##### Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549





FORM 10-K



|x | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended May 1, 2010

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 1-7923





HANDLEMAN
COMPANY

(Exact name of registrant as specified in its charter)



|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|MICHIGAN                                                       |  | 38-1242806                          
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)



|                                         |  |           
|---------------------------------------- |  | ----------
|500 Kirts Boulevard, Troy, Michigan      |  | 48084-5225
|(Address of principal executive offices) |  | (Zip Code)

Registrants telephone number, including area code: 248-362-4400

Securities registered pursuant to Section 12(b) of the Act:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|NONE                |  | NONE                                     

Securities
registered pursuant to Section 12(g) of the Act: COMMON STOCK $.01 PAR VALUE

Indicate by check mark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities

Act.     YES  
 ̈  NO  x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the

Act.    YES   ̈  NO  
x

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 at least the past 90 days.    YES  x  NO   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    YES  x  NO   ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  
x

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

Large accelerated
filer   ̈                    Accelerated
filer   ̈                    Smaller reporting
company  x

Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Act.).    YES   ̈  NO  x

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter. The aggregate market value as of October 31, 2009 was $204,000.

Indicate the number of shares outstanding of each of the registrants classes of common stock, as of the latest practicable date. The
number of shares of common stock outstanding as of June 11, 2010 was 20,500,181.

DOCUMENTS INCORPORATED BY REFERENCE

None.



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##### Table of Contents

HANDLEMAN COMPANY



INDEX



|           |  |                                                                                                              |  |     
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|           |  |                                                                                                              |  | PAGE
|PART I.    |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 1.    |  | Business                                                                                                     |  | 1   
|Item 1A.   |  | Risk Factors                                                                                                 |  | 3   
|Item 1B.   |  | Unresolved Staff Comments                                                                                    |  | 5   
|Item 2.    |  | Properties                                                                                                   |  | 5   
|Item 3.    |  | Legal Proceedings                                                                                            |  | 5   
|           |  |                                                                                                             
|PART II.   |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 5.    |  | Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 6   
|Item 7.    |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                        |  | 7   
|Item 8.    |  | Financial Statements and Supplementary Data                                                                  |  | 14  
|Item 9.    |  | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure                         |  | 47  
|Item 9A.   |  | Controls and Procedures                                                                                      |  | 47  
|Item 9B.   |  | Other Information                                                                                            |  | 48  
|           |  |                                                                                                             
|PART III.  |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 10.   |  | Directors, Executive Officers and Corporate Governance                                                       |  | 48  
|Item 11.   |  | Executive Compensation                                                                                       |  | 50  
|Item 12.   |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters               |  | 52  
|Item 13.   |  | Certain Relationships, Related Transactions, and Director Independence                                       |  | 54  
|Item 14.   |  | Principal Accounting Fees and Services                                                                       |  | 54  
|           |  |                                                                                                             
|PART IV.   |  |                                                                                                              |  |     
|           |  |                                                                                                             
|Item 15.   |  | Exhibits, Financial Statement Schedules                                                                      |  | 56  
|           |  |                                                                                                             
|SIGNATURES |  |                                                                                                              |  | 64  







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##### Table of Contents

PART I



|        |  |          |  | 
|------- |  | -------- |  | 
|Item 1. |  | BUSINESS |  | 



Handleman
Company, a Michigan corporation (herein referred to as the Company or Handleman or Registrant), which has its executive offices in Troy, Michigan, is the successor to a proprietorship formed in 1934, and to a
partnership formed in 1937. Handleman Company operated as a category manager and distributor of prerecorded music and console video game hardware, software and accessories to leading retailers in the United States (U.S.), United Kingdom
(UK) and Canada. The Company was dissolved on May 5, 2009.



Copies of the Forms 10-K, Forms 10-Q, Forms 8-K, all amendments to those reports and certain other materials are available, as soon as reasonably
practicable after said material is electronically filed with or furnished to the Securities and Exchange Commission, free of charge on the Registrants website, www.handleman.com.



RECENT DEVELOPMENTS



Handleman Company has been dissolved and continues only for purposes of
winding down its affairs. The Company must complete the termination of the U.S. and Canadian pension plans. Pursuant to Board of Directors approval on March 11, 2009 for the termination of the U.S. pension plan, the Company will terminate
this pension plan and plans to purchase a non-participating group annuity contract for all of its participants. The Canadian pension plan, which received Board of Directors approval for termination early in fiscal 2009, will be paid to
participants, either by lump sum payout or through the purchase of an annuity contract, dependent upon the participants selection of payment. These pension initiatives are expected to be completed, subject to regulatory approval, at the same
payout percentage and at the same timing as other unsecured creditor claims. The final settlement amounts of the U.S. and Canadian pension plans could differ from these estimates due to changes in market conditions, which could affect discount rates
and returns on plan assets. The Company must also resolve tax matters that may require management to adjust tax assets and liabilities, perhaps significantly.



On November 6, 2009, H.R. 3548, the Worker, Homeownership, and Business Assistance Act of 2009 (the Act) was enacted. Although the Act
deals principally with the extension of unemployment benefits and mortgage relief, it also extends, to all businesses, the five-year net operating loss carryback previously available only to small businesses. The Act provides that a business of
any size may elect to carry back net operating losses incurred in 2008 or 2009 (but not both) for three, four or five years. During the third quarter of fiscal 2010, Handleman Company determined that it will carryback fiscal 2008 net operating
losses and filed for a $10.4 million refund on Form 1139. On February 22, 2010, the Company received a refund in the amount of $10.4 million from the Internal Revenue Service (IRS). This refund is expected to provide the Company
with sufficient liquidity for payment in full to its creditors and allow for a distribution to shareholders. The Company was notified at the end of the fourth quarter that the IRS will examine the 2008 tax returns giving rise to the refund. The
audit work began early in fiscal 2011 and it is uncertain when the audit will be concluded.



Based on the Companys net asset balance as of May 1, 2010, the Company believes that it will have sufficient liquidity to fund the
Companys remaining wind down related costs and provide payment in full to its creditors. These distributions are primarily dependent upon the resolution of all open items and periods with taxing authorities and the costs to fund existing
pension obligations. If the Company is unable to resolve outstanding tax issues in a reasonable period of time or if pension costs increase significantly as a result of changes in interest rates, the Companys ability to settle its liabilities
in full while incurring necessary wind down costs would be in doubt. If the Company is able to generate cash proceeds in excess of what is needed to satisfy all of the Companys obligations, the Company will distribute any such proceeds to
shareholders. Whether there will be any excess cash proceeds for distribution to shareholders is subject to a number of material risks and uncertainties that may prevent any such distribution from occurring. Accordingly, while the Company believes
that a cash distribution is possible, actual results may differ from current estimates, perhaps materially, possibly resulting in no excess cash proceeds available for distribution to shareholders. In addition, as a result of the aforementioned IRS
audit, the Company cannot predict at this time when net assets will be available for distribution to creditors and shareholders.



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Basis of Accounting



At the Companys annual shareholders meeting on October 1, 2008, the Companys shareholders approved a Plan of Final
Liquidation of the Company. As a result of this approval, the Company adopted the liquidation basis of accounting as of October 5, 2008. This basis of accounting is appropriate when the liquidation of a company appears imminent and the net
realizable value of its assets is reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their net realizable value, and estimated costs through the liquidation date are accrued for, to the extent reasonably
determinable.



Dissolution Filed with State of Michigan



On May 5, 2009, Handleman Company filed a Certificate of
Dissolution with the Michigan Department of Energy, Labor and Economic Growth, Bureau of Commercial Services, Corporate Division. As a dissolved company, Handleman will continue its corporate existence, but will not conduct business, except for the
purpose of winding down its affairs. Under State of Michigan law, before making any distribution to shareholders, a dissolved corporation must pay or make provision for its non-barred, valid debts, including those obligations that arise after the
effective date of dissolution, but before the bar date and before the distribution. Accordingly, Handlemans activities are now limited to: selling, collecting or otherwise realizing the value of its remaining assets; making tax and other
regulatory filings; winding down the Companys remaining business activities; paying (or adequately providing for the payment) of all non-barred, valid creditor claims and obligations; and making a distribution to Handleman Company
shareholders.



Payments during the liquidation period will be
prioritized in the following hierarchy: (i) wind down related costs, including supplier costs necessary to the wind down of the business, employee obligations such as on-going salaries, fringe benefits and retention costs; (ii) income tax
payments and other regulatory filing fees; (iii) payment of unsecured valid creditor claims and obligations, including the purchase of non-participating group annuity contracts to supplement the terminated U.S. and Canadian pension plans; and
(iv) distribution to shareholders. Based on the Companys net asset balance as of May 1, 2010, proceeds from the liquidation of assets are expected to be sufficient to provide payment in full to creditors and a distribution to
shareholders.



On May 6, 2009, Handleman Company petitioned
the Circuit Court for Oakland County, State of Michigan, for an Order of Limited Supervision over the Liquidation of Handleman post-dissolution. On May 20, 2009, the court order was granted and declared that shares of Handleman common stock
will become non-transferable 30 days after notification to shareholders. Accordingly, Handleman Companys shares of common stock became non-transferable on June 20, 2009. This allows the Company to reduce costs during liquidation and
maximize the liquidated value of the Company for the benefit of its creditors and potential benefit to its shareholders. The Company will distribute proceeds, if any, to shareholders in proportion to their interests as of the close of business on
June 20, 2009, the date of record.



DESCRIPTION OF FORMER
BUSINESS OPERATIONS



Prior to the wind down of business
operations, the reportable segments of the Company were category management and distribution operations, video game operations and all other. Within the category management and distribution operations business segment, the Companys revenues
were categorized as follows: (i) Category Management Revenues  sales to customers who received the full suite of category management services included with their purchase of Handleman-owned tangible products (primarily music); this suite
of services included assortment management utilizing the Companys category management systems and processes, product warehousing, ticketing, direct to store shipments, in-store field service and customer returns management; and
(ii) Fee-for-Services Revenues  revenues generated from the sale of services performed by the Company such as in-store field service and/or warehousing and distribution of customer-owned product; in these arrangements, the customer did
not



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purchase tangible product from Handleman Company. As a result of the Companys decision in the fourth quarter of fiscal 2008 to exit the music business in North America and the decision in
the first quarter of fiscal 2009 to sell the Handleman UK operations, the U.S., Canadian and UK operations were classified as discontinued operations in the Companys Consolidated Statement of Operations. On June 2, 2008 and
September 2, 2008, the Company completed asset purchase agreements related to its U.S. and Canadian operations, respectively. Further, on September 16, 2008, the Company sold certain Handleman UK assets and operations.



Within the video game operations business segment, the Company generated
revenues from the sale and distribution of Handleman-owned video game hardware, software and accessories. As a result of the Companys decision in the first quarter of fiscal 2009 to begin marketing Crave Entertainment Group, Inc.
(Crave) for sale and the subsequent sale of certain Crave assets on February 10, 2009, the Crave operations have been classified as discontinued operations.



The all other segment primarily represented the Companys REPS LLC
(REPS) operating segment. REPS provided in-store merchandising for home entertainment and consumer product brand owners at mass merchant, warehouse club and specialty retailers. As a result of the Companys decision in the second
quarter of fiscal 2009 to begin marketing REPS for sale and the subsequent sale of certain REPS assets on April 16, 2009, the REPS operations have been classified as discontinued operations.



* * * * * * * * *



See Managements Discussion and Analysis of Financial Condition and
Results of Operations for additional information regarding the Companys wind down activities.



As of May 1, 2010, Handleman Company had four full-time and three part-time employees remaining, with none belonging to a labor union.



|         |  |              |  | 
|-------- |  | ------------ |  | 
|Item 1A. |  | RISK FACTORS |  | 



Cautionary
Statement for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995  The discussion of the Companys future plans contains various forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. There are risks associated with forward looking statements. Forward-looking statements are based on
current expectations or beliefs concerning future events. Such statements can be identified by the use of terminology such as anticipate, believe, estimate, expect, intend, may,
could, possible, plan, project, will, forecast and similar words or expressions. Do not place undue reliance on forward-looking statements since actual results may vary
significantly.



Handleman cannot assure that it will have
adequate cash to complete an orderly liquidation of the Company.



Based on the Companys net asset balance as of May 1, 2010, the Company believes that it will have sufficient liquidity to fund the
Companys wind down related costs and provide payment in full to its creditors. These distributions are primarily dependent upon the resolution of all open items and periods with taxing authorities and the costs to fund existing pension
obligations. If the Company is unable to resolve outstanding tax issues in a reasonable period of time or if pension costs increase significantly, the Companys ability to settle its liabilities in full while incurring necessary wind down costs
would be in doubt. If the Company is able to generate cash proceeds in excess of what is needed to satisfy all of the Companys obligations, the Company will distribute any such proceeds to shareholders. Whether there will be any excess cash
proceeds for distribution to shareholders is subject to a number of material risks and uncertainties that may prevent any such distribution from occurring. Accordingly, while the Company believes that a cash distribution is possible, actual results
may differ from current estimates, perhaps



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materially, possibly resulting in no excess cash proceeds available for distribution to shareholders. In addition, as a result of an open IRS audit, the Company cannot predict at this time when
net assets will be available for distribution to creditors and shareholders.



Handleman cannot assure that the timing of distributions to creditors and shareholders will be as previously anticipated.



The Company has previously indicated that payments to unsecured creditors
and distributions to shareholders, if any, will be made mid-calendar 2010 and that such amounts would be based on the net asset position of the Company at the time of distribution. On November 6, 2009, H.R. 3548, the Worker, Homeownership, and
Business Assistance Act of 2009 was enacted. Although the Act deals principally with the extension of unemployment benefits and mortgage relief, it also extends to all businesses the five-year net operating loss carryback previously available only
to small businesses. The Act provides that a business of any size may elect to carry back net operating losses incurred in 2008 or 2009 (but not both) for three, four or five years. During the third quarter of fiscal 2010, Handleman Company
determined that it will carryback fiscal 2008 net operating losses and filed for a $10.4 million refund on Form 1139. This refund is expected to provide the Company with sufficient liquidity for payment in full to its creditors and allow for a
distribution to shareholders. The $10.4 million refund has been collected by the Company and the IRS began an examination of the tax returns giving rise to the refund in early fiscal 2011. As a result, the Company cannot predict at this time when
the net assets will be available for distribution to creditors and shareholders.



Handleman Company must resolve tax matters.



The Company is continuing to address on-going tax matters, including federal income taxes, state taxes and other taxing jurisdictions. Management
continually monitors factors that may result in changes to tax estimates and may require management to adjust its tax assets and liabilities, perhaps significantly, and record additional income tax expense or benefits.



Handleman cannot assure that there will not be any unanticipated
complications in the transitions of its businesses.



Handleman cannot assure that there will not be unanticipated complications related to the transition of its divested businesses. Handleman may be subject
to claims filed by customers, Anderson Merchandisers L.P. (Anderson), Tesco Stores Limited (Tesco), Fillpoint LLC (Fillpoint) and/or Mosaic Sales Solutions US Operations Co. LLC (Mosaic) related to the
sale of those businesses, settling of accounts receivable disputes regarding customer product returns, accounts payable disputes regarding vendor claims or other related party claims. These risks include potential accounts receivable disputes with
Handlemans former customers, accounts payable disputes with vendors and disputes with the music providers to which Handlemans former customers were transitioned.



The Companys decision to wind down all business operations has resulted
in the termination of employee relationships. Handleman is, therefore, subject to risk of employee lawsuits. While Handleman has made every effort to comply with laws related to these situations, there is a risk that an employee might assert that
Handleman terminated his/her relationship in violation of certain laws, and that Handleman is required to pay the employee damages related to the employment termination. Even if Handleman were to prevail in such matters, Handleman would have to
defend itself in matters related to employee rights and benefits.



Handleman must resolve matters related to its U.S. and Canadian pension plans.



Handleman Company has certain risks related to its defined-benefit pension
plans. Handlemans pension plans are at risk related to the current economic downturn. To the extent that Handlemans pension plans have investments in volatile instruments, Handleman is at risk that its pension plans will be under funded
at any given time. During fiscal 2009, Handleman took steps to immunize its U.S. pension plan, which is significantly larger than the Canadian pension plan, thereby removing a significant portion of the economic risk. Handleman has elected to
terminate its pension plans and plans to purchase a non-



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participating annuity contract for all participants in the U.S. pension plan upon regulatory approval, and either purchase non-participating annuity contracts or make lump sum payments to
participants in the Canadian pension plans following regulatory approval. These distributions and/or purchases will require a large amount of cash. The risk exists that the amounts accrued may be insufficient if market conditions continue to
fluctuate and if net assets of the Company are insufficient to pay unsecured creditors in full. The Company plans to begin the process of settling these plans upon completion of the IRS audit.



Handleman Company cannot provide assurance that shareholder distributions
will occur.



The Companys Board of Directors will
consider the appropriate application of the remaining cash balances, if any, including a distribution to shareholders after Handleman has settled all, or substantially all, of its obligations.



Handleman may eventually rely on outside consultants and advisors to
perform critical functions.



As Handleman progresses in the
wind down of operations, it may become more dependent on outside consultants and advisors to perform critical functions. While Handleman anticipates that it will maintain Handleman employees in certain critical accounting, finance and tax positions,
Handleman may have to rely on consultants, outside legal counsel and other contractors to perform day-to-day tasks. There is a risk that these non-Handleman employees will have interests and arrangements that may be different from the Companys
shareholders interests, including, but not limited to, other client priorities. Further, if the Company was unable to continue to employ qualified outside advisors and consultants to perform critical functions, the Company may be unable to
meet its regulatory reporting obligations in a timely manner and the system of internal accounting controls may not function as intended.



|         |  |                           |  | 
|-------- |  | ------------------------- |  | 
|Item 1B. |  | UNRESOLVED STAFF COMMENTS |  | 



Handleman Company does not have any unresolved staff comments to report.



|        |  |            |  | 
|------- |  | ---------- |  | 
|Item 2. |  | PROPERTIES |  | 



As of
May 1, 2010, Handleman Company has an unoccupied leased warehouse located in Indianapolis, Indiana, which lease expires in November 2010, and an unoccupied sales office in California, which lease expires in March 2013. The Company negotiated
settlements with the lessors in June 2010.



On February 12,
2010, the Company sold its 130,000 square foot corporate office building located in Troy, Michigan, and continues to occupy a portion of the building on a rent free basis through December 31, 2011.



|        |  |                   |  | 
|------- |  | ----------------- |  | 
|Item 3. |  | LEGAL PROCEEDINGS |  | 



See Note 11 of Notes to Consolidated Financial Statements for a discussion of the Companys contingencies.



Except as discussed in Note 11 of Notes to Consolidated Financial
Statements with respect to tax litigation, Handleman Company is not currently involved in any legal proceedings that are material or for which it does not believe it has adequate reserves. Any other legal proceedings in which the Company is involved
are routine legal matters that are incidental to the wind down of business operations. The Company establishes reserves for all claims and legal proceedings based on its best estimate of the amounts it expects to pay.



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##### Table of Contents

PART II



|        |  |                                                                                                              |  | 
|------- |  | ------------------------------------------------------------------------------------------------------------ |  | 
|Item 5. |  | MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES |  | 



On
May 6, 2009, Handleman Company petitioned the Circuit Court for Oakland County, State of Michigan, for an Order of Limited Supervision over the Liquidation of Handleman post-dissolution. On May 20, 2009, the court order was granted and
declared that shares of Handleman common stock will become non-transferable 30 days after notification to shareholders. Accordingly, Handleman Companys shares of common stock became non-transferable on June 20, 2009. As of June 20,
2009, the Company had 2,551 shareholders of record.



Effective
March 26, 2008, Handleman Companys stock began trading on the Pink Sheet Electronic Quotation Service, trading symbol HDLM.PK. There can be no assurance that the Companys common stock will continue to be quoted on the
Pink Sheet Electronic Quotation Service or any other service.



Below is a summary of the market price of the Companys common stock:



|        |  |                    |      |             |   |       |  |     |      |      |   |       |  |   |      |  |   |     
|------- |  | ------------------ | ---- | ----------- | - | ----- |  | --- | ---- | ---- | - | ----- |  | - | ---- |  | - | ----
|        |  | Fiscal Years Ended
|        |  | May 1, 2010        |      | May 2, 2009
|Quarter |  | Low                |      | High        |   | Close |  | Low |      | High |   | Close
|First   |  | $                  | 0.00 |             | $ | 0.05  |  | $   | 0.00 |      | $ | 0.68  |  | $ | 2.07 |  | $ | 1.38
|Second  |  |                    | 0.00 |             |   | 0.01  |  |     | 0.01 |      |   | 1.15  |  |   | 2.80 |  |   | 1.29
|Third   |  |                    | 0.01 |             |   | 0.26  |  |     | 0.16 |      |   | 0.13  |  |   | 1.37 |  |   | 0.14
|Fourth  |  |                    | 0.09 |             |   | 0.21  |  |     | 0.10 |      |   | 0.01  |  |   | 0.18 |  |   | 0.03



During the fourth quarter of fiscal 2007, the Company suspended indefinitely its quarterly cash dividends. Accordingly, no dividends were declared during
the past two fiscal years.



The share repurchase program, which
was authorized by the Companys Board of Directors on February 23, 2005, is no longer active as the Companys common shares are no longer transferable.



6



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##### Table of Contents

|        |  |                                      |  | 
|------- |  | ------------------------------------ |  | 
|Item 7. |  | MANAGEMENTS DISCUSSION AND ANALYSIS |  | 

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Companys fiscal year 2010 ended on May 1, 2010 and its fiscal
year 2009 ended on May 2, 2009. Both fiscal years consisted of 52 weeks.



