**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

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**FORM 10-K**

**x**                              ANNUALREPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXHANGE ACTOF 1934

**Forthe year ended December 31, 2006**

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACTOF 1934

**Forthe transition period from                   to                   **

**Commission file number: 333-97721**

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**VERTIS, INC.**

(Exact name of registrantas specified in its charter)

| **Delaware**                              |   | **13-3768322**                    |
|-------------------------------------------|--------|-----------------------------------|
| (State or other  jurisdiction of          |   | (I.R.S. Employer  Identification) |
| incorporation or  organization)           |   |                              |
| **250 West Pratt Street, Baltimore, MD**  |   | **21201**                         |
| (Address of  principal executive offices) |   | (Zip Code)                        |

 

Registrant’s telephonenumber, including area code:   **(410) 528-9800**

Securities registeredpursuant to Section 12 (b) of the Act:   **None**

Securities registered pursuant of Section 12(g) ofthe Act:   **None**

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Indicate by check mark ifthe registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act.   Yes o   No x

Indicate by check mark ifthe registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.   Yes x   No o

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

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of the registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this Form 10-K or any amendment tothis Form 10-K.   x

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer. See definition of “acceleratedfiler and large accelerated filer” in Rule 12b-2 of the ExchangeAct:

| Large accelerated filer   o |   | Accelerated filer   o |   | Non-accelerated  filer   x |
|---------------------------------------|--------|---------------------------------|--------|--------------------------------------|

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act)   Yes o   No x

The number of shares outstanding of Registrant’scommon stock as of April 2, 2007 was 1,000 shares.

**DocumentsIncorporated By Reference:**   None

 

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**VERTIS, INC.**

**ANNUAL REPORT ON FORM 10-KFOR THE YEAR ENDED DECEMBER 31, 2006**

**TABLE OF CONTENTS**
| Form 10-K  Item No.                                   | ** ** | ** **                                                                                                                      | ** ** | **Name of Item** | ** ** | **Page** | ** ** |
|-----------------------------------------------------------------|------------|---------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|----------|------------|
| **Part I**                                                 |       |                                                                                                                            |       |                       |       |
| Item 1                                                          |       | Business                                                                                                                        |       | 3                          |       |
| Item 1A                                                         |       | Risk Factors                                                                                                                    |       | 7                          |       |
| Item 1B                                                         |       | Unresolved Staff Comments                                                                                                       |       | 11                         |       |
| Item 2                                                          |       | Properties                                                                                                                      |       | 11                         |       |
| Item  3                                                         |       | Legal  Proceedings                                                                                                              |       | 13                         |       |
| Item 4                                                          |       | Submission of Matters to Vote of Security Holders                                                                               |       | 13                         |       |
| **Part II**                                                |       |                                                                                                                            |       |                       |       |
| Item 5                                                          |       | Market for Registrant’s Common Equity, Related  Stockholder Matters and Issuer Purchases of Equity Securities              |       | 14                         |       |
| Item  6                                                         |       | Selected  Financial Data                                                                                                        |       | 14                         |       |
| Item 7                                                          |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations       |       | 17                         |       |
| Item 7A                                                         |       | Quantitative and Qualitative Disclosures about Market  Risk                                                                     |       | 38                         |       |
| Item 8                                                          |       | Financial Statements and Supplementary Data                                                                                     |       | 39                         |       |
| Item 9                                                          |       | Changes in and Disagreements with Accountants on  Accounting and Financial Disclosure                  |       | 39                         |       |
| Item  9A                                                        |       | Controls  and Procedures                                                                                                        |       | 39                         |       |
| Item  9B                                                        |       | Other  Information                                                                                                              |       | 39                         |       |
| **Part III**                                               |       |                                                                                                                            |       |                       |       |
| Item 10                                                         |       | Directors, Executive Officers and Corporate Governance                                                                          |       | 40                         |       |
| Item 11                                                         |       | Executive  Compensation                                                                                                         |       | 42                         |       |
| Item 12                                                         |       | Security Ownership of Certain Beneficial Owners and  Management and Related Stockholder Matters                  |       | 55                         |       |
| Item 13                                                         |       | Certain Relationships and Related Transactions and  Director Independence                                                       |       | 58                         |       |
| Item 14                                                         |       | Principal Accountant Fees and Services                                                                                          |       | 59                         |       |
| **Part IV**                                                |       |                                                                                                                            |       |                       |       |
| Item 15                                                         |       | Exhibits and Financial Statement Schedules                                                                                      |       | 60                         |       |
| Signatures                                                      |       | 65                                                                                                                              |       |
| Index to Financial Statements and Financial Statement  Schedule |       | F-1                                                                                                                             |       |

 

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**CAUTIONARYSTATEMENTS**

We have included inthis Annual Report on Form 10-K, and from time to time ourmanagement may make, statements which may constitute “forward-lookingstatements”. You may find discussionscontaining such forward-looking statements in “Business” and “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” aswell as within this Annual Report generally. In addition, when used in thisAnnual Report, the words “believes,” “anticipates,” “expects,” “estimates,” “plans,”“projects,” “intends” and similar expressions are intended to identify forward-lookingstatements. These forward-looking statements include statements otherthan historical information or statements of current condition, but insteadrepresent only our belief regarding future events, many of which, by theirnature, are inherently uncertain and outside of our control. It is possiblethat our actual results may differ, possibly materially, from the anticipatedresults indicated in these forward-looking statements. Important factors thatcould cause actual results to differ from those in our specific forward-lookingstatements include, but are not limited to, those discussed under “RiskFactors,” as well as:

·       generaleconomic and business conditions;

·       changesin the advertising, marketing and information services markets;

·       thefinancial condition of our customers;

·       thepossibility of future terrorist activities or the continuation or escalation ofhostilities in the Middle East or elsewhere;

·       ourability to execute key strategies;

·       actionsby our competitors;

·       theeffects of supplier price fluctuations on our operations, includingfluctuations in the price of raw materials we use;

·       downgradesin our credit ratings;

·       changesin interest rates; and

·       othermatters discussed in this Annual Report generally.

Consequently, readers of this Annual Report shouldconsider these forward-looking statements only as our current plans, estimatesand beliefs. We do not undertake and specifically decline any obligation topublicly release the results of any revisions to these forward-lookingstatements that may be made to reflect future events or circumstances after thedate of such statements or to reflect the occurrence of anticipated orunanticipated events. We undertake no obligation to update or revise anyforward-looking statement in this Annual Report to reflect any new events orany change in conditions or circumstances. All of the forward-lookingstatements in this Annual Report are expressly qualified by these cautionarystatements. Even if these plans, estimates or beliefs change because of futureevents or circumstances after the date of these statements, or becauseanticipated or unanticipated events occur, we disclaim any obligation to updatethese forward-looking statements.

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**PART I**

**ITEM1**                   BUSINESS

**Overview**

Vertis, Inc. is amarketing partner to a wide array of clients, including many of today’s Fortune500 companies. We offer world-class consulting, creative, research, directmail, media, technology and printing services. For over three decades, we haveworked with clients to turn complex marketing ideas into realities. Ourmarketing and printing heritage affords us the greatest experience in managinglarge, complicated, time-sensitive assignments. Our clients include approximately2,000 grocery stores, drug stores and other retail chains, general merchandiseproducers and manufacturers, financial and insurance service providers,newspapers, and advertising agencies.

We offer an extensive listof solutions across a broad spectrum of media designed to enable our clients toreach target customers with the most effective message. Customers may employthese services individually or on a combined basis to create an integratedend-to-end targeted marketing solution. We believe that the breadth of ourclient base limits our reliance on any individual customer. Our top tencustomers in 2006 accounted for 33.0% of our revenue, and no customer accountedfor more than 8.3% of our revenue. We have longstanding relationships with our customersas evidenced by the average length of our relationships with our ten largestcustomers, which is over 17 years.

Vertis, Inc. is aDelaware corporation incorporated in 1993. In 2006, Vertis had approximately$1.5 billion of revenue and 5,800 employees in North America. Our principalexecutive offices are located at 250 West Pratt Street, Baltimore, Maryland21201. Our Internet address is *www.vertisinc.com*.Although we are not subject to the information requirements of the SecuritiesExchange Act of 1934, as amended (the “Exchange Act”), we file annual,quarterly and special reports and other information with the Securities andExchange Commission, or SEC, pursuant to certain contractual obligations. Ourfilings are available to the public at the SEC’s website at *www.sec.gov*and also at our website, under“investor relations”, at the specified address shown above. You may read andcopy any documents we file with the SEC at its public reference facility inWashington, D.C. Please call the SEC at 1-800-SEC-0330 forfurther information on the public reference facilities.

In this Annual Report,when we use the terms “Vertis,” “we,” “our,” and the “Company,” we mean Vertis, Inc.and its consolidated subsidiaries. The words “Vertis Holdings” refer to Vertis Holdings, Inc.,the parent company of Vertis and its sole stockholder.

**Business Segments**

We operate through tworeportable business segments based on the way management views and manages theCompany. These business segments are Advertising Inserts and Direct Mail.  Advertising Inserts provides a full productline of printed targeted advertising products inserted primarily intonewspapers. Direct Mail provides personalized direct mail products and varioustargeted direct marketing services. In addition, we also provide premedia andrelated services (“Premedia”) as well as media planning and placement services(“Media Services”). These services are included in “Corporate and Other” fordiscussion within this Annual Report, together with corporate costs incurred bythe Company.

Financial and otherinformation relating to our business segments for each of 2006, 2005 and 2004can be found in Item 7, “Management’s Discussion and Analysis of FinancialCondition and Results of Operations”, and Note 21, “Segment Information”, toour consolidated financial statements included in this Annual Report.

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***Advertising Inserts***

*General.**  *Advertising Inserts provides a fullarray of targeted advertising insert products and services. Our products andservices include:

·       Targetableadvertising insert programs for retailers and manufacturers

·       Newspaperproducts (TV magazines, Sunday magazines, color comics and special supplements)

·       Consumerresearch

·       Creativeservices including page layout and design

We are a leading providerof advertising inserts and the largest single producer of newspaper TV listingguides and Sunday comics in the United States. In 2006, we produced more than33 billion advertising inserts. Advertising inserts are typically producedin color on better quality paper than the reproductions that appear inrun-of-press newspaper advertise­ments. In addition, advertising inserts allowmarketers to vary layout, artwork, design, trim size, paper type, color andformat. Versions may be targeted by newspaper zones and by specific customerdemographics. We provide 72 of the top 100 Sunday newspapers in the UnitedStates with circulation-building newspaper products and services throughproduction of comics, TV listing guides, Sunday supplements and specialsections. In 2006, we produced approximately 1.4 billion Sunday comics,and approximately 524 million TV listing guides.

*Revenue and Customers.**  *Total Advertising Insert revenuefor 2006 accounted for 70.2% of Vertis’ total 2006 revenue. Advertising Insertsemploys approximately 37 sales representatives devoted to this segment’sspecific products and services.  Ourcustomers include grocery stores, drug stores, other retailers, newspapers, andconsumer goods manufacturers. Our advertising insert products are distributedin national newspapers and, depending on their target audience, through variousforms of mail distribution and in-store circulation. Advertising Insert’s tenlargest customers accounted for approximately 45.5% of the segment’s 2006revenue. We have established and maintained long-standing customerrelationships with our major customers.

***Direct Mail***

*General.**  *Direct Mail provides a full arrayof targeted direct marketing products and services. Our products and servicesinclude:

·       Highlycustomized one-to-one marketing programs

·       Automateddigital fulfillment services

·       Directmail production with varying levels of personalization

·       Datadesign, collection and management to identify target audiences

·       Mailingmanagement services

·       Effectivenessmeasurement

·       Responsemanagement, warehousing and fulfillment services

We are one of the largestproviders of highly customized direct mail, one-to-one marketing programs,mailing management services, automated digital fulfillment and specialtyadvertising products in the United States. We derive the majority of ourrevenues from the design, production, and execution of personalized advertisingmailings rather than traditional, broadbase direct mailings. Personalizeddirect mail enables consumer goods retailers and other marketers to communicatewith their customers on an individual-by-individual basis, an approach thatprovides higher response rates than broad, non-personalized mailings.

We use sophisticated,data-driven techniques to target prospects and deliver full color, individualizedmarketing messages. We can process and manipulate databases to enable ourcustomers to target direct mail recipients based on many attributes, rangingfrom age, gender, and address to spending habits, type of car owned, whetherthe recipient is a pet owner, and many others. These highly individualizedmarketing campaigns are designed to enhance customer response levels andimprove client marketing efficiencies 

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throughon-demand workflow automation. The growth in customer data availability, the increasingsophistication of database marketing tools and the growing use of the Internetfor integrated marketing campaigns have significantly increased demand forthese services.

*Revenue and Customers.**  *Total Direct Mail revenue for 2006accounted for 22.5% of Vertis’ total 2006 revenue. Direct Mail employsapproximately 60 sales representatives devoted to this segment’s specificproducts and services.   Our customersinclude consumer goods manufacturers, financial institutions, Internetadvertisers, not-for-profit organizations, retailers and government agencies.  While a majority of our sales are madedirectly to clients, we also sell our products and services through agenciesand brokers. Direct Mail’s ten largest customers accounted for approximately 38.5%of the segment’s 2006 revenue. We have established and maintained long-standingcustomer relationships with our major customers.

***Corporate and Other***

*General.**  *Corporate and Other consists of abroad range of Premedia, Media Services and other technologies to assistclients with their advertising campaigns, including:

·       Digitalcontent management

·       Graphicdesign and animation

·       Digitalphotography, compositing and retouching

·       In-storedisplays, billboards and building wraps

·       Consultingservices

·       Newspaperadvertising development

·       Mediaplanning and placement and software solutions

We are a leading providerof digital media production and content management solutions to retailers,consumer and commercial products companies and advertising agencies. Ourservices and technologies enable clients to more efficiently create, produceand manage traditional print and advertising content. More importantly, theseservices and technologies also enable clients to benefit from the influences ofnewer digital advertising media such as CD-ROM and the Internet. Our integratedoffering enables advertisers to maintain consistency of appearance of theirproducts and brand names throughout various media forms. Additionally, includedin the Corporate and Other is our Media Services division designed to supportour targeted capabilities and marketing efforts. Corporate and Other hasapproximately 43 sales representatives devoted to this segment’s specificproducts and services. Additionally, Corporate and Other includes corporatecosts incurred by the Company.

**Seasonality of Business**

A large portion of ourrevenue is generally seasonal in nature, resulting in higher fourth quarterrevenue than in the three preceding quarters. This seasonal impact on revenuehas been somewhat mitigated over recent years due to our efforts to expand ourproduct lines, as well as expand the market for our advertising inserts toyear-round customers. Our profitability, however, continues to follow a moreseasonal pattern due to the higher marginsand efficiencies gained from running at higher capacity during the fourthquarter holiday production season.

**Raw Materials**

In 2006, we spentapproximately $587 million on raw materials. The primary raw materialsrequired in our operations are paper and ink. We also use other raw materials,such as film, chemicals, computer supplies and proofing materials. We believethat there are adequate sources of supply for our primary raw materials andthat our relationships with our suppliers yield improved quality, pricing andoverall service to our customers; however, there can be no assurance that wewill not be adversely affected by a tight market for our primary raw materials.

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Our results of operations areimpacted by the cost of paper and our ability to pass along to our customersany increases in these costs and remain competitive when there are decreases. Inrecent years, the number of suppliers of paper has declined, and we have formedstronger commercial relationships with selected suppliers, allowing us toachieve more assured sourcing of high quality paper that meets ourspecifications.

In 2006, we renegotiatedall contracts that had previously subjected us to target minimum quantities,which were mainly contracts covering the purchase of ink and press supplies(i.e. plates, blankets, solutions). Under the new contracts, there are nominimum purchase amounts required. As of December 31, 2006, we do not haveany contracts requiring us to purchase any specified minimum quantities.

**Competition**

The principal methods ofcompetition in our businesses are pricing, quality, flexibility, customertargeting capabilities, breadth of service, timeliness of delivery, customerservice and other value-added services. Pricing depends in large part on theprice of paper, which is our major raw material (see “Raw Materials” above). Pricingis also influenced by product type, shipping costs, operating efficiencies andthe ability to control costs. We believe that the introduction of new technologies,continued excess capacity in this industry, consolidation in our customers’markets, and softness in traditional brand advertising spending, combined withthe cost pressures facing customers resulting from other factors, including thecost of paper, have resulted in margin pressures and increased competition inour core businesses. We expect this trend to continue for the near term.

Our major competitors inNorth America include R.R. Donnelley & Sons Company, QuebecorWorld, Inc. and American Color Graphics. In addition, we compete withother marketing service providers such as Valassis Communications, Inc.,Harte-Hankes, Inc., Acxiom Corporation, Experian, Inc., AppliedGraphics Technologies, Inc. and Schawk, Inc. We also compete foradvertising dollars with television, radio, Internet and other forms ofelectronic media.

**Trade Names, Trademarks and Patents**

We own certain tradenames, trademarks and patents used in our business. The loss of any such tradename, other than “Vertis”, or any trademark or patent would not have a materialadverse effect on our consolidated financial condition or results ofoperations.

**Governmental Regulations**

Our business is subject toa variety of federal, state and local laws, rules and regulations. Ourproduction facilities are governed by laws and regulations relating toworkplace safety and worker health, primarily the Occupational Safety andHealth Act (“OSHA”) and the regulations promulgated thereunder. Except asdescribed herein, we are not aware of any pending legislation that in our viewis likely to affect significantly the operations of our business. We believethat our operations comply substantially with all applicable governmental rules andregulations.

**Environmental Matters**

Our operations are subjectto a number of federal, state, local and foreign environmental laws andregulations including those regarding the discharge, emission, storage,treatment, handling and disposal of hazardous or toxic substances as well asremediation of contaminated soil and groundwater. While these laws andregulations impose significant capital and operating costs on our business andthere are significant penalties for violations, these costs currently are notmaterial.

Certain environmental lawshold current owners or operators of land or businesses liable for their own andfor previous owners’ or operators’ releases of hazardous or toxic substances. Becauseof our 

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operations,the long history of industrial operations at some of our facilities, theoperations of predecessor owners or operators of certain of our businesses, andthe use, production and release of hazardous substances at these sites and atsurrounding sites, we may be subject to liability under these environmentallaws. Various facilities of ours have experienced some level of regulatoryscrutiny in the past and are, or may become, subject to further regulatoryinspections, future requests for investigation or liability for past practices.

The ComprehensiveEnvironmental Response, Compensation & Liability Act of 1980 as amended(“CERCLA”), provides for strict, and under certain circumstances, joint andseveral liability, for among other things, generators of hazardous substancesdisposed of at contaminated sites. We have received requests for information ornotifications of potential liability from the Environmental Protection Agencyunder CERCLA for a few off-site locations. We have not incurred any significantcosts relating to these matters and we do not believe that we will incurmaterial costs in the future in responding to conditions at these sites.

The nature of ouroperations exposes us to certain risks of liabilities and claims with respectto environmental matters. We believe our operations are currently in materialcompliance with applicable environmental laws and regulations. In manyjurisdictions, environmental requirements may be expected to become morestringent in the future which could affect our ability to obtain or maintainnecessary authorizations and approvals or result in increased environmentalcompliance costs.

We do not believe thatenvironmental compliance requirements are likely to have a material effect onus. We cannot predict what additional environmental legislation or regulationswill be enacted in the future or how existing or future laws or regulationswill be administered or interpreted, or the amount of future expenditures thatmay be required in order to comply with these laws. There can be no assurancethat future environmental compliance obligations or discovery of new conditionswill not arise in connection with our operations or facilities and that thesewould not have a material adverse effect on our business, financial conditionor results of operations.

**Employees**

As of December 31,2006, we had approximately 5,800 employees. Most of the hourly employees at ourNorth Brunswick and Newark, New Jersey facilities (approximately 147 employees)are represented by the United Steel, Paper and Forestry, Rubber, Manufacturing,Energy, Allied-Industrial, and Service Workers International Union. We believewe have satisfactory employee and labor relations.

**ITEM 1A**           RISKFACTORS

***Our highlyleveraged status may impair our financial condition and we may incur additionaldebt***.

As of December 31,2006, our total consolidated debt was $1.1 billion. Our substantial debt couldhave important consequences for our financial condition, including:

·       makingit more difficult for us to satisfy our obligations under the outstandingindebtedness;

·       making it more difficult to refinance ourobligations as they come due;

·       increasingour vulnerability to general adverse economic and industry conditions;

·       limitingour ability to obtain additional financing to fund future working capital,capital expenditures, acquisitions and other general corporate requirements;

·       requiringa substantial portion of our cash flow from operations for the payment ofinterest on our debt and reducing our ability to use our cash flow to fundworking capital, capital expenditures, acquisitions and general corporaterequirements;

·       limiting our ability to purchase paper andother raw materials under satisfactory credit terms thereby limiting oursources of supply and/or increasing cash required to fund operations;

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·       limitingour flexibility in planning for, or reacting to, changes in our business andthe industry in which we operate; and

·       placingus at a competitive disadvantage to other less-leveraged competitors.

The indentures governingour debt instruments, subject to specified limitations, permit us and oursubsidiaries to incur additional debt. In addition, as of December 31,2006, our senior credit facility would permit us to borrow up to an additional$90.8 million.  If new debt is added toour and our subsidiaries’ current debt levels, the related risks that we andthey now face could intensify. In March 2007, we amended the senior creditfacility to provide that the maximum availability under the credit facilitywould increase to $250 million from $220 million at December 31, 2006. Underthe amended credit facility, up to $200 million consists of a revolvingcredit facility and the remaining $50 million represents a term loan. SeeNote 11 “Long-Term Debt” to our consolidated financial statements includedelsewhere in this Annual Report and “Liquidity and Capital Resources” in Item7, “Management’s Discussion and Analysis of Financial Condition and Results ofOperations” for further information.

***Servicing our debt, including the refinancing of ourexisting debt, will require a significant amount of cash, and our ability togenerate sufficient cash depends upon many factors, some of which are beyondour control.***

Our ability to makepayments on and refinance our debt and to fund planned capital expendituresdepends on our ability to generate cash flow in the future. To some extent,this is subject to general economic, financial, competitive and other factorsthat are beyond our control. Based on the current and anticipated level ofoperations, we believe that our cash flows from operations, together withamounts available under our senior credit facility and our accounts receivablesecuritization facility, are adequate to meet our anticipated requirements forworking capital, capital expenditures, interest payments and scheduledprincipal payments for the next twelve months. See “*Contractual Obligations*” in the “Management’s Discussion andAnalysis of Financial Condition and Results of Operations” section, includedelsewhere in this Annual Report, for a summary of our contractual obligationsover the next five years. We cannot assure you, however, that our business willcontinue to generate cash flow at or above current levels. If we are unable togenerate sufficient cash flows from operations in the future to service ourdebt, we may have to refinance all or a portion of our existing debt or obtainadditional financing. We cannot assure you that any refinancing of this kindwould be possible or that any additional financing could be obtained. Most ofour existing long-term debt matures during 2009 and we cannot assure you thatany required replacement debt will be obtained. The inability to obtainadditional financing could materially impact our ability to meet our futuredebt service, capital expenditure and working capital requirements.

***Covenantrestrictions under our indebtedness may limit our ability to operate ourbusiness.***

Ourindentures and other debt agreements contain, among other things, covenantsthat may restrict our ability to finance future operations or capital needs orto engage in other business activities. The indentures and agreements restrict,among other things, our and the subsidiary guarantors’ ability to:

·       borrowmoney;

·       paydividends or make distributions;

·       purchaseor redeem stock;

·       makeinvestments and extend credit;

·       engagein transactions with affiliates;

·       engagein sale-leaseback transactions;

·       consummatecertain asset sales;

·       effecta consolidation or merger or sell, transfer, lease or otherwise dispose of allor substantially all of our assets; and

·       createliens on our assets.

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In addition, our senior credit facility requires us tomaintain a minimum Earnings Before Interest, Taxes, Depreciation andAmortization (“EBITDA”) amount, as calculated per the credit agreement. Also,as is customary in asset-based agreements, there is a provision for the creditfacility agent (the “Agent”), in its reasonable credit judgment, to establishreserves against availability based on a change in circumstances. The Agent’sright to alter existing reserves requires written consent from the borrowerswhen our minimum EBITDA, as calculated per the credit agreement, is in excessof $180 million on a quarterly trailing twelve-month basis. The Agent is notrequired to obtain written consent when our minimum EBITDA on a quarterlytrailing twelve-month basis is less than $180 million. Our trailing twelve-monthEBITDA as calculated under the credit agreement was $169.4 million atDecember 31, 2006. There were no reserves established by the Agent againstour availability in 2006. For more information about the restrictions andrequirements under our senior credit facility, see Note 11 “Long-Term Debt” toour consolidated financial statements included elsewhere in this Annual Reportand “Liquidity and Capital Resources” in Item 7, “Management’s Discussion and Analysisof Financial Condition and Results of Operations”.

Events beyond our control,including changes in general economic and business conditions, may affect ourability to meet the minimum EBITDA test. We cannot assure you that we will meetthis test or that the lenders will waive any failure to meet this test. Abreach of any of these covenants would result in a default under our indenturesand debt agreements. All of our debt instruments have customary cross-defaultprovisions. If an event of default under our debt instruments occurs, thelenders could elect to declare all amounts outstanding thereunder, togetherwith accrued interest, to be immediately due and payable. In that event, wemight not have sufficient assets to pay amounts due on our outstanding debt.

***The high level ofcompetition in the advertising and marketing services industry could have anegative impact on our ability to service debt, particularly in a prolongedeconomic downturn.***

The advertising and marketing services industry ishighly competitive in most product categories and geographic regions. Competitionis largely based on price, quality and servicing the specialized needs ofcustomers. Moreover, rapid changes in information technology may result in moreintense competition, as existing and new entrants seek to take advantage of newproducts, services and technologies that could render our products, servicesand technologies less competitive or, in some instances, even obsolete. See  “Competition” in the “Business” section. Technologicaladvances in digital transmission of data and advertising creation have resultedin the in-house production of advertising content by certain end-users whichhas had a negative impact on our profitability. In addition, our industry hasexperienced competitive pricing pressure due to industry over-capacity whichaffects the margin on our advertising insert and direct mail products. Thecompetitive pricing pressures have resulted in a decline in our margins. Inaddition, changes in product and equipment mix can have an impact on margins.

Any future periods ofeconomic downturn could result in continuing increased competition and possiblyaffect our sales and profitability. A decline in sales and profitability maydecrease our cash flow, and make it more difficult for us to service our levelof debt.

***Demand for ourservices may decrease due to a decline in clients’ or an industry’s financialcondition or due to an economic downturn.***

We cannot assure you thatthe demand for our services will continue at current levels. Our clients’demands for our services may change based on their needs and financialcondition. In addition, when economic downturns affect particular clients orindustry groups, demand for advertising and marketing services provided tothese clients or industry groups is often adversely affected. For example, asubstantial portion of our revenue is generated from customers in varioussectors of the retail industry. There can be no assurance that economicconditions or the level of demand for our services will improve or that theywill 

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notdeteriorate. If there is a period of economic downturn or stagnation, ourresults of operations may be adversely affected.

***Changes in the cost of paper could have a negativeimpact on our ability to service our indebtedness.***

An increase in the cost of paper, a key raw materialin our operations, may reduce our production volume and profits. If (i) weare not able to pass paper cost increases to our customers, or (ii) ourcustomers reduce the size of their print advertising programs, our sales andprofitability could be negatively affected. A decline in volume may decreaseour cash flow, and make it difficult for us to service our level of debt.

Increases or decreases indemand for paper have led to corresponding pricing changes and, in periods ofhigh demand, to limitations on the availability of certain grades of paper,including grades used by us. A loss of the sources of paper supply or adisruption in those sources’ business or failure by them to meet our productneeds on a timely basis could cause temporary shortages in needed materialswhich could have a negative effect on our revenue and profitability.

***Regulations and government actions on direct marketingmay affect us.***

Federal and statelegislatures have passed a variety of laws in recent years relating todirect marketing and related areas. This and similar future legislation, aswell as other government actions, could negatively affect direct marketingactivities by imposing restrictions on telemarketing and on advertising incertain industries such as tobacco and sweepstakes, increasing the postal rateand tightening privacy regulations. Therefore, this might have a substantialimpact on our direct mail services, which represent approximately 23% of ourconsolidated revenues for the twelve months ended December 31, 2006, as weand our customers adjust our behaviors in response to such legislation andgovernment actions.

***We rely on key management personnel.***

Our success will depend,in part, on the efforts of our executive officers and other key employees,including Mr. Michael DuBose. Mr. DuBose was appointed chairman andchief executive officer of the Company in November 2006. Mr. DuBosehas a significant number of years experience as a chief executive officer aswell as other executive positions. We believe Mr. DuBose provides us withthe leadership skills and prior experience that will greatly benefit Vertis,our customers and employees. The market for qualified personnel is competitiveand our future success will depend upon, among other factors, our ability toattract and retain key personnel. The loss of the services of any of our keymanagement personnel or the failure to attract and retain employees could havea material adverse effect on our results of operations and financial conditiondue to disruptions in leadership and continuity of our business relationships.

***There can be noassurance that Thomas H. Lee Partners L.P and its affiliates (“THL L.P.”), ascontrolling shareholder, will exercise its control in our best interests asopposed to its own best interests.***

Because of itsposition as controlling shareholder of Vertis, THL L.P. is able to exercisecontrol over decisions affecting us, including:

·       compositionof our board of directors, and, through it, our direction and policies,including the appointment and removal of officers;

·       mergersor other business combinations and opportunities involving us;

·       furtherissuance of capital stock or other securities by us;

·       paymentof dividends; and

·       approvalof our business plans and general business development.

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There can be no assurance that THL L.P. will exerciseits control in our best interests as opposed to its best interests ascontrolling shareholder.

In addition, THL L.P. ownsdebt securities in Vertis and Vertis Holdings, and may choose to take actionsthat are in its best interests as a debt holder, rather than a shareholder.

**ITEM1B**          UNRESOLVED STAFFCOMMENTS

None.

**ITEM2**                   PROPERTIES

**Executive Offices**

Our principal executiveoffices are located at 250 West Pratt Street, Baltimore, Maryland, and compriseapproximately 52,004 square feet of leased space, pursuant to a lease agreementexpiring on August 31, 2014.

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**ProductionFacilities**

As of December 31,2006, we owned 12 and leased****26production facilities, with an aggregate area of approximately 3,700,000 squarefeet. The leased production facilities have lease terms expiring at varioustimes from 2007 to 2016. We believe that our facilities are suitable andadequate for our business. We continually evaluate our facilities to ensurethey are consistent with our operational needs and business strategy. A summaryof production facilities is set forth in the table below:

| **Locations**                    | ** ** | ** ** | ** ** | **Square Footage**      | ** ** | **Lease Term Expiration** |
|----------------------------------|------------|------------|------------|-------------------------|------------|---------------------------|
| *Advertising  Inserts Locations* |       |       |       |                    |
| Atlanta, GA(1)                   |       | 94,700     |       | Fee Ownership           |
| Charlotte, NC                    |       | 105,700    |       | April 30, 2013     |
| City of Industry, CA             |       | 103,000    |       | September 30, 2011 |
| Columbus, OH                     |       | 141,185    |       | December 31, 2014  |
| Irving, TX                       |       | 91,649     |       | October 31, 2012   |
| East Longmeadow, MA              |       | 159,241    |       | February 2, 2016   |
| Elk Grove Village, IL            |       | 80,665     |       | August 31, 2007    |
| Greenville, MI                   |       | 130,000    |       | Fee Ownership           |
| Lenexa, KS                       |       | 89,403     |       | Fee Ownership           |
| Manassas, VA                     |       | 108,120    |       | May 31, 2014       |
| Niles, MI(2)                     |       | 90,000     |       | Fee Ownership           |
| Pomona, CA                       |       | 144,542    |       | May 31, 2011       |
| Portland, OR                     |       | 125,250    |       | November 30, 2007  |
| Riverside, CA                    |       | 83,520     |       | Fee Ownership           |
| Sacramento, CA                   |       | 57,483     |       | Fee Ownership           |
| Salt Lake City, UT               |       | 103,600    |       | June 14, 2009      |
| San Antonio, TX                  |       | 67,900     |       | Fee Ownership           |
| San Leandro, CA                  |       | 143,852    |       | November 30, 2014  |
| Saugerties, NY                   |       | 209,000    |       | Fee Ownership           |
| Tampa, FL                        |       | 72,418     |       | December 31, 2008  |
| *Direct  Mail Locations*         |       |       |       |                    |
| Bristol, PA                      |       | 123,000    |       | Fee Ownership           |
| Chalfont, PA                     |       | 320,000    |       | Fee Ownership           |
| Chicago, IL                      |       | 38,302     |       | July 31, 2009      |
| Irvine, CA                       |       | 28,000     |       | September 30, 2009 |
| Monroe Township, NJ              |       | 57,987     |       | June 30, 2012      |
| Newark, NJ                       |       | 48,692     |       | December 31, 2007  |
| Newark, NJ                       |       | 23,000     |       | Fee Ownership           |
| North Brunswick, NJ              |       | 281,232    |       | Fee Ownership           |
| York, PA                         |       | 203,133    |       | December 31, 2012  |

 

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| *Other  Locations* |   |   |   |                   |
|--------------------|--------|--------|--------|------------------------|
| Chicago, IL(3)     |   | 52,024 |   | May 31, 2011      |
| Earth City, MO     |   | 23,023 |   | June 30, 2012     |
| Greenville, SC     |   | 1,400  |   | February 28, 2008 |
| Greensboro, NC(4)  |   | 85,830 |   | April 30, 2007    |
| Harrison, NJ       |   | 21,957 |   | May 31, 2010      |
| Irving, TX         |   | 91,649 |   | October 31, 2012  |
| North Haven, CT    |   | 31,600 |   | December 27, 2007 |
| Richmond, VA       |   | 4,600  |   | March 31, 2009    |
| San Antonio, TX    |   | 26,227 |   | April 30, 2011    |

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(1)          Comprisedof two adjacent facilities.

(2)          Idle.

(3)          27,552square feet are subleased to another party with the remaining square footageidle.

(4)          Subleasedto another party.

**Sales Offices andOther Facilities**

We maintain a large numberof facilities for use as sales offices and other administrative purposes. Allbut one of the sales offices and other facilities are leased, with lease termsexpiring at various times from 2007 to 2016.

**ITEM3**                   LEGALPROCEEDINGS

Certain claims, suits andcomplaints (including those involving environmental matters) which arise in theordinary course of our business have been filed or are pending against us. Webelieve, based upon the currently available information, that all the resultsof such proceedings, individually, or in the aggregate would not have amaterial adverse effect on our consolidated financial condition or results ofoperations.

**ITEM4**                   SUBMISSION OFVOTE TO SECURITY HOLDERS

There were no matters submitted to a vote of securityholders during the fourth quarter of our fiscal year ended December 31,2006.

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**PART II**

**ITEM5**                   MARKET FORREGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OFEQUITY SECURITIES

Vertis is a wholly-ownedsubsidiary of Vertis Holdings. There is no established public trading marketfor Vertis Holdings’ common stock. During 2005, we paid dividends to VertisHoldings of approximately $4,000 for normal operating expenses. We did not makeany dividend payments in 2006. We do not intend to pay any dividends except forthose necessary for the normal operating expenses of Vertis Holdings, butreserve the right to do so. Our debt instruments contain certain customarycovenants imposing limitations on the payment of dividends or otherdistributions.

**ITEM6**                   SELECTEDFINANCIAL DATA

The following table sets forth selected historicalconsolidated financial data for Vertis and its subsidiaries as of and forthe years ended December 31, 2006, 2005, 2004, 2003 and 2002. Thehistorical data for the three-year period ended December 31, 2006 has beenderived from our audited consolidated financial statements included elsewherein this Annual Report. The historical data for the two-year period ended December 31,2003 has been derived from our audited consolidated financial statements notincluded herein. We sold our fragrance business in 2006 and our subsidiaries inEurope (the “European Subsidiaries”) in 2005. The table below presents theoperating results of our fragrance business and European Subsidiaries asdiscontinued operations for all applicable periods.

EBITDA is includedin this Annual Report as it is the primary measure we use to evaluate ourperformance. EBITDA, as we use it for this purpose, represents income (loss)from continuing operations before cumulative effect of accounting change, plus:

·       Interestexpense (net of interest income),

·       Incometax expense (benefit), and

·       Depreciationand amortization of intangibles.

We present EBITDA here to provide additionalinformation regarding our performance and because it is the measure by which wegauge the profitability and assess the performance of our segments. EBITDA isnot a measure of financial performance in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”). You should notconsider it an alternative to net income as a measure of operating performanceor to cash flows from operating activities as a measure of liquidity. Ourcalculation of EBITDA may be different from the calculation used by othercompanies and therefore comparability may be limited. A full quantitativereconciliation of EBITDA to income (loss) from continuing operations beforecumulative effect of accounting change, is set forth in Note 13 to thefollowing table.

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Youshould read the following selected historical consolidated financial data inconjunction with “Management’s Discussion and Analysis of Financial Conditionand Results of Operations” and the related historical consolidated financialstatements and notes included elsewhere in this Annual Report.

| ** **                                                                                                      | ** ** | **Year ended December 31,** | ** ** |
|-----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                                                      | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                                                      | ** ** | **(in thousands)**                    | ** ** |
| **Operating data:**                                                                                             | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                                                                         |       | $                                          | 1,468,661  |   | $ | 1,470,088 |   | $ | 1,474,359 |   | $ | 1,410,306 |   | $ | 1,497,397 |   |
| Operating income                                                                                                |       | 90,564                                     | (1)        | 100,163 | (2) | 109,518 | (3) | 79,730 | (4) | 115,791 | (5) |
| Interest expense, net(6)                                                                                        |       | 131,023                                    |       | 128,821 |   | 132,809 |   | 136,557 |   | 134,374 |   |
| Loss from continuing operations before income tax  expense (benefit) and cumulative effect of accounting change |       | (47,796                                    | )          | (36,311 | ) | (70,976 | ) | (51,068 | ) | (23,446 | ) |
| Loss from continuing operations before cumulative  effect of accounting change                                  |       | (47,795                                    | )          | (28,241 | ) | (4,923 | ) | (99,502 | ) | (21,410 | ) |
| Gain (loss) from discontinued operations, net(7)                                                                |       | 21,600                                     | (8)        | (143,389 | )(9) | (6,210 | ) | 3,577 |   | (12,136 | )(10) |
| Cumulative effect of accounting change,  net                                                                    |       |                                       |       | (1,600 | )(11) | — |   | — |   | (86,600 | )(10) |
| Net loss                                                                                                        |       | (26,195                                    | )          | (173,230 | ) | (11,133 | ) | (95,925 | ) | (120,146 | ) |
| **Balance  sheet data (at year end):**                                                                          | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Working capital(12)                                                                                             |       | $                                          | (40,527    | ) | $ | (74,064 | ) | $ | (72,738 | ) | $ | (60,857 | ) | $ | (19,911 | ) |
| Net property, plant and equipment                                                                               |       | 330,039                                    |       | 336,248 |   | 358,872 |   | 380,503 |   | 422,371 |   |
| Total assets(12)                                                                                                |       | 844,686                                    |       | 872,639 |   | 1,049,795 |   | 1,147,498 |   | 1,134,998 |   |
| Long-term debt (including current  portion)                                                                     |       | 1,096,041                                  |       | 1,049,059 |   | 1,024,035 |   | 1,051,917 |   | 1,092,972 |   |
| Accumulated deficit                                                                                             |       | (953,090                                   | )          | (926,895 | ) | (753,661 | ) | (742,512 | ) | (646,579 | ) |
| Other stockholder’s equity                                                                                 |       | 403,007                                    |       | 401,017 |   | 405,101 |   | 400,314 |   | 396,587 |   |
| Total stockholder’s deficit                                                                                |       | (550,083                                   | )          | (525,878 | ) | (348,560 | ) | (342,198 | ) | (249,992 | ) |
| **Other  data:**                                                                                                | ** ** | ** **                                 | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Capital expenditures                                                                                            |       | $                                          | 48,985     |   | $ | 42,197 |   | $ | 45,636 |   | $ | 40,195 |   | $ | 39,638 |   |
| Cash flows provided by operating  activities                                                                    |       | 11,690                                     |       | 5,693 |   | 47,545 |   | 89,046 |   | 96,719 |   |
| Cash flows used in investing activities                                                                         |       | (28,146                                    | )          | (43,765 | ) | (18,992 | ) | (40,903 | ) | (41,412 | ) |
| Cash flows provided by (used in) financing activities                                                           |       | 20,307                                     |       | 39,332 |   | (29,608 | ) | (53,176 | ) | (68,736 | ) |
| EBITDA(13)                                                                                                      |       | 142,015                                    |       | 155,339 |   | 127,263 |   | 158,222 |   | 190,334 |   |
| Dividends to parent                                                                                             |       | —                                     |       | 4 |   | 15 |   | — |   | — |   |
| Ratio of earnings  to fixed charges                                                                             |       | —                                     | (14)       | — | (14) | — | (14) | — | (14) | — | (14) |

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          (1) Includes $16.0million of restructuring expenses.

          (2) Includes $17.1million of restructuring expenses.

          (3) Includes $4.5million of restructuring expenses.

          (4) Includes$14.6 million of restructuring expenses.

          (5) Includes$16.6 million of restructuring expenses.

          (6) Interestexpense, net includes interest expense, amortization of deferred financingfees, interest income and the write-off of deferred financing fees.

          (7) In 2006 and2005, we sold our fragrance business and our Europe Subsidiaries, respectively,both of which are accounted for as discontinued operations in all periodspresented.

          (8) Includes $1.1million of income from our fragrance business, which was sold in 2006, and a$21.4 million gain on the sale of the fragrance business offset by $1.0 millionin additional expenses recorded in 2006 related to the sale of our EuropeanSubsidiaries.

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          (9) Includes$136.2 million in asset impairment charges, $111.2 million of which resultedfrom the write-off of the goodwill of our Europe segment and  $25.0 million of Europe long-lived assetswritten off; a $1.6 million loss on sale of our European Subsidiaries based onnet proceeds of $2.4 million; and an $11.0 million loss from the operations ofour European Subsidiaries in 2005 offset by $5.4 million of income from theoperations of our fragrance business.

