million, or 10.4%, from the six months ended June 30, 2005.  The decrease in sales was primarily due to unfavorable exchange rate changes of $3.9 million and an overall mix shift to smaller containers.  Container units sold in Europe increased 1.7% compared to the same period last year.  Sales for the six months ended June 30, 2006 in South America decreased $1.7 million, or 5.5%, from the six months ended June 30, 2005.  The decrease in sales was primarily due to an
overall mix shift to smaller containers, partially offset by favorable exchange rate changes of $2.4 million.

Gross Profit.Gross profit for the six months ended June 30, 2006 decreased $4.9 million to $151.9 million from $156.8 million for the six months ended June 30, 2005. Gross profit for the six months ended June 30, 2006 decreased $1.9 million, $1.4 million and $1.6 million in North America, Europe and South America, respectively, when compared to the six months ended June 30, 2005. The positive impact on gross profit of added volume was more than offset by a loss of approximately $5.5 million due to the inability to recover all raw material costs related to extraordinary efforts during the Rita/Katrina hurricane events during the latter half of 2005 to procure PET raw materials and build unusually high inventory levels to make certain the Company met its customers requirements in the short term and build for the peak isotonic beverage demand in the long term.
Gross profit was also negatively impacted by a net increase of $3.3 million in non-recurring charges, an unfavorable impact from changes in foreign currency exchange rates of $0.3 million and a net decrease in gross profit related to ongoing business of $5.0 million, partially offset by a net decrease in project costs of $2.9 million and a net decrease in depreciation and amortization expense (principally due to the finalization of the fixed asset valuation for O-I Plastic in the third quarter of 2005 resulting in a reduction in the fixed asset valuation) of $6.3 million.  The non-recurring charges



30







included expenses incurred in 2006 and 2005 related to the integration of O-I Plastic and restructuring and other non-recurring expenses; additional expenses were incurred in 2006 related to the hurricanes in the United States in the second half of 2005.

Selling, General & Administrative Expenses.Selling, general and administrative expenses for the six months ended June 30, 2006 decreased $2.1 million to $64.3 million from $66.4 million for the six months ended June 30, 2005. The decrease was primarily due to a decrease in non-recurring charges and compensation-related expenses, partially offset by increases in legal expenses, recruitment expenses and depreciation expenses.  The non-recurring charges were $6.9 million and $11.8 million for the six months ended June 30, 2006 and 2005, respectively, comprised of expenses relating to aborted acquisitions, the integration of O-I Plastic, global reorganization costs and other costs.  Selling, general and administrative expenses as a percent of sales decreased to 5.0% of sales for the six months ended June 30, 2006 from 5.2% of sales for the six months ended June 30, 2005.

Impairment Charges.Impairment charges for the six months ended June 30, 2006 were $1.1 million as compared to $1.6 million for the six months ended June 30, 2005.  In 2006 and 2005, due to changes in the ability to utilize certain assets in the United States, the Company evaluated the recoverability of these assets.  For these assets to be held and used, the Company determined that the undiscounted cash flows were below the carrying value of these long-lived assets.  Accordingly, the Company adjusted the carrying value of these long-lived assets to their estimated fair value in accordance with SFAS 144, Accounting for the Impairment or Disposal of Long-Lived Assets, resulting in impairment charges of $1.1 million and $1.6 million for the six months ended June 30, 2006 and 2005, respectively.

Interest Expense, Net. Interest expense, net increased $18.2 million to $104.4 million for the six months ended June 30, 2006 from $86.2 million for the six months ended June 30, 2005.  The increase was primarily related to an increase in interest rates (average 90-day LIBOR increased from 3.06% for the first six months of 2005 to 4.99% for the first six months of 2006) and average debt levels for the six months ended June 30, 2006.

Income Tax Provision (Benefit).Income tax provision decreased $1.6 million to $7.2 million for the six months ended June 30, 2006 from $8.8 million for the six months ended June 30, 2005.  The decrease was primarily related to decreased taxable earnings in North America.

Net (Loss) Income.Primarily as a result of the factors discussed above, net loss was $25.3 million for the six months ended June 30, 2006 compared to net loss of $7.4 million for the six months ended June 30, 2005.