At the Companys annual shareholders meeting on October 1, 2008, the Companys shareholders approved a Plan of Final Liquidation of
the Company. As a result of this approval, the Company adopted the liquidation basis of accounting as of October 5, 2008. This basis of accounting is appropriate when the liquidation of a company appears imminent and the net realizable value of
its assets is reasonably determinable. Under this basis of accounting, assets and liabilities are stated at their net realizable value, and estimated costs through the liquidation date are accrued for, to the extent reasonably determinable.



On May 5, 2009, Handleman Company filed a Certificate of
Dissolution with the Michigan Department of Energy, Labor and Economic Growth, Bureau of Commercial Services, Corporate Division. As a dissolved company, Handleman will continue its corporate existence, but will not conduct business, except for the
purpose of winding down its affairs. Under State of Michigan law, before making any distribution to shareholders, a dissolved corporation must pay or make provision for its non-barred, valid debts, including those obligations that arise after the
effective date of dissolution, but before the bar date and before the distribution. Accordingly, Handlemans activities are now limited to: selling, collecting or otherwise realizing the value of its remaining assets; making tax and other
regulatory filings; winding down the Companys remaining business activities; paying (or adequately providing for the payment) of all non-barred, valid creditor claims and obligations; and making a distribution to Handlemans shareholders.



The Company must complete the termination of the United States
(U.S.) and Canadian pension plans. Pursuant to Board of Directors approval on March 11, 2009 for the termination of the U.S. pension plan, the Company will terminate this pension plan and plans to purchase a non-participating
group annuity contract for all of its participants. The Canadian pension plan, which received Board of Directors approval for termination early in fiscal 2009, will be paid to participants, either by lump sum payout or through the purchase of an
annuity contract, dependent upon the participants selection of payment. These pension initiatives are expected to be completed, subject to regulatory approval and at the same payout percentage and at the same timing as other unsecured creditor
claims. The final settlement amounts of the U. S. and Canadian pension plans could differ from these estimates due to changes in market conditions, which could affect discount rates and returns on plan assets. The Company must also resolve tax
matters that may require management to adjust tax assets and liabilities, perhaps significantly. The Company plans to begin the process of settling these plans upon completion of the IRS audit.



On November 6, 2009, H.R. 3548, the Worker, Homeownership, and Business
Assistance Act of 2009 (the Act) was enacted. Although the Act deals principally with the extension of unemployment benefits and mortgage relief, it also extends, to all businesses, the five-year net operating loss carryback previously
available only to small businesses. The Act provides that a business of any size may elect to carry back net operating losses incurred in 2008 or 2009 (but not both) for three, four or five years. During the third quarter of fiscal 2010,
Handleman Company determined that it will carryback fiscal 2008 net operating losses and filed for a $10.4 million refund on Form 1139. On February 22, 2010, the Company received a refund in the amount of $10.4 million from the Internal Revenue
Service (IRS). This refund is expected to provide the Company with sufficient liquidity for payment in full to its creditors and allow for a distribution to shareholders. The Company was notified at the end of the fourth quarter of
fiscal 2010 that the IRS will examine the 2008 tax returns giving rise to the refund. The audit work began in early fiscal 2011 and it is uncertain when the audit will conclude.



Based on the Companys net asset balance as of May 1, 2010, the
Company believes that it will have sufficient liquidity to fund the Companys wind down related costs and provide payment in full to its creditors. These distributions are primarily dependent upon the resolution of all open items and periods
with taxing authorities and the costs to fund existing pension obligations. If the Company is unable to resolve outstanding tax issues in a reasonable period of time or if pension costs increase significantly, the Companys ability to settle
its liabilities in full while incurring necessary wind down costs would be in



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doubt. If the Company is able to generate cash proceeds in excess of what is needed to satisfy all of the Companys obligations, the Company will distribute any such proceeds to
shareholders. Whether there will be any excess cash proceeds for distribution to shareholders is subject to a number of material risks and uncertainties that may prevent any such distribution from occurring. Accordingly, while the Company believes
that a cash distribution is possible, actual results may differ from current estimates, perhaps materially, possibly resulting in no excess cash proceeds available for distribution to shareholders. In addition, as a result of the aforementioned IRS
audit, the Company cannot predict at this time, when net assets will be available for distribution to creditors and shareholders.



Payments during the liquidation period will be prioritized in the following hierarchy: (i) wind down related costs, including supplier costs
necessary to the wind down of the business, employee obligations such as on-going salaries, fringe benefits and retention costs; (ii) income tax payments and other regulatory filing fees; (iii) payment of unsecured valid creditor claims
and obligations, including the purchase of non-participating group annuity contracts to supplement the terminated U.S. and Canadian pension plans; and (iv) distribution to shareholders.



On May 6, 2009, Handleman Company petitioned the Circuit Court for
Oakland County, State of Michigan, for an Order of Limited Supervision over the Liquidation of Handleman post-dissolution. On May 20, 2009, the court order was granted and declared that shares of Handleman common stock became non-transferable
30 days after notification to shareholders. Accordingly, Handleman Companys common shares became non-transferable on June 20, 2009. This allows the Company to reduce costs during liquidation and maximize the liquidated value of the
Company for the benefit of its creditors and potential benefit to its shareholders. The Company will distribute proceeds, if any, to shareholders in proportion to their interests as of the close of business on June 20, 2009, the date of record.



Prior to the wind down of business operations, Handleman Company
operated as a category manager and distributor of prerecorded music and console video game hardware, software and accessories to leading retailers in the U.S., United Kingdom (UK) and Canada. During fiscal 2009, the Company completed
sales agreements for certain assets related to the U.S., UK and Canadian category management and distribution operations, as well as the Crave Entertainment Group, Inc. (Crave) video game operations and the REPS LLC (REPS)
field service business unit. All of those operations were wound down and the Company has no continuing involvement in those businesses. In accordance with accounting guidance, the U.S., Canada and Handleman UK music category management and
distribution businesses, as well as Crave and REPS, have been classified as discontinued operations in the Companys Consolidated Statement of Operations.



Critical Accounting Estimates



The Companys discussion and analysis of its financial condition and
results of operations are based upon the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial
statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosure of contingent assets and liabilities. The Company continually evaluates its
estimates and assumptions, which are based on historical experience, future expectations and other various factors that are believed to be reasonable under the circumstances. The results of these estimates and assumptions form the basis for making
judgments about the carrying values of certain assets and liabilities.



The following are the Companys critical accounting estimates under the liquidation basis of accounting:



Accrued Liquidation Costs



The Company adopted the liquidation basis of accounting as of
October 5, 2008. This basis of accounting is appropriate when the liquidation of a company appears imminent and the net realizable value of its assets is reasonably determinable. Under this basis of accounting, assets and liabilities are stated
at their net realizable value, and estimated costs through the liquidation date are accrued for, to the extent reasonably determinable.



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The transition from the going concern basis of accounting to the liquidation basis of accounting required
management to make significant estimates and judgments in many areas. The Company has approval from its Board of Directors to terminate its U.S. pension plan and purchase a non-participating group annuity contract for all U.S. plan participants. In
addition, the Company has terminated its Canadian pension plan and Canadian plan participants will be paid either by lump sum payout or through the purchase of an annuity. Accordingly, actuarial valuation analyses have been prepared quarterly to
determine the ultimate amounts owed to terminate the plans. Each valuation resulted in significant adjustments being made to the accrued liquidation costs related to the U.S. pension plan primarily as a result of fluctuations in the Pension Benefit
Guaranty Corporation (PBGC) discount rates. The termination value of the Canadian pension plan was recorded as of October 4, 2008, prior to the Companys transition to the liquidation basis of accounting and is re-evaluated
quarterly. The Company reviews, on a quarterly basis, all other remaining operating expenses and contractual commitments such as payroll and related expenses, lease termination costs, professional fees and other outside services to determine the
estimated costs to be incurred during the liquidation period. The Company expects most of the activities will cease by the end of calendar year 2011 and assumed costs through that date.



Pension Expense



Handleman Company will terminate its U.S. pension plan and plans to purchase
a non-participating group annuity contract for all plan participants at the same payout percentage and at the same timing as all other unsecured creditor claims. Under the liquidation basis of accounting, actuarial valuation analyses are prepared
quarterly to determine the termination value of the plan. In the U.S., the PBGC issues select and ultimate interest rates for the specific purpose of determining the present value of annuities in involuntary and distress terminations of
single-employer plans. The Company relies on these rates for their valuations. The valuations also utilize participant data and asset information provided by the Company.



The Company performed an actuarial valuation analysis assuming the pension plan would be terminated through the purchase of non-participating
group annuity contracts. This resulted in an estimated cost of $17,420,000 at May 2, 2009, which was included in accrued liquidation costs as of that date. The estimated cost to settle the U.S. pension plan as of May 2, 2009 was based upon
an average discount rate of 5.40%. As of May 2, 2009, the U.S. pension plan assets totaled $42,266,000 and the U.S. pension plan liability totaled $59,686,000.



The Company accrued $17,171,000 for its U.S. pension cost at May 1,
2010. This liability assumed an average discount rate of 4.61%. The U.S. pension plan assets at May 1, 2010 were $46,038,000 and the U.S. pension plan termination liability was $63,209,000 at May 1, 2010.



The May 1, 2010 termination value of the Companys pension plans is
affected by May 1, 2010 assumptions. Note that the following sensitivities may be asymmetric and are specific to fiscal 2010. They also may not be additive, so the impact of changing multiple factors simultaneously cannot be calculated by
combining the individual sensitivities shown. The effect of the indicated increase/(decrease) in selected factors for the Companys U.S. pension plan is shown below (in thousands of dollars):



|                        |  |                       |  |                                        
|----------------------- |  | --------------------- |  | ---------------------------------------
|                        |  | May 1, 2010          
|                        |  | PercentagePointChange |  | Impact onFiscal
2010Cost of Liquidation
|Discount rate           |  | +/-1 pt.              |  | $8,669 / $(10,904)                     
|Actual return on assets |  | +/-1 pt.              |  | $450 / $(450)                          



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The foregoing indicates that changes in the PBGC discount rate can have a significant effect on the
termination value of the Companys U.S. pension plan, and accordingly, the amount of net assets available for distribution to unsecured creditors and shareholders.



Handleman Company terminated its Canadian pension plan and will purchase either non-participating annuity contracts or make lump-sum payments
to participants in the Canadian pension plan following regulatory approval by the Financial Services Commission of Ontario. Final settlement will occur at the same payout percentage and same timing as all other unsecured creditors. The termination
value of the Canadian pension plan was $822,000 as of May 1, 2010.



Income Taxes



The Company has reported under the liquidation basis of accounting since October 5, 2008. Since this time the Company has not reported an income
statement and, as such, has not reported income tax expense.



Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial
reporting purposes and amounts recognized for income tax purposes. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the assets will not be realized. In assessing the likelihood of realization,
consideration is given to all available evidence including estimates of future taxable income and the character of income needed to realize future benefits.



Based on information available to date, the Company recorded any income tax receivable or payable for the ultimate tax amount owed to wind down the
Company. The calculation of current and deferred tax assets (including valuation allowances) and liabilities requires management to apply significant judgment related to the application of complex tax laws, changes in tax laws or related
interpretations, uncertainties related to the outcomes of tax audits and changes in the Companys operations or other facts and circumstances. Further, management must continually monitor changes in these factors. Changes in such factors may
result in changes to management estimates and could require the Company to adjust its tax assets and liabilities and record additional income tax expense or benefits. Handleman Company makes assumptions about individual tax positions before any part
of the related benefit can be recognized in its financial statements. A company must consider whether it is more likely than not that a tax position will be sustained upon examination by a taxing authority. Significant judgment is required in
assessing the timing and amounts of deductible and taxable items. The Company establishes reserves when, despite its belief that its tax return positions are supportable, it is determined that certain positions may be successfully challenged by the
taxing authorities. When facts and circumstances change, the Company adjusts these reserves through its provision for income taxes.



The Companys estimates of tax implications related to the liquidation of the Company are subject to change, perhaps significantly, as the Company
continues to finalize tax matters. Accordingly, the amount of liability, if any, will be included in the Companys financial statements as changes in estimates occur.



Results of Operations for the Five Months Ended October 4, 2008 (Fiscal 2009)



Unless otherwise noted, the following discussion relates only to results
from continuing operations, which primarily includes the Companys corporate function.



Revenues and direct product costs for the five-months ended October 4, 2008 presented in the Companys Consolidated Statement of Operations are
classified in discontinued operations because all operations of the Company have ceased.



Selling, general and administrative expenses were $26.8 million for the five-month period ended October 4, 2008.



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Loss before interest expense, investment income and income taxes (operating loss) was $26.8
million for the five-month period ended October 4, 2008.



Interest expense was $3.7 million for the five-month period ended October 4, 2008.



Investment income was $0.1 million for the
five-month period ended October 4, 2008.



Income tax benefit was $0.7 million for the five-month period ended October 4, 2008.



The Company had a net loss from continuing operations of $29.6 million, or
$1.45 per diluted share, for the first five months of fiscal 2009.



Liquidity and Capital Resources



As a result of Handleman Companys filing of a Certificate of
Dissolution, its activities are now limited to: selling, collecting or otherwise realizing the value of its remaining assets; making tax and other regulatory filings; winding down the Companys remaining business activities; paying (or
adequately providing for the payment) of all non-barred, valid creditor claims and obligations; and making a distribution to Handlemans shareholders.



Based on the Companys net asset balance as of May 1, 2010, the Company believes proceeds from the liquidation of assets will be sufficient to
provide payment in full to its creditors; however, there can be no assurances. Payments are estimated as follows (in thousands of dollars):



|                                                                                        |  |                  |        |                     |     |   |                                       |   |       
|--------------------------------------------------------------------------------------- |  | ---------------- | ------ | ------------------- | --- | - | ------------------------------------- | - | ------
|Category                                                                                |  | TotalLiabilities |        | ProrationPercentage |     |   | Total AssetsAvailable forDistribution
|Wind down related costs                                                                 |  | $                | 8,080  |                     | 100 | % |                                       | $ | 8,080 
|Taxes (income and other)                                                                |  |                  | 1,474  |                     | 100 | % |                                       |   | 1,474 
|Unsecured creditor claims, including termination costs for the pension plans of $17,993 |  |                  | 27,237 |                     | 100 | % |                                       |   | 27,237
|                                                                                        |  |                  |        |                     |     |   |                                       |   |       
|Total liabilities                                                                       |  | $                | 36,791 |                     |     |   |                                       | $ | 36,791
|                                                                                        |  |                  |        |                     |     |   |                                       |   |       
|Available for shareholder distribution                                                  |  |                  |        |                     |     |   |                                       |   | 1,667 
|                                                                                        |  |                  |        |                     |     |   |                                       |   |       
|Total assets                                                                            |  |                  |        |                     |     |   |                                       | $ | 38,458
|                                                                                        |  |                  |        |                     |     |   |                                       |   |       



These projected payments are based on significant estimates and judgments. Through the liquidation period, if the Company is able to generate cash
proceeds in excess of what is needed to satisfy all the Companys obligations, the Company will distribute any such proceeds to shareholders. The actual amount and timing of future liquidating distributions, if any, to shareholders is dependent
upon the resolution of all open items and periods with taxing authorities; the ultimate settlement amounts of the Companys liabilities and obligations, in particular the Companys pension obligations; actual costs incurred in connection
with carrying out the Companys Plan of Final Liquidation, including administrative costs during the liquidation period; and market fluctuations in the discount rate as it relates to the settlement of pension plans. In addition, the timing of
cash distributions is subject to the IRS examination of the net operating loss carryback and related federal income tax refund. The aggregate amount of distributions to shareholders is currently expected to be approximately $0.08 per share of common
stock based on net assets as of May 1, 2010; however, the actual amount of cash remaining for distribution to shareholders following completion of the liquidation, the dissolution of the Company and the examination by the IRS of the income tax
refund could vary significantly from current estimates and could even result in no excess cash available for distribution.



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On February 12, 2010, the Company closed on the sale of its corporate headquarters building in Troy,
Michigan for a price of $3.0 million. Cash received at closing totaled $2.7 million; the Company received an additional $0.2 million of the selling price on January 9, 2010.



Included in the net assets of $1.7 million as of May 1, 2010, was $35.2
million of cash and cash equivalents with original maturities of less than six months. The Company believes, based upon its value of net assets as of May 1, 2010, that it will have sufficient funds to settle its liabilities and obligations in
full with its creditors. The Company also believes it is possible that there will be excess cash for distribution to the Companys shareholders. These assumptions are subject to change primarily based upon the ultimate settlement of
liabilities, particularly the Companys pension plans and taxes.



Net cash provided from operating activities for the five months ended October 4, 2008 was $42.6 million. The net cash changes in operating assets and
liabilities was primarily related to the reduction in accounts receivable and merchandise inventories of $120.7 million and $23.4 million, respectively. These changes were offset, in part, by a decrease in accounts payable of $62.2 million, an
increase in other operating assets of $6.8 million and a decrease in other operating liabilities of $1.4 million.



Net cash provided from investing activities for the five months ended October 4, 2008 was $48.7 million, consisting primarily of cash proceeds of
$19.5 million related to the sale of certain U.S. music inventory and Wal-Mart fixtures to Anderson, $15.9 million in proceeds related to the sale of Canadian music inventory and Wal-Mart Canada fixtures to Anderson and $16.4 million in proceeds
related to the sale of fixed assets as part of the sale of the Tesco business. The Company also received $1.3 million in proceeds which was previously held in escrow at the time Handleman had purchased Crave in November 2005. These cash proceeds
were offset, in part, by cash payments related to software and development costs and acquired rights of $4.0 million.



Net cash used by financing activities for the five months ended October 4, 2008 was $66.3 million. This use of cash was predominately due to net debt
repayments of $63.7 million as a result of the Company paying all outstanding debt under its credit facility and incurring $2.5 million in financing related fees.



New Accounting Pronouncements



Although many new accounting pronouncements were issued during
fiscal 2010, the following pronouncements were applicable to the Company when considering the liquidation basis of accounting.



In May 2009, the FASB issued SFAS No. 165, Subsequent Events. This Statement establishes general standards of accounting for and
disclosures of events that occur after the balance sheet date, but before financial statements are issued or are available to be issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for
that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and as such, the Company applied this Statement in its liquidation presentation in the first quarter of fiscal 2010. In February 2010, the
Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-09, Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU
No. 2010-09 removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated. Managements responsibility to evaluate subsequent events through the date of issuance remains unchanged. The
adoption of these pronouncements did not have a material impact on the Companys consolidated financial statements.



In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162. SFAS No. 168 identifies the sources of accounting principles and the framework for selecting the principles
used in the preparation of financial statements of nongovernmental entities, which are presented in conformity with generally accepted accounting principles (GAAP) in the United States. It establishes the FASB Accounting Standards
Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS No. 168 was effective for interim or
annual financial periods ending after September 15, 2009. Adoption of this pronouncement did not have a material impact on the Companys consolidated financial statements.



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Other Information



Except as discussed in Note 11 of Notes to Consolidated Financial
Statements, the Company is not currently involved in any legal proceedings that are material or for which it does not believe it has adequate reserves. Any other legal proceedings in which the Company is involved are routine legal matters that are
incidental to the wind down of business operations. The Company establishes reserves for all claims and legal proceedings based on its best estimate of the amounts it expects to pay.



The Company has no significant investments that are accounted for under the
equity method in accordance with accounting principles generally accepted in the United States of America. Accordingly, there are no liabilities associated with investments accounted for under the equity method that would be considered material to
the Company. In addition, the Company had no significant off-balance sheet arrangements as of May 1, 2010.



On November 27, 2007, the Board of Directors appointed Mr. Albert A. Koch as Handlemans President and Chief Executive Officer through
Handlemans engagement of AP Services, LLC (APS). AP Services is affiliated with AlixPartners, a financial advisory and consulting firm, where Mr. Koch is a Vice Chairman, Managing Director and Partner. In addition to an hourly
rate and time commitment for services, Handlemans agreement, as amended, provides that Handleman will pay APS a success fee based on 5% (currently $83,000) of the fair value of cash and/or other assets that is distributed to shareholders if
such a distribution is approved by the Companys Board of Directors. The success fee shall be paid in cash, concurrent with the date or dates that distributions are made to Handleman Companys shareholders. All APS staffing was approved,
in advance of their joining Handleman, by the CEO Governing Committee, which was a Committee of the Board that was formed to oversee the AlixPartners engagement. The Company now engages Mr. Koch on a part-time basis. All invoices from
AlixPartners to the Company are reviewed and approved by a member of the Board of Directors prior to their payment. In accordance with accounting guidance, this relationship is viewed as a related party transaction since the APS consultants may
control or significantly influence the management and operating policies of the Company.



The Company has not engaged in any other related party transactions, which would have had a material effect on the Companys financial position,
results of operations or cash flows.



On March 10, 2010, the
Companys Board of Directors approved a reduction in work hours and a corresponding decrease in the annual salary, management bonus and retention bonus for Rozanne Kokko, the Companys Senior Vice President and Chief Financial Officer.
This reduction is due to the reduced workload during the wind down period. Ms. Kokko remains eligible for a discretionary bonus upon her final termination date.



During the first quarter of fiscal 2010, the Companys two remaining
members of its Board of Directors agreed to discontinue receiving director fees for their services.



* * * * * * * * * *



This document contains forward-looking statements, which are not historical facts. These statements involve risks and uncertainties, and are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Actual results, events and performance could differ materially from those contemplated by these forward-looking statements including, without limitation,
resolving open items and periods with taxing authorities, maintaining sufficient liquidity to fund wind down operations, retaining key personnel, satisfactory resolution of any outstanding claims or claims which may arise, and other factors
discussed in this document and those detailed from time to time in the Companys filings with the Securities and Exchange Commission. Handleman Company notes that the preceding conditions are not a complete list of risks and uncertainties. The
Company undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date of this document.