    (10) Effective January 1,2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142(“SFAS 142”). Under this statement, goodwill and intangible assets with indefinitelives are no longer amortized. Under the transitional provisions of SFAS 142,our goodwill was tested for impairment as of January 1, 2002. Each of ourreporting units fair value was determined based on a valuation study using thediscounted cash flow method and the guideline company method. As a result ofour impairment test completed in the third quarter of 2002, we recorded animpairment loss of $86.6 million to reduce the carrying value of goodwill toits implied fair value. This amount was reflected as a cumulative effect ofaccounting change. Additionally, a $21.8 million impairment loss was recordedby our European Subsidiaries and is included in the loss from discontinuedoperations. Impairment in both cases was due to a combination of factors includingoperating performance and acquisition price.

    (11) Effective December 31,2005, we adopted FIN 47 “Accounting for Conditional Asset RetirementObligations”. FIN 47 requires that companies recognize a liability for the fairvalue of a conditional asset retirement obligation if the fair value of theliability can be reasonably estimated. Upon adoption of FIN 47, we estimatedand accrued for the cost to retire our leasehold improvements based on thepresent value of these costs. As a result of the adoption, we recorded acumulative effect of accounting change of $1.6 million for the year ended December 31,2005.

    (12) We are aparty to an agreement to sell certain trade accounts receivable of certain ofour subsidiaries (see Note 7 to our consolidated financial statements for amore detailed discussion). The agreement allows for a maximum of $130.0 millionof trade accounts receivable to be sold at any time based on the level ofeligible receivables. We sell our trade accounts receivable through abankruptcy-remote wholly-owned subsidiary, however, we maintain an interest inthe receivables and are still responsible for the servicing and collection ofthose accounts receivable. The amount sold under these facilities, net ofretained interest, was $130.0 million at December 31, 2006, 2005 and 2004,$122.5 million at December 31, 2003, and $125.9 million at December 31,2002. These amounts are reflected as reductions of Accounts receivable, net onour consolidated balance sheet included elsewhere in this Annual Report.

    (13) A full quantitative reconciliation of EBITDA toincome (loss) from continuing operations before cumulative effect of accountingchange, is provided as follows: 

| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                    | ** ** |
| Loss from continuing  operations before cumulative effect of accounting change |       | $                                          | (47,795    | ) | $ | (28,241 | ) | $ | (4,923 | ) | $ | (99,502 | ) | $ | (21,410 | ) |
| Interest expense, net                                                          |       | 131,023                                    |       | 128,821 |   | 132,809 |   | 136,557 |   | 134,374 |   |
| Income tax (benefit) expense                                                   |       | (1                                         | )          | (8,070 | ) | (66,053 | ) | 48,436 |   | (2,036 | ) |
| Depreciation and amortization of intangibles                                   |       | 58,788                                     |       | 62,829 |   | 65,430 |   | 72,731 |   | 79,406 |   |
| EBITDA                                                                         |       | $                                          | 142,015    |   | $ | 155,339 |   | $ | 127,263 |   | $ | 158,222 |   | $ | 190,334 |   |

 

    (14) Earnings were inadequate to cover fixed charges by $48.3 million,$36.5 million, $71.0 million, $51.3 million and $23.5 million forthe years ended December 31, 2006, 2005, 2004, 2003, and 2002,respectively. See Exhibit 12.1 to this Annual Report for this computation.Net loss for the years ended December 31, 2006, 2005, 2004, 2003, and2002, includes $58.8 million, $62.8 million, $65.4 million, $72.7 millionand $79.4 million, respectively, of non-cash depreciation and amortizationexpense.

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**ITEM7**                   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This section provides areview of the financial condition and results of operations of Vertis duringthe three years ended December 31, 2006. The analysis is based on theconsolidated financial statements and related notes that are included elsewherein this Annual Report, prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”).

**IntroductoryOverview**

***Executive Summary***

Vertis, Inc. is a marketing partner to a widearray of clients, including many of today’s Fortune 500 companies. We offerworld-class consulting, creative, research, direct mail, media, technology andproduction services. Our marketing and printing heritage affords us thegreatest experience in managing large, complicated, time-sensitive assignments.

We operate through two reportable business segments: AdvertisingInserts and Direct Mail. Advertising Inserts provides a full product line ofprinted targeted advertising products inserted into newspapers. Direct Mailprovides personalized direct mail products and various targeted directmarketing services. In addition, we also provide Premedia and Media Services. Theseservices are included in Corporate and Other, together with corporate costsincurred by the Company.

On May 31, 2006, we acquired USA Direct for $21.0million in cash. USA Direct, Inc. (“USA Direct”) is a full-service provider ofdirect marketing services based in York, Pennsylvania. The acquisition of USADirect provides us with a strategic complement to our existing direct marketingproduct offerings by expanding the flexibility and range of products,especially in small to mid-sized quantities, and adding capacity to our coremanufacturing capabilities including digital, conventional and in-lineprinting.

On September 8, 2006, we entered into anagreement to sell our fragrance business, which included two presses and theCompany’s fragrance lab and microencapsulation facility, all of which werelocated in one of our Direct Mail facilities, as well as fragrance receivables,inventory and payables, the fragrance business customer list, certain employeesand all intellectual property related to the business. The sale agreement wasentered into as the result of a strategic decision to move away from this lineof business and focus our resources on the growth of our other direct marketingproduct lines.

We use independent third-party source materials totrack statistics pertaining to advertising growth. Based on these publications,projections for 2006 domestic advertising spending indicated growth rangingfrom 4.7% to 5.6%. U.S. advertising growth estimates for 2007 range from 2.6%to 4.8%. Advertising growth percentages include all forms of advertising, notexclusively print advertising, as those statistics are not tracked separately.

The advertising insert business in general has beenimpacted by excess industry capacity causing industry-wide price pressure andintense competition for volume. Marketers have trended toward multi-channeladvertising campaigns which leverage more than one type of medium in additionto advertising inserts to expand their coverage. There has also beenconsolidation in end-user groups who traditionally use advertising inserts toconvey their messages. These factors contributed to the volume and pricingdeclines at our Advertising Inserts segment in 2006 and were the primarydrivers of the year-over-year decline in Advertising Inserts revenue of 1.7%and the year-over-year decline in Advertising Inserts EBITDA of 5.9%. Thechallenging conditions in Advertising Inserts, specifically the industry-widedynamics around pricing as well as the intense competitive pressure to maintainand grow sales volume, are expected to continue. We posted 12.6% revenue growthin Direct Mail of which 6.8% was due to the acquisition of USA Direct discussedbelow. Direct Mail EBITDA was essentially flat versus 2005, with a decline inpricing and higher costs offsetting the increase in revenue. We expect volumegrowth in Direct 

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Mail to continue. AlthoughPremedia revenue and EBITDA both declined in 2006, we expect this business tostabilize in the near-term.

Our 2006 performance fell short of expectations andpotential, primarily resulting from the unique circumstances resulting fromcertain cost reductions, reorganizations, and order management changes whichwere initiated during 2006.

Our focus in 2007 is to begin to transform Vertis intoa customer focused well-managed world class business. We are investing inpeople, processes and our customers while launching several key initiativesaimed at dramatically improving Vertis’ performance over the long term. We willaccomplish this by further strengthening our foundation of quality printing andvalue added services capabilities and focusing our efforts on understanding andexceeding our customers’ expectations. These important initiatives are aimed atreversing the negative trends we have experienced over the past several yearsand allow us to dramatically improve performance in the future.  The amendment to our revolving senior creditfacility (the “Credit Facility”) will facilitate these investments as well asincreases in maintenance and other infrastructure costs, if needed, byincreasing liquidity and lowering the financial covenant.

Cost management continues to be a major focus of ours.Cost reductions have beenaccomplished through streamlining of shared service and corporate functions,combining operations, closing unprofitable locations, staff reductions andasset write-offs. Our 2006 restructuring activities yielded year-over-yearsavings of approximately $18.9 million.

Liquidity continues to be a primary focus. At December 31,2006, we had approximately $90.8 million available to borrow under our CreditFacility, our primary source of funds. In May 2006, we amended our CreditFacility allowing for an increase in the maximum availability from $200 millionto $220 million. Under this amendment, the availability under the Credit Facilitywould have decreased in stages based on a schedule set forth by the CreditFacility agreement, ultimately reaching $200 million by December 31, 2007.In March 2007, we amended the Credit Facility to provide that the maximumavailability under the Credit Facility will increase to $250 million until the December 22,2008 maturity date. Under the amended Credit Facility, up to $200 millionconsists of a revolving credit facility and the remaining $50 millionrepresents a term loan. Under the Credit Facility, we are subject to a minimumEBITDA covenant requiring us to maintain EBITDA, as defined by the CreditFacility, of $160 million on a trailing twelve-month basis as of December 31,2006. As of December 31, 2006, we were in compliance with all of our covenants,financial or otherwise. Under the March 2007 amendment to the CreditFacility, the EBITDA required under the covenant is $125 million on a trailingtwelve-month basis. While we currently expect to be in compliance in futureperiods, there can be no assurance that we will continue to meet the minimumEBITDA required under the covenant. Based upon the latest projections for 2007,including results from January and February, we believe we will be incompliance in the upcoming year.

The Company continues to be highly leveraged. However,as a result of the refinancing of our revolving credit facility and otherrefinancings over the last few years, no significant debt repayments are dueuntil 2008 and beyond.

Capital expenditures amounted to approximately $49.0million, $42.2 million and $45.6 million in 2006, 2005 and 2004, respectively. Capitalspending has been directed toward projects that improve efficiency, maintain ourinfrastructure, and upgrade our equipment base. We currently expect the levelof capital expenditures in 2007 to be essentially the same as in 2006.

A large portion of theCompany’s revenue is generally seasonal in nature. However, our efforts toexpand our other product lines as well as expand the market for our advertisinginserts to year-round customers, have reduced the overall seasonality of ourrevenues. Of our full year 2006 revenue, 23.8% of revenue was generated in thefirst quarter, 23.9% in the second, 24.0% in the third and 28.3% in the fourth.Profitability continues to follow a more seasonal pattern due to the highermargins and efficiencies 

18

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gainedfrom running at higher capacity during the fourth quarter holiday productionseason. On the other hand, lower volume negatively impacts margins since we arenot able to fully leverage fixed depreciation, amortization, interest and othercosts that are incurred evenly throughout the year. Based on our historicalexperience and projected operations, we expect our operating results in thenear future to be strongest in the fourth quarter and softest in the first. Asa result, our overall yearly performance depends, to a significant degree, onour performance in the second half of the year.

***Discontinued Operations***

On September 8, 2006, we entered into anagreement to sell our fragrance business, which included two presses and ourfragrance lab and microencapsulation facility, all of which were located in oneof our Direct Mail facilities, as well as fragrance receivables, inventory andpayables, the fragrance business customer list, certain employees and allintellectual property related to the business. The sale agreement was enteredinto as the result of a strategic decision to move away from this line ofbusiness and focus our resources on the growth of its other direct marketingproduct lines.

Included in the agreement to sell the fragrancebusiness was a transition services agreement (the “Transition Agreement”) underwhich we provided services on a subcontracting basis to the purchaser of thefragrance business (the “Purchaser”), utilizing certain assets of the businessthat was sold. These assets remained at our Direct Mail facility during thetime of the Transition Agreement. As of December 31, 2006, we hadcompleted our performance of the subcontracting services under the TransitionAgreement and the remaining assets of the fragrance business were transferredto the Purchaser’s facilities.

As of December 31, 2006, we had received proceedsof $41.1 million related to the sale of our fragrance business, and estimatethe total proceeds from the sale to be $42.1 million, including $1.0 million ofproceeds that were held in escrow at year end. A portion of the proceeds heldin escrow, $0.5 million, were released to us in January 2007. Theremaining $0.5 million will be held in escrow until April 10, 2007, atwhich time it will be released to us if there have not been any claims filed bythe Purchaser. The sale of our fragrance business resulted in a gain on sale of$21.4 million, which is included in Income (loss) from discontinued operationson our consolidated statements of operations included elsewhere in this AnnualReport. We estimate the total gain on the sale to be $21.9 million, includingthe $0.5 million of proceeds held in escrow to be released in April 2007,which are included in Other current liabilities on our consolidated balancesheet at December 31, 2006 included elsewhere in this Annual Report.

Revenue from the fragrance business, which wasreported under our Direct Mail segment, was $26.7 million, $40.2 millionand $32.3 million for the twelve months ended December 31, 2006, 2005, and2004 respectively. The net income from the fragrance business was $1.1 million,$5.4 million and $4.0 million for twelve months ended December 31,2006, 2005, and 2004 respectively. The results of the fragrance business havebeen accounted for as discontinued operations and, as such, are included inIncome (loss) from discontinued operations on our consolidated statements of operations.No taxes were recorded for the fragrance business due to pre-tax losses and taxbenefits being offset by deferred tax valuation allowances. Interest was notallocated to discontinued operations as the divestiture of the fragrancebusiness was on a debt-free basis. Prior year financial statements have beenrestated to present the operations of our fragrance business as a discontinuedoperation. See Note 4 to our consolidated financial statements includedelsewhere in this Annual Report for further discussion.

In the third quarter of 2005, we decided to sell thetwo divisions in our European segment primarily because each had incurredoperating losses and neither was deemed a fit within the Company’s overallstrategy. The direct mail division of this segment was sold on October 3,2005 and the premedia division of this segment was sold on December 14,2005. In 2005, a $1.6 million loss on the sale of our Europe segment wasrecognized based on net proceeds of $2.4 million. Additionally, in 2006 we paid$0.6 million to settle a lawsuit brought against us by a customer of ourEuropean segment. These amounts are included 

19

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in Income (loss) fromdiscontinued operations on our consolidated income statement included elsewherein this Annual Report.

The net operating loss forour European Subsidiaries was $0.4 million, $147.2 million and $10.2 millionfor the years ended December 31, 2006, 2005 and 2004, respectively, and isincluded in discontinued operations on our consolidated financial statements. TheEurope loss we recorded in 2006 represents a $0.4 million payment made to aformer employee of our European segment in respect of the employee’stermination agreement. Included in the 2005 loss are impairment charges of$136.2 million to write off the Europe goodwill and write-down other Europelong-lived assets. Revenue for Vertis Europe, which is also included in theloss from discontinued operations for the years ended December 31, 2005and December 31, 2004, was $100.0 million and $138.6 million, respectively.Interest was not allocated to discontinued operations as the European businesswas divested on a debt-free basis. Prior year financial statements have beenrestated to present the operations of Vertis Europe as a discontinued operation.See Note 4 to our consolidated financial statements included in this AnnualReport for further discussion.

***Restructuring***

In2006, we began a restructuring program (the “2006 Program”) to address thecontinuing issue of industry-wide overcapacity and streamline operations tocapitalize on operating efficiencies and improve productivity and consistency,thus reducing our overall cost base. Under the 2006 program, restructuringactions included reductions in work force of 537 employees and the closure ofone advertising inserts production facility, one inserts sales office, onedirect mail fulfillment facility and two premedia production facilities. Allapproved restructuring actions under the 2006 Program were complete as of December 31,2006. Costs associated with approved restructuring actions under the 2006Program were $16.0 million, all of which were recorded in 2006. Cost savingsachieved in 2006 as a result of the 2006 Program were approximately $18.9million, $17.8 million of which were staffing related with the remainderrelated to decreased facility costs. These savings impacted both the cost ofproduction and the selling, general and administrative line items on theconsolidated statement of operations included elsewhere in this Annual Report. Annualcost savings expected in future years as a result of the 2006 Program areestimated to be approximately $32.1 million, $29.8 million of which relate toexpected staffing cost savings and $2.3 million related to facility costssavings.

In the year ended December 31, 2006, under the2006 Program, the Advertising Inserts segment recorded $3.7 million inseverance and related costs associated with the elimination of 243 positionsand $0.6 million in facility closing costs as well as a $1.4 million write-downof assets associated with the closure of a production facility. The Direct Mailsegment recorded $1.8 million in severance and related costs in 2006 associatedwith the elimination of 126 positions and the closure of a fulfillmentfacility. Corporate and Other recorded $5.6 million in severance and relatedcosts in 2006 associated with the elimination of 137 positions and $2.9 millionin facility closure costs, $1.4 million of which reflects an adjustment torestructuring expense primarily related to a recalculation of facility closurecosts expected to be paid based on a revised assumption of estimate subleaseincome, and the remainder associated with the closure of two premediaproduction facilities in 2006.

Included in the 2006 segment restructuring expenseamounts above are $0.9 million of aggregate severance costs allocated to thesegments based on percentages established by management. The severance costsare related to the elimination of 31 shared services positions and thefacilities costs represent accretion expense.

Liabilities for severance costs related to futurerestructurings are not accrued as the amounts cannot be reasonably estimated.We are continuously evaluating the need to implement restructuring programs torationalize our costs and improve operating efficiency. It is likely that wewill incur additional restructuring costs in 2007 in an on-going effort toachieve these objectives.

20

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Our 2005 restructuringprogram (the “2005 Program”) aimed at regionalizing and streamlining operationsto capitalize on operating efficiencies and improve productivity andconsistency, and reducing our overall cost base. The 2005 Program includedreductions in work force of approximately 490 employees; the closure of sixpremedia facilities, one advertising inserts warehouse, and two advertisinginserts regional offices, some of which are associated with the consolidationof operations; and the transfer of certain positions. The total cost associatedwith actions taken under the 2005 Program was $19.9 million (net of estimatedsublease income of $1.3 million), approximately all of which were recorded in2005. The execution of the 2005 Program was complete as of December 31,2005. Included in the 2005 Program, were restructuring costs of $3.5 millionrelated to reductions in workforce of approximately 130 employees in our VertisEurope segment. These costs are included in the loss from discontinuedoperations on our consolidated statement of operations included elsewhere inthis Annual Report.

In the year ended December 31,2005, under the 2005 Program, the Advertising Inserts segment recorded $7.0million in severance and related costs associated with the elimination ofapproximately 186 positions and $0.8 million in facility closure costsassociated with the closure of two regional offices and one warehouse. TheDirect Mail segment recorded $2.0 million in severance and related costs in2005 associated with the elimination of approximately 33 positions.  Corporate and Other recorded $5.1 million inseverance and related costs in 2005 associated with the elimination ofapproximately 91 positions and $1.7 million in facility closure costsassociated with the closure of six premedia facilities offset by $0.1 millionin gains from the sale of assets related to the closure of one of the premediafacilities. Additionally, $0.7 million in costs were recorded in the firstquarter of 2005 related to the amendment of an executive level employmentagreement announced in 2004, as discussed below.

Included in the 2005segment severance amounts above are approximately $2.5 million of aggregateseverance costs allocated to the segments based on percentages established bymanagement. These severance costs are related to the elimination ofapproximately 50 shared services positions for which the costs are allocated tothe segments on a monthly basis.

In 2004, the AdvertisingInserts segment recorded $0.2 million in severance costs. Corporate and Otherrecorded $0.3 million in severance costs due to headcount reductions ofapproximately 50 employees, and $3.5 million in facility closure costs. Thesecosts were associated with our 2003 restructuring program, which included theclosure of facilities, some of which were associated with the consolidation ofoperations; transfer of certain positions to the corporate office; reductionsin work force of approximately 260 employees; and the abandonment of assetsassociated with vacating these premises. Additionally, in 2004 we announced anamendment of an executive level employment agreement resulting in an estimatedcost of $1.2 million. Corporate and Other recorded $0.5 million inrestructuring costs in 2004 related to this amendment. Europe recorded $2.4million in restructuring costs in 2004, which are included in the loss fromdiscontinued operations on our consolidated statement of operations.

In connection with ourrestructuring actions discussed above, we recorded $16.0 million, $17.1 million,and $4.5 million of restructuring charges in the years ended December 31,2006, 2005 and 2004, respectively. We expect to pay $4.2 million of the accruedrestructuring costs in 2007 and the remainder, approximately $4.0 million, by2011. For more information about our restructuring charges, see Note 5 to ourconsolidated financial statements included in this Annual Report.

***Factors AffectingComparability***

Several factors can affectthe comparability of our results from one period to another. Primary amongthese factors are the cost of paper, changes in business mix, the timing ofrestructuring expenses and the realization of the associated benefits.

21

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The cost of paper is aprincipal factor in our pricing to certain customers since a substantial portion of revenueincludes the cost of paper. Therefore, changes in the cost of paper and changesin the proportion of paper supplied by our customers significantly affects ourrevenue generated from the sale of advertising insert and direct mail products,both of which are products where paper is a substantial portion of the costs ofproduction. Changes in the cost of paper do not materially impact our netearnings since we are generally able to pass on increases in the cost of paperto our customers, while decreases in paper costs generally result in lowerprices to customers.

Variances in expensesexpressed in terms of percentage of revenue can fluctuate based on changes inbusiness mix and are influenced by the change in revenue directly resultingfrom changes in paper prices and the proportion of paper supplied by ourcustomers. As our business mix changes, the nature of products sold in a periodcan lead to offsetting increases and decreases in different expense categories.

Also affectingyear-over-year comparability is the acquisition of USA Direct in May 2006.See Note 6 to our consolidated financial statements included elsewhere in thisAnnual Report for further discussion. The USA Direct results of operations areincluded in our Direct Mail segment in 2006 from the date of acquisition.

You should consider all ofthese factors in reviewing the discussion of our operating results.

**Results ofOperations**

Thefollowing table presents major components from our consolidated statements ofoperations and consolidated statements of cash flows. 

| ** **                                             | ** ** | **Year ended December 31,** | ** ** | **Percentage of Revenue** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                             | ** ** | **2006**                                   | ** ** | **2005**                            | ** ** | **2004** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                             | ** ** | **(in thousands)**                    | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenue                                                |       | $                                          | 1,468,661  |                                | $          | 1,470,088 |   | $ | 1,474,359 |   | 100.0 | % | 100.0 | % | 100.0 | % |
| Costs of production                                    |       | 1,160,392                                  |       | 1,140,582                           |       | 1,137,216 |   | 79.0 | % | 77.6 | % | 77.2 | % |
| Selling, general and administrative                    |       | 142,916                                    |       | 149,395                             |       | 157,694 |   | 9.7 | % | 10.2 | % | 10.7 | % |
| Restructuring charges                                  |       | 16,001                                     |       | 17,119                              |       | 4,501 |   | 1.1 | % | 1.1 | % | 0.3 | % |
| Depreciation and amortization of  intangibles          |       | 58,788                                     |       | 62,829                              |       | 65,430 |   | 4.0 | % | 4.3 | % | 4.4 | % |
| Total operating costs                                  |       | 1,378,097                                  |       | 1,369,925                           |       | 1,364,841 |   | 93.8 | % | 93.2 | % | 92.6 | % |
| Operating income                                       |       | $                                          | 90,564     |                                | $          | 100,163 |   | $ | 109,518 |   | 6.2 | % | 6.8 | % | 7.4 | % |
| **Other data:**                                        | ** ** | ** **                                 | ** ** | ** **                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cash flows provided by operating  activities           |       | $                                          | 11,690     |                                | $          | 5,693 |   | $ | 47,545 |   |   |   |   |   |   |   |
| Cash flows used in investing activities                |       | (28,146                                    | )          | (43,765                             | )          | (18,992 | ) |   |   |   |   |   |   |
| Cash flows provided by (used in)  financing activities |       | 20,307                                     |       | 39,332                              |       | (29,608 | ) |   |   |   |   |   |   |
| EBITDA                                                 |       | 142,015                                    |       | 155,339                             |       | 127,263 |   | 9.7 | % | 10.6 | % | 8.6 | % |

 

**EBITDArepresents income (loss) from continuing operations before cumulative effect ofaccounting change, plus**

·                     interestexpense (net of interest income)

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·                     incometax expense (benefit), and

·                     depreciationand amortization of intangibles.

Wepresent EBITDA here to provide additional information regarding our performanceand because it is the measure by which we gauge the profitability and assessthe performance of our segments. EBITDA is not a measure of financialperformance in accordance with GAAP. You should not consider it an alternativeto net income as a measure of operating performance or to cash flows fromoperating activities as a measure of liquidity. Our calculation of EBITDA maybe different from the calculation used by other companies and therefore comparabilitymay be limited. A full quantitative reconciliation of EBITDA to loss fromcontinuing operations before cumulative effect of accounting change, isprovided as follows:

| ** **                                                                     | ** ** | **Year ended December 31,** | ** ** |
|--------------------------------------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                                                     | ** ** | **2006**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(in thousands)**                    | ** ** |
| Loss from continuing operations  before cumulative effect of accounting change |       | $                                          | (47,795    | ) | $ | (28,241 | ) | $ | (4,923 | ) |
| Interest expense, net                                                          |       | 131,023                                    |       | 128,821 |   | 132,809 |   |
| Income tax benefit                                                             |       | (1                                         | )          | (8,070 | ) | (66,053 | ) |
| Depreciation and amortization of  intangibles                                  |       | 58,788                                     |       | 62,829 |   | 65,430 |   |
| EBITDA                                                                         |       | $                                          | 142,015    |   | $ | 155,339 |   | $ | 127,263 |   |

 

**Results of Operations—2006 compared to 2005**

*Revenue*

For the year ended December 31, 2006, ourconsolidated revenue decreased $1.4 million, or 0.1%, from $1,470.1 million in2005 to $1,468.7 million in 2006.

At ourAdvertising Inserts segment, revenue decreased $17.9 million, or 1.7%, from$1,048.4 million for the year ended December 31, 2005 to $1,030.5 millionfor the year ended December 31, 2006. The primary changes in AdvertisingInserts revenue are as follows:

| ** **           | ** ** | **Revenue**        | ** ** |
|----------------------|------------|--------------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| 2005                 |       | $                  | 1,048,417  |   |
| Increase (decrease): |       |               |       |
| Volume               |       | (12,738            | )          |
| Pricing(1)           |       | (9,066             | )          |
| Paper(2)             |       | 3,858              |       |
| Total revenue change |       | (17,946            | )          |
| 2006                 |       | $                  | 1,030,471  |   |

----

(1)          Includesproduct, customer and equipment mix.

(2)          See*“**Factors Affecting Comparability*” section.

The Advertising Insertbusiness in general has been impacted by excess industry capacity causingindustry-wide price pressure and intense competition for volume.  Marketers have trended toward multi-channeladvertising campaigns which leverage more than one type of medium in additionto advertising 

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insertsto expand their coverage. There has also been consolidation in end-user groupswho traditionally use advertising inserts to convey their messages.  

The decline in revenue inAdvertising Inserts reflects the continued price pressure, intense competitionfor volume, and changes in product type. The revenue decline was generally broad-based and impacted both the retailand the newspaper and publishing end-user groups.  These two major end-user groups continue torepresent approximately 85% and 13%, respectively, of total Advertising Insertsrevenue.

The challenging conditions in Advertising Inserts,specifically the industry-wide dynamics around Pricing as well as the intensecompetitive pressure to maintain and grow sales volume, are expected tocontinue in the near-term.

At our Direct Mailsegment, revenue increased $37.0 million, or 12.6%, from $293.8 million for theyear ended December 31, 2005 to $330.8 million for the year ended December 31,2006. The primary changes in Direct Mail revenue are as follows:

| ** **            | ** ** | **Revenue**        | ** ** |
|-----------------------|------------|--------------------|------------|
| ** **            | ** ** | **(in thousands)** | ** ** |
| 2005                  |       | $                  | 293,814    |   |
| Increase  (decrease): |       |               |       |
| Volume                |       | 11,526             |       |
| Pricing(1)            |       | 10,187             |       |
| Paper(2)              |       | 1,678              |       |
| Other                 |       | 13,589             |       |
| Total  revenue change |       | 36,980             |       |
| 2006                  |       | $                  | 330,794    |   |

----

(1)   Includes product, customer and equipment mix.

(2)   See*“**Factors Affecting Comparability*” section.

The year-over-yearincrease in Direct Mail revenue includes $20.1 million for USA Direct which wasacquired in May 2006. (See Note 6 to our consolidated financial statements forfurther discussion of this acquisition).

The balance of theincrease, approximately $16.9 million, reflects increased volume and Pricing.More than 100% of the increase in Pricing was the result of a change in productmix which necessitated an increase in contract services.  As such, the increase in revenue from Pricingdid not result in an increase in EBITDA as contract services are largely apass-through. We expect revenue growth in Direct Mail to continue in thenear-term.

Our Direct Mail businessserves a diverse group of clients across a broad array of productioncapabilities. The major end-user groups posting year-over-year revenue growthwere financial, healthcare, and consumer goods, partially offset by declines inautomotive and entertainment.

Corporate and Other revenue decreased $22.8 million,or 16.4%, from $138.7 million for the year ended December 31, 2005 to$115.9 million for the year ended December 31, 2006. Premedia accountedfor $24.2 million of the decline in revenue in 2006, offset by a $2.5 millionincrease in Media Services revenue.

See also “*SegmentPerformance*” for a discussion of EBITDA by segment.

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*Operating Expenses*

For the year endedDecember 31, 2006, our consolidated costs of production increased $19.8million, or 1.7%, from $1,140.6 million in 2005 to $1,160.4 million in 2006.Included within these cost variances are $16.9 million of USA Direct costs ofproduction, which are included in the Company’s 2006 results. The balance ofthe change in costs of production is attributable to increases in the cost ofpaper, other materials consumed, contract services, repairs and maintenance,freight expense, property taxes and other supplies used in the productionprocess, offset by decreases in labor costs and rent expense. The remainder ofthe change is due to fluctuations in various miscellaneous costs of production.

Selling, general andadministrative expenses decreased $6.5 million, or 4.4%, for the yearended  December 31, 2006, from$149.4 million in 2005 to $142.9 million in 2006. Included within these costvariances are $2.7 million of USA Direct costs, which are included in theCompany’s 2006 results. The balance of the decrease is due to lower staffing,telecommunications costs and rent expense offset by increases in professionaland consulting fees, travel and entertainment expenses, repairs andmaintenance, contract services and sales and property taxes. The remainder ofthe change is due to fluctuations in various miscellaneous selling and generaland administrative expenses.

Restructuring charges forthe year ended December 31, 2006 totaled $16.0 million as compared to$17.1 million in 2005. See the “*Restructuring*”section for a detailed discussion of restructuring charges.

*Interest and Other Expenses (Income)*

Interest expense, netincreased $2.2 million, or 1.7%, for the year ended December 31, 2006,from $128.8 million in 2005 to $131.0 million in 2006. This increase was due toa higher revolver balance and slightly higher interest rates on the revolver in2006.

Other, net decreased $0.4million, or 5.2%, for the year ended December 31, 2006 from $7.7 millionin 2005 to $7.3 million in 2006. This increase is primarily due to a $1.4million increase in fees associated with our trade receivables facility (see “*Off-Balance Sheet Arrangements*” section). Fora more detailed discussion of the other miscellaneous components of Other, netsee Note 18 to our consolidated financial statements included in this AnnualReport.

*Loss from continuing operations before cumulativeeffect of accounting change*

Loss from continuingoperations before cumulative effect of accounting change was $47.8 million forthe year ended December 31, 2006, an increase of $19.6 million compared toa loss of $28.2 million for the year ended December 31, 2005. Included inthe 2005 loss is an $8.3 million income tax benefit related to an agreementwith the Internal Revenue Service to settle a tax liability relating to thetermination of leasehold interests discussed in the “Sources of Funds”section  (see also the “Other Factors”section below). Excluding this item, loss from continuing operations beforecumulative effect of accounting change increased $27.9 million as compared to2005. This decrease reflects the aforementioned changes in revenue and costs. Seealso “Segment Performance” below.

*Segment Performance*

Set forth below is adiscussion of the performance of our business segments based on EBITDA, whichis the measure reported to our chief operating decision maker for the purposeof making decisions about allocating resources to the segment and assessingperformance of the segment. A tabular reconciliation of segment EBITDA to income(loss) from continuing operations before cumulative effect of accountingchange, in accordance with Financial Accounting Standards Board (“FASB”)Statement No. 131, “Disclosure about Segments of an Enterprise and RelatedInformation”, is contained in Note 21 to our consolidated financial statementsincluded elsewhere in this Annual Report.

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At theAdvertising Inserts segment, EBITDA amounted to $117.9 million for the yearended December 31, 2006, a decrease of $7.4 million, or 5.9%, compared to$125.3 million in the comparable 2005 period. The primary changes in EBITDA areas follows:

| ** **                              | ** ** | **EBITDA**              | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| 2005                                    |       |                    | $          | 125,294 |   |   |
| Increase  (decrease) in EBITDA:         |       |                    |       |   |   |
| Volume                                  |       |                    | (6,280     | ) |   |
| Pricing(1)                              |       |                    | (9,008     | ) |   |
| Variable Costs,  rate adjusted(2)       |       |                    | (2,123     | ) |   |
| Fixed Costs(3)                          |       |                    | 1,341      |   |   |
| Selling, general  and administrative(4) |       |                    | 6,593      |   |   |
| Restructuring  charges                  |       |                    | 2,067      |   |   |
| Total EBITDA change                     |       |                    | (7,410     | ) |   |
| 2006                                    |       |                    | $          | 117,884 |   |   |

----

(1)          Includesproduct, customer and equipment mix.

(2)          Primarilyrelated to increased freight costs and increased cost of production suppliesoffset by a decline in labor costs.

(3)          Primarilyrelated to decreased staffing costs offset by increased maintenance costs.

(4)          Primarilyrelated to decreased staffing costs.

At the Direct Mailsegment, EBITDA amounted to $36.6 million for the year ended December 31,2006, a decrease of $0.1 million, or 0.2%, compared to $36.7 million in thecomparable 2005 period. The primary changes in EBITDA are as follows:

| ** **                              | ** ** | **EBITDA**              | ** ** |
|-----------------------------------------|------------|-------------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| 2005                                    |       |                    | $          | 36,652 |   |   |
| Increase  (decrease) in EBITDA:         |       |                    |       |   |   |
| Volume                                  |       |                    | 8,427      |   |   |
| Pricing(1)                              |       |                    | (3,818     | ) |   |
| Variable Costs,  rate adjusted(2)       |       |                    | (2,461     | ) |   |
| Fixed Costs(3)                          |       |                    | (4,016     | ) |   |
| Selling, general  and administrative(4) |       |                    | 1,930      |   |   |
| Restructuring  charges                  |       |                    | 386        |   |   |
| Other(5)                                |       |                    | (535       | ) |   |
| Total EBITDA change                     |       |                    | (87        | ) |   |
| 2006                                    |       |                    | $          | 36,565 |   |   |

----

(1)          Includesproduct, customer and equipment mix.

(2)          Primarilyrelated to increased costs related to materials used in production, freight andutilities, partially offset by lower direct labor costs.

(3)          Primarilyrelated to increased staffing, maintenance costs and rent expense.

(4)          Primarilyrelated to decreased staffing costs offset by increases in professional feesand contract services.

(5)          Principally,the decline in EBITDA for our fulfillment and other businesses.

Corporate and Otherrecorded an EBITDA loss of $12.4 million for the year ended December 31,2006, an increase of $5.8 million, or 87.9%, compared to a $6.6 million EBITDAloss for the year ended December 31, 2005. This change is primarily theresult of the decline in Premedia revenue discussed above.

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**Results of Operations—2005 compared to 2004**

*Revenue*

For the year ended December 31,2005, our consolidated revenue decreased $4.3 million, or 0.3%, from $1,474.4million in 2004 to $1,470.1 million in 2005.

At our AdvertisingInserts segment, revenue decreased $12.7 million, or 1.2%, from $1,061.1million for the year ended December 31, 2004 to $1,048.4 million for theyear ended December 31, 2005. The primary changes in Advertising Insertsrevenue are as follows:

| ** **           | ** ** | **Revenue**             | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| 2004                 |       |                    | $          | 1,061,141 |   |   |
| Increase (decrease): |       |                    |       |   |   |
| Volume               |       |                    | (49,676    | ) |   |
| Pricing(1)           |       |                    | 11,171     |   |   |
| Paper(2)             |       |                    | 27,026     |   |   |
| Other(3)             |       |                    | (1,245     | ) |   |
| Total revenue change |       |                    | (12,724    | ) |   |
| 2005                 |       |                    | $          | 1,048,417 |   |   |

----

(1)          Includesproduct, customer and equipment mix.

(2)          See*“**Factors Affecting Comparability*” section.

(3)          Includes a decrease inrevenue resulting from the impact of the revision to our print revenuerecognition policy (see *“Revenue Recognition’’*section).

At our Direct Mailsegment, revenue increased $12.9 million, or 4.6%, from $280.9 million for theyear ended December 31, 2004 to $293.8 million for the year ended December 31,2005. The primary changes in Direct Mail revenue are as follows:

| ** **           | ** ** | **Revenue**             | ** ** |
|----------------------|------------|-------------------------|------------|
| ** **           | ** ** | **(in thousands)** | ** ** |
| 2004                 |       |                    | $          | 280,909 |   |   |
| Increase (decrease): |       |                    |       |   |   |
| Volume               |       |                    | 696        |   |   |
| Pricing(1)           |       |                    | 11,276     |   |   |
| Paper(2)             |       |                    | 727        |   |   |
| Other(3)             |       |                    | 206        |   |   |
| Total revenue change |       |                    | 12,905     |   |   |
| 2005                 |       |                    | $          | 293,814 |   |   |

----

(1)          Includesproduct, customer and equipment mix.

(2)          See*“**Factors Affecting Comparability*” section.

(3)          Includes the change inrevenue in our fulfillment and other businesses.

Corporate and Other revenue decreased $3.2 million, or2.3%, from $141.9 million for the year ended December 31, 2004 to $138.7million for the year ended December 31, 2005. The primary changes inCorporate and Other revenue are due to lower Premedia revenue partially offsetby increased Media Services revenue and revenue from our integrated datasolutions group which helps customers analyze data to more effectively targettheir advertising products.

See also “*SegmentPerformance*” for a discussion of EBITDA by segment.

27

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*Operating Expenses*

For the year ended December 31, 2005, ourconsolidated costs of production increased $3.4 million, or 0.3%, from $1,137.2million in 2004 to $1,140.6 million in 2005. The increase in costs ofproduction is attributable to increases in paper, labor costs, freight expense,utilities and rent expense.  Offsettingthese increased costs were decreases in ink and other materials consumed,contract services, repairs and maintenance, property taxes and other suppliesused in the production process. Additionally, in relation to the revision toour print revenue recognition policy and our maintenance parts capitalizationpolicy, decreases in costs of production of $9.8 million and $6.2 million,respectively, were recognized in 2005 (see Note 3 to the consolidated financialstatements included in this Annual Report). The remainder of the change is dueto fluctuations in various miscellaneous costs of production.

Selling, general and administrative expenses decreased$8.3 million, or 5.3%, for the year ended December 31, 2005, from $157.7 million in 2004 to $149.4 million in2005. The decrease is due to decreases in staffing costs, and rent expenseoffset by increases in telecommunications expense, contract services, suppliesutilized and bad debt expense due to a $2.0 million write-off of amounts owedto us by a bankrupt customer. The remainder of the change is due to fluctuationsin various miscellaneous selling and general and administrative expenses.

Restructuring charges forthe year ended December 31, 2005 totaled $17.1 million as compared to $4.5million in 2004. See the “*Restructuring*”section for a detailed discussion of restructuring charges.

*Other Expenses(Income)*

Other, net decreased $40.0million for the year ended December 31, 2005 from $47.7 million in 2004 to$7.7 million in 2005. This decrease is primarily due to a $44.0 millionnon-cash loss recorded in 2004 related to the termination of our leaseholdinterest in five real estate properties in two lease-leaseback transactionsentered into in 1998 (see “*Sources of Funds*”section). For a more detailed discussion of the other miscellaneous componentsof Other, net see Note 18 to our consolidated financial statements included inthis Annual Report.

*Loss fromcontinuing operations before cumulative effect of accounting change*

Loss from continuingoperations before cumulative effect of accounting change was $28.2 million forthe year ended December 31, 2005, an increase in loss of $23.3 millioncompared to a loss of $4.9 million for the year ended December 31, 2004. Includedin the 2005 loss is an $8.3 million income tax benefit related to an agreementwith the Internal Revenue Service to settle a tax liability relating to thetermination of leasehold interests discussed in the “Sources of Funds”section  (see also the “Other Factors”section below). Included in the 2004 loss is the $44.0 million loss from thetermination of leasehold interests offset by a $66.7 million tax benefitrelated to the loss. Excluding these items, loss from continuing operationsbefore cumulative effect of accounting change increased $7.7 million, or 38.7%in 2005 as compared to 2004. Included in this increase is a $12.6 millionincrease in restructuring charges, the components of which are discussed above.The balance of the increase in loss from continuing operations reflects theaforementioned changes in revenue and costs, as discussed above. See also “SegmentPerformance” below.

*Segment Performance*

Set forth below is adiscussion of the performance of our business segments based on EBITDA, whichis the measure reported to our chief operating decision makers for the purposeof making decisions about allocating resources to the segment and assessingperformance of the segment. A tabular reconciliation of segment EBITDA toincome (loss) from continuing operations before cumulative effect of accountingchange, in accordance with FASB Statement No. 131, “Disclosure aboutSegments of an Enterprise and 

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RelatedInformation”, is contained in the notes to our consolidated financialstatements included elsewhere herein.

At the Advertising Inserts segment, EBITDA amounted to$125.3 million for the year ended December 31, 2005, a decrease of $18.1million, or 12.6%, compared to $143.4 million in the comparable 2004 period. Theprimary changes in EBITDA are as follows: 

| ** **                              | ** ** | **EBITDA**         | ** ** |    |
|-----------------------------------------|------------|--------------------|------------|---------|
| ** **                              | ** ** | **(in thousands)** | ** ** |    |
| 2004                                    |       |               | $          | 143,403 |   |   |
| Increase  (decrease) in EBITDA:         |       |               |       |    |   |
| Volume                                  |       |               | (24,875    | )       |   |
| Pricing(1)                              |       |               | 18,899     |    |   |
| Variable Costs,  rate adjusted(2)       |       |               | (16,214    | )       |   |
| Fixed Costs(3)                          |       |               | 10,129     |    |   |
| Selling, general  and administrative(4) |       |               | 1,511      |    |   |
| Restructuring  charges                  |       |               | (7,559     | )       |   |
| Total EBITDA change                     |       |               | (18,109    | )       |   |
| 2005                                    |       |               | $          | 125,294 |   |   |
|                                         |            |                    |            |         |  |  |  |  |

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(1)          Includesproduct, customer and equipment mix.

