**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**


________________





**FORM
      10-Q**




**(Mark
      One)**





ý
            **QUARTERLY
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**





**For
      The Quarterly Period Ended June 30, 2006**





**or**





o
            **TRANSITION
                REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                ACT OF
                1934**




Commission
      File Number: 001-32407


________________





**AMERICAN
      REPROGRAPHICS COMPANY**


(Exact
      name of Registrant as specified in its Charter)





**Delaware**
              (State
                or other jurisdiction of
              incorporation
                or organization)
            **20-1700361**
              (I.R.S.
                Employer
              Identification
                No.)


**700
      North Central Avenue, Suite 550**


**Glendale,
      California 91203**


**(818)
      500-0225**





**(Address,
      including zip code, and telephone number, including area code,
      of**


**Registrant’s
      principal executive offices)**





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 þ  No o




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




Large
      accelerated filer o   Accelerated
      filer o  Non-accelerated
      filer þ





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




As
      of
      July 31, 2006, there were 45,252,469 **** shares
      of
      the Registrant’s common stock outstanding.














**AMERICAN
      REPROGRAPHICS COMPANY**


**Quarterly
      Report on Form 10-Q**


**For
      the Quarter Ended June 30, 2006**





**Table
      of Contents**





PART
                I Financial
                InformationItem
                1. Financial
                Statements (unaudited)
            —Consolidated
                Balance Sheets as of December 31, 2005 and June 30, 2006Consolidated
                Statements of Operations for the three and six months ended June
                30, 2005
                and  2006Condensed
                Consolidated Statement of Changes in Stockholders’ Equity for
                thesix
                months ended June 30, 2006Consolidated
                Statements of Cash Flows for the six months ended June 30, 2005 and
                2006Notes
                to Consolidated Financial StatementsItem
                2. Management’s Discussion and Analysis of Financial Condition and Results
                of Operations
            —Item
                3. Quantitative and Qualitative Disclosures About Market
                Risk
            —Item
                4. Controls
                and Procedures
            —PART
                IIItem
              1. Legal ProceedingsItem
                1 A. Risk
                Factors
            —Item
                2. Unregistered
                Sales of Equity Securities and Use of Proceeds
            —Item
                4. Submission
                of Matters to a Vote of Security Holders
            —Item
              5. Other InformationItem
                6. Exhibits
            —SIGNATURESIndex
              to ExhibitsExhibit
              10.1Exhibit
              31.1Exhibit
              31.2Exhibit
              32.1Exhibit
              99.1




2


**PART** **I.**  **FINANCIAL
      INFORMATION**




**Item
              1.**
            **Financial
                Statements**




**AMERICAN
      REPROGRAPHICS COMPANY**


**CONSOLIDATED
      BALANCE SHEETS**


**(Unaudited)**





**December
                31,**
            
            **June
                30,****2005**
            
            **2006****(Dollars
                in thousands)****Assets**Current
                assets:Cash
                and cash equivalents
            
            $
            22,643
            
            $
            23,099Accounts
                receivable, net
            
            
            71,062
            
            
            87,688Inventories,
                net
            
            
            6,817
            
            
            8,801Deferred
                income taxes
            
            
            4,272
            
            
            9,664Prepaid
                expenses and other current assets
            
            
            6,425
            
            
            6,276Total
                current assets
            
            
            111,219
            
            
            135,528Property
                and equipment, net
            
            
            45,773
            
            
            55,347Goodwill
            
            
            245,271
            
            
            256,010Other
                intangible assets, net
            
            
            21,387
            
            
            29,739Deferred
                financing costs, net
            
            
            923
            
            
            856Deferred
                income taxes
            
            
            16,216
            
            
            11,532Other
                assets
            
            
            1,573
            
            
            1,661Total
                assets
            
            $
            442,362
            
            $
            490,673**Liabilities
                and Stockholders’ Equity**Current
                liabilities:Accounts
                payable
            
            $
            20,811
            
            $
            24,651Accrued
                payroll and payroll-related expenses
            
            
            15,486
            
            
            15,468Accrued
                expenses
            
            
            18,684
            
            
            37,064Current
                portion of long-term debt and capital leases
            
            
            20,441
            
            
            18,907Total
                current liabilities
            
            
            75,422
            
            
            96,090Long-term
                debt and capital leases
            
            
            253,371
            
            
            249,521Total
                liabilities
            
            
            328,793
            
            
            345,611Commitments
                and contingencies (Note 6)Stockholders’
                equity:Preferred
                stock, $.001 par value, 25,000,000 shares authorized; zero and zero
                shares
                issued and outstanding
            
            
            —
            
            
            —Common
                stock, $.001 par value, 150,000,000 shares authorized; 44,598,815
                and
                44,984,551 shares issued and outstanding
            
            
            44
            
            
            45Additional
                paid-in capital
            
            
            56,825
            
            
            64,982Deferred
                stock-based compensation
            
            
            (1,903
            )
            
            (1,620
            )Retained
                earnings
            
            
            58,561
            
            
            81,363Accumulated
                other comprehensive income
            
            
            42
            
            
            292Total
                stockholders’ equity
            
            
            113,569
            
            
            145,062Total
                liabilities and stockholders’ equity
            
            $
            442,362
            
            $
            490,673





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


3


**AMERICAN
      REPROGRAPHICS COMPANY**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Dollars
      in thousands, except per share data)**


**(Unaudited)**





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Reprographics
                services
            