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|Item 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|------- | -------------------------------------------



The following financial statements and supplementary data are filed as a part of this report:



Report of Independent Registered Public Accounting Firm



Consolidated Statements of Changes in Net Assets  For the Period
October 5, 2008 to May 1, 2010



Consolidated Statements
of Net Assets as of May 1, 2010 and May 2, 2009



Consolidated Statement of Operations  For the Five-Month Period Ended October 4, 2008



Consolidated Statement of Shareholders Equity  For the
Five-Month Period Ended October 4, 2008



Consolidated
Statement of Cash Flows  For the Five-Month Period Ended October 4, 2008



Notes to Consolidated Financial Statements



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



Board of Directors and Shareholders

Handleman Company



We have audited the accompanying consolidated statement of net assets of Handleman Company and subsidiaries (the Company) as of May 1,
2010 and May 2, 2009, and the related consolidated statement of changes in net assets for the year ended May 1, 2010 and for the period October 5, 2008 to May 2, 2009. We have audited the accompanying consolidated statements of
operations, shareholders equity and cash flows for the period May 4, 2008 to October 4, 2008. Our audits of the basic financial statements included the financial statement schedule listed in the index appearing under Item 15
(a)(2). These financial statements and financial statement schedule are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our
audits.



We conducted our audits in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



As
discussed in Note 1 to the consolidated financial statements, the shareholders of the Company approved a plan of liquidation on October 1, 2008. As a result, the Company changed its basis of accounting from the going concern basis to a
liquidation basis effective October 5, 2008.



In our opinion,
the consolidated financial statements referred to above present fairly, in all material respects, the consolidated net assets of Handleman Company and subsidiaries as of May 1, 2010 and May 2, 2009, the consolidated changes in net assets
for the year ended May 1, 2010 and for the period October 5, 2008 to May 2, 2009, and the results of their operations and their cash flows for the period May 4, 2008 to October 4, 2008, in conformity with accounting
principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects,
the information set forth therein.



|                      
|----------------------
|                      
|/s/ GRANT THORNTON LLP
|Southfield, Michigan  
|Date: June 17, 2010   



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HANDLEMAN COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETS

FOR THE PERIOD OCTOBER 5, 2008 TO MAY 1, 2010

(LIQUIDATION BASIS)

(in thousands of dollars)



|                                                        |  |   |         |  
|------------------------------------------------------- |  | - | ------- | -
|Shareholders equity at October 4, 2008                 |  | $ | 67,226  |  
|Liquidation basis adjustments:                          |  |   |         |  
|Adjust assets and liabilities to fair value             |  |   | (6,143  | )
|Accrued liquidation costs                               |  |   | (30,669 | )
|                                                        |  |   |         |  
|Net assets (liquidation basis) as of October 5, 2008    |  |   | 30,414  |  
|                                                        |  |   |         |  
|Net revenues earned from October 5, 2008 to May 2, 2009 |  |   | 81,789  |  
|Net costs incurred from October 5, 2008 to May 2, 2009  |  |   | (82,531 | )
|Adjust assets and liabilities to fair value             |  |   | (22,492 | )
|Adjustment to accrued liquidation costs - pension       |  |   | (5,912  | )
|Adjustment to accrued liquidation costs - other         |  |   | (7,143  | )
|                                                        |  |   |         |  
|Net liabilities (liquidation basis) as of May 2, 2009   |  |   | (5,875  | )
|                                                        |  |   |         |  
|Adjust assets and liabilities to fair value             |  |   | 671     |  
|Adjustment for estimated federal income tax refund      |  |   | 9,288   |  
|Adjustment to accrued liquidation costs - pension       |  |   | 249     |  
|Adjustment to accrued liquidation costs - other         |  |   | (2,666  | )
|                                                        |  |   |         |  
|Net assets (liquidation basis) as of May 1, 2010        |  | $ | 1,667   |  
|                                                        |  |   |         |  



The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

HANDLEMAN COMPANY

CONSOLIDATED STATEMENTS OF NET ASSETS

AS OF MAY 1, 2010 AND MAY 2, 2009

(LIQUIDATION BASIS)

(in thousands of dollars)



|                                                                       |  |            |        |            |   |        |  
|---------------------------------------------------------------------- |  | ---------- | ------ | ---------- | - | ------ | -
|                                                                       |  | May 1,2010 |        | May 2,2009 |  
|ASSETS                                                                 |  |            |        |            |   |        |  
|Current assets:                                                        |  |            |        |            |   |        |  
|Cash and cash equivalents                                              |  | $          | 35,194 |            | $ | 24,526 |  
|Accounts receivable and other                                          |  |            | 1,272  |            |   | 7,083  |  
|Other current assets                                                   |  |            | 1,992  |            |   | 10,877 |  
|                                                                       |  |            |        |            |   |        |  
|Total assets                                                           |  | $          | 38,458 |            | $ | 42,486 |  
|                                                                       |  |            |        |            |   |        |  
|LIABILITIES                                                            |  |            |        |            |   |        |  
|Current liabilities:                                                   |  |            |        |            |   |        |  
|Accounts payable                                                       |  | $          | 65     |            | $ | 3,205  |  
|Accrued and other liabilities                                          |  |            | 11,831 |            |   | 13,055 |  
|Accrued liquidation costs                                              |  |            | 24,895 |            |   | 32,101 |  
|                                                                       |  |            |        |            |   |        |  
|Total liabilities                                                      |  | $          | 36,791 |            | $ | 48,361 |  
|                                                                       |  |            |        |            |   |        |  
|Net assets (liabilities) available to shareholders - liquidation basis |  | $          | 1,667  |            | $ | (5,875 | )
|                                                                       |  |            |        |            |   |        |  



The accompanying notes are an integral part of the consolidated financial statements.



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##### Table of Contents

HANDLEMAN COMPANY

CONSOLIDATED STATEMENT OF OPERATIONS

FOR THE FIVE-MONTH PERIOD ENDED OCTOBER 4, 2008

(GOING CONCERN BASIS)

(in thousands of dollars except per share data)



|                                                                                                                   |  |                                        |         |  
|------------------------------------------------------------------------------------------------------------------ |  | -------------------------------------- | ------- | -
|                                                                                                                   |  | For theFive MonthsEndedOctober 4, 2008 |        
|Revenues                                                                                                           |  | $                                      | 20      |  
|Costs and expenses:                                                                                                |  |                                        |         |  
|Selling, general and administrative expenses                                                                       |  |                                        | (26,808 | )
|                                                                                                                   |  |                                        |         |  
|Operating loss                                                                                                     |  |                                        | (26,788 | )
|Interest expense                                                                                                   |  |                                        | (3,678  | )
|Investment income                                                                                                  |  |                                        | 127     |  
|                                                                                                                   |  |                                        |         |  
|Loss before income taxes                                                                                           |  |                                        | (30,339 | )
|Income tax benefit                                                                                                 |  |                                        | 699     |  
|                                                                                                                   |  |                                        |         |  
|Net loss from continuing operations                                                                                |  | $                                      | (29,640 | )
|                                                                                                                   |  |                                        |         |  
|Discontinued operations (Note 4):                                                                                  |  |                                        |         |  
|Loss from operations of discontinued subsidiaries (including net loss on disposal of subsidiary assets of
$24,478) |  |                                        | (15,350 | )
|Income tax expense                                                                                                 |  |                                        | (5,788  | )
|                                                                                                                   |  |                                        |         |  
|Net loss from discontinued operations                                                                              |  | $                                      | (21,138 | )
|                                                                                                                   |  |                                        |         |  
|Net loss                                                                                                           |  | $                                      | (50,778 | )
|                                                                                                                   |  |                                        |         |  
|Loss per share:                                                                                                    |  |                                        |         |  
|Continuing operations - basic                                                                                      |  | $                                      | (1.45   | )
|                                                                                                                   |  |                                        |         |  
|Continuing operations - diluted                                                                                    |  | $                                      | (1.45   | )
|                                                                                                                   |  |                                        |         |  
|Discontinued operations - basic                                                                                    |  | $                                      | (1.03   | )
|                                                                                                                   |  |                                        |         |  
|Discontinued operations - diluted                                                                                  |  | $                                      | (1.03   | )
|                                                                                                                   |  |                                        |         |  
|Net loss - basic                                                                                                   |  | $                                      | (2.48   | )
|                                                                                                                   |  |                                        |         |  
|Net loss - diluted                                                                                                 |  | $                                      | (2.48   | )
|                                                                                                                   |  |                                        |         |  
|Weighted average number of shares outstanding during the period                                                    |  |                                        |         |  
|Basic                                                                                                              |  |                                        | 20,472  |  
|                                                                                                                   |  |                                        |         |  
|Diluted                                                                                                            |  |                                        | 20,472  |  
|                                                                                                                   |  |                                        |         |  



The accompanying notes are an integral part of the consolidated financial statements.



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HANDLEMAN COMPANY

CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY

FOR THE FIVE-MONTH PERIOD ENDED OCTOBER 4, 2008

(GOING CONCERN BASIS)

(in thousands of dollars)



|                                                                    |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  
|------------------------------------------------------------------- |  | ------------ | - | -------------------------------------------- | ------ | --- | ---------------------- | - | ------- | ------------------------ |  | - | ---------------- | - |  | ------------------------ | --- | - |  | - | ------- | - |  | - | ------- | -
|                                                                    |  | Common Stock |   | Accumulated OtherComprehensive Income (Loss) |        |     |                        |   |         |                          |  |   |                  |  
|                                                                    |  |              |   | ForeignCurrencyTranslationAdjustment         |        |     | EmployeeBenefitRelated |   |         | AdditionalPaid-inCapital |  |   | RetainedEarnings |   |  | TotalShareholdersEquity |    
|                                                                    |  | SharesIssued |   |                                              | Amount |     |                        |   |         |                         
|May 3, 2008                                                         |  | 20,464       |   |                                              | $      | 205 |                        | $ | 21,441  |                          |  | $ | (4,342           | ) |  | $                        | 788 |   |  | $ | 123,581 |   |  | $ | 141,673 |  
|Net loss                                                            |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   | (50,778 | ) |  |   | (50,778 | )
|Adjustment for foreign currency translation, net of tax of $(2,301) |  |              |   |                                              |        |     |                        |   | (21,441 | )                        |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   | (21,441 | )
|Employee benefit plan related adjustment, net of tax of $1,208      |  |              |   |                                              |        |     |                        |   |         |                          |  |   | (2,261           | ) |  |                          |     |   |  |   |         |   |  |   | (2,261  | )
|                                                                    |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  
|Comprehensive loss, net of tax                                      |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   | (74,480 | )
|                                                                    |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  
|Stock-based compensation:                                           |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  
|Performance shares/units                                            |  | 67           |   |                                              |        |    |                        |   |         |                          |  |   |                  |   |  |                          | (73 | ) |  |   |         |   |  |   | (73     | )
|Restricted stock and other                                          |  | (21          | ) |                                              |        |    |                        |   |         |                          |  |   |                  |   |  |                          | 106 |   |  |   |         |   |  |   | 106     |  
|                                                                    |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  
|October 4, 2008                                                     |  | 20,510       |   |                                              | $      | 205 |                        | $ |        |                          |  | $ | (6,603           | ) |  | $                        | 821 |   |  | $ | 72,803  |   |  | $ | 67,226  |  
|                                                                    |  |              |   |                                              |        |     |                        |   |         |                          |  |   |                  |   |  |                          |     |   |  |   |         |   |  |   |         |  



The accompanying notes are an integral part of the consolidated financial statements.



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##### Table of Contents

HANDLEMAN COMPANY

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE FIVE-MONTH PERIOD ENDED OCTOBER 4, 2008

(GOING CONCERN BASIS)

(in thousands of dollars)



|                                                                                  |  |                                        |          |  
|--------------------------------------------------------------------------------- |  | -------------------------------------- | -------- | -
|                                                                                  |  | For theFive MonthsEndedOctober 4, 2008 |         
|Cash flows from operating activities:                                             |  |                                        |          |  
|Net loss                                                                          |  | $                                      | (50,778  | )
|                                                                                  |  |                                        |          |  
|Adjustments to reconcile net loss to net cash provided from operating activities: |  |                                        |          |  
|Depreciation                                                                      |  |                                        | 2,126    |  
|Amortization of definite-lived intangible assets                                  |  |                                        | 2,630    |  
|Recoupment of development costs/licensed rights                                   |  |                                        | 1,533    |  
|Amortization of financing related fees                                            |  |                                        | 5,581    |  
|Net loss on disposal of subsidiary assets                                         |  |                                        | 24,478   |  
|Goodwill impairment adjustment                                                    |  |                                        | (1,294   | )
|Loss on disposal of property and equipment                                        |  |                                        | 88       |  
|Foreign currency translation adjustment                                           |  |                                        | (15,598  | )
|Stock-based compensation                                                          |  |                                        | 96       |  
|Changes in operating assets and liabilities:                                      |  |                                        |          |  
|Decrease in accounts receivable                                                   |  |                                        | 120,714  |  
|Decrease in merchandise inventories                                               |  |                                        | 23,395   |  
|Increase in other operating assets                                                |  |                                        | (6,801   | )
|Decrease in accounts payable                                                      |  |                                        | (62,208  | )
|Decrease in other operating liabilities                                           |  |                                        | (1,396   | )
|                                                                                  |  |                                        |          |  
|Total adjustments                                                                 |  |                                        | 93,344   |  
|                                                                                  |  |                                        |          |  
|Net cash provided from operating activities                                       |  |                                        | 42,566   |  
|                                                                                  |  |                                        |          |  
|Cash flows from investing activities:                                             |  |                                        |          |  
|Additions to property and equipment                                               |  |                                        | (553     | )
|Software development costs and acquired rights                                    |  |                                        | (4,026   | )
|Proceeds from sale of subsidiary assets                                           |  |                                        | 51,778   |  
|Adjustment of cash investment in Crave Entertainment Group                        |  |                                        | 1,294    |  
|Proceeds from disposition of properties and equipment                             |  |                                        | 239      |  
|                                                                                  |  |                                        |          |  
|Net cash provided from investing activities                                       |  |                                        | 48,732   |  
|                                                                                  |  |                                        |          |  
|Cash flows from financing activities:                                             |  |                                        |          |  
|Issuances of debt                                                                 |  |                                        | 176,472  |  
|Repayments of debt                                                                |  |                                        | (240,178 | )
|Financing related fees                                                            |  |                                        | (2,540   | )
|Cash payments from stock-based compensation plans                                 |  |                                        | (62      | )
|                                                                                  |  |                                        |          |  
|Net cash used by financing activities                                             |  |                                        | (66,308  | )
|                                                                                  |  |                                        |          |  
|Effect of exchange rate changes on cash                                           |  |                                        | (2,423   | )
|Net increase cash and cash equivalents                                            |  |                                        | 22,567   |  
|Cash and cash equivalents at beginning of year                                    |  |                                        | 1,043    |  
|                                                                                  |  |                                        |          |  
|Cash and cash equivalents at end of period                                        |  | $                                      | 23,610   |  
|                                                                                  |  |                                        |          |  



The accompanying notes are an integral part of the consolidated financial statements.



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##### Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

---



Unless otherwise noted, the following Notes to Consolidated Financial Statements relate only to
results from continuing operations.



1. Basis of Presentation



At the annual shareholders meeting on October 1, 2008, the Companys shareholders approved a Plan of Final Liquidation of the Company and
on May 5, 2009, the Company filed a Certificate of Dissolution with the State of Michigan. Through the liquidation period, if the Company is able to generate cash proceeds in excess of what is needed to satisfy all the Companys
obligations, the Company will distribute any such proceeds to shareholders. The actual amount and timing of future liquidating distributions, if any, to shareholders is dependent upon the resolution of all open items and periods with taxing
authorities; the ultimate settlement amounts of the Companys liabilities and obligations, in particular the Companys pension obligations; actual costs incurred in connection with carrying out the Companys Plan of Final Liquidation,
including administrative costs during the liquidation period; and market fluctuations in the discount rate as it relates to the settlement of pension plans. In addition, the timing of cash distributions is subject to the Internal Revenue Service
(IRS) examination of the net operating loss carryback and related federal income tax refund, as discussed below.



As a result of the Companys shareholders approval of the Plan of Final Liquidation, the Company adopted the liquidation basis of accounting as
of October 5, 2008, which was the beginning of the fiscal month closest to the shareholders approval date.



The consolidated financial statements for the period ending October 4, 2008 were prepared on the going concern basis of accounting, which
contemplated realization of assets and satisfaction of liabilities in the normal course of business. In the opinion of management, the accompanying Consolidated Statement of Operations, Shareholders Equity and Cash Flows contain all
adjustments, including normal recurring adjustments, necessary to present fairly the results of operations and changes in cash flows for the five months then ended on a going concern basis.



Liquidation Basis of Accounting



The liquidation basis of accounting is appropriate when the liquidation of a
company appears imminent and the net realizable value of its assets is reasonably determinable. Under this basis of accounting, assets are stated at their net realizable value, liabilities are stated at their estimated settlement amounts, and
estimated costs through the liquidation date are provided to the extent reasonably determinable.



The Company is required to make significant estimates and exercise judgment in determining accrued liquidation costs. During fiscal 2010, the Company
accrued costs expected to be incurred in liquidation and recorded payments made related to the accrued liquidation costs as follows (in thousands of dollars):



|                          |  |                      |        |                       |   |        |          |  |   |                       |   |  |   |       
|------------------------- |  | -------------------- | ------ | --------------------- | - | ------ | -------- |  | - | --------------------- | - |  | - | ------
|Accrued Liquidation Costs |  | As BookedMay 
2,2009 |        | AdjustmentstoReserves |   |        | Payments |  |   | Balance atMay 
1,2010
|U.S. pension plan costs   |  | $                    | 17,420 |                       | $ | (249   | )        |  | $ |                      |   |  | $ | 17,171
|Outside services          |  |                      | 3,979  |                       |   | 2,458  |          |  |   | (3,508                | ) |  |   | 2,929 
|Contractual commitments   |  |                      | 4,506  |                       |   | (617   | )        |  |   | (1,610                | ) |  |   | 2,279 
|Payroll related costs     |  |                      | 3,661  |                       |   | 1 ,007 |          |  |   | (3,504                | ) |  |   | 1,164 
|Other                     |  |                      | 2,535  |                       |   | (182   | )        |  |   | (1,001                | ) |  |   | 1,352 
|                          |  |                      |        |                       |   |        |          |  |   |                       |   |  |   |       
|Total                     |  | $                    | 32,101 |                       | $ | 2,417  |          |  | $ | (9,623                | ) |  | $ | 24,895
|                          |  |                      |        |                       |   |        |          |  |   |                       |   |  |   |       



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



The Company has a qualified defined benefit pension plan that covers substantially all full-time United
States (U.S.) employees. The Company performed an actuarial valuation analysis assuming the pension plan would be terminated through the purchase of non-participating group annuity contracts. This resulted in an estimated cost of
$17,171,000 at May 1, 2010, which was included in accrued liquidation costs as of that date. The estimated cost to settle the U.S. pension plan as of May 1, 2010 was based upon an average discount rate of 4.61% derived from interest rates
published by the Pension Benefit Guaranty Corporation (PBGC) for the specific purpose of determining the present value of annuities in involuntary and distress terminations of single-employer plans. As of May 1, 2010, the U.S.
pension plan assets totaled $46,038,000 and the U.S. pension plan liability totaled $63,209,000.



The estimated termination cost for the Canadian pension plan as of May 1, 2010 totaling $822,000 is included in Accrued and other liabilities in the
Companys Consolidated Statements of Net Assets.



The final
settlement amounts of the U.S. and Canadian pension plans could differ from these estimates due to changes in market conditions that could affect discount rates and returns on plan assets.



On a quarterly basis, the Company reviews all other remaining operating
expenses and contractual commitments such as payroll and related expenses, lease termination costs, professional fees and other outside services to determine the estimated costs to be incurred during the liquidation period. As a result of a federal
income tax net operating loss carryback filed in the third quarter of fiscal 2010 and the related IRS examination, the Company now anticipates that wind down related costs will extend at least through calendar 2011 at a minimum. Adjustments to the
accrued costs of liquidation were made in the second quarter of fiscal 2010 to reflect these additional costs. See below for additional information related to this federal income tax refund.



The estimate of outside services in the accrued costs of liquidation was
increased by $2,458,000 during fiscal 2010. The Company increased its accrual for outside services by $770,000 for legal, audit, Securities and Exchange Commission (SEC) filing fees and other miscellaneous charges to reflect wind down
costs through calendar 2011. The Company also increased outside services in the accrued costs of liquidation by $630,000 due to estimated insurance and legal costs being higher than anticipated due to the wind down occurring at a slower pace than
previously forecasted and by $484,000 for pension-related costs including actuarial and plan administration fees. In addition, the Company accrued a success fee of $83,000 for AP Services, LLC (APS) in accordance with that agreement and
reclassified a $311,000 accrual from other to outside services.



The estimate of contractual commitments in the accrued cost of liquidation was decreased by $617,000 during fiscal 2010 primarily due to creditor claim
reconciliations and negotiated early payment settlements.



