<PAGE>
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, DC 20549

                                    FORM 10-Q

         (Mark One)

         [X] Quarterly report under Section 13 or 15(d) of the Securities
             Exchange Act of 1934

         For the quarterly period ended October 31, 2005

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

         For the transition period from _________ to _________

COMMISSION FILE NUMBER   1-13437
                      ----------------------

                        SOURCE INTERLINK COMPANIES, INC.
             (Exact Name of Registrant as Specified in Its Charter)

              DELAWARE                                       20-2428299
------------------------------------------------------------------------------
    (State or Other Jurisdiction of                       (I.R.S. Employer
    Incorporation or Organization)                        Identification No.)

 27500 RIVERVIEW CENTER BLVD., SUITE 400
 BONITA SPRINGS, FLORIDA                                        34134
--------------------------------------------------       ---------------------
   (Address of Principal Executive Offices)                       (Zip Code)

                                 (239) 949-4450
----------------------------------------------------------------------------
              (Registrant's Telephone Number, Including Area Code)


--------------------------------------------------------------------------------
              (Former Name, Former Address and Former Fiscal Year,
                          if Changed Since Last Report)

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

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

         Indicate by check mark whether the registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).     Yes    [  ]    No    [X]

Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.

<TABLE>
<CAPTION>
              Class                         Outstanding on  December 6 , 2005
              -----                         ---------------------------------
<S>                                         <C>
    Common Stock, $.01 Par Value                     51,412,311
</TABLE>


<PAGE>
                                      INDEX

                         PART I - FINANCIAL INFORMATION

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----
<S>        <C>                                                             <C>
ITEM  1.   FINANCIAL STATEMENTS

           Consolidated Balance Sheets as of
           October 31, 2005 and January 31, 2005                              1

           Consolidated Statements of Income for the three
           and nine months ended October 31, 2005 and 2004                    3

           Consolidated Statement of Stockholders'
           Equity for the nine months ended October 31, 2005                  4

           Consolidated Statements of Cash Flows for the
           nine months ended October 31, 2005 and 2004                        5

           Notes to Consolidated Financial Statements                      6-16

ITEM  2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
           AND RESULTS OF OPERATIONS                                         17

ITEM  3.   QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK         34

ITEM  4.    CONTROLS AND PROCEDURES                                          34


                        PART II - OTHER INFORMATION

ITEM  1.   LEGAL PROCEEDINGS                                                 35

ITEM  1A.  RISK FACTORS                                                      35

ITEM  2.   UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS       36

ITEM  3.   DEFAULTS UPON SENIOR SECURITIES                                   36

ITEM  4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS               36

ITEM  5.   OTHER INFORMATION                                                 36

ITEM  6.   EXHIBITS                                                          36
</TABLE>

<PAGE>

                                                SOURCE INTERLINK COMPANIES, INC.


                                                     CONSOLIDATED BALANCE SHEETS
                                                                  (in thousands)

<TABLE>
<CAPTION>
                                                              (unaudited)
                                                            October 31, 2005    January 31, 2005
-------------------------------------------------------------------------------------------------
<S>                                                        <C>                  <C>
ASSETS
CURRENT ASSETS
      Cash                                                 $            3,316   $           1,387
      Trade receivables, net                                          177,112              48,078
      Purchased claims receivable                                       4,999               2,006
      Inventories                                                     222,854              16,868
      Income tax receivable                                                 -               2,275
      Deferred tax asset                                               11,202               2,302
      Prepaid expenses and other                                        6,928               3,349
-------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS                                                  426,411              76,265
-------------------------------------------------------------------------------------------------


Property and equipment                                                 89,437              36,706
Less accumulated depreciation and amortization                        (21,092)            (14,375)
-------------------------------------------------------------------------------------------------
       Net property and equipment                                      68,345              22,331
-------------------------------------------------------------------------------------------------

OTHER ASSETS
      Goodwill, net                                                   187,401              71,600
      Intangibles, net                                                244,156              16,126
      Deferred tax asset                                                5,201               2,903
      Other                                                             8,363               8,528
-------------------------------------------------------------------------------------------------
TOTAL OTHER ASSETS                                                    445,121              99,157
-------------------------------------------------------------------------------------------------
                                                           $          939,877   $         197,753
=================================================================================================
</TABLE>



                                        1              See accompanying notes to
                                               Consolidated Financial Statements

<PAGE>
                                                     CONSOLIDATED BALANCE SHEETS
                                                (in thousands, except par value)

<TABLE>
<CAPTION>
                                                                                         (unaudited)
                                                                                      October 31, 2005    January 31, 2005
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                      <C>               <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
     Checks issued against future advances on revolving credit facility                  $        12,533   $           1,951
     Accounts payable and accrued expenses, net of allowances for returns
     of $139,063 and $70,292, respectively                                                       338,025              25,274
     Deferred revenue                                                                              2,517               2,205
     Income tax payable and other                                                                  4,425                  19
     Current maturities of long-term debt                                                          6,456               5,630
     Current portion of obligations under capital leases                                             247                   -
----------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES                                                                        364,203              35,079
Long-term debt, less current maturities                                                          114,199              34,139
Obligations under capital leases                                                                     158                   -
Other                                                                                              7,220                 852
----------------------------------------------------------------------------------------------------------------------------

TOTAL LIABILITIES                                                                                485,780              70,070
----------------------------------------------------------------------------------------------------------------------------

COMMITMENTS AND CONTINGENCIES (NOTE 7)

STOCKHOLDERS' EQUITY
Contributed Capital:
     Common Stock, $.01 par; 100,000 and 40,000 shares authorized,
     respectively; 51,312 and 23,849 shares issued, respectively                                     513                 238
     Additional paid-in-capital                                                                  464,915             150,269
----------------------------------------------------------------------------------------------------------------------------
     Total contributed capital                                                                   465,428             150,507
Accumulated deficit                                                                              (13,312)            (23,696)
Accumulated other comprehensive income:
    Foreign currency translation                                                                   1,981               1,439
----------------------------------------------------------------------------------------------------------------------------
                                                                                                 454,097             128,250

Less:  Treasury Stock (100 shares at cost)                                                             -                (567)
----------------------------------------------------------------------------------------------------------------------------

TOTAL STOCKHOLDERS' EQUITY                                                                       454,097             127,683
----------------------------------------------------------------------------------------------------------------------------
                                                                                        $        939,877   $         197,753
============================================================================================================================
</TABLE>


                                       2               See accompanying notes to
                                               Consolidated Financial Statements
<PAGE>



                                                SOURCE INTERLINK COMPANIES, INC.

                                               CONSOLIDATED STATEMENTS OF INCOME
                                                                     (unaudited)
                                           (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                      Three months ended October 31,       Nine months ended October 31,
                                                           2005             2004            2005             2004
-----------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>             <C>               <C>            <C>

Revenues                                               $       425,859  $       90,753   $   1,054,070  $       259,792
Cost of revenues                                               339,765          65,044         838,442          188,328
-----------------------------------------------------------------------------------------------------------------------
Gross profit                                                    86,094          25,709         215,628           71,464
Selling, general and administrative expenses                    48,355          13,101         125,001           37,129
Fulfillment freight                                             20,151           5,611          48,841           15,244
Depreciation and amortization                                    4,926           1,005          12,271            2,630
Relocation charges                                                   -               -               -            1,552
Merger and acquisition charges                                       -               -           3,094                -
-----------------------------------------------------------------------------------------------------------------------
Operating income                                                12,662           5,992          26,421           14,909
-----------------------------------------------------------------------------------------------------------------------
Other income (expense)
      Interest expense                                          (1,964)           (333)         (4,642)            (993)
      Interest income                                               68              34             158              140
      Write off of deferred financing costs and
      original issue discount                                        -               -               -           (1,494)
          Other income                                              84             135             233              175
-----------------------------------------------------------------------------------------------------------------------
Total other expense                                             (1,812)           (164)         (4,251)          (2,172)
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before income
taxes and discontinued operation                                10,850           5,828          22,170           12,737
Income tax expense                                               4,767           1,799          10,340            4,012
-----------------------------------------------------------------------------------------------------------------------
Income from continuing operations before
discontinued operation                                           6,083           4,029          11,830            8,725
Income (loss) from discontinued operation, net of
tax                                                                  -             349          (1,446)             288
-----------------------------------------------------------------------------------------------------------------------
Net income                                             $         6,083  $        4,378   $      10,384  $         9,013
-----------------------------------------------------------------------------------------------------------------------

Earnings (loss) per share - basic
          Continuing operations                        $          0.12  $         0.17   $        0.24  $          0.39
          Discontinued operation                                     -            0.02           (0.03)            0.01
-----------------------------------------------------------------------------------------------------------------------
Total                                                  $          0.12  $         0.19   $        0.21  $          0.40
-----------------------------------------------------------------------------------------------------------------------

Earnings (loss) per share - diluted
          Continuing operations                        $          0.11  $         0.16   $        0.24  $          0.36
          Discontinued operation                                     -            0.02           (0.03)            0.01
-----------------------------------------------------------------------------------------------------------------------
Total                                                  $          0.11  $         0.18   $        0.21  $          0.37
-----------------------------------------------------------------------------------------------------------------------

Weighted average of shares outstanding - basic                  51,305          23,374          48,318           22,727
Weighted average of shares outstanding - diluted                53,012          24,924          50,188           24,606
=======================================================================================================================
</TABLE>





                                       3               See accompanying notes to
                                               Consolidated Financial Statements

<PAGE>
                                                SOURCE INTERLINK COMPANIES, INC.

                                  CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

                                                                     (unaudited)
                                                                  (in thousands)

<TABLE>
<CAPTION>



                                 Common Stock                              Accumulated      Treasury Stock
                               ---------------  Additional                    Other       -----------------          Total
                                                 Paid - in   Accumulated  Comprehensive                          Stockholders'
                               Shares   Amount    Capital      Deficit       Income       Shares     Amount         Equity
-----------------------------------------------------------------------------------------------------------------------------

<S>                            <C>     <C>     <C>          <C>           <C>               <C>     <C>       <C>
Balance January 31, 2005       23,849  $  238  $  150,269   $ (23,696)    $ 1,439           100     $ (567)   $     127,683

Net income                          -       -           -      10,384         -              -          -            10,384
Foreign currency translation        -       -           -        -            542            -          -               542

                                                                                                                 -------------
Comprehensive income                                             -                                                   10,926
                                                                                                                 -------------
Exercise of stock options         621       7       3,149        -            -              -          -             3,156
Tax benefit from stock
options exercised                   -       -       1,118        -            -              -          -             1,118
Stock issued in Alliance
acquisition                    26,942     269     304,445        -            -              -          -           304,714
Exchange of stock options and
warrants to acquire Alliance
common stock                        -       -       6,500        -            -              -          -             6,500
Retirement of treasury stock     (100)     (1)       (566)       -            -            (100)       567                -
-----------------------------------------------------------------------------------------------------------------------------


Balance October 31, 2005       51,312  $  513  $  464,915  $  (13,312)    $ 1,981            -      $   -     $     454,097
=============================================================================================================================
</TABLE>



                                       4               See accompanying notes to
                                               Consolidated Financial Statements

<PAGE>



                                                SOURCE INTERLINK COMPANIES, INC.

                                           CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                                     (unaudited)
                                                                  (in thousands)

<TABLE>
<CAPTION>
Nine months ended October 31,                                                                 2005               2004
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                                                       <C>               <C>

OPERATING ACTIVITIES
     Net income                                                                           $        10,384   $          9,013
     Adjustments to reconcile net income to net cash used in operating
     activities:
        Depreciation and amortization                                                              13,195              3,639
        Amortization of deferred loan costs included in interest expense                              466                379
        Provision for losses on accounts receivable                                                 2,792                593
        Deferred income taxes                                                                           -               (234)
        Tax benefit from stock options exercised                                                    1,118              1,516
        Deferred revenue                                                                              288                 58
        Write off of deferred financing costs and original issue discount                               -              1,494
        Other                                                                                         217                208
        Changes in assets and liabilities (excluding business acquisitions):
            Increase in accounts receivable                                                       (81,150)           (24,751)
            (Increase) decrease in inventories                                                    (65,995)             3,364
            Decrease (increase) in prepaid expenses and other assets                                7,944               (894)
            Increase (decrease) in accounts payable and other liabilities                          97,296            (14,254)
----------------------------------------------------------------------------------------------------------------------------
CASH USED IN OPERATING ACTIVITIES                                                                 (13,445)           (19,869)
----------------------------------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES
     Capital expenditures                                                                          (8,979)            (4,069)
     Purchase of claims                                                                           (77,411)           (66,592)
     Payments received on purchased claims                                                         74,418             69,227
     Collections under magazine export agreement                                                        -              5,306
     Payments under magazine import agreement                                                           -             (1,500)
     Acquisition of claim filing contracts                                                              -            (12,915)
     Acquisition of net assets of wholesale magazine distributor                                        -             (3,342)
     Net cash from Alliance Entertainment Corp. acquisition                                        16,878                  -
     Acquisition of distribution rights                                                            (2,300)                 -
     Proceeds from sale of fixed assets                                                             1,547                  -
     Acquisition of Chas. Levy Circulating Company LLC, net of cash acquired                      (44,991)                 -
     Other                                                                                              -               (401)
----------------------------------------------------------------------------------------------------------------------------
CASH USED IN INVESTING ACTIVITIES                                                                 (40,838)           (14,286)
----------------------------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
     Decrease in checks issued against revolving credit facilities                                   (995)           (11,178)
     Net borrowings under credit facilities                                                        56,646              8,961
     Proceeds from the issuance of notes payable                                                   20,000             10,000
     Payments on debt and capital leases                                                          (21,518)           (22,419)
     Net proceeds from the issuance of common stock                                                 3,155             45,412
     Deferred financing costs                                                                      (1,076)                 -
----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES                                                              56,212             30,776
----------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH                                                                         1,929             (3,379)
CASH, beginning of period                                                                           1,387              4,963
----------------------------------------------------------------------------------------------------------------------------
CASH, end of period                                                                       $         3,316   $          1,584
============================================================================================================================
</TABLE>



                                       5               See accompanying notes to
                                               Consolidated Financial Statements

<PAGE>

BASIS OF PRESENTATION


The consolidated financial statements included herein have been prepared by
Source Interlink Companies, Inc. (the Company), without audit, pursuant to the
rules and regulations of the Securities and Exchange Commission. In the opinion
of the Company's management, all adjustments (consisting only of normal
recurring adjustments and reclassifications) necessary to present fairly our
results of operations for the three and nine months ended October 31, 2005 and
October 31, 2004, our financial position as of October 31, 2005, and cash flows
for the nine months ended October 31, 2005 and 2004, respectively. The results
of operations for such interim periods are not necessarily indicative of the
operating results to be expected for the full year.