            $
            94,708
            
            $
            114,658
            
            $
            182,403
            
            $
            219,475Facilities
                management
            
            
            21,076
            
            
            24,691
            
            
            40,248
            
            
            47,623Equipment
                and supplies sales
            
            
            9,776
            
            
            12,178
            
            
            19,375
            
            
            25,231Total
                net sales
            
            
            125,560
            
            
            151,527
            
            
            242,026
            
            
            292,329Cost
                of sales
            
            
            71,906
            
            
            85,713
            
            
            140,047
            
            
            166,156Gross
                profit
            
            
            53,654
            
            
            65,814
            
            
            101,979
            
            
            126,173Selling,
                general and administrative expenses
            
            
            28,140
            
            
            33,112
            
            
            55,021
            
            
            64,598Litigation
                reserve
            
            
            —
            
            
            11,262
            
            
            —
            
            
            11,262Amortization
                of intangible assets
            
            
            431
            
            
            867
            
            
            815
            
            
            1,652Income
                from operations
            
            
            25,083
            
            
            20,573
            
            
            46,143
            
            
            48,661Other
                income
            
            
            106
            
            
            472
            
            
            224
            
            
            801Interest
                expense, net
            
            
            (6,194
            )
            
            (7,001
            )
            
            (14,518
            )
            
            (11,460
            )Income
                before income tax provision (benefit)
            
            
            18,995
            
            
            14,044
            
            
            31,849
            
            
            38,002Income
                tax provision (benefit)
            
            
            7,612
            
            
            5,617
            
            
            (15,097
            )
            
            15,200Net
                income
            
            $
            11,383
            
            $
            8,427
            
            $
            46,946
            
            $
            22,802Earnings
                per share:Basic
            
            $
            0.26
            
            $
            0.19
            
            $
            1.13
            
            $
            0.51Diluted
            
            $
            0.25
            
            $
            0.18
            
            $
            1.10
            
            $
            0.50Weighted
                average common shares outstanding:Basic
            
            
            43,931,154
            
            
            44,932,873
            
            
            41,690,494
            
            
            44,779,662Diluted
            
            
            44,861,155
            
            
            45,510,158
            
            
            42,771,754
            
            
            45,312,592




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


4


**AMERICAN
      REPROGRAPHICS COMPANY**


**CONDENSED
      CONSOLIDATED STATEMENT OF**


**CHANGES
      IN STOCKHOLDERS’ EQUITY**


**(Dollars
      in thousands)**


**(Unaudited)**





**Accumulated****Common
                Stock**
            
            **Additional**
            
            
            
            
            
            **Other**
            
            **Total****Members’**
            
            
            
            **Par**
            
            **Paid-In**
            
            **Deferred**
            
            **Retained**
            
            **Comprehensive**
            
            **Stockholders’****Deficit**
            
            **Shares**
            
            **Value**
            
            **Capital**
            
            **Compensation**
            
            **Earnings**
            
            **Income**
            
            **Equity**Balance
                at December 31, 2005
            
            $
            —
            
            
            44,598,815
            
            $
            44
            
            $
            56,825
            
            $
            (1,903
            )
            $
            58,561
            
            $
            42
            
            $
            113,569Amortization
                of stock-based compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            283
            
            
            —
            
            
            —
            
            
            283Stock-based
                compensation
            
            
            —
            
            
            —
            
            
            —
            
            
            742
            
            
            —
            
            
            —
            
            
            —
            
            
            742Issuance
                of common stock under Employee Stock Purchase Plan
            
            
            —
            
            
            6,530
            
            
            —
            
            
            238
            
            
            —
            
            
            —
            
            
            —
            
            
            238Issuance
                of common stock in connection with accrued bonuses
            
            
            —
            
            
            80,652
            
            
            —
            
            
            2,160
            
            
            —
            
            
            —
            
            
            —
            
            
            2,160Stock
                options exercised
            
            
            —
            
            
            298,554
            
            
            1
            
            
            1,664
            
            
            —
            
            
            —
            
            
            —
            
            
            1,665Tax
                benefit from exercise of stock options
            
            
            —
            
            
            —
            
            
            —
            
            
            3,353
            
            
            —
            
            
            —
            
            
            —
            
            
            3,353Comprehensive
                Income:Net
                income
            
            
            —
            
            
            
            
            
            —
            
            
            —
            
            
            —
            
            
            22,802
            
            
            —
            
            
            22,802Foreign
                currency translation adjustments
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            (31
            )
            
            (31
            )Fair
                value adjustment ofderivatives,
                net of tax effects
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            281
            
            
            281Comprehensive
                income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            23,052Balance
                at June 30, 2006
            
            $
            —
            
            
            44,984,551
            
            $
            45
            
            $
            64,982
            
            $
            (1,620
            )
            $
            81,363
            
            $
            292
            
            $
            145,062





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


5


**AMERICAN
      REPROGRAPHICS COMPANY**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Dollars
      in thousands)**


**(Unaudited)**




**Six
                  Months Ended**
                **June
                  30,****2005**
            
            
            **2006****Operating
                activities**Net
                income
            
            $
            46,946
            
            $
            22,802Adjustments
                to reconcile net income to net cash providedby
                operating activities:Accretion
                of yield on redeemable preferred member units
            
            
            449
            
            
            —Allowance
                for doubtful accounts
            
            
            723
            
            
            790Reserve
                for inventory obsolescence
            
            
            90
            
            
            (127
            )Depreciation
            
            
            8,074
            
            
            10,354Amortization
                of intangible assets
            
            
            815
            
            
            1,652Amortization
                of deferred financing costs
            
            
            823
            
            
            151Write-off
                of deferred financing costs
            
            
            1,631
            
            
            57Stock-based
                compensation
            
            
            308
            
            
            1,025Deferred
                income taxes
            
            
            (25,571
            )
            
            (3,315
            )Changes
                in operating assets and liabilities, net of effect of business
                acquisitions:Accounts
                receivable, net
            
            
            (7,527
            )
            
            (12,675
            )Inventory
            
            
            200
            
            
            (25
            )Prepaid
                expenses and other assets
            
            
            720
            
            
            570Accounts
                payable and accrued expenses
            
            
            (3,092
            )
            