The
estimate of payroll related costs in the accrued costs of liquidation was increased by $1,007,000 during fiscal 2010. Payroll and related expenses were also expected to occur through fiscal 2010. However, as a result of the federal income tax refund
and the related examination by the IRS, adjustments of $343,000 were made to extend payroll and related expenses through calendar 2011. In addition, $599,000 was accrued due to payroll and related expenses being higher than forecasted due to the
wind down occurring at a slower pace than previously forecasted and an accrual for $187,000 was reclassified from outside services to payroll. These additions were offset in part by a net decrease of $122,000 in accrued medical costs. The Company
accrued for higher than anticipated medical costs for a self-insured medical plan covering select severed employees and previous employees that have elected COBRA coverage; these costs were offset in part as the Company moved from the self-insured
medical plan to an insured regional medical plan for eligible employees in the third quarter of fiscal 2010.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



Transition to Liquidation Basis of Accounting  Fiscal 2009



The transition from the going concern basis of accounting to the liquidation
basis of accounting required management to make significant estimates and judgments. The recording of assets at estimated net realizable value and liabilities at estimated settlement amounts under the liquidation basis of accounting required the
Company to record the following adjustments as of October 5, 2008, the date of adoption of the liquidation basis of accounting (in thousands of dollars):



|                                       |  |        |      
|-------------------------------------- |  | ------ | -----
|Adjustments of assets and
liabilities: |  | Amount
|Prepaid U.S. pension plan adjustment   |  | $      | 3,248
|Write down of real estate              |  |        | 1,435
|Write down of other fixed assets       |  |        | 689  
|Prepaid assets adjustment              |  |        | 771  
|                                       |  |        |      
|Total                                  |  | $      | 6,143
|                                       |  |        |      



The adjustment of prepaid pension costs of $3,248,000 resulted from the write off of prepaid pension related balances in the U.S. and Canada, recorded
under the going concern basis of accounting.



The Company reduced
the carrying value of its corporate headquarters by $1,435,000 to its liquidation value based on recent sales of similar properties and current market conditions.



The adjustments of other fixed assets (computer software) and prepaid assets
in the amounts of $689,000 and $771,000, respectively, were the result of these assets not having a net realizable value upon the Companys adoption of liquidation accounting.



During fiscal 2009, the Company accrued costs expected to be incurred in
liquidation and recorded payments made related to the accrued liquidation costs as follows (in thousands of dollars):



|                          |  |                          |        |                       |   |          |  |   |                       |   |  |   |       
|------------------------- |  | ------------------------ | ------ | --------------------- | - | -------- |  | - | --------------------- | - |  | - | ------
|Accrued Liquidation Costs |  | As BookedOctober 
5,2008 |        | AdjustmentstoReserves |   | Payments |  |   | Balance atMay 
2,2009
|U.S. pension plan costs   |  | $                        | 11,508 |                       | $ | 5,912    |  | $ |                      |   |  | $ | 17,420
|Outside services          |  |                          | 6,701  |                       |   | 849      |  |   | (3,571                | ) |  |   | 3,979 
|Contractual commitments   |  |                          | 4,699  |                       |   | 2,062    |  |   | (2,255                | ) |  |   | 4,506 
|Payroll related costs     |  |                          | 4,216  |                       |   | 3,278    |  |   | (3,833                | ) |  |   | 3,661 
|Other                     |  |                          | 3,545  |                       |   | 954      |  |   | (1,964                | ) |  |   | 2,535 
|                          |  |                          |        |                       |   |          |  |   |                       |   |  |   |       
|Total                     |  | $                        | 30,669 |                       | $ | 13,055   |  | $ | (11,623               | ) |  | $ | 32,101
|                          |  |                          |        |                       |   |          |  |   |                       |   |  |   |       



The Company performed an actuarial valuation analysis of the U.S. pension plan as of October 5, 2008, which resulted in an estimated termination cost
of $11,508,000. The estimated cost to settle the U.S. pension plan as of October 5, 2008 was based upon an average discount rate of approximately 6.5% derived from interest rates published by the PBGC. As of October 5, 2008, the U.S.
pension plan assets totaled $45,976,000 and the U.S. pension plan liability totaled $57,484,000.



The Company performed another actuarial valuation analysis as of May 2, 2009. As a result of this analysis, the estimated termination cost for the
U.S. pension plan increased by $5,912,000 to $17,420,000 as of May 2, 2009. This estimated cost was based upon an average PBGC discount rate of 5.4%. The U.S. pension plan assets at May 2, 2009 were $42,266,000 and the U.S. pension plan
termination liability totaled $59,686,000 at May 2, 2009.



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



Each of these actuarial valuations assumed the U.S. pension plan would be terminated through the
purchase of non-participating group annuity contracts.



The
termination cost of the Canadian pension plan was accrued for under the going concern basis of accounting and was not included in the accrued liquidation costs as of May 2, 2009. As of May 2, 2009, the termination cost for the Canadian
pension plan totaled $1,121,000.



As of May 2, 2009, the
payroll and related expenses as well as all other expenses were principally expected to occur through January 2010. The initial estimate of payroll related costs in the accrued costs of liquidation was increased by $3,278,000 during the period
October 5, 2008 through May 2, 2009. This increase was principally due to estimated payroll, severance and fringe benefit costs totaling $1,278,000 resulting from the sale of REPS LLC (REPS) taking significantly longer than
anticipated, as well as higher than expected medical claims. Estimated payroll and severance costs for Crave Entertainment Group, Inc. (Crave) also increased by $851,000 based upon the terms of the agreement for the sale of certain Crave
assets. In addition, estimated payroll and fringe benefit costs increased by $597,000 due to corporate employees being retained beyond their originally scheduled departure dates, along with higher than anticipated medical costs. Contractual
commitments cost increased by $2,062,000, primarily driven by an exclusive distribution arrangement at Crave, whereby $1,336,000 is payable to a licensor for guaranteed minimum product purchases.



Adjustments to Fair Value



The following table summarizes gain (loss) adjustments to fair value under
the liquidation basis of accounting (in thousands of dollars):



|                                        |  |                                |       |   |                                    |   |         |  
|--------------------------------------- |  | ------------------------------ | ----- | - | ---------------------------------- | - | ------- | -
|Adjustments to fair value:              |  | May 3, 
2009throughMay 1, 2010 |       |   | October 5, 
2008throughMay 2, 2009 |  
|Adjust Crave subsidiary to fair value   |  | $                              | 251   |   |                                    | $ | (16,309 | )
|Adjust REPS subsidiary to fair value    |  |                                | (22   | ) |                                    |   | (4,167  | )
|Adjust real estate to fair value        |  |                                | (720  | ) |                                    |   | (1,339  | )
|Adjust other fixed assets to fair value |  |                                | (14   | ) |                                    |   | (677    | )
|Adjust other assets and liabilities     |  |                                | 1,176 |   |                                    |   |        |  
|                                        |  |                                |       |   |                                    |   |         |  
|Total gain (loss)                       |  | $                              | 671   |   |                                    | $ | (22,492 | )
|                                        |  |                                |       |   |                                    |   |         |  



Crave



The carrying value of Crave at October 5, 2008 was calculated based on estimated proceeds to be received upon sale based on an average of Letters of
Intent received by the Company from prospective buyers as of that date. On February 10, 2009, the Company sold certain assets of Crave to Fillpoint LLC (Fillpoint). The Company recorded a loss of $16,309,000, net of legal expenses
of $124,000, for the period October 5, 2008 through May 2, 2009, based on proceeds received at closing and estimated future proceeds to be received in accordance with the terms of the agreement. This deterioration in the carrying value of
Crave was due to market conditions.



The cash received at closing
totaled $8,103,000. Payments received since the closing related to these estimated future proceeds totaled $1,442,000 for accounts receivable collections and $3,518,000 for inventory. During fiscal 2010, the Company worked through and settled all
Crave accounts receivable and inventory items in accordance with the sale agreement. Settlement gains of $251,000, net, have been recorded as adjustments to fair value through May 1, 2010. Fillpoint also agreed to pay the Company 50% of the net
profit in excess of $300,000 realized during the 24-month



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



period following the closing with respect to the sale of video games published by Fillpoint and acquired as part of exclusive distribution or publishing agreements assumed by Fillpoint as part of
the transaction. The Company has not recorded an asset related to this arrangement because the amount due is not estimable at this time. No payments have been received by the Company related to this exclusive distribution arrangement as of the
filing of this Form 10-K.



REPS



The carrying value of REPS at October 5, 2008 was
calculated based on estimated proceeds to be received upon sale based on an average of Expression of Interest Letters received by the Company from prospective buyers as of that date. During the fourth quarter of fiscal 2009, the Company entered into
an asset purchase and assignment agreement with Mosaic Sales Solutions US Operating Co. LLC (Mosaic) related to the sale of certain assets of REPS. This sale was completed on April 6, 2009. The Company recorded a loss of $4,167,000,
net of legal expenses of $17,000, for the period October 5, 2008 through May 2, 2009 based on proceeds received at closing and estimated future proceeds to be received in accordance with the terms of the agreement. This deterioration in
the carrying value of REPS was due to market conditions.



Mosaic
assumed liability for all obligations that arise, accrue and first become due after April 6, 2009, the closing date, related to the purchased customer contracts. All other REPS liabilities were retained by the Company.



As consideration for this purchase, Mosaic advanced a cash payment of
$250,000 against future revenue sharing, as defined in the agreement. Through May 1, 2010, Mosaic fully recouped the $250,000 advance and the Company has recorded a receivable of $1,800 related to this revenue sharing arrangement. Handleman has
provided customary representations and warranties as of the closing date.



Real Estate and Other Fixed Assets



The Company recorded a loss on the carrying value of its corporate headquarters in the amount of $1,339,000 for the period October 5, 2008, through
May 2, 2009, under the liquidation basis of accounting. This write down was mainly driven by further deterioration in financial market conditions. The Company recorded additional write downs of $720,000 on the corporate headquarters during
fiscal 2010 based on the sale of that building on February 12, 2010 to AAM I, LLC. The purchase price was $3,000,000. Cash received at closing totaled $2,710,828.64, following adjustments for a realtor commission fee, customary proration of
property taxes and closing costs. The $200,000, plus interest, that was released to the Company on January 9, 2010 as a result of First Amendment to Purchase Agreement was credited against the purchase price at the closing.



The Company also recorded a loss on the carrying value of other fixed assets
of $677,000 for the period October 5, 2008 through May 2, 2009 (mainly computer hardware) due to lack of interest from third-party buyers, as well as a further decline in overall economic conditions.



Adjustment for Estimated Federal Income Tax Refund



On November 6, 2009, H.R. 3548, the Worker, Homeownership,
and Business Assistance Act of 2009 (the Act) was enacted. Although the Act deals principally with the extension of unemployment benefits and mortgage relief, it also extends to all businesses the five-year net operating loss carryback
previously available only to small businesses. The Act provides that a business of any size may elect to carryback net operating losses incurred in 2008 or 2009 (but not both) for three, four or five years.



After considering the fiscal 2008 federal income tax return filed with the
IRS and the expected fiscal 2009 net operating losses, Handleman Company determined that it would carryback approximately



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



$33.0 million of tax-basis net operating losses from fiscal 2008, which would result in approximately $10,440,000 of income taxes being recovered. This includes $1,151,000 previously recorded in
fiscal 2009. During the third quarter of fiscal 2010, the Company filed Form 1139. During the fourth quarter of fiscal 2010, the Company collected the refund. During the first quarter of fiscal 2011, the IRS began an examination of tax returns
giving rise to the refund. It is expected that this audit will take several months to complete and the final outcome of the examination is not yet determinable.



Dissolution



On May 5, 2009, Handleman Company filed a Certificate of Dissolution with the State of Michigan. As a dissolved company, Handleman will continue its
corporate existence, but will not conduct business, except for the purpose of winding down the business. Accordingly, Handlemans activities are now limited to: selling, collecting or otherwise realizing the value of its remaining assets;
making tax and other regulatory filings; winding down the Companys remaining business activities; paying (or adequately providing for the payment) of all non-barred, valid claims and obligations; and making distributions to Handlemans
shareholders. Based on the Companys net asset balance as of May 1, 2010, proceeds from the liquidation of assets are expected to be sufficient to provide payment in full to its creditors and a distribution to shareholders. Payments during
the liquidation period will be prioritized in the following hierarchy: (i) wind down related costs, including supplier costs necessary to the wind down of the business and employee obligations such as on-going salaries, fringe benefits and
retention costs; (ii) income tax and other regulatory filing fees; (iii) payments of other unsecured valid creditor claims and obligations, including the purchase of non-participating group annuity contracts or lump sum payments (Canada)
to supplement the terminated U.S. and Canadian pension plans; and (iv) shareholder distribution. Creditors will be paid according to their priority in the hierarchy and pro rata, if necessary, within the priority category.



On May 6, 2009, Handleman Company petitioned the Circuit Court for
Oakland County, State of Michigan, for an Order of Limited Supervision over the Liquidation of Handleman post-dissolution. On May 20, 2009, the court order was granted and declared that shares of Handleman common stock became non-transferable
30 days after notification to shareholders. Accordingly, Handleman Companys common shares became non-transferable on June 20, 2009. This allows the Company to reduce costs during liquidation and maximize the liquidated value of the
Company for the benefit of its creditors and potential benefit to its shareholders. The Company will distribute proceeds, if any, to shareholders in proportion to their interests as of the close of business on June 20, 2009, the date of record.



As a result of the IRS examination of the net operating loss
carryback and related federal income tax refund issue described above, the Company cannot state with certainty when payment of creditor claims or distribution to shareholders is likely to occur. The actual amount and timing of future liquidating
distributions, if any, to creditors and shareholders is dependent upon the resolution of all open items and periods with taxing authorities; the ultimate settlement amounts of the Companys liabilities and obligations, in particular the
Companys pension obligations; actual costs incurred in connection with carrying out the Companys Plan of Final Liquidation, including administrative costs during the liquidation period; and market fluctuations in the discount rate as it
relates to the settlement of pension plans.



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2. Accounting Policies



Liquidation Basis of Accounting



Accrued Liquidation Costs



Under the liquidation basis of accounting, assets are stated at their net
realizable value, liabilities are stated at their estimated settlement amounts and estimated costs through the liquidation date are accrued for, to the extent reasonably determinable.



The Company is required to make significant estimates and judgments in many
areas. These estimates are subject to change. The Company reviews, on a quarterly basis, the estimated fair value of its assets and all other remaining operating expenses and contractual commitments such as payroll and related expenses, lease
termination costs, professional fees and other outside services to determine the estimated costs to be incurred during the liquidation period.



Pension Expense



Handleman Company terminated its U.S. pension plan during the fourth quarter of fiscal 2009 and plans to purchase a non-participating group annuity
contract for all plan participants subject to regulatory approval. Under the liquidation basis of accounting, actuarial valuation analyses are prepared quarterly to determine the fair value, or termination value, of the plan. These valuations and
the ultimate liability to settle the plan may result in significant adjustments driven by changes in assumptions and due to market conditions.



Handleman Company terminated its Canadian pension plan in the first quarter of fiscal 2009 and plans to purchase either non participating annuity
contracts or make lump-sum payments to participants in the Canadian pension plan following regulatory approval by the Finance Service Commission of Ontario. The Company accrued the termination value of the Canadian pension plan under the going
concern basis of accounting.



The liabilities related to these
pension plans will be settled at the same payout percentage and same timing as all other unsecured creditor claims.



Income Taxes



The Company has reported under the liquidation basis of accounting since October 5, 2008. Since this time the Company has not reported an income
statement and, as such, has not reported income tax expense.



Deferred income taxes are provided for the effect of temporary differences between the amounts of assets and liabilities recognized for financial
reporting purposes and amounts recognized for income tax purposes. Valuation allowances are recognized to reduce deferred tax assets when it is more likely than not that the assets will not be realized. In assessing the likelihood of realization,
consideration is given to all available evidence including estimates of future taxable income and the character of income needed to realize future benefits.



Based on information available to date, the Company recorded any income tax receivable or payable for the ultimate tax amount expected to be collected or
paid. This estimate requires management to apply significant judgment related to the application of complex tax laws, changes in tax laws or related interpretations, uncertainties related to the outcomes of tax audits and changes in the
Companys operations or other facts and circumstances. Further, management must continually monitor changes in these factors. Changes in such factors may result in changes to management estimates and could require the Company to significantly
adjust its tax assets and liabilities.



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Handleman Company makes assumptions about individual tax positions before any part of the related
benefit can be recognized in its financial statements. A company must consider whether it is more likely than not that a tax position will be sustained upon examination by a taxing authority. Significant judgment is required in assessing the timing
and amounts of deductible and taxable items. The Company establishes reserves when, despite its belief that its tax return positions are supportable, it is determined that certain positions may be successfully challenged by the taxing authorities.



The Company reduced $674,000 of uncertain tax positions
established in prior periods due to the expirations of certain statutes of limitations. As of May 1, 2010, the total amount reported for uncertain tax positions was approximately $3.0 million. The Company anticipates that an additional $703,000
of tax reserves will be reversed in fiscal 2011.



During fiscal
2010, the Company started to file final state tax returns for all states except Michigan. The filing of these state returns will be completed in fiscal 2011.



The Companys estimates of tax implications related to the liquidation of the Company are subject to change, perhaps significantly, as the Company
continues to finalize tax matters. Accordingly, the amount of liability, if any, will be updated in the Companys financial statements as changes in estimates occur.



Going Concern Basis of Accounting



Business



Handleman Company previously had the following reporting segments: category management and distribution operations, video game operations and all other.
As a category manager and distributor of music product and prior to fiscal 2009, the Company predominately provided full category management services for prerecorded music product to leading retail chains in the U.S., United Kingdom (UK)
and Canada. The video game operations were related to Crave and the all other segment primarily represented REPS.



Fiscal Year



The Companys fiscal year ends on the Saturday closest to April 30. The fiscal years ended May 1, 2010 (fiscal 2010) and
May 2, 2009 (fiscal 2009) each consisted of 52 weeks.



Principles of Consolidation



The consolidated financial statements include the accounts of the Company and all subsidiaries where the Company has voting control. All intercompany
accounts and transactions have been eliminated. All subsidiary companies are wholly owned. The Company does not have any significant equity investments other than in companies in which it has voting control.



The Company had intercompany transactions between its U.S. category
management and distribution operations and REPS related to revenues and expenses resulting from REPS providing field service for the U.S. music business. As these revenues and expenses are not on-going, costs and associated eliminations have been
classified as discontinued operations in the Companys Consolidated Statement of Operations for all periods presented.



Estimates



The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions that affect



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the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.



Foreign Currency Translation



The Companys foreign subsidiaries utilized the local currency as their functional currency. Therefore, the Company converted the balance sheets and
statements of operations of its foreign subsidiaries to United States dollars. The Company used an average exchange rate for the period, based on published daily rates, to convert foreign operational transactions to United States dollars. Assets and
liabilities of foreign subsidiaries were converted to United States dollars using the prevailing published exchange rate on the last business day of the fiscal period. Common stock and additional paid in capital were converted at historical exchange
rates. Net transaction gains included in Selling, general and administrative expenses from continuing operations in the Companys Consolidated Statement of Operations was $50,000 for the five-month period ended October 4, 2008.



Cash and Cash Equivalents



The Company considers all highly liquid debt instruments purchased with an
original maturity of six months or less to be cash equivalents. The Company has deposits in a bank account in excess of FDIC limits.



Selling, General and Administrative Expenses



The major components of the Companys selling, general and
administrative expenses from continuing operations included in its Consolidated Statement of Operations were as follows:



| |  |  | labor expense, which includes corporate office labor and associated payroll taxes and fringe benefits;
| | - |  | ------------------------------------------------------------------------------------------------------



| |  |  | outside information technology related service expenses;
| | - |  | --------------------------------------------------------



| |  |  | outside consulting expense; and
| | - |  | -------------------------------



| |  |  | repairs and maintenance expense.
| | - |  | --------------------------------



Income Taxes



Income taxes are allocated between continuing operations, discontinued operations and other comprehensive income by tax jurisdiction and, in periods in
which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or other comprehensive income, tax expense is allocated to the other sources of income, with a related benefit recorded
in continuing operations.



Deferred income taxes are provided for
the effect of temporary differences between the amounts of assets and liabilities recognized for financial reporting purposes and amounts recognized for income tax purposes. Valuation allowances are recognized to reduce deferred tax assets when it
is more likely than not that the assets will not be realized. In assessing the likelihood of realization, consideration is given to all available evidence including estimates of future taxable income and the character of income needed to realize
future benefits.



The calculation of current and deferred tax
assets (including valuation allowances) and liabilities requires management to apply significant judgment related to the application of complex tax laws, changes in tax laws or related interpretations, uncertainties related to the outcomes of tax
audits and changes in the Companys operations or other facts and circumstances. Further, management must continually monitor changes in these factors. Changes in such factors may result in changes to management estimates and could require the
Company to adjust its tax assets and liabilities and



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record additional income tax expense or benefits. Handleman Company makes assumptions about individual tax positions before any part of the related benefit can be recognized in its financial
statements. A company must consider whether it is more likely than not that a tax position will be sustained upon examination by a taxing authority. Significant judgment is required in assessing the timing and amounts of deductible and taxable
items. The Company establishes reserves when, despite its belief that its tax return positions are supportable, it is determined that certain positions may be successfully challenged by the taxing authorities. When facts and circumstances change,
the Company adjusts these reserves through its provision for income taxes.



Earnings Per Share



No additional shares related to stock options issued by the Company were included in the computation of diluted weighted average shares because the
options exercise prices were greater than the average market price of the common shares or as a result of the net losses for the periods presented.



New Accounting Pronouncements



Although many new accounting pronouncements were issued during fiscal 2010, the following pronouncements were applied to the Company when considering the
liquidation basis of accounting.



In May 2009, the FASB issued
SFAS No. 165, Subsequent Events. This Statement establishes general standards of accounting for and disclosures of events that occur after the balance sheet date, but before financial statements are issued or are available to be
issued. It requires the disclosure of the date through which an entity has evaluated subsequent events and the basis for that date. SFAS No. 165 is effective for interim and annual periods ending after June 15, 2009 and as such, the
Company applied this Statement in its liquidation presentation in the first quarter of fiscal 2010. In February 2010, Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-09,
Subsequent Events (Topic 855) Amendments to Certain Recognition and Disclosure Requirements. ASU No. 2010-09 removes the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated.
Managements responsibility to evaluate subsequent events through the date of issuance remains unchanged. The adoption of these pronouncements did not have a material impact on the Companys consolidated financial statements.