Certain information and disclosures normally included in the notes to the annual
consolidated financial statements have been condensed or omitted from these
interim consolidated financial statements. Accordingly, these interim
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our Annual
Report on Form 10-K (the "Annual Report") for the fiscal year ended January 31,
2005, as filed with the Securities and Exchange Commission ("SEC") on April 18,
2005.

Certain reclassifications have been made to conform to the current period
presentation. These reclassifications had no effect on the results of operations
or stockholders' equity.


1.       BUSINESS COMBINATIONS

CHAS. LEVY CIRCULATING COMPANY LLC ACQUISITION

On May 10, 2005, the Company and Chas. Levy Company LLC ("Seller") entered into
a Unit Purchase Agreement (the "Purchase Agreement"). Under the terms of the
Purchase Agreement, the Company purchased all of the issued and outstanding
membership interests in Chas. Levy Circulating Co. LLC ("Levy") from Seller for
a purchase price of approximately $30 million, subject to adjustment based on
Levy's net worth as of the closing date of the transaction. Seller was the sole
member of Levy. In addition, approximately $19.3 million was also provided on
the date of acquisition to Seller to repay all outstanding intercompany debt of
Levy. The purchase price and the intercompany debt repayment were funded from
the revolving line of credit.

On May 10, 2005, as contemplated by the terms of the Purchase Agreement, the
Company and Levy Home Entertainment LLC ("LHE") entered into a Distribution and
Supply Agreement (the "Distribution Agreement"). Under the terms of the
Distribution Agreement, LHE appointed the Company as its sole and exclusive
subdistributor of book products to all supermarkets (excluding supermarkets
combined with general merchandise stores), drug stores, convenience stores,
newsstands and terminals within the geographic territory in which the Registrant
currently distributes DVDs, CDs and/or magazines. The initial term of the
Distribution Agreement begins on May 10, 2005 and expires on June 30, 2015. The
parties may renew the agreement thereafter for successive one year periods.

The total cost of the acquisition was allocated to the assets acquired and
liabilities assumed based on their respective fair values in accordance with FAS
141, Business Combinations. Goodwill and other intangible assets, which is
deductible for tax purposes, recorded in connection with the transaction totaled
$64.1 million and $20.0 million, respectively. These amounts will be tested at
least annually for impairment in accordance with FAS No. 142, Goodwill and Other
Intangible Assets.

The assets acquired and liabilities assumed in the acquisition were recorded in
the quarter ended July 31, 2005. The acquisition was accounted for by the
purchase method and, accordingly, the results of Levy's operations have been
included in our consolidated statements of income since May 10, 2005. The pro
forma operating results as if the Company had completed the acquisition at the
beginning of the periods presented are not significant to the Company's
consolidated financial statements and are not presented.

                                       6

<PAGE>



The assets acquired and liabilities assumed in the acquisition are summarized
below (in thousands):

<Table>
<Caption>

                  --------------------------------------------------------------
<S>                                                       <C>
                  Cash                                    $               4,276
                  Trade receivables, net                                  2,869
                  Inventories                                            37,557
                  Property and equipment                                  1,524
                  Goodwill                                               64,964
                  Intangible assets                                      20,000
                  Other assets                                            2,385

                  Accounts payable and accrued
                  liabilities                                           (68,903)
                  Long-term debt                                        (13,969)
                  Other long-term liabilities                            (1,436)
                  --------------------------------------------------------------
                  Total consideration                    $               49,267
                  ==============================================================
</Table>




ALLIANCE ENTERTAINMENT CORP. ACQUISITION

On February 28, 2005, the Company completed its acquisition with Alliance
Entertainment Corp. ("Alliance") pursuant to the terms and conditions of the
Agreement and Plan of Merger Agreement dated November 18, 2004 (the
"Agreement"). Alliance provides full-service distribution of home entertainment
products. They provide product and commerce solutions to "brick-and-mortar" and
e-commerce retailers, while maintaining trading relationships with major
manufacturers in the home entertainment industry.

The purchase price of approximately $315.5 million consisted of $304.7 million
in the Company's common stock, representing approximately 26.9 million shares,
$6.5 million related to the exchange of approximately 0.9 million options to
acquire shares of common stock on exercise of outstanding stock options,
warrants and other rights to acquire Alliance common stock and direct
transaction costs of approximately $4.3 million. The value of the common stock
was determined based on the average market price of Source Interlink common
stock over the 5-day period prior to and after the announcement of the
acquisition in November 2004. The value of the stock options was determined
using the Black-Scholes option valuation model.

The total cost of the acquisition was allocated to the assets acquired and
liabilities assumed based on their respective fair values in accordance with FAS
141, Business Combinations. Goodwill and other intangible assets, none of which
is deductible for tax purposes, recorded in connection with the transaction
totaled $50.5 million and $211.5 million, respectively. These amounts will be
tested at least annually for impairment in accordance with FAS No. 142, Goodwill
and Other Intangible Assets.

The assets acquired and liabilities assumed in the acquisition were recorded in
the quarter ended April 30, 2005. The acquisition was accounted for by the
purchase method and, accordingly, the results of Alliance's operations have been
included in our consolidated statements of income since March 1, 2005.



                                       7


<PAGE>



The assets acquired and liabilities assumed in the acquisition are summarized
below (in thousands):

<Table>
<Caption>

                  --------------------------------------------------------------
<S>                                                       <C>
                  Cash                                    $               18,567
                  Trade receivables, net                                  47,806
                  Inventories                                            102,434
                  Property and equipment                                  43,696
                  Goodwill                                                50,520
                  Intangible assets                                      211,525
                  Other assets                                            17,465

                  Accounts payable and accrued
                  liabilities                                          (160,156)
                  Obligations under capital leases                         (563)
                  Long-term debt                                        (11,811)
                  Other long-term liabilities                            (4,000)
                  --------------------------------------------------------------
                  Total consideration                    $               315,483
                  ==============================================================
</Table>



The acquisition was accounted for by the purchase method and, accordingly, the
results of Alliance's operations have been included in our consolidated
statements of income since March 1, 2005. The following table summarizes pro
forma operating results as if the Company had completed the acquisition on
February 1, 2004 (in thousands, except per share data):

<Table>
<Caption>
                                                         Three months ended                 Nine months ended
                                                             October 31,                        October 31,
------------------------------------------------------------------------------------------------------------------
                                                         2005           2004               2005          2004
------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>             <C>            <C>               <C>
Revenues                                            $    425,859    $     323,280  $    1,127,264    $    926,008
Net income                                                 6,083            7,305          11,939          18,312
Earnings per share - basic
     Continuing operations                                  0.12             0.15            0.25            0.37
     Discontinued operation                                    -                -          (0.02)               -
                                                  ----------------------------------------------------------------
Total                                                       0.12             0.15            0.23            0.37
                                                  ================================================================
Earnings per share -- diluted
     Continuing operations                                  0.11             0.14            0.24            0.36
     Discontinued operation                                    -                -          (0.01)               -
                                                  ----------------------------------------------------------------
Total                                                       0.11             0.14            0.23            0.36
==================================================================================================================
</Table>


This information has been prepared for comparative purposes only and does not
purport to be indicative of the results of operations which actually would have
resulted had the acquisition occurred on February 1, 2004, nor is it indicative
of future results.

Merger charges related to the acquisition recorded as expenses by the Company
through October 31, 2005 totaled $3.1 million. These expenses represented
severance and personnel-related charges, charges to exit certain merchandiser
contracts and a success fee paid to certain Company executives. These expenses
were not capitalized as they did not represent costs that provide future
economic benefits to the Company.


                                       8


<PAGE>


2.       TRADE RECEIVABLES

Trade receivables consist of the following (in thousands):

<Table>
<Caption>
                                                             October 31, 2005          January 31, 2005
             -----------------------------------------------------------------------------------------------
<S>                                                         <C>                     <C>
             Trade receivables                              $            364,049    $               129,031
             Allowances:
                  Sales returns and other                              (166,831)                   (78,404)
                  Doubtful accounts                                     (20,106)                    (2,549)
             -----------------------------------------------------------------------------------------------
                                                                       (186,937)                   (80,953)
             -----------------------------------------------------------------------------------------------
             Net trade receivables                          $            177,112    $                48,078
             ===============================================================================================
</Table>


3.       INVENTORIES

Inventories consist of the following (in thousands):

<Table>
<Caption>
                                                                October 31, 2005     January 31, 2005
                  ------------------------------------------------------------------------------------
<S>                                                         <C>                     <C>
                  Raw materials                             $              2,534    $           2,657
                  Work-in-process                                          1,902                1,459
                  Finished goods:
                        Pre-recorded music and video                     160,123                    -
                        Magazine and book                                 55,998               11,345
                        Fixtures                                           2,297                1,407
                                                               ---------------------------------------
                  Inventories                               $            222,854    $          16,868
                  ====================================================================================
</Table>

In the event of non-sale, pre-recorded music and video, magazine and book
inventories are generally returnable to the suppliers thereof for full credit.


4.       PROPERTY AND EQUIPMENT

Property and equipment consists of the following (in thousands):

<Table>
<Caption>
                                                                            OCTOBER 31        JANUARY 31,
                                                                              2005              2005
---------------------------------------------------------------------------------------------------------
<S>                                                                        <C>               <C>
Land                                                                       $        8,218    $      870
Buildings                                                                          17,406         8,809
Leasehold improvements                                                              4,953         2,566
Machinery and equipment                                                            31,243        10,806
Vehicles                                                                              487           354
Furniture and fixtures                                                              9,843         3,855
Computers                                                                          13,862         9,446
Construction in progress                                                            3,425             -
                                                                           ------------------------------
Property and  equipment                                                    $       89,437    $   36,706
=========================================================================================================
</Table>

Depreciation expense from property and equipment was $2.5 million and $6.7
million for the three and nine months ended October 31, 2005 and $1.0 million
and $2.9 million for the three and nine months ended October 31, 2004,
respectively.



                                       9


<PAGE>



5.       GOODWILL AND INTANGIBLE ASSETS

A summary of the Company's intangible assets is as follows (in thousands):

<Table>
<Caption>
                                                                                           October 31,     January 31,
                                                                                              2005            2005
        ---------------------------------------------------------------------------------------------------------------
<S>                                                                                     <C>               <C>
        Amortized intangible assets:
           Customer lists                                                               $       106,630   $      16,025
           Non-compete agreements                                                                 2,250           1,000
           Software                                                                              16,492               -

        Unamortized intangible assets including publisher and vendor lists                      126,135               -
        ---------------------------------------------------------------------------------------------------------------
                                                                                                251,507          17,025
           Accumulated amortization                                                             (7,351)           (899)
        ---------------------------------------------------------------------------------------------------------------
        Intangibles, net                                                                $       244,156   $      16,126
        ---------------------------------------------------------------------------------------------------------------
</Table>

Amortization expense from intangible assets was $2.7 million and $6.5 million
for the three and nine months ended October 31, 2005 and $0.4 million and $0.8
million for the three and nine months ended October 31, 2004, respectively.
Amortization expense will approximate $9.2 million for each of the next five
fiscal years.