Effect of Changes in Exchange Rates

In general, the Companys results of operations are affected by changes in foreign exchange rates. Subject to market conditions, the Company prices its products in its foreign operations in local currencies. As a result, a decline in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a favorable effect on the profitability of the Company, and an increase in the value of the U.S. dollar relative to the local currencies of profitable foreign subsidiaries can have a negative effect on the profitability of the Company. Exchange rate fluctuations increased comprehensive income by $4.0 million and decreased comprehensive income by $7.8 million for the three months ended June 30, 2006 and 2005, respectively, and increased comprehensive income by $6.3 million and decreased comprehensive income by $17.4 million for the six months ended June
30, 2006 and 2005, respectively.



Derivatives

During 2003, the Company entered into four interest rate swap agreements (three of which matured in the first quarter of 2006) under which the Company (for the remaining swap) receives variable interest based on the Eurodollar Rate (the applicable interest rate offered to banks in the London interbank eurocurrency market) and pays fixed interest at a weighted average rate of 2.80%, on $100.0 million of term loans. During 2004, the Company entered into four additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 3.89%, on $700.0 million of term loans. During 2005, the Company entered into three additional interest rate swap agreements, under which the Company receives variable interest based on the Eurodollar rate and pays fixed interest at a weighted average rate of 4.43%,



31







on $225.0 million of term loans. The interest rate swaps are accounted for as cash flow hedges. The hedges are highly effective as defined in SFAS 133, Accounting for Derivative Instruments and Hedging Activities.  The effective portion of the cash flow hedges is recorded in other comprehensive income (OCI) and was an unrealized gain of $5.4 million and $1.6 million for the six months ended June 30, 2006 and 2005, respectively.  Failure to properly document the Companys interest rate swaps as effective hedges would result in income statement recognition of all or part of the cumulative $19.9 million unrealized gain recorded in accumulated OCI as of June 30, 2006.  Approximately 68% of the amount recorded within OCI as of June 30, 2006 is expected to be recognized in interest expense in the next twelve months.

Liquidity and Capital Resources

In the six months ended June 30, 2006, the Company funded, through its operating activities, $88.9 million of investing activities and $76.9 million of financing activities.  Included in the Companys operating activities was a decrease in inventories of $47.9 million from December 31, 2005 to June 30, 2006, primarily due to a seasonal drop in finished goods inventories and a decrease in raw material reserves that were established at the end of 2005 to mitigate the effects on the supply of raw materials caused by the hurricanes in the United States in the latter part of 2005.

In connection with the acquisition of O-I Plastic on October 7, 2004, the Operating Company, Holdings, GPC Capital Corp. I, Holdings wholly-owned subsidiary (CapCo I), and a syndicate of lenders entered into a first-lien credit agreement (the Credit Agreement) and a second-lien credit agreement (the Second-Lien Credit Agreement and, together with the Credit Agreement, the Credit Agreements). Pursuant to its terms, on April 18, 2006, the Credit Agreement was amended in order to, among other things, increase the Term Loan B facility provided under the Credit Agreement by $150.0 million.  Proceeds of the Amendment were used to pay down $100.0 million of the Second-Lien Credit Agreement, with the remaining $50.0 million being used to reduce outstanding borrowings on the existing revolving credit facility provided for under the Credit
Agreement.  The Credit Agreements consist of a senior secured Term Loan B to the Operating Company totaling $1,577.9 million, a second-lien term loan totaling $250.0 million (the Term Loans or Term Loan Facilities) and a $250.0 million revolving credit facility (the Revolving Credit Facility). The unused availability of the Revolving Credit Facility at June 30, 2006 was $165.6 million (as reduced by $9.4 million of outstanding letters of credit.  The Term Loan B is payable in quarterly installments and requires payments of $15.6 million in 2006 and $16.0 million in each of 2007, 2008, 2009 and 2010 and $1,505.8 million in 2011. The Company expects to fund scheduled debt repayments from cash from operations and unused lines of credit. The Revolving Credit Facility expires on October 7, 2010. The second-lien term loan is payable on April 7, 2012. The obligations of the Operating Company and CapCo I under the Credit Agreements are guaranteed by
Holdings and certain other subsidiaries of Holdings. As of June 30, 2006, the Company was in compliance with all covenants.