(2)          Primarilyrelated to an increase in utilities, labor and packaging materials as well asthe impact of the change in our print revenue recognition and our maintenanceparts capitalization policies (see Note 3 to the consolidated financialstatements included elsewhere in this Annual Report.

(3)          Primarilyrelated to decreased repair and maintenance costs and a decrease in propertytaxes offset by a increase in labor costs.

(4)          Primarilyrelated to decreased staffing costs.

At theDirect Mail segment, EBITDA amounted to $36.7 million for the year ended December 31,2005, an increase of $1.6 million, or 4.6%, compared to $35.1 million in thecomparable 2004 period. The primary changes in EBITDA are as follows: 

| ** **                              | ** ** | **EBITDA**         | ** ** |
|-----------------------------------------|------------|--------------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| 2004                                    |       | $                  | 35,106     |   |
| Increase  (decrease) in EBITDA:         |       |               |       |
| Volume                                  |       | 848                |       |
| Pricing(1)                              |       | 10,685             |       |
| Variable Costs,  rate adjusted(2)       |       | (1,818             | )          |
| Fixed Costs(3)                          |       | (2,580             | )          |
| Selling, general  and administrative(4) |       | (1,318             | )          |
| Restructuring  charges                  |       | (2,043             | )          |
| Other(5)                                |       | (2,228             | )          |
| Total EBITDA change                     |       | 1,546              |       |
| 2005                                    |       | $                  | 36,652     |   |

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(1)          Includes product,customer and equipment mix.

(2)          Primarily related toincreased cost of materials used in production and increased utilities expense.

(3)          Primarily related toincreased staffing and rent expense offset by a decline in repairs andmaintenance.

(4)          Primarily related toincreases in supplies consumed and contract services.

(5)          Includes changes inEBITDA for our fulfillment and other businesses.

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Corporate and Otherrecorded an EBITDA loss of $6.6 million for the year ended December 31,2005, a decrease in loss of $44.6 million, or 87.1%, compared to a $51.2million EBITDA loss for the year ended December 31, 2004. The change isprimarily the result of a loss of $44.0 million was incurred in 2004 from thetermination of our leasehold interest in real estate properties. The remainderof the change was primarily driven by the Premedia revenue decline partiallyoffset by increased Media Services revenue and revenue from our integrated datasolutions group discussed above.

**Liquidity andCapital Resources**

***Sourcesof Funds***

We fund our operations, acquisitions and investmentswith internally generated funds, revolving credit facility borrowings, sales ofaccounts receivable and issuances of debt.

We believe that the debt facilities in place, includingthe March 2007 amendment to our Credit Facility discussed below, as well as ourcash flows, will be sufficient to meet operational needs (including capital expenditures,restructuring costs and interest payments) for the next twelve months andbeyond. At December 31, 2006, we had approximately $90.8 million availableto borrow under the Credit Facility.

In May 2006, we amended our Credit Facility toallow for an increase in the maximum availability from $200 million to $220million. Under this amendment, the availability under the Credit Facility wouldhave decreased in stages based on a schedule set forth by the Credit Facilityagreement, ultimately reaching $200 million by December 31, 2007. In March 2007,we amended the Credit Facility to provide that the maximum availability underthe Credit Facility will increase to $250 million until the December 22,2008 maturity date. Under the amended Credit Facility, up to $200 millionconsists of a revolving credit facility and the remaining $50 millionrepresents a term loan.

At December 31, 2006, the maximum availabilityunder the Credit Facility was $220 million, limited to a borrowing basecalculated as follows: 85% of the Company’s eligible receivables; 65% of thenet amount of eligible raw materials, finished goods, maintenance parts,unbilled receivables and the residual interest in the Company’s $130 milliontrade receivables securitization (see Note 7 to the consolidated financialstatements included elsewhere in this Annual Report); and 55% of eligiblemachinery, equipment and owned real estate. The eligibility of such assetsincluded in the calculation is set forth in the credit agreement.  At December 31, 2006, the Company’sborrowing base was calculated to be $248.4 million.

Per the March 2007 amendment, the maximumavailability under the Credit Facility will be limited to a borrowing basedcalculated as follows: 85% of the Company’s eligible receivables; 65% of thenet amount of eligible raw materials, finished goods, maintenance parts,unbilled receivables and the residual interest in the Company’s $130 milliontrade receivables securitization (see Note 7 to the consolidated financialstatements included elsewhere in this Annual Report); the lesser of 55% of thebook value of eligible machinery and equipment at owned locations or 100% ofthe orderly liquidation value-in-place (as defined in the credit agreement);the lesser of 55% of the book value of eligible machinery and equipment atleased locations or 100% of the net orderly liquidation value (as defined inthe credit agreement) and 80% of the fair market value of owned real estate. Inaddition, as is customary in asset-based agreements, there is a provision forthe Agent, in its reasonable credit judgment, to establish reserves againstavailability based on a change in circumstances. The Agent’s right to alterexisting reserves requires written consent from the borrowers when ComplianceEBITDA, as defined in Note 11 to the consolidated financial statements, is inexcess of $180 million on a quarterly trailing twelve-month basis. The Agent isnot required to obtain written consent when Compliance EBITDA on a quarterlytrailing twelve-month basis is less than $180 million. However, the CreditFacility requires the Company to maintain Compliance EBITDA as set forth underthe credit agreement. The Compliance EBITDA covenant at December 31, 2006was $160 million on a trailing twelve-month basis. At December 31, 2006,the Company’s trailing twelve-month Compliance EBITDA as calculated under thecredit agreement was $169.4 million. The Compliance EBITDA covenant set forthin the March 2007 amendment to the Credit Facility is 

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$125 million on atrailing twelve-month basis through December 2008. If the Company is unable tomaintain this minimum Compliance EBITDA amount, the bank lenders could requirethe Company to repay any amounts owing under the Credit Facility. At December 31,2006, the Company was in compliance with its debt covenants.

The Company has debtinstruments that mature in 2008 and 2009 in the amounts of $112.9 millionand $993.5 million, respectively. There can be no assurance that ouroperations will generate sufficient cash flows or that we will always be ableto refinance our current debt. In the event we are unable to obtain sufficientfinancing, we would pursue other sources of funding such as debt offerings byVertis Holdings, equity offerings by us and/or Vertis Holdings or asset sales.

Items that could impactour liquidity are described below.

*ContractualObligations*

The following table discloses aggregate informationabout our contractual obligations as of December 31, 2006 and the periodsin which payments are due:

| ** **                          | ** ** | ** **              | ** ** | **Less than** | ** ** | ** **      | ** ** | ** **         | ** ** | **After**          | ** ** |
|-------------------------------------|------------|-------------------------|------------|--------------------|------------|-----------------|------------|--------------------|------------|--------------------|------------|
| **Contractual Obligations**    | ** ** | ** **              | ** ** | **Total**          | ** ** | **1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **5 years** | ** ** |
| ** **                          | ** ** | **(In thousands)** | ** ** |
| Long-term debt                      |       | $                       | 1,106,380  |               | $          | 5               |       | $                  | 1,106,375  |               |       |   |   |   |
| Interest payments(1)                |       | 287,016                 |       | 111,809            |       | 175,207         |       |               |       |               |       |
| Operating leases                    |       | 97,451                  |       | 25,591             |       | 34,092          |       | $                  | 21,785     |               | $          | 15,983 |   |
| Restructuring  payments(2)          |       | 3,194                   |       | 2,429              |       | 765             |       |               |       |               |       |
| Pension payments(3)                 |       | 25,783                  |       | 2,690              |       | 5,604           |       | 5,438              |       | 12,051             |       |
| Total contractual cash  obligations |       | $                       | 1,519,824  |               | $          | 142,524         |       | $                  | 1,322,043  |               | $          | 27,223 |   | $ | 28,034 |   |
|                                     |            |                         |            |                    |            |                 |            |                    |            |                    |            |  |  |  |  |  |  |  |

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(1)          Interest payments relateonly to the interest on the Company’s debt for which the interest rate is fixed.The amount excludes interest owed under the Company’s revolving creditfacility, for which the interest rate fluctuates. For further discussion, seeNote 11 to the consolidated financial statements included in this Annual Report.The balance of the revolving credit facility at December 31, 2006 was$112.9 million and the weighted-average interest rate was 8.30%.

(2)          Restructuring paymentsexclude lease payments associated with facilities exited under a restructuringplan as these costs are included in the Operating lease amounts above.

(3)          Pension amountsrepresent the estimated future benefit payments under our non-qualified definedbenefit plan and estimated contributions related to our qualified definedbenefit plans.

In 2006, we renegotiated all contracts that hadpreviously subjected us to target minimum quantities, which were mainlycontracts covering the purchase of ink and press supplies (i.e. plates,blankets, solutions). Under the new contracts, there are no minimum purchaseamounts required. No such contracts were entered into in 2006. As of December 31,2006, we do not have any contracts requiring us to purchase any specifiedminimum quantities, therefore, we do not have any purchase obligations thatrequire disclosure in the table above.

On August 17, 2006,the Pension Protection Act (the “Act”) was signed into law. The Act requiresthat all single employer defined benefit plans are to be fully funded within aseven-year period, beginning in 2008. ** **The Act replaces the prior funding rules withrules based on a plan’s funded status. As of December 31, 2006, theCompany’s defined benefit plans are underfunded. Under the new funding rules setforth by the Act , our contributions are expected to be fairly level beginningin 2008 through 2015, at which time we expect our qualified defined benefitplans will be fully funded. We estimate the amount of expected contributionsunder the Act to be approximately $1.5 million per year for our qualifieddefined benefit plans.

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*Debt Financing*

Our Credit Facility, which matures onDecember 22, 2008, the outstanding 9 3/4% notes due April 1, 2009,the outstanding 10 7/8% notes due June 15, 2009, and the outstanding 131/2% senior subordinated notes due December 7, 2009 all contain customarycovenants. In addition, the Credit Facility requires us to maintain ComplianceEBITDA as set forth under the credit agreement. The Compliance EBITDA covenantat December 31, 2006 was $160 million on a trailing twelve-month basis. AtDecember 31, 2006, our trailing twelve-month Compliance EBITDA ascalculated under the credit agreement was $169.4 million. The Compliance EBITDAcovenant set forth in the March 2007 amendment to the Credit Facility is$125 million on a trailing twelve-month basis. If we are unable to maintainthis minimum Compliance EBITDA amount, the bank lenders could require us torepay any amounts owing under the Credit Facility. At December 31, 2006,we were in compliance with our debt covenants.

While we currently expectto be in compliance in future periods, there can be no assurance that ourfinancial covenants will continue to be met. Based upon the latest projectionsfor 2007, including actual results for January and February, we believe wewill be in compliance in the upcoming year. For further information on ourlong-term debt, see Note 11 to the consolidated financial statements includedelsewhere in this Annual Report.

*Off-Balance SheetArrangements*

In December 2002, we entered into a three-yearagreement, which was due to expire on November 30, 2005, to sellsubstantially all trade accounts receivable generated by subsidiaries in theU.S. (the “2002 Facility”) through the issuance of $130.0 million variable ratetrade receivable backed notes. In November 2005, we entered into a new$130 million three-year revolving trade receivables facility (the “A/R Facility”)terminating in December 2008. Funds advanced pursuant to the A/R Facilitywere used by us to pay off the remaining obligations under and terminate the2002 Facility.

Under the A/R Facility, as well as the 2002 Facilitypreviously in place, we sell our trade accounts receivable through abankruptcy-remote wholly-owned subsidiary. However, we maintain an interest inthe receivables and have been contracted to service the accounts receivable. Wereceived cash proceeds for servicing of $1.2 million and $3.0 million in 2006and 2005, respectively. These proceeds are fully offset by servicing costs.

The A/R Facility allows for a maximum of $130.0million of trade accounts receivable to be sold at any time based on the levelof eligible receivables and limited to a borrowing base linked to netreceivables balances and collections. Additional deductions may be made if wefail to maintain a consolidated Compliance EBITDA of at least $180 million forany rolling four fiscal quarter period. In addition, the A/R Facility includescertain targets related to its receivables collections and credit experienceincluding a minimum EBITDA of $160 million, amended to $125 million effective March 2007(see “*Sources of Funds*” forfurther discussion). There are also covenants customary for facilities of thistype including requirements related to the characterization of receivablestransactions, credit and collection policies, deposits of collections,maintenance by each party of its separate corporate identity includingmaintenance of separate records, books, assets and liabilities and disclosuresabout the transactions in the financial statements of Vertis Holdings and itsconsolidated subsidiaries. Failure to meet the targets or the covenants couldlead to an acceleration of the obligations under the A/R Facility or the saleof assets securing the A/R Facility. As of December 31, 2006, we are incompliance with all targets and covenants under the A/R Facility.

At December 31, 2006 and 2005, accountsreceivable of $130.0 million had been sold under the A/R Facility and as suchare reflected as reductions of accounts receivable. At December 31, 2006and 2005, we retained an interest in the pool of receivables in the form of overcollateralizationand cash reserve accounts of $92.3 million and $71.8 million, under the A/RFacility, which is included in Accounts receivable, net on the consolidatedbalance sheet at allocated cost, which approximates fair value. The 

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proceeds from collectionsreinvested in securitizations amounted to $1,680.3 million and $1,595.7 millionin 2006 and 2005, respectively.

Fees for the program vary based on the amount ofinterests sold and the London Inter Bank Offered Rate (“LIBOR”) plus an averagemargin of 50 basis points under the A/R Facility and 90 basis points under the2002 Facility. We also pay an unused commitment fee of 37.5 basis points on thedifference between $130 million and the amount of any advances. The loss onsale, which approximated the fees, totaled $6.5 million in 2006, $5.2 millionin 2005 and $3.1 million in 2004, and is included in Other, net.

We have no otheroff-balance sheet arrangements that may have a material current or futureeffect on financial condition, changes in financial condition, results ofoperations, liquidity, capital expenditures, capital resources or significantcomponents of revenues or expenses.

*Working Capital*

Our current liabilities exceeded current assets by $40.5million at December 31, 2006 and by $74.1 million at December 31,2005. This represents an increase in working capital of $33.6 million for theyear ended December 31, 2006. The excess of current liabilities overcurrent assets reflects the impact of accounts receivable sold under the A/R Facility.We use the proceeds from those accounts receivable sales to reduce long-termborrowings under our revolving credit facility. After the sale of all tradeaccounts receivable, however, we still retain an interest in the receivables inthe form of over-collateralization and cash reserve accounts, and we have beencontracted to service the receivables. Therefore, if we add back $130.0 millionof accounts receivable sold under the A/R Facility as of both December 31,2006 and 2005, and reflect the offsetting increase in long-term debt as if theA/R Facility were not in place, our working capital at December 31, 2006and 2005 would have been $89.5 million and $55.9 million, respectively. Theratio of current assets to current liabilities as of December 31, 2006 was0.85 to 1 (1.34 to 1, excluding the impact of the A/R Facility) compared to0.76 to 1 as of December 31, 2005 (1.18 to 1, excluding the impact of theA/R Facility).

In the year ended December 31,2006, cash used for working capital, adjusted for acquisitions anddivestitures, was $37.0 million. This was $24.1 million higher than the cashused in the year ended December 31, 2005. The 2006 increase was primarilydriven by increases in accounts receivable in our Advertising Inserts andDirect Mail segments related to the timing of cash receipts and increases inworking capital in our Media Services business to more normal levels in 2006compared to 2005.

**Summary of CashFlows**

*Cash Flows fromOperating Activities*

Net cash provided by continuing operating activitiesin 2006 increased by $6.0 million from the 2005 level.   This increase is primarily the result ofchanges in the timing of the settlement of payables and collection ofreceivables.

Net cash provided bycontinuing operating activities in 2005 decreased by $41.9 million from the2004 level. This decrease is primarily the result of changes in the timing ofthe settlement of payables and collection of receivables.

*Cash Flows fromInvesting Activities*

Net cash used for investing activities in 2006decreased by $15.6 million from the 2005 level, primarily due to the $41.1million in proceeds received in 2006 related to the sale of our fragrancebusiness. Offsetting these proceeds were $21.0 million of expenditures relatedto the acquisition of USA Direct (see Note 6 to our financial statementsincluded elsewhere within this Annual Report) and a $6.8 million increase incapital expenditures. Additionally, impacting the change in cash used forinvesting activities is a $1.5 million decrease associated with investingactivities of our discontinued operations. Our European 

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segment, which was sold in2005, had $1.5 million of cash used for investing activities in 2005. Therewere no investing activities associated with our fragrance business, which wassold in 2006. See the “*DiscontinuedOperations*” section for further discussion on these transactions.

Net cash used forinvesting activities in 2005 increased by $24.8 million from the 2004 level,primarily due to the $31.1 million in proceeds received in 2004 from thetermination of our leasehold interest in real estate properties (see “*Sources of Funds*” section), and $3.4 millionin expenditures in 2005 related to our acquisition of Elite (see Note 6 toour financial statements included elsewhere within this Annual Report).  Offsetting these amounts is $2.4 millionin net proceeds received from the sale of our Vertis Europe segment.Additionally, included in the change in cash used in investing activities is a$3.7 million decrease associated with investing activities of ourdiscontinued operations.

*Cash Flows fromFinancing Activities*

In 2006, net cash provided by financing activities in2006 decreased by $19.0 million from the 2005 level. The majority of thischange relates to a $36.8 million fluctuation in the amount of outstandingchecks drawn on controlled disbursement accounts which is primarily due totiming differences. Offsetting this change is a $20.3 million fluctuationin funding under our revolving credit facility which reflects the relativelevels of cash provided by operating activities and capital expenditures ineach respective year. Additionally, financing activities of our discontinuedoperations contributed $1.6 million of this fluctuation.

In 2005, net cash providedby financing activities was $39.3 million as compared to a $29.6 millionnet usage of cash in 2004. Financing activities of our discontinued operationscontributed $16.2 million of this fluctuation. The majority of theremainder relates to funding fluctuations under our revolving credit facilitywhich reflect the relative levels of cash provided by operating activities andcapital expenditures in each respective year.

**Other Factors**

During 2006, we used $32.2 million of our U.S.capital loss carryovers as a result of the sale of our fragrance business (See“*Discontinued Operations*”). Thetransaction reduced our capital loss carryforward to $104.8 million as ofDecember 31, 2006.

At the end of 2006 our federal net operating losscarryforwards were $261.1 million. The carryforwards expire beginning in2007 through 2027.

Our valuation allowance related to our deferred taxasset, which was $132.5 million at the beginning of 2006, was decreased by$3.9 million to $128.6 million at the end of 2006. The valuationallowance reserves all deferred tax assets that will not be offset by reversingtaxable temporary differences. This treatment is required under SFASNo. 109, “Accounting for Income Taxes”, when in the judgment ofmanagement, it is not more likely than not that sufficient taxable income willbe generated in the future to realize the deductible temporary differences. Ourdeferred tax assets and tax carryforwards remain available to offset taxableincome in future years, thereby lowering any future cash tax obligations. Weintend to maintain a valuation allowance until sufficient positive evidenceexists to support its reversal.

On August 30, 2005, we reached a tentativesettlement agreement with the IRS resolving disputes over the tax deductibilityof net losses relating to the five leasehold interests in real estateproperties that we entered into in 1998. On January 23, 2006, we signed aclosing agreement with the IRS. The closing agreement received final approvalfrom the Congressional Joint Committee on Taxation on May 16, 2006.

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As a result of the 2005 settlement agreement with theIRS, we reduced our tax reserves related to the IRS examination from $10.3 millionto $2.0 million. The reduction resulted in an $8.3 million taxbenefit in 2005. During 2006, the Company paid $1.1 million and receivedrefunds of $0.2 million in settlement.

In the fourth quarter of 2005, we sold the stock ofour Europe direct mail subsidiary which generated a capital loss carryforwardin the U.S. of $137.0 million. Also in the fourth quarter, our Europe premediasubsidiary sold the stock of its subsidiaries generating a U.K. capital losscarryforward of $29.0 million. The U.S. capital loss carryforward expiresin 2011. The U.K. capital loss can be carried forward indefinitely.

During 2004, the Companyrecorded a tax benefit of $66.7 million from the termination of theCompany’s leasehold interest in the same real estate properties that were thesubject of the Company’s 2005 IRS settlement (see Note 10 for furtherdiscussion).

**New AccountingPronouncements**

In February 2006, the FASB issued SFAS No. 155,“Accounting for Certain Hybrid Financial Instruments—an amendment of StatementsNo. 133 and 140” (“SFAS 155”), which amends SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishment ofLiabilities”. SFAS 155 permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation, clarifies which interest-only strips and principal-onlystrips are not subject to the requirements of SFAS No. 133, establishes arequirement to evaluate interests in securitized financial assets to identifyinterests that are freestanding derivatives or that are hybrid financialinstruments that contain an embedded derivative requiring bifurcation,clarifies that concentrations of credit risk in the form of subordination arenot embedded derivatives, and amends SFAS No. 140 to eliminate the prohibitionon a qualifying special-purpose entity from holding a derivative financialinstrument that pertains to a beneficial interest other than another derivativefinancial instrument. SFAS 155 is effective for all financial instrumentsacquired or issued after the beginning of an entity’s first fiscal year thatbegins after September 15, 2006. The adoption of this statement is notexpected to have a material impact on our results of operations or financialposition.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets—an amendment of Statement No. 140”(“SFAS 156”). SFAS 156 requires all separately recognized servicingassets and liabilities to be initially measured at fair value. For subsequentmeasurements, SFAS 156 permits companies to choose, on a class-by-classbasis, either an amortization method or a fair value measurement method. Theprovisions of this Statement are effective for us in the reporting periodbeginning January 1, 2007. The adoption of this statement is not expectedto have a material impact on our results of operations or financial position.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109” (“ FIN 48”), which clarifies the accountingand disclosure for uncertainty in tax positions, as defined. FIN 48 isintended to reduce the diversity in practice associated with certain aspects ofthe recognition and measurement related to accounting for income taxes. Thisinterpretation is effective for us for fiscal years beginning after December 15,2006. The cumulative effect of applying this interpretation must be reported asan adjustment to the opening balance of our stockholder’s deficit in 2007. Weare currently evaluating the impact of FIN 48 on our consolidatedfinancial statements and anticipate the adjustment to our stockholder’s deficitwill not be material.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes aframework for measuring fair value and expands disclosures about fair valuemeasurements. SFAS 157 clarifies the principle that fair value should bebased on the assumption market participants would use when pricing an asset orliability and establishes a fair value hierarchy that prioritizes theinformation used to develop those assumptions. This Statement is effective forfiscal years 

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beginning after November 15,2007.   We are not able to assess at thistime the future impact of this Statement on our consolidated financial positionor results of operations.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS 158”).SFAS 158 requires an employer that sponsors one or more single-employerdefined benefit plans to recognize the overfunded or underfunded status of abenefit plan in its statement of financial position and to recognize as acomponent of other comprehensive income, net of tax, the gains or losses andprior service costs or credits that arise during the period but are notrecognized as components of net periodic benefit cost. SFAS 158 alsorequires an entity to measure defined benefit plan assets and obligations as ofthe date of its fiscal year-end. Additional footnote disclosures are alsorequired under SFAS 158.  The provisionsof this Statement are effective for us as of December 31, 2007. We adoptedthis statement on December 31, 2006. See Note 14 to our consolidatedfinancial statements included elsewhere in this Annual Report for the impact ofthe adoption of SFAS 158.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements (“SAB 108”). SAB 108 provides guidance on howthe effects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. The SEC staff believesthat registrants should quantify errors using both a balance sheet and anincome statement approach and evaluate whether either approach results inquantifying a misstatement that is material. We were required to apply theguidance in SAB 108 beginning with the financial statements for the yearended December 31, 2006. We adopted this Statement without material impactto our consolidated financial position or results of operations.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”). SFAS 159 permits entities tochoose to measure eligible items at fair value at specified election dates. Ifan entity chooses this practice, it shall report unrealized gains and losses onthe items for which the fair value option has been elected at each subsequentreporting date. The fair value option may be elected for a single eligible itemwithout electing it for other identical items, with certain exceptionsspecified in the Statement. Additional disclosures are required for an entitythat chooses to elect the fair value option. The provisions of this Statementare effective for us on January 1, 2008. Early adoption is permitted undercertain circumstances as specified in this Statement. We are not able to assessat this time the future impact of this Statement on our consolidated financialposition or results of operations.

**Application ofCritical Accounting Policies**

Our significant accountingpolicies are described in Note 2 to our consolidated financial statementsincluded in this Annual Report. Several accounting policies require theapplication of significant judgment by management in selecting the appropriateassumptions for calculating financial estimates. By their nature, thesejudgments are subject to an inherent degree of uncertainty. We base ourestimates and judgments on historical experience, terms of existing contracts,observance of trends in the industry, information provided by customers andoutside sources and various other assumptions that we believe to be reasonableunder the circumstances. Significant accounting policies which we believeinvolve the application of significant judgment and discretion by managementand are therefore “critical” accounting policies include:

*Revenue Recognition*

We provide a wide variety of print and print relatedservices and products for specific customers, primarily under contract. Revenueis not recognized until the earnings process has been completed in 

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accordance with the termsof the contracts. Print revenue is recognized when the product is shipped. Revenuefrom premedia operations is recognized upon the completion of orders. Unbilledreceivables are recorded for completed services or products which remainunbilled as of the period end.

In 2005, we revised our revenue recognition policy. Underthe new policy, revenue for printed materials is recognized when the product isshipped. Previously, revenue was recorded when these materials were completedand off press. This revision resulted in a $12.7 million decrease inrevenue and a $2.9 million decrease in net income for the year ended December 31,2005. Additionally, unbilled accounts receivable increased by $12.7 millionand finished goods inventory balances increased by $9.8 million as aresult of the change.

We charge customers for shipping and handling charges.The amounts billed to customers are recorded as revenue and actual charges paidby us are included in costs of production in the consolidated statements ofoperations.

We bill our customers forsales tax calculated on each sales invoice and record a liability for the salestax payable, which is included in other current liabilities on our consolidatedbalance sheet included elsewhere in this Annual Report. Sales tax billed to acustomer is not included in our revenue.

*Allowance forDoubtful Accounts*

We maintain allowances fordoubtful accounts for estimated losses resulting from the failure of ourcustomers to make payments. If actual customer payments are less than ourestimates, we would need to increase the allowance for doubtful accounts, whichwould adversely affect our results of operations. See the Financial StatementSchedule, which accompanies the financial statements included elsewhere in thisAnnual Report, for a history of our charges to the allowance for doubtfulaccounts and write-offs taken over the three-year period ended December 31,2006.

*Long-lived Assets*

We evaluate the recoverability of our long-livedassets, including property, plant and equipment and intangible assets, whenthere are changes in economic circumstances or business objectives thatindicate the carrying value may not be recoverable. Our evaluations includeestimated future cash flows, profitability and estimated future operatingresults and other factors determining fair value. As these assumptions andestimates may change over time, it may or may not be necessary to recordimpairment charges.

Our goodwill is tested forimpairment on an annual basis at January 1 of each year. Each of the ourreporting units is tested for impairment by comparing the fair value of thereporting unit with the carrying value of that unit. Fair value is determinedbased on a valuation study we perform using the discounted cash flow method andthe estimated market values of the reporting units.

*Income Taxes*

We record a valuationallowance to reduce our deferred tax assets to the amount that we believe ismore likely than not to be realized. We estimate future taxable income inassessing the need for the valuation allowance. In the event we determine thatwe would not be able to realize all or part of our net deferred tax assets inthe future, an adjustment to the deferred tax assets would be charged to incomein the period such determination was made. Likewise, should we determine thatwe would be able to realize our deferred tax assets in the future in excess ofour net recorded amount, an adjustment to the deferred tax assets wouldincrease income in the period that determination was made.

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*Defined BenefitPension Plans*

Accounting for defined benefit pension plans requiresvarious assumptions, including, but not limited to discount rates, expectedrates of return on plan assets and future compensation rates. We evaluate theseassumptions at least once each year and make changes as conditions warrant. Changesto these assumptions will increase or decrease our reported income, which willresult in changes to the recorded benefit plan assets and liabilities.

We determined the discountrates using a measurement date of December 31, 2006. The weighted averagediscount rate assumed in 2006 was 5.75%. We developed our expected long-termrate of return assumption based on historical experience and by evaluating inputfrom the trustee managing the plans’ assets. Our expected long-term rate ofreturn on plan assets is based on a target allocation of assets as follows: 60%for equity and 40% for fixed income securities. We assumed returns of 9%-11%for the equity securities and 6.5% for fixed income securities.

*Stock BasedCompensation*

Vertis employees participate in Vertis Holdings’ 1999Equity Award Plan (the “Stock Plan”), which authorizes grants of stock options,restricted stock, performance shares and other stock based awards. We haveoptions, restricted shares, retained shares and rights outstanding under theStock Plan at December 31, 2006. We account for these stock based awardsunder SFAS No. 123 (revised), “Share-Based Payments” (“SFAS 123R”),which requires all share-based payments to employees, including grants ofemployee stock options and restricted stock, to be recognized in our financialstatements based on their grant date fair values. We adopted SFAS 123R on January 1,2006, applying the modified prospective transition method outlined in theStatement. The adoption of this Statement did not have a material effect on ourconsolidated financial position or results of operations. There have been nochanges to our mix of employee compensation or terms of our stock based awardssubsequent to our adoption of SFAS 123R in 2006. See Note 16 to ourconsolidated financial statements for further discussion.

In 2005, we accounted forthe Stock Plan under the intrinsic value method, which followed the recognitionand measurement principles of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees.” Approximately $0.1 million of employee compensation cost wasreflected in our net income for 2005. No stock-based employee compensation costwas reflected in our net loss for the year ended December 31, 2004. Seeour consolidated financial statements included elsewhere in this Annual Report.

**Item7A.**                QUALITATIVE ANDQUANTITATIVE DISCLOSURES ABOUT MARKET RISK

**QualitativeInformation**

Our primary exposure to market risks relates tointerest rate fluctuations on variable rate debt, which bears interest at theUS Prime rate.

The objective of our riskmanagement program is to seek a reduction in the potential negative earningseffects from changes in interest rates. To meet this objective, consistent withpast practices, we intend to vary the proportions of fixed-rate andvariable-rate debt based on our perception of interest rate trends and themarketplace for various debt instruments. We currently do not have anyderivatives.

**QuantitativeInformation**

At December 31, 2006, 10.2% of our long-term debtheld a variable interest rate (19.7% if we include off-balance sheet debtrelated to the accounts receivable securitization facility, the fees on whichare also variable).

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Based on a hypothetical 10% increase in interestrates, the expected effect related to variable-rate debt would be to increasenet loss for the twelve months ended December 31, 2007 by approximately$1.8 million.

For the purpose ofsensitivity analysis, we assumed the same percentage change for allvariable-rate debt and held all factors constant. The sensitivity analysis islimited in that it is based on balances outstanding at December 31, 2006and does not provide for changes in borrowings that may occur in the future.

**ITEM 8**                   FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA

Reference is made to the Indexto the consolidated financial statements and schedule on Page F-1for our consolidated financial statements and notes thereto and supplementaryschedule.

**ITEM9**                   CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES

None.

**ITEM9A**        CONTROLS AND PROCEDURES

Our management, includingour principal executive and principal financial officers, has evaluated theeffectiveness of our disclosure controls and procedures as of December 31,2006. Our disclosure controls and procedures are designed to provide reasonableassurance that the information required to be disclosed in this Annual Reporton Form 10-K has been appropriately recorded, processed, summarizedand reported within the time periods specified in the Securities and ExchangeCommission’s rules and forms, and that such information is accumulated andcommunicated to our management, including our principal executive and principalfinancial officers, to allow timely decisions regarding required disclosure.Based on that evaluation, our principal executive and principal financialofficers have concluded that our disclosure controls and procedures areeffective at the reasonable assurance level. No significant changes were madein our internal controls over financial reporting during the year ended December 31,2006 that materially affected or are reasonably likely to materially affect ourinternal controls over financial reporting.

**ITEM9B**          OTHER INFORMATION

In March 2007, the Company amended the Credit Facility(the “2007 Amendment”). The information regarding the 2007 Amendment containedin “Management's Discussion and Analysis of Financial Condition and results ofOperations—Liquidity and Capital Resources—Sources of Funds” is incorporated byreference herein.

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**PARTIII**

**ITEM10**            DIRECTORS, EXECUTIVEOFFICERS AND CORPORATE GOVERNANCE

Thefollowing table sets forth certain information regarding the directors andexecutive officers of Vertis.

| **Name**                 | ** ** | ** ** | ** ** | **Age**                                                             | ** ** | **Positions** |
|--------------------------|------------|------------|------------|---------------------------------------------------------------------|------------|---------------|
| Michael T. DuBose        |       | 53         |       | Chairman and Chief  Executive Officer                               |
| Stephen E. Tremblay      |       | 48         |       | Chief Financial Officer                                             |
| Douglas L. Mann          |       | 43         |       | Senior Vice President  and General Manager—Advertising Inserts |
| David P. Colatriano      |       | 44         |       | Senior Vice President  and General Manager—Direct Mail         |
| John V. Howard, Jr. |       | 45         |       | Chief Legal Officer and  Secretary                                  |
| Ann M. Raider            |       | 59         |       | Chief Strategy Officer                                              |
| Gary L. Sutula           |       | 62         |       | Chief Information  Officer                                          |
| Donald E. Roland         |       | 64         |       | Director                                                            |
| Ciara A. Burnham         |       | 40         |       | Director                                                            |
| John T. Dillon           |       | 68         |       | Director                                                            |
| Anthony J. DiNovi        |       | 44         |       | Director                                                            |
| Soren L. Oberg           |       | 36         |       | Director                                                            |
| Scott M. Sperling        |       | 49         |       | Director                                                            |

 

**MichaelT. DuBose**was named Chairman and ChiefExecutive Officer of Vertis in November 2006. Prior to that he had servedas senior advisor to Aurora Capital andchairman of Anthony International. Mr. DuBose served as chairman,president and chief executive officer of Aftermarket Technology Company from1998 to 2005. Prior to his role at Aftermarket, Mr. DuBose was chairmanand CEO of Grimes Aerospace Company. Mr. DuBose has also held executivepositions at SAIC, General Instrument and General Electric Company.

**Stephen E. Tremblay**was named Chief Financial Officer of Vertis inFebruary 2005. From May 2003 to February 2005, he served asSenior Vice President Finance and Treasurer of Vertis and from May 1998 toMay 2003 he served as Vice President Finance of Vertis. Prior tojoining Vertis as Group Controller in 1997, Mr. Tremblay held seniorfinancial management positions with Wellman, Inc. and served as a seniormanager at Ernst & Young.

**Douglas L. Mann**was named Senior Vice President and GeneralManager of the Advertising Inserts segment of Vertis in January 2007. Priorto that, Mr. Mann was employed by Gannett Company, Inc., where heserved a dual role as president of Minneapolis Offset and group vice presidentof sales and marketing for the Gannett Offset Group. Prior to joining Gannettin 2001, Mr. Mann held various sales leadership positions at C2 Media,Ariston, and Reynolds & Reynolds.

**David P. Colatriano**was named Senior Vice President and GeneralManager of Direct Mail in April 2005. Prior to that, he served as GroupPresident of Vertis North America East since August 2003. From June 2000 to August2003, Mr. Colatriano served as the Group President of the former DirectMarketing Services segment of Vertis. Prior to June 2000 he held numerouspositions at Webcraft Inc., beginning in January 1987, including Senior VicePresident and General Manager, Vice President of Operations and DivisionDirector. Prior to joining Webcraft, Mr. Colatriano worked as anIndustrial Engineer with the Boeing Company.

**John V. Howard, Jr.**was named Chief Legal Officer and Secretary inFebruary 2005. In July 2000, Mr. Howard was named Senior Vice President3⁄4General Counselof Vertis, having served as general counsel of several Vertis subsidiariesbeginning in 1998. Prior to joining Vertis, Mr. Howard was Counsel andChief Intellectual Property Counsel for Andersen Worldwide, S.C. in Chicago,the parent entity of 

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**ArthurAndersen and Andersen Consulting, in charge of all worldwide intellectualproperty matters for the Andersen organization. Before leaving for Andersen hewas Chief Counsel for Quark, Inc., in Denver, a developer of QuarkXPress,in charge of all worldwide legal matters. Mr. Howard is also a Trustee onthe Board of Trustees of the Hammond-Harwood House.**

**Ann M. Raider**joined Vertis in April 2005 as Chief StrategyOfficer. Prior to joining Vertis, Ms. Raider served from August 1999 to April2005 as Senior Vice President of Sales and Marketing at SmartSource Direct, adivision of News America Marketing. In addition, Ms. Raider co-foundedConsumer Card Marketing, Inc., a loyalty marketing company, and heldsenior management positions at Shawmut National Corporation, H.P. Hood, andother corporations. Ms. Raider has also served as a marketing consultantto such organizations as Staples and Bank One.

**Gary L. Sutula**has been Chief Information Officer since February 2005.Prior to joining Vertis, Mr. Sutula worked as an independent consultantfrom 2004 to 2005; served as Chief Operating Officer and Chief InformationOfficer of gLimit, Inc. from 2003 to 2004; and served as Corporate SeniorVice President and Chief Information Officer at R.R. Donnelley & Sons, Inc.from 1997 to 2003. Mr. Sutula has also served as Vice President and ChiefInformation Officer at Transamerica Financial Services and Senior VicePresident and Chief Information Officer at American Savings Bank (WashingtonMutual).

**Donald E. Roland**has served as a director of Vertis and VertisHoldings since June 2000 and served as Chairman of the Board from April 2001 toNovember 2006. From March 2006 to November 2006 he served as non-executiveChairman of the Board of Directors. Mr. Roland was Chief Executive Officerof Vertis from June 2000 until February 2006. Prior to June 2000, Mr. Rolandwas the President beginning in October 1994 and, starting in June 1995, ChiefExecutive Officer of TC Advertising, a Vertis subsidiary. Mr. Rolandjoined TC Advertising in 1983 as Senior Vice President of Operations and becameExecutive Vice President in 1993. Prior to joining TC Advertising, he was atTimes Mirror Press where he held numerous management positions includingDirector of Computer Graphics and Vice President of Operations. Mr. Rolandalso serves on the board of the University of Maryland, Baltimore Foundation,as well as the advisory board of the School of Continuing and ProfessionalStudies, Center for Graphic Communications Management & Technology atNew York University.

**Ciara A. Burnham**has been a director of Vertis and VertisHoldings since April 2004. Ms. Burnham is a Senior Managing Director ofEvercore Group Holdings, an affiliate of Evercore Partners, an advisory andinvestment firm. Ms. Burnham originally joined the firm in 1997 andrejoined in 2003. From 2001 through 2003, she was a founding partner of FiveMile Capital Partners, a hedge fund management company. Prior to joiningEvercore, she was an equity research analyst with Sanford C. Bernstein &Co., Inc. and previously spent six years in consulting, most recently asan engagement manager at McKinsey & Co., Inc. Ms. Burnhamalso serves on the Board of Specialty Products & Insulation Co.

**John T. Dillon**has been a director of Vertis and VertisHoldings since April 2005. In March 2005, Mr. Dillon became Vice Chairmanof Evercore Capital Partners, a private equity fund, and a Senior ManagingDirector of Evercore Partners, an advisory and investment firm.  Prior to that, Mr. Dillon served asChairman and chief executive officer of paper and forest products companyInternational Paper from April 1996 until October 2003.  Following his retirement, Mr. Dillonserved, and continues to serve, as a director of Caterpillar Inc., Kellogg Co.and E.I. DuPont de Nemours, and currently sits on the board of two privatelyheld companies. Mr. Dillon is a past Chairman of the Business Roundtable.

**Anthony J. DiNovi**has been a director of Vertis since March 2001and Vertis Holdings since December 1999. Mr. DiNovi has been employed byThomas H. Lee Partners, L.P. and its predecessor Thomas H. LeeCompany since 1988 and currently serves as Co-President. Mr. DiNovi iscurrently a Director of American Media Operations, Inc., Dunkin’ Brands, Inc.,Michael Foods, Inc., Nortek, Inc., US LEC Corporation and WestCorporation as well as various other private companies.

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**Soren L. Oberg**has been a director of Vertis and VertisHoldings since May 2001. Mr. Oberg has been employed by Thomas H. LeePartners, L.P., and its predecessor Thomas H. Lee Company since 1993. From 1992to 1993, Mr. Oberg worked at Morgan Stanley & Co., Inc. inthe Merchant Banking Division. Mr. Oberg also serves on the boards ofAmerican Media Operations, Inc., Cumulus Media Partners, Grupo CorporativoOno, S.A., West Corporation and several other private companies. Mr. Obergalso serves on the audit committee of West Corporation.

**Scott M. Sperling**has been a director of Vertis since May 2001and Vertis Holdings since December 1999. Mr. Sperling has beenemployed by Thomas H. Lee Partners, L.P. and its predecessor Thomas H. LeeCompany since 1994 and currently serves as Co- President. Mr. Sperling iscurrently a Director of Houghton Mifflin Company, Thermo Fisher Scientific, Inc.,Warner Music Group, ProSiebensat.1 Media AG, as well as several privatecompanies.

The term of office of each executive officer is untilthe organizational meeting of our board of directors following the next annualmeeting of our stockholders and until a successor is elected and qualified, oruntil that officer’s death, resignation, retirement, disqualification orremoval.

Each of our directors waselected to hold office until the next annual meeting of our stockholders anduntil his successor is elected and qualified and subject to his death,resignation, retirement, disqualification or removal.

**Audit Committee andAudit Committee Financial Expert**

The Company hasestablished a separate Audit Committee of the Board of Directors, comprised ofthree of its members: Ciara A. Burnham, Soren L. Oberg and Scott M. Sperling.The Company’s Board of Directors has determined that it does not have an auditcommittee financial expert as defined under the regulations of the Securitiesand Exchange Commission serving on its Audit Committee, and it is not requiredto do so. Our Board of Directors believes that the current members of the Boardof Directors have substantial investment and management experience andsignificant financial expertise, and as a consequence, are fully capable ofdischarging their responsibilities as members of the Company’s Board of Directorsnotwithstanding that no current member of the Audit Committee is an “auditcommittee financial expert” as so defined.

**Code of Ethics**

The Company has adopted acode of ethics that applies to its principal executive officer, principalfinancial officer, principal accounting officer or controller and certain othersenior financial personnel. The code of ethics can be viewed on our website at *www.vertisinc.com*.