The changes in the carrying amount of goodwill for the nine months ended October
31, 2005, are as follows:

<Table>
<Caption>


                                                     Foreign currency
                            January 31,                 translation      Working capital       October 31,
                               2005       Additions     adjustments        adjustments             2005
----------------------------------------------------------------------------------------------------------------
<S>                       <C>              <C>              <C>              <C>                <C>
     Goodwill             $   71,600       116,147          260              (606)              $ 187,401
----------------------------------------------------------------------------------------------------------------
</Table>


6.       DEBT AND REVOLVING CREDIT FACILITY

       Debt consists of (in thousands):

<Table>
<Caption>
                                                                      October 31,          January 31,
                                                                          2005                 2005
         --------------------------------------------------------------------------------------------------
<S>                                                                 <C>                  <C>
         Revolving Credit facility - Wells Fargo Foothill           $          75,935    $           19,289
         Note payable - Wells Fargo Foothill                                        -                 8,766
         Note payable - Magazine import and export                              6,898                 9,879
         Notes payable -- Former owner of Empire                                  717                 1,200
         Notes payable - Arrangements with suppliers                           13,252                     -
         Mortgage loan - Wachovia Bank                                         20,000                     -
         Equipment loans - SunTrust Leasing                                     3,518                     -
         Other                                                                    335                   635
         --------------------------------------------------------------------------------------------------
         Debt                                                                 120,655                39,769
         Less current maturities                                                6,456                 5,630
         --------------------------------------------------------------------------------------------------
         Debt, less current maturities                              $         114,199    $           34,139
         ==================================================================================================
</Table>



WELLS FARGO FOOTHILL CREDIT FACILITY

On February 28, 2005, the Company modified its existing credit facility with
Wells Fargo Foothill ("WFF") as a result of its acquisition of Alliance
Entertainment Corp. The primary changes from the original line of credit were


                                       10



<PAGE>

to (1) increase the maximum allowed advances under the line of credit from $45.0
million to $250.0 million and (2) extend the maturity date from October 2009 to
October 2010. In addition, in conjunction with the modification of the existing
credit facility, the Company repaid the balance of its $10.0 million WFF term
loan. WFF, as arranger and administrative agent for each of the parties that may
become a participant in such arrangement and their successors ("Lenders") will
make revolving loans to us and our subsidiaries of up to $250.0 million
including the issuance of letters of credit. The terms and conditions of the
arrangement are governed primarily by the Amended and Restated Loan Agreement
dated February 28, 2005 by and among us, our subsidiaries, and WFF.

Outstanding borrowings bear interest at a variable annual rate equal to the
prime rate announced by Wells Fargo Bank, National Association's San Francisco
office, plus a margin of between 0.0% and 1.00% (applicable margin was 0.0% at
October 31, 2005) based upon a ratio of the Company's EBITDA to interest expense
("Interest Coverage Ratio"). At October 31, 2005 the prime rate was 6.75%. We
also have the option of selecting up to five traunches of at least $1 million
each to bear interest at LIBOR plus a margin of between 2.00% and 3.00% based
upon our Interest Coverage Ratio. The Company has four LIBOR contracts
outstanding at October 31, 2005 (expiring through December 27, 2005) and bear
interest at a weighted average rate of approximately 5.87%. To secure repayment
of the borrowings and other obligations of ours to the Lenders, we and our
subsidiaries granted a security interest in all of the personal property assets
to WFF, for the benefit of the Lenders. These loans mature on October 31, 2010.

Under the credit agreement, the Company is limited in its ability to declare
dividends or other distributions on capital stock or make payments in connection
with the purchase, redemption, retirement or acquisition of capital stock. There
are also limitations on capital expenditures and the Company is required to
maintain certain financial ratios. The Company was in compliance with these
ratios at October 31, 2005

Availability under the facility is limited by the Company's borrowing base
calculation, as defined in the agreement. The calculation resulted in excess
availability, after consideration of outstanding letters of credit, of $148.1
million at October 31, 2005.


EQUIPMENT LOANS

Through the acquisition of Alliance, the Company entered into a loan agreement
with SunTrust Leasing Corporation (the "SunTrust Loan") for the purchase of
equipment to be used at various locations. A credit line of $6.8 million was
approved under the SunTrust Loan, with repayment terms for five promissory notes
ranging from three to five years. The total principal balance of the SunTrust
Loan outstanding as of October 31, 2005 was $3.3 million.

SUPPLIER LOANS


Through the acquisition of Levy, the Company assumed four notes payable with
suppliers (the "Supplier Loans") totaling $14.0 million. The maturity dates of
the supplier notes range between March 2007 and August 2014 and bear interest at
5%. Principal repayments range from $1.0 to $2.0 million per fiscal year with
$0.8 million and $2.0 million due to be repaid in fiscal year 2006 and 2007,
respectively. The total principal balance of the supplier loans as of October
31, 2005 is $13.3 million.


MORTGAGE LOAN

The Company obtained a 10 year, $20.0 million conventional mortgage loan through
Wachovia Bank (the "Wachovia Mortgage") in October 2005. The Wachovia Mortgage
is collateralized by land and building located in Coral Springs, FL. The
Wachovia Mortgage monthly principal payments are approximately $0.08 million
beginning in October 2006 plus interest at a rate of LIBOR plus a margin of
1.60%. At the end of the 10 year term, a balloon payment in the amount of $11.1
million is due and payable.


                                       11



<PAGE>



7.       DISCONTINUED OPERATION

In November 2004, the Company sold and disposed of its secondary wholesale
distribution operation for $1.4 million, in order to focus more fully on its
domestic and export distribution. All rights owned under the secondary wholesale
distribution contracts were assigned, delivered, conveyed and transferred to the
buyer, an unrelated third party. All assets and liabilities of the secondary
wholesale distribution operation were not assumed by the buyer. The Company
recognized a gain on sale of this business of $1.4 million ($0.8 net of tax) in
the fourth quarter of fiscal year 2005. In the second quarter of fiscal 2006,
the Company wrote off certain accounts receivable totaling $1.4 million, net of
tax.

The following amounts related to the Company's discontinued operation have been
segregated from continuing operations and reflected as discontinued operations
(in thousands):

<Table>
<Caption>
                                                        Three months ended             Nine months ended
                                                            October 31,                    October 31,
-------------------------------------------------------------------------------------------------------------
                                                         2005          2004              2005        2004
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>              <C>          <C>
Revenues                                          $            -   $      5,291     $         -  $    13,380
                                                  ===========================================================
Income (loss) before taxes                                     -            582         (2,410)          480
Income tax (expense) benefit                                   -          (233)             964        (192)
                                                  ===========================================================
Income (loss) from discontinued operation,        $            -   $        349     $   (1,446)  $       288
net of tax
=============================================================================================================
</Table>



8.       EARNINGS PER SHARE

A reconciliation of the denominators of the basic and diluted earnings per share
computations are as follows (in thousands):

<Table>
<Caption>
                                                                  Three Months Ended       Nine Months Ended
                                                                      October 31,             October 31,
                                                                   2005       2004        2005         2004
       ----------------------------------------------------------------------------------------------------------
<S>                                                                 <C>         <C>         <C>           <C>
       Basic weighted average number of common shares               51,305      23,374      48,318        22,727
       outstanding

       Effect of dilutive securities:
          Stock options and warrants                                 1,707       1,550       1,870         1,879
       ----------------------------------------------------------------------------------------------------------

       Diluted weighted average number of common shares             53,012      24,924      50,188        24,606
       outstanding
       ==========================================================================================================
</Table>


For the quarter ended October 31, 2005, stock options to purchase 0.3 million
shares and warrants convertible into 0.01 million shares were excluded from the
calculation of diluted income per share because their exercise/conversion price
exceeded the average market price of the common shares during the period.


                                       12


<PAGE>

9.       SUPPLEMENTAL CASH FLOW INFORMATION

Supplemental information on interest and income taxes paid is as follows (in
thousands):

<Table>
<Caption>
       Nine Months Ended October 31,                                     2005                   2004
       -----------------------------------------------------------------------------------------------------
<S>                                                              <C>                    <C>
       Interest                                                  $             3,916    $             1,334

       Income Taxes                                              $             2,890    $             1,101

       =====================================================================================================
</Table>



On February 28, 2005, as discussed in Note 1, the Company acquired Alliance
Entertainment Corp. for the total consideration of $315.5 million as follows (in
thousands):

<Table>
<Caption>

              ------------------------------------------------------------------------------
<S>                                                                             <C>
              Fair value of common stock issued to Alliance shareholders        $   304,714
              Fair value of options to purchase common stock issued to
                Alliance shareholders                                                 6,500
              Cash paid for direct acquisition costs (of which, $1.7
                million were paid during the nine months ended October 31, 2005)      4,269
                                                                                ------------
              Total purchase price for acquisition of Alliance                     $315,483
              ==============================================================================

</Table>


The total purchase price was allocated to the assets and liabilities of Alliance
Entertainment Corp as disclosed in Note 1.

10.      STOCK-BASED COMPENSATION

FAS No. 123, "Accounting for Stock-Based Compensation" defined a fair value
method of accounting for stock options and other equity instruments. Under the
fair value method, compensation cost is measured at the grant date based on the
fair value of the award and is recognized over the service period, which is
usually the vesting period. As provided in FAS No. 123, the Company elected to
apply Accounting Principles Board ("APB") Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans. No stock
based compensation was reflected in the period ended October 31, 2005 and 2004
as all options granted in those years had an exercise price equal to or greater
than the market value of the underlying stock on the date of grant.

The following is a reconciliation of net income per weighted average share had
the Company adopted FAS No. 123 (table in thousands except per share amounts):

<Table>
<Caption>
                                                        Three Months Ended                Nine Months Ended
                                                           October 31,                       October 31,

                                                       2005            2004            2005             2004
       -------------------------------------------------------------------------------------------------------------
<S>                                               <C>              <C>            <C>             <C>
       Net income                                 $         6,083  $        4,378 $        10,384 $           9,013
       Stock compensation costs, net of tax                  (69)            (89)         (1,400)             (267)
                                                     -------------    ------------   -------------   ---------------
       Adjusted net income                        $         6,014  $        4,289 $         8,984 $           8,746
                                                     -------------    ------------   -------------   ---------------

       Weighted average shares, basic                      51,305          23,374          48,318            22,727
       Weighted average shares, diluted                    53,012          24,924          50,188            24,606

       Basic earnings per share - as reported     $          0.12  $         0.19 $          0.21 $            0.40
       Diluted earnings per share - as reported   $          0.11  $         0.18 $          0.21 $            0.37

       Basic earnings per share - pro-forma       $          0.12  $         0.18 $          0.19 $            0.38
       Diluted earnings per share - pro-forma     $          0.11  $         0.17 $          0.18 $            0.36
       =============================================================================================================
</Table>


                                       13
<PAGE>



The fair value of each option grant is estimated on the grant date using the
Black-Scholes option pricing model with the following assumptions:

<Table>
<Caption>
                  October 31,                                           2005              2004
                  ------------------------------------------------------------------------------------
<S>                                                                     <C>                <C>
                  Dividend yield                                                0%                 0%
                  Expected volatility                                         0.50               0.50
                  Risk-free interest rate                               3.10-3.75%         2.18-2.25%
                  ====================================================================================
</Table>



11.      SEGMENT FINANCIAL INFORMATION

The Company's segment reporting is based on the reporting of senior management
to the Chief Executive Officer. This reporting combines the Company's business
units in a logical way that identifies business concentrations and synergies.

The reportable segments of the Company are CD and DVD Fulfillment, Magazine
Fulfillment, In-Store Services, and Shared Services. The accounting policies of
the segments are materially the same as those described in the Summary of
Accounting Policies included in our Annual Report on Form 10-K (the "Annual
Report") for the fiscal year ended January 31, 2005, as filed with the
Securities and Exchange Commission ("SEC") on April 18, 2005.

Based on the comparability of the operations, Levy's results are included in the
Magazine Fulfillment group. As a result of the acquisition of Alliance on
February 28, 2005, the Company created a CD and DVD Fulfillment reporting
segment. Based on the reporting of the senior management, the previous Wood
Manufacturing group's results are included in the In-Store Services group. The
results of fiscal year 2005 have been restated to conform to this presentation.

The CD and DVD Fulfillment segment derives revenues from (1) selling and
distributing pre-recorded music, videos, video games and related products to
retailers, (2) providing product and commerce solutions to "brick-and-mortar"
and e-commerce retailers, and (3) providing consumer-direct fulfillment and
vendor managed inventory services to its customers.

The Magazine Fulfillment segment derives revenues from (1) selling and
distributing magazines, including domestic and foreign titles, to major
specialty and mainstream retailers and wholesalers throughout the United States
and Canada, (2) exporting domestic titles internationally to foreign wholesalers
or through domestic brokers, (3) providing return processing services for major
specialty retail book chains and (4) serving as an outsourced fulfillment agent.

The In-Store Services segment derives revenues from (1) designing,
manufacturing, and invoicing participants in front-end fixture programs, (2)
providing claim filing services related to rebates owed retailers from
publishers or their designated agent, (3) designing, manufacturing, shipping,
installation and removal of front-end fixtures, including high end wood and wire
and (4) providing information and management services relating to retail
magazine sales to U.S. and Canadian retailers and magazine publishers.

Shared Services consists of overhead functions not allocated to individual
operating segments.