            21,141Net
                cash provided by operating activities
            
            
            24,589
            
            
            42,400**Investing
                activities**Capital
                expenditures
            
            
            (2,476
            )
            
            (3,808
            )Payments
                for businesses acquired, net of cash acquired and including other
                cash
                payments associated with acquisitions
            
            
            (4,076
            )
            
            (16,106
            )Other
            
            
            (209
            )
            
            (202
            )Net
                cash used in investing activities
            
            
            (6,761
            )
            
            (20,116
            )**Financing
                activities**Proceeds
                from initial public offering, net of underwriting
                discounts
            
            
            92,690
            
            
            —Direct
                costs of initial public offering
            
            
            (1,487
            )
            
            —Proceeds
                from stock option exercises
            
            
            —
            
            
            1,665Proceeds
                from issuance of common stock under Employee Stock Purchase
                Plan
            
            
            —
            
            
            238Redemption
                of preferred member units
            
            
            (28,263
            )
            
            —Excess
                tax benefit related to stock options exercised
            
            
            —
            
            
            3,353Proceeds
                from borrowings
            
            
            13,000
            
            
            5,000Payments
                on debt
            
            
            (86,636
            )
            
            (31,943
            )Payment
                of loan fees
            
            
            (123
            )
            
            (141
            )Member
                distributions
            
            
            (8,244
            )
            
            —Net
                cash used in financing activities
            
            
            (19,063
            )
            
            (21,828
            )Net
                (decrease) increase in cash and cash equivalents
            
            
            (1,235
            )
            
            456Cash
                and cash equivalents at beginning of period
            
            
            13,826
            
            
            22,643Cash
                and cash equivalents at end of period
            
            $
            12,591
            
            $
            23,099**Supplemental
                disclosure of cash flow information****Noncash
                investing and financing activities**Noncash
                transactions include the following:Capital
                lease obligations incurred
            
            $
            6,104
            
            $
            12,222Issuance
                of subordinated notes in connection with the acquisition of
                businesses
            
            $
            1,974
            
            $
            8,815Change
                in fair value of derivatives
            
            $
            19
            
            $
            281




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




6




**AMERICAN
      REPROGRAPHICS COMPANY**


**Notes
      to Consolidated Financial Statements**


**(Unaudited)**




**1.**  **Description
      of Business and Basis of Presentation**




American
      Reprographics Company (ARC or the Company) is the leading reprographics company
      in the United States providing business-to-business document management services
      to the architectural, engineering and construction industry, or AEC industry.
      ARC also provides these services to companies in non-AEC industries, such as
      technology, financial services, retail, entertainment, and food and hospitality
      that require sophisticated document management services. The Company conducts
      its operations through its wholly-owned operating subsidiary, American
      Reprographics Company, L.L.C., a California limited liability company (Opco),
      and its subsidiaries.





***Reorganization
      and Initial Public Offering***





Prior
      to
      the consummation of the Company’s initial public offering on February 9, 2005,
      the Company was reorganized (the Reorganization) from a California limited
      liability company (American Reprographics Holdings, L.L.C. or Holdings) to
      a
      Delaware corporation (American Reprographics Company). In connection with the
      Reorganization, the members of Holdings exchanged their common member units
      for
      common stock of ARC. Each option issued to purchase Holdings’ common member
      units under Holding’s equity option plan was exchanged for an option exercisable
      for shares of ARC’s common stock with the same exercise prices and vesting terms
      as the original grants. In addition, all outstanding warrants to purchase common
      units of Holdings were exchanged for shares of ARC’s common stock.





On
      February 9, 2005, the Company closed an initial public offering (IPO) of its
      common stock at $13.00 per share, consisting of 7,666,667 newly issued shares
      sold by the company and 5,683,333 outstanding shares sold by the selling
      stockholders.




***Basis
      of Presentation***




The
      accompanying consolidated financial statements are prepared in accordance with
      accounting principles generally accepted in the United States of America (GAAP)
      for interim financial information and in conformity with the requirements of
      the
      Securities and Exchange Commission. As permitted under those rules, certain
      footnotes or other financial information required by GAAP for complete financial
      statements have been condensed or omitted. In management’s opinion, the interim
      consolidated financial statements presented herein reflect all adjustments
      of a
      normal and recurring nature that are necessary to fairly present the interim
      consolidated financial statements. All material intercompany accounts and
      transactions have been eliminated in consolidation. The operating results for
      the six months ended June 30, 2006 are not necessarily indicative of the results
      that may be expected for the year ending December 31, 2006.




The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      estimates and assumptions that affect the amounts reported in the consolidated
      financial statements and accompanying notes. We evaluate our estimates and
      assumptions on an ongoing basis and rely on historical experience and various
      other factors that we believe to be reasonable under the circumstances to
      determine such estimates. Actual results could differ from those estimates
      and
      such differences may be material to the consolidated financial
      statements.




These
      interim consolidated financial statements and notes should be read in
      conjunction with the consolidated financial statements and notes included in
      the
      Company’s 2005 Annual Report on Form 10-K. The accounting policies used in
      preparing these interim consolidated financial statements are the same as those
      described in our 2005 Annual Report on Form 10-K.




**2.**  **Stock-Based
      Compensation**





The
      Company adopted the American Reprographics Company 2005 Stock Plan, or Stock
      Plan, in connection with the Company’s IPO in February 2005. The Stock Plan
      provides for the grant of incentive and non-statutory stock options, stock
      appreciation rights, restricted stock purchase awards, restricted stock awards,
      and restricted stock units to employees, directors and consultants of the
      Company. The Stock Plan authorizes the Company to issue up to
      5,000,000 shares of common stock. This amount will automatically increase
      annually on the first day of the Company’s fiscal year, from 2006 through and
      including 2010, by the lesser of (i) 1.0% of the Company’s outstanding
      shares on the date of the increase; (ii) 300,000 shares; or
      (iii) such smaller number of shares determined by the Company’s board of
      directors. At June 30, 2006, 3,049,330****shares remain
      available for grant under the Stock Plan.