**ITEM11**            EXECUTIVE COMPENSATION

**CompensationDiscussion and Analysis**

The following discussionrelates to the compensation of Michael T. DuBose, Vertis’ Chairman and ChiefExecutive Officer; Stephen E. Tremblay, Vertis’ Chief Financial Officer; andthe three other most highly compensated executive officers of Vertis(collectively, the “Named Executive Officers”) that were employed by theCompany at December 31, 2006.

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***Compensation Philosophy***

The general philosophy ofthe Company’s executive compensation program is to attract and retain talentedmanagement while ensuring that Named Executive Officers are compensated in away that advances the interests of shareholders. To that end, the compensationprogram provides the Named Executive Officers with incentives to enhance thegrowth and profitability of the Company. The program is designed to reward bothindividual and collective achievement, with emphasis placed on year-over-yearimprovement, closely aligning the interests of management with the interests ofshareholders. This is accomplished by emphasizing short-term rewardopportunities, which are measured by annual EBITDA improvements and by eachNamed Executive Officer’s individual accomplishments that support EBITDAgrowth.

***Compensation Program Components***

The compensation ofthe Company’s Named Executive Officer is comprised of the following primaryelements:

·       base salary,

·       annual cash incentiveawards,

·       discretionary cash bonuses,

·       equity based compensation,

·       retirement and otherbenefits and

·       perquisites and otherpersonal benefits.

Each of these componentsis designed to be consistent with the Company’s compensation philosophy and toachieve the goals described above. The following is a discussion of eachcompensation component and the items considered when determining the level ofeach component to be provided to each of the Named Executive Officers. See theSummary Compensation Table for the amounts of compensation by component foreach Named Executive Officer.

*Base Salary*

In reviewing and approvingthe base salaries of the Named Executive Officers, the Company considers theterms of any employment contract with the executive; the recommendations of theChief Executive Officer (except in the case of his own compensation, which isdetermined by the Board of Directors); a determination of what other companiesmight pay the executive for his or her services; the executive’s experience;and a subjective assessment of the nature of the executive’s performance andcontribution to the Company. In 2004, the Company retained the services of anindependent compensation consulting firm to benchmark key positions throughoutthe company. The survey conducted by the consulting firm considers suchvariables as geographic location, annual revenues for each business unit, andstandard industry classification. Base pay levels for the Named ExecutiveOfficers are reviewed annually to ensure they remain competitive andappropriate. The Company utilizes various independent survey sources whenperforming their review. The predominant survey utilized in 2006 was the SalaryAssessor Series published electronically by the Economic ResearchInstitute. The Salary Assessor Series includes the Executive CompensationAssessor, which allows data segmentation by industry classification and annualrevenues.

*Annual CashIncentive Compensation*

In reviewing and approving the annual cash incentivecompensation of the Named Executive Officers, the Board considers the overallCompany performance as compared to the prior fiscal year, the Named 

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Executive Officer’s ownperformance as measured against their individual objectives and the extent towhich the Company achieved its overall financial goals. Financial goals arebased upon the Company’s EBITDA. For certain of the Named Executive Officers,the goals may also have a component that is based upon a particular segment’sEBITDA performance. If performance for the year is below minimum targetedEBITDA levels, no cash incentive is typically awarded. However, the Board ofDirectors (the “Board”) may make exceptions in the case of extraordinaryindividual achievement. If the Company’s or the respective segment’s targetedperformance for the year is met or exceeded, each Named Executive Officerreceives a formula-based payout. The formula is comprised of an individualperformance factor, the Named Executive Officer’s target bonus percentage ofpay, and a factor reflecting the level of Company achievement against performancegoals. The Chief Executive Officer establishes individual performance goals foreach Named Executive Officer other than himself. The Board establishes theindividual objectives for the Chief Executive Officer. All goals and awards aresubject to review and approval by the Board.  Under the executive incentive plan (the “EIP”)as of December 31, 2006, the potential bonus payouts for Mr. Tremblay,Mr. Colatriano and Mr. Howard were 50% of base salary, assuming bonustargets under the EIP were met, which can rise to 200% of the target incentiveif the Company exceeds its goals. Mr. Sutula’s potential bonus payout asof December 31, 2006, was 40% of his base salary, assuming bonus targetsunder the EIP were met, which can rise to 200% of the target incentive if theCompany exceeds its goals. No payments were made in 2006, 2005 and 2004 underthe EIP. The Company may also, at its discretion, compensate the NamedExecutive Officers with cash bonuses outside of the Company’s EIP for personalachievement. The Company paid discretionary cash bonuses in the first quarterof 2006 of $100,000 each to Mr. Tremblay and Mr. Howard inrecognition of performance efforts prior to 2006. In 2005, the Company paid a$200,000 discretionary cash bonus to Mr. Durbin based upon his pastperformance. The Company did not pay any discretionary cash bonuses to theNamed Executive Officers for performance in 2006.

Base salary and annualcash incentive compensation are the primary components of the Named ExecutiveOfficers’ compensation. These components provide the Board the most effectivemeans to reward achievement of the near-term goals, which are appropriate forthe Company’s current ownership and capital structure. Emphasis on annualEBITDA improvement is consistent with the goals of the Company’s debt andequity holders. In addition, the Named Executive Officers may be provided otherforms of compensation, as discussed below, to further align their efforts withthose of the shareholders. While these other forms of compensation providefurther enhancement to the executives’ total compensation package, they do not,individually and collectively, form a significant portion of the NamedExecutive Officer’s compensation.

*Equity-BasedCompensation*

The Board may, in its fulldiscretion, choose to grant restricted shares to the Named Executive Officers. TheCompany does not have an established program for the award of restricted shares.Awards are made on a case-by-case basis as determined by the Board. Restrictedshares are granted subject to such restrictions as are set forth in therestricted share agreement for each executive. Shares typically do not becomevested until immediately prior to a liquidity event (“Liquidity Event”),generally defined as a public offering of our common stock (where immediatelyfollowing such offering, the aggregate number of shares of common stock held bythe public, not including affiliates of the Company, represents at least 20% ofthe total number of outstanding shares), merger or other business combination,or a sale or other disposition of all or substantially all of our assets toanother entity for cash and/or publicly traded securities. The number of sharesallocated to the Named Executive Officers is governed by a desire to provide ameaningful award in the event of a liquidity event without significantlyimpacting the level of ownership or control of the Company.

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*Retirement andOther Benefits*

·       EmployeeBenefit Plans—The Named Executive Officers are eligible to participate in thesame benefit programs made available to other full-time employees of thecompany. Such plans include a 401(k) retirement plan with company match,health and welfare plans, short-term disability, life insurance and otherprograms consistent with similarly situated companies. The level of benefitoffered to the Named Executive Officers is consistent with those offered to allother employees who meet the eligibility rules of each plan.

·       ExecutiveCompensation Deferral Program—The Named Executive Officers, in addition tocertain other eligible employees, are entitled to participate in the Company’sdeferred compensation plan. Pursuant to the deferred compensation plan,eligible employees can defer up to 100% of earnings from their base annualsalary, annual bonus and commissions. The Company may in its sole discretioncredit the account of any participant under the Deferred Compensation Plan, butthe Company has not elected to do so. For each plan year for which a NamedExecutive Officer elects to defer compensation, the Named Executive Officerwill elect the time and form of payment for that plan year, and such electionmay not be changed, except as allowed for scheduled in-service withdrawalsunder the plan. The Named Executive Officer may elect to have a plan year’sannual deferral amount paid in a scheduled in-service withdrawal or uponseparation from service. For payment by scheduled in-service withdrawal, theNamed Executive Officer may elect a lump sum or equal annual installments over2, 3, 4 or 5 years. For payment upon separation from service, the NamedExecutive Officer may elect a lump sum or equal annual installments over 5, 10,or 15 years.

·       FrozenBenefit Plans—Several benefit plans were offered to certain Named ExecutiveOfficers by companies that were acquired, or merged together to form Vertis, Inc.Eligibility for these programs was generally frozen prior to 2006. NamedExecutive Officers that participated in these plans prior to the dateeligibility was frozen continue to receive benefits under these plans. Such plansinclude the Company’s executive long-term disability plan and a qualified andnon-qualified pension plan. The non-qualified pension plan is the VertisSupplemental Executive Retirement Plan (the “SERP”). Benefits under the SERPare computed by multiplying the participant’s average salary for the last fiveyears prior to retirement by a percentage equal to one percent for each year ofservice up to a maximum of 30 years. Benefits under the SERP are not subject toa deduction for Social Security. Benefits under the SERP are subject to anoffset for amounts paid to participants under the Retirement Income Plan as of June 30,2002, which allowed for discretionary contributions to plan participants andwas merged into the Vertis 401(k) plan on July 1, 2002, and formatching contributions under the Vertis 401(k) plan. The qualified pensionplan is the Webcraft Retirement Income Plan (“Webcraft RIP”). This plan pays alump sum equal to the participant’s aggregate percentage credits multiplied bythe highest five year average annual total compensation. The participant earnsa specified amount of percentage credits for each year of employment thatincreases as the participant ages (1% at age 20 increasing to 10.6% at age 65). Extra credits are earned for compensationabove the level counted for Social Security benefits (0% at age 20 increasingto 3.4% at age 65). The Webcraft RIP was frozen at November 30, 1998, andno percentage credits are earned and no compensation is counted after that date.However, the frozen accrued benefit at that date is increased by 3% per yearuntil termination of employment

*Perquisites andOther Personal Benefits*

The Company provides the Named Executive Officers withperquisites and other personal benefits that the Company believes arereasonable and consistent with its overall compensation program and aretargeted to attract and retain superior employees for key positions in theCompany. The following perquisites are made available to certain NamedExecutive Officers: automobile allowance, relocation benefits and temporaryhousing expenses.

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***Compensation Related Tax and Accounting Implications***

The American Jobs Creation Act of 2004, which wasenacted on October 22, 2004, changed the tax rules applicable tononqualified deferred compensation arrangements, under which certain of theNamed Executive Officers participate. While the final regulations have notbecome effective yet, the Company believes it is operating in good faithcompliance with the provisions that were effective January 1, 2005.

The following table setsforth the compensation earned by the Named Executive Officers in the year endedDecember 31, 2006.

**SummaryCompensation Table**

| **Name and Principal Position**                                  | ** ** | ** ** | ** ** | **Salary** | ** ** | **Stock  Awards(1)** | ** ** | **Change in  Pension Value  and Non-Qualified  Deferred  Compensation  Earnings** | ** ** | **All Other  Compensation  Earnings** | ** ** | **Total** | ** ** |
|---------------------------------------------------------------------------------|------------|------------|------------|------------|------------|----------------------|------------|--------------------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-----------|------------|
| Michael T. DuBose  Chairman and Chief Executive Officer(2)                      |       | $          | 69,231     |       |       |                 |       |                                                                                             |       |                                       |       | $    | 1,980      | (3) |   | $ | 71,211 |   |
| Stephen E. Tremblay  Chief Financial Officer                                    |       | 322,308    |       | $          | 865,812    |                 |       | $                                                                                                | 4,037      | (4)                                        |       |      | 18,415     | (5) |   | 1,210,572 |   |
| David P. Colatriano  Senior Vice President and General Manager—Direct Mail |       | 312,692    |       | 614,400    |       |                 | 8,149      | (6)                                                                                              |       |                                       | 16,789     | (5)       |       | 952,030 |   |
| Dean D. Durbin  Former President and Chief Executive Officer(7)                 |       | 563,091    |       | 2,031,759  |       |                 | 27,101     | (4)                                                                                              |       |                                       | 1,157,449  | (8)       |       | 3,779,400 |   |
| John V. Howard, Jr.  Chief Legal Officer and Secretary                     |       | 295,932    |       | 614,400    |       |                 | 810        | (4)                                                                                              |       |                                       | 16,588     | (5)       |       | 927,730 |   |
| Gary L. Sutula  Chief Information Officer                                       |       | 246,092    |       | 423,281    |       |                 |       |                                                                                             |       |                                       | 11,880     | (3)       |       | 681,253 |   |
|                                                                                 |            |            |            |            |            |                      |            |                                                                                                  |            |                                            |            |           |            |  |  |  |  |  |  |  |  |  |

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(1)           Represents grants of restricted shares with a grantdate fair value of $20.48 per share. See Note 16 to the consolidated financialstatements included elsewhere in this Annual Report for further discussion ofthe assumptions used by the Company to determine this fair value in accordancewith SFAS 123R.

(2)           Mr. DuBose was appointed chairman and chiefexecutive officer of Vertis in November 2006. See “***DuBose Employment Agreement***”section for Mr. DuBose’s annual base salary.

(3)           Represents an auto allowance.

(4)           Represents the increase in the actuarial present valueof the respective Named Executive Officer’s benefit under the SERP. See Note 14to the consolidated financial statements included elsewhere in this AnnualReport for further discussion of the Company’s retirement plans.

(5)           Represents an auto allowance and an amount contributedto the Company’s 401(k) plan for the Named Executive Officer.

(6)           Represents the increase in the actuarial present valueof Mr. Colatriano’s benefit under the SERP. Mr. Colatriano alsoparticipates in the Webcraft Retirement Income Plan, under which the actuarialpresent value of his benefit decreased in 2006 by $1,634. This amount is notincluded in the summary compensation table above.

(7)           Mr. Durbin resigned his positions as President andChief Executive Officer in November 2006.

(8)           Represents $1,140,000 in severance accrued for Mr. Durbinunder his termination agreement dated January 2, 2007, $10,890 for an autoallowance paid to Mr. Durbin and $6,559 contributed to the Company’s 401(k) planfor Mr. Durbin.

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The following tablesummarizes the grants in the year ended December 31, 2006 under our equitybased compensation plan (see “*Equity-BasedCompensation*” section).

**Grantsof Plan-Based Awards**

| ** **               | ** ** | ** **          | ** ** | **Estimated Future Payouts Under  Non-Equity Incentive Plan Awards(1)** | ** ** | **All Other  Stock  Awards:  Number of  Shares of  Stock or** | ** ** | **Grant Date Fair** | ** ** |
|--------------------------|------------|---------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------|------------|
| **Name**                 | ** ** | ** **          | ** ** | **Grant Date**                                                     | ** ** | **Threshold ($)**                                                            | ** ** | **Target ($)**           | ** ** | **Maximum ($)** | ** ** | **Units (#)(2)** | ** ** | **Value ($)(3)** | ** ** |
| Michael T. DuBose        |       |                |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stephen E. Tremblay      |       | March 6,  2006 |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   | 42,276 |   |   |   | $ | 865,812 |   |   |
|                     |       |                |       |                                                                    | $          | 165,000                                                                           |       |                          | $          | 165,000 |   |   | $ | 330,000 |   |   |   |   |   |   |   |   |   |   |
| David P. Colatriano      |       | March 6,  2006 |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   | 30,000 |   |   |   | 614,400 |   |   |
|                     |       |                |       |                                                                    | 157,500    |                                                                              |       | 157,500                       |       |   | 315,000 |   |   |   |   |   |   |   |   |   |   |
| Dean D. Durbin(4)        |       | March 6,  2006 |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   | 99,207 |   |   |   | 2,031,759 |   |   |
| John V. Howard, Jr. |       | March 6,  2006 |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   | 30,000 |   |   |   | 614,400 |   |   |
|                     |       |                |       |                                                                    | 149,058    |                                                                              |       | 149,058                       |       |   | 298,116 |   |   |   |   |   |   |   |   |   |   |
| Gary L. Sutula           |       | March 6,  2006 |       |                                                                    |       |                                                                              |       |                          |       |   |   |   |   |   | 20,668 |   |   |   | 423,281 |   |   |
|                     |       |                |       |                                                                    | 98,880     |                                                                              |       | 98,880                        |       |   | 197,760 |   |   |   |   |   |   |   |   |   |   |
|                          |            |                     |            |                                                                         |            |                                                                                   |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          These amounts representthe potential bonus payments set forth in the Company’s EIP assuming bonustargets under the EIP, which are based upon the percentages of the achievementof an internally calculated pro forma EBITDA measure, are met. The bonustargets under the EIP were not met for the year ended December 31, 2006and therefore the Named Executive Officers were not paid these bonuses in 2007.

(2)          Represents the number ofshares of restricted stock granted to the Named Executive Officer on therespective grant date.

(3)          The grant date fairvalue of the restricted shares granted in 2006 was $20.48 per share. See Note16 to the consolidated financial statements included elsewhere in this AnnualReport for further discussion of the assumptions used by the Company todetermine this fair value in accordance with SFAS 123R.

(4)          Mr. Durbinresigned from the Company in November 2006, therefore there is noestimated future payout for him under the Company’s EIP.

**EmploymentArrangements with Executive Officers**

***DuBose EmploymentAgreement.******  ***The Company is in the process offinalizing an employment agreement with Michael T. DuBose that will containmutually agreed upon terms and conditions that reflect Mr. DuBose’semployment as Chief Executive Officer and Chairman of the Board. Mr. DuBoseis currently receiving an annual base salary of $750,000. All other terms andconditions of his employment are being negotiated.

***Tremblay EmploymentAgreement.******  ***The Company entered into an employmentagreement with Stephen E. Tremblay dated April 22, 1997 (as amended todate, the “Tremblay Agreement”), pursuant to which Mr. Tremblay currentlyserves as Chief Financial Officer. The Tremblay Agreement may be terminated byeither Mr. Tremblay or the Company at any time and for any reason. Underthe Tremblay Agreement, Mr. Tremblay receives an annual base salary, asadjusted by the Board, and various 

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employment benefits. In2006, Mr. Tremblay received a base salary of $322,308. In addition, Mr. Tremblayreceived a special, discretionary cash bonus of $100,000, which was paid on March 6,2006 (“Tremblay Special Bonus”) in recognition of performance efforts prior to2006. The Tremblay Special Bonus was not considered as salary or bonus forpurposes of the Company’s other benefit and compensation plans or for purposes ofMr. Tremblay’s employment agreement. In addition, it did not count in anyseverance calculations and was distinct from his annual bonus opportunity underthe EIP. The Tremblay Agreement also provides that Mr. Tremblay receive anannual bonus targeted at not less than 50% of base salary (assuming bonustargets under the EIP, which are based upon the percentages of the achievementsof an internally calculated pro forma EBITDA measure, are met) and which canrise to 200% of the target incentive if the Company exceeds its goals. Additionally,the Tremblay Agreement provides that Mr. Tremblay receive certain fringebenefits, including participation in the SERP. The Company entered into aRestricted Stock Agreement with Mr. Tremblay effective May 20, 2004pursuant to which Mr. Tremblay exchanged certain options to purchaseshares of the common stock of the Company for 1,167 restricted shares of commonstock of Vertis Holdings.  Mr. Tremblayalso received a grant of 42,276 restricted shares of common stock of VertisHoldings pursuant to a Restricted Stock Agreement effective March 6, 2006.

***ColatrianoEmployment Agreement.***   The Company enteredinto an employment agreement with Dave Colatriano, effective August 15,2003 (the “Colatriano Agreement”), pursuant to which Mr. Colatrianocurrently serves as Senior Vice President and General Manager for Direct Mail.The Colatriano Agreement may be terminated by either Mr. Colatriano or theCompany at any time for any reason. Under the Colatriano Agreement, Mr. Colatrianoreceives an annual base salary, as adjusted by the Board, and variousemployment benefits. In 2006, Mr. Colatriano received a base salary of$312,692. Under the Colatriano Agreement, Mr. Colatriano received asigning bonus of $50,000. The Colatriano Agreement also provides an annualbonus targeted at 50% of his base salary (assuming bonus targets under the EIP,which are based upon the percentages of the achievements of an internallycalculated pro forma EBITDA measure, are met) and which can rise to 200% of thetarget incentive if the Company exceeds its goals. Additionally, the ColatrianoAgreement provides that Mr. Colatriano receive certain fringe benefits,including participation in the SERP. The Company entered into a RestrictedStock Agreement with Mr. Colatriano effective May 20, 2004 pursuantto which Mr. Colatriano exchanged certain options to purchase shares ofthe common stock of the Company for 6,683 restricted shares of common stock ofVertis Holdings.  Additionally, Mr. Colatrianoreceived a grant of 30,000 restricted shares of common stock of Vertis Holdingspursuant to a Restricted Stock Agreement effective March 6, 2006.

***Durbin EmploymentAgreement.***   The Company entered into anemployment agreement with Dean D. Durbin, effective August 30, 2003, whichwas amended by the parties on March 9, 2006 (the “Durbin Amendment”)(collectively, the “Durbin Agreement”). The Durbin Amendment changed Mr. Durbin’sposition to President and Chief Executive Officer of Vertis and adjusted hisannual base salary to $570,000. Under the Durbin Agreement, Mr. Durbinreceived an annual base salary, as adjusted by the Board, and variousemployment benefits. In 2006, Mr. Durbin received a base salary of$563,091. The Durbin Agreement also provided that Mr. Durbin received anannual bonus targeted at not less than 75% of base salary (assuming bonustargets under the EIP, which are based upon the percentages of the achievementsof an internally calculated pro forma EBITDA measure, are met) and which couldrise to 200% of the target incentive if the Company exceeds its goals. Additionally,the Durbin Agreement provided that Mr. Durbin receive certain fringebenefits, including participation in the SERP. The Company entered into aRestricted Stock Agreement with Mr. Durbin effective May 20, 2004pursuant to which Mr. Durbin exchanged certain options to purchase sharesof the common stock of the Company for 14,406 restricted shares of common stockof Vertis Holdings.  Mr. Durbin alsoreceived a grant of 99,207 restricted shares of common stock of Vertis Holdingspursuant to a Restricted Stock Agreement effective March 6, 2006.

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In connection with Mr. Durbin’s resignation in November 2006,the Company entered into a separation agreement with Mr. Durbin on January 7,2007. See the “*Durbin Severance Arrangement*”section for a detailed discussion of this separation agreement.

***Howard EmploymentAgreement.***   The Company entered into anemployment agreement with John Howard, effective August 31, 2003 (asamended to date, the “Howard Agreement”), pursuant to which Mr. Howardcurrently serves as Chief Legal Officer and Secretary. The Howard Agreement maybe terminated by either Mr. Howard or the Company at any time for anyreason. Under the Howard Agreement, Mr. Howard receives an annual basesalary, as adjusted by the Board, and various employment benefits. In 2006, Mr. Howardreceived a base salary of $295,932. In addition, Mr. Howard received aspecial, discretionary cash bonus of $100,000, which was paid on March 6,2006 (“Howard Special Bonus”) in recognition of performance efforts prior to2006. The Howard Special Bonus was not considered as salary or bonus forpurposes of the Company’s other benefit and compensation plans or for purposesof Mr. Howard’s employment agreement. In addition, it did not count in anyseverance calculations and was distinct from his annual bonus opportunity underthe Company’s EIP. The Howard Agreement also provides that Mr. Howardreceive an annual bonus targeted at not less than 50% of base salary (assumingbonus targets under the EIP, which are based upon the percentages of theachievements of an internally calculated pro forma EBITDA measure, are met) andwhich can rise to 200% of the target incentive if the Company exceeds its goals.Additionally, the Howard Agreement provides that Mr. Howard receivecertain fringe benefits, including participation in the SERP. The Company enteredinto a Restricted Stock Agreement with Mr. Howard effective May 20,2004 pursuant to which Mr. Howard exchanged certain options to purchaseshares of the common stock of the Company for 6,610 restricted shares of commonstock of Vertis Holdings. Mr. Howard also received a grant of 30,000restricted shares of common stock of Vertis Holdings pursuant to a RestrictedStock Agreement effective March 6, 2006

***Sutula EmploymentAgreement.******  ***The Company has entered into anemployment agreement with Gary L. Sutula dated January 11, 2005 (the “SutulaAgreement”), pursuant to which Mr. Sutula currently serves as ChiefInformation Officer. The Sutula Agreement may be terminated by either Mr. Sutulaor the Company at any time and for any reason. Under the Sutula Agreement, Mr. Sutulareceives an annual base salary, as adjusted by the board of directors, andvarious employment benefits. In 2006, Mr. Sutula received a base salary of$246,092. The Sutula Agreement also provides that Mr. Sutula receive anannual bonus targeted at not less than 40% of base salary (assuming bonustargets under the EIP, which are based upon the percentages of the achievementsof an internally calculated pro forma EBITDA measure, are met) and which canrise to 200% of the target incentive if the Company exceeds its goals. Additionally,the Sutula Agreement provides that Mr. Sutula receive certain fringebenefits, including an automobile allowance and relocation assistance. As partof the Sutula Agreement, Mr. Sutula also received a grant of 5,000 restrictedshares of common stock of Vertis Holdings, which were granted pursuant to aRestricted Stock Agreement effective February 18, 2005. Mr. Sutulahas also received a grant of 20,668 restricted shares of common stock of VertisHoldings pursuant to a Restricted Stock Agreement effective March 6, 2006.

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Thefollowing table sets forth the number of unvested stock awards outstanding at December 31,2006 for each Named Executive Officer and the market value of such awards.

**OutstandingEquity Awards at Fiscal Year-End**

|                          | ** ** | **Stock Awards** | ** ** |
|--------------------------|------------|-----------------------|------------|
| **Name**                 | ** ** | ** **            | ** ** | **Type of Award(1)** | ** ** | **Number of Shares  or Units of Stock  That Have Not  Vested (#)** | ** ** | **Market Value of  Shares or Units  of Stock That  Have Not Vested  ($)(3)** | ** ** |
| Michael T. DuBose        |       |                  |       |   |   |   |   |   |   |   |   |
| Stephen E.  Tremblay     |       | Restricted  shares    |       |   | 43,443 |   |   |   | $ | 889,713 |   |   |
| David P. Colatriano      |       | Restricted  shares    |       |   | 36,683 |   |   |   | 751,268 |   |   |
|                          |       | Rights                |       |   | 2,335 |   |   |   | 73,553 |   |   |
| Dean D. Durbin           |       | Restricted  shares(2) |       |   | 113,613 |   |   |   | 2,326,794 |   |   |
|                     |       | Rights                |       |   | 6,002 |   |   |   | 189,063 |   |   |
| John V. Howard, Jr. |       | Restricted  shares.   |       |   | 36,610 |   |   |   | 749,773 |   |   |
| Gary L. Sutula           |       | Restricted shares     |       |   | 25,668 |   |   |   | 525,681 |   |   |
|                          |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |

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(1)          The Company, under thedirection of its Board, may grant restricted shares to the Named ExecutiveOfficers under the Company’s equity based compensation plan. The restrictedshares do not become vested until immediately prior to a Liquidity Event asdefined in the “*Equity-Based Compensation*”section. Additionally, certain Named Executive Officers own rights (the “Rights”)to shares of common stock subject to a management subscription agreement. Thesemanagement subscription agreements were entered into in connection with theCompany’s recapitalization in 1999 with the intent to replace previously issuednonqualified stock options at equivalent economic value.

(2)          Under Mr. Durbin’sseparation agreement, discussed in the “*DurbinSeverance Arrangement*” section, he begins forfeiting any unvestedrestricted shares on the date of termination, as defined in the separationagreement, and based upon the terms specified in this agreement.

(3)          In calculating themarket value of restricted shares and rights that have not vested as of December 31,2006, the Company used a value of $20.48 per share and $31.50 per share,respectively, based upon the assumptions used by the Company in accordance withSFAS 123R (See Note 16 to the consolidated financial statements elsewhere inthis Annual Report).

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Thefollowing table presents detail of the Named Executive Officers’ benefits underthe Company’s defined benefit plans.

**PensionBenefits**

| Name                     | ** ** | ** **                          | ** ** | **Plan Name** | ** ** | **Number of Years  of Credited  Service (#)(1)** | ** ** | **Present Value  of  Accumulated  Benefit ($)** | ** ** |
|--------------------------|------------|-------------------------------------|------------|--------------------|------------|----------------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Michael T. DuBose        |       |                                |       |               |       |                                                                 |       |                                                      |       |   |   |
| Stephen E.  Tremblay     |       | SERP                                |       |               | 9.7        |                                                                 |       |                                                      | $          | 4,608 |   |   |
| David P. Colatriano      |       | Webcraft  Retirement Income Plan(2) |       |               | 18.2       |                                                                 |       |                                                      | 40,847     |   |   |
|                          |       | SERP                                |       |               | 20.0       |                                                                 |       |                                                      | 72,106     |   |   |
| Dean D. Durbin           |       | SERP                                |       |               | 9.4        |                                                                 |       |                                                      | 63,606     |   |   |
| John V. Howard, Jr. |       | SERP                                |       |               | 8.8        |                                                                 |       |                                                      | 1,659      |   |   |
| Gary L. Sutula           |       |                                |       |               |       |                                                                 |       |                                                      |       |   |   |
|                          |            |                                     |            |                    |            |                                                                      |            |                                                           |            |  |  |  |  |  |

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(1)          The Board has theability to grant extra years of service under these defined benefit plans atits discretion. As of December 31, 2006, the Board had not granted anyextra years of service to the participating Named Executive Officers.

(2)          The benefits under theWebcraft Retirement Income Plan were frozen as of April 2005, thereforethe number of years of credited service for Mr. Colatriano under this planis less than his actual number of years of service with the Company.

The Company has two pension plans under which certainof the Named Executive Officers participate: the SERP and the Webcraft RIP. Theactuarial valuation methods used for determining the present value of theaccumulated benefit under the SERP and the Webcraft RIP are the projected unitcredit cost method and the unit credit cost method, respectively. See Note 14to the Company’s consolidated financial statements for further discussion ofpension plan assumptions.

The “*Frozen BenefitPlans*” section discusses the benefit computation under the SERP andthe Webcraft RIP. The optional forms of payment under the SERP are a singlelife annuity with payments ending upon the death of the Named ExecutiveOfficer; a 50% joint and survivor annuity which provides a reduced monthlybenefit for the lifetime of the Named Executive Officer, with continuation ofthe benefit payable to the Named Executive Officer’s beneficiary after hisdeath equal to 50% of the benefit received prior to his death; or a 100% jointand survivor annuity which provides a reduced monthly benefit for the lifetimeof the Named Executive Officer, with continuation of the benefit payable to theNamed Executive Officer’s beneficiary after his death equal to 100% of thebenefit received prior to his death. The optional forms of payment under theWebcraft RIP are a single life annuity; a joint and survivor annuity where acertain percentage of the Named Executive Officer’s benefit is payable to theirspouse at the death of the Named Executive Officer; a 10 year certain and lifeannuity which guarantees payments expiring at the later of the end of 120monthly payments or the death of the Named Executive Officer; or a lump sumcalculated as the actuarial equivalent of the accrued monthly benefit payableat the severance from service date.

Participants in the SERPare eligible for benefits at age 62 if they retire from the Company after age55 and have completed at least 15 years of service. The Webcraft RIP allows fordistribution of benefits upon termination from the Company whereby the benefitis adjusted for the actuarial difference between the date of termination andretirement.

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**Potential Paymentsupon Termination or Change-in-Control**

***DuBose SeveranceArrangement.******  ***The Company is in the process offinalizing an employment agreement with Michael T. DuBose, which will containprovisions regarding Mr. DuBose’s severance. The terms and conditions ofhis employment, other than his annual base salary, are still being negotiated.

***Tremblay SeveranceArrangement.******  ***The Company entered into a****severance arrangement with Mr. Tremblay,effective July 1, 2005, under which if Mr. Tremblay’semployment is terminated by the Company without cause, he will receiveseverance pay in the form of payroll continuation of his annual base salary asof his date of separation for a period of twelve months.

***ColatrianoSeverance Arrangement.******  ***The employmentagreement of David P. Colatriano, described in the “*Colatriano Employment Agreement*” section, containsprovisions regarding severance  (the “ColatrianoSeverance Arrangement”). Pursuant to the Colatriano Severance Arrangement, if Mr. Colatriano’semployment is terminated by the Company without cause or if the Companyrequires that he be based at a location which is more than fifty miles from theoffice at which he is based at the time of the relocation, he will receiveseverance pay, in the form of payroll continuation of his annual base salary asof his date of separation for a period of twelve months. If Mr. Colatrianoremains unemployed at the end of those payments, he is eligible for acontinuation of the severance pay for each month in which he remains unemployedup to a maximum of six months.

***Durbin SeveranceArrangement.******  ***In connection with Mr. Durbin’sresignation in November 2006, the Company entered into a separationagreement with Mr. Durbin on January 7, 2007 (the “Durbin SeparationAgreement”). Pursuant to the Durbin Separation Agreement, the Company agreed toprovide Mr. Durbin with the severance benefits set forth in this agreement.Mr. Durbin continued his employment with the Company as a non-officeremployee through February 28, 2007 (the “Date of Termination”), at whichtime Mr. Durbin’s employment terminated. Mr. Durbin continued to receivehis current base salary and was eligible to participate in all Vertisretirement, health and welfare benefit plans through the Date of Termination. Furthermore,under the Durbin Agreement, Mr. Durbin forfeited on the Date ofTermination 40% of his unvested shares of Vertis restricted common stock issuedunder the Restricted Stock Agreement dated May 20, 2004 and the RestrictedStock Agreement dated March 6, 2006. With respect to the remaining 60% of Mr. Durbin’sunvested shares of restricted common stock, 33% percent shall be forfeited on February 28,2011, if they have not by such date become vested, and the remainder shall beforfeited equally on a monthly basis over a twenty-four month period commencingon the Date of Termination if they have not earlier become vested.

Additionally, pursuant to the Durbin Agreement, theCompany waived its call rights, as provided for in the Amended and RestatedManagement Subscription Agreement dated August 31, 2003 (the “SubscriptionAgreement”), exclusive of any drag-along rights (as described and defined inthe Subscription Agreement), against 6,002 shares of common stock held or thatmay be held by Mr. Durbin which the Company otherwise could have exercisedupon the termination of Mr. Durbin’s employment with the Company. TheCompany also agreed to preserve the tag-along rights (as described and definedin the Subscription Agreement) granted to Mr. Durbin in the SubscriptionAgreement beyond the termination of his employment with the Company.

***Howard SeveranceArrangement.***   The employment agreement ofJohn V. Howard, Jr., described in the “*HowardEmployment Agreement*” section, contain provisions regardingseverance (the “Howard Severance Arrangement”). Pursuant to the HowardSeverance Arrangement, if Mr. Howard’s employment is terminated by theCompany without cause or by Mr. Howard for “good reason” following a “changein control” of the Company, he will receive a lump sum amount equal to threetimes the sum of (i) his annual base salary in effect immediately prior tothe date of termination and (ii) the greater of his target bonus under theEIP in the year immediately preceding that in which the termination occurs andthe annual bonus he would have earned for the fiscal year in which the date oftermination occurs absent such 

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termination. In addition,he will receive a prorated annual bonus equal to the bonus he would havereceived had he remained employed by the company through the last day of thefiscal year during which the date of termination occurs. The prorated bonusshall be determined, as near as practicable, based on actual performanceachieved for the fiscal year through the date of termination, expressed as apercentage of targeted performance for that period. Finally, Mr. Howardand his eligible dependents will be entitled to one year of continued medical,dental, prescription and vision care insurance coverages (the “ContinuedCoverage”).

If Mr. Howardleaves the Company absent a change of control of the Company, the HowardSeverance Arrangement provides the following payments and benefits:

·       ifMr. Howard’s employment is terminated upon his death or disability, theCompany will pay to Mr. Howard or his estate a lump sum equal to earnedannual base salary and earned annual bonus for completed fiscal years. Inaddition, the Company will provide Mr. Howard or his eligible dependentssix months of the Continued Coverage and he will then be entitled to electcontinuation coverage in accordance with the Internal Revenue Code of 1986 (the“COBRA coverage”);

·       ifthe Company terminates Mr. Howard’s employment for cause or he resignsother than for good reason, the Company will pay to him a lump sum equal to hisannual base salary earned through the date of termination that has not beenpaid and earned annual bonus prior to the date of termination; and

·       ifthe Company terminates Mr. Howard’s employment other than for cause, deathor disability, or he terminates for good reason, in addition to the payment ofany unpaid amounts of his earned annual base salary and earned annual bonus forcompleted fiscal years which shall be paid within 30 days of termination, theCompany will also pay a cash payment equal to 1.5 times the sum of (i) hisannual base salary in effect immediately prior to the date of termination and (ii) thegreater of his target bonus under the EIP in the year immediately precedingthat in which the termination occurs and the annual bonus he would have earnedfor the fiscal year in which the date of termination occurs absent suchtermination. In addition, he will receive aprorated annual bonus equal to the bonus he would have received had he remainedemployed by the company through the last day of the fiscal year during whichthe date of termination occurs. The prorated bonus shall be based on the actualresults for the completed fiscal year during which the date of terminationoccurs.

Also, the Company will (i) provide Mr. Howardand his eligible dependents six months of the Continued Coverage and he willthen be eligible for COBRA coverage, and (ii) credit Mr. Howard withan additional year of vesting for purposes of his then outstanding options,which will remain exercisable in accordance with the terms of the applicableoption grants and equity plan.

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Thefollowing table presents an estimate of severance payments that would beprovided to the Named Executive Officers if the applicable triggering eventtook place on December 31, 2006.

**TriggeringEvent**

| **Name**                  | ** ** | ** ** | ** ** | **Termination by  the Company  Without Cause or  Termination  by the Executive  Officer for “Good  Reason” Following  a Change in  Control** | ** ** | **Termination by  the Company  Without Cause or  Termination  by the Executive  Officer for “Good  Reason” Absent a  Change in Control** | ** ** | **Termination  Upon Death  or Disability** | ** ** | **Termination by  the Company for  Cause or  Termination by  the Executive for  Other Than  Good Reason** | ** ** |
|---------------------------|------------|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Michael T. DuBose         |       |       |       |                                                                                                                                                                                                          |       |                                                                                                                                                                                                           |       |                                                 |       |                                                                                                                                                   |       |   |   |   |   |   |   |
| Stephen E.  Tremblay      |       |       | $          | 330,000                                                                                                                                                                                                       |       |                                                                                                                                                                                                           |       |                                                 |       |                                                                                                                                                   |       |   |   |   |   |   |   |   |
| David P.  Colatriano      |       |       | 315,000    | (1)                                                                                                                                                                                                           |       |                                                                                                                                                                                                           | $          | 315,000                                              | (1)        |                                                                                                                                                   |       |   |   |   |   |   |   |   |
| Dean D. Durbin            |       |       |       |                                                                                                                                                                                                          |       |                                                                                                                                                                                                           | 1,140,000  | (2)                                                  |       |                                                                                                                                                   |       |   |   |   |   |   |   |
| John V.  Howard, Jr. |       |       | 897,904    |                                                                                                                                                                                                          |       |                                                                                                                                                                                                           | 450,730    |                                                 |       |                                                                                                                                                   | $          | 3,556 |   |   |   | $ | 3,556 |   |   |
| Gary L. Sutula            |       |       |       |                                                                                                                                                                                                          |       |                                                                                                                                                                                                           |       |                                                 |       |                                                                                                                                                   |       |   |   |   |   |   |   |
|                           |            |            |            |                                                                                                                                                                                                               |            |                                                                                                                                                                                                                |            |                                                      |            |                                                                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |

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(1)          Under the ColatrianoSeverance Arrangement, if Mr. Colatriano remains unemployed at the end ofthe time period under which he would receive the severance payments above, heis eligible for a continuation of the severance pay for each month in which heremains unemployed up to a maximum of six months. In the event the maximumamount of severance continuation is provided by the Company, the totalseverance paid to Mr. Colatriano under both triggering events would be$472,500.

(2)          Representsseverance set forth in the Durbin Separation Agreement effective January 7,2007, which was entered into in connection with Mr. Durbin’s resignationfrom the Company in November 2006.

**Compensation ofDirectors**

Michael T. DuBose and Donald E. Roland were thedirectors of Vertis at December 31, 2006, who were also executive officersof the Company. Neither Mr. DuBose nor Mr. Roland received anyadditional compensation for service as members of the Board.

All non-employee directors of Vertis, except MichaelS. Rawlings, are directly affiliated with either Thomas H. Lee Partners (“THL”)or Evercore Capital Partners (“ECP”), two significant shareholders of VertisHoldings. Mr. Rawlings was appointed to the Board upon the nomination ofTHL and ECP pursuant to the Amended and Restated Investors’ Agreement amongVertis Holdings, THL, ECP and others, dated March 23, 2001. With theexception of Mr. Rawlings, as discussed below, none of the non-employee directorsindividually receive any compensation from Vertis for serving on the Board. Vertis,however, entered into consulting agreements with Thomas H. Lee Capital, LLC (anaffiliate of THL), THL Equity Advisors IV, LLC (an affiliate of THL) andEvercore Advisor Inc. (an affiliate of ECP), pursuant to which Vertis paysannual fees to these parties in amounts of approximately $220,000, $780,000 and$250,000. See “*Certain Relationships andRelated Transactions*.”

Mr. Rawlingswas a Vertis Director at December 31, 2006, however he resigned from thisposition in February 2007. Prior to his resignation, Mr. Rawlings’compensation for his service as a director was as follows:

·       $50,000per year for service on the Board,

·       $50,000per year for business consulting services, and

·       upto 7,500 shares of restricted stock over a three-year period, subject to theplan’s provisions.

54

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The following tablepresents the compensation of the Company’s directors for the year ended December 31,2006.

**DirectorCompensation**

| **Name**             | ** ** | ** ** | ** ** | **Fees Earned or  Paid in Cash** | ** ** | **All Other  Compensation** | ** ** | **Total  Compensation** | ** ** |
|----------------------|------------|------------|------------|------------------------------------------------------|------------|----------------------------------|------------|-------------------------|------------|
| Michael S.  Rawlings |       |       | $          | 50,000                                               |       |                             |       | $                       | 50,000     | (1) |   |   | $ | 100,000 |   |   |
|                      |            |            |            |                                                      |            |                                  |            |                         |            |  |  |  |  |  |  |  |  |  |

----

(1)          Represents businessconsulting services

Mr. Rawlings had5,000 shares of restricted stock outstanding at December 31, 2006. Theseshares were cancelled in February 2007 when Mr. Rawlings resigned hisposition as a director of the Company.

**CompensationCommittee Interlocks and Insider Participation**

The Company does not havea compensation committee. Dean Durbin, during the time he was Chief ExecutiveOfficer of the Company, served on the Board and participated in deliberationswith the Board regarding compensation of executive officers, other than his owncompensation. Michael DuBose, current Chief Executive Officer of the Companyand Chairman of the Board, began participating in deliberations with the Boardregarding compensation of executive officers when he joined the Company, otherthan his own compensation.