Segment results from continuing operations follow (in thousands):


                                       14
<PAGE>
<TABLE>
<CAPTION>
                                                                                           Other
                                      CD and DVD        Magazine         In-Store         (Shared
Three Months Ended October 31, 2005  Fulfillment      Fulfillment       Services        Services)      Consolidated
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>              <C>             <C>               <C>
Revenue                            $      226,401  $      176,735   $       22,723  $            -    $      425,859
Cost of revenue                           186,003         137,739           16,023               -           339,765
                                    ---------------------------------------------------------------------------------
Gross profit                               40,398          38,996            6,700               -            86,094
Selling, general &
administrative                             20,736          20,306            2,021           5,292            48,355
Fulfillment freight                         7,787          12,364                -               -            20,151
Depreciation and amortization               3,020           1,238              149             519             4,926
                                    ---------------------------------------------------------------------------------
Operating income (loss)            $        8,855  $        5,088   $        4,530  $      (5,811)    $       12,662
                                    =================================================================================

Total Assets                       $      576,435  $      224,649   $       84,343  $       54,450    $      939,877
Goodwill, net                              51,144          81,616           50,502           4,139           187,401
Intangibles, net                          206,984          33,187            3,985               -           244,156
Capital  expenditures                       1,818             319              265             458             2,860
</TABLE>


<TABLE>
<CAPTION>
                                                                                         Other
                                    CD and DVD        Magazine         In-Store         (Shared
Three Months Ended October 31, 2004 Fulfillment      Fulfillment       Services        Services)      Consolidated
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>              <C>             <C>               <C>
Revenue                            $            -  $       69,934   $       20,819  $            -    $       90,753
Cost of revenue                                 -          51,548           13,496               -            65,044
                                    ---------------------------------------------------------------------------------
Gross profit                                    -          18,386            7,323               -            25,709
Selling, general &
administrative                                  -           7,179            2,445           3,477            13,101
Fulfillment freight                             -           5,611                -               -             5,611
Depreciation and amortization                   -             522               17             466             1,005
                                    ---------------------------------------------------------------------------------
Operating income (loss)            $            -  $        5,074   $        4,861  $      (3,943)    $        5,992
                                    =================================================================================

Total Assets                       $            -  $       68,823   $      110,834  $       20,728    $      200,385
Goodwill, net                                   -           8,746           50,202           4,139            63,087
Intangibles, net                                -           8,853            4,326               -            13,179
Capital  expenditures                           -             203               98             611               912
</TABLE>


<TABLE>
<CAPTION>
                                                                                         Other
                                    CD and DVD        Magazine         In-Store         (Shared
Nine Months Ended October 31, 2005  Fulfillment      Fulfillment       Services        Services)      Consolidated
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>              <C>             <C>               <C>
Revenue                            $      583,503  $      415,151   $       55,416  $            -    $    1,054,070
Cost of revenue                           479,292         320,641           38,509               -           838,442
                                    ---------------------------------------------------------------------------------
Gross profit                              104,211          94,510           16,907               -           215,628
Selling, general &
administrative                             53,968          49,081            6,329          15,623           125,001
Fulfillment freight                        19,391          29,450                -               -            48,841
Depreciation and amortization               7,923           2,406              450           1,492            12,271
Merger and acquisition charges                  -               -              227           2,867             3,094
                                    ---------------------------------------------------------------------------------
Operating income (loss)            $       22,929  $       13,573   $        9,901  $     (19,982)    $       26,421
                                    =================================================================================

Capital  expenditures              $        5,605  $          822   $          502  $        2,050    $        8,979
</TABLE>


                                       15

<PAGE>


<TABLE>
<CAPTION>
                                                                                        Other
                                    CD and DVD        Magazine         In-Store         (Shared
Nine Months Ended October 31, 2004  Fulfillment      Fulfillment       Services        Services)      Consolidated
---------------------------------------------------------------------------------------------------------------------
<S>                                <C>             <C>              <C>             <C>               <C>
Revenue                            $            -  $      201,340   $       58,452  $            -    $      259,792
Cost of revenue                                 -         151,152           37,176               -           188,328
                                    ---------------------------------------------------------------------------------
Gross profit                                    -          50,188           21,276               -            71,464
Selling, general &
administrative                                  -          20,356            6,736          10,037            37,129
Fulfillment freight                             -          15,244                -               -            15,244
Depreciation and amortization                   -           1,019              241           1,370             2,630
Relocation expense                              -           1,552                -               -             1,552
                                    ---------------------------------------------------------------------------------
Operating income (loss)            $            -  $       12,017   $       14,299  $     (11,407)    $       14,909
                                    =================================================================================

Capital  expenditures              $            -  $        1,213   $          243  $        2,613    $        4,069
</TABLE>

12.      RELATED PARTY TRANSACTIONS

Pursuant to an agreement through August 2007, the Company conducts significant
business with one customer distributing magazines, music and DVDs. The Chairman
and major stockholder of this customer is a passive minority investor of AEC
Associates, the Company's largest shareholder. Subsequent to the acquisition of
Alliance Entertainment, the Company had revenues of $273.0 million to this
customer and this customer's subsidiaries.



                                       16
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS.

Some of the information contained in this report, which are not historical
facts, are considered to be "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities and Exchange Act of 1934, as amended. The words "believe," "expect,"
"anticipate,' "estimate," "project," and similar expressions often characterize
forward-looking statements. These statements may include, but are not limited
to, projections of collections, revenues, income or loss, cash flow, estimates
of capital expenditures, plans for future operations, products or services, and
financing needs or plans, as well as assumptions relating to these matters.
These statements are only predictions and you should not unduly rely on them.
Our actual results will differ, perhaps materially, from those anticipated in
these forward-looking statements as a result of a number of factors, including
the risks and uncertainties faced by us described below and those set forth
under this heading and those set forth under the heading "Risk Factors that
Might Affect Future Operating Results and Financial Condition" contained in our
Annual Report on Form 10-K for this fiscal year ended January 31, 2005.

- market acceptance of and continuing demand for magazines, DVDs, CDs and other
  home entertainment products;

- the impact of competitive products and technologies;

- the pricing and payment policies of magazine publishers, film studios, record
  labels and other key vendors;

- our ability to obtain additional financing to support our operations;

- changing market conditions and opportunities;

- our ability to realize operating efficiencies, costs savings and other
  benefits from recent acquisitions; and,

- retention of key management and employees.

We believe it is important to communicate our expectations to our investors.
However, there may be events in the future that we are not able to predict
accurately or over which we have no control. The factors listed above provide
examples of risks, uncertainties and events that may cause our actual results to
differ materially from the expectations we describe in our forward-looking
statements. Before you make an investment decision relating to our common stock,
you should be aware that the occurrence of the events described in these risk
factors and those set forth under the heading "Risk Factors that Might Affect
Future Operating Results and Financial Condition" contained in our Annual Report
on Form 10-K for this fiscal year ended January 31, 2005 could have a material
adverse effect on our business, operating results and financial condition. You
should read and interpret any forward-looking statement in conjunction with our
consolidated financial statements, the notes to our consolidated financial
statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations." Any forward-looking statement speaks only as of the date
on which that statement is made. Unless required by U.S. federal securities
laws, we will not update any forward-looking statement to reflect events or
circumstances that occur after the date on which the statement is made.


OVERVIEW

We provide supply chain management and/or related value-added products and
services to most national/regional retailers, magazine publishers and other
providers of home entertainment content. On February 28, 2005 we completed our
merger with Alliance Entertainment Corp., a logistics and supply chain
management services company for the home entertainment product market
principally selling CDs and DVDs. In addition, on May 10, 2005, the Company
acquired Chas. Levy Circulating Co. LLC ("Levy"), a company that primarily
distributes magazines and books to the mainstream market. Following the merger,
we organized the combined company into three main operating business units: CD
and DVD Fulfillment, Magazine Fulfillment and In-Store Services.



ACQUISITION OF ALLIANCE ENTERTAINMENT CORP.


                                       17
<PAGE>

On February 28, 2005, we completed the merger with Alliance Entertainment Corp,
a logistics and supply chain management services company for the home
entertainment product market pursuant to the terms and conditions of the
Agreement and Plan of Merger Agreement dated as of November 18, 2004 (the
"Merger Agreement").

Alliance historically operated two business segments: the Distribution and
Fulfillment Services Group ("DFSG") and the Digital Medial Infrastructure
Services Group (the "DMISG"). Prior to the merger, on December 31, 2004,
Alliance disposed of all of the operations conducted by the DMISG business lines
through a spin-off to its existing stockholders. Consequently, in connection
with the merger, we acquired only the DFSG business and not the DMISG business.
The DMISG business represented approximately 1.8% and 1.4% of Alliance's
consolidated sales for the years ended December 31, 2004 and 2003, respectively.

We consummated the merger with Alliance to further our objective of creating the
premier provider of information, supply chain management and logistics services
to retailers and producers of home entertainment content products. We believe
that the merger provides significant market opportunities to take advantage of
our strong retailer relationships and experience in marketing our products by
expanding product offerings beyond our existing magazine fulfillment business to
DVDs, CDs, video games and related home entertainment products and accessories.
In addition, we believe that our in-store merchandising capabilities would be
strengthened. We also believe this transaction positioned us as the distribution
channel of choice for film studios, record labels, publishers and other
producers of home entertainment content products. We expect to benefit from
substantial cost savings in the areas of procurement, marketing, information
technology and administration and from other operational efficiencies,
particularly in the distribution and fulfillment functions, where we plan to
consolidate some distribution operations, reorganize others and leverage our
best practices across all of our distribution operations. As a result, we
believe the merger will enhance our financial strength, increase our visibility
in the investor community and strengthen our ability to pursue further strategic
acquisitions.

ACQUISITION OF CHAS. LEVY CIRCULATING COMPANY LLC


On May 10, 2005, the Company and Chas. Levy Company LLC entered into a Unit
Purchase Agreement (the "Purchase Agreement"). Under the terms of the Purchase
Agreement, the Company purchased all of the issued and outstanding membership
interests in Chas. Levy Circulating Co. LLC ("Levy") from Chas. Levy Company LLC
for a purchase price of approximately $30 million, subject to adjustment based
on Levy's net worth as of the closing date of the transaction. Chas. Levy
Company LLC was the sole member of Levy. In addition, approximately $19.3
million was also provided on the date of acquisition to Seller to repay all
outstanding intercompany debt of Levy.

On May 10, 2005, as contemplated by the terms of the Purchase Agreement, the
Company and Levy Home Entertainment LLC ("LHE") entered into a Distribution and
Supply Agreement (the "Distribution Agreement"). Under the terms of the
Distribution Agreement, LHE appointed the Company as its sole and exclusive
subdistributor of book products to all supermarkets (excluding supermarkets
combined with general merchandise stores), drug stores, convenience stores,
newsstands and terminals within the geographic territory in which the Registrant
currently distributes DVDs, CDs and/or magazines. The initial term of the
Distribution Agreement begins on May 10, 2005 and expires on June 30, 2015. The
parties may renew the agreement thereafter for successive one year periods.



SOURCE INTERLINK BUSINESS

Our business provides supply chain management and/or related value-added
products and services to most national regional retailers, magazine publishers
and other providers of home entertainment content.

   Our clients include:

     o    Mainstream retailers,  such as The Kroger Company, Target Corporation,
          Walgreen Company, Ahold USA, Inc., Kmart Corporation, Sears, Roebuck &
          Co., and Meijers;

     o    Specialty  retailers,  such as Barnes & Noble,  Inc.,  Borders  Group,
          Inc., The Musicland Group, Inc., Hastings  Entertainment,  Inc., Fry's
          Electronics, Inc. and Circuit City Stores, Inc.; and



                                       18
<PAGE>

     o    e-commerce retailers, such as amazon.com, barnesandnoble.com,
          circuitcity.com and bestbuy.com;


   Our suppliers include:

     o    Record labels, such as Vivendi Universal S.A., Sony BMG Music
          Entertainment Company, WEA Distribution and Thorn-EMI;

     o    Film studios, such as The Walt Disney Company, Time-Warner Inc., Sony
          Corp., The News Corporation, Viacom Inc. and General Electric Company;
          and,

     o    Magazine Distributors, such as COMAG Marketing Group, LLC., Time
          Warner Retail Sales & Marketing, Inc., Curtis Circulation Company and
          Kable Distribution Services, Inc.;

Our business model is designed to deliver a complete array of products and
value-added services developed to assist retailers and manufacturers of digital
versatile disks (DVDs), audio compact disks (CDs), magazines, confections and
general merchandise in efficiently and effectively marketing their products to
consumers visiting the more than 110,000 store fronts we serve.