7




Options
      granted under the Stock Plan generally expire no later than ten years from
      the
      date of grant (five years in the case of an incentive stock option granted
      to a
      10% stockholder). Options generally vest and become fully exercisable over
      a
      period of four or five years, except options granted to non-employee directors
      may vest over a shorter time period. The exercise price of options must be
      equal
      to at least 100% (110% in the case of an incentive stock option granted to
      a 10%
      stockholder) of the fair market value of the Company’s common stock as of the
      date of grant.





In
      addition, the Stock Plan provides for automatic grants, as of each annual
      meeting of the Company’s stockholders commencing with the first such meeting, of
      non-statutory stock options to directors of the Company who are not employees
      of, or consultants to, the Company or any affiliate of the Company (non-employee
      directors). Each non-employee director automatically will receive a
      non-statutory stock option with a fair market value, as determined under the
      Black-Scholes option pricing formula, equal to $50,000 (or 55.56%) of such
      non-employee director’s annual cash compensation (exclusive of committee fees).
      Each non-statutory stock option will cover the non-employee director’s service
      since either the previous annual meeting or the date on which he or she was
      first elected or appointed. Options granted to non-employee directors vest
      in
      1/16 increments for each month from the date of grant. The Company’s board of
      directors approved a one time discretionary grant of 9,854 options to purchase
      shares of common stock to each of the Company’s five non-employee directors as
      part of their compensation for 2005 service since no annual meeting of the
      Company’s stockholders was held in 2005.





Prior
      to
      the January 1, 2006 adoption of Financial Accounting Standards Board (FASB)
      Statement No. 123(R), “Share-Based Payment” (SFAS 123R), the Company accounted
      for stock-based compensation using the intrinsic value method prescribed in
      Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued
      to Employees,” and related interpretations.  Accordingly, because the stock
      option grant price equaled the market price on the date of grant, no
      compensation expense was recognized for Company-issued stock options issued
      prior to fiscal year 2004.  As permitted by SFAS 123, “Accounting for
      Stock-Based Compensation” (SFAS 123), stock-based compensation was included as a
      pro forma disclosure in the Notes to the Consolidated Financial
      Statements.





During
      2004, the Company granted 307,915 options to purchase common membership units
      to
      employees with exercise prices ranging from $5.62 to $6.85 per unit. The
      fair market value of the Company’s common member units on the date of grant was
      $16 per unit. In connection with the issuances, the Company recorded a
      deferred compensation charge of $3.1 million because the exercise price of
      the
      units was less than the estimated fair market value of the Company’s membership
      units as of the date of grant after giving consideration to the anticipated
      fair
      value of the membership units during the one-year period preceding the Company’s
      initial public offering which was consummated on February 9, 2005. The Company
      will amortize the deferred compensation charge over the vesting period of the
      options, generally five years. As of June 30, 2006, the Company has cumulatively
      amortized $1.5 million of the deferred compensation charge.





Effective
      January 1, 2006, the Company adopted SFAS 123R using the modified prospective
      transition method and, as a result, did not retroactively adjust results from
      prior periods. Under this transition method, stock-based compensation was
      recognized for: (i) expense related to the remaining unvested portion of all
      stock option awards granted in 2005, based on the grant date fair value
      estimated in accordance with the original provisions of SFAS 123; and (ii)
      expense related to all stock option awards granted on or subsequent to January
      1, 2006, based on the grant date fair value estimated in accordance with the
      provisions of SFAS 123R. In accordance with SAB 107, the remaining unvested
      options issued by the company prior to its initial public offering are not
      included in its SFAS 123R option pool. As a result unless subsequently modified,
      repurchased or cancelled, such unvested options will not be included in
      stock-based compensation. We apply the Black-Scholes valuation model in
      determining the fair value share-based payments to employees, which is then
      amortized on a straight-line basis over the requisite service
      period.





8




Compensation
      expense is recognized only for those options expected to vest, with forfeitures
      estimated based on our historical experience and future expectations. Prior
      to
      the adoption of SFAS 123R, the effect of forfeitures on the pro forma expense
      amounts was recognized as the forfeitures occurred.





As
      a
      result of adopting SFAS 123R, the impact to the Consolidated Statement of
      Operations for the three months ended June 30, 2006 on income before income
      taxes and net income was $.4 million and $.3 million, respectively ,
      and
      $0.006 on basic and diluted earnings per share .
      The
      impact to the Consolidated Statement of Operations for the six months ended
      June
      30, 2006 on income before income taxes and net income was $.7 million and $.5
      million, respectively ,
      and
      $0.01on basic and diluted earnings per share .
      In
      addition, upon the adoption of SFAS 123R the tax benefit resulting from the
      exercise of stock options, which were previously presented as operating cash
      inflows in the Consolidated Statement of Cash Flows, are classified as financing
      cash inflows.