The acquisition of O-I Plastic and the related refinancing of the indebtedness of the Company also included the issuance of $250.0 million in Senior Notes of the Operating Company and $375.0 million in Senior Subordinated Notes of the Operating Company (collectively the Notes). The Notes are unconditionally guaranteed, jointly and severally, by Holdings and domestic subsidiaries of the Operating Company and mature on October 7, 2012 (Senior Notes) and October 7, 2014 (Senior Subordinated Notes). Interest on the Senior Notes is payable semi-annually at 8.50% and interest on the Senior Subordinated Notes is payable semi-annually at 9.875%.

At June 30, 2006, the Companys total indebtedness was $2,562.8 million.

The Credit Agreements and the Notes contain a number of significant covenants.  The Company believes that these covenants are material terms of these agreements and that information about the covenants is material to an investors understanding of the Companys financial condition and liquidity. Covenant compliance EBITDA (as defined below) is used to determine the Companys compliance with many of these covenants.  Any breach of covenants in the Credit Agreements that are tied to financial ratios based on covenant compliance EBITDA could result in a default under the Credit Agreements and the lenders could elect to declare all amounts borrowed to be immediately due and payable. Any such acceleration would also result in a default under the Notes. Additionally, these covenants restrict the Companys ability to dispose of assets, repay other indebtedness, incur additional
indebtedness, pay dividends, prepay subordinated indebtedness, incur liens, make capital expenditures, investments or acquisitions, engage in mergers or consolidations, engage in transactions with affiliates and otherwise restrict the Companys activities. Under the Credit Agreements, the Company is required to satisfy specified financial ratios and



32







tests beginning with the first quarter of 2005. As of June 30, 2006, the Company was in compliance with the financial ratios and tests specified in the Credit Agreements.

Covenant compliance EBITDA is defined as EBITDA (i.e., earnings before interest, taxes, depreciation and amortization) further adjusted to exclude non-recurring items, non-cash items and other adjustments required in calculating covenant compliance under the Credit Agreements and the Notes, as shown in the table below. Covenant compliance EBITDA is not intended to represent cash flow from operations as defined by generally accepted accounting principles and should not be used as an alternative to net income as an indicator of operating performance or to cash flow as a measure of liquidity. The Company believes that the inclusion of covenant compliance EBITDA in this quarterly report on Form 10-Q is appropriate to provide additional information to investors about the calculation of certain financial covenants in the Credit Agreements and the Notes. Because not all companies use identical
calculations, these presentations of covenant compliance EBITDA may not be comparable to other similarly titled measures of other companies. A reconciliation of net loss to covenant compliance EBITDA is as follows:



Reconciliation of net loss to EBITDA



|                              |  | Four Quarters EndedJune 30, 2006 |              
|----------------------------- |  | -------------------------------- | -------------
|                              |  |                                  | (In millions)
|Net loss                      |  | $                                | (70.5        
|Interest income               |  |                                  | (0.7         
|Interest expense              |  |                                  | 203.2        
|Income tax provision          |  |                                  | 12.9         
|Depreciation and amortization |  |                                  | 195.4        
|                              |  |                                  |              
|EBITDA                        |  | $                                | 340.3        

Reconciliation of EBITDA to covenant compliance EBITDA



|                                         |  | Four Quarters EndedJune 30, 2006 |              
|---------------------------------------- |  | -------------------------------- | -------------
|                                         |  |                                  | (In millions)
|EBITDA                                   |  | $                                | 340.3        
|Impairment charges                       |  |                                  | 6.8          
|Other non-cash charges (a)               |  |                                  | 14.5         
|Fees related to monitoring agreements(b) |  |                                  | 5.0          
|Non-recurring items(c)                   |  |                                  | 54.8         
|Pro forma adjustments (d)                |  |                                  | 18.0         
|                                         |  |                                  |              
|Covenant compliance EBITDA               |  | $                                | 439.4        



|(a) | Represents the net loss on disposal of fixed assets.                                                                                   
|--- | ---------------------------------------------------------------------------------------------------------------------------------------
|(b) | Represents annual fees paid to Blackstone Management Partners III L.L.C. and a limited partner of Holdings under monitoring agreements.
|(c) | The Company is required to adjust EBITDA, as defined above, for the non-recurring items in the table below:                            



|                                  |  | Four Quarters EndedJune 30, 2006 |              
|--------------------------------- |  | -------------------------------- | -------------
|                                  |  |                                  | (In millions)
|Reorganization and other costs(i) |  | $                                | 36.7         
|Project startup costs(ii)         |  |                                  | 18.1         
|                                  |  | $                                | 54.8         