Our business consists of four business segments: Magazine Fulfillment, CD and
DVD Fulfillment, In-Store Services and Shared Services. Our segment reporting is
structured based on the reporting of senior management to the Chief Executive
Officer.


     o    Our Magazine Fulfillment group provides domestic and foreign titled
          magazines to specialty retailers, such as bookstores and music stores,
          and to mainstream retailers, such as supermarkets, discount stores,
          drug stores, convenience stores and newsstands. This group also
          exports domestic titled magazines from more than 100 publishers to
          foreign markets worldwide. We provide fulfillment services to more
          than 26,000 retail stores, 7,300 of which also benefit from our
          selection and logistical procurement services.

     o    Our CD and DVD Fulfillment group was established upon the acquisition
          of Alliance Entertainment Corp. effective February 28, 2005. The group
          provides full-service distribution of pre-recorded music, videos,
          video games and related accessories and merchandise to retailers and
          other customers primarily in North America. The group provides product
          and commerce solutions to "brick-and-mortar" and e-commerce retailers,
          while maintaining trading relationships with major manufacturers of
          pre-recorded music, video, and related products. As part of the
          traditional distribution services, and as an integral part of its
          service offering, the group also provides consumer-direct fulfillment
          ("CDF"), and vendor managed inventory ("VMI") solutions to its
          customers.

     o    Our In-Store Services group assists retailers with the design and
          implementation of their front-end area merchandise programs, both for
          wood and wire displays and fixtures. We also provide other value-added
          services to retailers, publishers and other vendors. These services
          include assisting retailers with the filing of claims for publisher
          incentive payments, which are based on display location or total
          retail sales, and providing publishers with access to real-time sales
          information on more than 10,000 magazine titles, thereby enabling them
          to make more informed decisions regarding their product placement,
          cover treatments and distribution efforts.

     o    Our Shared Services group consists of overhead functions not allocated
          to the other operating groups. These functions include corporate
          finance, human resource, management information systems and executive
          management. Upon completion of our consolidation of our administrative
          operations, we restructured our accounts to separately identify
          corporate expenses that are not directly or exclusively attributable
          to any of our three main operating groups.




                                       19
<PAGE>


REVENUES:

The CD and DVD Fulfillment group derives revenues from:

     o    selling and distributing pre-recorded music, videos, video games and
          related products to retailers;

     o    providing product and commerce solutions to "brick-and-mortar" and
          e-commerce retailers; and

     o    providing consumer-direct fulfillment and vendor managed inventory
          services to its customers.

The Magazine Fulfillment group derives revenues from:

     o    selling and distributing magazines, including domestic and foreign
          titles, to major specialty and mainstream retailers and wholesalers
          throughout the United States and Canada;

     o    exporting domestic titles internationally to foreign wholesalers or
          through domestic brokers;

     o    providing return processing services for major specialty retail book
          chains; and

     o    serving as an outsourced fulfillment agent and backroom operator for
          publishers.

The In-Store Services group derives revenues from:

     o    designing, manufacturing and invoicing participants in front-end
          merchandising programs;

     o    providing claim filing services related to rebates owed retailers from
          publishers or their designated agents;

     o    shipping, installing and removing front-end fixtures;

     o    designing, manufacturing and installing custom wood fixtures primarily
          for retailers; and

     o    providing information and management services relating to magazine
          sales to retailers and publishers throughout the United States and
          Canada.

COST OF REVENUES

Our cost of revenues for the Magazine Fulfillment and the CD and DVD Fulfillment
groups consists of the costs of products purchased for resale less all
applicable publisher discounts and rebates.

Our cost of revenues for the In-Store Services group includes:

     o    raw materials consumed in the production of display fixtures,
          primarily steel, wood and plastic components;

     o    production labor; and

     o    manufacturing overhead.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses for each of the operating groups
include:

     o    non-production labor;

     o    rent and office overhead;

     o    insurance;

     o    professional fees; and

     o    management information systems.

Expenses associated with corporate finance, human resources, certain management
information systems and executive offices are included within the Shared
Services group and are not allocated to the other groups.

FULFILLMENT FREIGHT

Fulfillment freight consists of our direct costs of distributing magazines, DVDs
and CDs by our primary third-party freight carrier, UPS, as well as Federal
Express ground service. Freight rates are driven primarily by the weight of the
product being shipped and the distance between origination and destination.

Fulfillment freight is not disclosed as a component of cost of revenues, and, as
a result, gross profit and gross profit margins are not comparable to other
companies that include shipping and handling costs in cost of revenues.


                                       20
<PAGE>

Fulfillment freight has increased proportionately as the amount of product we
distribute has increased. We anticipate the continued growth in our Magazine
Fulfillment and our CD and DVD Fulfillment groups will result in an increase in
fulfillment freight.

RELOCATION EXPENSES

The Company completed expansion into the mainstream retail market during the
first quarter of fiscal 2005. The expansion schedule required relocation from
the distribution fulfillment center in Milan, OH to Harrisburg, PA. The Company
did not incur similar costs in the nine month period ended October 31, 2005.





                                       21
<PAGE>
RESULTS OF OPERATIONS

The following table sets forth, for the periods presented, information relating
to our continuing operations (in thousands):

<TABLE>
<CAPTION>
                                                         2005                               2004

THREE MONTHS ENDED OCTOBER 31,                  Amount       Margin %              Amount      Margin %
-------------------------------------------------------------------------------------------------------------
<S>                                      <C>                                 <C>               <C>
CD AND DVD FULFILLMENT
Revenue                                  $          226,401                  $              -              -
Cost of revenue                                     186,003                                 -              -
Gross profit                                         40,398          17.8%                  -              -
Selling, general and administrative
expense (1)                                          23,756                                 -              -
Fulfillment freight                                   7,787
-------------------------------------------------------------------------------------------------------------
Operating income                         $            8,855           3.9%   $              -              -

MAGAZINE FULFILLMENT
Revenue                                  $          176,735                  $         69,934
Cost of revenue                                     137,739                            51,548
Gross profit                                         38,996          22.1%             18,386          26.3%
Selling, general and administrative
expense (1)                                          21,544                             7,701
Fulfillment freight                                  12,364                             5,611
-------------------------------------------------------------------------------------------------------------
Operating income                         $            5,088           2.9%   $          5,074           7.3%

IN-STORE SERVICES
Revenue                                  $           22,723                  $         20,819
Cost of revenue                                      16,023                            13,496
Gross profit                                          6,700          29.5%              7,323          35.2%
Selling, general and administrative
expense(1)                                            2,170                             2,462
-------------------------------------------------------------------------------------------------------------
Operating income                         $            4,530          19.9%   $          4,861          23.3%

 OTHER (SHARED SERVICES)
Revenue                                  $                -                  $              -
Cost of revenue                                           -                                 -
Gross profit                                              -              -                  -              -
Selling, general and administrative
expense  (1)                                          5,811                             3,943
-------------------------------------------------------------------------------------------------------------
Operating loss                           $          (5,811)              -   $        (3,943)              -

TOTAL FROM CONTINUING OPERATIONS
Revenue                                  $          425,859                  $         90,753
Cost of revenue                                     339,765                            65,044
Gross profit                                         86,094          20.2%             25,709          28.3%
Selling, general and administrative
expense  (1)                                         53,281                            14,106
Fulfillment freight                                  20,151                             5,611
-------------------------------------------------------------------------------------------------------------
Operating income                         $           12,662           3.0%   $          5,992           6.6%
=============================================================================================================
</TABLE>

(1) Selling, general and administrative expenses include selling, general and
administrative expenses, depreciation and amortization of intangibles.


                                       22



<PAGE>

<TABLE>
<CAPTION>
                                                         2005                             2004

NINE MONTHS ENDED OCTOBER 31,                   Amount       Margin %              Amount      Margin %
-------------------------------------------------------------------------------------------------------------
<S>                                      <C>                 <C>             <C>               <C>
CD AND DVD FULFILLMENT
Revenue                                  $          583,503                  $              -
Cost of revenue                                     479,292                                 -
Gross profit                                        104,211          17.9%                  -              -
Selling, general and administrative
expense (1)                                          61,891                                 -
Fulfillment freight                                  19,391                                 -
-------------------------------------------------------------------------------------------------------------
Operating income                         $           22,929           3.9%   $              -              -

MAGAZINE FULFILLMENT
Revenue                                  $          415,151                  $        201,340
Cost of revenue                                     320,641                           151,152
Gross profit                                         94,510          22.8%             50,188          25.0%
Selling, general and administrative
expense (1)                                          51,487                            21,375
Fulfillment freight                                  29,450                            15,244
Relocation expense                                        -                             1,552
-------------------------------------------------------------------------------------------------------------
Operating income                         $           13,573           3.3%   $         12,017           6.0%

IN-STORE SERVICES
Revenue                                  $           55,416                  $         58,452
Cost of revenue                                      38,509                            37,176
Gross profit                                         16,907          30.5%             21,276          36.4%
Selling, general and administrative
expense (1)                                           6,779                             6,977
Merger and acquisition charges                          227                                 -
-------------------------------------------------------------------------------------------------------------
Operating income                         $            9,901          17.9%   $         14,299          24.5%

 OTHER (SHARED SERVICES)
Revenue                                  $                -                  $              -
Cost of revenue                                           -                                 -
Gross profit                                              -              -                  -              -
Selling, general and administrative
expense (1)                                          17,115                            11,407
Merger and acquisition charges                        2,867                                 -
-------------------------------------------------------------------------------------------------------------
Operating loss                           $         (19,982)              -   $       (11,407)              -

TOTAL FROM CONTINUING OPERATIONS
Revenue                                  $        1,054,070                  $        259,792
Cost of revenue                                     838,442                           188,328
Gross profit                                        215,628          20.5%             71,464          27.5%
Selling, general and administrative
expense (1)                                         137,272                            39,759
Fulfillment freight                                  48,841                            15,244
Merger and acquisition charges                        3,094                                 -
Relocation expenses                                       -              -              1,552              -
-------------------------------------------------------------------------------------------------------------
Operating income                         $           26,421           2.5%   $         14,909           5.7%
=============================================================================================================
</TABLE>

(1) Selling, general and administrative expenses include selling, general and
administrative expenses, depreciation and amortization of intangibles.



                                       23


<PAGE>


THREE MONTHS ENDED OCTOBER 31, 2005, AS COMPARED TO THE THREE MONTHS ENDED
OCTOBER 31, 2004

REVENUES

Total revenues for the quarter ended October 31, 2005 increased $335.1 million,
or 369.3%, from the prior year same quarter due primarily to the acquisitions of
Alliance and Levy as discussed above.

CD AND DVD FULFILLMENT - On February 28, 2005, we acquired Alliance
Entertainment Corp. Results of operations have been included in our consolidated
financial statements since the date of acquisition. CD and DVD Fulfillment
accounted for approximately 53.2% of our revenues, or $226.4 million, for the
quarter ended October 31, 2005. There were no CD and DVD Fulfillment revenues in
the third quarter of fiscal 2005.


MAGAZINE FULFILLMENT group's revenues were $176.7 million, an increase of $106.8
million or 152.7 % as compared to the quarter ended October 31, 2004. The
group's revenues for the three months ended October 31 are comprised of the
following components (in thousands):

<TABLE>
<CAPTION>
                                                         2005                2004              Change
     -----------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                 <C>
     Domestic Specialty                         $           55,085  $           55,536  $           (451)
     Domestic Mainstream                                   114,207               5,823            108,384
     Export                                                  7,443               8,575            (1,132)
     -----------------------------------------------------------------------------------------------------
     Total                                      $          176,735  $           69,934  $         106,801
     =====================================================================================================
</TABLE>

Revenue consists of the gross amount of magazines (both domestic and imported
titles) distributed to domestic retailers and wholesalers, less actual returns
received, less an estimate of future returns and customer discounts. Revenues
also consists of fees earned for the picking of third party product, return
processing and wastepaper revenue.

Domestic mainstream revenues originate from sales to "mainstream" retailers,
which consist of Grocery, Discount, Transportation Terminals, Convenient Stores
and Drug Stores. The mainstream distribution channel's revenues include book and
magazine distribution. Domestic specialty revenues originate from magazine sales
to "specialty" retailers, which consist of Bookstores, Music outlets, Office
Supply stores and Computer stores. The magazine industry in the United States
has set-up two distinct distribution channels to service these two separate
retailer classifications. In May 2005, the group significantly increased its
presence in the mainstream market with the acquisition of Levy, a leading
magazine wholesaler based in Chicago, IL with distribution centers in Chicago,
IL, Lancaster, PA, Brainerd, MN, and City of Industry, CA.

The $106.8 million increase in revenue relates primarily to the $108.4 million
increase in domestic mainstream revenues. The increase was attributable
primarily to the acquisitions of Levy and Empire News and secondarily to the
company's marketing efforts to obtain customers in this distribution channel.
The decrease in the export revenues relates primarily to the timing of the
printing of certain publisher clients export copies, which impacts when those
copies are delivered to its customers and the timing of revenue recognition.

Sales efficiency expressed as a percentage of net distribution to gross
distribution was 44.0%, 36.7% and 32.0% for the specialty, mainstream and export
groups respectively. The prior year comparable period efficiencies were 44.1%,
46.7% and 42.7%. The mainstream distribution channel's sales include book and
magazine distribution. Books generally remain on sale longer then magazines and
as a result have higher sales efficiencies. The mainstream distribution channel
generally experience magazine sales efficiencies lower than sales to the
specialty distribution channel.

IN-STORE SERVICES - Our In-Store Services group revenues were $22.7 million, an
increase of $1.9 million or 9.1% as compared to the quarter ended October 31,
2004.


                                       24

<PAGE>

The group's revenues are comprised of the following components (in millions):

<TABLE>
<CAPTION>
     Three months ended October 31,                      2005                2004              Change
     -----------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                 <C>
     Claim filing and information               $            4,079  $            5,173  $          (1,094)
     Front end wire store fixtures and
     services                                                7,983               8,848               (865)
     Wood store fixtures                                    10,661               6,798              3,863
     -----------------------------------------------------------------------------------------------------
     Total                                      $           22,723  $           20,819  $           1,904
     =====================================================================================================
</TABLE>

Our claim filing revenues are recognized at the time the claim is paid. Claim
filing revenues are consistent with the quarter ending October 31, 2004.
Information revenues decreased approximately $0.8 million as compared to the
quarter ended October 31, 2004 due to certain information contracts not
repeating in the current quarter.