The
      pro
      forma table below reflects net income and basic and diluted net income per
      share
      for the three and six months ended June 30, 2005, had we applied the fair value
      recognition provisions of SFAS 123 (in thousands, except per share
      data):





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30, 2005**
            
            **June
                30, 2005****(Unaudited)****(Dollars
                in thousands, except per share data)**Net
                income:As
                reported
            
            $
            11,383
            
            $
            46,946Equity-based
                employee compensation cost, net of related tax effects, included
                in as
                reported net income
            
            
            83
            
            
            182Equity-based
                employee compensation cost, net of related tax effects, that would
                have
                been included in the determination of net income if the fair value
                method
                had been applied
            
            
            (106
            )
            
            (244
            )Pro
                forma
            
            $
            11,360
            
            $
            46,884Basic
                earnings per share:As
                reported
            
            $
            0.26
            
            $
            1.13Equity-based
                employee compensation cost, net of related tax effects, included
                in as
                reported net income
            
            
            —
            
            
            —Equity-based
                employee compensation cost, net of related tax effects, that would
                have
                been included in the determination of net income if the fair value
                method
                had been applied
            
            
            —
            
            
            (0.01
            )Pro
                forma
            
            $
            0.26
            
            $
            1.12Diluted
                earnings per share:As
                reported
            
            $
            0.25
            
            $
            1.10Equity-based
                employee compensation cost, net of related tax effects, included
                in as
                reported net income
            
            
            —
            
            
            —Equity-based
                employee compensation cost, net of related tax effects, that would
                have
                been included in the determination of net income if the fair value
                method
                had been applied
            
            
            —
            
            
            (0.01
            )Pro
                forma
            
            $
            0.25
            
            $
            1.09




Pro
      forma
      disclosure for the three and six months ended June 30, 2006 are not presented
      because the amounts are recognized in the consolidated financial
      statements.





The
      weighted average fair value at the grant date for options issued in the six
      months ended June 30, 2006 was $9.90. There were no options granted during
      the
      six months ended June 30, 2005. The fair value of options at date of grant
      was
      estimated using the following weighted average assumptions for the six months
      ended June 30, 2006 (a) no dividend yield on our stock, (b) expected stock
      price
      volatility of 26.17% **,** (c)
      a
      risk-free interest rate of 4.6% and 5.0% and (d) an expected option term of
      6.25
      years for options vesting over a 4 year period, 6.5 years for options vesting
      over a 5 year period, and 5.5 years for options vesting over a 1 year period
      under the “simplified” method as provided in Staff Accounting Bulletin (SAB)
      107.





For
      fiscal 2006, expected stock price volatility is based on a combined weighted
      average expected stock price volatility of three publicly traded peer companies
      deemed to be similar entities whose share or option prices are publicly
      available. Until such time that the Company has enough historical data, it
      will
      continue to rely on peer companies’ volatility and will ensure that the selected
      peer companies are still appropriate. The risk-free interest rate is based
      on
      the U.S. Treasury yield curve in effect at the time of grant with an equivalent
      remaining term. The Company has not paid dividends in the past and does not
      currently plan to pay dividends in the near future.





9




The
      following is a summary of the Company’s stock option activity during the six
      month period ended June 30, 2006.




**Six
                Months Ended**
              ******June 30, 2006****Shares**
            
            **Weighted
                  Average Exercise**Price
            
            **Weighted
                  Average Contractual**Life
            
            **Aggregate
                  Intrinsic**ValueOutstanding
                at beginning of the period
            
            
            1,422,585
            
            $
            5.9Granted
            
            
            514,985
            
            
            26.32Exercised
            
            
            (298,554
            )
            
            (5.58
            )Outstanding
                at end of the period
            
            
            1,639,016
            
            $
            12.38
            
            
            7.2
            
            $
            39,120Exercisable
                at end of the period
            
            
            901,319
            
            $
            6.05
            
            
            4.3
            
            $
            27,218


The
      aggregate intrinsic value in the table above represents the total pretax
      intrinsic value (the difference between our closing stock price on June 30,
      2006
      and the exercise price, multiplied by the number of in-the-money options) that
      would have been received by the option holders had all the option holders
      exercised their options on June 30, 2006. This amount changes based on the
      fair
      market value of our stock. Total intrinsic value of options exercised for the
      six months ended June 30, 2006 was $8.4 million. As of June 30, 2006, total
      unrecognized stock-based compensation expense related to nonvested stock options
      was approximately $6.4 million, which is expected to be recognized over a
      weighted average period of approximately 4.2 years




**3.**  **Employee
      Stock Purchase Plan**





The
      Company adopted the American Reprographics Company 2005 Employee Stock Purchase
      Plan (the ESPP) in connection with the consummation of its IPO in February
      2005.
      Under the ESPP, purchase rights may be granted to eligible employees subject
      to
      a calendar year maximum per eligible employee of the lesser of (i) 400 shares
      of
      common stock, or (ii) a number of shares of common stock having an aggregate
      fair market value of $10,000 as determined on the date of purchase.





Prior
      to
      the adoption of SFAS 123R, the Company amended its ESPP such that common stock
      purchases by employees in fiscal 2006 will not give rise to recognizable
      compensation cost. The purchase price of common stock offered under the Amended
      ESPP is equal to 95% of the fair market value of such shares of common stock
      on
      the purchase date. Accordingly, no compensation cost was recognized for employee
      stock purchases under the ESPP during the six months ended June 30,
      2006.





**4.**  **Long-Term
      Debt**





Long-term
      debt consists of the following:





**December 31,**2005
            
            **June
                  30,**2006**(Unaudited)****(Dollars
                in thousands)**Borrowings
                from senior secured First Priority — Revolving Credit Facility; variable
                interest payable quarterly (8.25% and 9% interest rate at December
                31,
                2005 and June 30, 2006,repectively);any unpaid principal and interest
                due
                December 18, 2008
            
            $
            5,000
            
            $
            —Borrowings
                from senior secured First Priority — Term Loan Credit Facility; variable
                interest payable quarterly ( weighted average 6.2% and 7.1% interest
                rate
                at December 31, 2005 and June 30, 2006, respectively); principal
                payable
                in varying quarterly installments; any unpaid principal and interest
                due
                June 18, 2009
            
            
            230,423
            
            
            216,487Various
                subordinated notes payable; interest ranging from 5% to 7%; principal
                and
                interest payable monthly through July 2011
            
            
            11,262
            
            
            17,994Various
                capital leases; interest rates ranging to 15.9%; principal and interest
                payable monthly through May 2012
            
            
            27,127
            
            
            33,947273,812
            
            
            268,428Less
                current portion
            
            
            (20,441
            )
            
            (18,907
            )$
            253,371
            
            $
            249,521





In
      December 2005, the Company entered into a Second Amended and Restated Credit
      and
      Guaranty Agreement (the Second Amended and Restated Credit Agreement). The
      Second Amended and Restated Credit Agreement provided the Company a $310,600
      Senior Secured Credit Facility, comprised of a $280,600 term loan facility
      and a
      $30,000 revolving credit facility. The proceeds from the incremental new term
      loan, in the amount of $157,500, were used to prepay in full all principal
      and
      interest payable under the Second Lien Credit and Guaranty Agreement. The
      remaining balance of the increased term loan facility of $50,000 is available
      for our use, subject to the terms of the Second Amended and Restated Credit
      Agreement.