33











|(i)  | Represents non-recurring costs related to the integration of O-I Plastic, aborted acquisitions, expenses related to the hurricanes in the United States in the second half of 2005, global reorganization costs and other costs.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(ii) | Represents non-recurring costs associated with project startups.                                                                                                                                                                



|(d) | The Company is required to adjust EBITDA for synergy cost savings, as defined in the Credit Agreement.
|--- | ------------------------------------------------------------------------------------------------------



Under the debt agreements, the Companys ability to engage in activities such as incurring additional indebtedness, making investments and paying dividends is also tied to ratios based on covenant compliance EBITDA. The Credit Agreement requires that the Company maintain a covenant compliance EBITDA to cash interest ratio starting at a minimum of 1.90x and increasing in increments of .05 to 2.20x in 2010 and a net debt to covenant compliance EBITDA ratio starting at a maximum of 6.75x and decreasing in increments of .25 to 5.00x in 2010, in each case for the most recent four quarter period. The Second-Lien Credit Agreement requires that the Company maintain a covenant compliance EBITDA to cash interest ratio starting at a minimum of 1.65x and increasing in increments of .05 to 1.95x in 2010 and a net debt to covenant compliance EBITDA ratio starting at a maximum of 7.35x and decreasing
in increments of .25 to 5.60x in 2010, in each case for the most recent four quarter period. For the four quarters ended June 30, 2006, the Operating Companys covenant compliance EBITDA was $439.4 million, which includes $18.0 million of certain required adjustments in accordance with the Companys Credit Agreements. The covenant compliance EBITDA to cash interest ratio and net debt to covenant compliance EBITDA ratio were 2.24x and 5.80x, respectively, for the four quarters ended June 30, 2006. The ability of the Operating Company to incur additional debt and make certain restricted payments under its Notes is tied to a covenant compliance EBITDA to interest expense ratio of 2.0 to 1, except that the Operating Company may incur certain debt and make certain restricted payments without regard to the ratio, such as up to $2.2 billion under the Credit Agreements and investments equal to 7.5% of the Operating Companys total assets.

Substantially all of the Companys domestic tangible and intangible assets are pledged as collateral pursuant to the terms of the Credit Agreements.

Under the Credit Agreements, the Operating Company is subject to restrictions on the payment of dividends or other distributions to Holdings; provided that, subject to certain limitations, the Operating Company may pay dividends or other distributions to Holdings:



| | in respect of overhead, tax liabilities, legal, accounting and other professional fees and expenses;  and                                                                                                                                                                                                                                                                                      
|- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | to fund purchases and redemptions of equity interests of Holdings or BMP/Graham Holdings Corporation held by then present or former officers or employees of Holdings, the Operating Company or their subsidiaries or by any employee stock ownership plan upon that persons death, disability, retirement or termination of employment or other circumstances with annual dollar limitations.

As market conditions warrant, the Company and its major equityholders, including Blackstone Capital Partners III Merchant Bank Fund L.P. and its affiliates, may from time to time repurchase debt securities issued by the Company, in privately negotiated or open market transactions, by tender offer or otherwise.

Cash paid for property, plant and equipment, net of proceeds on sales of property, plant and equipment and excluding acquisitions, for the six months ended June 30, 2006 was $88.7 million. Management believes that capital investment to maintain and upgrade property, plant and equipment is important to remain competitive. Management estimates that on average the annual capital expenditures required to maintain the Companys current facilities are approximately $55.0 million per year. Additional capital expenditures beyond this amount will be required to expand capacity or improve the cost structure.

For the fiscal year 2006, the Company expects to incur approximately $220.0 million of capital investments.  However, total capital investments will depend on the size and timing of growth related opportunities.



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2006 capital investments include restructuring expenditures which are excluded from the capital expenditure covenant in the Credit Agreement.  The Companys principal sources of cash to fund ongoing operations and capital requirements have been and are expected to continue to be net cash provided by operating activities and borrowings under the Credit Agreement.  Management believes that these sources will be sufficient to fund the Companys ongoing operations and its foreseeable capital requirements.