Our front end wire and services revenues declined due to changes in the
industry. Major chains typically purchase new front-end fixtures every three
years; however, the use of the front end fixtures has been extending beyond this
life cycle thereby decreasing or delaying the revenue recognized on the front
end wire programs. In addition, retail chains are now opting for regional as
opposed to national program rollouts which results in smaller fixture orders.
Finally, pricing pressures and competition have resulted in reduced revenues.

Wood revenues increased $3.9 million, an increase of 56.8% over the quarter
ending October 31, 2004. The increase is primarily driven by an increase in the
number of store openings and store remodelings performed by our customers.

GROSS PROFIT

Gross profit for the period increased $60.4 million or 234.9%, over the third
quarter of fiscal 2005 primarily due to the acquisitions of Alliance and Levy.

Overall gross profit margins decreased 7.9 percentage points in the current
period over the comparable period of the prior fiscal year. Margins decreased
overall due to the acquisitions of Alliance and Levy in the current fiscal year
as the gross profit margins on CDs and DVDs and mainstream magazines are
generally lower than the remainder of our product mix while they represent a
significant percentage of our sales.

CD AND DVD FULFILLMENT - Gross profit was $40.4 million with a gross margin of
17.8%. We did not distribute CDs and DVDs during the third quarter of fiscal
2005.

MAGAZINE FULFILLMENT - Gross profit was $39.0 million, an increase of $ 20.6
million or 112.1%, compared to the quarter ended October 31, 2004. Gross profit
margin decreased from 26.3% to 22.1%.

The decrease in gross profit margins is attributable to the change in sales mix
due to the increase in revenues in the mainstream distribution channel. The
mainstream distribution channel generally has lower gross margins than the
specialty distribution channel due to certain publisher rebates that are
available to the specialty distribution channel that are not available in the
domestic mainstream channel. The gross margins were 26.1% and 20.7% for the
specialty and mainstream groups, respectively.

IN-STORE SERVICES - Gross profit in our In-Store Services group decreased $0.6
million or 8.5%. The decrease in gross profit and gross profit margin is being
driven primarily by sales mix in the current quarter.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses, including depreciation and
amortization, for the quarter ended October 31, 2005 increased $39.2 million or
277.7%, compared to the prior fiscal year comparable quarter. Selling, general,
and administrative expenses as a percent of revenues decreased from 15.5% to
12.5%.

CD AND DVD FULFILLMENT - The CD and DVD Fulfillment group's selling, general,
and administrative expenses were $23.8 million, of which approximately $1.7
million relates to amortization of intangibles. We did not distribute CDs and
DVDs during the third quarter of fiscal 2005.


                                       25

<PAGE>
MAGAZINE FULFILLMENT - The group's selling, general and administrative expenses
include the costs of operating the group's distribution centers, the in-store
merchandising field force and the backroom operations. Selling, general and
administrative expenses increased $ 13.8 million, or 179.2%, from $ 7.7 million
to $ 21.5 million. The increase relates primarily to the expansion of the
group's mainstream distribution infrastructure through the acquisition of Levy.
Expenses as a percentage of revenues increased from 11.0 % to 12.2 %. The
increase relates primarily to the acquisitions of Levy and Empire News which
includes costs associated with the mainstream distribution in-store
merchandising field force, distribution center costs and incremental overhead
functions, which are required to support distribution to the majority of
mainstream retailer accounts.

IN-STORE SERVICES - The selling, general, and administrative expenses of the
In-Store Services group decreased by approximately $0.3 million compared to the
third quarter of fiscal 2005.

SHARED SERVICES - The selling, general, and administrative expenses of Shared
Services increased $1.9 million or 47.4%. The overall increase is primarily due
to incurring additional expenses to properly manage the expanded role of Shared
Services after the acquisitions of Alliance and Levy. As noted above, as a
percentage of consolidated sales, Shared Services costs decreased from 4.3% to
1.4% compared to the third quarter of fiscal 2005.

NINE MONTHS ENDED OCTOBER 31, 2005, AS COMPARED TO THE NINE MONTHS ENDED OCTOBER
31, 2004

REVENUES

Total revenues for the nine month period ended October 31, 2005 increased $794.3
million, or 305.7%, from the prior year same period due primarily to the
acquisitions of Alliance and Levy as discussed above.

CD AND DVD FULFILLMENT - On February 28, 2005, we acquired Alliance
Entertainment Corp. Results of operations have been included in our consolidated
financial statements since the date of acquisition. CD and DVD Fulfillment
accounted for approximately 55.4% of our revenues, or $583.5 million, for the
nine month period ended October 31, 2005. There were no CD and DVD Fulfillment
revenues in the nine month period ended October 31, 2004.

MAGAZINE FULFILLMENT - The group's revenues were $415.2 million, an increase of
$213.8 million or 106.2% as compared to the nine months ended October 31, 2004.
The group's revenues for the nine months ended October 31, 2005 are comprised of
the following components (in thousands):

<TABLE>
<CAPTION>
                                                         2005                2004              Change
     -----------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                 <C>
     Domestic Specialty                         $          167,330  $          163,580  $           3,750
     Domestic Mainstream                                   223,592               9,027            214,565
     Export                                                 24,229              28,733             (4,504)
     -----------------------------------------------------------------------------------------------------
     Total                                      $          415,151  $          201,340  $         213,811
     =====================================================================================================
</TABLE>

Revenue consists of the gross amount of books and magazines (both domestic and
imported titles) distributed to domestic retailers and wholesalers, less actual
returns received, less an estimate of future returns and customer discounts.
Revenues also consists of fees earned for the picking of third party product,
return processing and wastepaper revenue.

Domestic mainstream revenues originate from sales to "mainstream" retailers,
which consist of Grocery, Discount, Transportation Terminals, Convenient Stores
and Drug Stores. The mainstream distribution channel's revenues include book and
magazine distribution. Domestic specialty revenues originate from magazine sales
to "specialty" retailers, which consist of Bookstores, Music outlets, Office
Supply stores and Computer stores. The magazine industry in the United States
has set-up two distinct distribution channels to service these two separate
retailer classifications. In May 2005, the group significantly increased its
presence in the mainstream market with the acquisition of Levy, a leading
magazine wholesaler based in Chicago, IL with distribution centers in Chicago,
IL, Lancaster, PA, Brainerd, MN, and City of Industry, CA.

The $213.8 million increase in revenue relates primarily to the $214.6 million
increase in domestic mainstream revenues. The increase was attributable
primarily to the acquisitions of Levy and Empire News and secondarily to the
company's marketing efforts to obtain customers in this distribution channel.
The decrease in the export revenues relates primarily to the timing of the
printing of certain publisher clients export copies, which impacts when those
copies are delivered to its customers and the timing of revenue recognition.



                                       26

<PAGE>

Sales efficiency expressed as a percentage of net distribution to gross
distribution was 44.4%, 36.7% and 35.7% for the specialty, mainstream and export
groups respectively. The prior year comparable period efficiencies were 45.4%,
46.2% and 43.3%. The mainstream distribution channel's sales include book and
magazine distribution. The mainstream distribution channel generally experience
magazine sales efficiencies lower than sales to the specialty distribution
channel.

IN-STORE SERVICES - Our In-Store Services group revenues were $55.4 million, a
decrease of $3.0 million or 5.2% compared to the nine month period ended October
31, 2004.

The group's revenues are comprised of the following components (in millions):

<TABLE>
<CAPTION>
     Nine months ended October 31,                       2005                2004              Change
     -----------------------------------------------------------------------------------------------------
<S>                                             <C>                 <C>                 <C>
     Claim filing and information               $           11,956  $           13,499  $         (1,543)
     Front end wire store fixtures and
     services                                               19,151              26,504            (7,353)
     Wood store fixtures                                    24,309              18,449             5,860
     -----------------------------------------------------------------------------------------------------
     Total                                      $           55,416  $           58,452  $         (3,036)
     =====================================================================================================
</TABLE>

Our claim filing revenues are recognized at the time the claim is paid. The
decrease in revenues for the current period relates to the timing of the cash
payments received on the claims. In addition, information revenues decreased
approximately $1.0 million as compared to the nine months ended October 31, 2004
due to certain information contracts not repeating in the current fiscal year.

Our front end wire and services revenues declined due to changes in the
industry. Major chains typically purchase new front-end fixtures every three
years; however, the use of the front end fixtures has been extending beyond this
life cycle thereby decreasing or delaying the revenue recognized on the front
end wire programs. In addition, retail chains are now opting for regional as
opposed to national program rollouts which results in smaller fixture orders.
Finally, pricing pressures and competition have resulted in reduced revenues.

Wood revenues increased $5.9 million, an increase of 31.8% over the nine months
ending October 31, 2004. The increase is primarily driven by an increase in the
number of store openings and remodelings performed by our customers.

GROSS PROFIT

Gross profit for the period increased $144.2 million or 201.7%, over the nine
month period ended October 31, 2004 primarily due to the acquisitions of
Alliance Entertainment Corp. and Levy.

Overall gross profit margins decreased 7.0 percentage points in the current
period over the comparable period of the prior fiscal year nine month period.
Margins decreased overall due to the acquisitions of Alliance and Levy in the
current fiscal year as the gross profit margins on CDs and DVDs and mainstream
magazines are generally lower than the remainder of our product mix while they
represent a significant percentage of our sales.

CD AND DVD FULFILLMENT - Gross profit was $104.2 million with a gross margin of
17.9%. We did not distribute CDs and DVDs during the first nine months of fiscal
2005.

MAGAZINE FULFILLMENT - The group's gross profit was $94.5 million, an increase
of $44.3 million or 88.3%, as compared to the comparable period of the prior
year. Gross profit margin decreased from 25.0% to 22.8%.

The decrease in gross profit margins is attributable to the change in sales mix
due to the increase in revenues in the mainstream distribution channel. The
mainstream distribution channel generally has lower gross margins then the
specialty distribution channel due to certain publisher rebates that are
available to the specialty distribution channel that are not available in the
domestic distribution channel. The gross margins were 26.4% and 20.9% for the
specialty and mainstream groups, respectively.

IN-STORE SERVICES - Gross profit in our In-Store Services group decreased $4.4
million or 20.5%. The decrease in gross profit and gross profit margin is being
driven by the decrease in sales volume and increase in pricing pressures in the
front end wire store fixtures and services coupled with the decrease in claiming
and information revenues as described above.

 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES


                                       27


<PAGE>

Selling, general and administrative expenses, including depreciation and
amortization, for the nine months ended October 31, 2005 increased $97.5 million
or 245.3%, compared to the prior fiscal year comparable nine months. Selling,
general, and administrative expenses as a percent of revenues declined from
15.3% to 13.0%.

CD AND DVD FULFILLMENT - The CD and DVD Fulfillment group's selling, general,
and administrative expenses were $61.9 million, of which approximately $7.9
million relates to amortization of intangibles. We did not distribute CDs and
DVDs during the nine month period of fiscal 2005.

MAGAZINE FULFILLMENT - The group's selling, general and administrative expenses
include the costs of operating the group's distribution centers, the in-store
merchandising field force and the backroom operations. Selling, general and
administrative expenses increased $30.1 million, or 140.9%, from $21.4 million
to $51.5 million. The increase relates primarily to the expansion of the group's
mainstream distribution infrastructure. Expenses as a percentage of revenues
increased from 10.6% to 12.4%. The increase relates primarily to the
acquisitions of Levy and Empire News which includes costs associated with the
mainstream distribution in-store merchandising field force, distribution center
costs and incremental overhead functions, which are required to support
distribution to the majority of mainstream retailer accounts.

IN-STORE SERVICES - The selling, general, and administrative expenses of the
In-Store Services group remained flat at approximately $6.8 million compared to
the nine month period of fiscal 2005 of $7.0 million.

SHARED SERVICES - The selling, general, and administrative expenses of Shared
Services increased $5.7 million or 50.0%. The overall increase is primarily due
to incurring additional expenses to properly manage the expanded role of shared
services after the acquisitions of Alliance Entertainment Corp. and Levy. As
noted above, as a percentage of consolidated sales, shared services costs
decreased from 4.3% to 1.6%.

FULFILLMENT FREIGHT

Fulfillment freight represents the outbound and return freight costs of
distribution. It consists primarily of the costs, including payroll, of
operating the fleet of trucks that deliver the majority of the books and
magazines in the mainstream distribution channel, as well as payments to third
party carriers to provide delivery service directly from our distribution
centers to our customers' retail stores.