10




Interest
      or borrowings under the credit facilities bear interest at one of two floating
      rates, at our option. The floating rates may be priced as either an Index Rate
      Loan or as an Eurodollar Rate Loan. Term loans that are Index Rate Loans bear
      interest at the Index Rate plus .75%. The Index Rate is defined as the higher
      of
      (i) the rate of interest publicly quoted from time to time by The Wall Street
      Journal as the base rate on corporate loans posted by the nation’s largest banks
      and (ii) the Federal Reserve reported overnight funds rate plus .5%. Term Loans
      which are Eurodollar Rate Loans bear interest at the Adjusted Eurodollar Rate
      plus 1.75%





Revolving
      Loans which are Index Rate Loans bear interest at the Index Rate plus an
      Applicable Margin. Revolving Loans which are Eurodollar Rate Loans bear interest
      at the Adjusted Eurodollar Rate plus an Applicable Margin. The Applicable Margin
      is determined by a grid based on the ratio of the consolidated indebtedness
      of
      the Company and its subsidiaries to the consolidated adjusted EBITDA (as defined
      in the credit facilities) of the Company and its subsidiaries for the most
      recently ended four fiscal quarters and range between 2.00% to 2.75% for
      Eurodollar Rate Loans and range between 1.00% and 1.75% for Index Rate
      Loans.





On
      July
      17, 2006 the Company entered into a First Amendment to Second Amended and
      Restated Credit and Guaranty Agreement (the First Amendment) in order to
      facilitate the consummation of certain proposed acquisitions. The First
      Amendment provided the Company with a $30 million increase to its T erm
      Loan
      Facility in addition to amending certain other terms including the
      following:





·
            An
                increase in the aggregate purchase price limitation for business
                acquisitions commencing with fiscal year ending December 31,
                2006;


·
            An
                increase in the threshold for capital expenditures during any trailing
                twelve-month period;


·
            Reset
                the Incremental Term Loan amount at $50 million;
                and


·
            Permit
                the Company to issue certain shares of its common stock in connection
                with
                certain proposed acquisitions.





Except
      as
      described above, all other material terms and conditions, including the maturity
      dates of the Company’s existing senior secured credit facilities remained
      similar to those as described in Note 5-“Long Term Debt” to our consolidated
      financial statements included in our 2005 Annual Report on Form
      10-K.





During
      the six months ended June 30, 2006, the Company made payments totaling $12.4
      million, exclusive of contractually scheduled payments, on its $230 million
      senior secured credit facility. As a result of this prepayment, the Company
      wrote off $57 thousand of deferred financing costs during the six months ended
      June 30, 2006 which is included in interest expense in the accompanying
      consolidated financial statements.




**5.**  **Income
      Taxes**





Prior
      to
      the consummation of the Company’s IPO on February 9, 2005, the Company was
      reorganized from a California limited liability company (American Reprographics
      Holdings, LLC or Holdings) to a Delaware Corporation (American Reprographics
      Company). As a result of the reorganization to a Delaware corporation, our
      total
      earnings are subject to federal, state and local taxes at a combined statutory
      rate of approximately 40% excluding a one-time tax benefit of $27.7 million
      due
      to the reorganization.





11




**6.**  **Commitments
      and Contingencies**





Our
      future contractual obligations as of June 30, 2006, by fiscal year are as
      follows:




**Six
                Months Ending**
            
            **Twelve
                Months Ending December 31,****December 31,****2006**
            
            **2007**
            
            **2008**
            
            **2009**
            
            **2010**
            
            **Thereafter****(Dollars
                in thousands)**Debt
                obligations
            
            $
            3,097
            
            $
            6,030
            
            $
            117,239
            
            $
            103,937
            
            $
            3,311
            
            $
            867Capital
                lease obligations
            
            
            6,297
            
            
            11,498
            
            
            8,659
            
            
            4,033
            
            
            2,217
            
            
            1,243Operating
                lease obligations
            
            
            16,772
            
            
            25,965
            
            
            18,037
            
            
            12,450
            
            
            8,713
            
            
            28,380Total
            
            $
            26,166
            
            $
            43,493
            
            $
            143,935
            
            $
            120,420
            
            $
            14,241
            
            $
            30,490




***Operating
      Leases.***  We
      have
      entered into various non-cancelable operating leases primarily related to
      facilities, equipment and vehicles used in the ordinary course of our
      business .




***Contingent
      Transaction Consideration.*** The
      Company entered into earnout agreements in connection with prior acquisitions.
      If the acquired businesses generate operating profits in excess of predetermined
      targets, the Company is obligated to make additional cash payments in accordance
      with the terms of such earnout agreements. As of June 30, 2006, the Company
      has
      potential future earnout obligations aggregating $7.4 million through 2010
      if
      the operating profits exceed the predetermined targets. Earnout
      payments are recorded as additional purchase price (as goodwill) when the
      contingent payments are earned and become payable and consist of a combination
      of cash and notes payable issued to the seller.