In June 2009, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles  a replacement of FASB Statement No. 162. SFAS No. 168 identifies the sources of
accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities, which are presented in conformity with generally accepted accounting principles (GAAP) in
the United States. It establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in
conformity with GAAP. SFAS No. 168 was effective for interim or annual financial periods ending after September 15, 2009. Adoption of this pronouncement did not have a material impact on the Companys consolidated financial
statements.



3. Other Current
Assets  Liquidation Accounting



The Other current
assets line item in the Companys Consolidated Statements of Net Assets as of May 1, 2010 consisted of a letter of credit of $1,124,000, income taxes receivable of $379,000, deposits of $103,000 and other various current assets of
$386,000. The Other current assets as of May 2, 2009 consisted of property and equipment, net of $3,640,000, taxes receivable of $3,081,000, a letter of credit of $2,619,000, deposits of $705,000 and other various current assets of $832,000.



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4. Disposal of Long-Lived Assets  Going Concern Accounting



Music Business in North America



On June 2, 2008, the Company completed an asset
purchase agreement with Anderson Merchandisers L. P. (Anderson) to purchase a portion of the U.S. music inventory and all of the store display fixtures related to its Wal-Mart Stores, Inc. (Wal-Mart) business in the U.S. This
agreement resulted in a gain on the sale of $5,124,000, net of legal expenses of $51,000, and generated net cash proceeds of $19,536,000 during the first quarter of fiscal 2009. The gain on the sale was recognized in the first quarter of fiscal 2009
and was included in discontinued operations in the Companys Consolidated Statements of Operations. Also, in accordance with this agreement, Anderson purchased additional inventory in early September 2008 totaling $1,255,000; the proceeds were
received during the second quarter of fiscal 2009.



On
September 2, 2008, the Company completed a separate definitive agreement with Anderson to sell all of the music inventory, fixed assets and operations of its Canadian subsidiary, inclusive of customer relationships. The total net proceeds of
$12,602,000 were received in the second quarter of fiscal 2009, less $750,000, which was being held in escrow for certain representations and warranties (the Company has collected the entire amount held in escrow as of the second quarter of fiscal
2010). The sale of this Canadian subsidiary resulted in a gain of $419,000, net of legal expenses of $193,000, in the second quarter of fiscal 2009 and was included in discontinued operations in the Companys Consolidated Statements of
Operations. As a result of the sale of the Canadian subsidiary, the Company also earned an incentive fee from Anderson. This $4,000,000 incentive fee was received during the second quarter of fiscal 2009 and was included in discontinued operations
in the Companys Consolidated Statements of Operations.



Handleman United Kingdom



On September 16, 2008, the Company sold to Tesco Stores Limited (Tesco) certain assets and all of the operations related to the Tesco
category management and distribution operations, as well as certain of the Companys intellectual properties. The purchase price paid by Tesco totaled $16,687,000 and resulted in a gain of $188,000, net of legal expenses of $357,000, in the
second quarter of fiscal 2009, which was recorded in discontinued operations in the Companys Consolidated Statements of Operations. The proceeds from this sale, net of $2,663,000, which was held in escrow for certain indemnifications, were
also received in the second quarter of fiscal 2009. The Company has collected the entire amount held in escrow as of October 31, 2009.



Handleman UK is undergoing a members voluntary liquidation, which is a formal process by which solvent companies wind down their operations in the UK. The
Company continues to work through this process and this liquidation is expected to be completed during calendar 2010.



Crave Entertainment



The Company considered Crave held for sale during the first quarter of fiscal 2009 and adjusted the carrying value of Crave for the period ended
October 4, 2008 under the going concern basis of accounting. The loss of $26,634,000 was calculated using projected cash flows prepared by the Company and were recorded in discontinued operations in the Companys Consolidated Statement of
Operations. On February 10, 2009, the Company sold certain Crave assets to Fillpoint.



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REPS LLC



The Company considered REPS held for sale during the second quarter of
fiscal 2009 and adjusted its carrying value at October 4, 2008 under the going concern basis of accounting. The $7,577,000 loss was calculated based on estimated proceeds to be received upon sale based on an average of Expression of Interest
Letters received by the Company from prospective buyers. This loss was recorded in the second quarter of fiscal 2009 in discontinued operations in the Companys Consolidated Statement of Operations. On April 2, 2009, the Company sold
certain REPS assets to Mosaic.



Discontinued
Operations



The results of operations for the U.S., Canadian
and Handleman UK music category management and distribution businesses, as well as Crave and REPS, are reported in discontinued operations in the Companys Consolidated Statement of Operations. After completion of these sales transactions and
the wind down of the remaining business activities, the operations and cash flows of these business units were eliminated from the ongoing operations of the Company, and the Company does not have any continuing involvement in the operations of these
businesses.



Upon completion of the Canadian and Handleman UK
asset purchase agreements, all of their music category management and distribution operations were transitioned to the buyers in the second quarter of fiscal 2009. As a result, the Company recorded foreign currency translation gains of $4,321,000
and $11,320,000 related to the Canadian and UK operations, respectively, offset in part by a foreign currency translation loss of $43,000 related to other foreign operations, resulting from the substantial liquidation of the investments in these
businesses. These amounts were recorded in discontinued operations in the Companys Consolidated Statement of Operations in the second quarter of fiscal 2009 under the going concern basis of accounting.



The U.S., Canadian and Handleman UK music operations were previously included
in the category management and distribution operations reporting segment, whereas Crave and REPS were previously included in the video game operations and all other reporting segments, respectively.



The table below summarizes the discontinued operations included in the
Companys Consolidated Statement of Operations, by segment, for the five months ended October 4, 2008 (in thousands of dollars):



|                                                                                         |  |                                               |         |                      |   |           |  |   |        |  
|---------------------------------------------------------------------------------------- |  | --------------------------------------------- | ------- | -------------------- | - | --------- |  | - | ------ | -
|                                                                                         |  | CategoryManagementand 
DistributionOperations |         | Video GameOperations |   | All Other | 
|Revenues                                                                                 |  | $                                             | 117,895 |                      | $ | 89,561    |  | $ | 5,207  |  
|Pre-tax income (loss) from operations excluding net loss ondisposal of subsidiary assets |  |                                               | 8,475   |                      |   | 3,866     |  |   | (3,213 | )



5. Impairment and Other Charges



Wind Down of the Music Business in North America



Under the going concern basis of accounting, the Company incurred one-time
costs related to its decision to exit the music business in North America and the category management and distribution operating reporting segment. Costs to be incurred after October 4, 2008 were estimated and included in accrued liquidation
costs under the liquidation basis of accounting.



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The following table summarizes one-time costs incurred in the first five months of fiscal 2009 related
to the exiting of the music business in North America, which have been recorded in discontinued operations in the Companys Consolidated Statement of Operations (in thousands of dollars):



|                              |  |                                   |        |   |                            |   |        |            |  |   |      |  
|----------------------------- |  | --------------------------------- | ------ | - | -------------------------- | - | ------ | ---------- |  | - | ---- | -
|                              |  | Five Months Ended October 4, 2008 |       
|                              |  | Severance/RetentionCosts          |        |   | ContractTermination 
Costs |   |        | OtherCosts | 
|Balance as of May 3, 2008     |  | $                                 |       |   |                            | $ |       |            |  | $ |     |  
|Expensed during the period    |  |                                   | 8,099  |   |                            |   | 1,370  |            |  |   | 268  |  
|Cash paid during the period   |  |                                   | (3,737 | ) |                            |   | (1,370 | )          |  |   | (268 | )
|                              |  |                                   |        |   |                            |   |        |            |  |   |      |  
|Balance as of October 4, 2008 |  | $                                 | 4,362  |   |                            | $ |       |            |  | $ |     |  
|                              |  |                                   |        |   |                            |   |        |            |  |   |      |  



In addition to the one-time costs identified above, the Company recorded an inventory markdown in the amount of $2,760,000 during the first quarter of
fiscal 2009, representing the Companys best estimate of the adjustment necessary to write down inventory to net realizable value. This inventory markdown was recorded in discontinued operations in the Companys Consolidated Statement of
Operations.



Handleman United Kingdom



Under the going concern basis of accounting, the Company
incurred one-time costs related to the sale of the Tesco-related business (which was completed in the second quarter of fiscal 2009) and the wind down of the remaining UK operations.



In the UK, there is a statutory obligation for companies to pay severance,
upon termination, to employees who will neither be transferred to a new organization (if applicable) under the Transfer of Undertakings (Protection of Employment) regulations, nor be retained by the existing company in some other capacity. This
statutory requirement is the equivalent of a benefit plan because there is a mutual understanding between the employee and the company. A substantial majority of the employees in Handleman UK transitioned with the operations to Tesco upon closing of
the asset purchase agreement in the second quarter of fiscal 2009. The Company recorded severance costs of $364,000 in the first five months of fiscal 2009 for the employees discharged related to the wind down of the remaining UK operations. In the
first five months of fiscal 2009, the Company incurred legal fees of $445,000 related to the wind down of the UK business. These costs all related to the category management and distribution operations reporting segment and were charged to
discontinued operations in the Companys Consolidated Statements of Operations. Costs to be incurred after October 4, 2008 to complete the wind down of the Handleman UK business were estimated and included in accrued liquidation costs
under the liquidation basis of accounting.



6. Goodwill and Intangible Assets



Goodwill



Historically, under going concern accounting, the Company performed an annual impairment test for goodwill in the fourth quarter of each fiscal year or as
business conditions warranted a review. The goodwill test for impairment was conducted on a reporting unit level, whereby the carrying value of each reporting unit, including goodwill, was compared to its fair value. Fair value was estimated using a
discounted cash flow methodology.



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The Company began actively marketing REPS for sale in the second quarter of fiscal 2009. Accordingly,
the Company considered REPS held for sale and adjusted the carrying value of its assets. This included the adjustment of goodwill in the all other reporting segment from $6,903,000 to $0, as of October 4, 2008 under the going concern basis of
accounting. The valuation was based on estimated proceeds to be received upon sale based on an average of Expressions of Interest Letters received by the Company from prospective buyers. This adjustment was included in discontinued operations in the
Companys Consolidated Statement of Operations. See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information related to the write down of REPS.



Intangible Assets



The Companys intangible assets predominately related to the
acquisitions of Crave and REPS. Historically, under going concern accounting, the Company performed annual impairment analyses, or as business conditions warranted a review, comparing the carrying value of its intangible assets with the future
economic benefit of these assets. Based on such analyses, the Company adjusted, as necessary, the value of its intangible assets. As a result of the Crave and REPS business units being marketed for sale, the Company adjusted the carrying values of
these entities, including intangibles during the second quarter of fiscal 2009 under the going concern basis of accounting. See Notes 1 and 4 of Notes to Consolidated Financial Statements for additional information related to the losses recorded on
the carrying values of Crave and REPS.



Internally Developed Video Game Software



Crave, through one of its subsidiary companies, published video game titles under the Crave brand name. These titles supported Sony, Nintendo and/or
Microsoft video game platforms and were distributed by Crave. As a result, Crave incurred obligations to contracted video game software developers and, in some cases, obligations to intellectual property right holders. Under its software development
agreements, payments were typically based on the achievement of defined milestones, which varied by agreement. Such milestones included payments due at the signing of the agreements, design and/or technical achievements and delivery of completed
product; these advances were typically not refundable. These developed games were the property of Crave. Software development costs were recorded in accordance with accounting guidance, which required that these costs be capitalized once
technological feasibility of a product is established and such costs are determined to be recoverable.



Software development payments were classified as Intangible assets, net in the Companys Consolidated Balance Sheet. Commencing upon
product release, these payments were amortized as royalty expense based upon the ratio of current revenues to total projected revenues, generally over a period of approximately 18 months, and included in discontinued operations in the Companys
Consolidated Statements of Operations. The Company performed quarterly analyses, comparing the carrying value of its software development costs with the expected sales performance of the specific products for which the costs relate.
Managements judgments and estimates were utilized in the ongoing assessment of the recoverability of these advances. Based on such analyses, the Company adjusted, when necessary, the value of its software development costs.



Under Craves intellectual property licensing agreements, payments were
made to licensors in exchange for the rights to utilize intellectual properties owned by the licensors (e.g. popular animated characters, including all designs, themes and story lines) that may be used in the development of video game software.
Payments to licensors allowed Crave the limited right to use these intellectual properties, and at no time did Crave take ownership of these intellectual properties. Advances under these licensing agreements typically occurred at the signing of the
agreements and were not refundable. License advance payments were classified as Intangible assets, net in the Companys Consolidated Balance Sheet. Commencing upon product release, these payments were amortized



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as royalty expense based upon the ratio of current revenues to total projected revenues, generally over a period of approximately 18 months, and included in discontinued operations in the
Companys Consolidated Statements of Operations. The Company performed quarterly analyses comparing the carrying value of its license advances with the expected sales performance of the specific products to which the costs relate.
Managements judgments and estimates were utilized in the ongoing assessment of the recoverability of these advances. Based on such analyses, the Company adjusted, when necessary, the value of its license advances. Certain intellectual property
licensing agreements may have required Crave to make additional payments based on sales volumes. Subject to these terms, once all advance payments to licensors were expensed, additional payments to licensors may have been required. These additional
payments were accrued as royalties in the Companys Consolidated Balance Sheet.



Purchased Video Game Software



Crave also purchased video game software from other software developers that supported Sony, Nintendo and Microsoft video game platforms. As a
distributor, Crave occasionally entered into exclusive distribution agreements with these video game suppliers. Under these exclusive distribution agreements, Crave had the right to sole distribution of the agreed upon video software games. The
agreements varied by supplier, and may have obligated Crave to pay minimum distribution fees or purchase a specified number of units over a designated period of time. Payments under these exclusive distribution agreements were usually made at the
time the agreements were signed, at the time of manufacturing, or in some instances, at the time of product receipt by Crave. These exclusive distribution advances were classified as Intangible assets, net in the Companys
Consolidated Balance Sheet and were amortized as royalty expense based upon sales of product purchased from these suppliers, and included in Direct product costs in the Companys Consolidated Statements of Operations. Under certain
of these exclusive distribution agreements, additional payments to these suppliers may have been required if pre-defined minimum purchase volumes were exceeded. These additional payments were also classified as Intangible assets, net in
the Companys Consolidated Balance Sheet. Managements judgments and estimates were utilized in the ongoing assessment of the recoverability of these advances.



Royalty expense related specifically to software development costs and licensed rights included in Recoupment of development
costs/licensed rights in the Companys Consolidated Statements of Cash Flows is as follows (in thousands of dollars):



|                                                                                   |  |                                 |      
|---------------------------------------------------------------------------------- |  | ------------------------------- | -----
|Royalty Expense                                                                    |  | Five MonthsEndedOctober 
4,2008
|Software development costs, including write
down to net realizable value of $286   |  | $                               | 1,048
|Exclusive distribution rights, including write down
to net realizable value of $75 |  |                                 | 370  
|Licensed intellectual property rights                                              |  |                                 | 115  
|                                                                                   |  |                                 |      
|Total                                                                              |  | $                               | 1,533
|                                                                                   |  |                                 |      



The Companys aggregate amortization expense for the five months ended October 4, 2008 was $4,163,000.



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7. Property and Equipment



As a result of the Companys Plan of Final Liquidation and the adoption
of the liquidation basis of accounting, property and equipment were classified as Other current assets in the Companys Consolidated Statements of Net Assets as of May 1, 2010 and May 2, 2009. Assets were recorded at fair value and
depreciation ceased when the assets were deemed held for sale in accordance with accounting guidance.



Historically, under going concern accounting, property and equipment was recorded at cost. Upon retirement or disposal, the asset cost and related
accumulated depreciation were eliminated from the respective accounts and the resulting gain or loss was included in results of operations for the period. Repair costs were charged to expense as incurred.



The Company capitalized internal labor costs associated with developing
computer software. Such costs were depreciated over the expected life of the software, generally three to seven years.



The Company included depreciation expense in Selling, general and administrative expenses in its Consolidated Statement of Operations.
Depreciation was computed primarily using the straight-line method based on the following useful lives:



|                               |  |                                            
|------------------------------ |  | -------------------------------------------
|Buildings and improvements     |  | Lesser of the lease term or the useful life
|Leasehold improvements         |  | Lesser of the lease term or the useful life
|Display fixtures               |  | 2-5 years                                  
|Computer hardware and software |  | 3-7 years                                  
|Equipment, furniture and other |  | 3-10 years                                 



8. Debt



Handleman Company had no outstanding debt as of May 1, 2010 or May 2, 2009. The credit agreement with Silver Point Finance, LLC was terminated
on October 31, 2008 and the credit agreement with General Electric Capital Corporation was terminated on August 1, 2008. As a result of reductions in the size of the Companys credit facility and ensuing termination, during fiscal
2009, the Company accelerated the write-off of financing related fees in accordance with accounting guidance. During the five months ended October 4, 2008, financing related fees expensed were $5,581,000.



Total interest expense from both continuing and discontinued operations for
the five months ended October 4, 2008 was $15,665,000. The Company allocated a portion of its interest expense related to its debt agreements from continuing operations to discontinued operations for fiscal year 2009.



9. Pension Plan



The Company has two qualified defined benefit pension plans (pension
plans) that cover substantially all full-time U.S. and Canadian employees.



Pension Plans



During the first quarter of fiscal 2007, the Companys Board of Directors approved amendments to freeze the U.S. pension plan. Subsequently, on
March 11, 2009, the Companys Compensation Committee of the Board of Directors approved the termination of the U.S. pension plan in fiscal 2010, or thereafter. Upon approval from the Internal Revenue Service and the Pension Benefit
Guaranty Corporation, the Company plans to replace the U.S. pension plan with the purchase of a non-participating group annuity contract for all participants. Under the liquidation basis of accounting, the



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---



Company has $17,171,000 accrued in the costs of liquidation as of May 1, 2010 assuming it purchases this annuity contract for all participants. This purchase is subject to the same payout
percentage and same timing as all other unsecured creditors under the liquidation basis of accounting. See Note 1 of Notes to Consolidated Financial Statements for additional information related to the U.S. pension plan termination.



During the fourth quarter of fiscal 2008, the Companys Board of
Directors approved amendments to freeze the Canadian pension plan. On July 31, 2008, the Companys Compensation Committee of the Board of Directors approved the termination of the Canadian pension plan. The estimated settlement amount of
$1,444,000 was accrued in the second quarter of fiscal 2009 using a discount rate of 4.02%, under the going concern basis of accounting. The estimated settlement amount of the Canadian pension plan is $822,000 as of May 1, 2010 based on an
updated termination cost. Final settlement of the Canadian pension plan will occur when the termination is approved by the Financial Services Commission of Ontario and is subject to the same payout percentage and same timing as all other unsecured
creditors under the liquidation basis of accounting.



Obligations and Funded Status



The following information combines U.S. and Canadian pension plans. The projected benefit obligation, fair value of plan assets and funded status at
October 4, 2008 for the two defined benefit pension plans are as follows (in thousands of dollars):



|                                                |  |                |        |  
|----------------------------------------------- |  | -------------- | ------ | -
|                                                |  | Pension Plans  |       
|                                                |  | October 4,2008 |       
|Change in projected benefit obligation:         |  |                |        |  
|Benefit obligation at May 3, 2008               |  | $              | 55,976 |  
|Interest cost                                   |  |                | 1,438  |  
|Actuarial gain                                  |  |                | (5,598 | )
|Benefits paid                                   |  |                | (1,932 | )
|                                                |  |                |        |  
|Projected benefit obligation at October 4, 2008 |  | $              | 49,884 |  
|                                                |  |                |        |  
|Change in plan assets:                          |  |                |        |  
|Fair value of plan assets at May 3, 2008        |  | $              | 59,989 |  
|Actual return on plan assets                    |  |                | (7,543 | )
|Company contributions                           |  |                | 153    |  
|Benefits paid                                   |  |                | (1,932 | )
|                                                |  |                |        |  
|Fair value of plan assets at
October 4, 2008    |  | $              | 50,667 |  
|                                                |  |                |        |  
|Funded status at October 4, 2008                |  | $              | 783    |  
|                                                |  |                |        |  



Amounts recognized in the Companys Consolidated Balance Sheet at October 4, 2008 are as follows (in thousands of dollars):



|                           |  |                |        |  
|-------------------------- |  | -------------- | ------ | -
|                           |  | Pension Plans  |       
|                           |  | October 4,2008 |       
|Prepaid asset, non-current |  | $              | 2,227  |  
|Accrued liability, current |  |                | (1,444 | )
|                           |  |                |        |  
|Net asset recognized       |  | $              | 783    |  
|                           |  |                |        |  



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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, continued

---



The accumulated benefit obligation for the two defined benefit pension plans was $49,884,000 as of
October 4, 2008.



The unrecognized losses in
Accumulated other comprehensive income at October 4, 2008 was $10,425,000.



Components of net periodic benefit cost are as follows (in thousands of dollars):



|                                                                          |  |                                |        |  
|------------------------------------------------------------------------- |  | ------------------------------ | ------ | -
|                                                                          |  | PensionPlans                   |       
|                                                                          |  | Five MonthsEndedOctober
4,2008 |       
|Service cost                                                              |  | $                              |       |  
|Interest cost                                                             |  |                                | 1,438  |  
|Expected return on plan assets                                            |  |                                | (1,566 | )
|Amortization of unrecognized prior service cost, actuarial gain and other |  |                                | 10     |  
|                                                                          |  |                                |        |  
|Net periodic benefit cost                                                 |  | $                              | (118   | )
|                                                                          |  |                                |        |  



Assumptions



A weighted average discount rate of 7.54% and a rate of compensation increase of 0% was used to determine the actuarial present value of the projected
benefit obligation at October 4, 2008.