Fulfillment freight expenses increased $14.5 million or 259.1%, compared to the
three months ended October 31, 2004 and $33.6 million or 220.4% compared to the
nine months ended October 31, 2004. The CD and DVD Fulfillment group incurred
$7.8 million during the quarter ended October 31, 2005 and $19.4 million for the
nine months ended October 31, 2005 and we did not distribute CDs and DVDs during
the quarter or nine month period ended October 31, 2004. The Magazine
Fulfillment group's freight expense increased $14.2 million, or 93.2%, from
$15.2 million to $29.5 million for the nine months ended October 31, 2005.
Freight expense as a percentage of gross domestic distribution decreased from
4.0% to 3.0%. The decrease is attributable to the expansion of our distribution
into the mainstream distribution channel.

RELOCATION EXPENSES

During the quarter ended October 31, 2004, the Company began expansion into the
mainstream retail market. The expansion schedule required an acceleration of the
relocation process from the distribution fulfillment center in Milan, OH to
Harrisburg, PA, which was completed in the quarter. Relocation expenses recorded
in the quarter ended October 31, 2004, including a lease termination charge and
the transfer of employees and equipment, were approximately $1.6 million.

MERGER AND ACQUISITION CHARGES

Merger charges related to acquisitions recorded as expenses by the Company
through October 31, 2005 totaled $3.1 million. These expenses represented
severance and personnel-related charges, charges to exit certain merchandiser
contracts and a success



                                       28


<PAGE>

fee paid to certain Company executives. These expenses were not capitalized as
they did not represent costs that provide future economic benefits to the
Company.

OPERATING INCOME

Operating income for the quarter ended October 31, 2005 increased $6.7 million
or 111.3%, compared to the same quarter in the prior fiscal year due to the
factors described above.

Operating income for the nine months ended October 31, 2005 increased $11.5
million or 77.2%, compared to the nine months ended October 31, 2004 due to the
factors described above

Operating profit margins decreased from 6.6% for the quarter ended October 31,
2004 to 3.0% for the quarter ended October 31, 2005 and decreased from 5.7% for
the nine month period ended October 31, 2004 to 2.5% for the nine month period
ended October 31, 2005. The decrease was primarily due to the acquisition of
Alliance which accounts for approximately 53% and 55% of our revenues for the
quarter and nine month period, respectively, and has an operating profit margin
of approximately 3.9% for both periods presented. In addition, the Magazine
Fulfillment group's operating profit margins were 2.9% and 3.3% for the quarter
and nine month period ended October 31, 2005, respectively, compared to 7.3% and
6.0% for comparable quarter and nine month period of the prior year. The
decrease related to the acquisition of Levy, which historically had lower
operating margins then our specialty distribution group.

INTEREST EXPENSE

Interest expense includes the interest and fees on our significant debt
instruments and outstanding letters of credit.

Interest expense increased $1.6 million or 489.8% from the quarter ended October
31, 2004 and $3.6 million or 367.4% compared to the nine month period ended
October 31, 2004. Interest expense increase from the prior year quarter and nine
month period are due to significantly lower borrowings in the prior fiscal year
as a result of the raising of proceeds from the sale of 3.8 million shares of
common stock. In addition, the Company acquired Levy in the quarter ended July
31, 2005 for approximately $25.7 million, net of cash acquired, and intercompany
debt repayments of approximately $19.3 million which also contributed to the
higher interest charges in the quarter and nine month periods.

OTHER INCOME (EXPENSE)

Other income (expense) consists of items outside of the normal course of
operations. Due to its nature, comparability between periods is not generally
meaningful.

For the nine months ended October 31, 2004, the Company recorded a charge of
approximately $1.5 million related to the write off of deferred financing
charges as a result of paying off certain debt instruments, as described below
in Liquidity and Capital Resources.

INCOME TAX EXPENSE

The effective income tax rates for continuing operations were 44.0% and 30.9%
for the quarters ended October 31, 2005 and 2004, respectively.

The effective income tax rates for continuing operations were 46.6% and 31.5%
for the nine months ended October 31, 2005 and 2004, respectively.

The difference between the statutory rate and effective tax rates for the
quarter and nine month period ended October 31, 2005 primarily relates to the
amortization of the intangible assets acquired in the Alliance transaction not
being deductible for tax purposes.

The difference between the statutory rate and effective tax rates for the
quarter and nine month period ended October 31, 2004 relates primarily to the
realization of a portion of the net operating loss carryforward acquired with
our acquisition of Interlink.


                                       29


<PAGE>

DISCONTINUED OPERATION

In November 2004, the Company sold and disposed of its secondary wholesale
distribution operation for $1.4 million, in order to focus more fully on its
domestic and export distribution. All rights owned under the secondary wholesale
distribution contracts were assigned, delivered, conveyed and transferred to the
buyer, an unrelated third party. All assets and liabilities of the secondary
wholesale distribution operation were not assumed by the buyer. The Company
recognized a gain on sale of this business of $1.4 million ($0.8 net of tax) in
the fourth quarter of fiscal year 2005. In the second quarter of fiscal 2006,
the Company wrote off certain accounts receivable totaling $1.4 million, net of
tax.

The following amounts related to the Company's discontinued operation have been
segregated from continuing operations and reflected as discontinued operations
(in thousands):

<TABLE>
<CAPTION>
                                                       Three months ended             Nine months ended
                                                           October 31,                   October 31,
-------------------------------------------------------------------------------------------------------------
                                                         2005          2004              2005        2004
-------------------------------------------------------------------------------------------------------------
<S>                                               <C>             <C>               <C>          <C>
Revenues                                          $            -  $       5,291     $        -   $    13,380
                                                  -----------------------------------------------------------
Income (loss) before taxes                                     -            582         (2,410)          480

Income tax benefit  (expense)                                  -           (233)           964          (192)

                                                  -----------------------------------------------------------
(Loss) income from discontinued operation, net
of tax                                            $            -  $         349     $   (1,446)  $       288
                                                  ===========================================================
</TABLE>


LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

Our primary sources of cash include receipts from our customers, borrowings
under our credit facilities and, from time to time, the proceeds from the sale
of common stock.

Our primary cash requirements for the CD and DVD Fulfillment group and the
Magazine Fulfillment group consist of the cost of home entertainment products
and freight, labor and facility expenses associated with our distribution
centers.

Our primary cash requirements for the In-Store Services group consist of the
cost of raw materials, labor, and factory overhead incurred in the production of
front-end wood and wire displays, the cost of labor incurred in providing our
claiming, design and information services, and cash advances to fund our Advance
Pay program. Our Advance Pay program allows retailers to accelerate collections
of their rebate claims through payments from us in exchange for the rights to
collect the claim. We collect the claims when paid by publishers for our own
account.

Our primary cash requirements for the Shared Services group consist of salaries,
professional fees and insurance costs not allocated to specific operating
groups.

OPERATING CASH FLOW

Net cash used in operating activities was $13.4 and $19.9 million for the nine
months ended October 31, 2005 and 2004, respectively.

Operating cash flows for the nine months ended October 31, 2005 were comprised
of net income of $10.4 million, plus non-cash charges including depreciation and
amortization of $13.2 million, amortization of deferred loan costs of $0.5
million, provisions for losses on accounts receivable of $2.8 million, a tax
benefit received on stock options exercised of $1.1 million and an increase of
$0.3 million in deferred revenue. An increase in accounts payable and other
liabilities of $97.3 million and a decrease in other assets of $7.9 million also
provided cash for the nine month period ended October 31, 2005. These cash


                                       30


<PAGE>

providing activities were offset by an increase in inventories of $66.0 million
and an increase in accounts receivable of $81.2 million.

The increase in accounts receivable for the nine months ended October 31, 2005
of $81.2 million was primarily due to a increase of $23.4 million from the
Magazine Fulfillment group primarily as a result of certain negotiated
collection terms and a $52.7 million increase in the CD and DVD Fulfillment
group due to extending customer payment terms and timing of customer payments.
Historically, custom payment terms have been extended for the holiday season.

The increase in inventories of $66.0 million for the nine months ended October
31, 2005 was primarily due to the acquisition of the CD and DVD Fulfillment
group on February 28, 2005, as approximately $57.6 million of the increase was
attributable to their purchases subsequent to the date of acquisition. This
buildup in inventories for the CD and DVD Fulfillment group in the third quarter
is primarily to support the holiday shopping season of the fourth quarter.

The increase in accounts payable and other current and non-current liabilities
in the current period of $97.3 million relates to the timing of vendor payments
in the current period as compared to the quarter ended January 31, 2005. In
addition, favorable terms have been negotiated for purchases of inventory, which
increases significantly in third quarter due to the holiday season.

Operating cash flows for the nine months ended October 31, 2004 were primarily
from net income of $9.0 million, plus non-cash charges including depreciation
and amortization of $4.0 million and provisions for losses on accounts
receivable of $0.6 million, a write off of deferred financing costs and original
issue discount of $1.5 million and a decrease in inventories of $3.4 million.
These cash providing activities were offset by an increase in accounts
receivable of $24.7 million and a decrease in accounts payable and accrued
expenses $14.3 million.

The increase in accounts receivable for the nine months ended October 31, 2004
was primarily due to an increase in accounts receivable in our Magazine
Fulfillment group. The increase was due to an overall increase in distribution
levels, especially in the last month of the quarter, more lenient payment terms
offered to a significant customer in exchange for more favorable pricing, and
the increase in the sales return reserve from January 31, 2004. Receivables in
our Wood Manufacturing division increased by approximately $2.9 million, due to
additional revenues in the period of approximately $3.8 million. The In-Store
Division had an increase in accounts receivable of approximately $3.4 million
due primarily due to the seasonal nature of the wire manufacturing business,
which generally has the highest receivable balance in the third quarter. The
fourth quarter is generally our best collection and cash flow quarter of the
year as revenues from the third quarter are collected.

The decrease in accounts payable and accrued expenses for the nine months ended
October 31, 2004 of $14.3 million relates primarily to 1) a reduction in
customer deposits due to change in payment terms and 2) timing of payments to
vendors in the current period.

INVESTING CASH FLOW

Net cash used in investing activities was $40.8 and $14.3 million for the nine
month periods ended October 31, 2005 and 2004, respectively.

For the nine months ended October 31, 2005, cash used in investing activities
was reduced by capital expenditures of $9.0 million, which was partially offset
by $1.5 million in proceeds from the sale of equipment. Our advance pay program
used $3.0 million in the current period. We also invested $2.3 million for the
rights to distribute certain titles over a period of three to fifteen years. As
part of the acquisition of the CD and DVD Fulfillment group, we acquired cash of
$16.9 million after direct acquisition costs; and finally, the Company utilized
approximately $25.7 million in the purchase of Levy, net of cash acquired. In
addition, approximately $19.3 million was also provided on the date of
acquisition to seller to repay all outstanding intercompany debt of Levy.

For the nine months ended October 31, 2004, cash used in investing activities
included capital expenditures of $4.1 million, which in part related to our
expansion of our distribution facility in Harrisburg, Pennsylvania. Our advance
pay program generated net cash flow of $2.6 million in the current period. In
addition, the Company advanced to the prior operator of our export distribution
business $6.8 million at January 31, 2004. The advances were made as part of the
agreement to collect the prior operator's receivables and pay outstanding
payables so as to create a seamless transition for both the customers and
suppliers. The company collected $5.3 million of the advances during the nine
months ended October 31, 2004.



                                       31


<PAGE>

In August 2004, the Company acquired all customer-based intangibles (i.e., all
market composition, market share and other value) of the claiming and
information services of PROMAG Retail Services, LLC ("Promag") for approximately
$13.2 million. Of the $13.2 million purchase price, $10.0 million was funded
from a term loan discussed below and $0.75 million in a promissory note payable
over a three year period to Promag. Promag provides claim filing services
related to rebates owed retailers from publishers or their designated agent
throughout the United States and Canada.

In September 2004, the Company acquired substantially all of the assets and
liabilities of Empire State News Corp. ("Empire"), a magazine wholesaler in
northwest New York State for approximately $5.0 million. The purchase price
consisted of $3.3 million of cash paid and $1.6 million of deferred
consideration in the form of two notes payable ($1.2 million) and deferred
compensation, subject to finalization of working capital adjustments in
accordance with the purchase agreement.

Our borrowing agreements limit the amount of our capital expenditures in any
fiscal year.

FINANCING CASH FLOW

Outstanding balances on our credit facility fluctuate partially due to the
timing of the retailer rebate claiming process and our advance pay program, the
seasonality of our front end wood, wire and services business and the payment
cycles of the CD and DVD and magazine distribution businesses. Because the
magazine distribution business and advance pay program cash requirements peak at
our fiscal quarter ends, the reported bank debt levels usually are at their
highest level outstanding during the quarter.

Payments under our advance pay program generally occur just prior to our fiscal
quarter end. The related claims are not generally collected by us until 30-60
days after the advance is made. As a result, our funding requirements peak at
the time of the initial advances and decrease over this period as the cash is
collected on the related claims. In addition, Alliance has historically
generated approximately 33% of its total net sales in the fourth calendar
quarter coinciding with the holiday shopping season and therefore should have
greater borrowings in the third quarter to finance the buildup of inventory.

The front end wood, wire and services business is seasonal because most
retailers prefer initiating new programs before the holiday shopping season
begins, which concentrates revenues in the second and third quarter. Receivables
from these programs are generally collected within 180 days. The Company is
usually required to tender payment on the costs of these programs within a
shorter period. As a result, our funding requirements peak in the second and
third fiscal quarters when we manufacture the fixtures and decrease
significantly in the fourth and first fiscal quarters as the related receivable
are collected.