***State
      Sales Tax.*** The
      Company was involved in a state tax authority dispute related to unresolved
      sales tax issues which arose from such state tax authority’s audit findings from
      their sales tax audit of certain of the company's operating divisions for the
      period from October 1998 to September 2001. Those unresolved issues relate
      to
      the application of sales taxes on certain discounts that were granted to
      customers. Based on the position taken by the state tax authority on these
      unresolved issues, they claimed that an additional $1.2 million of sales taxes
      are due for the period in question, plus $489,000 of interest. At an appeals
      conference held on December 14, 2004, the appeals board ruled that the
      Company was liable in connection with one component of the dispute involving
      approximately $40,000, which was previously paid. The Company paid the tax
      in
      May of 2005 but strongly disagreed with the state tax authority’s position and
      filed a petition for redetermination requesting an appeals conference to resolve
      these issues. The Company was granted another appeals conference in
      April 2006 to resolve the remaining issues. The Company lost on appeal.
      Accrued expenses in the Company’s consolidated balance sheet as of June 30,
      2006 include $489,000 **** of
      accrued interest related to this matter which was paid in July of 2006.




***Louis
      Frey case.*** On
      July
      28, 2006, a decision was rendered against the Company in the previously
      disclosed Louis Frey bankruptcy litigation in the United States Bankruptcy
      Court, Southern District of New York. The judge determined that damages should
      be awarded to the plaintiff in the amount of $11.06 million, interest expense
      of
      $2.28 million through June 30, 2006, and $0.20 million in preference claims.
      The
      Company continues to believe its position is meritorious, and remains committed
      to vigorously defending the Company’s position through the appellate process. In
      accordance with generally accepted accounting principles (GAAP), the Company
      has
      accounted for the judgment by recording a one-time, non-recurring litigation
      charge of $13.54 million that includes a $11.26 million litigation reserve
      ($11.06 million in awarded damages and $0.20 million in preference claims),
      and
      interest expense of $2.28 million. These charges are offset by a corresponding
      tax benefit of $5.42 million, resulting in a net impact of $8.12 million to
      the
      net income during the three and six months ended June 30, 2006.




The
      Company may be involved in litigation and other legal matters from time to
      time
      in the normal course of business. Management does not believe that the outcome
      of any of these matters will have a material adverse effect on the Company’s
      consolidated financial position, results of operations or cash
      flows.




12




**7.**  **Comprehensive
      Income**




Comprehensive
      income includes changes in the fair value of certain financial derivative
      instruments which qualify for hedge accounting. The differences between net
      income and comprehensive income for the three and six months ended June 30,
      2005
      and 2006 are as follows:




**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006****(Unaudited)**
            
            **(Unaudited)****(Dollars
                in thousands)**
            
            **(Dollars
                in thousands)**Net
                income
            
            $
            11,383
            
            $
            8,427
            
            $
            46,946
            
            $
            22,802Foreign
                currency translation adjustments
            
            
            —
            
            
            (31
            )
            
            —
            
            
            (31
            )Increase
                (Decrease) in fair value of financial derivative instruments, net
                of tax
                effects
            
            
            (289
            )
            
            181
            
            
            19
            
            
            281Comprehensive
                income
            
            $
            11,094
            
            $
            8,577
            
            $
            46,965
            
            $
            23,052




**8.**  **Earnings
      Per Share**




The
      Company accounts for earnings per share in accordance with SFAS No. 128,
“Earnings per Share”. Basic earnings per share is computed by dividing net
      income by the weighted-average number of common shares outstanding for the
      period. Diluted earnings per share is computed similar to basic earnings per
      share except that the denominator is increased to include the number of
      additional common shares that would have been outstanding if the potential
      common shares had been issued and if the additional common shares were dilutive.
      Common stock equivalents are excluded from the computation if their effect
      is
      anti-dilutive. There are no common stock equivalents excluded for anti-dilutive
      effects for the three and six months ended June 30, 2005. There are 19,985
      common stock equivalents excluded for anti-dilutive effects for the three and
      six months ended June 30, 2006. The Company’s common stock equivalents consist
      of stock options issued under the Company’s equity option plan, as well as
      warrants to purchase common stock issued during 2000 to certain creditors of
      the
      Company. All of such warrants were exchanged for shares of common stock of
      the
      Company in connection with the Company’s reorganization in February
      2005.




Basic
      and
      diluted earnings per share were calculated using the following common shares
      for
      the three and six months ended June 30, 2005 and 2006:





**Three
                Months Ended**
            
            **Six
                Months Ended****June
                30,**
            
            **June
                30,****2005**
            
            **2006**
            
            **2005**
            
            **2006****(Unaudited)**
            
            **(Unaudited)**Weighted
                average common shares outstanding during the period —
basic
            
            
            43,931,154
            
            
            44,932,873
            
            
            41,690,494
            
            
            44,779,662Effect
                of dilutive stock options
            
            
            930,001
            
            
            577,285
            
            
            930,001
            
            
            532,930Effect
                of dilutive warrants
            
            
            —
            
            
            
            
            
            151,259
            
            
            —Weighted
                average common shares outstanding during the period —
                diluted
            
            
            44,861,155
            
            
            45,510,158
            
            
            42,771,754
            
            
            45,312,592





**9.**  **Recent
      Accounting Pronouncements**





In
      April
      2005, the United States Securities and Exchange Commission (SEC) approved a
      new
      rule that delayed the effective date of Statement of Financial Accounting
      Standards (SFAS) No. 123R, Share-Based Payment. Except for this deferral of
      the
      effective date, the guidance in SFAS No. 123R was unchanged. Under the SEC's
      rule, SFAS No. 123R became effective for the Company for annual, rather than
      interim, periods that began after June 15, 2005. The Company began applying
      this
      Statement to all awards granted on or after January 1, 2006 and to awards
      modified, repurchased, or cancelled after that date. The implementation of
      this
      standard is further discussed in Note 2, Stock-Based Compensation.