On July 9, 2002, the Company and Graham Engineering Corporation (Graham Engineering), an affiliated company, executed a First Amendment to the equipment sales, services and license agreement (the Equipment Sales Agreement) to, among other things, (i) permit the Company to purchase certain extrusion blow molding wheel systems from a third party under certain circumstances if Graham Engineering is provided the opportunity to bid on supplying the same equipment; (ii) clarify that the Companys exclusivity rights under the Equipment Sales Agreement do not apply to certain new generations of Graham Engineering equipment; (iii) in the event of the sale of Graham Engineering to a competitor, provide the Company the option to require the transfer of the existing agreement or obtain a perpetual, royalty-free license to make and use wheel equipment and components; (iv)
provide Graham Engineering with the ability to terminate the Equipment Sales Agreement if an arbitrator determines that the Company has purchased certain high output extrusion blow molding equipment from another supplier in breach of the Equipment Sales Agreement; and (v) obligate the Company, retroactive to January 1, 2002, and subject to certain credits and carry-forwards, to make payments for products and services to Graham Engineering in the amount of at least $12.0 million per calendar year, or else pay to Graham Engineering a shortfall payment. The Company does not expect to be required to make a shortfall payment relative to its purchases for 2006.

Subsequently, on January 13, 2004, the parties executed a Second Amendment to the Equipment Sales Agreement.  Such amendment removed restrictions originally placed upon the Company with respect to the Companys use of Graham Engineering technology to manufacture containers at blow molding plants co-located with dairies or dairy-focused facilities.

The Equipments Sales Agreement terminates on December 31, 2007, unless mutually extended by the parties.



Off-Balance Sheet Arrangements

Other than operating leases, as of June 30, 2006, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.



Recent Accounting Pronouncements

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. (FIN) 48  Accounting for Uncertainty in Income Taxes  an interpretation of FASB Statement No. 109.  FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  FIN 48 also provides guidance on accounting for derecognition, interest, penalties, accounting in interim periods, disclosure and classification of matters related to uncertainty in income taxes and transitional requirements upon adoption of FIN 48.  FIN 48 is effective for fiscal years beginning after December 15, 2006.  The Company is currently in the process of assessing the impact of the adoption of FIN 48 on its results of operations and financial position.





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Item 3. Quantitative and Qualitative Disclosures About Market Risk

The following table provides disclosure as of June 30, 2006 for financial instruments that have experienced material changes in fair value since December 31, 2005.





|                                        |   | Expected Maturity Date of Interest Rate Swap Agreements at June 30, 2006 |   | Fair Value |        
|--------------------------------------- | - | ------------------------------------------------------------------------ | - | ---------- | -------
|                                        |   | 2006                                                                     |   | 2007       |        
|                                        |   |                                                                          |   |            |        
|Derivatives matched against liabilities |   |                                                                          |   |            |        
|Pay fixed swaps                         | $ | 100,000                                                                  |   | $          | 650,000
|Pay rate                                |   | 2.80                                                                     | % |            | 3.98   
|Receive rate                            |   | 5.30                                                                     | % |            | 5.46   



(1) A $100 million swap maturing in 2007 is forward starting at expiration of existing swaps; therefore totals reflect only active swaps.





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|Item 4. | Controls and Procedures
|------- | -----------------------
|        |                        
|        | (a)                    
|        |                        
|        |                        
|        | (b)                    
|        |                        





37











|PART II. | OTHER INFORMATION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|-------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Item 1A. | Risk Factors                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A. Risk Factors in Holdings Annual Report on Form 10-K for the year ended December 31, 2005, which could materially affect the Companys business, financial condition or future results.  The risk factors in Holdings Annual Report on Form 10-K have not materially changed.  The risks described in Holdings Annual Report on Form 10-K are not the only risks facing the Company.  Additional risks and uncertainties not currently known to the Company or that the Company currently deems to be immaterial also may materially adversely affect the Companys business, financial condition and/or operating results.
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|Item 6.  | Exhibits                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|         | Exhibit 10.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | Exhibit 31.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | Exhibit 31.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | Exhibit 32.1                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|         | Exhibit 32.2                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          











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SIGNATURE





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed by the undersigned, thereunto duly authorized.



Dated:  August 11, 2006





|GRAHAM PACKAGING HOLDINGS COMPANY
|---------------------------------
|(Registrant)                     
|                                 
|                                 
|By:                              
|                                 
|                                 
|                                 









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