Net cash provided by financing activities was $56.2 and $30.8 million for the
nine months ended October 31, 2005 and 2004, respectively.

Financing activities in the first nine months of fiscal year 2006 consisted of
borrowings under the credit facilities of $56.6 million and $20.0 obtained from
the mortgage loan. These funds were offset by repayments of $21.5 million in
debt and capital leases, approximately $8.8 million of which relates to the
repayment of the Wells Fargo Foothill term loan in connection with the
modification of the revolving credit facility and $8.5 million relating to the
repayment of the mortgage loan obtained in the Alliance transaction, and a
decrease of $1.0 million in checks issued and outstanding at October 31, 2005.
Finally, the exercise of employee stock options in the quarter generated
approximately $3.2 million.

Financing activities in the first nine months of fiscal year 2005 consisted of
proceeds from the sale of 3.8 million shares of common stock. The proceeds of
$40.5 million (net of underwriting and related expenses) from the sale were
utilized to repay the Wells Fargo Foothill original term loan, the Hilco Capital
note payable and the notes payable to former owners ($22.4 million through
October 31, 2004). For the nine month period ended October 31, 2004, borrowings
on the credit facilities increased $8.9 million and a term loan in the amount
of $10.0 million was issued related to the Promag transaction. In addition, the
cash provided by the activities noted above were offset by an $11.1 million
decrease in checks issued and outstanding at October 31, 2004. Finally, the
exercise of employee stock options in the period generated approximately $4.9
million.

DEBT

At October 31, 2005, our total debt obligations were $120.7 million, excluding
outstanding letters of credit. Debt consists


                                       32

<PAGE>

primarily of amounts owed under a revolving credit facility, various notes
payable related to the acquisition of magazine import and export businesses,
equipment loans and a mortgage loan.

On February 28, 2005, the Company modified its existing credit facility with
Wells Fargo Foothill ("WFF") as a result of its acquisition of Alliance
Entertainment Corp. WFF, as arranger and administrative agent for each of the
lenders that may become a participant in such arrangement and their successors
("Lenders") will make revolving loans to us and our subsidiaries of up to $250
million and provide for the issuance of letters of credit. The terms and
conditions of the arrangement are governed primarily by the Amended and Restated
Loan Agreement dated February 28, 2005 by and among us, our subsidiaries, and
WFF.

Outstanding borrowings bear interest at a variable annual rate equal to the
prime rate announced by Wells Fargo Bank, National Association's San Francisco
office, plus a margin of between 0.0% and 1.00% (applicable margin was 0.0% at
October 31, 2005) based upon a ratio of the Company's EBITDA to interest expense
("Interest Coverage Ratio"). At October 31, 2005 the prime rate was 6.75%. We
also have the option of selecting up to five traunches of at least $1 million
each to bear interest at LIBOR plus a margin of between 2.00% and 3.00% based
upon our Interest Coverage Ratio. The Company has four LIBOR contracts
outstanding at October 31, 2005 (expiring through December 27, 2005) and bear
interest at a weighted average rate of approximately 5.87%. To secure repayment
of the borrowings and other obligations of ours to the Lenders, we and our
subsidiaries granted a security interest in all of the personal property assets
to WFF, for the benefit of the Lenders. These loans mature on October 31, 2010.

Under the credit facility, the Company is limited in its ability to declare
dividends or other distributions on capital stock or make payments in connection
with the purchase, redemption, retirement or acquisition of capital stock. There
are also limitations on capital expenditures and the Company is required to
maintain certain financial ratios. The Company was in compliance with these
ratios at October 31, 2005.

Availability under the facility is limited by the Company's borrowing base
calculation, as defined in the agreement. The calculation resulted in excess
availability, after consideration of outstanding letters of credit, of $148.1
million at October 31, 2005.

Through the acquisition of Alliance, the Company entered into a loan agreement
with SunTrust Leasing Corporation (the "SunTrust Loan") for the purchase of
equipment to be used at various locations. A credit line of $6.8 million was
approved under the SunTrust Loan, with repayment terms for five promissory notes
ranging from three to five years. The total principal balance of the SunTrust
Loan outstanding as of October 31, 2005 was $3.3 million.

Through the acquisition of Levy, the Company assumed four notes payable with
suppliers (the "Supplier Loans") totaling $14.0 million. The maturity dates of
the supplier notes range between March 2007 and August 2014 and bear interest at
5%. Principal repayments range from $1.0 to $2.0 million per fiscal year with
$0.8 million and $2.0 million due to be repaid in fiscal year 2006 and 2007,
respectively. The total principal balance of the supplier loans as of October
31, 2005 is $13.3 million.

The Company obtained a 10-year, $20.0 million conventional mortgage loan through
Wachovia Bank (the "Wachovia Mortgage") in October 2005. The Wachovia Mortgage
is collateralizedby land and building located in Coral Springs, FL. The
Wachovia Mortgage monthly principal payments are approximately $0.08 million
beginning in October 2006 plus interest at a rate of LIBOR plus a margin of
1.60%.  At the end of the 10 year term, a balloon payment in the amount of
$11.1 million is due and payable.

OFF-BALANCE SHEET ARRANGEMENTS

We do not engage in transactions or arrangements with unconsolidated or other
special purpose entities.




                                       33

<PAGE>

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our primary market risks include fluctuations in interest rates and exchange
rate variability.

The amended revolving credit facility with Wells Fargo Foothill had an
outstanding principal balance of approximately $75.9 million at October 31,
2005. Outstanding borrowings bear interest at a variable annual rate equal to
the prime rate announced by Wells Fargo Bank, National Association's San
Francisco office, plus a margin of between 0.0% and 1.00% (applicable margin was
0.0% at October 31, 2005) based upon a ratio of the Company's EBITDA to interest
expense ("Interest Coverage Ratio"). At October 31, 2005 the prime rate was
6.75%. We also have the option of selecting up to five traunches of at least $1
million each to bear interest at LIBOR plus a margin of between 2.00% and 3.00%
based upon our Interest Coverage Ratio. The Company has four LIBOR contracts
outstanding at October 31, 2005 (expiring through December 27, 2005) and bear
interest at a weighted average rate of approximately 5.87%. To secure repayment
of the borrowings and other obligations of ours to the Lenders, we and our
subsidiaries granted a security interest in all of the personal property assets
to WFF, for the benefit of the Lenders. These loans mature on October 31, 2010.

As a result of the above, our primary market risks relate to fluctuations in
interest rates. We do not perform any interest rate hedging activities related
to the facility noted above. Therefore, if the prime rate of interest were to
increase one percentage point based on the Company's current borrowings under
its credit facility, interest expense would increase approximately $0.75 million
on an annual basis.

We have exposure to foreign currency fluctuations through our operations in
Canada. These operations accounted for approximately $5.2 million in revenues,
which represented less than 1.0% of our revenues for the nine month period ended
October 31, 2005. We generally pay the operating expenses related to these
revenues in the corresponding local currency. We will be subject to any risk for
exchange rate fluctuations between such local currency and the dollar.

Revenues derived from the export of foreign titles (or sales to domestic brokers
who facilitate the export) totaled $ 24.2 million for the period ended October
31, 2005 or 2.3% of total revenues. For the most part, our export revenues are
denominated in dollars, and the foreign wholesaler is subject to foreign
currency risks. We have the availability to control foreign currency risk via
increasing or decreasing the local cover price paid in the foreign markets.
There is a risk that a substantial increase in local cover price, due to a
decline in the local currency relative to the dollar, could decrease demand for
these magazines at retail and negatively impact our results of operations.

Domestic distribution (gross) of imported titles totaled approximately $71.7
million (of a total $986.8 million or 7.3%). Foreign publications are purchased
in both dollars and the local currency of the foreign publisher, primarily Euros
and pounds sterling. In the instances where we buy in the foreign currency, we
generally have the ability to set the domestic cover price, which allows us to
minimize if we so choose the foreign currency risk. Foreign titles generally
have significantly higher cover prices than comparable domestic titles, are sold
only at select retail locations, and sales do not appear to be highly impacted
by cover price increases. However, a significant negative change in the relative
strength of the dollar to these foreign currencies could result in higher
domestic cover prices and result in lower sales of these titles at retail, which
would negatively impact our results of operations.

ITEM 4.  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of the end of the period covered by this report (the
"Evaluation Date").

Attached as exhibits to this Quarterly Report are certifications of our chief
executive officer and chief financial officer, which are required in accordance
with Rule 13a-14 of the Securities Exchange Act of 1934, as amended (Exchange
Act). The information appearing below should be read in conjunction with the
certifications for a more complete understanding of the topics presented.

ABOUT DISCLOSURE CONTROLS

Disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule
15d-15(e) of the Securities Exchange Act of 1934) are designed to provide
assurance that the information concerning us and our consolidated subsidiaries,
which is required to be included in our reports and statements filed or
submitted under the Securities Exchange Act of 1934, as amended, (i) is



                                       34


<PAGE>

accumulated and communicated to our management, including our principal
executive officer and principal financial officer, as appropriate to allow
timely decisions required disclosure and (ii) is recorded, processed, summarized
and reported within the time periods specified in rules and forms of the
Securities and Exchange Commission.

LIMITATIONS ON THE EFFECTIVENESS OF CONTROLS

Our management, including our chief executive officer and chief financial
officer, do not expect that our disclosure controls and procedures will prevent
all error and all fraud. A control system, no matter how well designed and
operated, can provide only reasonable, not absolute, assurance that the control
system's objectives will be met. Further, the design of a control system must
reflect the fact that there are resource constraints, and the benefits of
controls must be considered relative to their costs. Because of the inherent
limitations in all control systems, no evaluation of controls can provide
absolute assurance that all control issues and instances of fraud, if any,
within the company have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty and that breakdowns
can occur because of simple error or mistake. Controls can also be circumvented
by the individual acts of some persons, by collusion of two or more people, or
by management override of the controls. The design of any system of controls is
based in part on certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of
compliance with policies or procedures. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur and
not be detected.

SCOPE OF THE CONTROLS EVALUATION

The evaluation of our disclosure controls and procedures included a review of
the controls' objectives and design, the company's implementation of the
controls and the effect of the controls on the information generated for use in
this Quarterly Report. In the course of the controls evaluation, we sought to
identify data errors, control problems or acts of fraud and confirm that
appropriate corrective action, including process improvements, were being
undertaken. This type of evaluation is performed on a quarterly basis so that
the conclusions of management, including the chief executive officer and the
chief financial officer, concerning the effectiveness of the controls can be
reported in our Quarterly Reports on Form 10-Q and to supplement our disclosures
made in our Annual Report on Form 10-K. Many of the components of our disclosure
controls and procedures are also evaluated on an ongoing basis by our Internal
Audit Department and by other personnel in our finance organization. The overall
goals of these various evaluation activities are to monitor our disclosure
controls and procedures, and to modify them as necessary. Our intent is to
maintain the disclosure controls and procedures as dynamic systems that change
as conditions warrant.

CONCLUSIONS

Based on this evaluation, our chief executive officer and our chief financial
officer, have concluded that, subject to the limitations noted above, as of the
end of the period covered by this report, our disclosure controls and procedures
were effective to ensure that information we are required to disclose in reports
that we file or submit under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Company's
management, including the Chief Executive Officer and the Chief Financial
Officer, as appropriate to allow timely decisions regarding required disclosure.

There were no changes in the Company's internal controls over financial
reporting (as defined in Rule (13a-15(f) under the Securities Exchange Act of
1934) that occurred during the fiscal quarter ended October 31, 2005 that have
materially affected, or are reasonably likely to materially affect these
controls.

                           PART II - OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

We are party to routine legal proceedings arising out of the normal course of
business.  Although it is not possible to predict with certainty the outcome of
these unresolved legal actions or the range of possible loss, we believe that
none of these actions, individually or in the aggregate, will have a material
adverse effect on our financial condition or results of operations.

ITEM 1A.  RISK FACTORS


                                       35


<PAGE>

We operate in a dynamic and rapidly changing industry that involves numerous
risks and uncertainties. The risks and uncertainties described in our Annual
Report on Form 10-K as filed with Securities and Exchange Commission on April
18, 2005 are those that we currently believe may materially affect our company.
Other risks and uncertainties that we do not presently consider to be material
or of which we are not presently aware may become important factors that affect
our company in the future.

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

         Not Applicable

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES

         Not Applicable.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

         Not Applicable

ITEM 5.  OTHER INFORMATION

         Not Applicable.

ITEM 6.  EXHIBITS

(a)      Exhibits.

              See Exhibit Index
SIGNATURES

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

Date:  December 12, 2005

                                        SOURCE INTERLINK COMPANIES, INC.


                                        /s/ Marc Fierman
                                        ----------------------------------------
                                        Marc Fierman
                                        Chief Financial Officer



                                       36

<PAGE>
                                  EXHIBIT INDEX

<Table>
<Caption>
  Exhibit
  Number                               Description

<S>        <C>
    31.1   Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer

    31.2   Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer

    32.1   Section 1350 Certifications of Principal Executive Officer

    32.2   Section 1350 Certifications of Principal Financial Officer
</Table>




                                       37