Plan Assets



The Companys two defined benefit pension plans weighted-average asset allocations by asset category, are as
follows:



|                       |  |                |   |  |            |   |  |            |  
|---------------------- |  | -------------- | - |  | ---------- | - |  | ---------- | -
|                       |  | Pension Plan   |  
|Asset Category         |  | October 4,2008 |   |  | May 2,2009 |   |  | May 1,2010 |  
|Equity securities      |  | 18             | % |  | 15         | % |  | 10         | %
|Debt securities        |  | 81             |   |  | 75         |   |  | 75         |  
|Short-term investments |  | 1              |   |  | 10         |   |  | 15         |  
|                       |  |                |   |  |            |   |  |            |  
|Total                  |  | 100            | % |  | 100        | % |  | 100        | %
|                       |  |                |   |  |            |   |  |            |  



Pension plan assets are invested in various mutual funds and individual securities, which are overseen by two independent investment advisers. The Pension
Trust held no shares of Handleman Company common stock at October 4, 2008. The Companys strategy for pension plan assets is to provide for growth of capital with a moderate level of volatility. To the extent that Handlemans pension
plans have investments in volatile instruments, Handleman is at risk that its pension plans will be under funded at any given time. During fiscal 2009, Handleman immunized its pension plans thereby removing a significant portion of the economic
risk. The Handleman U.S. pension, which is significantly larger than the Canadian pension plan, moved to an 80% long-bond portfolio and 20% equity exposure from 60% equity exposure and a 40% long-bond portfolio. This significantly reduces
asset/liability mismatch risk.



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The expected long-term rate of return on assets was 6.56% as of October 4, 2008. The basis used to
determine the overall expected long-term rate of return on assets was the expected return of each of the above categories, weighted based on the median of the target allocation for each class. Equity securities are expected to return 10% to 11% over
the long-term, while cash and fixed income are expected to return between 4% and 6%.



Cash Flows



The Company contributed $301,000 to the Canadian pension plan during fiscal 2010. Final contributions to the Canadian pension plan for fiscal 2011 will
not be determined until the plans termination is approved by the Financial Services Commission of Ontario and the assets of the Company are distributed. Final contribution to the U.S. pension plan in fiscal 2010 will be made when the lump sum
payouts are made or the non-participating group annuity is purchased.



10. Stock-Based Compensation



Handleman Company cancelled all stock plans effective with the suspension in trading of common stock as of June 20, 2009.



The Company was authorized to grant stock options, performance shares,
performance units and restricted stock under three plans. The Companys 2004 Stock Plan was approved by the Companys shareholders during fiscal 2005. The Companys 2001 Stock Option and Incentive Plan was approved during fiscal 2002.
The Companys 1998 Stock Option and Incentive Plan was effective for outstanding awards under that plan.



The maximum number of shares of stock that may have been issued under the 2004 Stock Plan is 750,000 shares. During the first five months of fiscal 2009,
the Company granted no shares under this plan. After deducting stock options, performance shares and restricted stock issued or granted under this plan since adoption in September 2004, 479,160 shares of the Companys stock were available for
use under this plan as of October 4, 2008.



The maximum
number of shares of stock that may have been issued under the 2001 Stock Option and Incentive Plan was 1,600,000 shares. During the first five months of fiscal 2009, the Company granted no shares under this plan. After deducting stock options,
performance shares and restricted stock issued or granted under this plan since adoption in September 2001, there were 169,697 shares of the Companys stock available for use under this plan as of October 4, 2008.



The Company recorded compensation expense for various stock-based
compensation awards issued pursuant to the plans described herein in the amount of $140,000 for the five months ended October 4, 2008. Related income tax benefit of $49,000 was recorded during the five months ended October 4, 2008.



Fair Value Estimation Methodology and
Assumptions



The Companys use of the Black-Scholes
option pricing model required management to make various assumptions including the risk-free interest rate, expected term, expected volatility and dividend yield. Expected volatilities were based on the historical volatility of the Companys
stock. The expected term represented the period of time that stock-based compensation awards granted were expected to be outstanding and was estimated based on considerations including the vesting period, contractual term and anticipated employee
exercise patterns. The risk-free rate for periods during the contractual life of stock-based compensation awards was based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding to the expected life of the award.
Dividend yield assumptions were based on historical patterns and future expectations.



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Prior to the adoption of SFAS No. 123(R) Share-Based Payment (revised 2004) on
April 30, 2006, the Company used the Black-Scholes option pricing model to determine the fair value of its equity based stock option awards and issuances under its Employee Stock Purchase Plan (ESPP). All other awards were based on
the intrinsic value of the underlying stock. There were no stock options granted or ESPP shares issued for the five months ended October 4, 2008.



Stock Options



Information with respect to options outstanding under the previous and current stock plans, which had various terms (not exceeding 10 years) and vesting
periods (not exceeding three years) as approved by the Compensation Committee of the Board of Directors for the five months ended October 4, 2008, is set forth below. Options were granted at no less than fair market value at the date of grant.



|                                  |  |                 |   |  |                       |      
|--------------------------------- |  | --------------- | - |  | --------------------- | -----
|                                  |  | Number ofShares |   |  | WeightedAverage Price
|Balance as of May 3, 2008         |  | 557,250         |   |  | $                     | 17.44
|Granted                           |  |                |   |  |                       |     
|Terminated                        |  | (71,044         | ) |  | $                     | 19.19
|Exercised                         |  |                |   |  |                       |     
|                                  |  |                 |   |  |                       |      
|Balance as of October 4, 2008     |  | 486,206         |   |  | $                     | 17.18
|                                  |  |                 |   |  |                       |      
|Exercisable as of October 4, 2008 |  | 486,206         |   |  | $                     | 17.18
|                                  |  |                 |   |  |                       |      



For the period October 5, 2008 through May 2, 2009 there were no stock options granted or exercised, and an additional 181,832 stock options
were terminated. As of June 20, 2009, all stock options were terminated as shares of the Companys common stock could no longer be transferred.



The following relates to the Companys outstanding and exercisable stock options as of October 4, 2008:



|                     |  |                           |  |                               |       |                                    |           |                |         |                        |   |                                    |  |          
|-------------------- |  | ------------------------- |  | ----------------------------- | ----- | ---------------------------------- | --------- | -------------- | ------- | ---------------------- | - | ---------------------------------- |  | ---------
|                     |  | Total Options Outstanding |  | Currently Exercisable Options
|Exercise Price Range |  | NumberofShares            |  | Wtd. Avg.Exercise 
Price      |       | Wtd. Avg.RemainingContractual Life |           | NumberofShares |         | Wtd. Avg.ExercisePrice |   | Wtd. Avg.RemainingContractual Life
|$10.31 - $12.99      |  | 113,213                   |  | $                             | 11.67 |                                    | 42 months |                | 113,213 |                        | $ | 11.67                              |  | 42 months
|$13.00 - $16.99      |  | 217,193                   |  | $                             | 16.26 |                                    | 46 months |                | 217,193 |                        | $ | 16.26                              |  | 46 months
|$17.00 - $22.95      |  | 155,800                   |  | $                             | 22.48 |                                    | 69 months |                | 155,800 |                        | $ | 22.48                              |  | 69 months
|                     |  |                           |  |                               |       |                                    |           |                |         |                        |   |                                    |  |          
|Total                |  | 486,206                   |  |                               |       |                                    |           |                | 486,206 |                        |   |                                    |  |          
|                     |  |                           |  |                               |       |                                    |           |                |         |                        |   |                                    |  |          



There was
no unrecognized compensation cost related to unvested stock options as of October 4, 2008 because all options were vested as of this date.



The intrinsic value of the options outstanding and currently exercisable is zero because the exercise price of the options exceeds the Companys
stock price as of October 4, 2008.



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Performance Shares



The Company granted performance shares to certain employees as authorized
within its stock plans. The performance shares expected to be used was based upon achieving free cash flow objectives, as defined, and vested over a three-year period. Expense recorded for performance shares was recognized over the
vesting period and was based upon the probability of meeting the Companys performance target, and was adjusted periodically, as required.



The Company did not grant any performance shares during the first five months of fiscal 2009.



Information related to performance shares for the five months ended
October 4, 2008 is as follows:



|                              |  |                                       |   |  |                                       |       |                                 |          |  
|----------------------------- |  | ------------------------------------- | - |  | ------------------------------------- | ----- | ------------------------------- | -------- | -
|                              |  | EstimatedNumber ofShares to beAwarded |   |  | Weighted-AverageGrant 
DateFair Value |       | MaximumNumber ofSharesAvailable |         
|Balance as of May 3, 2008     |  | 301,400                               |   |  | $                                     | 9.86  |                                 | 452,100  |  
|Granted                       |  |                                      |   |  |                                       |      |                                 |         |  
|Terminated                    |  | (92,725                               | ) |  | $                                     | 9.73  |                                 | (139,088 | )
|Distribution(a)               |  | (97,275                               | ) |  | $                                     | 15.47 |                                 | (145,912 | )
|                              |  |                                       |   |  |                                       |       |                                 |          |  
|Balance as of October 4, 2008 |  | 111,400                               |   |  | $                                     | 5.10  |                                 | 167,100  |  
|                              |  |                                       |   |  |                                       |       |                                 |          |  



|(a) | Performance shares totaling 87,675; 5,550; and 4,100 granted in fiscal 2006, 2007 and 2008, respectively.
|--- | ---------------------------------------------------------------------------------------------------------



For the period October 5, 2008 through May 2, 2009 no performance
shares were granted, 37,300 performance shares were terminated and 11,700 performance shares were distributed. The balance of performance shares as of May 2, 2009 totaled 62,400. All remaining performance shares were terminated as of
June 20, 2009 as shares of the Companys common stock could no longer be transferred.



As of October 4, 2008, unrecognized compensation cost related to performance shares totaled $49,000.



Performance Units



Beginning in fiscal 2006, the Company granted performance units to certain
employees as authorized within its stock plans. The performance units are payable in cash based upon achieving free cash flow objectives as defined and measured against pre-determined benchmarks. As of October 4, 2008, approximately
$56,000 was recorded as current liabilities in the Companys Consolidated Balance Sheet. As of October 4, 2008, approximately $22,000 was recorded as non-current liabilities in the Companys Consolidated Balance Sheet. Performance
units vest over a three-year period and compensation expense associated with these performance units is adjusted to market value at each reporting date over the vesting period.



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Information related to performance units for the five months ended
October 4, 2008 is as follows:



|                              |  |                                       |   |  |                                       |       |                                 |          |  
|----------------------------- |  | ------------------------------------- | - |  | ------------------------------------- | ----- | ------------------------------- | -------- | -
|                              |  | EstimatedNumber ofShares to beAwarded |   |  | Weighted-AverageGrant 
DateFair Value |       | MaximumNumber ofSharesAvailable |         
|Balance as of May 3, 2008     |  | 663,600                               |   |  | $                                     | 6.60  |                                 | 995,400  |  
|Granted                       |  |                                      |   |  |                                       |      |                                 |         |  
|Terminated                    |  | (283,275                              | ) |  | $                                     | 5.58  |                                 | (424,912 | )
|Distributed                   |  | (128,025                              | ) |  | $                                     | 15.04 |                                 | (192,038 | )
|                              |  |                                       |   |  |                                       |       |                                 |          |  
|Balance as of October 4, 2008 |  | 252,300                               |   |  | $                                     | 3.47  |                                 | 378,450  |  
|                              |  |                                       |   |  |                                       |       |                                 |          |  



For the period October 5, 2008 through May 2, 2009 no performance units were granted, 148,500 performance units were terminated, and 23,700
performance units were distributed. The balance of performance units as of May 2, 2009 totaled 80,100. During fiscal 2010, the Company terminated all performance units as of June 20, 2009 as shares of the Companys common stock could
no longer be transferred.



As of October 4, 2008,
unrecognized compensation cost related to performance units totaled $23,300.



Restricted Stock



The Company granted restricted stock to certain employees and directors, as authorized within its stock plans. Restricted stock is expensed over the
vesting period, which varies by grant.



Restricted stock issued for the five months ended October 4, 2008 is as follows:



|                              |  |                               |   |  |                                        |     
|----------------------------- |  | ----------------------------- | - |  | -------------------------------------- | ----
|                              |  | Number ofSharesto be 
Awarded |   |  | Weighted-Average Grant 
DateFair Value
|Balance as of May 3, 2008     |  | 88,657                        |   |  | $                                      | 7.41
|Granted                       |  | 12,000                        |   |  | $                                      | 1.87
|Terminated                    |  | (3,000                        | ) |  | $                                      | 7.05
|Vested                        |  | (40,150                       | ) |  | $                                      | 8.54
|                              |  |                               |   |  |                                        |     
|Balance as of October 4, 2008 |  | 57,507                        |   |  | $                                      | 5.48
|                              |  |                               |   |  |                                        |     



For the period October 5, 2008 through May 2, 2009 no restricted stock was granted, 24,382 restricted shares were terminated, and 25,123
restricted shares vested. The balance of restricted stock as of May 2, 2009 totaled 8,002. During fiscal 2010, the restrictions lapsed and all restricted shares fully vested.



Restricted stock granted during the first five months of fiscal 2009, net of
forfeitures in the year of grant, was 12,000 shares with a weighted-average grant date fair value of $1.87. As of October 4, 2008, unrecognized compensation cost related to restricted stock totaled $129,087.



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11. Commitments and Contingencies



Contingencies



The Company had a contingent liability with a certain state taxing authority
related to the filing and payment of franchise taxes. The Company believed that it filed and paid these taxes appropriately, and filed a protest with this taxing authority. The state court ruled in the Companys favor on this matter in February
2009. In the fourth quarter of fiscal 2009, the state taxing authority filed an appeal to this state court decision and in the first quarter of fiscal 2011, oral arguments were heard by the State Court of Appeals. Because no determination can be
made as to the resolution of this issue, as it is neither probable nor estimable, no accrual has been recorded for this item.



The Company had approximately $1,124,000 in a standby letter of credit primarily associated with the requirement to fund certain expenditures related to
workers compensation benefits as of May 1, 2010.



The Company
has tax indemnification agreements related to the sales of each subsidiary company. Under the terms of the agreements, the Company may be responsible for any tax liabilities identified subsequent to the sale of those companies.



Litigation



Except as discussed above with respect to state tax litigation, the Company
is not currently involved in any legal proceedings that are material or for which it does not believe it has adequate reserves. Any other legal proceedings in which the Company is involved are routine legal matters that are incidental to the wind
down of business operations. The Company establishes reserves for all claims and legal proceedings based on its best estimate of the amounts it expects to pay.



12. Segment Information



Prior to the wind down of business operations, the reportable segments of the Company were category management and distribution operations, video game
operations and all other.



As a result of the Companys
decision in the fourth quarter of fiscal 2008 to exit the music business in North America and the subsequent decisions in fiscal 2009 to sell certain assets and operations of the remaining operating segments, the U.S., Canadian and UK operations, as
well as the Crave and REPS operations, have been classified as discontinued operations in the Companys Consolidated Statement of Operations.



Because the operations of all the reporting segments are now categorized as discontinued operations, the disclosure of reportable segment information is
no longer meaningful and has been excluded.



13. Income
Taxes



Deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. As of May 1, 2010 and May 2, 2009, the Company had disposed of substantially all of
its operations and has significant accumulated net operating losses and related deferred tax assets. The Company has no expectation of generating future profits. As a result, the Company established a valuation allowance against all of its net
deferred tax assets except those existing at its Canadian operating subsidiary. A valuation allowance has been recognized to offset deferred tax assets



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because the Company cannot conclude that it is more likely than not that the deferred tax assets will be realized in the foreseeable future. With respect to its Canadian operations, the Company
has a net deferred tax asset as of May 1, 2010 of approximately $279,000 relating to the Companys Canadian pension. A valuation allowance was not established against this net deferred tax asset as the Company is eligible to file a
carryback claim to recover taxes paid in prior years.



For the
period ending October 4, 2008, income taxes reported under the going concern basis of accounting are allocated between continuing operations, discontinued operations and other comprehensive income in accordance with ASC Topic 740-20-45-7, which
states that all items, including discontinued operations, should be considered for purposes of determining the amount of tax benefit that results from a loss from continuing operations and that could be allocated to continuing operations. ASC Topic
740 is applied by tax jurisdiction and, in periods in which there is a pre-tax loss from continuing operations and pre-tax income in another category, such as discontinued operations or other comprehensive income, tax expense is first allocated to
the other sources of income, with a related benefit recorded in continuing operations.



The domestic and foreign components of loss from continuing operations before income taxes for the five-month period ended October 4, 2008 are as
follows (in thousands of dollars):



|                                                    |  |                                  |        |  
|--------------------------------------------------- |  | -------------------------------- | ------ | -
|                                                    |  | Five 
MonthsEndedOctober 4, 2008 |       
|Domestic                                            |  | $                                | 30,360 |  
|Foreign                                             |  |                                  | (21    | )
|                                                    |  |                                  |        |  
|Loss from continuing operations before income taxes |  | $                                | 30,339 |  
|                                                    |  |                                  |        |  



Benefit for income taxes related to the loss from continuing operations for the five-month period ended October 4, 2008 consisted of the following
(in thousands of dollars):



|                   |  |                                  |    
|------------------ |  | -------------------------------- | ---
|                   |  | Five 
MonthsEndedOctober 4, 2008
|Currently payable: |  |                                  |    
|Federal            |  | $                                | 699
|Foreign            |  |                                  |   
|State and other    |  |                                  |   
|                   |  |                                  |    
|                   |  | $                                | 699
|                   |  |                                  |    



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---



The following table provides a reconciliation of the Companys resulting income tax from continuing
operations from the federal statutory income tax (in thousands of dollars):



|                                                        |  |                                  |         |  
|------------------------------------------------------- |  | -------------------------------- | ------- | -
|                                                        |  | Five MonthsEndedOctober 4, 
2008 |        
|Federal statutory income tax                            |  | $                                | (10,619 | )
|State and local income taxes                            |  |                                  |        |  
|U.S. tax on foreign earnings                            |  |                                  | 1,799   |  
|Net increase in valuation allowance                     |  |                                  | 8,029   |  
|Repatriation of foreign earnings                        |  |                                  | 90      |  
|Other                                                   |  |                                  | 2       |  
|                                                        |  |                                  |         |  
|Resulting income tax benefit from continuing operations |  | $                                | (699    | )
|                                                        |  |                                  |         |  



14. Related Party Transactions



In November 2007, the Board of Directors appointed Mr. Albert A. Koch as Handlemans President and Chief Executive Officer through
Handlemans engagement of AP Services, LLC (APS). AP Services is affiliated with AlixPartners, a financial advisory and consulting firm, where Mr. Koch is a Vice Chairman, Managing Director and Partner.



In addition to an hourly rate and time commitment for services,
Handlemans agreement, as amended, provides that Handleman will pay APS a success fee based on 5% of the fair value of cash and/or other assets that is distributed to shareholders if such a distribution is approved by the Companys Board
of Directors. The success fee shall be paid in cash, concurrent with the date or dates that distributions are made to Handleman Companys shareholders. As of May 1, 2010, the Company has accrued $83,000 for the success fee, which is
included in the accrued liquidation costs in the Companys Consolidated Statements of Net Assets.



All APS staffing was approved, in advance of their joining Handleman by the CEO Governing Committee, which was a Committee of the Board that was formed to
oversee the AlixPartners engagement. The Company now engages Mr. Koch on a part-time basis.



This relationship is viewed as related party transactions because the APS consultants may control or significantly influence the management and operating
policies of the Company.



The Company recorded $1,589,000 of costs
related to the APS agreement during the first five months of fiscal 2009 under going concern accounting. These amounts were included in Selling, general and administrative expenses in the Companys Consolidated Statement of
Operations, and were related to labor and expenses. The Company had originally prepaid $250,000 related to the CEO retainer. During the second quarter of fiscal 2010, the Company received a refund of $150,000 of the retainer. The remaining $100,000
prepaid retainer is included in Other current assets in the Companys Consolidated Statements of Net Assets. For the fiscal year ended May 1, 2010, the Company has recorded total costs of $39,000 related to the APS agreement and has
another $386,000 included in accrued liquidation costs in the Companys Consolidated Statements of Net Assets as of May 1, 2010. All invoices from AlixPartners to the Company are reviewed and approved by a member of the Board of Directors
prior to their payment.



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15. Subsequent Event



Events and transactions have been evaluated subsequent to May 1, 2010
for the items that could potentially be recognized or disclosed in these financial statements.



In May 2010, the IRS notified the Company that it will begin an examination of the 2008 tax returns giving rise to the $10.4 million federal income tax
refund received in the fourth quarter of fiscal 2010. It is uncertain when this audit will conclude.



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|        |  |                                              
|------- |  | ---------------------------------------------
|Item 9. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
|        |  | ON ACCOUNTING AND FINANCIAL DISCLOSURE       



None.



|         |  |                        
|-------- |  | -----------------------
|Item 9A. |  | CONTROLS AND PROCEDURES



The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Companys
reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to management, including the Companys
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. The Company completed an evaluation of the Companys disclosure controls and procedures (as defined in Rule
13a-15(e) of the Securities Exchange Act of 1934 (the Act)) as of May 1, 2010, under the supervision and with the participation of the Companys Chief Executive Officer and Chief Financial Officer. Based on that evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that the Companys disclosure controls and procedures were effective as of the end of the period covered by this annual report on Form 10-K.



MANAGEMENTS REPORT ON INTERNAL CONTROL OVER FINANCIAL
REPORTING



Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Exchange Act. The Companys internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:



| | (i) | pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company;
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (iii) | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Companys assets that could have a
material effect on the financial statements.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.



Under the supervision and with the participation of management, including the
Chief Executive Officer and Chief Financial Officer, the Company conducted an assessment of the effectiveness of its internal control over financial reporting as of May 1, 2010. The assessment was based on criteria established in Internal
Control  Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management concluded that our internal control over financial reporting was effective as of
May 1, 2010.