**ITEM12**            SECURITY OWNERSHIP OFCERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCK MATTERS

Vertis is a wholly-owned subsidiary of VertisHoldings.

The following table sets forth certain informationregarding the beneficial ownership of Vertis Holdings’ common stock as of February 28,2007 for (i) each stockholder who is known by us to beneficially own morethan 5% of Vertis Holdings common stock, (ii) each director and executiveofficer of Vertis and Vertis Holdings, and (iii) all of the directors andexecutive officers of Vertis and Vertis Holdings as a group.

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| ** **                                                                                                          | ** ** | **Shares Beneficially Owned** | ** ** |
|---------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| **Name and Address of Beneficial Owner**                                                   | ** ** | ** **                              | ** ** | **Amount and Nature of  Ownership(1)** | ** ** | **Percentage of  Class** | ** ** |
| Thomas H. Lee  Partners L.P. and Affiliates(2)  c/o Thomas H. Lee Partners, L.P., 75 State Street, Boston, MA 02109 |       |                                    | 8,844,938  |   |   |   | 65.1 | % |   |
| Evercore Capital  Partners L.P. and Affiliates(3)  65 East 55th Street, 33rd Floor, New York, NY 10022              |       |                                    | 2,114,415  |   |   |   | 15.6 | % |   |
| Stephen E.  Tremblay  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                             |       |                                    | 43,443     |   |   |   | * |   |   |
| David P.  Colatriano(4)  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                          |       |                                    | 39,018     |   |   |   | * |   |   |
| Dean D. Durbin(5)  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                |       |                                    | 74,170     |   |   |   | * |   |   |
| John V.  Howard, Jr.  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                        |       |                                    | 36,610     |   |   |   | * |   |   |
| Gary L. Sutula  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                   |       |                                    | 25,668     |   |   |   | * |   |   |
| Douglas L. Mann  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                  |       |                                    | 7,500      |   |   |   | * |   |   |
| Ann M. Raider  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                                    |       |                                    | 13,267     |   |   |   | * |   |   |
| Donald E.  Roland(6)  c/o Vertis, Inc., 250 West Pratt Street, Baltimore, MD 21201                             |       |                                    | 72,469     |   |   |   | * |   |   |
| Anthony J.  DiNovi(7)  c/o THL Partners, 75 State Street, Boston, MA 02109                                          |       |                                    | 7,166,451  |   |   |   | 52.7 | % |   |
| Scott M. Sperling(8)  c/o THL Partners, 75 State Street, Boston, MA 02109                                           |       |                                    | 7,166,451  |   |   |   | 52.7 | % |   |
| Soren L. Oberg(9)  c/o THL Partners, 75 State Street, Boston, MA 02109                                              |       |                                    | 7,146,253  |   |   |   | 52.6 | % |   |
| Ciara A.  Burnham(10)  c/o Evercore Capital Partners, 55 East 52 nd Street, 43 rd Floor,  New York, NY 10055   |       |                                    | 2,114,415  |   |   |   | 15.6 | % |   |
| John T.  Dillon(11)  c/o Evercore Capital Partners, 55 East 52 nd Street, 43 rd Floor,  New York, NY 10055     |       |                                    | 2,114,415  |   |   |   | 15.6 | % |   |
| All Directors and  Executive Officers of Vertis and Vertis Holdings as a group  (14 persons)(12)               |       |                                    | 356,615    |   |   |   | 2.6 | % |   |
|                                                                                                                     |            |                                         |            |  |  |  |  |  |  |  |  |

----

                 * Less than one percent.

       (1) This column includes shares which directors and executive officersof Vertis have the right to acquire within 60 days. This column alsoincludes shares of the Company’s restricted stock that vest immediately priorto a liquidity event, generally defined as a public offering of the Company’scommon stock (where immediately following such offering, the aggregate numberof shares of common stock held by the public, not including affiliates of theCompany, represents at least 20% of the total number of outstanding shares),merger or other business combination, or a sale or other disposition of all orsubstantially all of our assets to another entity for cash and/or publiclytraded securities (“Liquidity Event”). Except as otherwise indicated, eachperson and entity has sole voting and dispositive power with respect to theshares set forth in the table.

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       (2) Includes 6,135,560 shares of common stock and warrants to purchase177,906 shares of common stock held by Thomas H. Lee Equity Fund IV, L.P. (“FundIV”); 212,097 shares of common stock and warrants to purchase 6,149 shares ofcommon stock held by Thomas H. Lee Foreign Fund IV, L.P. (“Foreign IV”);595,905 shares of common stock and warrants to purchase 17,278 shares of commonstock held by Thomas H. Lee Foreign Fund IV-B, L.P. (“Foreign IV-B”); 1,032shares of common stock and warrants to purchase 30 shares of common stock heldby Thomas H. Lee Investors Limited Partnership (“THLILP”); and 399,727 sharesof common stock and warrants to purchase 11,585 shares of common stock held byother affiliates of Thomas H. Lee Partners, L.P. Also includes 1,248,295 sharesof common stock and warrants to purchase 39,374 shares of common stock held byCLI/THLEF IV Vertis LLC (“CLI/THLEF”).

       (3) Includes 925,225 shares of common stock held by Evercore CapitalPartners L.P. (“Evercore Capital”); 222,199 shares of common stock held byEvercore Capital Partners (NQ) L.P. (“Evercore Capital NQ”); and 966,991 sharesof common stock controlled by EBF Group LLC (“EBF”), which include 243,936shares of common stock held by Evercore Capital Offshore Partners L.P., 30,262shares of common stock held by Evercore Co-Investment Partnership L.P., 277,117shares of common stock held by Aetna Life Insurance Company and 415,676 sharesof common stock held by Capital Communications CDPQ Inc.

       (4) Includes rights entitling Mr. Colatriano to 2,335 shares ofcommon stock upon the occurrence of certain sales or liquidation of VertisHoldings and 36,683 shares of restricted stock that vest immediately prior to aLiquidity Event.

       (5) Includes rights entitling Mr. Durbin to 6,002 shares of commonstock upon the occurrence of certain sales or liquidation of Vertis Holdingsand 68,168 shares of restricted stock that vest immediately prior to aLiquidity Event. Per the Durbin Separation Agreement discussed in the “*Durbin Severance Arrangement*” section,45,445 shares of restricted stock were forfeited on February 28, 2007.

       (6) Includes 52,003 shares of common stock and rights entitling Mr. Rolandto 20,466 shares of common stock upon the occurrence of certain sales orliquidation of Vertis Holdings.

       (7) Director of Vertis Holdings and Vertis; includes 17,899 shares ofcommon stock and warrants to purchase 519 shares of common stock which arecurrently exercisable and owned directly by Mr. DiNovi; and 3,042 sharesof common stock and warrants to purchase 96 shares of common stock held byCLI/THLEF, which represent Mr. DiNovi’s pro rata ownership of thoseentities. Also includes the 6,135,560 shares of common stock and warrants topurchase 177,906 shares of common stock held by Fund IV; 212,097 shares ofcommon stock and warrants to purchase 6,149 shares of common stock held byForeign IV; and 595,905 shares of common stock and warrants to purchase 17,278shares of common stock held by Foreign IV-B. Mr. DiNovi disclaimsbeneficial ownership of the shares held by Fund IV, Foreign IV, and ForeignIV-B except to the extent of his pecuniary interest therein.

       (8) Director of Vertis Holdings and Vertis; includes 17,899 shares ofcommon stock and warrants to purchase 519 shares of common stock which arecurrently exercisable and owned directly by Mr. Sperling; 3,042 shares ofcommon stock and warrants to purchase 96 shares of common stock held byCLI/THLEF, which represent Mr. Sperling’s pro rata ownership of thoseentities. Also includes the 6,135,560 shares of common stock and warrants topurchase 177,906 shares of common stock held by Fund IV; 212,097 shares ofcommon stock and warrants to purchase 6,149 shares of common stock held byForeign IV; and 595,905 shares of common stock and warrants to purchase 17,278shares of common stock held by Foreign IV-B. Mr. Sperling disclaimsbeneficial ownership of the shares held by Fund IV, Foreign IV, and ForeignIV-B except to the extent of his pecuniary interest therein.

       (9) Director of Vertis Holdings and Vertis; includes 1,127 shares ofcommon stock and warrants to purchase 33 shares of common stock which arecurrently exercisable and owned directly by Mr. Oberg; 

57

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192 shares of common stockand warrants to purchase 6 shares of common stock held by CLI/THLEF, whichrepresent Mr. Oberg’s pro rata ownership of those entities. Also includesthe 6,135,560 shares of common stock and warrants to purchase 177,906 shares ofcommon stock held by Fund IV; 212,097 shares of common stock and warrants topurchase 6,149 shares of common stock held by Foreign IV; and 595,905 shares ofcommon stock and warrants to purchase 17,278 shares of common stock held byForeign IV-B. Mr. Oberg disclaims beneficial ownership of the shares heldby Fund IV, Foreign IV and Foreign IV-B except to the extent of his pecuniaryinterest therein.

(10) Director of Vertis Holding and Vertis; includes beneficially ownedshares in the amount of 925,225 shares of common stock held by EvercoreCapital; 222,199 shares of common stock held by Evercore Capital NQ; and966,991 shares of common stock controlled by EBF. Ms. Burnham disclaimsbeneficial ownership of the shares held by Evercore Capital, Evercore CapitalNQ and EBF except to the extent of her pecuniary interest therein.

(11) Director of Vertis Holding and Vertis; includes beneficially ownedshares in the amount of 925,225 shares of common stock held by EvercoreCapital; 222,199 shares of common stock held by Evercore Capital NQ; and966,991 shares of common stock controlled by EBF. Mr. Dillon disclaimsbeneficial ownership of the shares held by Evercore Capital, Evercore CapitalNQ and EBF except to the extent of his pecuniary interest therein.

(12) Includes 95,204 shares of common stock; rightsto 28,803 shares of common stock upon the occurrence of certain sales orliquidation of Vertis Holdings, warrants to purchase 1,269 shares of commonstock; and 231,339 shares of restricted stock that vest immediately prior to aLiquidity Event.

**ITEM 13**            CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

On December 7, 1999, we entered into consultingagreements commencing January 1, 2000 with each of Thomas H. LeeCapital, LLC (an affiliate of Thomas H. Lee Equity Fund IV, LP, asignificant stockholder of Vertis Holdings), THL Equity Advisors IV, LLC (anaffiliate of Thomas H. Lee Equity Fund IV, LP), and Evercore Advisors Inc.(an affiliate of Evercore Capital Partners, LP, a significant stockholder ofVertis Holdings). Under each agreement, these parties have agreed to provide uswith consulting services on matters involving corporate finance, strategiccorporate planning and other management skills and services. The annual feespayable to these parties under these agreements amount to approximately$220,000, $780,000 and $250,000, respectively. Unless otherwise agreed, theconsulting agreements with Thomas H. Lee Capital, LLC and THL EquityAdvisors IV, LLC expire when certain persons affiliated with THL cease to ownat least one third of the number of Vertis Holdings common shares theycollectively held immediately after December 7, 1999. The consultingagreement with Evercore Advisors Inc. expires when Evercore Capital Partners,LP and certain of its affiliates cease to own at least one third of the numberof Vertis Holdings common shares they collectively held immediately after December 7,1999. Among our directors of the board, Messrs. Di Novi, Oberg andSperling are affiliated with THL and Ms. Burnham and Mr. Dillon areaffiliated with ECP. See Item 10, “*Directors,Executive Officers and Corporate Governance*”.

On December 7, 1999, Vertis Holdings issued tocertain of its equity investors $100.0 million aggregate principal amountof 12.0% mezzanine notes as part of a unit including warrants to purchasecommon stock of Vertis Holdings at the time of Vertis Holdings’recapitalization. Effective with the closing of the Credit Facility in December 2004,interest will continue to be 13% payable in-kind unless certain conditions setforth in the credit agreement are met. In addition, the Company’s indenturesinclude covenants that restrict payments from the Company to Vertis Holdings.

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Our audit committeecharter requires that the audit committee review and approve all related partytransactions and discuss such transactions and their appropriate disclosure inour financial statements with management and the independent auditors.

**ITEM14**            PRINCIPAL ACCOUNTANTFEES AND SERVICES

Thefollowing table presents fees for professional audit services rendered byDeloitte & Touche LLP, the member firms of Deloitte Touche Tohmatsu,and their respective affiliates (collectively, the “Deloitte Entities”) for theaudit of our consolidated annual financial statements for the years ended December 31,2006 and 2005, and fees billed for other services rendered by DeloitteEntities.

| ** **             | ** ** | **Year ended  December 31**, | ** ** |
|------------------------|------------|----------------------------------------|------------|
| ** **             | ** ** | **2006**                               | ** ** | **2005** | ** ** |
| ** **             | ** ** | **(in thousands)**                | ** ** |
| Audit fees(1)          |       | $                                      | 1,295      |   | $ | 1,214 |   |
| Audit-related  fees(2) |       | 175                                    |       | 550 |   |
| Tax fees(3)            |       | 143                                    |       | 631 |   |
| Total fees billed      |       | $                                      | 1,613      |   | $ | 2,395 |   |

----

(1)          Audit fees consist offees for professional services rendered for the audit of our consolidatedfinancial statements, review of financial statements included in our quarterlyreports, comfort letters and other services related to SEC matters, as well asservices that are normally provided by the independent registered publicaccounting firm in connection with statutory and regulatory filings orengagements.

(2)          Audit-related fees consistmainly of services related to Sarbanes-Oxley Section 404 readiness andagreed-upon procedures engagements.

(3)          Taxfees consist of compliance fees for the preparation of the corporate taxreturns and assistance on some UK tax issues.

**Audit Committee Pre-ApprovalPolicies**

The audit committee has established pre-approvalpolicies and procedures pursuant to which the audit committee must approve allaudit and non-audit engagement fees and terms on a case-by-case basis (otherthan with respect to de minimis exceptions permitted by the Sarbanes-Oxley Actof 2002). The audit committee is also responsible for considering, to theextent applicable, whether the independent auditors’ provision of othernon-audit services to the Company is compatible with maintaining theindependence of the independent auditors. In accordance with the pre-approvalpolicies and procedures of the audit committee, the Company’s management isauthorized to retain the independent auditors to provide audit related servicesin addition to the annual audit, including services related to SEC filings,accounting and reporting research and consultations, internal control reviews,quarterly reviews, benefit plan audits, consultations as to regulatory issuesregarding benefit plans, statutory audits of subsidiaries, attest services,acquisition due diligence services and corporate and subsidiary tax complianceand consulting services. Any additional services must be specificallypre-approved on an individual basis by the audit committee prior to theengagement of the independent auditor. The authority for such pre-approval maybe delegated to one or more designated members of the audit committee with anysuch pre-approval reported to the audit committee at its next regularlyscheduled meeting.

All services provided by Deloitte Entities in fiscal2006 were pre-approved by the audit committee or its designee.

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**PART IV**

**Item 15.**                 Exhibitsand Financial Statement Schedules

(a)           Documentsfiled as part of this Report:

1.                ConsolidatedFinancial Statements

The consolidated financial statements required to befiled in this Annual Report on Form 10-K are listed on page F-1hereof.

2.                FinancialStatement Schedules

The financial statement schedule required in thisAnnual Report on Form 10-K is listed on page F-1 hereof. Therequired schedule appears on page F-40 hereof.

3.                Exhibits

| 3  | .1 | Restated  Certificate of Incorporation of Vertis, Inc.##                                                                                                                                                                                                                                                                               |   |
|----|----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 3  | .2 | Amended and  Restated By-Laws of Vertis, Inc.**                                                                                                                                                                                                                                                                                        |   |
| 4  | .1 | Indenture, dated  as of June 24, 2002, among Vertis, Inc, (the “Company”), as Issuer, the  Company’s subsidiaries listed on the signature pages thereof (the  “Subsidiary Guarantors”) and the Bank of New York, as trustee**                                                                            |   |
| 4  | .2 | Indenture, dated  as of June 6, 2003 (the “Indenture”), among the Company as Issuer, the  Subsidiary Guarantors and the Bank of New York, as Trustee.***                                                                                                                                                                     |   |
| 4  | .3 | U.S. Security  Agreement, dated December 7, 1999 and amended and restated as of  June 6, 2003, among the Company, the Subsidiary Guarantors, Vertis  Holdings, Inc. and certain of its subsidiaries listed on the signature  page thereto, and GE Capital, as Collateral Agent#                                         |   |
| 4  | .4 | Indenture, dated  as of February 28, 2003, among the Company as Issuer, the subsidiary  guarantors listed on the signature pages thereof and the Bank of New  York, as Trustee.##                                                                                                                                                 |   |
| 10 | .1 | $200,000,000  Credit Agreement dated December 22, 2004 by and among Vertis, Vertis  Limited, Vertis Digital Services Limited, General Electric Capital  Corporation, GECC Capital Markets Group, Inc., Bank of America, N.A. and  the other lenders and credit parties named therein.^                                            |   |
| 10 | .2 | Limited Consent  and Amendment No. 1 to Credit Agreement, dated as of October 3,  2005 by and among Vertis, Vertis Limited and Vertis Digital Services Limited,  as Borrowers, the other Credit Parties signatory hereto, General Electric  Capital Corporation, as a Lender and as Agent for Lenders and the other  Lenders.**** |   |
| 10 | .3 | Amendment  No. 2 to Credit Agreement, dated as of November 22, 2005 by and  among Vertis and Vertis Digital Services Limited, as Borrowers, the other  Credit Parties signatory hereto, General Electric Capital Corporation, as a  Lender and as Agent for Lenders, and the other Lenders.****                                   |   |
| 10 | .4 | Limited Consent  and Amendment No. 3 to Credit Agreement, dated as of December 12,  2005 by and among Vertis and Vertis Digital Services Limited, as Borrowers,  the other Credit Parties signatory hereto, General Electric Capital  Corporation, as a Lender and as Agent for Lenders, and the other Lenders.****               |   |
| 10 | .5 | Amendment  No. 4 to Credit Agreement, dated as of May 30, 2006 by and among  Vertis as Borrower, the other Credit Parties signatory hereto, General  Electric Capital Corporation, as a Lender and as Agent for Lenders, and the  other Lenders.##                                                                                |   |

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| 10 | .6  | Limited Consent  and Amendment No. 5 to Credit Agreement, dated as of September 5,  2006 by and among Vertis as Borrower, the other Credit Parties signatory  hereto, General Electric Capital Corporation, as a Lender and as Agent for Lenders,  and the other Lenders.##                                                               |   |
|----|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10 | .7  | Limited Consent  and Amendment No. 6 to Credit Agreement, dated as of November 27,  2006 by and among Vertis as Borrower, the other Credit Parties signatory  hereto, General Electric Capital Corporation, as a Lender and as Agent for Lenders,  and the other Lenders.##                                                               |   |
| 10 | .8  | Termination  Agreement, dated November 25, 2005, by and among Manufacturers and  Traders Trust Company, not individually but solely as trustee under the  Amended and Restated Indenture and Servicing Agreement dated as of  December 9, 2002, Vertis Receivables LLC and Vertis, Inc.****                                          |   |
| 10 | .9  | Receivables Sale  and Servicing Agreement dated November 25, 2005 by and among each of the  Entities Party Hereto From Time to Time as Originators, Vertis Receivables  II, LLC as Buyer and Vertis, Inc. as Servicer.****                                                                                                                |   |
| 10 | .10 | Receivables  Funding Administration Agreement dated as of November 25, 2005 by and  among Vertis Receivables II, LLC, as Borrower, the Financial Institutions  Signatory Hereto From Time to Time, as Lenders, and General Electric Capital  Corporation, as a Lender, as Swing Line Lender and as Administrative  Agent.****                  |   |
| 10 | .11 | Annex X to  Receivables Sale and Servicing Agreement and Receivables Funding  Administration Agreement dated as of November 25, 2005.****                                                                                                                                                                                                      |   |
| 10 | .12 | First Amendment  to Receivables Funding Administration Agreement dated as of September 5,  2006 by and among Vertis Receivables II, LLC, as Borrower, the Financial  Institutions Signatory Hereto From Time to Time, as Lenders, and General  Electric Capital Corporation, as a Lender, as Swing Line Lender and as  Administrative Agent.## |   |
| 10 | .13 | Stock Purchase  Agreement dated September 18, 2002 by and between Vertis Holdings and  Dean D. Durbin.*†                                                                                                                                                                                                                                  |   |
| 10 | .14 | Stock Purchase  Agreement dated September 20, 2002 by and between Vertis Holdings and  John V. Howard, Jr.*†                                                                                                                                                                                                                         |   |
| 10 | .15 | Employment  Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings  and Donald Roland.#†                                                                                                                                                                                                                                  |   |
| 10 | .16 | Employment  Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings  and Dean D. Durbin.#†                                                                                                                                                                                                                                 |   |
| 10 | .17 | Employment  Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings  and Herbert W. Moloney III.#†                                                                                                                                                                                                                         |   |
| 10 | .18 | Service Agreement  dated August 31, 2003 by and between Vertis Digital Services Limited and  Adriaan Roosen.#†                                                                                                                                                                                                                            |   |
| 10 | .19 | Employment  Agreement dated August 31, 2003 by and between Vertis, Vertis Holdings  and John Howard.#†                                                                                                                                                                                                                                    |   |
| 10 | .20 | Employment  Agreement dated August 31,2003 by and between Vertis, Vertis Holdings  and Catherine Leggett†^                                                                                                                                                                                                                                |   |
| 10 | .21 | Memo of  Understanding dated August 15, 2003 by and between Vertis and Thomas  Zimmer.#†                                                                                                                                                                                                                                                  |   |

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| 10 | .22 | Memo of  understanding dated August 15, 2003 by and between Vertis and David  Colatriano†^                                                                                                                                                                                       |   |
|----|-----|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10 | .23 | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Dean D. Durbin.†^                                                                                                                                |   |
| 10 | .24 | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc to  Dean D. Durbin.†^                                                                                                                                                                     |   |
| 10 | .25 | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and John V. Howard, Jr†^                                                                                                                        |   |
| 10 | .26 | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc to  John V. Howard, Jr.†^                                                                                                                                                            |   |
| 10 | .27 | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Donald E. Roland.†^                                                                                                                              |   |
| 10 | .28 | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc to  Donald E. Roland.†^                                                                                                                                                                   |   |
| 10 | .29 | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and David P. Colatriano.† ^                                                                                                                          |   |
| 10 | .30 | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc to  David P. Colatriano.† ^                                                                                                                                                               |   |
| 10 | .31 | Restricted Stock  Agreement dated May 20, 2004 by and among Vertis Holdings, Inc.,  Thomas H. Lee Equity Fund IV, L.P. and Thomas R. Zimmer.†^                                                                                                                         |   |
| 10 | .32 | Restricted Stock  Incentive Memo dated April 5, 2004 on behalf of Vertis Holdings, Inc to  Thomas R. Zimmer.†^                                                                                                                                                                   |   |
| 10 | .33 | Employment  Agreement dated October 13, 2004 by and between Vertis and Joe. M  Scott.†^                                                                                                                                                                                     |   |
| 10 | .34 | Memo of  Understanding dated November 6, 2004 by and between Vertis and Herbert W.  Moloney III amending Mr. Moloney’s Employment Agreement dated  August 31, 2003, and filed as Exhibit 10.44 to Vertis’ 2003 Annual  Report on Form 10-K.†^ |   |
| 10 | .35 | Memo of  Understanding dated November 6, 2004 by and between Vertis and Herbert W.  Moloney III amending Mr. Moloney’s Employment Agreement dated  August 31, 2003 and filed as Exhibit 10.44 to Vertis’ 2003 Annual  Report on Form 10-K.†^  |   |
| 10 | .36 | Memo of  Understanding dated November 12, 2004 by and between Vertis and Dean D.  Durbin amending Mr. Durbin’s Employment Agreement dated August 31,  2003 and filed as Exhibit 10.43 to Vertis’ 2003 Annual Report on  Form 10-K.†^          |   |
| 10 | .37 | Employment  Agreement dated January 11, 2005 by and between Vertis and Gary L.  Sutula.†^                                                                                                                                                                                        |   |
| 10 | .38 | Employment  Agreement dated March 3, 2005 by and between Vertis and Ann M. Raider.†****                                                                                                                                                                                          |   |
| 10 | .39 | Termination  Agreement dated November 9,2005 by and between Vertis Digital Services  Limited and Adriaan Roosen.†****                                                                                                                                                            |   |
| 10 | .40 | Letter Agreement  dated March 9, 2006 amending Employment Agreement dated August 31,  2003 by and among Vertis, Vertis Holdings and Dean D. Durbin†****                                                                                                                     |   |

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| 10 | .41 | Letter Agreement  dated January 2, 2007 by and between Vertis and Dean D. Durbin regarding  separation from employment.†##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |
|----|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| 10 | .42 | Offer Letter and  Business Responsibility Agreement dated January 10, 2007 by and between  Vertis and Doug L. Mann.†##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   |
| 10 | .43 | Executive  Incentive Plan for Vertis Executives dated March 1, 2005.†****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| 10 | .44 | Employee  Incentive Plan for Vertis Executives dated February 1, 2006.†****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |
| 10 | .45 | Employee  Incentive Plan for Vertis Executives dated January 1, 2007.†##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |
| 10 | .46 | Vertis Holdings, Inc.  1999 Equity Award Plan.†****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 10 | .47 | Unanimous Written  Consent of the Board of Directors of Vertis Holdings, Inc. changing the  name of the Equity Award Plan to Vertis Holdings, Inc. 1999 Equity Award  Plan.†****                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   |
| 10 | .48 | Management  Services Agreement dated December 7, 1999 between Thomas H. Lee Capital,  LLC and Big Flower Holdings, Inc., predecessor in interest to Vertis  Holdings, Inc.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |
| 10 | .49 | Management  Services Agreement dated December 7, 1999 between THL Equity Advisors  IV, LLC and Big Flower Holdings, Inc., predecessor in interest to Vertis  Holdings, Inc.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 10 | .50 | Management  Services Agreement dated December 7, 1999 between Evercore  Advisors, Inc. and Big Flower Holdings, Inc., predecessor in interest  to Vertis Holdings, Inc.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   |
| 10 | .51 | Limited Consent and  Amendment No. 7 to Credit Agreement, dated as of March 30, 2007, by  and among Vertis, as Borrower, the other Credit Parties signatory hereto,  General Electric Capital Corporation, as a Lender and as Agent for Lenders,  the other Lenders, and Crystal Capital Fund, L.P, as a Joint-Lead Arranger.##                                                                                                                                                                                                                                                                                                                                                                  |   |
| 10 | .52 | Second Amendment, dated  March 30, 2007, to (i) that certain Receivables Funding and  Administration Agreement, dated as of November 25, 2005 (as amended  pursuant to that certain First Amendment dated as of September 5, 2006),  among Vertis Receivables II, LLC,  as  Borrower, the Financial Institutions From Time To Time Party Thereto, as  Lenders,  and General Electric Capital  Corporation, as administrative agent for the Lenders and (ii) that  certain Receivables Sale and Servicing Agreement, dated as of November 25,  2005 among Borrower, Vertis, as Servicer, and each of the Entities Party  Hereto From Time to Time as Originators.## |   |
| 12 | .1  | Statement re  computation of ratios of earnings to fixed charges.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   |
| 21 | .1  | List of  subsidiaries of Vertis, Inc.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |
| 31 | .1  | Certification of  Michael T. DuBose, Chairman and Chief Executive Officer, dated April 2,  2007, pursuant to Section 302 of the Sarbanes-Oxley Act 0f 2002.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   |
| 31 | .2  | Certification of  Stephen E. Tremblay, Chief Financial Officer, dated April 2, 2007,  pursuant to Section 302 of the Sarbanes-Oxley Act 0f 2002.##                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |

----

| *  |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2002. |   |
|----|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ** |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s registration  statement on Form S-4 (No. 333-97721).                     |   |

63

----

 
| ***    |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s registration  statement on Form S-4 (No. 333-106435).                    |   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
| ****   |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2005. |   |
| ##     |   | Filed herewith.                                                                                                                                                     |   |
| #      |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2003. |   |
| ^      |   | Incorporated by  reference to the corresponding exhibit to the Registrant’s Annual Report on  Form 10-K for the fiscal year ended December 31, 2004. |   |
| † |   | This exhibit is a  management contract or a compensatory plan or arrangement.                                                                                       |   |

 

64

----

**SIGNATURES**

Pursuant to therequirements of Section 13 or 15(d) of the Securities Exchange Act of1934, the registrant has duly caused this report to be signed on its behalf bythe undersigned thereunto duly authorized. 

|        | VERTIS, INC. |
|--------|--------------|
|   | BY:          | /s/ MICHAEL T. DUBOSE |
|   |         | Name: Michael T. DuBose |
|   |         | Title:    Chairman and Chief Executive Officer |

 

Date: April 2, 2007

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below on behalf of the registrant and in the capacities and on the datesindicated. 

|                          | **Signatures** | ** **                                   | ** ** | ** **         | **Capacity** | ** ** | ** ** | ** ** | **Date** | ** ** | ** ** |
|--------------------------|----------------|----------------------------------------------|------------|--------------------|--------------|------------|------------|------------|----------|------------|------------|
| /s/ MICHAEL T.  DUBOSE   |           | Chairman and Chief Executive Officer         |       | April 2, 2007 |         |
| Michael T. Dubose        |           | (Principal Executive Officer)                |       |               |         |
| /s/ CIARA A.  BURNHAM    |           | Director                                     |       | April 2, 2007 |         |
| Ciara A. Burnham         |           |                                         |       |               |         |
| /s/ JOHN T.  DILLON      |           | Director                                     |       | April 2, 2007 |         |
| John T. Dillon           |           |                                         |       |               |         |
| /s/ ANTHONY J.  DI NOVI  |           | Director                                     |       | April 2, 2007 |         |
| Anthony J. Dinovi        |           |                                         |       |               |         |
| /s/ SOREN L.  OBERG      |           | Director                                     |       | April 2, 2007 |         |
| Soren L. Oberg           |           |                                         |       |               |         |
| /s/ DONALD E.  ROLAND    |           | Director                                     |       | April 2, 2007 |         |
| Donald E. Roland         |           |                                         |       |               |         |
| /s/ SCOTT M.  SPERLING   |           | Director                                     |       | April 2, 2007 |         |
| Scott M. Sperling        |           |                                         |       |               |         |
| /s/ STEPHEN E.  TREMBLAY |           | Chief Financial Officer                      |       | April 2, 2007 |         |
| Stephen E. Tremblay      |           | (Principal Financial and Accounting Officer) |       |               |         |

 

65

----

**VERTIS, INC. ANDSUBSIDIARIES**

**INDEX TO CONSOLIDATED FINANCIAL STATEMENTS ANDSCHEDULE**
|                                                                                                                                                      | ** ** | **Page** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|
| Report of Independent Registered Public Accounting  Firm                                                                                             |       | F-2      |       |
| Consolidated  Balance Sheets at December 31, 2006 and 2005                                                                                      |       | F-3      |       |
| Consolidated Statements of Operations for the Years  Ended December 31, 2006, 2005 and 2004                                                     |       | F-4      |       |
| Consolidated Statements of Stockholder’s Deficit for  the Years Ended December 31, 2006, 2005 and 2004       |       | F-5      |       |
| Consolidated  Statements of Cash Flows for the Years Ended December 31, 2006, 2005 and  2004                                                    |       | F-6      |       |
| Notes to Consolidated Financial Statements                                                                                                           |       | F-7      |       |
| Schedule of Valuation and Qualifying Accounts for the  Years Ended December 31, 2006, 2005 and 2004                                             |       | F-43     |       |

 

F-1

----

**REPORT OFINDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Stockholder ofVertis, Inc. and subsidiaries:Baltimore, Maryland

We have audited the accompanying consolidated balancesheets of Vertis, Inc. and subsidiaries (the “Company”), a wholly-ownedsubsidiary of Vertis Holdings, Inc. as of December 31, 2006 and 2005and the related consolidated statements of operations, stockholder’s deficit,and cash flows for each of the three years in the period ended December 31,2006. Our audits also included the financial statement schedule referred to inthe Index at Item 15. These financial statements and financial statementschedule are the responsibility of the Company’s management. Our responsibilityis to express an opinion on the financial statements and financial statementschedule based on our audits.

We conducted our audits in accordance with thestandards of the Public Company Accounting Oversight Board (United States). Thosestandards require that we plan and perform the audit to obtain reasonableassurance about whether the financial statements are free of materialmisstatement. The Company is not required to have, nor were we engaged toperform, an audit of its internal control over financial reporting. Our auditsincluded consideration of internal control over financial reporting as a basisfor designing audit procedures that are appropriate in the circumstances, butnot for the purpose of expressing an opinion on the effectiveness of theCompany’s internal control over financial reporting. Accordingly, we express nosuch opinion. An audit also includes examining, on a test basis, evidencesupporting the amounts and disclosures in the financial statements, assessingthe accounting principles used and significant estimates made by management, aswell as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion.

In our opinion, suchconsolidated financial statements present fairly, in all material respects, thefinancial position of Vertis, Inc. and subsidiaries at December 31,2006 and 2005, and the results of their operations and their cash flows foreach of the three years in the period ended December 31, 2006, inconformity with accounting principles generally accepted in the United Statesof America. Also, in our opinion, such financial statement schedule, whenconsidered in relation to the basic consolidated financial statements taken asa whole, presents fairly in all material respects the information set forththerein.

/s/ Deloitte & Touche LLP

Baltimore, MarylandApril 2, 2007

F-2

----

**Vertis, Inc. and SubsidiariesConsolidated Balance Sheets**In thousands, except per share amounts

| **As of December 31,**                                                            | ** ** | ** ** | ** ** | **2006**  | ** ** | **2005** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|----------|------------|
| **ASSETS**                                                                                       |       |       |       |      |       |
| Current Assets:                                                                                  |       |       |       |      |       |
| Cash and cash equivalents                                                                        |       | $          | 5,710      |      | $          | 1,828    |       |
| Accounts receivable, net                                                                         |       | 139,426    |       | 145,049   |       |
| Inventories                                                                                      |       | 48,227     |       | 51,735    |       |
| Maintenance parts, net                                                                           |       | 22,292     |       | 20,500    |       |
| Prepaid expenses and other current assets                                                        |       | 8,578      |       | 9,027     |       |
| Current assets of operations held for sale                                                       |       | —     |       | 7,056     |       |
| Total current assets                                                                             |       | 224,233    |       | 235,195   |       |
| Property, plant  and equipment, net                                                              |       | 330,039    |       | 336,248   |       |
| Goodwill                                                                                         |       | 246,260    |       | 238,566   |       |
| Deferred  financing costs, net                                                                   |       | 14,838     |       | 20,755    |       |
| Other assets, net                                                                                |       | 29,316     |       | 30,341    |       |
| Long-term assets  of operations held for sale                                                    |       | —     |       | 11,534    |       |
| Total assets                                                                                     |       | $          | 844,686    |      | $          | 872,639  |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                  |       |       |       |      |       |
| Current Liabilities:                                                                             |       |       |       |      |       |
| Accounts payable                                                                                 |       | $          | 186,638    |      | $          | 229,812  |       |
| Compensation and benefits payable                                                                |       | 34,755     |       | 37,645    |       |
| Accrued interest                                                                                 |       | 14,300     |       | 14,110    |       |
| Accrued income taxes                                                                             |       | 897        |       | 2,347     |       |
| Current portion of long-term debt                                                                |       | 5          |       |      |       |
| Other current liabilities                                                                        |       | 28,165     |       | 23,385    |       |
| Current liabilities of operations held for sale                                                  |       | —     |       | 1,960     |       |
| Total current liabilities                                                                        |       | 264,760    |       | 309,259   |       |
| Due to parent                                                                                    |       | 3,491      |       | 7,898     |       |
| Long-term debt                                                                                   |       | 1,096,036  |       | 1,049,059 |       |
| Other long-term  liabilities                                                                     |       | 30,482     |       | 32,301    |       |
| Total liabilities                                                                                |       | 1,394,769  |       | 1,398,517 |       |
| Stockholder’s  deficit:                                                                     |       |       |       |      |       |
| Common stock—authorized  3,000 shares; $0.01 par value; issued and outstanding 1,000 shares |       |       |       |      |       |
| Contributed capital                                                                              |       | 409,689    |       | 409,689   |       |
| Accumulated deficit                                                                              |       | (953,090   | )          | (926,895  | )          |
| Accumulated other comprehensive loss                                                             |       | (6,682     | )          | (8,672    | )          |
| Total stockholder’s deficit                                                                 |       | (550,083   | )          | (525,878  | )          |
| Total liabilities and stockholder’s deficit                                                 |       | $          | 844,686    |      | $          | 872,639  |       |

 

See Notes to Consolidated Financial Statements.

F-3

----

**Vertis, Inc. and SubsidiariesConsolidated Statements of OperationsIn thousands**

| **Year Ended December 31,**                                                            | ** ** | ** ** | ** ** | **2006**  | ** ** | **2005**  | ** ** | **2004** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|------------|------------|-----------|------------|-----------|------------|----------|------------|
| Revenue                                                                                               |       | $          | 1,468,661  |      | $          | 1,470,088 |       | $        | 1,474,359  |   |
| Operating expenses:                                                                                   |       |       |       |      |       |      |       |
| Costs of production                                                                                   |       | 1,160,392  |       | 1,140,582 |       | 1,137,216 |       |
| Selling, general and administrative                                                                   |       | 142,916    |       | 149,395   |       | 157,694   |       |
| Restructuring charges                                                                                 |       | 16,001     |       | 17,119    |       | 4,501     |       |
| Depreciation and amortization of intangibles                                                          |       | 58,788     |       | 62,829    |       | 65,430    |       |
|                                                                                                  |       | 1,378,097  |       | 1,369,925 |       | 1,364,841 |       |
| Operating income                                                                                      |       | 90,564     |       | 100,163   |       | 109,518   |       |
| Other expenses, net:                                                                                  |       |       |       |      |       |      |       |
| Interest expense, net                                                                                 |       | 131,023    |       | 128,821   |       | 132,809   |       |
| Other, net                                                                                            |       | 7,337      |       | 7,653     |       | 47,685    |       |
|                                                                                                  |       | 138,360    |       | 136,474   |       | 180,494   |       |
| Loss from continuing operations before income tax  benefit and cumulative effect of accounting change |       | (47,796    | )          | (36,311   | )          | (70,976   | )          |
| Income tax  benefit                                                                                   |       | (1         | )          | (8,070    | )          | (66,053   | )          |
| Loss from  continuing operations before cumulative effect of accounting change                        |       | (47,795    | )          | (28,241   | )          | (4,923    | )          |
| Discontinued  operations:                                                                             |       |       |       |      |       |      |       |
| Income (loss)  from discontinued operations                                                           |       | 21,600     |       | (143,389  | )          | (6,210    | )          |
| Loss before  cumulative effect of accounting change                                                   |       | (26,195    | )          | (171,630  | )          | (11,133   | )          |
| Cumulative effect of accounting change                                                                |       | —     |       | (1,600    | )          | —    |       |
| Net loss                                                                                              |       | $          | (26,195    | )         | $          | (173,230  | )          | $        | (11,133    | ) |

 

See Notes to Consolidated Financial Statements.

F-4

----

**Vertis, Inc. and SubsidiariesConsolidated Statements of Stockholder’s Deficit**In thousands, except where otherwise noted

| ** **                                        | ** ** | **Shares** | ** ** | **Common  Stock** | ** ** | **Contributed  Capital** | ** ** | **Accumulated  Deficit** | ** ** | **Accumulated  Other  Comprehensive  Income (Loss)** | ** ** | **Total** | ** ** |
|---------------------------------------------------|------------|------------|------------|-------------------|------------|--------------------------|------------|--------------------------|------------|-----------------------------------------------------------|------------|-----------|------------|
| **Balance  at January 1, 2004**              |       |       | 1          |              |       |                     | $          | —                   |       |                                                      |       | $         | 408,964    |   |   |   | $ | (742,512 | ) |   |   | $ | (8,650 | ) |   | $ | (342,198 | ) |
| Net loss                                          |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (11,133 | ) |   |   |   |   |   | (11,133 | ) |
| Currency  translation adjustment                  |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | 5,962 |   |   | 5,962 |   |
| Minimum pension  liability adjustment             |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | (1,270 | ) |   | (1,270 | ) |
| Comprehensive loss                                |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | (6,441 | ) |
| Dividends to parent                               |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (15 | ) |   |   |   |   |   | (15 | ) |
| Capital  contributions by parent                  |       |       |       |              |       |                     |       |                     |       |                                                      | 95         |      |       |   |   |   |   |   |   |   |   | 95 |   |
| Other                                             |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (1 | ) |   |   |   |   |   | (1 | ) |
| **Balance at December 31, 2004**             |       |       | 1          |              |       |                     | —     |                     |       |                                                      | 409,059    |      |       |   | (753,661 | ) |   |   | (3,958 | ) |   | (348,560 | ) |
| Net loss(1)                                       |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (173,230 | ) |   |   |   |   |   | (173,230 | ) |
| Currency  translation adjustment(1)               |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | (4,294 | ) |   | (4,294 | ) |
| Minimum pension  liability adjustment             |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | (420 | ) |   | (420 | ) |
| Comprehensive loss                                |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | (177,944 | ) |
| Dividends to parent                               |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (4 | ) |   |   |   |   |   | (4 | ) |
| Capital  contributions by parent                  |       |       |       |              |       |                     |       |                     |       |                                                      | 660        |      |       |   |   |   |   |   |   |   |   | 660 |   |
| Other                                             |       |       |       |              |       |                     |       |                     |       |                                                      | (30        | )         |       |   |   |   |   |   |   |   |   | (30 | ) |
| **Balance at December 31, 2005**             |       |       | 1          |              |       |                     | —     |                     |       |                                                      | 409,689    |      |       |   | (926,895 | ) |   |   | (8,672 | ) |   | (525,878 | ) |
| Net loss                                          |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   | (26,195 | ) |   |   |   |   |   | (26,195 | ) |
| Currency  translation adjustment                  |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | 31 |   |   | 31 |   |
| Minimum pension  liability adjustment             |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | 3,208 |   |   | 3,208 |   |
| Comprehensive loss                                |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   |   |   |   | (22,956 | ) |
| Adjustment related to the adoption of SFAS 158(2) |       |       |       |              |       |                     |       |                     |       |                                                      |       |      |       |   |   |   |   |   | (1,249 | ) |   | (1,249 | ) |
| **Balance  at December 31, 2006**            |       |       | 1          |              |       |                     | $          | —                   |       |                                                      |       | $         | 409,689    |   |   |   | $ | (953,090 | ) |   |   | $ | (6,682 | ) |   | $ | (550,083 | ) |

----

(1)          Includes a $1.4 millionreclassification adjustment related to a translation gain realized upon thesale of the Company’s Europe segment (see Note 4.)

(2)          See Note 15 for furtherdiscussion.

See Notes to Consolidated Financial Statements.

F-5

----

**Vertis, Inc. and SubsidiariesConsolidated Statements of Cash FlowsIn thousands**

| **Year Ended December 31,**                                                                                   | ** ** | ** ** | ** ** | **2006** | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|------------|------------|----------|------------|----------|------------|----------|------------|
| **Cash Flows from Operating Activities:**                                                                                    |       |       |       |     |       |     |       |
| Net loss                                                                                                                     |       | $          | (26,195    | )        | $          | (173,230 | )          | $        | (11,133    | ) |
| Adjustments for  discontinued operations                                                                                     |       | (21,600    | )          | 143,389  |       | 6,210    |       |
| Net loss from  continuing operations                                                                                         |       | (47,795    | )          | (29,841  | )          | (4,923   | )          |
| Adjustments to reconcile  net loss from continuing operations to net cash provided by continuing  operating activities: |       |       |       |     |       |     |       |
| Depreciation and  amortization                                                                                               |       | 58,788     |       | 62,829   |       | 65,430   |       |
| Amortization of  deferred financing costs                                                                                    |       | 6,306      |       | 7,265    |       | 7,831    |       |
| Write-off of  deferred financing fees                                                                                        |       |       |       |     |       | 1,788    |       |
| Accretion of  long-term debt discounts                                                                                       |       | 3,961      |       | 3,961    |       | 3,962    |       |
| Cumulative effect  of accounting change                                                                                      |       |       |       | 1,600    |       |     |       |
| Loss on  termination of leasehold interest                                                                                   |       |       |       |     |       | 44,012   |       |
| Deferred income  taxes                                                                                                       |       |       |       |     |       | (66,733  | )          |
| Provision for  doubtful accounts                                                                                             |       | 942        |       | 1,544    |       | 670      |       |
| Other, net                                                                                                                   |       | 2,544      |       | 1,532    |       | (512     | )          |
| Changes in operating  assets and liabilities  (excluding effect of acquisitions and dispositions):                           |       |       |       |     |       |     |       |
| Decrease  (increase) in accounts receivable                                                                                  |       | 9,078      |       | (7,537   | )          | 9,323    |       |
| Decrease  (increase) in inventories                                                                                          |       | 5,211      |       | (10,664  | )          | (4,403   | )          |
| Decrease  (increase) in prepaid expenses and other assets                                                                    |       | 2,234      |       | (5,574   | )          | 3,644    |       |
| Decrease in  accounts payable and other liabilities                                                                          |       | (28,033    | )          | (19,263  | )          | (10,327  | )          |
| Net cash provided  by continuing operating activities                                                                        |       | 13,236     |       | 5,852    |       | 49,762   |       |
| Net income (loss)  from discontinued operations                                                                              |       | 21,600     |       | (143,389 | )          | (6,210   | )          |
| Change in net  assets of discontinued operations held for sale                                                               |       | (23,146    | )          | 143,230  |       | 3,993    |       |
| Net cash used in  discontinued operations                                                                                    |       | (1,546     | )          | (159     | )          | (2,217   | )          |
| Net cash provided  by operating activities                                                                                   |       | 11,690     |       | 5,693    |       | 47,545   |       |
| **Cash Flows from Investing Activities:**                                                                                    |       |       |       |     |       |     |       |
| Capital  expenditures                                                                                                        |       | (46,936    | )          | (40,165  | )          | (43,731  | )          |
| Software  development costs capitalized                                                                                      |       | (2,049     | )          | (2,032   | )          | (1,905   | )          |
| Proceeds from sale  of property, plant and equipment                                                                         |       | 785        |       | 1,021    |       | 808      |       |
| Proceeds from sale  of businesses, net                                                                                       |       | 41,071     |       | 2,361    |       |     |       |
| Proceeds from  termination of leasehold interest                                                                             |       |       |       |     |       | 31,068   |       |
| Acquisition of  business, net of cash acquired                                                                               |       | (21,017    | )          | (3,430   | )          |     |       |
| Investing  activities of discontinued operations                                                                             |       |       |       | (1,520   | )          | (5,232   | )          |
| Net cash used in  investing activities                                                                                       |       | (28,146    | )          | (43,765  | )          | (18,992  | )          |
| **Cash Flows from Financing Activities:**                                                                                    |       |       |       |     |       |     |       |
| Issuance of  long-term debt under new revolving credit facility                                                              |       |       |       |     |       | 103,294  |       |
| Repayment of debt  under prior revolving credit facility                                                                     |       |       |       |     |       | (102,932 | )          |
| Net borrowings  (repayments) under revolving credit facilities                                                               |       | 41,470     |       | 21,197   |       | (57,705  | )          |
| Repayments of  long-term debt                                                                                                |       | (34        | )          | (6       | )          | (74      | )          |
| Deferred financing  costs                                                                                                    |       | (388       | )          | (1,204   | )          | (5,605   | )          |
| (Decrease)  increase in outstanding checks drawn on controlled disbursement accounts                                         |       | (21,807    | )          | 15,030   |       | 13,976   |       |
| Dividends to  parent                                                                                                         |       |       |       | (4       | )          | (15      | )          |
| Capital  contributions by parent                                                                                             |       |       |       |     |       | 95       |       |
| (Advances to)  distributions from parent                                                                                     |       | (480       | )          | 1,150    |       | (47      | )          |
| Financing  activities of discontinued operations                                                                             |       | 1,546      |       | 3,169    |       | 19,405   |       |
| Net cash provided  by (used in) financing activities                                                                         |       | 20,307     |       | 39,332   |       | (29,608  | )          |
| Effect of exchange  rate changes on cash                                                                                     |       | 31         |       | (2,070   | )          | 1,610    |       |
| Net increase  (decrease) in cash and cash equivalents                                                                        |       | 3,882      |       | (810     | )          | 555      |       |
| Cash and cash  equivalents at beginning of year                                                                              |       | 1,828      |       | 2,638    |       | 2,083    |       |
| Cash and cash  equivalents at end of year                                                                                    |       | $          | 5,710      |     | $          | 1,828    |       | $        | 2,638      |   |

 

See Notes to Consolidated Financial Statements.

F-6

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**Vertis, Inc. and SubsidiariesNotes to Consolidated Financial Statements**

**1.   BASIS OFPRESENTATION**

***Principles ofConsolidation******—The***consolidatedfinancial statements include those of Vertis, Inc. and its subsidiaries(together, the “Company”). All significant intercompany balances andtransactions have been eliminated.

***Ownership******—The***Companyis a wholly-owned subsidiary of Vertis Holdings, Inc. (“Vertis Holdings”).

***Business******—The***Companyis a leading provider of targeted advertising, media and marketing services. TheCompany operates in two segments: Advertising Inserts and Direct Mail. Additionally,the Company provides other services which will be referred to as “Corporate andOther” for discussion in these financial statements (see Note 21).

***Use of Estimates******—The***Company’smanagement must make estimates and assumptions in preparing financialstatements in conformity with accounting principles generally accepted in theUnited States of America (“generally accepted accounting principles”). Theseestimates and assumptions affect the reported amounts of assets andliabilities, the disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenues and expenses. Actualresults could differ from those estimates.

***Reclassifications******—Certain***amountsfor prior periods have been reclassified to conform to the current periodpresentation.

**2.   SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES**

***Revenue Recognition******—The***Companyprovides a wide variety of print and print related services and products forspecific customers, primarily under contract. Revenue is not recognized untilthe earnings process has been completed. Print revenue is recognized when theproduct is shipped (see Note 3). Revenue from premedia operations is recognizedupon the completion of orders. Unbilled receivables are recorded for completedservices or products which remain unbilled as of the period end.

The Company charges customers for shipping andhandling charges. The amounts billed to customers are recorded as revenue andactual charges paid by the Company are included in costs of production in theconsolidated statements of operations.

The Company bills its customers for sales taxcalculated on each sales invoice and records a liability for the sales tax payable,which is included in other current liabilities on the Company’s consolidatedbalance sheet. Sales tax billed to a customer is not included in the Company’srevenue.

***Cash and CashEquivalents******—Cash*** equivalentsinclude all investments with initial maturities of 90 days or less. As theCompany’s cash management program utilizes zero-balance accounts, bookoverdrafts in these accounts are reclassified as current liabilities, and thefluctuation within these accounts is shown as the change in outstanding checksdrawn on controlled disbursement accounts in the financing section of theCompany’s consolidated statements of cash flows.

***Inventories******—Inventories***arerecorded at the lower of cost or market determined primarily on the first-in,first-out method.

***Maintenance Parts******—The***Companymaintains a supply of maintenance parts, primarily cylinders, drive motors,rollers and gear boxes, which are classified as current assets on the Company’sconsolidated balance sheets with the long-term portion included in Other assets,net.

F-7

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***Long-lived Assets******—Property,***plantand equipment are stated at cost. Depreciation and amortization are computedusing the straight-line method over the assets’ estimated useful lives, or whenapplicable, the terms of the leases, if shorter.

The Company evaluates the recoverability of itslong-lived assets, including property, plant and equipment and intangibleassets, when there are changes in economic circumstances or business objectivesthat indicate the carrying value may not be recoverable. The Company’sevaluations include estimated future cash flows, profitability and estimatedfuture operating results and other factors determining fair value. As theseassumptions and estimates may change over time, it may or may not be necessaryto record impairment charges.

Software development costs incurred for softwareintended to be licensed to others are expensed until technological feasibilityis determined, after which costs are capitalized until the product is ready forgeneral release and sale. These costs are amortized over one to five-year livesbeginning at the respective release dates.

Certain direct development costs associated withinternal-use software are capitalized, including payroll costs for employeesdevoting time to the software projects and external costs of material andservices by third-party providers. These costs are included in softwaredevelopment and are being amortized beginning when the asset is substantiallyready for use. Costs incurred during the preliminary project stage, as well asmaintenance and training costs, are expensed as incurred.

Intangible assets other than goodwill, which includetrademarks, a customer base and a non-compete agreement, are amortized over theterms of the related agreements or life of the intangible asset. Accumulatedamortization was $2.8 million and $1.7 million at December 31, 2006 and2005, respectively. Deferred financing costs are amortized over the terms ofthe related financing instruments.

***Goodwill******—Goodwill***isaccounted for under the Statement of Financial Accounting Standards (“SFAS”) No. 142,“Goodwill and Other Intangible Assets” (“SFAS 142”). Under the provisions ofthis statement, the Company’s goodwill is tested for impairment on an annualbasis. The Company elected January 1 of each year as the annual test date.Each of the Company’s reporting units is tested for impairment by comparing thefair value of the reporting unit with the carrying value of that unit. Fairvalue is determined based on a valuation study performed by the Company usingthe discounted cash flow method and the estimated market values of thereporting units. See Note 4 for discussion of the Europe impairment lossrecorded in 2005. No impairment of goodwill was noted in 2006 and 2004.

***Income Taxes******—Income***taxesare accounted for under the asset and liability method as outlined in SFAS No. 109“Accounting for Income Taxes” (“SFAS 109”). Deferred income taxes reflect thenet tax effects of temporary differences between the carrying amounts of assetsand liabilities for financial reporting purposes and the amounts used forincome tax purposes, and operating loss and tax credit carryforwards.

The provision for federal income taxes recorded by theCompany represents the amount calculated as outlined by SFAS 109 and allocatedin accordance with a tax-sharing arrangement with Vertis Holdings. State andforeign income taxes represent actual amounts paid or payable by the Company.

***Fair Value ofFinancial Instruments******—The***Companydetermines the fair value of its financial instruments as follows:

***Cash and CashEquivalents, Accounts Receivable and Accounts Payable******—Carrying***amountsapproximate fair value because of the short maturities of these instruments.

***Revolving CreditFacility******—Carrying***amountapproximates fair value because its interest rates are based on variablereference rates.

F-8

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***Long-Term Debt(Excluding Revolving Credit Facility)******—The*** fairvalue of the senior secured second lien notes, with a principal amount of$350.0 million, approximated $361 million and $363 million at December 31,2006 and 2005, respectively. The fair value of the senior unsecured notes, witha principal amount of $350.0 million, approximated $351 million and $346million at December 31, 2006 and 2005, respectively. The aggregate fairvalue of the remaining debt outstanding at December 31, 2006 and 2005approximated $264 million and $240 million, respectively.

***Asset RetirementObligations******—The***Companyaccounts for asset retirement obligations under SFAS 143, “Accounting forAsset Retirement Obligations”, as interpreted by FIN 47, “Accounting forConditional Asset Retirement Obligations”, whereby the Company recognizes aliability for the fair value of conditional asset retirement obligations if thefair value of the liability can be reasonably estimated. The Company recorded a$1.6 million cumulative effect of accounting change for the twelve months endedDecember 31, 2005 as a result of adopting FIN 47 on December 31, 2005.There were no material changes to the liability recognized for asset retirementobligations in 2006.

***Stock BasedCompensation******—Employees*** ofthe Company participate in Vertis Holdings’ 1999 Equity Award Plan (the “StockPlan”), which authorizes grants of stock options, restricted stock, performanceshares and other stock based awards. The Company has options, restrictedshares, retained shares and rights outstanding under the Stock Plan at December 31,2006. The Company accounts for these stock based awards under SFAS No. 123(revised), “Share-Based Payments” (“SFAS 123R”), which requires all share-basedpayments to employees, including grants of employee stock options andrestricted stock, to be recognized in the Company’s financial statements basedon their grant date fair values. The Company adopted SFAS 123R on January 1,2006, applying the modified prospective transition method outlined in theStatement. The adoption of this statement did not have a material impact on theCompany’s consolidated financial position or results of operations. See Note16, “Vertis Holdings Share Based Compensation”, for further discussion.

***Concentration ofCredit Risk******—The***Companyprovides services to a wide range of clients who operate in many industrysectors in varied geographic areas. The Company grants credit to all qualifiedclients and does not believe that it is exposed to undue concentration ofcredit risk to any significant degree.

***New AccountingPronouncements******—In*** February 2006,the FASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments—an amendment of Statements No. 133 and 140” (“SFAS 155”),which amends SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishment of Liabilities”. SFAS 155permits fair value remeasurement for any hybrid financial instrument thatcontains an embedded derivative that otherwise would require bifurcation, clarifieswhich interest-only strips and principal-only strips are not subject to therequirements of SFAS No. 133, establishes a requirement to evaluateinterests in securitized financial assets to identify interests that arefreestanding derivatives or that are hybrid financial instruments that containan embedded derivative requiring bifurcation, clarifies that concentrations ofcredit risk in the form of subordination are not embedded derivatives, andamends SFAS No. 140 to eliminate the prohibition on a qualifyingspecial-purpose entity from holding a derivative financial instrument thatpertains to a beneficial interest other than another derivative financialinstrument. SFAS 155 is effective for all financial instruments acquired orissued after the beginning of an entity’s first fiscal year that begins after September 15,2006. The adoption of this statement is not expected to have a material impacton the Company’s results of operations or financial position.

In March 2006, the FASB issued SFAS No. 156,“Accounting for Servicing of Financial Assets—an amendment of Statement No. 140”(“SFAS 156”). SFAS 156 requires all separately recognized servicing assets andliabilities to be initially measured at fair value. For subsequentmeasurements, SFAS 156 permits companies to choose, on a class-by-class basis,either an amortization method or a fair value measurement method. Theprovisions of this Statement are effective for the Company in the reporting 

F-9

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period beginning January 1,2007. The adoption of this statement is not expected to have a material impacton the Company’s results of operations or financial position.

In July 2006, the FASB issued FASB InterpretationNo. 48, “Accounting for Uncertainty in Income Taxes—an interpretation ofFASB Statement No. 109” (“ FIN 48”), which clarifies the accounting anddisclosure for uncertainty in tax positions, as defined. FIN 48 is intended toreduce the diversity in practice associated with certain aspects of therecognition and measurement related to accounting for income taxes. Thisinterpretation is effective for the Company for fiscal years beginning after December 15,2006. The cumulative effect of applying this interpretation must be reported asan adjustment to the opening balance of the Company’s stockholder’s deficit in2007. The Company is currently evaluating the impact of FIN 48 on itsconsolidated financial statements and anticipates the adjustment to stockholder’sdeficit will not be material.

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements” (“SFAS 157”). SFAS 157 establishes a framework formeasuring fair value and expands disclosures about fair value measurements. SFAS157 clarifies the principle that fair value should be based on the assumptionmarket participants would use when pricing an asset or liability andestablishes a fair value hierarchy that prioritizes the information used todevelop those assumptions. This Statement is effective for fiscal yearsbeginning after November 15, 2007. The Company is not able to assess at thistime the future impact of this Statement on its consolidated financial positionor results of operations.

In September 2006, the FASB issued SFAS No. 158,“Employers’ Accounting for Defined Benefit Pension and Other PostretirementPlans—an amendment of FASB Statements No. 87, 88, 106 and 132(R) (“SFAS158”). SFAS 158 requires an employer that sponsors one or more single-employerdefined benefit plans to recognize the overfunded or underfunded status of abenefit plan in its statement of financial position and to recognize as acomponent of other comprehensive income, net of tax, the gains or losses andprior service costs or credits that arise during the period but are notrecognized as components of net periodic benefit cost. SFAS 158 also requiresan entity to measure defined benefit plan assets and obligations as of the dateof its fiscal year-end. Additional footnote disclosures are also required underSFAS 158.  The provisions of thisStatement are effective for the Company as of December 31, 2007. TheCompany adopted this statement on December 31, 2006. See Note 14 forfurther discussion.

In September 2006, the Securities and ExchangeCommission issued Staff Accounting Bulletin No. 108, “Considering theEffects of Prior Year Misstatements when Quantifying Misstatements in CurrentYear Financial Statements (“SAB 108”). SAB 108 provides guidance on how theeffects of the carryover or reversal of prior year misstatements should beconsidered in quantifying a current year misstatement. The SEC staff believesthat registrants should quantify errors using both a balance sheet and anincome statement approach and evaluate whether either approach results inquantifying a misstatement that is material. The guidance in SAB 108 should beapplied by the Company beginning with the financial statements for the yearended December 31, 2006. The Company adopted this Statement withoutmaterial impact on its consolidated financial position or results ofoperations.

In February 2007, theFASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose tomeasure eligible items at fair value at specified election dates. If an entitychooses this practice, it shall report unrealized gains and losses on the itemsfor which the fair value option has been elected at each subsequent reportingdate. The fair value option may be elected for a single eligible item withoutelecting it for other identical items, with certain exceptions specified in theStatement. Additional disclosures are required for en entity that chooses toelect the fair value option. The provisions of this Statement are effective forthe Company on January 1, 2008. Early adoption is permitted under certaincircumstances as specified in this Statement. The Company is not able to assessat this time the future impact of this Statement on its consolidated financialposition or results of operations.

F-10

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**3.   SUMMARY OFACCOUNTING REVISIONS**

In 2005, the Company revised its revenue recognition policyfor printed materials to recognize revenue when product is shipped. Prior tothe change, revenue was recorded when these materials were completed andoff-press. This revision resulted in a $12.7 million decrease in revenue and a$2.9 million increase in loss from continuing operations for the year ended December 31,2005.

Based on a completephysical inventory of maintenance parts in 2005, the Company determined that itshould have capitalized all maintenance parts, rather than just those assetsthat exceeded the Company’s previous $100 minimum threshold for capitalization.As a result, the Company recorded $6.2 million of maintenance part assets in2005 that had not been capitalized previously. The recording of these assetsdecreased cost of production expenses and net loss for the year ended December 31,2005 by $6.2 million.

**4.   DISCONTINUEDOPERATIONS**

On September 8, 2006, the Company entered into anagreement to sell its fragrance business, which included two presses and theCompany’s fragrance lab and microencapsulation facility, all of which werelocated in one of the Company’s Direct Mail facilities, as well as fragrancereceivables, inventory and payables, the fragrance business customer list,certain employees and all intellectual property related to the business. Thesale agreement was entered into as the result of a strategic decision by theCompany to move away from this line of business and focus its resources on thegrowth of its other direct marketing product lines.

Included in the agreement to sell the fragrancebusiness was a transition services agreement (the “Transition Agreement”) underwhich the Company provided services on a subcontracting basis to the purchaserof the fragrance business (the “Purchaser”), utilizing certain assets of thebusiness that was sold. These assets remained at the Company’s Direct Mail facilityduring the time of the Transition Agreement. As of December 31, 2006, theCompany has completed its performance of the subcontracting services under theTransition Agreement and the remaining assets of the fragrance business weretransferred to the Purchaser’s facilities.

As of December 31, 2006, the Company had receivedproceeds of $41.1 million related to the sale of its fragrance business, andestimates the total proceeds from the sale to be $42.1 million, including $1.0million of proceeds that are held in escrow at year end. A portion of theproceeds held in escrow, $0.5 million, were released to the Company in January 2007.The remaining $0.5 million will be held in escrow until April 10, 2007, atwhich time it will be released to the Company if there have not been any claimsfiled by the Purchaser. The sale of the Company’s fragrance business resultedin a gain on sale of $21.4 million, which is included in income (loss) fromdiscontinued operations on the consolidated statements of operations. TheCompany estimates the total gain on the sale to be $21.9 million, including the$0.5 million of proceeds held in escrow to be released in April 2007,which are included in other current liabilities on the Company’s consolidatedbalance sheet at December 31, 2006.

F-11

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Theresults of the fragrance business, which had been reported under the DirectMail segment, have been accounted for as discontinued operations. These resultsare included in income (loss) from discontinued operations on the consolidatedstatements of operations. No taxes were recorded for the fragrance business dueto pretax losses and tax benefits being offset by deferred tax valuationallowances, see Note 13. Interest was not allocated to discontinued operationsas the divestiture of the fragrance business was on a debt-free basis. Prioryear financial statements have been restated to reflect the fragrance businessas discontinued operations. Select results of this business, are presented inthe following table.

| ** **                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Revenue                                  |       |                    | $          | 26,683   |       |     | $          | 40,200 |   | $ | 32,309 |   |
| Income from operations                   |       |                    | 1,146      |     |       | 5,401    |       | 4,007 |   |
| Gain on sale of  discontinued operations |       |                    | 21,443     | (1)      |       |     |       |   |   |
| Income from discontinued  operations     |       |                    | $          | 22,589   |       |     | $          | 5,401 |   | $ | 4,007 |   |

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(1)          The gain on sale ofdiscontinued operations is net of the costs incurred to sell the fragrancebusiness.

Theassets and liabilities of the Company’s fragrance business are presentedseparately under the captions “Assets of operations held for sale” and “Liabilitiesof operations held for sale,” respectively, in the accompanying consolidatedbalance sheet at December 31, 2005. The components of these balance sheetline items are specified in the discontinued operations’ balance sheet asfollows:

| ** **                                             | ** ** | **December 31,**   | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|
| ** **                                             | ** ** | **2005**                | ** ** |
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Assets of  operations held for sale—Current:      |       |                    |       |   |   |
| Accounts receivable, net                               |       |                    | $          | 6,357 |   |   |
| Inventory                                              |       |                    | 699        |   |   |
| Total current assets of operations held for sale       |       |                    | $          | 7,056 |   |   |
| Assets of  operations held for sale—Long-term:    |       |                    |       |   |   |
| Property, plant and equipment                          |       |                    | $          | 417 |   |   |
| Goodwill allocated to Fragrance business               |       |                    | 11,117     | (1) |   |
| Total long-term assets of operations held for sale     |       |                    | $          | 11,534 |   |   |
| Liabilities of  operations held for sale—Current: |       |                    |       |   |   |
| Accounts payable                                       |       |                    | $          | 1,615 |   |   |
| Accrued expenses and other current liabilities         |       |                    | 345        |   |   |
| Total liabilities  of operations held for sale         |       |                    | $          | 1,960 |   |   |

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(1)          In conjunction with thedisposition of the Company’s fragrance business, a goodwill valuation of thedirect mail reporting unit was performed by an independent third party. As aresult of this valuation, $11.1 million of goodwill was allocated to thefragrance business. See Note 2 for discussion of the Company’s goodwillaccounting policy.

During the third quarter of 2005, the Company decidedto sell the two divisions in its European segment primarily because each hadincurred operating losses and neither was deemed a fit within the Company’soverall strategy. As a result, the Company accounted for the operations of itsEuropean segment as a discontinued operation. The direct mail division of thissegment was sold on October 3, 2005 and the premedia division of thissegment was sold on December 14, 2005.

Theresults of the Company’s European segment, which are included in the income(loss) from discontinued operations on the consolidated statements ofoperations, are presented in the following table. 

F-12

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No taxes were recorded in this segment due to pretaxlosses and tax benefits being offset by deferred tax valuation allowances, seeNote 13. Interest was not allocated to discontinued operations as thedivestiture of the European business was on a debt-free basis. The 2006discontinued operations amounts presented in the table below representadjustments related to the divestiture of the Company’s European segment. Seethe footnotes to the following table for further discussion. 

| ** **                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(in thousands)** | ** ** |
| Revenue                                  |       |                    |       | $        | 99,982     |     | $          | 138,583 |   |
| Loss from operations                     |       | $                       | (422       | )(1)     | (147,238   | )(3)     | (10,217    | ) |
| Loss on sale of  discontinued operations |       | (567                    | )(2)       | (1,552   | )(4)       |     |       |
| Loss from discontinued  operations       |       | $                       | (989       | )        | $          | (148,790 | )          | $ | (10,217 | ) |

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(1)          Amountrepresents a payment made to a former employee of the Company’s Europeansegment in respect of the employee’s termination agreement.

(2)          Amountrepresents a settlement paid in relation to a lawsuit brought against theCompany by one of the European segment’s customers.

(3)          Includes$136.2 million of other impairment charges, as discussed below, and write-downsof long-lived assets recorded prior to the sale.

(4)          The loss on sale ofdiscontinued operations is net of the costs incurred to sell the Europesegment.

As a result of the Company’s impairment testing, theCompany recorded an impairment loss of $111.2 million at its Europe segment toreduce the carrying value of goodwill to its implied fair value. See Note 2 fordiscussion of the Company’s goodwill accounting policy. In addition, as aresult of the conclusion of a direct mail contract within our Europe segment,long-lived assets with a carrying value of $1.2 million were deemed impairedand written off in the second quarter of 2005. The Company also recorded a$23.8 million loss to write-down the carrying value of the remaining long-livedassets of its discontinued operations to their estimated fair values, less costto sell. These impairment losses are shown as discontinued operations for theyear ended December 31, 2005.

**5.**                 RESTRUCTURING

In 2006, the Company began a restructuring program(the “2006 Program”) to address the continuing issue of industry-wideovercapacity and streamline operations to capitalize on operating efficienciesand improve productivity and consistency, thus reducing the Company’s overallcost base. Under the 2006 program, restructuring actions included reductions inwork force of 537 employees and the closure of one advertising insertsproduction facility, one inserts sales office, one direct mail fulfillmentfacility and two premedia production facilities. All approved restructuringactions under the 2006 Program were complete as of December 31, 2006.Costs associated with approved restructuring actions under the 2006 Programwere $16.0 million, all of which were recorded in 2006.

In the year ended December 31, 2006, under the2006 Program, the Advertising Inserts segment recorded $3.7 million inseverance and related costs associated with the elimination of 243 positionsand $0.6 million in facility closing costs as well as a $1.4 million write-downof assets associated with the closure of a production facility. The Direct Mailsegment recorded $1.8 million in severance and related costs in 2006 associatedwith the elimination of 126 positions and the closure of a fulfillment facility.Corporate and Other recorded $5.6 million in severance and related costs in2006 associated with the elimination of 137 positions and $2.9 million infacility closure costs, $1.4 million of which reflects an adjustment torestructuring expense primarily related to a recalculation of facility closurecosts expected to be paid based on a revised assumption of estimated subleaseincome, and the remainder associated with the closure of two premediaproduction facilities in 2006.

F-13

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Included in the 2006 segment restructuring expenseamounts above are $0.9 million of aggregate severance costs allocated to thesegments based on percentages established by management. The severance costsare related to the elimination of 31 shared services positions and thefacilities costs represent accretion expense.

Liabilities for severance costs related to futurerestructurings are not accrued as the amounts cannot be reasonably estimated. TheCompany is continuously evaluating the need to implement restructuring programsto rationalize its costs and improve operating efficiency. It is likely thatthe Company will incur additional restructuring costs in 2007 in an on-goingeffort to achieve these objectives.

The Company’s 2005 restructuring program (the “2005Program”) aimed at regionalizing and streamlining operations to capitalize onoperating efficiencies and improve productivity and consistency, and reducingthe Company’s overall cost base. The 2005 Program included reductions in workforce of approximately 490 employees; the closure of six premedia facilities,one advertising inserts warehouse, and two advertising inserts regionaloffices, some of which are associated with the consolidation of operations; andthe transfer of certain positions. The total cost associated with actions takenunder the 2005 Program was $19.9 million (net of estimated sublease income of$1.3 million), approximately all of which were recorded in 2005. The executionof the 2005 Program was complete as of December 31, 2005. Included in the2005 Program, were restructuring costs of $3.5 million related to reductions inworkforce of approximately 130 employees in the Company’s Vertis Europe segment.These costs are included in the loss from discontinued operations on theCompany’s consolidated statement of operations (see Note 4).

In the year ended December 31, 2005, under the2005 Program, the Advertising Inserts segment recorded $7.0 million inseverance and related costs associated with the elimination of approximately186 positions and $0.8 million in facility closure costs associated with theclosure of two regional offices and one warehouse. The Direct Mail segmentrecorded $2.0 million in severance and related costs in 2005 associated withthe elimination of approximately 33 positions.  Corporate and Other recorded $5.1 million inseverance and related costs in 2005 associated with the elimination ofapproximately 91 positions and $1.7 million in facility closure costsassociated with the closure of six premedia facilities offset by $0.1 millionin gains from the sale of assets related to the closure of one of the premediafacilities. Additionally, $0.7 million in costs were recorded in the firstquarter of 2005 related to the amendment of an executive level employmentagreement announced in 2004, as discussed below.

Included in the 2005 segment severance amounts aboveare approximately $2.5 million of aggregate severance costs allocated to thesegments based on percentages established by management. These severance costsare related to the elimination of approximately 50 shared services positionsfor which the costs are allocated to the segments on a monthly basis.

In 2004, the Advertising Inserts segment recorded $0.2million in severance costs. Corporate and Other recorded $0.3 million inseverance costs due to headcount reductions of approximately 50 employees, and$3.5 million in facility closure costs. These costs were associated with theCompany’s 2003 restructuring program, which included the closure of facilities,some of which were associated with the consolidation of operations; transfer ofcertain positions to the corporate office; reductions in work force ofapproximately 260 employees; and the abandonment of assets associated withvacating these premises. Additionally, in 2004 the Company announced anamendment of an executive level employment agreement resulting in an estimatedcost of $1.2 million. Corporate and Other recorded $0.5 million inrestructuring costs in 2004 related to this amendment. Europe recorded $2.4million in restructuring costs in 2004, which are included in the loss fromdiscontinued operations on the Company’s consolidated statement of operations.

F-14

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Thesignificant components of the restructuring and asset impairment charges wereas follows:

| ** **                                | ** ** | **Severance  and Related  Costs** | ** ** | **Asset Write  Off & Disposal  Costs** | ** ** | **Facility  Closing  Costs** | ** ** | **Other  Costs** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|----------------------------------------|------------|-----------------------------------------------------------|------------|------------------------------|------------|------------------|------------|-----------|------------|
| ** **                                | ** ** | **(in thousands)**                | ** ** |
| Balance at  January 1, 2004          |       |                                   | $          | 1,800                                                     |       |                         |       | $                | —     |      |       | $ | 9,305 |   | $ | 525 |   | $ | 11,630 |   |
| Restructuring  charges in 2004            |       |                                   | 960        |                                                      |       |                         | 35         |             |       | 3,506     |       |   |   | 4,501 |   |
| Restructuring  payments and usage in 2004 |       |                                   | (2,016     | )                                                         |       |                         | (35        | )                |       | (5,939    | )          | 50 |   | (7,940 | ) |
| Balance at  December 31, 2004        |       |                                   | 744        |                                                      |       |                         | —     |             |       | 6,872     |       | 575 |   | 8,191 |   |
| Restructuring  charges in 2005            |       |                                   | 14,748     |                                                      |       |                         | (109       | )                |       | 2,480     | (1)        |   |   | 17,119 |   |
| Restructuring  payments and usage in 2005 |       |                                   | (12.572    | )                                                         |       |                         | 109        |             |       | (3,557    | )          | (575 | ) | (16,595 | ) |
| Balance at  December 31, 2005        |       |                                   | 2,920      |                                                      |       |                         | —     |             |       | 5,795     |       | — |   | 8,715 |   |
| Restructuring  charges in 2006            |       |                                   | 11,128     |                                                      |       |                         | 1,354      |             |       | 3,519     | (2)        |   |   | 16,001 |   |
| Restructuring  payments and usage in 2006 |       |                                   | (10,855    | )                                                         |       |                         | (1,354     | )                |       | (4,296    | )          |   |   | (16,505 | ) |
| Balance at  December 31, 2006        |       |                                   | $          | 3,193                                                     |       |                         |       | $                | —     |      |       | $ | 5,018 |   | $ | — |   | $ | 8,211 |   |

----

(1)          Includes accretionexpense of $0.3 million.

(2)          Includes accretionexpense of $0.6 million.

Accrued restructuring reserves total approximately$8.2 million at December 31, 2006. The Company expects to payapproximately $4.2 million of the accrued restructuring costs during the nextyear, and the remainder, approximately $4.0 million, by 2011. The portion ofthis accrual attributable to facility closing costs is recorded net ofestimated sublease income at its present value. Actual future cash requirementsmay differ from the accrual, particularly if actual sublease income differsfrom current estimates.

Therestructuring charges are comprised of the following:

| ** **                                          | ** ** | **2006**           | ** ** | **2005** | ** ** | **2004** | ** ** |
|-----------------------------------------------------|------------|--------------------|------------|----------|------------|----------|------------|
| ** **                                          | ** ** | **(in thousands)** | ** ** |
|                                                |       |               |       |     |       |     |       |
| Charges requiring  cash payments                    |       | $                  | 14,647     |     | $          | 17,228   |       | $ | 4,466 |   |
| (Gain) loss on  asset disposals in closed locations |       | 1,354              |       | (109     | )          | 35       |       |
|                                                |       | $                  | 16,001     |     | $          | 17,119   |       | $ | 4,501 |   |

 

**6.**                 ACQUISITIONS

On May 31, 2006, the Company acquired USA Direct, Inc.(“USA Direct”) for $21.0 million in cash. The financial results of USA Directare included in the Company’s consolidated financial statements, within theCompany’s Direct Mail segment, from the date of acquisition. USA Direct is afull-service provider of direct marketing services based in York, Pennsylvania.The acquisition of USA Direct provides the Company with a strategic complementto its existing direct marketing product offerings by expanding the flexibilityand range of products, especially in small to mid-sized quantities, and addingcapacity to core manufacturing capabilities including digital, conventional andin-line printing.

Goodwill arising in connection with the USA Directacquisition was approximately $7.7 million, calculated as the excess of thepurchase price over the fair value of the net assets acquired. The Companyexpects to deduct the full amount of this goodwill for tax purposes, the amountof which will increase the Company’s net tax benefit carryforwards (See Note13).

Thefollowing table summarizes the estimated fair values of the assets acquired andliabilities assumed at the date of the USA Direct acquisition. The Companydetermined the fair value of certain USA Direct assets and intangiblesincluding the use of a third party valuation, which was finalized in the fourthquarter 

F-15

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of 2006. Adjustments to goodwill in the amount of $1.7million have been made in the fourth quarter of 2006 related to a $1.5 millionrevision to the valuation of the customer base and trademark being acquired, a$0.3 million write-off of obsolete inventory on USA Direct’s books, offset by a$0.1 million adjustment to property, plant and equipment based on the valuation.The Company is in the process of finalizing the working capital calculationunder the USA Direct purchase agreement, thus, the allocation of the purchaseprice is subject to refinement. The Company expects the purchase price to befinalized in the second quarter of 2007. 

| **As of May 31,**        | ** ** | ** **              | ** ** | **2006**   | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------|------------|
| ** **                              | ** ** | **(in thousands)** | ** ** |
| **ASSETS**                              | ** ** |                    | ** ** | ** ** |       |
| Current assets                          |       |                    | $          | 6,252      | ** ** |   |
| Property, plant  and equipment          |       |                    | 7,973      | ** ** |       |
| Goodwill                                |       |                    | 7,693      | ** ** |       |
| Customer base(1)                        |       |                    | 3,600      | ** ** |       |
| Trademark                               |       |                    | 40         | ** ** |       |
| Other long-term  assets(2)              |       |                    | 122        | ** ** |       |
| Total assets acquired                   |       |                    | $          | 25,680     | ** ** |   |
| **LIABILITIES**                         | ** ** |                    | ** ** | ** ** |       |
| Current  Liabilities                    |       |                    | $          | 4,611      | ** ** |   |
| Total liabilities assumed               |       |                    | 4,611      | ** ** |       |
| Net assets acquired—Purchase price |       |                    | $          | 21,069     | ** ** |   |

----

(1)          The Customer base willbe amortized over a period of four years, which represents the asset’sremaining useful life.

(2)          Includes a $90,000non-compete agreement that will be amortized over its three-year useful term.

On January 20, 2005, the Company acquired EliteMailing and Fulfillment Services, Inc. (“Elite”) for $3.4 million. Eliteis a full-service lettershop and mail presorting facility based in Bellmawr,New Jersey. Elite has been a strategic partner of Vertis since 1996, providinglettershop and fulfillment services.

Goodwill arising in connection with the Eliteacquisition was approximately $2.8 million.  Goodwill is calculated as the excess of theliabilities assumed over the fair value of the net assets acquired. Thefinancial results of Elite are included in the Company’s consolidated financialstatements from the date of acquisition.

Thefollowing unaudited pro forma information reflects the Company’s resultsadjusted to include USA Direct as though the acquisition had occurred at thebeginning of 2005 and Elite as though the acquisition had occurred at thebeginning of 2004.

| ** **                                                                     | ** ** | **Twelve months ended** | ** ** |
|--------------------------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                                     | ** ** | **December 31,**             | ** ** |
| ** **                                                                     | ** ** | **2006**                          | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                     | ** ** | **(In thousands)**           | ** ** |
| Revenue                                                                        |       | $                                 | 1,482,806  |   | $ | 1,499,744 |   | $ | 1,475,121 |   |
| Loss from  continuing operations before cumulative effect of accounting change |       | (48,111                           | )          | (25,352 | ) | (5,093 | ) |
| Net loss                                                                       |       | (26,511                           | )          | (170,341 | ) | (11,303 | ) |
|                                                                                |            |                                   |            |  |  |  |  |  |  |  |

 

F-16

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**7.**                 ACCOUNTSRECEIVABLE

Accountsreceivable consisted of the following:

| ** **                          | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                          | ** ** | **(in thousands)** | ** ** |
| Trade—billed                   |       | $                       | 114,263    |     | $          | 119,742 |   |
| Trade—unbilled                 |       | 20,522                  |       | 17,076   |       |
| Other receivables                   |       | 7,500                   |       | 9,725    |       |
|                                |       | 142,285                 |       | 146,543  |       |
| Allowance for  doubtful accounts(1) |       | (2,859                  | )          | (1,494   | )          |
|                                |       | $                       | 139,426    |     | $          | 145,049 |   |

----

(1)          The Company recorded aprovision for doubtful accounts of $0.9 million, $1.5 million and $0.7 millionin the twelve months ended December 31, 2006, 2005 and 2004, respectively.

In December 2002, the Company entered into athree-year agreement, which was due to expire on November 30, 2005, tosell substantially all trade accounts receivable generated by subsidiaries inthe U.S. (the “2002 Facility”) through the issuance of $130.0 million variablerate trade receivable backed notes. In November 2005, the Company enteredinto a new $130 million three-year revolving trade receivables facility (the “A/RFacility”) terminating in December 2008. Funds advanced pursuant to theA/R Facility were used by the Company to pay off the remaining obligationsunder and terminate the 2002 Facility.

Under the A/R Facility, as well as the 2002 Facilitypreviously in place, the Company sells its trade accounts receivable through abankruptcy-remote wholly-owned subsidiary. However, the Company maintains aninterest in the receivables and has been contracted to service the accountsreceivable. The Company received cash proceeds for servicing of $1.2 millionand $3.0 million in 2006 and 2005, respectively. These proceeds are fullyoffset by servicing costs.

The A/R Facility allows for a maximum of $130.0million of trade accounts receivable to be sold at any time based on the levelof eligible receivables and limited to a borrowing base linked to netreceivables balances and collections. Additional deductions may be made if theCompany fails to maintain a consolidated Compliance EBITDA (as defined in Note11) of at least $180 million for any rolling four fiscal quarter period. Inaddition, the A/R Facility includes certain targets related to its receivablescollections and credit experience including a minimum EBITDA of $160 million,amended to $125 million effective March 2007 (see Note 11). There are alsocovenants customary for facilities of this type including requirements relatedto the characterization of receivables transactions, credit and collectionpolicies, deposits of collections, maintenance by each party of its separatecorporate identity including maintenance of separate records, books, assets andliabilities and disclosures about the transactions in the financial statementsof Vertis Holdings and its consolidated subsidiaries. Failure to meet thetargets or the covenants could lead to an acceleration of the obligations underthe A/R Facility or the sale of assets securing the A/R Facility. As of December 31,2006, the Company is in compliance with all targets and covenants under the A/RFacility.

At December 31, 2006 and 2005, accountsreceivable of $130.0 million had been sold under the A/R Facility and as suchare reflected as reductions of accounts receivable. At December 31, 2006and 2005, the Company retained an interest in the pool of receivables in theform of overcollateralization and cash reserve accounts of $92.3 million and$71.8 million, under the A/R Facility, which is included in Accountsreceivable, net on the consolidated balance sheet at allocated cost, whichapproximates fair value. The proceeds from collections reinvested insecuritizations amounted to $1,680.3 million and $1,595.7 million in 2006 and2005, respectively.