This annual report does not include an
attestation report of the Companys registered public accounting firm regarding internal control over financial reporting. Managements report was not subject to attestation by the Companys registered public accounting firm pursuant
to temporary rules of the Securities and Exchange Commission that permit the Company to provide only managements report in this annual report.



47



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##### Table of Contents

CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING



There were no changes in internal control over financial reporting (as
defined in Rule 13a-15(f) of the Act), that occurred during the fourth fiscal quarter ended May 1, 2010, that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.



|         |  |                   |  | 
|-------- |  | ----------------- |  | 
|Item 9B. |  | OTHER INFORMATION |  | 



None.



PART III



|         |  |                                                       
|-------- |  | ------------------------------------------------------
|Item 10. |  | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE



CORPORATE GOVERNANCE



Because the Company is focused on the reduction of costs during its
liquidation and the maximization of the liquidated value of the Company, for the benefit of its creditors and potential benefit to its shareholders, the Company is not actively considering the expansion of the Board and, therefore, has not focused
on how diversity would be considered in the Director process.



The
current members of the Board of Directors have agreed to serve without compensation to see the Company through the liquidation process.



ANNUAL SHAREHOLDERS MEETING



The Company did not hold an Annual Shareholders meeting during its fiscal year ended May 1, 2010, nor does it intend to hold any future Annual
Meetings during its liquidation.



DIRECTORS



The discussion below sets forth
information as of May 1, 2010 regarding the Companys two Directors.



|                 |  |                           
|---------------- |  | --------------------------
|Eugene A. Miller |  | Director since 2002
Age 72



Mr. Miller served as Chairman of the Board of Comerica Incorporated and Comerica Bank from January 2002 through his retirement in October 2002. From
June 1999 through December 2001, Mr. Miller served as Chairman, President and Chief Executive Officer of Comerica Incorporated and Comerica Bank. From June 1993 until June 1999, Mr. Miller served as Chairman and Chief Executive Officer of
Comerica Incorporated and Comerica Bank. Mr. Millers banking career began in 1955 with The Detroit Bank, forerunner of Comerica Bank. He rose to chairman, president and chief executive officer of Comerica Incorporated and Comerica Bank
prior to the merger of Comerica Incorporated and Manufacturers National Corporation. Mr. Miller earned a bachelor of business administration degree with honors from the Detroit Institute of Technology. Mr. Miller is also a director of DTE
Energy, Inc., TriMas Corporation and Amerisure Companies.



|                   |  |                           
|------------------ |  | --------------------------
|James B. Nicholson |  | Director since 1991
Age 67



Mr. Nicholson has served as President, Chief Executive Officer and Director of PVS Chemicals, Inc. since 1979. PVS manufactures, markets and
distributes chemicals for water treatment and industrial use. Operations include six manufacturing facilities and a highly diversified product distribution network. In



48



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##### Table of Contents

addition to an extensive customer base in the United Sates, PVS has established itself in markets throughout the world, most notably in Belgium, Canada and Thailand. A 1965 graduate of Stanford
University, Mr. Nicholson holds an undergraduate degree in Economics. He earned an MBA degree from the University of Chicago in 1967 and an MS degree in Economics from the London (England) School of Economics in 1968. Mr. Nicholson worked
at the London England branch of the First National Bank of Chicago from 1967 to 1970. From 1970 to 1972, he was manager of a Dublin, Ireland office of the same bank. In 1972, Mr. Nicholson joined PVS as a Vice President and assumed the
additional duties of Treasurer in 1977. He became President of PVS in 1979 and has served as Chief Executive Officer since that date. Mr. Nicholson is Chairman of the Board of Amerisure Companies.



COMMITTEES OF THE BOARD



None.



EXECUTIVE OFFICERS OF THE REGISTRANT



The table below sets forth information as of May 1, 2010 regarding the
executive officers of the Company. Executive officers serve at the pleasure of the Board.



|              |  |    |  |                                                                
|------------- |  | -- |  | ---------------------------------------------------------------
|Name and Age  |  |    |  | Office and Year First Elected or
Appointed                     
|              |  |   
|A.A. Koch     |  | 68 |  | (1)    President and Chief Executive Officer (2007)            
|              |  |   
|Rozanne Kokko |  | 56 |  | (2)    Senior Vice President and Chief Financial Officer (2008)



| | 1. | A. A. Koch has served as President and Chief Executive Officer through the Companys engagement of AP Services, LLC since November 2007. AP Services is affiliated
with AlixPartners, a financial advisory and consulting firm, where Mr. Koch is a Vice Chairman, Managing Director and Partner.
| | -- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | 2. | Rozanne Kokko was named Senior Vice President and Chief Financial Officer in July 2008. Previously, Ms. Kokko served as Senior Vice President, Finance and National
Team since February 2008; Vice President, Wal-Mart United States since October 2006; and Vice President, National Team since July 2004.
| | -- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



CODE OF BUSINESS CONDUCT AND ETHICS



The Company has adopted a Code of Business Conduct and Ethics applicable to all directors, officers and employees of the Company including the
Companys principal executive officer and principal financial officer.



SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE



Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Companys executive officers and Directors and persons who beneficially own more than 10% of a registered class of the Companys equity securities (insiders) to file reports with the SEC regarding their pecuniary
interest in any of the Companys equity securities and any changes thereto, and to furnish copies of these reports to the Company. Based on the Companys review of the insiders forms furnished to the Company or filed with the SEC and
representations made by the Directors and executive officers of the Company, no insider failed to file on a timely basis a Section 16(a) report in fiscal 2010.



49



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##### Table of Contents

AUDIT COMMITTEE



The Company does not have a separately designated audit committee. Because the Company has only two directors, the full Board of Directors
functions as the Companys Audit Committee.



|         |  |                        |  | 
|-------- |  | ---------------------- |  | 
|Item 11. |  | EXECUTIVE COMPENSATION |  | 
|         |  |                       
|         |  | DIRECTOR COMPENSATION  |  | 



During the
first quarter of fiscal 2010, the Companys two remaining members of its Board of Directors agreed to discontinue receiving director fees for their services.



The following table provides information on Handleman Companys director
compensation for non-employee directors in fiscal 2010:



|                   |  |                                                             |       
|------------------ |  | ----------------------------------------------------------- | ------
|                   |  | DirectorCompensationDuring the 
FiscalYear EndedMay 1, 2010
|Name               |  | Fees Earned or Paid inCash
(1)                             
|Eugene A. Miller   |  | $                                                           | 17,250
|James B. Nicholson |  |                                                             | 13,750
|                   |  |                                                             |       
|Total              |  | $                                                           | 31,000
|                   |  |                                                             |       

---

|(1) | Includes all fees paid in cash during the fiscal year ended May 1, 2010, including annual retainer fees, committee and chairman fees, and meeting fees. During the
first quarter of fiscal 2010, the Companys remaining two members of its Board of Directors agreed to discontinue receiving director fees for their services.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



COMPENSATION DISCUSSION AND ANALYSIS



The Companys Board of Directors
administers the Companys executive compensation program.



The compensation of Albert A. Koch, the Companys Chief Executive Officer, has been determined pursuant to the Companys agreement with AP
Services, LLP, which is described under Item 13. Certain Relationships and Related Transactions. The Board of Directors thus exercises no ongoing discretion with respect to the compensation of Mr. Koch.



The Board of Directors is also responsible for the oversight of the
Companys retirement plans and health and welfare benefit plans. Additionally, the Board of Directors administers the Companys various equity compensation plans, and exercises general oversight over the Companys compensation
practices.



50



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##### Table of Contents

SUMMARY COMPENSATION TABLE



|                                              |  |                                                                   |  |                |  |                |  |                               |  |                          |        |  |               
|--------------------------------------------- |  | ----------------------------------------------------------------- |  | -------------- |  | -------------- |  | ----------------------------- |  | ------------------------ | ------ |  | --------------
|                                              |  | Summary Compensation Table for the Fiscal Year Ended May 1, 
2010
|Name and Principal
Position                   |  | FiscalYear                                                        |  | Salary(2)($)   |  | Bonus(3)($)    |  | ChangeinPensionValue(4)(5)($) |  | All OtherCompensation($) |        |  | Total($)      
|Albert A. Koch(1)
President and CEO           |  | 20102009                                                          |  |              |  |              |  |                             |  | 35,376758,424            | (1)(1) |  | 35,376758,424 
|Rozanne Kokko
Senior VP and CFO               |  | 20102009                                                          |  | 258,404224,327 |  | 204,000110,000 |  | 33,82749,238                  |  | 10,781264,821            | (6)(7) |  | 507,012648,386
|Donald M. Genotti
VP and Corporate
Controller |  | 20102009                                                          |  | 60,968163,589  |  | 67,400162,000  |  |                             |  | 2,403118,877             | (8)(9) |  | 130,771444,466

---

|(1) | Mr. Koch is not a Handleman Company employee. AP Services, LLC, a subsidiary of AlixPartners, LLP, provided his services to the Company under contract. The amount
shown under All Other Compensation is the amount expensed for fees to AP Services, LLC for Mr. Kochs services in all capacities, excluding travel expenses.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Reflects salary earned in fiscal 2010 and 2009, Ms. Kokkos base salary was increased from $260,000 to $270,000 effective January 4, 2010 and increased from
$225,000 to $260,000 effective as of April 1, 2009. On March 10, 2010, the Companys Board of Directors approved a reduction in work hours and a corresponding decrease in the annual salary, management bonus and retention bonus for
Rozanne Kokko. Due to the reduced workload during the wind down period, Ms. Kokkos annual compensation and bonus will decrease from $378,000 to $264,000 and her retention bonus will decrease from $100,000 to $50,000 effective
April 5, 2010. Ms Kokko remains eligible for a discretionary bonus upon her final termination date. Mr. Genotti resigned from the company on July 31, 2009. Upon his resignation, Mr. Genottis base salary was $166,860.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | On May 22, 2007, Handleman Companys Compensation Committee adopted Handleman Companys Key Employee Retention Plan (KERP) for executive
officers and certain other employees. The bonus amounts for fiscal 2009 shown for Ms. Kokko and Mr. Genotti of $110,000 and $162,000, respectively, represent retention payments made to retain these employees during the wind down period.
The fiscal 2010 bonus amount for Ms. Kokko represents an incentive bonus of $104,000 and a retention bonus of $100,000. The fiscal 2010 bonus amount for Mr. Genotti represents an incentive bonus of $35,000 and a retention bonus of $32,400.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(4) | Includes annual change in the actuarial present value of accumulated pension and Supplemental Executive Retirement Plan benefits in fiscal 2009. The fiscal 2010 amount
includes annual change in the actuarial present value of accumulated pension for Ms. Kokko.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(5) | As of November 1, 2006, the amounts accrued in the U.S. Supplemental Executive Retirement Plan were frozen for all participants. The SERP covered a select group of
management employees of the Company. The computation of benefits under the SERP was based upon a formula that takes in to consideration retirement age, years of service up to a maximum of 30 years, and average annual compensation during the highest
five consecutive years within the last 10 year of employment. The compensation covered by the SERP includes all earnings from the Company as reported on the employees W-2 forms, for base pay, overtime, and bonus payment, plus salary deferrals.
No maximum was applied to compensation covered under the SERP. A Trust, established when the SERP was first formed in May 1994 was fully funded to meet SERP obligations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



51



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##### Table of Contents

|(6) | Includes company car benefits and amounts paid for certain life and health insurance benefits and amounts contributed to Ms. Kokko. For fiscal 2010, such amounts
were $8,975 and $1,806, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(7) | Includes severance based on the Change of Control Agreement between Ms. Kokko and the Company, company car benefits, amounts paid for certain life and health
insurance benefits and amounts contributed to Ms. Kokkos 401(k) Plan account for the Company matching of employee contributions. For fiscal 2009, such amounts were $249,092; $8,984; $1,806; and $4,939, respectively.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(8) | Includes company car benefits and amounts paid for certain life and health insurance benefits to Mr. Genotti. For fiscal 2010 such amounts were $2,143 and $260,
respectively.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(9) | Includes severance, company car benefits, amounts paid for certain life and health insurance benefits and amounts contributed to Mr. Genottis 401(k) Plan
account for the Company matching of employee contributions. For fiscal 2009 such amounts were $102,683; $7,960; $966; and $7,268, respectively.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|         |  |                                                               
|-------- |  | --------------------------------------------------------------
|Item 12. |  | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|         |  | AND RELATED STOCKHOLDER MATTERS                               
|         | 
|         |  | EQUITY COMPENSATION PLANS                                     



None.



52



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##### Table of Contents

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The table below reflects the number of shares beneficially owned by
(1) each Director of the Company; (2) each Executive Officer of the Company named in the Summary Compensation Table; (3) all Directors and Executive Officers as a group; and (4) each person or group owning more than five percent
of the outstanding shares of Handleman Company Common Stock. Unless otherwise noted, the information is stated as of May 31, 2010 and the beneficial owners exercise sole voting and/or investment power over their shares.



|                                                            |  |              |     |  |                  |  
|----------------------------------------------------------- |  | ------------ | --- |  | ---------------- | -
|Name of Beneficial Owner                                    |  | Shares Owned |     |  | Percent of Class |  
|Albert A. Koch                                              |  | 21,213       |     |  | *                |  
|Rozanne Kokko                                               |  | 2,422        |     |  | *                |  
|Donald M. Genotti                                           |  | 13,196       |     |  | *                |  
|Eugene A. Miller                                            |  | 24,452       |     |  | *                |  
|James B. Nicholson                                          |  | 29,214       |     |  | *                |  
|All Directors and Executive Officers
as a Group (5 persons) |  | 90,497       | (a) |  | *                |  
|S. Muoio & Co. LLC                                          |  | 3,161,023    | (b) |  | 15.4             | %
|Met Investors Advisory, LLC                                 |  | 2,614,013    | (b) |  | 12.7             | %
|Underhill Partners, L.P.                                    |  | 1,795,861    | (b) |  | 8.8              | %
|Blackhorse Capital Management LLC                           |  | 1,151,613    | (b) |  | 5.6              | %
|Third Avenue Management LLC                                 |  | 1,096,093    | (b) |  | 5.3              | %

---

|* | Less than 1% of the Companys outstanding shares of Common Stock.
|- | -----------------------------------------------------------------



|(a) | All Directors and Executive Officers as a group (5 persons) beneficially owned 90,497 shares of the Companys outstanding Common Stock as of May 31, 2010.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------



|(b) | Based on information filed with the Securities and Exchange Commission, (1) S. Muoio & Co., LLC, 500 Madison Avenue, Suite 406, New York,
New York 10022, owns 3,161,023 shares (15.4%) of the Companys outstanding Common Stock; (2) Met Investors Advisory, LLC, 5 Park Plaza, Suite 1900, Irvine, California 92614, owns 2,614,043 (12.7%) of the Companys
outstanding Common Stock; (3) Underhill Partners, L.P., 61 Broadway,
31stFloor, New York, New York 10006 owns 1,795,861 shares
(8.8%) of the Companys outstanding Common Stock; (4) Blackhorse Capital Management LLC, 338 S. Sharon Amity Road, #202, Charlotte, North Carolina 28211, owns 1,151,613 shares (5.6%) of the Companys outstanding Common
Stock; and (5) Third Avenue Management LLC, 622 Third Avenue,
32ndFloor, New York, New York 10017, owns 1,096,093
shares (5.3%) of the Companys outstanding Common Stock. Management does not know of any other person who, as of May 31, 2009, beneficially owned more than 5% of the Companys Common Stock.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53



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##### Table of Contents

|         |  |                                                    
|-------- |  | ---------------------------------------------------
|Item 13. |  | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
|         |  | DIRECTOR INDEPENDENCE                              
|         | 
|         |  | RELATED PERSON TRANSACTIONS                        



Payments to AP Services, LLC



Mr. Albert Koch, the President and Chief Executive Officer of the Company, has served in those capacities since November 2007 through the
Companys engagement of AP Services, LLC, a Michigan limited liability company. AP Services is affiliated with AlixPartners, a financial advisory and consulting firm, of which Mr. Koch is a Vice Chairman and has served as a Managing
Director since 1995 and Partner since 2007. Upon commencement of the agreement a retainer of $250,000 was paid to AP Services to be applied against expenses of AP Services personnel upon the completion of the engagement. During the second
quarter of fiscal 2010, the Company received a refund of $150,000 of the retainer.



During the fiscal years ended May 1, 2010 and May 2, 2009, Handleman Company paid $33,000 and $2,470,000, respectively (exclusive of the
retainer noted above and the success fee discussed below) to AP Services for interim management services provided by AP Services personnel, including the services of its employee, Albert Koch. Mr. Koch is a partner in AlixPartners and
thus an indirect equity owner in AP Services. His ownership in AP Services amounts to less than 10% of its total equity.



Per the agreement with AP Services, Handleman initially agreed to pay AP Services a success fee that was equal to 5% of the increase in shareholder market
capitalization from the inception of the agreement through the payment due date. On May 29, 2008, Handleman and AP Services amended their agreement with respect to the success fee. The Amendment provides that in lieu of the success fee
previously agreed to, Handleman will pay AP Services a success fee based on 5% of the fair value of cash and/or other assets that is distributed to shareholders. The success fee shall be paid in cash, concurrent with the date or dates that
distributions are made to Handlemans shareholders. As of May 1, 2010, the Company has accrued $83,000 for the success fee.



|         |  |                                                                      
|-------- |  | ---------------------------------------------------------------------
|Item 14. |  | PRINCIPAL ACCOUNTING FEES AND SERVICES                               
|         | 
|         |  | PRE-APPROVAL POLICIES AND PROCEDURES FOR AUDIT AND NON-AUDIT SERVICES



Pursuant to its charter, the Board of Directors must pre-approve the performance of audit and non-audit services. In pre-approving all audit
services and permitted non-audit services, the Board of Directors considers whether the provision of the permitted non-audit services is consistent with applicable law and stock exchange policies and with maintaining the independence of the
Companys independent registered public accounting firm.



54



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##### Table of Contents

Fees of Independent Registered Public Accounting Firm in Fiscal 2010 and
Fiscal 2009



The following information sets forth the fees that
were billed in fiscal 2010 and fiscal 2009 for audit and other services provided by Grant Thornton, the Companys independent registered public accounting firm. The Board of Directors, based on its review and discussions with management and
Grant Thornton, determined that the provision of these services was compatible with maintaining Grant Thorntons independence. All of such services were approved in conformity with the pre-approval policies and procedures described above.



|                      |  |                              |         |                             |   |          
|--------------------- |  | ---------------------------- | ------- | --------------------------- | - | ---------
|                      |  | Fiscal 
YearEndedMay 1, 2010 |         | Fiscal
YearEndedMay 2, 2009
|Audit fees(1)         |  | $                            | 249,671 |                             | $ | 670,607  
|Audit-related fees(2) |  |                              | 77,722  |                             |   | 130,664  
|Tax fees(3)           |  |                              | 352,887 |                             |   | 271,465  
|                      |  |                              |         |                             |   |          
|Total fees            |  | $                            | 680,280 |                             | $ | 1,072,736
|                      |  |                              |         |                             |   |          



|(1) | Includes recurring audit of consolidated financial statements including statutory audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States); and services related to SEC registration statements and financial reporting.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Includes audits of employee benefit plans.
|--- | ------------------------------------------



|(3) | Includes tax return review and tax planning services.
|--- | -----------------------------------------------------



55



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##### Table of Contents

PART IV



|         |  |                                        
|-------- |  | ---------------------------------------
|Item 15. |  | EXHIBITS, FINANCIAL STATEMENT SCHEDULES



|(a) | 1. The following financial statements and supplementary data are filed as a part of this report under Item 8:
|--- | -------------------------------------------------------------------------------------------------------------



| | Report of Independent Registered Public Accounting Firm
| | -------------------------------------------------------



| | Consolidated Statements of Changes in Net Assets  For the Period October 5, 2008 to May 1, 2010
| | ------------------------------------------------------------------------------------------------



| | Consolidated Statements of Net Assets as of May 1, 2010 and May 2, 2009
| | -----------------------------------------------------------------------



| | Consolidated Statement of Operations  For the Five-Month Period Ended October 4, 2008
| | --------------------------------------------------------------------------------------



| | Consolidated Statement of Shareholders Equity  For the Five-Month Period Ended October 4, 2008
| | ------------------------------------------------------------------------------------------------



| | Consolidated Statement of Cash Flows  For the Five-Month Period Ended October 4, 2008
| | --------------------------------------------------------------------------------------



| | Notes to Consolidated Financial Statements
| | ------------------------------------------



| | 2. Financial Statement Schedules
| | --------------------------------



| | II. Valuation and Qualifying Accounts and Reserves
| | --------------------------------------------------



| | All other schedules for Handleman Company have been omitted since the required information is not present, or not present in an amount sufficient to require submission
of the schedule, or because the information required is included in the financial statements or the notes thereto.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