F-17

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Fees for the program varybased on the amount of interests sold and the London Inter Bank Offered Rate (“LIBOR”)plus an average margin of 50 basis points under the A/R Facility and 90 basispoints under the 2002 Facility. The Company also pays an unused commitment feeof 37.5 basis points on the difference between $130 million and the amount ofany advances. The loss on sale, which approximated the fees, totaled $6.5million in 2006, $5.2 million in 2005 and $3.1 million in 2004, and is includedin Other, net.

**8.**                 INVENTORIES

Inventoriesconsisted of the following:

| ** **        | ** ** | **2006**                | ** ** | **2005** | ** ** |
|-------------------|------------|-------------------------|------------|----------|------------|
| ** **        | ** ** | **(in thousands)** | ** ** |
| Paper             |       | $                       | 29,858     |     | $          | 30,567 |   |
| Ink and chemicals |       | 3,160                   |       | 3,743    |       |
| Work in process   |       | 4,439                   |       | 3,611    |       |
| Finished goods    |       | 5,576                   |       | 9,757    |       |
| Other             |       | 5,194                   |       | 4,057    |       |
|              |       | $                       | 48,227     |     | $          | 51,735 |   |

 

**9.**                 PROPERTY,PLANT AND EQUIPMENT

Thecomponents and useful lives of property, plant and equipment were:

| ** **                                                    | ** ** | **Estimated**           | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                    | ** ** | **Useful Life**    | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                                    | ** ** | **(Years)**             | ** ** | **2006**   | ** ** | **2005**   | ** ** |
| ** **                                                    | ** ** | **(in thousands)** | ** ** |
| Land                                                          |       |                    |       |       |       | $          | 8,361      |   | $ | 8,491 |   |
| Machinery and  equipment                                      |       |                    | 3 to 15    |       |       | 646,960    |       | 646,357 |   |
| Buildings and  leasehold improvements                         |       |                    | 1 to 40    |       |       | 91,388     |       | 89,587 |   |
| Furniture and  fixtures                                       |       |                    | 3 to 10    |       |       | 113,837    |       | 112,013 |   |
| Internally  developed computer software                       |       |                    | 3 to 5     |       |       | 21,002     |       | 18,953 |   |
| Vehicles                                                      |       |                    | 3          |       |       | 968        |       | 1,159 |   |
| Construction in  progress and deposits on equipment purchases |       |                    |       |       |       | 23,988     |       | 21,187 |   |
|                                                          |       |                    |       |       |       | 906,504    |       | 897,747 |   |
| Accumulated  depreciation and amortization                    |       |                    |       |       |       | (576,465   | )          | (561,499 | ) |
|                                                          |       |                    |       |       |       | $          | 330,039    |   | $ | 336,248 |   |

 

The Company recordeddepreciation of $57.4 million, $62.0 million and $64.2 million in the twelvemonths ended December 31, 2006, 2005 and 2004, respectively.

**10.**          INVESTMENTS

The Company had two subsidiaries which were specialpurpose limited liability companies (“LLCs”) that were the head lessees andsub-lessors in two lease-leaseback transactions entered into in 1998. Underthese transactions, buildings with estimated useful lives of 65 years wereleased by the LLCs for terms of 57 years (the “Headleases”) and subleased by theLLCs to the lessors for terms of 52 years (the “Subleases”). Under theguidelines of SFAS No. 13, “Accounting for Leases,” the Headleasesqualified as capital leases and the Subleases qualified as leveraged leases. TheCompany’s investments represented approximately 24% of the buildings’ combinedleasehold values, while the balance was furnished by third-party financing 

F-18

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in the form of long-termdebt that provided no recourse against the LLCs or the Company, but was securedby first liens on the properties.

On September 14, 2004, the Company entered into atermination and release agreement with the headlessor/sublessee whereby theCompany terminated its leasehold interest in the properties. The Companyreceived net proceeds of approximately $31 million, after transaction expenses,from one of the third parties that was financing the original arrangement. As aresult of the transaction, the Company recorded a non-cash loss related to thetermination and release of $44.0 million, which is included in Other, net in2004, and a tax benefit of $66.7 million (see Note 13).

Other, net includes $1.0million of income earned on the leveraged lease investments in 2004, prior tothe termination of the leasehold interest.

**11.**          LONG-TERMDEBT

Long-termdebt consisted of the following in the order of priority:

| ** **                                                                                       | ** ** | **2006**                | ** ** | **2005**  | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------|------------|
| ** **                                                                                       | ** ** | **(in thousands)** | ** ** |
| Revolving credit  facility (due December 2008)                                              |       | $                       | 112,880    |      | $          | 69,864 |   |
| $350 million 93¤4%  senior secured second lien notes, net of discount (due April 2009) |       | 346,418                 |       | 344,827   |       |
| $350 million 107¤8%  senior notes, net of discount (due June 2009)                     |       | 349,113                 |       | 348,756   |       |
| 131¤2%  senior subordinated notes (due December 2009)                                  |       | 293,495                 |       | 293,495   |       |
| Discount—131¤2%  senior subordinated credit facility                                   |       | (5,870                  | )          | (7,883    | )          |
| Other notes                                                                                      |       | 5                       |       |      |       |
|                                                                                             |       | 1,096,041               |       | 1,049,059 |       |
| Current portion                                                                                  |       | (5)                     |       |      |       |
|                                                                                             |       | $                       | 1,096,036  |      | $          | 1,049,059 |   |

 

The Company entered into a four-year revolving creditagreement (the “Credit Facility”) in December 2004. In May 2006, theCompany amended its Credit Facility to allow for an increase in the maximumavailability from $200 million to $220 million. Under this amendment, theavailability under the Credit Facility would have decreased in stages based ona schedule set forth by the Credit Facility agreement, ultimately reaching $200million by December 31, 2007. In March 2007, we amended the CreditFacility to provide that the maximum availability under the Credit Facilitywill increase to $250 million until the December 22, 2008 maturity date. Underthe amended Credit Facility, up to $200 million consists of a revolving creditfacility and the remaining $50 million represents a term loan. The CreditFacility also provides for issuances of up to $45 million in letters of credit.There is no repayment of the principal due until maturity.

At December 31, 2006, the maximum availabilityunder the Credit Facility was limited to a borrowing base calculated asfollows: 85% of the Company’s eligible receivables; 65% of the net amount ofeligible raw materials, finished goods, maintenance parts, unbilled receivablesand the residual interest in the Company’s $130 million trade receivablessecuritization (see Note 7); and 55% of eligible machinery, equipment and ownedreal estate. The eligibility of such assets included in the calculation was setforth in the credit agreement. At December 31, 2006, the Company’sborrowing base calculation was $248.4 million.

Per the March 2007 amendment to the CreditFacility, the maximum availability under the Credit Facility will be limited toa borrowing base calculated as follows: 85% of the Company’s eligible 

F-19

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receivables; 65% of thenet amount of eligible raw materials, finished goods, maintenance parts,unbilled receivables and the residual interest in the Company’s $130 milliontrade receivables securitization (see Note 7); the lesser of 55% of the bookvalue of eligible machinery and equipment at owned locations or 100% of theorderly liquidation value-in-place (as defined in the credit agreement); thelesser of 55% of the book value of eligible machinery and equipment at leasedlocations or 100% of the net orderly liquidation value (as defined in thecredit agreement) and 80% of the fair market value of owned real estate.

In addition, as is customary in asset-basedagreements, there is a provision for the agent, in its reasonable creditjudgment, to establish reserves against availability based on a change incircumstances. The agent’s right to alter existing reserves requires writtenconsent from the borrowers when Compliance EBITDA, as defined below, is inexcess of $180 million on a quarterly trailing twelve-month basis. The agent isnot required to obtain written consent when Compliance EBITDA on a quarterlytrailing twelve-month basis is less than $180 million. At December 31,2006, the Company’s trailing twelve-month Compliance EBITDA as calculated underthe Credit Facility was $169.4 million.

“Compliance EBITDA” is the Consolidated EBITDA asreflected in Note 21 to these financial statements adjusted for certain itemsas defined in the Credit Facility.

The interest rate on the revolving portion of theCredit Facility is either (a) the US Prime rate, plus a margin whichfluctuates based on the Company’s senior secured leverage ratio (“LeverageRatio”), defined as the ratio of senior secured debt to EBITDA, or (b) theUS LIBOR rate plus a margin that fluctuates based on the Company’s LeverageRatio. The EBITDA amount used in this calculation is not equivalent to theamount included in these financial statements, but rather is net of adjustmentsto exclude certain items as defined in the Credit Facility. At December 31,2006, the margin was 275 basis points above LIBOR. The Company also pays anunused commitment fee of 50 basis points on the difference between $220 millionand the amount of loans and letters of credit outstanding. The term loan underthe amended Credit Facility has been structured on a last out basis and willbear interest at the greater of (a) the LIBOR rate plus 4.75% or (b) 1.75%greater than the interest rate in effect under the revolving portion of theCredit Facility.

At December 31, 2006, the weighted-averageinterest rate on the Credit Facility was 8.30% as compared to 7.33% at December 31,2005.

The Credit Facility, the 93¤4% seniorsecured second lien notes (the “93¤4%Notes”), the 107¤8%senior notes and the 131¤2%senior subordinated notes contain customary covenants including restrictions ondividends, and investments. In particular, these debt instruments all containcustomary high-yield debt covenants imposing limitations on the payment ofdividends or other distributions on or in respect of the Company or the capitalstock of its restricted subsidiaries. Substantially all of the Company’s assetsare pledged as collateral for the outstanding debt under the Credit Facility,and, on a second lien basis, the 93¤4%Notes. All of the Company’s debt has customary provisions requiring prepaymentin the event of a change in control and from the proceeds of asset sales, aswell as cross-default provisions. In addition, the Credit Facility requires theCompany to maintain Compliance EBITDA as set forth under the credit agreement. TheCompliance EBITDA covenant at December 31, 2006 was $160 million on atrailing twelve-month basis. At December 31, 2006, the Company’s trailingtwelve-month Compliance EBITDA as calculated under the credit agreement was$169.4 million. The Compliance EBITDA covenant set forth in the March 2007amendment to the Credit Facility is $125 million on a trailing twelve-monthbasis. If the Company is unable to maintain this minimum Compliance EBITDAamount, the bank lenders could require the Company to repay any amounts owingunder the Credit Facility. At December 31, 2006, the Company was incompliance with its debt covenants.

F-20

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At December 31,2006, the aggregate maturities of long-term debt were:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       |                    | $          | 5 |   |   |
| 2008       |       |                    | 112,880    |   |   |
| 2009       |       |                    | 993,495    |   |   |
| 2010       |       |                    |       |   |   |
| 2011       |       |                    |       |   |   |
| Thereafter |       |                    |       |   |   |
|       |       |                    | $          | 1,106,380 |   |   |

 

**12.**          LEASES

Facilities and certain equipment are leased underagreements that expire at various dates through 2016. Rental expense forcontinuing operations under operating leases for the years ended December 31,2006, 2005 and 2004, was $25.6 million, $25.9 million, and $26.4 million,respectively.

At December 31,2006, minimum annual rentals under non-cancelable operating leases (net ofsubleases) were:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       |                    | $          | 25,591 |   |   |
| 2008       |       |                    | 19,136     |   |   |
| 2009       |       |                    | 14,956     |   |   |
| 2010       |       |                    | 12,466     |   |   |
| 2011       |       |                    | 9,319      |   |   |
| Thereafter |       |                    | 15,983     |   |   |
|       |       |                    | $          | 97,451 |   |   |

 

Commitments under the lease agreements also extend inmost instances to property taxes, insurance and maintenance and certain leasescontain escalation clauses and extension options.

**13.**          INCOMETAXES

Incometax (benefit) expense consisted of the following components:

| ** **                | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                | ** ** | **(in thousands)** | ** ** |
| Current:                  |       |                    |       |     |       |     |       |   |   |
| Federal                   |       |                    |       |     |       | $        | (8,324     | ) | $ | 1,000 |   |
| State and foreign         |       |                    | $          | (1       | )          |     | 254        |   | (320 | ) |
|                      |       |                    | (1         | )        |       | (8,070   | )          | 680 |   |
| Deferred:                 |       |                    |       |     |       |     |       |   |   |
| Federal                   |       |                    |       |     |       |     |       | (66,733 | ) |
| State and foreign         |       |                    |       |     |       |     |       |   |   |
|                      |       |                    |       |     |       |     |       | (66,733 | ) |
| Total income tax  benefit |       |                    | $          | (1       | )          |     | $          | (8,070 | ) | $ | (66,053 | ) |

 

F-21

----

Vertis Holdings files aconsolidated Federal income tax return with all of its subsidiaries, includingthe Company. The components of income tax disclosed above have been allocatedto the Company as if the Company had filed a separate consolidated tax return.

The Company’s taxallocation arrangement does not provide for remuneration in years in which theCompany has a current taxable loss as in 2006, 2005, and 2004. There are no taxrelated intercompany balances due to or due from the Company.

The Company’s foreignpre-tax income was not a significant component of total pre-tax income or loss.During 2006, the Company increased its unremitted foreign earnings from itsFrench subsidiary by $0.4 million to approximately $1.4 million for which ithas recorded a deferred tax liability.

Thefollowing is a reconciliation of the U.S. statutory federal income tax rate tothe Company’s effective tax rates:

| ** **                                              | ** ** | **2006**                                     | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------------------------|------------|----------------------------------------------|------------|----------|------------|----------|------------|
| ** **                                              | ** ** | **(percent of pre-tax loss)** | ** ** |
| Statutory income tax rate                               |       | (35.0                                        | )%         | (35.0    | )%         | (35.0    | )%         |
| State income  taxes, net of federal income tax benefits |       |                                         |       |     |       | (0.5     | )          |
| Change in  valuation allowance                          |       | 30.4                                         |       | 29.4     |       | (60.2    | )          |
| Foreign income  taxed at other rates                    |       | (2.1                                         | )          | (0.1     | )          | 1.5      |       |
| Adjustment to  contingency reserve                      |       |                                         |       | (23.0    | )          | 1.4      |       |
| Officer’s life  insurance                          |       | (0.7                                         | )          | (0.4     | )          |     |       |
| Other                                                   |       | 7.4                                          |       | 6.8      |       | (0.4     | )          |
| Effective tax rate                                      |       | 0.0                                          | %          | (22.3    | )%         | (93.2    | )%         |

 

Thetax effects of significant items comprising deferred income taxes were:

| ** **                         | ** ** | **2006**                | ** ** | **2005** | ** ** |
|------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                         | ** ** | **(in thousands)** | ** ** |
| Employee benefits                  |       | $                       | 14,564     |     | $          | 15,054 |   |
| Net tax benefit  carry forwards    |       | 160,843                 |       | 162,285  |       |
| Accrued expenses  and reserves     |       | 7,101                   |       | 6,679    |       |
| Deferred tax  assets               |       | 182,508                 |       | 184,018  |       |
| Property, plant  and equipment     |       | (44,542                 | )          | (49,049  | )          |
| Other taxable  differences         |       | (9,382                  | )          | (2,438   | )          |
| Deferred tax  liabilities          |       | (53,924                 | )          | (51,487  | )          |
| Valuation  allowance               |       | (128,584                | )          | (132,531 | )          |
| Net deferred income tax  liability |       | $                       | 0          |     | $          | 0 |   |

 

During 2006, the Company used $32.2 million of itsU.S. capital loss carryovers as a result of the sale of the Company’s fragrancebusiness (See Note 4 for further discussion). The transaction reduced theCompany’s capital loss carryforward to $104.8 million as of December 3,2006.

At the end of 2006 the Company’s federal net operatingloss carryforwards were $261.1 million. This amount is included in theconsolidated Vertis Holdings net operating loss carryforward. The carryforwardsexpire beginning in 2007 through 2027.

The Company’s valuation allowance related to itsdeferred tax asset, which was $132.5 million at the beginning of 2006, wasdecreased by $3.9 million to $128.6 million at the end of 2006. The valuationallowance reserves all deferred tax assets that will not be offset by reversingtaxable temporary differences. This treatment is required under SFAS No. 109,“Accounting for Income Taxes”, when in the judgment of 

F-22

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management, it is not morelikely than not that sufficient taxable income will be generated in the futureto realize the deductible temporary differences. The Company’s deferred taxassets and tax carryforwards remain available to offset taxable income infuture years, thereby lowering any future cash tax obligations. The Companyintends to maintain a valuation allowance until sufficient positive evidenceexists to support its reversal.

On August 30, 2005, the Company reached atentative settlement agreement with the IRS resolving disputes over the taxdeductibility of net losses relating to five leasehold interests in real estateproperties that the company entered into in 1998. On January 23, 2006, theCompany signed a closing agreement with the IRS. The closing agreement receivedfinal approval from the Congressional Joint Committee on Taxation on May 16,2006.

As a result of the 2005 settlement agreement with theIRS, the Company reduced its tax reserves related to the IRS examination from$10.3 million to $2.0 million. The reduction resulted in an $8.3 million taxbenefit in 2005.  During 2006 the Companypaid $1.1 million and received refunds of $0.2 million related to thesettlement.

In the fourth quarter of 2005 the Company sold thestock of its Europe direct mail subsidiary which generated a capital losscarryforward in the U.S. of $137.0 million. Also in the fourth quarter, theEurope premedia subsidiary of the Company sold the stock of its subsidiariesgenerating a U.K. capital loss carryforward of $29.0 million. The U.S. capitalloss carryforward expires in 2011. The UK capital loss can be carried forwardindefinitely.

During 2004, the Company recorded a tax benefit of$66.7 million from the termination of the Company’s leasehold interest in thesame real estate properties that were the subject of the Company’s 2005 IRSsettlement (see Note 10 for further discussion.)

The Company is currently under examination by variousstates in the United States. The Company believes it has adequate provisionsfor all open years.

The Company made incometax payments of $0.7 million, $0.2 million and $0.4 million for the years endedDecember 31, 2006, 2005, and 2004, respectively.

**14.**          RETIREMENTPLANS

***DefinedBenefit Plans***—The******Companymaintains defined benefit plans, including pension and supplemental executiveretirement plans. On December 31, 2006, the Company adopted SFAS 158 whichrequired us to recognize the underfunded status of our defined benefit plans inour consolidated balance sheet and to recognize as a component of othercomprehensive loss, net of tax, the actuarial gains or losses and prior servicecosts or credits that have arisen during the period but are not included in ournet periodic pension cost.

Thefollowing table summarizes the impact of the adoption of SFAS 158 in 2006 onindividual line items in the Company’s consolidated balance sheet.

| ** **                           | ** ** | **As of December 31, 2006** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|
| ** **                           | ** ** | **Before  Application of  SFAS 158**  | ** ** | **Adjustments** | ** ** | **After  Application of  SFAS 158** | ** ** |
| ** **                           | ** ** | **(in thousands)**                         | ** ** |
| Other current liabilities            |       |                                            | $          | 28,733 |   |   |   | $ | 1,086 |   |   |   | $ | 29,819 |   |   |
| Other long-term  liabilities         |       |                                            | 30,319     |   |   |   | 163 |   |   |   | 30,482 |   |   |
| Total liabilities                    |       |                                            | 1,395,174  |   |   |   | 1,249 |   |   |   | 1,396,423 |   |   |
| Accumulated other comprehensive loss |       |                                            | $          | (5,433 | ) |   |   | $ | (1,249 | ) |   |   | $ | (6,682 | ) |   |
| Total stockholder’s  deficit    |       |                                            | (550,488   | ) |   |   | (1,249 | ) |   |   | (551,737 | ) |   |

 

F-23

----

 

Additionalinformation regarding the defined benefit plans, collectively, is as follows. Dueto the adoption of SFAS 158 on December 31, 2006, the applicabledisclosures required by SFAS 158 are presented only for 2006 in the tablebelow:

| ** **                                                                   | ** ** | **2006**                | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|------------|------------|------------|------------|
| ** **                                                                   | ** ** | **(in thousands)** | ** ** |
| **Components of net periodic pension cost:**                                 | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                                                 |       | $                       | 481        |       | $          | 673        |       | $ | 686 |   |
| Interest cost                                                                |       | 2,218                   |       | 2,271      |       | 2,159      |       |
| Expected return  on assets                                                   |       | (1,309                  | )          | (1,358     | )          | (1,023     | )          |
| Net amortization  and deferral                                               |       | 963                     |       | 1,155      |       | 944        |       |
| Settlements and  curtailments                                                |       | 873                     |       | 443        |       |       |       |
|                                                                         |       | $                       | 3,226      |       | $          | 3,184      |       | $ | 2,766 |   |
| **Changes in benefit obligations:**                                          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit  obligation at beginning of year                                     |       | $                       | 40,788     |       | $          | 40,022     |       |   |   |
| Service cost                                                                 |       | 481                     |       | 673        |       |       |       |
| Interest cost                                                                |       | 2,218                   |       | 2,271      |       |       |       |
| Actuarial loss  (gain)                                                       |       | (757                    | )          | 1,907      |       |       |       |
| Benefits paid                                                                |       | (3,403                  | )          | (2,512     | )          |       |       |
| Settlements and  curtailments                                                |       | (573                    | )          | (1,573     | )          |       |       |
| Benefit  obligation at end of year                                           |       | $                       | 38,754     |       | $          | 40,788     |       |   |   |
| Accumulated benefit obligation at end of year                                |       | $                       | 38,276     |       | $          | 40,029     |       |   |   |
| **Changes in plan assets:**                                                  | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Fair value of  plan assets at beginning of year                              |       | $                       | 16,602     |       | $          | 15,076     |       |   |   |
| Actual return on  assets                                                     |       | 1,765                   |       | 903        |       |       |       |
| Employer  contributions                                                      |       | 3,136                   |       | 3,135      |       |       |       |
| Benefits paid                                                                |       | (3,403                  | )          | (2,512     | )          |       |       |
| Fair value of  plan assets at end of year                                    |       | $                       | 18,100     |       | $          | 16,602     |       |   |   |
| **Funded status of the plan:**                                               | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Benefit  obligation at end of year                                           |       | $                       | 38,754     |       | $          | 40,788     |       |   |   |
| Fair value of  plan assets at end of year                                    |       | 18,100                  |       | 16,602     |       |       |       |
| Unfunded status  of the plan at end of year                                  |       | $                       | 20,654     |       | $          | 24,186     |       |   |   |
| Current liabilities                                                          |       | $                       | 1,086      |       |       |       |       |   |
| Long-term  liabilities                                                       |       | 19,568                  |       |       |       |       |       |
| Net amount  recognized                                                       |       | $                       | 20,654     |       |       |       |       |   |
| **Amounts recognized in other comprehensive loss:**                          | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net actuarial  loss                                                          |       | $                       | (10,726    | )          |       |       |       |   |
| Prior service  cost                                                          |       | (770                    | )          |       |       |       |       |
| Net amount  recognized                                                       |       | $                       | (11,496    | )          |       |       |       |   |
| **Amounts expected to be recognized in net  periodic pension cost in 2007:** | ** ** | ** **              | ** ** | ** ** | ** ** | ** ** | ** ** |
| Prior service  cost                                                          |       | $                       | 99         |       |       |       |       |   |
| Actuarial loss                                                               |       | 554                     |       |       |       |       |       |
| **Total**                                                                    |       | $                       | 653        |       |       |       |       |   |

 

F-24

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Theweighted-average assumptions used to determine net periodic pension cost andthe Company’s benefit obligation were as follows: 

| ** **                                                                     | ** ** | **2006**   | ** ** | **2005**   | ** ** | **2004**   | ** ** |
|--------------------------------------------------------------------------------|------------|------------|------------|------------|------------|------------|------------|
| **Weighted-average  assumptions used to calculate net periodic pension cost:** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                  |       | 5.50       | %          | 5.75       | %          | 6.25       | %          |
| Expected return  on plan assets                                                |       | 7.50       | %          | 8.75       | %          | 8.75       | %          |
| Annual  compensation increase                                                  |       | 3.00       | %          | 3.00       | %          | 3.00       | %          |
| **Weighted-average  assumptions used to determine benefit obligation:**        | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Discount rate                                                                  |       | 5.75       | %          | 5.50       | %          |       |       |
| Annual compensation increase                                                   |       | 3.00       | %          | 3.00       | %          |       |       |

 

The Company expects to make approximately $2.7 millionof cash contributions to its pension plans in 2007.

TheCompany expects to make the following benefit payments, which reflect expectedfuture service:

| ** ** | ** ** | **(in thousands)** | ** ** |
|------------|------------|-------------------------|------------|
| 2007       |       |                    | $          | 3,594 |   |   |
| 2008       |       |                    | 1,996      |   |   |
| 2009       |       |                    | 2,762      |   |   |
| 2010       |       |                    | 2,399      |   |   |
| 2011       |       |                    | 1,885      |   |   |
| 2012-2016  |       |                    | 12,941     |   |   |
|       |       |                    | $          | 25,577 |   |   |

 

Forthe Company’s pension plans, the percentage of fair value of plan assets byasset category as of the measurement date are as follows:

| ** **                 | ** ** | **2006** | ** ** | **2005**   | ** ** |
|----------------------------|------------|----------|------------|------------|------------|
| **Asset  category:**       | ** ** |     | ** ** | ** ** |       |   | ** ** | ** ** |   |
| Equity securities          |       |     | 56         | %          |       |   | 56 | % |   |
| Fixed Income               |       |     | 38         | %          |       |   | 39 | % |   |
| Cash and cash  equivalents |       |     | 6          | %          |       |   | 5 | % |   |
|                       |       |     | 100        | %          |       |   | 100 | % |   |

 

The Company’s investment strategy for the pensionplans is to maximize the long-term rate of return on plan assets within anacceptable level of risk in order to minimize the cost of providing pensionbenefits. The investment policy establishes a target allocation for each assetclass. Target allocations for 2006 are shown in the table below.

F-25

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TheCompany developed its expected long-term rate of return assumption based onhistorical experience and by evaluating input from the trustee managing theplans’ assets, including the trustee’s review of asset class returnexpectations by several consultants and economists as well as long-terminflation assumptions. The Company’s expected long-term rate of return on planassets is based on a target allocation of assets, which is based on the Company’sinvestment strategy. The plans strive to have assets sufficiently diversifiedso that adverse or unexpected results from one security class will not have anunduly detrimental impact on the entire portfolio. The target allocation ofassets is as follows:

| ** **               | ** ** | ** **          | ** ** | **Expected**  | ** ** |
|--------------------------|------------|---------------------|------------|---------------|------------|
| ** **               | ** ** | **Percent of** | ** ** | **Long-term** | ** ** |
| **Asset category:** | ** ** | ** **          | ** ** | **Total**     | ** ** | **Rate of Return** | ** ** |
| Large Cap Equities       |       |                | 47         | %             |       |   | 9.0 | % |   |
| Small/ Mid Cap  Equities |       |                | 8          | %             |       |   | 11.0 | % |   |
| International  Equities  |       |                | 5          | %             |       |   | 10.2 | % |   |
| Fixed Income             |       |                | 40         | %             |       |   | 6.5 | % |   |
|                     |       |                | 100        | %             |       |   |   |   |   |
|                          |            |                     |            |               |            |  |  |  |  |  |  |

 

***Deferred Compensation—***The Company also maintains adeferred compensation plan in which certain members of management may defer upto 100% of their total compensation through the date of their retirement. Long-termliabilities include balances related to this plan of $4.0 million as of December 31,2006 and $6.6 million as of December 31, 2005.

***Defined Contribution Plans—***The Company maintains 401(k) andother investment plans for eligible employees. The Company recorded $3.7million in expenses for the year ended December 31, 2006 and $5.0 millionin 2005. The Company did not make matching contributions to its 401(k) planin 2004 and thus did not record any expense for the year ended December 31,2004.

**15.**          STOCKHOLDER’SDEFICIT

***Contributed Capital—***In December 2005, inconjunction with the sale of the premedia division of the Vertis Europe segment(see Note 4), Vertis Holdings assigned its rights to a $0.7 million receivablefrom the Vertis Europe premedia division to Vertis, Inc. as a contributionof capital. This receivable was subsequently waived by Vertis, Inc.

Vertis Holdings has 700,000 warrants outstanding at December 31,2006, with an aggregate value of $15.8 million. These warrants are held by thelenders of the senior subordinated credit facility which entitle the holders topurchase one share of Vertis Holdings’ stock for $0.01 per share. The warrantsare immediately exercisable and expire on June 30, 2011.

***Dividends to Parent—***The Company paid approximately$4,000 and $15,000 of cash dividends to Vertis Holdings in 2005 and 2004,respectively. No dividends were paid in 2006. The Company’s debt instrumentscontain customary covenants imposing certain limitations on the payment ofdividends or other distributions.

F-26

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***Accumulated Other Comprehensive Loss—***The components of accumulatedother comprehensive loss at December 31 were:

| ** **                            | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|---------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                            | ** ** | **Gross**               | ** ** | **Tax**  | ** ** | **Net**  | ** ** | **Gross** | ** ** | **Tax** | ** ** | **Net** | ** ** | **Gross** | ** ** | **Tax** | ** ** | **Net** | ** ** |
| ** **                            | ** ** | **(in thousands)** | ** ** |
| Cumulative translation  adjustments   |       | $                       | 108        |     |       |     | $          | 108 |   | $ | 76 |   |   |   | $ | 76 |   | $ | 4,370 |   |   |   | $ | 4,370 |   |
| Minimum pension  liability adjustment |       |                    |       |     |       |     |       | (13,454 | ) | $ | (4,706 | ) | (8,748 | ) | (13,034 | ) | $ | (4,706 | ) | (8,328 | ) |
| Defined benefit  plans                |       | (11,496                 | )          | $        | (4,706     | )        | (6,790     | ) |   |   |   |   |   |   |   |   |   |   |   |   |
|                                  |       | $                       | (11,388    | )        | $          | (4,706   | )          | $ | (6,682 | ) | $ | (13,378 | ) | $ | (4,706 | ) | $ | (8,672 | ) | $ | (8,664 | ) | $ | (4,706 | ) | $ | (3,958 | ) |

 

**16.**          VERTISHOLDINGS SHARE BASED COMPENSATION

Employees of the Company participate in the VertisHoldings 1999 Equity Award Plan (the “Stock Plan”), which authorizes grants ofstock options, restricted stock, performance shares and other stock basedawards up to an aggregate of 10 million shares. Vertis Holdings has options,restricted shares, retained shares and rights outstanding under the Stock Planat December 31, 2006. SFAS 123R requires that share based payments forcompensation made by Vertis Holdings to employees of the Company be accountedfor in the financial statements of the Company.

Certain current and former members of the Company’smanagement own shares of common stock subject to retained share agreements (the“Retained Shares”). These retained share agreements were issued in connectionwith the Company’s recapitalization in 1999 (the “1999 Recapitalization”) withthe intent to replace previously issued incentive stock options at equivalenteconomic value. The retained share agreements restrict transfers of theRetained Shares unless there is a liquidity event, generally defined as apublic offering of Vertis Holdings’ common stock (where immediately followingsuch offering, the aggregate number of shares of common stock held by thepublic, not including affiliates of the Company, represents at least 20% of thetotal number of outstanding shares), merger or other business combination, or asale or other disposition of all or substantially all of our assets to anotherentity for cash and/or publicly traded securities (“Liquidity Event”). Additionally,included in the retained share agreements, employees (or their estates) havethe right to put (“Put Right”) the Retained Shares to the Company for the fairmarket value of the stock within 90 days of termination due to retirement,disability or death (the “Put Right Period”). Retirement for this purpose isdefined as the employee’s retirement from the Company at age 65 after at leastthree years of continuous service. The Retained Shares are considered equityawards under SFAS 123R.

Certain current and former members of the Company’smanagement own rights (the “Rights”) to shares of common stock subject to amanagement subscription agreement. These management subscription agreementswere issued in connection with the 1999 Recapitalization with the intent toreplace previously issued nonqualified stock options at equivalent economicvalue. The management subscription agreements are similar to the retained shareagreements discussed above, including the Put Right and the restrictions ontransfer. As a result, the Rights held by employees are also considered equityawards under SFAS 123R. In December 2006, the Company reversed a$1.7 million cumulative effect of accounting change recorded in the firstquarter of 2006 to classify the Retained Shares and Rights as equity awardsunder SFAS 123R.

TheCompany has the ability to issue restricted stock to certain members ofmanagement under the Stock Plan. The restricted stock awards do not vest untilimmediately prior to a Liquidity Event or upon death or disability duringemployment, and they cannot be transferred until vesting occurs. Additionally,if 

F-27

----

an employee leaves the Company prior to a LiquidityEvent, they forfeit their restricted shares. The probability of each of theseevents occurring is currently indeterminable, therefore compensation expensewill not be recorded by the Company related to the restricted shares until aLiquidity Event takes place, or is probable of occurring, or in the event of ashareholder’s death or disability.

VertisHoldings issued 297,620 shares of restricted stock and cancelled 106,717 sharesof restricted stock in the year ended December 31, 2006, due to forfeitureand employees departure from the Company. The fair value of the restrictedstock was determined to be $20.48 per share, which included our considerationof the range of values calculated by an independent third party valuationconducted for the Company in 2004. At December 31, 2006 there were 346,296shares of restricted stock outstanding under the Stock Plan.

TheCompany also has the ability to issue options to certain members of managementunder the Stock Plan. At December 31, 2006, there are 7,618 optionsoutstanding under the Stock Plan. These options were fully vested at January 1,2006 therefore no compensation expense is recorded.

A summary of activityunder the Stock Plan for the twelve months ended December 31, 2006 is asfollows:

| ** **                             | ** ** | **Retained**

**Shares**            | ** ** | **Rights** | ** ** | **Restricted**

**Stock(1)** | ** ** | **Options(2)** | ** ** |
|----------------------------------------|------------|-------------------------------------|------------|------------|------------|------------------------------|------------|----------------|------------|
| ** **                             | ** ** | **(thousands of shares)** | ** ** |
| Outstanding at December 31, 2005  |       |                                | 20         |       |       |                         | 32         |           |       |   | 155 |   |   |   | 8 |   |   |
| Granted                                |       |                                |       |       |       |                         |       |           |       |   | 298 |   |   |   |   |   |   |
| Forfeited/  Cancelled                  |       |                                | (2         | )          |       |                         | (1         | )              |       |   | (107 | ) |   |   |   |   |   |
| Outstanding at  December 31, 2006 |       |                                | 18         |       |       |                         | 31         |           |       |   | 346 |   |   |   | 8 |   |   |
| Nonvested at December 31, 2006    |       |                                |       |       |       |                         |       |           |       |   | 346 |   |   |   |   |   |   |
| Exercisable at  December 31, 2006 |       |                                |       |       |       |                         |       |           |       |   |   |   |   |   | 8 |   |   |

----

(1)          The weighted-averagegrant-date fair value of the restricted shares is $20.48 per share. As of December 31,2006 there was $7.1 million of unrecognized compensation cost related tononvested restricted stock awards granted under the Stock Plan.

(2)          The weighted-average exerciseprice of the vested options outstanding at December 31, 2006 is $31.50 pershare. The outstanding options have ten-year terms, with 5,832 options expiringin 2009 and the remainder expiring in 2012.

In2005, the Company accounted for the Stock Plan under the intrinsic valuemethod, which followed the recognition and measurement principles of AccountingPrinciples Board (“APB”) Opinion No. 25, “Accounting for Stock Issued toEmployees.”  Approximately $0.1 millionof employee compensation cost was reflected in net income for 2005. Nostock-based employee compensation cost was reflected in the Company’s net lossfor the year ended December 31, 2004. The following table summarizes theeffect of accounting for the awards under the Stock Plan as if the fair valuerecognition provisions of SFAS No. 123, “Accounting for Stock BasedCompensation,” as amended by SFAS No. 148, “Accounting for Stock-BasedCompensation—Transition and Disclosure, an amendment of FASB Statement No. 123,”had been applied.

| ** **                                                                                                       | ** ** | **2005**                | ** ** | **2004** | ** ** |
|------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|
| ** **                                                                                                       | ** ** | **(In thousands)** | ** ** |
| Net loss:                                                                                                        |       |                    |       |     |       |
| As reported                                                                                                      |       | $                       | (173,230   | )        | $          | (11,133 | ) |
| Deduct: total  stock-based compensation determined under the fair value based method for all  awards, net of tax |       | (7                      | )          | (11      | )          |
| Pro forma                                                                                                        |       | $                       | (173,237   | )        | $          | (11,144 | ) |

 

F-28

----

**17.   INTERESTEXPENSE, NET**

Interestexpense, net consists of the following:

| ** **                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                               | ** ** | **(In thousands)** | ** ** |
| Interest cost                            |       | $                       | 127,079    |     | $          | 123,320  |       | $ | 124,311 |   |
| Amortization of  deferred financing fees |       | 6,306                   |       | 7,265    |       | 7,831    |       |
| Write-off of  deferred financing fees    |       |                    |       |     |       | 1,788    |       |
| Capitalized  interest                    |       | (1,250                  | )          | (929     | )          | (798     | )          |
| Interest income                          |       | (1,112                  | )          | (835     | )          | (323     | )          |
|                                     |       | $                       | 131,023    |     | $          | 128,821  |       | $ | 132,809 |   |

 

The Company wrote off deferred financing fees of $1.8million in December 2004 in connection with the termination of the priorrevolving credit facility. See Note 11 for further discussion of debttransactions.

The Company made interestpayments of $122.9 million, $118.8 million and $123.2 million in the yearsended December 31, 2006, 2005 and 2004, respectively.

**18.   OTHER,NET**

Other,net consists of the following:

| ** **                                               | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004** | ** ** |
|----------------------------------------------------------|------------|-------------------------|------------|----------|------------|----------|------------|
| ** **                                               | ** ** | **(In thousands)** | ** ** |
| A/R Facility fees  (see Note 7)                          |       | $                       | 6,529      |     | $          | 5,163    |       | $ | 3,087 |   |
| Bank commitment  fees                                    |       | 804                     |       | 927      |       | 1,182    |       |
| Loss on  termination of leasehold interest (see Note 10) |       |                    |       |     |       | 44,012   |       |
| Income earned on  leasehold interest (see Note 10)       |       |                    |       |     |       | (1,021   | )          |
| Other expense                                            |       | 4                       |       | 1,563    |       | 425      |       |
|                                                     |       | $                       | 7,337      |     | $          | 7,653    |       | $ | 47,685 |   |

 

F-29

----

**19.   RELATEDPARTY TRANSACTIONS**

The Company has consultingagreements with the owners of Vertis Holdings under which these parties haveagreed to provide the Company with consulting services on matters involvingcorporate finance, strategic corporate planning and other management skills andservices. The annual fees payable to these parties under these agreementsamount to approximately $1.3 million. The Company paid approximately $1.3million in fees under these agreements in 2006, 2005 and 2004.

**20.   QUARTERLYFINANCIAL INFORMATION—UNAUDITED**

Theresults of operations for the years ended December 31, 2006 and 2005 arepresented below.

| ** **                                                                                                | ** ** | **First**               | ** ** | **Second**  | ** ** | **Third**   | ** ** | **Fourth**  | ** ** |
|-----------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-------------|------------|-------------|------------|-------------|------------|
| ** **                                                                                                | ** ** | **Quarter**             | ** ** | **Quarter** | ** ** | **Quarter** | ** ** | **Quarter** | ** ** |
| ** **                                                                                                | ** ** | **(in thousands)** | ** ** |
| **Year  Ended December 31, 2006(1)**                                                                 |       |                    |       |        |       |        |       |        |       |
| Revenue                                                                                                   |       | $                       | 349,171    |        | $          | 351,167     |       | $           | 352,748    |   | $ | 415,575 |   |
| Gross profit                                                                                              |       | 58,153                  |       | 66,315      |       | 58,172      |       | 74,441      |       |
| Loss from  continuing operations before income taxes and cumulative effect of accounting  change          |       | (20,866                 | )          | (4,808      | )          | (18,563     | )          | (3,559      | )          |
| Loss from  continuing operations before cumulative effect of accounting change                            |       | (20,941                 | )          | (4,872      | )          | (18,398     | )          | (3,584      | )          |
| Income (loss)  from discontinued operations                                                               |       | 1,060                   |       | (170        | )          | 302         |       | 20,408      |       |
| Cumulative effect  of accounting change(2)                                                                |       | (1,654                  | )          |        |       |        |       | 1,654       |       |
| Net (loss) income                                                                                         |       | (21,535                 | )          | (5,042      | )          | (18,096     | )          | 18,478      |       |
| **Year Ended December 31, 2005(1)**                                                                  |       |                    |       |        |       |        |       |        |       |
| Revenue                                                                                                   |       | $                       | 342,245    |        | $          | 355,299     |       | $           | 366,683    |   | $ | 405,861 |   |
| Gross profit                                                                                              |       | 52,268                  |       | 64,653      |       | 67,431      |       | 90,058      |       |
| (Loss) income  from continuing operations before income taxes and cumulative effect of  accounting change |       | (29,679                 | )          | (9,765      | )          | (6,793      | )          | 9,926       |       |
| (Loss) income  from continuing operations before cumulative effect of accounting change                   |       | (29,937                 | )          | (10,030     | )          | 1,394       |       | 10,332      |       |
| (Loss) income  from discontinued operations                                                               |       | (99,991                 | )          | (18,993     | )          | (25,951     | )          | 1,546       |       |
| Cumulative effect  of accounting change(3)                                                                |       |                    |       |        |       |        |       | (1,600      | )          |
| Net (loss) income                                                                                         |       | (129,928                | )          | (29,023     | )          | (24,557     | )          | 10,278      |       |

 

----

(1)          As a result of the saleof the Company’s fragrance business in the third quarter of 2006, which wasaccounted for as a discontinued operation (see Note 4), results have beenrestated for the first and second quarters of 2006 and for all 2005 periodspresented.

(2)          First quarter resultsinclude the effect of adopting SFAS 123R on January 1, 2006. This amountwas reversed in the fourth quarter of 2006 (see Note 16).

(3)          Fourthquarter results include the effect of adopting FIN 47 on December 31, 2005(see Note 3).

F-30

----

**21.   SEGMENTINFORMATION**

The Companyoperates in two reportable segments. The accounting policies of the businesssegments are the same as those described in Note 2 to the consolidatedfinancial statements. The Company uses EBITDA as the measure by which it gaugesthe profitability and assesses the performance of its segments. The segmentsare:

·       AdvertisingInserts—provides a full array of targeted advertising products inserted intonewspapers. In 2005, the results of our Advertising Inserts segment included anentity whose sole function is to buy and sell paper. The results of this entitywere reclassified as Corporate and Other in 2006 which the Company believes isthe more appropriate treatment. The operating results of the AdvertisingInserts segment have been restated for all periods presented within thesefinancial statements.

·       DirectMail—provides personalized direct mail products and various direct marketing. Thissegment previously included the Company’s fragrance business, which was sold inthe third quarter of 2006. The operational results of the Company’s fragrance businessare included in discontinued operations for all periods presented within thesefinancial statements. See Note 4 for further discussion. Additionally, in 2006,the results on one of the Company’s facilities and several support servicespreviously included in Corporate and Other (see discussion below) werereclassified under the Direct Mail segment as the Company’s managementdetermined that the majority of the services performed by the facility weredirect marketing services. The operating results of the Direct Mail segmenthave been restated for all periods presented within these financial statements.

In addition, the Company also provides outsourceddigital premedia and image content management, creative services foradvertising insert page layout and design, and media planning andplacement services. These services are included in the table below as “Corporateand Other”. Corporate and Other also includes the Company’s general corporatecosts, which reflect costs associated with the Company’s executive officers aswell as other transactions that are not allocated to the Company’s businesssegments.

The Company had operations in Europe, principally inthe United Kingdom, that were sold in the fourth quarter of 2005. Theoperational results of the Company’s European segment are included indiscontinued operations for all periods presented within these financialstatements. See Note 4 for further discussion.

F-31

----

Followingis information regarding the Company’s segments:

| ** **              | ** ** | ** **                                                                                  | ** ** | **2006**                | ** ** | **2005** | ** ** | **2004**  | ** ** |
|-------------------------|------------|---------------------------------------------------------------------------------------------|------------|-------------------------|------------|----------|------------|-----------|------------|
| ** **              | ** ** | ** **                                                                                  | ** ** | **(in thousands)** | ** ** |
| Revenue                 |       | Advertising Inserts                                                                         |       | $                       | 1,030,471  |     | $          | 1,048,417 |       | $ | 1,061,141 |   |
|                    |       | Direct Mail                                                                                 |       | 330,794                 |       | 293,814  |       | 280,909   |       |
|                    |       | Corporate and Other                                                                         |       | 115,859                 |       | 138,671  |       | 141,945   |       |
|                    |       | Elimination of  intersegment   sales                                                        |       | (8,463                  | )          | (10,814  | )          | (9,636    | )          |
|                    |       | Consolidated                                                                                |       | $                       | 1,468,661  |     | $          | 1,470,088 |       | $ | 1,474,359 |   |
| EBITDA                  |       | Advertising Inserts                                                                         |       | $                       | 117,884    |     | $          | 125,294   |       | $ | 143,403 |   |
|                    |       | Direct Mail                                                                                 |       | 36,565                  |       | 36,652   |       | 35,106    |       |
|                    |       | Corporate and Other                                                                         |       | (12,434                 | )          | (6,607   | )          | (51,246   | )          |
|                    |       | Consolidated EBITDA                                                                         |       | 142,015                 |       | 155,339  |       | 127,263   |       |
|                    |       | Depreciation and  amortization                                                              |       |                    |       |     |       |      |       |
|                    |       | of intangibles                                                                              |       | 58,788                  |       | 62,829   |       | 65,430    |       |
|                    |       | Interest expense, net                                                                       |       | 131,023                 |       | 128,821  |       | 132,809   |       |
|                    |       | Income tax benefit                                                                          |       | (1                      | )          | (8,070   | )          | (66,053   | )          |
|                    |       | Consolidated loss from  continuing operations before cumulative effect of accounting change |       | $                       | (47,795    | )        | $          | (28,241   | )          | $ | (4,923 | ) |
| Restructuring charges   |       | Advertising Inserts                                                                         |       | $                       | 5,737      |     | $          | 7,804     |       | $ | 245 |   |
|                    |       | Direct Mail                                                                                 |       | 1,828                   |       | 2,056    |       | 13        |       |
|                    |       | Corporate and Other                                                                         |       | 8,436                   |       | 7,259    |       | 4,243     |       |
|                    |       | Consolidated                                                                                |       | $                       | 16,001     |     | $          | 17,119    |       | $ | 4,501 |   |
| Depreciation and        |       | Advertising Inserts                                                                         |       | $                       | 39,749     |     | $          | 38,555    |       | $ | 37,530 |   |
| amortization of         |       | Direct Mail                                                                                 |       | 13,550                  |       | 14,302   |       | 16,735    |       |
| intangibles             |       | Corporate and Other                                                                         |       | 5,489                   |       | 9,972    |       | 11,165    |       |
|                    |       | Consolidated                                                                                |       | $                       | 58,788     |     | $          | 62,829    |       | $ | 65,430 |   |
| Additions to long-lived |       | Advertising Inserts                                                                         |       | $                       | 20,970     |     | $          | 23,900    |       | $ | 23,645 |   |
| assets (excluding       |       | Direct Mail                                                                                 |       | 12,614                  |       | 7,298    |       | 8,670     |       |
| acquisitions)           |       | Corporate and Other                                                                         |       | 15,401                  |       | 10,999   |       | 13,321    |       |
|                    |       | Consolidated                                                                                |       | $                       | 48,985     |     | $          | 42,197    |       | $ | 45,636 |   |
| Identifiable Assets     |       | Advertising Inserts                                                                         |       | $                       | 535,510    |     | $          | 542,958   |       | $ | 552,274 |   |
| ** **              |       | Direct Mail                                                                                 |       | 203,341                 |       | 183,636  | (1)        | 183,384   | (2)        |
| ** **              |       | Europe                                                                                      |       |                    |       |     |       | 174,653   | (3)        |
|                    |       | Corporate and Other                                                                         |       | 105,835                 |       | 146,045  |       | 139,484   |       |
|                    |       | Consolidated                                                                                |       | $                       | 844,686    |     | $          | 872,639   |       | $ | 1,049,795 |   |
| Goodwill                |       | Advertising Inserts                                                                         |       | $                       | 187,867    |     | $          | 187,867   |       | $ | 187,867 |   |
|                    |       | Direct Mail                                                                                 |       | 54,320                  |       | 46,626   |       | 43,798    |       |
|                    |       | Corporate and Other                                                                         |       | 4,073                   |       | 4,073    |       | 4,073     |       |
|                    |       | Consolidated                                                                                |       | $                       | 246,260    |     | $          | 238,566   |       | $ | 235,738 |   |

 

----

(1)          Includes assets held forsale of $18.6 million.

(2)          Includes assets held forsale of $18.2 million.

(3)          Includescash of $1.2 million and assets held for sale of $173.4 million.

F-32

----

**22.**               GUARANTOR/NON-GUARANTORCONDENSED CONSOLIDATED FINANCIAL INFORMATION

The Company has senior notes (see Note 11), which aregeneral unsecured obligations of Vertis, Inc., and guaranteed by certainof Vertis, Inc.’s domestic subsidiaries. Accordingly, the followingcondensed consolidated financial information as of December 31, 2006 and2005, and for the years ended December 31, 2006, 2005 and 2004 areincluded for (a) Vertis, Inc. (the “Parent”) on a stand-alone basis, (b) theguarantor subsidiaries, (c) the non-guarantor subsidiaries and (d) theCompany on a consolidated basis.

As of December 31, 2006, the guarantorsubsidiaries include Enteron Group LLC, Vertis Mailing LLC, Webcraft LLC, andWebcraft Chemicals LLC, all of which are wholly-owned subsidiaries of Vertis, Inc.The operations of Enteron Group LLC are reported in Corporate and Otherelsewhere in the financial statements, while the operations of Webcraft LLC andWebcraft Chemicals LLC are reported in the Direct Mail segment. Thenon-guarantor subsidiary is Laser Tech Color Mexico, S.A. de C.V., which is awholly-owned subsidiary of Vertis, Inc., and whose operations are includedin Corporate and Other elsewhere in the financial statements. The Parent iscomprised of Vertis, Inc. and Vertis Receivables II, LLC, and includes theoperations of Advertising Inserts as well as some Direct Mail operations andoperations reported under Corporate and Other.

In 2005 and 2004, Printco, Inc., a formersubsidiary of Vertis, Inc., was included in the guarantor subsidiaries. Thisentity was rolled into Vertis, Inc. beginning in 2006 and is included inthe Parent in 2006. Also, in 2005 and 2004, the operations of our Europesegment are included in the non-guarantor subsidiaries as discontinued operations.

Investments in subsidiaries are accounted for usingthe equity method for purposes of the consolidating presentation. The principalelimination entries eliminate investments in subsidiaries, intercompanybalances and intercompany transactions. Separate financial statements and otherdisclosures with respect to the subsidiary guarantors have not been madebecause the subsidiaries are wholly-owned and the guarantees are full andunconditional and joint and several.

F-33

----

**Condensed Consolidating Balance Sheet Information at December 31, 2006 In thousands**

| ** **                                                 | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|------------------------------------------------------------|------------|------------|------------|---------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                 | ** ** | **Parent** | ** ** | **Companies** | ** ** | **Companies**     | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                 | ** ** | ** ** | ** ** | ** **    | ** ** |              | ** ** | ** **       |       |             | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                            |       |       |       | ** **    | ** ** |              |       |             |       |             |       |   |   |   |   |   |   |
| Cash and cash equivalents                                  |       | $          | 554        |          | $          | 4,001             | ** ** |             | $          | 1,155            |       |   |   |   |   |   |   | $ | 5,710 |   |   |
| Accounts receivable, net                                   |       | 123,953    |       | 14,830        | ** ** |              | 643        |             |       |             |       |   |   |   | 139,426 |   |   |
| Inventories                                                |       | 35,321     |       | 12,844        | ** ** |              | 62         |             |       |             |       |   |   |   | 48,227 |   |   |
| Maintenance parts                                          |       | 18,572     |       | 3,720         | ** ** |              |       |             |       |             |       |   |   |   | 22,292 |   |   |
| Prepaid expenses and other current assets                  |       | 6,921      |       | 1,657         | ** ** |              |       |             |       |             |       |   |   |   | 8,578 |   |   |
| Total current assets                                       |       | 185,321    |       | 37,052        | ** ** |              | 1,860      |             |       |             |       |   |   |   | 224,233 |   |   |
| Intercompany receivable                                    |       | 68,139     |       | ** **    | ** ** |              |       |             |       |             | $          | (68,139 | ) |   |   |   |   |   |
| Investments in subsidiaries                                |       | 55,490     |       | 859           | ** ** |              |       |             |       |             | (56,349    | ) |   |   |   |   |   |
| Property, plant and equipment, net                         |       | 254,935    |       | 74,958        | ** ** |              | 146        |             |       |             |       |   |   |   | 330,039 |   |   |
| Goodwill                                                   |       | 196,828    |       | 49,432        | ** ** |              |       |             |       |             |       |   |   |   | 246,260 |   |   |
| Deferred financing costs, net                              |       | 14,838     |       |          | ** ** |              |       |             |       |             |       |   |   |   | 14,838 |   |   |
| Other assets, net                                          |       | 25,350     |       | 3,966         | ** ** |              |       |             |       |             |       |   |   |   | 29,316 |   |   |
| Total Assets                                               |       | $          | 800,901    |          | $          | 166,267           | ** ** |             | $          | 2,006            |       |   |   | $ | (124,488 | ) |   |   | $ | 844,686 |   |   |
| **LIABILITIES  AND STOCKHOLDER’S (DEFICIT) EQUITY**   |       |       |       | ** **    | ** ** |              |       |             |       |             |       |   |   |   |   |   |   |
| Current Liabilities:                                       |       |       |       | ** **    | ** ** |              |       |             |       |             |       |   |   |   |   |   |   |
| Accounts payable                                           |       | $          | 154,555    |          | $          | 32,061            | ** ** |             | $          | 22               |       |   |   |   |   |   |   | $ | 186,638 |   |   |
| Compensation and benefits payable                          |       | 29,564     |       | 5,145         | ** ** |              | 46         |             |       |             |       |   |   |   | 34,755 |   |   |
| Accrued interest                                           |       | 14,300     |       | ** **    | ** ** |              |       |             |       |             |       |   |   |   | 14,300 |   |   |
| Accrued income taxes                                       |       | 802        |       | ** **    | ** ** |              | 95         |             |       |             |       |   |   |   | 897 |   |   |
| Current portion of long-term debt                          |       |       |       | 5             | ** ** |              |       |             |       |             |       |   |   |   | 5 |   |   |
| Other current liabilities                                  |       | 22,198     |       | 5,898         | ** ** |              | 69         |             |       |             |       |   |   |   | 28,165 |   |   |
| Total current liabilities                                  |       | 221,419    |       | 43,109        | ** ** |              | 232        |             |       |             |       |   |   |   | 264,760 |   |   |
| Due to parent                                              |       | 3,491      |       | 48,522        | ** ** |              | 19,617     |             |       |             | $          | (68,139 | ) |   |   | 3,491 | (1) |   |
| Long-term debt, net of current portion                     |       | 1,096,036  |       |          | ** ** |              |       |             |       |             |       |   |   |   | 1,096,036 |   |   |
| Other long-term liabilities                                |       | 30,038     |       | 444           | ** ** |              |       |             |       |             |       |   |   |   | 30,482 |   |   |
| Total liabilities                                          |       | 1,350,984  |       | 92,075        | ** ** |              | 19,849     |             |       |             | (68,139    | ) |   |   | 1,394,769 |   |   |
| Stockholder’s (deficit) equity                        |       | (550,083   | )          | 74,192        | ** ** |              | (17,843    | )                |       |             | (56,349    | ) |   |   | (550,083 | ) |   |
| Total Liabilities  and Stockholder’s (Deficit) Equity |       | $          | 800,901    |          | $          | 166,267           | ** ** |             | $          | 2,006            |       |   |   | $ | (124,488 | ) |   |   | $ | 844,686 |   |   |

----

(1)          Represents the amountdue to Vertis Holdings

F-34

----

**Condensed Consolidating Balance Sheet Information at December 31, 2005 In thousands**

| ** **                                                     | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|----------------------------------------------------------------|------------|------------|------------|---------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                     | ** ** | **Parent** | ** ** | **Companies** | ** ** | **Companies**     | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| **ASSETS**                                                     | ** ** | ** ** | ** ** |          | ** ** | ** **        |       |             | ** ** | ** **       |       |   | ** ** | ** ** |   |   | ** ** | ** ** |   |
| Current Assets:                                                |       |       |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Cash and cash equivalents                                      |       | $          | 304        |          |       | $                 | 101        | ** **       |       |             | $          | 1,423 |   |   |   |   |   |   |   | $ | 1,828 |   |   |
| Accounts receivable, net                                       |       | 140,876    |       |          | 3,444      | ** **        |       |             | 729        |             |       |   |   |   |   |   | 145,049 |   |   |
| Inventories                                                    |       | 37,852     |       |          | 13,880     | ** **        |       |             | 3          |             |       |   |   |   |   |   | 51,735 |   |   |
| Maintenance parts                                              |       | 16,234     |       |          | 4,266      | ** **        |       |             |       |             |       |   |   |   |   |   | 20,500 |   |   |
| Prepaid expenses and  other                                    |       |       |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| current assets                                                 |       | 8,340      |       |          | 670        | ** **        |       |             | 17         |             |       |   |   |   |   |   | 9,027 |   |   |
| Current assets of operations held for sale                     |       |       |       |          | 7,056      | ** **        |       |             |       |             |       |   |   |   |   |   | 7,056 |   |   |
| Total current assets                                           |       | 203,606    |       |          | 29,417     | ** **        |       |             | 2,172      |             |       |   |   |   |   |   | 235,195 |   |   |
| Intercompany receivable                                        |       | 143,722    |       |          |       | ** **        |       |             |       |             |       |   | $ | (143,722 | ) |   |   |   |   |   |
| (Losses in excess of investments) investments in  subsidiaries |       | (12,982    | )          |          | 859        | ** **        |       |             |       |             |       |   | 12,123 |   |   |   |   |   |   |
| Property, plant and equipment, net                             |       | 257,547    |       |          | 78,615     | ** **        |       |             | 86         |             |       |   |   |   |   |   | 336,248 |   |   |
| Goodwill                                                       |       | 198,229    |       |          | 40,337     | ** **        |       |             |       |             |       |   |   |   |   |   | 238,566 |   |   |
| Deferred financing costs, net                                  |       | 20,755     |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   | 20,755 |   |   |
| Other assets, net                                              |       | 29,672     |       |          | 649        | ** **        |       |             | 20         |             |       |   |   |   |   |   | 30,341 |   |   |
| Long-term assets of operations held for sale                   |       |       |       |          | 11,531     | ** **        |       |             | 3          |             |       |   |   |   |   |   | 11,534 |   |   |
| Total Assets                                                   |       | $          | 840,549    |          |       | $                 | 161,408    | ** **       |       |             | $          | 2,281 |   |   |   | $ | (131,599 | ) |   |   | $ | 872,639 |   |   |
| **LIABILITIES  AND STOCKHOLDER’S (DEFICIT) EQUITY**       |       |       |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Current Liabilities:                                           |       |       |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Accounts payable                                               |       | $          | 207,437    |          |       | $                 | 22,133     | ** **       |       |             | $          | 242 |   |   |   |   |   |   |   | $ | 229,812 |   |   |
| Compensation and benefits payable                              |       | 33,056     |       |          | 4,551      | ** **        |       |             | 38         |             |       |   |   |   |   |   | 37,645 |   |   |
| Accrued interest                                               |       | 14,110     |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   | 14,110 |   |   |
| Accrued income taxes                                           |       | 2,135      |       |          |       | ** **        |       |             | 212        |             |       |   |   |   |   |   | 2,347 |   |   |
| Other current liabilities                                      |       | 20,748     |       |          | 2,616      | ** **        |       |             | 21         |             |       |   |   |   |   |   | 23,385 |   |   |
| Current (liabilities) of operations held for sale              |       |       |       |          | 1,960      | ** **        |       |             |       |             |       |   |   |   |   |   | 1,960 |   |   |
| Total current liabilities                                      |       | 277,486    |       |          | 31,260     | ** **        |       |             | 513        |             |       |   |   |   |   |   | 309,259 |   |   |
| Due to parent                                                  |       | 7,898      |       |          | 124,528    | ** **        |       |             | 19,194     |             |       |   | $ | (143,722 | ) |   |   | 7,898 | (1) |   |
| Long-term debt, net of current portion                         |       | 1,049,059  |       |          |       | ** **        |       |             |       |             |       |   |   |   |   |   | 1,049,059 |   |   |
| Other long-term liabilities                                    |       | 31,984     |       |          | 317        | ** **        |       |             |       |             |       |   |   |   |   |   | 32,301 |   |   |
| Total liabilities                                              |       | 1,366,427  |       |          | 156,105    | ** **        |       |             | 19,707     |             |       |   | (143,722 | ) |   |   | 1,398,517 |   |   |
| Stockholder’s (deficit) equity                            |       | (525,878   | )          |          | 5,303      | ** **        |       |             | (17,426    | )                |       |   | 12,123 |   |   |   | (525,878 | ) |   |
| Total Liabilities  and Stockholder’s (Deficit) Equity     |       | $          | 840,549    |          |       | $                 | 161,408    | ** **       |       |             | $          | 2,281 |   |   |   | $ | (131,599 | ) |   |   | $ | 872,639 |   |   |

----

(1)          Represents the amountdue to Vertis Holdings

F-35

----

**Condensed Consolidating Statement of Operations  Year ended December 31, 2006 In thousands**

| ** **                                                                              | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Non-Guarantor** | ** ** | ** **       | ** ** | ** **       | ** ** |
|-----------------------------------------------------------------------------------------|------------|------------|------------|---------------|------------|-------------------|------------|------------------|------------|------------------|------------|
| ** **                                                                              | ** ** | **Parent** | ** ** | **Companies** | ** ** | **Companies**     | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
| Revenue                                                                                 |       | $          | 1,201,282  |          |       | $                 | 272,000    |             |       |             | $          | 1,564 |   |   |   | $ | (6,185 | ) |   |   | $ | 1,468,661 |   |   |
| Operating expenses:                                                                     |       |       |       |          |       |              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Costs of production                                                                     |       | 962,523    |       |          | 203,184    |              |       |             | 870        |             |       |   | (6,185 | ) |   |   | 1,160,392 |   |   |
| Selling, general and administrative                                                     |       | 111,045    |       |          | 31,819     |              |       |             | 52         |             |       |   |   |   |   |   | 142,916 |   |   |
| Restructuring charges                                                                   |       | 14,662     |       |          | 1,339      |              |       |             |       |             |       |   |   |   |   |   | 16,001 |   |   |
| Depreciation and amortization of intangibles                                            |       | 48,362     |       |          | 10,402     |              |       |             | 24         |             |       |   |   |   |   |   | 58,788 |   |   |
|                                                                                    |       | 1,136,592  |       |          | 246,744    |              |       |             | 946        |             |       |   | (6,185 | ) |   |   | 1,378,097 |   |   |
| Operating income                                                                        |       | 64,690     |       |          | 25,256     |              |       |             | 618        |             |       |   |   |   |   |   | 90,564 |   |   |
| Other expenses (income):                                                                |       |       |       |          |       |              |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense, net                                                                   |       | 131,106    |       |          | (80        | )                 |       |             | (3         | )                |       |   |   |   |   |   | 131,023 |   |   |
| Other, net                                                                              |       | 7,337      |       |          |       |              |       |             |       |             |       |   |   |   |   |   | 7,337 |   |   |
|                                                                                    |       | 138,443    |       |          | (80        | )                 |       |             | (3         | )                |       |   |   |   |   |   | 138,360 |   |   |
| Equity in net income of subsidiaries                                                    |       | 47,383     |       |          |       |              |       |             |       |             |       |   | (47,383 | ) |   |   |   |   |   |
| (Loss) income before income taxes                                                       |       | (26,370    | )          |          | 25,336     |              |       |             | 621        |             |       |   | (47,383 | ) |   |   | (47,796 | ) |   |
| Income tax (benefit) expense                                                            |       | (175       | )          |          |       |              |       |             | 174        |             |       |   |   |   |   |   | (1 | ) |   |
| (Loss) income from continuing operations before  cumulative effect of accounting change |       | (26,195    | )          |          | 25,336     |              |       |             | 447        |             |       |   | (47,383 | ) |   |   | (47,795 | ) |   |
| Income from discontinued operations                                                     |       |       |       |          | 22,464     |              |       |             | (864       | )                |       |   |   |   |   |   | 21,600 |   |   |
| Net (loss) income                                                                       |       | $          | (26,195    | )             |       | $                 | 47,800     |             |       |             | $          | (417 | ) |   |   | $ | (47,383 | ) |   |   | $ | (26,195 | ) |   |

 

F-36

----

**Condensed Consolidating Statement of OperationsYear ended December 31, 2005In thousands**

| ** **                                                                                   | ** ** | **Parent** | ** ** | **Guarantor  Companies** | ** ** | **Non-Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|----------------------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| Revenue                                                                                      |       | $          | 1,164,835  |                     |       | $                            | 307,748    |             |       |             | $          | 1,173 |   |   |   | $ | (3,668 | ) |   |   | $ | 1,470,088 |   |   |
| Operating expenses:                                                                          |       |       |       |                     |       |                         |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Costs of  production                                                                         |       | 917,296    |       |                     | 226,569    |                         |       |             | 385        |             |       |   | (3,668 | ) |   |   | 1,140,582 |   |   |
| Selling, general  and administrative                                                         |       | 116,132    |       |                     | 33,231     |                         |       |             | 32         |             |       |   |   |   |   |   | 149,395 |   |   |
| Restructuring  charges                                                                       |       | 13,317     |       |                     | 3,802      |                         |       |             |       |             |       |   |   |   |   |   | 17,119 |   |   |
| Depreciation and  amortization of intangibles                                           |       | 49,383     |       |                     | 13,423     |                         |       |             | 23         |             |       |   |   |   |   |   | 62,829 |   |   |
|                                                                                         |       | 1,096,128  |       |                     | 277,025    |                         |       |             | 440        |             |       |   | (3,668 | ) |   |   | 1,369,925 |   |   |
| Operating income                                                                             |       | 68,707     |       |                     | 30,723     |                         |       |             | 733        |             |       |   |   |   |   |   | 100,163 |   |   |
| Other expenses (income):                                                                     |       |       |       |                     |       |                         |       |             |       |             |       |   |   |   |   |   |   |   |   |
| Interest expense,  net                                                                       |       | 128,807    |       |                     | 15         |                         |       |             | (1         | )                |       |   |   |   |   |   | 128,821 |   |   |
| Other, net                                                                                   |       | 7,653      |       |                     |       |                         |       |             |       |             |       |   |   |   |   |   | 7,653 |   |   |
|                                                                                         |       | 136,460    |       |                     | 15         |                         |       |             | (1         | )                |       |   |   |   |   |   | 136,474 |   |   |
| Equity in net loss of subsidiaries                                                           |       | (112,235   | )          |                     | (96,292    | )                            |       |             |       |             |       |   | 208,527 |   |   |   |   |   |   |
| (Loss) income before income taxes                                                            |       | (179,988   | )          |                     | (65,584    | )                            |       |             | 734        |             |       |   | 208,527 |   |   |   | (36,311 | ) |   |
| Income tax  (benefit) expense                                                                |       | (8,358     | )          |                     | 34         |                         |       |             | 254        |             |       |   |   |   |   |   | (8,070 | ) |   |
| (Loss) income from continuing operations before  cumulative effect of accounting change |       | (171,630   | )          |                     | (65,618    | )                            |       |             | 480        |             |       |   | 208,527 |   |   |   | (28,241 | ) |   |
| Income (loss) from discontinued operations                                                   |       |       |       |                     | 5,256      |                         |       |             | (148,645   | )                |       |   |   |   |   |   | (143,389 | ) |   |
| Cumulative effect  of accounting change                                                      |       | (1,600     | )          |                     |       |                         |       |             |       |             |       |   |   |   |   |   | (1,600 | ) |   |
| Net (loss) income                                                                            |       | $          | (173,230   | )                        |       | $                            | (60,362    | )                |       |             | $          | (148,165 | ) |   |   | $ | 208,527 |   |   |   | $ | (173,230 | ) |   |

 

F-37

----

**Condensed Consolidating Statement of OperationsYear ended December 31, 2004**In thousands

| ** **                                        | ** ** | **Parent** | ** ** | **Guarantor  Companies** | ** ** | **Non-Guarantor  Companies** | ** ** | **Eliminations** | ** ** | **Consolidated** | ** ** |
|---------------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|------------------|------------|
| Revenue                                           |       | $          | 1,160,433  |                     |       | $                            | 316,139    |             |       |             | $          | 1,118 |   |   |   | $ | (3,331 | ) |   |   | $ | 1,474,359 |   |   |   |
| Operating  expenses:                              |       |       |       |                     |       |                         |       |             |       |             |       |   |   |   |   |   |   |   |   |   |
| Costs of production                               |       | 905,535    |       |                     | 234,643    |                         |       |             | 369        |             |       |   | (3,331 | ) |   |   | 1,137,216 |   |   |   |
| Selling, general and administrative               |       | 123,120    |       |                     | 34,502     |                         |       |             | 72         |             |       |   |   |   |   |   | 157,694 |   |   |   |
| Restructuring charges                             |       | 3,903      |       |                     | 598        |                         |       |             |       |             |       |   |   |   |   |   | 4,501 |   |   |   |
| Depreciation and amortization of intangibles |       | 49,278     |       |                     | 16,002     |                         |       |             | 150        |             |       |   |   |   |   |   | 65,430 |   |   |   |
|                                              |       | 1,081,836  |       |                     | 285,745    |                         |       |             | 591        |             |       |   | (3,331 | ) |   |   | 1,364,841 |   |   |   |
| Operating income                                  |       | 78,597     |       |                     | 30,394     |                         |       |             | 527        |             |       |   |   |   |   |   | 109,518 |   |   |   |
| Other expenses  (income):                         |       |       |       |                     |       |                         |       |             |       |             |       |   |   |   |   |   |   |   |   |   |
| Interest expense, net                             |       | 132,799    |       |                     | 10         |                         |       |             |       |             |       |   |   |   |   |   | 132,809 |   |   |   |
| Other, net                                        |       | 4,672      |       |                     | 24         |                         |       |             | 42,989     |             |       |   |   |   |   |   | 47,685 |   |   |   |
|                                              |       | 137,471    |       |                     | 34         |                         |       |             | 42,989     |             |       |   |   |   |   |   | 180,494 |   |   |   |
| Equity in net income  (loss) of subsidiaries      |       | (18,492    | )          |                     | (7,063     | )                            |       |             |       |             |       |   | 25,555 |   |   |   |   |   |   |   |
| (Loss) income before  income taxes                |       | (77,366    | )          |                     | 23,297     |                         |       |             | (42,462    | )                |       |   | 25,555 |   |   |   | (70,976 | ) |   |   |
| Income tax (benefit) expense                      |       | (66,233    | )          |                     | (11        | )                            |       |             | 191        |             |       |   |   |   |   |   | (66,053 | ) |   |   |
| (Loss) income from  continuing operations         |       | (11,133    | )          |                     | 23,308     |                         |       |             | (42,653    | )                |       |   | 25,555 |   |   |   | (4,923 | ) |   |   |
| Income (loss) from discontinued operations        |       |       |       |                     | 3,766      |                         |       |             | (9,976     | )                |       |   |   |   |   |   | (6,210 | ) |   |   |
| Net (loss) income                                 |       | $          | (11,133    | )                        |       | $                            | 27,074     |             |       |             | $          | (52,629 | ) |   |   | $ | 25,555 |   |   |   | $ | (11,133 | ) |   |   |
|                                                   |            |            |            |                          |            |                              |            |                  |            |                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-38

----

**Condensed ConsolidatingStatement of Cash FlowsTwelve months ended December 31, 2006**In thousands

| ** **                                                                 | ** ** | ** ** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** |
|----------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                                                 | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** **       | ** ** |
| ** **                                                                 | ** ** | **Parent** | ** ** | **Companies** | ** ** | **Companies** | ** ** | **Consolidated** | ** ** |
| **Cash  Flows from Operating Activities**                                  |       | $          | (24,311    | )             |       | $             | 36,608     |             |       |   | $ | (607 | ) |   |   | $ | 11,690 |   |   |
| **Cash Flows from Investing  Activities:**                                 | ** ** | ** ** | ** ** |          |       |          |       |             |       |   |   |   |   |   |   |
| Capital  expenditures                                                      |       | (36,476    | )          |          | (10,376    | )             |       |             | (84        | ) |   |   | (46,936 | ) |   |
| Software  development costs capitalized                                    |       | (2,049     | )          |          |       |          |       |             |       |   |   |   | (2,049 | ) |   |
| Proceeds from  sale of property, plant and equipment                       |       | 776        |       |          | 9          |          |       |             |       |   |   |   | 785 |   |   |
| Proceeds from  sale of subsidiaries, net                                   |       |       |       |          | 41,071     |          |       |             |       |   |   |   | 41,071 |   |   |
| Acquisition of  business, net of cash acquired                             |       |       |       |          | (21,017    | )             |       |             |       |   |   |   | (21,017 | ) |   |
| Net cash (used  in) provided by investing activities                       |       | (37,749    | )          |          | 9,687      |          |       |             | (84        | ) |   |   | (28,146 | ) |   |
| **Cash Flows from Financing  Activities:**                                 | ** ** | ** ** | ** ** |          |       |          |       |             |       |   |   |   |   |   |   |
| Net borrowings  under revolving credit facilities                          |       | 41,470     |       |          |       |          |       |             |       |   |   |   | 41,470 |   |   |
| Repayments of  long-term debt                                              |       |       |       |          | (34        | )             |       |             |       |   |   |   | (34 | ) |   |
| Deferred  financing costs                                                  |       | (388       | )          |          |       |          |       |             |       |   |   |   | (388 | ) |   |
| Decrease in  outstanding checks drawn on controlled  disbursement accounts |       | (20,488    | )          |          | (1,319     | )             |       |             |       |   |   |   | (21,807 | ) |   |
| Other financing  activities                                                |       | 41,716     |       |          | (41,042    | )             |       |             | 392        |   |   |   | 1,066 |   |   |
| Net cash provided  by (used in) financing activities                       |       | 62,310     |       |          | (42,395    | )             |       |             | 392        |   |   |   | 20,307 |   |   |
| Effect of  exchange rate changes on cash                                   |       |       |       |          |       |          |       |             | 31         |   |   |   | 31 |   |   |
| Net increase  (decrease) in cash and cash equivalents                      |       | 250        |       |          | 3,900      |          |       |             | (268       | ) |   |   | 3,882 |   |   |
| Cash and cash  equivalents at beginning of year                            |       | 304        |       |          | 101        |          |       |             | 1,423      |   |   |   | 1,828 |   |   |
| Cash and cash  equivalents at end of period                                |       | $          | 554        |          |       | $             | 4,001      |             |       |   | $ | 1,155 |   |   |   | $ | 5,710 |   |   |

 

F-39

----

**Condensed ConsolidatingStatement of Cash FlowsTwelve months ended December 31, 2005In thousands**

| ** **                                                                | ** ** | ** ** | ** ** | ** **    | ** ** | **Non-**      | ** ** | ** **       | ** ** |
|---------------------------------------------------------------------------|------------|------------|------------|---------------|------------|---------------|------------|------------------|------------|
| ** **                                                                | ** ** | ** ** | ** ** | **Guarantor** | ** ** | **Guarantor** | ** ** | ** **       | ** ** |
| ** **                                                                | ** ** | **Parent** | ** ** | **Companies** | ** ** | **Companies** | ** ** | **Consolidated** | ** ** |
| **Cash  Flows from Operating Activities**                                 |       | $          | (36,842    | )             |       | $             | 48,437     |             |       |   | $ | (5,902 | ) |   |   | $ | 5,693 |   |   |
| **Cash Flows from Investing  Activities:**                                | ** ** | ** ** | ** ** |          |       |          |       |             |       |   |   |   |   |   |   |
| Capital  expenditures                                                     |       | (36,238    | )          |          | (3,927     | )             |       |             |       |   |   |   | (40,165 | ) |   |
| Software  development costs capitalized                                   |       | (2,032     | )          |          |       |          |       |             |       |   |   |   | (2,032 | ) |   |
| Proceeds from  sale of property, plant and equipment and divested assets  |       | 794        |       |          | 227        |          |       |             |       |   |   |   | 1,021 |   |   |
| Proceeds from  sale of subsidiaries, net                                  |       | 2,361      |       |          |       |          |       |             |       |   |   |   | 2,361 |   |   |
| Acquisition of  business, net of cash acquired                            |       | (3,430     | )          |          |       |          |       |             |       |   |   |   | (3,430 | ) |   |
| Other investing  activities                                               |       |       |       |          | (3         | )             |       |             | (1,517     | ) |   |   | (1,520 | ) |   |
| Net cash used in  investing activities                                    |       | (38,545    | )          |          | (3,703     | )             |       |             | (1,517     | ) |   |   | (43,765 | ) |   |
| **Cash Flows from Financing  Activities:**                                | ** ** | ** ** | ** ** |          |       |          |       |             |       |   |   |   |   |   |   |
| Net borrowings  under revolving credit facilities                         |       | 21,197     |       |          |       |          |       |             |       |   |   |   | 21,197 |   |   |
| Repayments of  long-term debt                                             |       | (6         | )          |          |       |          |       |             |       |   |   |   | (6 | ) |   |
| Deferred  financing costs                                                 |       | (1,204     | )          |          |       |          |       |             |       |   |   |   | (1,204 | ) |   |
| Increase in  outstanding checks drawn on controlled disbursement accounts |       | 14,349     |       |          | 681        |          |       |             |       |   |   |   | 15,030 |   |   |
| Other financing  activities                                               |       | 41,058     |       |          | (45,347    | )             |       |             | 8,604      |   |   |   | 4,315 |   |   |
| Net cash provided  by (used in) financing activities                      |       | 75,394     |       |          | (44,666    | )             |       |             | 8,604      |   |   |   | 39,332 |   |   |
| Effect of  exchange rate changes on cash                                  |       |       |       |          |       |          |       |             | (2,070     | ) |   |   | (2,070 | ) |   |
| Net increase  (decrease) in cash and cash equivalents                     |       | 7          |       |          | 68         |          |       |             | (885       | ) |   |   | (810 | ) |   |
| Cash and cash  equivalents at beginning of year                           |       | 297        |       |          | 33         |          |       |             | 2,308      |   |   |   | 2,638 |   |   |
| Cash and cash  equivalents at end of period                               |       | $          | 304        |          |       | $             | 101        |             |       |   | $ | 1,423 |   |   |   | $ | 1,828 |   |   |

 

F-40

----

**Condensed Consolidating Statement of Cash FlowsYear ended December 31, 2004In thousands**

| ** **                                                                    | ** ** | **Parent** | ** ** | **Guarantor  Companies** | ** ** | **Non-Guarantor  Companies** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------------------------------------|------------|------------|------------|--------------------------|------------|------------------------------|------------|------------------|------------|
| **Cash  Flows from Operating Activities**                                     |       | $          | 36,657     |                     |       | $                            | 25,008     |             |       |   | $ | (14,120 | ) |   |   | $ | 47,545 |   |   |
| **Cash Flows from Investing  Activities:**                                    |       |       |       |                     |       |                         |       |             |       |   |   |   |   |   |   |
| Capital  expenditures                                                         |       | (36,739    | )          |                     | (6,992     | )                            |       |             |       |   |   |   | (43,731 | ) |   |
| Software  development costs capitalized                                       |       | (1,905     | )          |                     |       |                         |       |             |       |   |   |   | (1,905 | ) |   |
| Proceeds from  sale of property, plant and equipment and divested assets |       | 763        |       |                     | 45         |                         |       |             |       |   |   |   | 808 |   |   |
| Proceeds from  termination of leasehold interest                              |       |       |       |                     |       |                         |       |             | 31,068     |   |   |   | 31,068 |   |   |
| Other investing  activities                                                   |       |       |       |                     |       |                         |       |             | (5,232     | ) |   |   | (5,232 | ) |   |
| Net cash (used  in) provided by investing activities                          |       | (37,881    | )          |                     | (6,947     | )                            |       |             | 25,836     |   |   |   | (18,992 | ) |   |
| **Cash Flows from Financing  Activities:**                                    |       |       |       |                     |       |                         |       |             |       |   |   |   |   |   |   |
| Net repayments  under revolving credit facilities                             |       | (57,343    | )          |                     |       |                         |       |             |       |   |   |   | (57,343 | ) |   |
| Repayments of  long-term debt                                                 |       | (72        | )          |                     | (2         | )                            |       |             |       |   |   |   | (74 | ) |   |
| Deferred  financing costs                                                     |       | (5,605     | )          |                     |       |                         |       |             |       |   |   |   | (5,605 | ) |   |
| Increase in  outstanding checks drawn on controlled disbursement accounts     |       | 12,187     |       |                     | 1,789      |                         |       |             |       |   |   |   | 13,976 |   |   |
| Other financing  activities                                                   |       | 51,965     |       |                     | (19,923    | )                            |       |             | (12,604    | ) |   |   | 19,438 |   |   |
| Net cash provided  by (used in) financing activities                          |       | 1,132      |       |                     | (18,136    | )                            |       |             | (12,604    | ) |   |   | (29,608 | ) |   |
| Effect of  exchange rate changes on cash                                      |       |       |       |                     |       |                         |       |             | 1,610      |   |   |   | 1,610 |   |   |
| Net (decrease)  increase in cash and cash equivalents                         |       | (92        | )          |                     | (75        | )                            |       |             | 722        |   |   |   | 555 |   |   |
| Cash and cash  equivalents at beginning of year                               |       | 389        |       |                     | 108        |                         |       |             | 1,586      |   |   |   | 2,083 |   |   |
| Cash and cash  equivalents at end of year                                     |       | $          | 297        |                     |       | $                            | 33         |             |       |   | $ | 2,308 |   |   |   | $ | 2,638 |   |   |

 

F-41

----

**23.**          COMMITMENTSAND CONTINGENCIES

Certain claims, suits and allegations that arise inthe ordinary course of business and certain environmental claims have beenfiled or are pending against the Company. Management believes that all suchmatters in the aggregate would not have a material effect on the Company’sconsolidated financial statements.

* * * * *

F-42

----

**VERTIS, INC. AND SUBSIDIARIESSCHEDULE II—VALUATION AND QUALIFYING ACCOUNTSIn thousands**

| ** **                            | ** ** | **Balance at** | ** ** | **Charges (Credits)** | ** ** | **Write offs** | ** ** | **Balance**      | ** ** |
|---------------------------------------|------------|---------------------|------------|----------------------------|------------|---------------------|------------|------------------|------------|
| ** **                            | ** ** | **Beginning**       | ** ** | **to Costs and** | ** ** | **Net of**     | ** ** | **at End**  | ** ** |
| ** **                            | ** ** | **of Year**    | ** ** | **Expenses**               | ** ** | **Recoveries**      | ** ** | **of Year** | ** ** |
| **Allowance for Doubtful Accounts**   | ** ** | ** **          | ** ** |                       | ** ** | ** **          |       |             | ** ** | ** ** |   | ** ** | ** ** |
| Year ended  December 31, 2006    |       | $                   | 1,494      |                       |       | $                   | 942        |             |       |   | $  | 423 | (1) |   | $ | 2,859 |   |
| Year ended  December 31, 2005    |       | 3,320               |       |                       | 1,544      |                |       |             | (3,370     | ) |   | 1,494 |   |
| Year ended  December 31, 2004    |       | 3,862               |       |                       | 670        |                |       |             | (1,212     | ) |   | 3,320 |   |
| **Deferred Tax Valuation  Allowance** | ** ** | ** **          | ** ** |                       | ** ** | ** **          |       |             | ** ** | ** ** |   | ** ** | ** ** |
| Year ended  December 31, 2006    |       | $                   | 132,531    |                       |       | $                   | (3,294     | )                |       |   |   |   |   | $ | 129,237 |   |
| Year ended  December 31, 2005    |       | 40,490              |       |                       | 92,041     |                |       |             |       |   |   | 132,531 |   |
| Year ended  December 31, 2004    |       | 74,393              |       |                       | (33,903    | )                   |       |             |       |   |   | 40,490 |   |
|                                       |            |                     |            |                            |            |                     |            |                  |            |  |  |  |  |  |  |  |  |

----

(1) In 2006,recoveries of accounts receivable previously written off were greater than theamount of accounts receivable written off.

F-43

----