56



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##### Table of Contents

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS AND RESERVES

YEARS ENDED MAY 2, 2009 AND May 1, 2010

(in thousands of dollars)



|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|---------------------------------------------------------------------------------- |  | ---------------------------- | ------ | --------------------------- | - | -------- | ----------------------- | -------- | ---------------------------------------------- | ------ | ----------------------- | - | ------ |  | - | -
|COLUMN A                                                                           |  | COLUMN B                     |        | COLUMN C                    |   | COLUMN D |                         | COLUMN E
|                                                                                   |  |                              |        | Additions:                  |   |          |                         |         
|Description                                                                        |  | Balance atBeginningof
Period |        | Charged toCosts
andExpenses |   |          | Charged 
toSalesReturns |          | Deductions:Adjustmentsof, or Chargeto, Reserve |        | Balance atEnd of Period
|Year ended May 2, 2009:                                                            |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Accounts receivable, allowance for gross profit impact of estimated future returns |  | $                            | 4,458  |                             | $ | (23,357  | )                       |          | $                                              | 21,574 |                         | $ | 2,675  |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Accounts receivable, allowance for doubtful accounts                               |  | $                            | 3,509  |                             | $ | (594     | )                       |          | $                                              | 0      |                         | $ | 2,915  |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Inventory reserve                                                                  |  | $                            | 9,333  |                             | $ | 3,334    |                         |          | $                                              | 0      |                         | $ | 12,667 |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Income tax valuation allowance                                                     |  | $                            | 51,264 |                             | $ | (51,264  | )                       |          | $                                              | 0      |                         | $ | 0      |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Year ended May 1, 2010:                                                            |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Accounts receivable, allowance for gross profit impact of estimated future returns |  | $                            | 0      |                             | $ | 0        |                         |          | $                                              | 0      |                         | $ | 0      |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Accounts receivable, allowance for doubtful accounts                               |  | $                            | 0      |                             | $ | 0        |                         |          | $                                              | 0      |                         | $ | 0      |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Inventory reserve                                                                  |  | $                            | 0      |                             | $ | 0        |                         |          | $                                              | 0      |                         | $ | 0      |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  
|Income tax valuation allowance                                                     |  | $                            | 0      |                             | $ | 0        |                         |          | $                                              | 0      |                         | $ | 0      |  | $ | 0
|                                                                                   |  |                              |        |                             |   |          |                         |          |                                                |        |                         |   |        |  |   |  



57



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##### Table of Contents

3. Exhibits as required by Item 601 of Regulation S-K.



(a) The following documents are filed as part of this Annual
Report on the Form 10-K:



|               |  |                                                                                                                                                             |  |  
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|Exhibit
Number |  | EXHIBIT                                                                                                                                                     |  |  
|               |  |                                                                                                                                                            
|3(a)           |  | Handleman Companys Restated Articles of Incorporation dated June 30, 1989
(Exhibit A to Form 10-K for the year ended May 1, 1993).                         |  | *
|               |  |                                                                                                                                                            
|3(b)           |  | Handleman Company Bylaws adopted March 7, 1990, as amended through February 22, 2006 (Form 8-K dated February 22, 2006).                                    |  | *
|               |  |                                                                                                                                                            
|10(a)          |  | 1992 Performance Incentive Plan (Form S-8 dated March 5, 1993, File No. 33-59100).                                                                          |  | *
|               |  |                                                                                                                                                            
|10(b)          |  | 1998 Stock Option and Incentive Plan (Form S-8 dated December 21, 1998, File No. 333-69389).                                                                |  | *
|               |  |                                                                                                                                                            
|10(c)          |  | 2001 Employee Stock Purchase Plan (Form S-8 dated November 1, 2001, File No. 333-72622).                                                                    |  | *
|               |  |                                                                                                                                                            
|10(d)          |  | 2001 Stock Option and Incentive Plan (Form S-8 dated November 1, 2001, File No. 333-72624).                                                                 |  | *
|               |  |                                                                                                                                                            
|10(e)          |  | Amendment to Handleman Company 2001 Stock Option and Incentive Plan (Exhibit A to Form 10-K for the fiscal year ended May 1, 2004).                         |  | *
|               |  |                                                                                                                                                            
|10(f)          |  | Amendment to Handleman Company 1998 Stock Option and Incentive Plan (Exhibit B to Form 10-K for the fiscal year ended May 1, 2004).                         |  | *
|               |  |                                                                                                                                                            
|10(g)          |  | Amendment to Handleman Company 2001 Stock Option and Incentive Plan (Exhibit 10.1 to Form 10-Q for the quarter ended January 31, 2004).                     |  | *
|               |  |                                                                                                                                                            
|10(h)          |  | Amendment to Handleman Company 1998 and 2001 Stock Options and Incentive Plan (Exhibit 10.3 to Form 10-Q for the quarter ended October 30, 2004).           |  | *
|               |  |                                                                                                                                                            
|10(i)          |  | 2004 Stock Plan (Form S-8 dated November 15, 2004, File No. 333-120485).                                                                                    |  | *
|               |  |                                                                                                                                                            
|10(j)          |  | Handleman Company Fiscal Year 2005 Annual Management Incentive Plan (Form 8-K dated June 14, 2005).                                                         |  | *
|               |  |                                                                                                                                                            
|10(k)          |  | Fiscal Year 2005 Performance Share Awards Plan (Form 8-K dated June 14, 2005).                                                                              |  | *
|               |  |                                                                                                                                                            
|10(l)          |  | Handleman Companys Fiscal Year 2006 Annual Management Incentive Plan (Form 8-K dated June 14, 2005).                                                       |  | *
|               |  |                                                                                                                                                            
|10(m)          |  | Fiscal Year 2006 Performance Awards Plan (Form 8-K dated June 14, 2005).                                                                                    |  | *
|               |  |                                                                                                                                                            
|10(n)          |  | Form of the Handleman Company Annual Management Incentive Plan Participants Summary (Exhibit 10(n) to Form 10-K for the fiscal year ended April 30, 2005). |  | *



58



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                            |  |  
|-------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -
|Exhibit
Number |  | EXHIBIT                                                                                                                                                                                                                                    |  |  
|               |  |                                                                                                                                                                                                                                           
|10(o)          |  | Form of Performance Share Grant Agreement (Fiscal 2003) (Exhibit 10(o) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                                             |  | *
|               |  |                                                                                                                                                                                                                                           
|10(p)          |  | Form of Performance Share Grant Agreement (Fiscal 2005) (Exhibit (10p) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                                             |  | *
|               |  |                                                                                                                                                                                                                                           
|10(q)          |  | Performance Share and Performance Unit Grant Agreement (Fiscal 2006) (Exhibit 10(q) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                                |  | *
|               |  |                                                                                                                                                                                                                                           
|10(r)          |  | Handleman Company Restricted Stock Agreement Long Term Performance Incentive Grant (Exhibit 10(r) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                  |  | *
|               |  |                                                                                                                                                                                                                                           
|10(s)          |  | Form of Handleman Company Key Employee Retention Program Agreement
(Exhibit 10(s) to Form 10-K for the fiscal year ended April 28, 2007).                                                                                                  |  | *
|               |  |                                                                                                                                                                                                                                           
|10(t)          |  | Handleman Company Severance Guidelines dated May 29, 2008 (Exhibit 99.2 to Form 8-K dated June 2, 2008).                                                                                                                                   |  | *
|               |  |                                                                                                                                                                                                                                           
|10(u)          |  | Severance Agreement between Handleman Company and Stephen Strome dated November 27, 2007 (Exhibit 99.1 to Form 8-K dated November 30, 2007).                                                                                               |  | *
|               |  |                                                                                                                                                                                                                                           
|10(v)          |  | Summary of Directors Compensation (Exhibit 10(s) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                                                                  |  | *
|               |  |                                                                                                                                                                                                                                           
|10(w)          |  | Summary of Salary Continuation Death Benefits for Officers and Directors (Exhibit 10(t) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                            |  | *
|               |  |                                                                                                                                                                                                                                           
|10(x)          |  | Handleman Company Defined Contributions Supplemental Executive Retirement Plan (United States). (Exhibit 10(aa) to Form 10-K for the fiscal year ended April 28,
2007).                                                                    |  | *
|               |  |                                                                                                                                                                                                                                           
|10(y)          |  | Advisory Agreement with David Handleman (Exhibit to Form 10-K for the fiscal year ended April 28, 1990).                                                                                                                                   |  | *
|               |  |                                                                                                                                                                                                                                           
|10(z)          |  | Form of Change of Control/Severance Agreement, generally for grade 14 and higher (Exhibit 10(dd) to Form 10-K for the fiscal year ended April 30, 2005).                                                                                   |  | *
|               |  |                                                                                                                                                                                                                                           
|10(aa)         |  | Form of Change of Control/Severance Agreement for Certain Executive Officers, generally for grade 13 (Exhibit 10(ff) to Form 10-K for the fiscal year ended April 28, 2007).                                                               |  | *
|               |  |                                                                                                                                                                                                                                           
|10(bb)         |  | Securities Purchase Agreement among Handleman Company and the Shareholders, Optionholders and Warrantholders of Crave Entertainment Group, Inc. dated October 18, 2005 (Exhibit
10.1 to Form 10-Q for the quarter ended October 29, 2005). |  | *
|               |  |                                                                                                                                                                                                                                           
|10(cc)         |  | Amendment to Securities Purchase Agreement dated November 22, 2005 (Exhibit 10.2 to Form 10-Q for the quarter ended October 29, 2005).                                                                                                     |  | *
|               |  |                                                                                                                                                                                                                                           
|10(dd)         |  | Asset Purchase Agreement between Handleman Company and Anderson Merchandisers, L.P. dated June 2, 2008 (Exhibit 10.1 to Form 8-K filed June 2, 2008).                                                                                      |  | *
|               |  |                                                                                                                                                                                                                                           
|10(ee)         |  | Management and Restructuring Services Agreement between Handleman Company and AP Services Inc. dated November 27, 2007 (Exhibit 99.2 to Form 8-K dated November 30,
2007).                                                                 |  | *
|               |  |                                                                                                                                                                                                                                           
|10(ff)         |  | Amendment to AP Services LLP Agreement dated May 29, 2008 (Exhibit 10.5 to Form 8-K dated June 2, 2008).                                                                                                                                   |  | *



59



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##### Table of Contents

|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  
|------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|ExhibitNumber |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(gg)        |  | $140,000,000 Senior Secured Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company and certain of its subsidiaries as Guarantors, Handleman Entertainment
Resources L.L.C. and certain other domestic subsidiaries of Handleman Company as Borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-Lead Arranger and General Electric Capital Corporation as
Co-Lead Arranger (Exhibit 10.1 to Form 8-K dated May 1, 2007). |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(hh)        |  | $110,000,000 Credit Agreement dated April 30, 2007 among Handleman Company, as Parent Guarantor, and General Electric Capital Corporation, as Administrative Agent, Agent and
Lender, and GE Capital Markets, Inc., as Lead Arranger (Exhibit 10.2 to Form 8-K dated May 1, 2007).                                                                                                                                                                                                              |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(ii)        |  | Waiver and First Amendment to Credit Agreement dated June 28, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and
General Electric Capital Corporation, as administrative agent (Exhibit 10.1 to Form 10-Q for the quarter ended July 28, 2007).                                                                                                                                                                               |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(jj)        |  | Waiver and First Amendment to the Credit Agreement dated June 27, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and Silver Point
Finance LLC, as administrative agent (Exhibit 10.2 to Form 10-Q for the quarter ended July 28, 2007).                                                                                                                                                                                                           |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(kk)        |  | Second Amendment to Credit Agreement dated September 5, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and
General Electric Capital Corporation, as administrative agent (Exhibit 10.1 to Form 10-Q for the quarter ended October 27, 2007).                                                                                                                                                                                  |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(ll)        |  | Second Amendment to Credit Agreement dated September 5, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and Silver Point Finance LLC,
as administrative agent (Exhibit 10.2 to Form 10-Q for the quarter ended October 27, 2007).                                                                                                                                                                                                                  |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(mm)        |  | Third Amendment to Credit Agreement dated November 30, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and
General Electric Capital Corporation, as administrative agent (Exhibit 10.3 to Form 10-Q for the quarter ended October 27, 2007).                                                                                                                                                                                   |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(nn)        |  | Third Amendment to Credit Agreement dated November 30, 2007 among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and Silver Point Finance LLC,
as administrative agent (Exhibit 10.4 to Form 10-Q for the quarter ended October 27, 2007).                                                                                                                                                                                                                    |  | *
|              |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|10(oo)        |  | Fourth Amendment to Credit Agreement dated January 10, 2008, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and
General Electric Capital Corporation, as administrative agent (Exhibit 10.1 to Form 10-Q for the quarter ended January 31, 2008).                                                                                                                                                                                   |  | *



60



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |  
|-------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|Exhibit
Number |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  |  
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(pp)         |  | Fourth Amendment to Credit Agreement dated January 10, 2008, among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and Silver Point Finance LLC,
as administrative agent (Exhibit 10.2 to Form 10-Q for the quarter ended January 31, 2008).                                                                                                                                                                                                                                           |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(qq)         |  | Fifth Amendment to Credit Agreement dated March 11, 2008, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and General
Electric Capital Corporation, as administrative agent (Exhibit 10.3 to Form 10-Q for the quarter ended January 31, 2008).                                                                                                                                                                                                              |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(rr)         |  | Fifth Amendment to Credit Agreement dated March 11, 2008, among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and Silver Point Finance LLC, as
administrative agent (Exhibit 10.4 to Form 10-Q for the quarter ended January 31, 2008).                                                                                                                                                                                                                                              |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(ss)         |  | Sixth Amendment to Credit Agreement dated April 30, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and Silver
Point Finance, LLC, as administrative agent (Exhibit 10.1 to Form 8-K dated May 15, 2008).                                                                                                                                                                                                                                              |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(tt)         |  | Sixth Amendment to Credit Agreement dated April 30, 2007, among Handleman Company and certain subsidiaries of Handleman Company, certain lenders and General Electric Capital
Corporation, as administrative agent (Exhibit 10.2 to Form 8-K dated May 14, 2008).                                                                                                                                                                                                                                                       |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(uu)         |  | Seventh Amendment to $140,000,000 Senior Secured Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company and certain of its subsidiaries as Guarantors,
Handleman Entertainment Resources L.L.C. and certain other domestic subsidiaries of Handleman Company as borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-Lead Arranger and General Electric
Capital Corporation as Co-Lead Arranger (Exhibit 10.3 to Form 8-K dated June 2, 2008).   |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(vv)         |  | Seventh Amendment to Credit Agreement dated April 30, 2008, among Handleman Company and certain subsidiaries of Handleman Company, certain credit parties and lenders, and General
Electric Capital Corporation, as administrative agent (Exhibit 10.4 to Form 8-K dated June 2, 2008).                                                                                                                                                                                                                                 |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(ww)         |  | Eighth Amendment to $140,000,000 Senior Secured Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company, and certain of its subsidiaries as Guarantors,
Handleman Entertainment Resources L.L.C. and certain other domestic subsidiaries of Handleman Company as borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-lead Arranger and General Electric
Capital Corporation, as Co-lead Arranger (Exhibit 10.1 to Form 8-K dated June 25, 2008). |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|10(xx)         |  | Eighth Amendment to credit Agreement dated April 30, 2007 among Handleman Company, as Parent Guarantor, and General Electric Capital Corporation, as Administrative Agent, Agent
and Lender, and GE Capital Markets, Inc., as Lead Arranger (Exhibit 10.2 to Form 8-K dated June 25, 2008).                                                                                                                                                                                                                             |  | *



61



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##### Table of Contents

|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |  
|-------------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -
|Exhibit
Number |  | EXHIBIT                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |  
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(yy)         |  | Ninth Amendment dated July 24, 2008 to $140,000,000 Senior Secured Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company and certain of its subsidiaries as
Guarantors, Handleman Entertainment Resources L.L.C. and certain other domestic subsidiaries of Handleman Company as Borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-Lead Arranger and General
Electric Capital Corporation as Co-Lead Arranger (Exhibit 10.2 to Form 8-K dated July 29, 2008). |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(zz)         |  | Ninth Amendment dated July 24, 2008 to Credit Agreement dated April 30, 2007 among Handleman Company, as Parent Guarantor, and General Electric Capital Corporation, as
Administrative Agent, Agent and Lender, and GE Capital Markets, Inc., as Lead Arranger (Exhibit 10.3 to Form 8-K dated July 29, 2008).                                                                                                                                                                                                                           |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(aaa)        |  | Asset Purchase Agreement among Handleman Company of Canada Limited, Handleman Company and Anderson Merchandisers-Canada, Inc. and Anderson Merchandiser, L.P. dated July 24, 2008
(Exhibit 10.1 for Form 8-K dated July 29, 2008).                                                                                                                                                                                                                                                                                                       |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(bbb)        |  | Tenth Amendment dated August 6, 2008 to the Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company and certain of its subsidiaries as Guarantors, Handleman
Entertainment Resources L.L.C. and certain other domestic subsidiaries of Handleman Company as Borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-Lead Arranger (Exhibit 10.1 to Form 8-K dated
August 6, 2008).                                                                                    |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(ccc)        |  | Payoff Letter between Handleman Company and General Electric Capital Corporation dated August 1, 2008 (Exhibit 10.2 to Form 8-K dated August 6, 2008).                                                                                                                                                                                                                                                                                                                                                                                   |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(ddd)        |  | Settlement and Release Agreement among Handleman Company and David Handleman dated August 18, 2008 (Exhibit 10.1 to Form 8-K dated August 22, 2008).                                                                                                                                                                                                                                                                                                                                                                                     |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(eee)        |  | Amendment Agreement dated September 2, 2008 to the Asset Purchase Agreement among Handleman Company of Canada Limited, Handleman Company and Anderson Merchandisers-Canada Inc.
and Anderson Merchandiser, L.P. dated July 24, 2008 (Exhibit 10.1 to Form 8-K dated September 3, 2008).                                                                                                                                                                                                                                                  |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(fff)        |  | Asset Purchase Agreement among Handleman UK Limited and Handleman Company Inc. and Oakwood Distribution dated September 16, 2008 (Exhibit 10.1 to Form 8-K dated September 18,
2008).                                                                                                                                                                                                                                                                                                                                                    |  | *
|               |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|10(ggg)        |  | Eleventh Amendment dated September 18, 2008 to the Credit and Guaranty Agreement dated April 30, 2007 among Handleman Company and certain of its subsidiaries as Guarantors,
Handleman Entertainment resources L.L.C. and certain other domestic subsidiaries of Handleman Company as Borrowers, various lenders, Silver Point Finance, LLC, as Administrative Agent, Collateral Agent and Co-Lead Arranger (Exhibit 10.2 Form 8-K
datedSeptember 18, 2008).                                                                             |  | *



62



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##### Table of Contents

|                                                                                    |  |                                                                                                                                                                                                                                         |  |   |  
|----------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | -
|Exhibit
Number                                                                      |  | EXHIBIT                                                                                                                                                                                                                                 |  |   |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|10(hhh)                                                                             |  | Asset Purchase Agreement among Crave Entertainment Group, Inc., Crave Entertainment, Inc. and SVG Distribution, Inc. and Fillpoint LLC dated February 10, 2009 (Exhibit 10.1
to Form 8-K dated February 17, 2009).                      |  | * |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|10(iii)                                                                             |  | Purchase and Assignment Agreement among REPS, L.L.C. and Handleman Company and Mosaic Sales Solutions US Operating Co., LLC dated April 6, 2009 (Exhibit 10.1 to Form 8-K dated
April 6, 2009).                                         |  | * |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|10(jjj)                                                                             |  | Purchase Agreement among Handleman Company and AAM I, LLC dated December 8, 2009 (Exhibit 10.1 to Form 10-Q dated December 9, 2009).                                                                                                    |  | * |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|10(kkk)                                                                             |  | Order of Limited Supervision Over Post-Dissolution Liquidation of Handleman Company and Declaring Shares in Handleman Company Non-Transferable Post-Dissolution, entered on May
20, 2009 (Exhibit 99.1 to Form 8-K dated May 21, 2009). |  | * |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|14                                                                                  |  | Handleman Company Code of Business Conduct and Ethics.                                                                                                                                                                                  |  | * |  
|                                                                                    |  |                                                                                                                                                                                                                                        
|21                                                                                  |  | Subsidiaries of the Registrant.                                                                                                                                                                                                         |  | * | *
|                                                                                    |  |                                                                                                                                                                                                                                        
|31.1                                                                                |  | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                     |  | * | *
|                                                                                    |  |                                                                                                                                                                                                                                        
|31.2                                                                                |  | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002.                                                                                                                                    |  | * | *
|                                                                                    | 
|*       Indicates documents are incorporated herein by reference.                   |  |                                                                                                                                                                                                                                         | 
|                                                                                    | 
|**     Indicates documents are filed as part of this Annual Report on Form
10-K.    |  |                                                                                                                                                                                                                                         | 
|                                                                                    | 
|(b) The following document is furnished as part of
this Annual Report on Form 10-K: |  |                                                                                                                                                                                                                                         | 



|               |  |                                                                                                                                                                                                                 |  | 
|-------------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | 
|Exhibit
Number |  | EXHIBIT                                                                                                                                                                                                         |  | 
|               |  |                                                                                                                                                                                                                
|32             |  | Certifications Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 furnished to the Securities Exchange
Commission.                                        |  | 
|               |  |                                                                                                                                                                                                                
|Note:          |  | Exhibits attached to this report will be furnished to requesting security holders upon payment of a reasonable fee to reimburse the Registrant for expenses incurred by Registrant
in furnishing such Exhibits. |  | 



63



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##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has dully caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |  |  |     |  |                   |  |                                                 
|------------------- |  |  |  | --- |  | ----------------- |  | ------------------------------------------------
|                    |  |  |  |     |  | HANDLEMAN COMPANY
|                    |  |  | 
|DATE: June 17, 2010 |  |  |  | BY: |  | /s/ A.A. Koch    
|                    |  |  |  |     |  |                   |  | A.A. Koch, President and
Chief Executive Officer



Pursuant to the
requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant, and in the capacities and on the dates indicated.



|                                                                                            
|--------------------------------------------------------------------------------------------
|/s/ Rozanne Kokko                                                                           
|Rozanne Kokko, Senior Vice Presidentand Chief Financial Officer(Principal Financial Officer)
|June 17, 2010                                                                               
|DATE                                                                                        



|                                          |  |  |  |                           
|----------------------------------------- |  |  |  | --------------------------
|/s/ James B. Nicholson                    |  |  |  | /s/ Eugene A. Miller      
|James B. Nicholson, Chairman of the Board |  |  |  | Eugene A. Miller, Director
|June 17, 2010                             |  |  |  | June 17, 2010             
|DATE                                      |  |  |  | DATE                      



64