Also,
      in
      November 2005, the Financial Accounting Standards Board (FASB) issued FASB
      Staff
      Position No. FAS 123R-3 (FSP 123R-3), Transition Election Related to Accounting
      for the Tax Effects of Share-Based Payment Awards. FSP 123R-3 provides an
      elective alternative transition method for calculating the pool of excess tax
      benefits available to absorb tax short falls recognized subsequent to the
      adoption of FAS 123R. Companies may take up to one year from the effective
      date
      of FSP 123R-3 to evaluate the available transition alternatives and make a
      one-time election as to which method to adopt. The Company is currently in
      the
      process of evaluating the alternative methods.





13




On
      July
      13, 2006, the FASB issued Interpretation No. 48 (FIN No. 48) "Accounting for
      Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109."
      This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS No.
      109,
      "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold
      and
      measurement principles for financial statement disclosure of tax positions
      taken
      or expected to be taken on a tax return. This interpretation is effective for
      fiscal years beginning after December 15, 2006, or fiscal year 2007 for the
      Company. The Company is assessing the impact the adoption of FIN No. 48 will
      have on the Company's consolidated financial position and results of operations.





**10.
      Goodwill and Other Intangibles**




In
      connection with its acquisitions subsequent to July 1, 2001, the Company
      has applied the provisions of SFAS No. 141 “Business Combinations”,
      using the purchase method of accounting. The assets and liabilities assumed
      were
      recorded at their estimated fair values. The excess purchase price over those
      fair values was recorded as goodwill and other intangible assets.





The
      changes in the carrying amount of goodwill from December 31, 2005 through
      June 30, 2006 are summarized as follows:




**Goodwill**Balance
                at December 31, 2005
            
            $
            245,271Additions
            
            
            10,739Balance
                at June 30, 2006
            
            $
            256,010




The
      additions to goodwill include the excess purchase price over fair value of
      net
      assets acquired in the amount of $10,005, adjustments to acquisition costs
      in
      the amount of $224 and certain earnout payments in the amount of $510.




Other
      intangible assets that have finite useful lives are amortized over their useful
      lives. An impaired asset is written down to fair value. Intangible assets with
      finite useful lives consist primarily of not-to-compete covenants, trade names,
      and customer relationships and are amortized over the expected period of benefit
      which ranges from two to twenty years using the straight-line and accelerated
      methods. Customer relationships are amortized under an accelerated method which
      reflects the related customer attrition rates and trade names are amortized
      using the straight-line method. At December 31, 2005 and June 30, 2006,
      customer relationships and the related accumulated amortization consist of
      $25,588 and $34,302, and $6,241 and $7,798, respectively. Trade names and the
      related accumulated amortization consist of $2,369 and $3,659, and $329 and
      $424
      at December 31,
      2005 and June 30, 2006, respectively.





The
      estimated future amortization expense of other intangible assets as of June
      30,
      2006 are as follows:




2006
            
            $
            2,1402007
            
            
            3,4512008
            
            
            3,0792009
            
            
            2,7822010
            
            
            2,518Thereafter
            
            
            15,769$
            29,739





14


**11.
      Subsequent Events**




Subsequent
      to June 30, 2006, the Company completed the acquisition of three reprographics
      companies, including Reliable Graphics which is located in Southern California.
      At the time of the acquisition, Reliable Graphics had trailing twelve months
      revenue of approximately $19 million.





On
      July
      28, 2006, a decision was rendered against the Company in the previously
      disclosed Louis Frey bankruptcy litigation in the United States Bankruptcy
      Court, Southern District of New York. The judge determined that damages should
      be awarded to the plaintiff in the amount of $11.06 million, interest expense
      of
      $2.28 million through June 30, 2006, and $0.20 million in preference claims.
      The
      Company continues to believe its position is meritorious, and remains committed
      to vigorously defending the Company’s position through the appellate process. In
      accordance with generally accepted accounting principles (GAAP), the Company
      has
      accounted for the judgment by recording a one-time, non-recurring litigation
      charge of $13.54 million that includes a $11.26 million litigation reserve
      ($11.06 million in awarded damages and $0.20 million in preference claims),
      and
      interest expense of $2.28 million. These
      charges are offset by a corresponding tax benefit of $5.42 million, resulting
      in
      a net impact of $8.12 million to the net income during the three and six months
      ended June 30, 2006.




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




*The
      following discussion should be read in conjunction with our consolidated
      financial statements and the related notes and other financial information
      appearing elsewhere in this report as well as Management’s Discussion and
      Analysis included in our 2005 Annual Report on Form 10-K, our final prospectus
      for our recent secondary offering dated April 5, 2006, and our 2006 first
      quarter report on Form 10-Q dated May 15, 2006.*





*In
      addition to historical information, this report on Form 10-Q contains certain
      forward-looking statements within the meaning of Section 21E of the
      Securities Exchange Act of 1934, as amended. These statements relate to future
      events or future financial performance, and include statements regarding the
      Company’s business strategy, timing of, and plans for, the introduction of new
      products and enhancements, future sales, market growth and direction,
      competition, market share, revenue growth, operating margins and profitability.
      All forward-looking statements involve known and unknown risks, uncertainties
      and other factors that may cause our actual results, levels of activity,
      performance or achievements to be materially different from any future results,
      levels of activity, performance or achievements, expressed or implied, by these
      forward looking statements. In some cases, you can identify forward-looking
      statements by terminology such as “may,” “will,” “should,” “expects,” “intends,”
“plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,”
“continue,” or the negative of these terms or other comparable terminology.
      These statements are only predictions and are based upon information available
      to the Company as of the date of this report. We undertake no on-going
      obligation, other than that imposed by law, to update these forward-looking
      statements.*





*Actual
      results could differ materially from our current expectations. Factors that
      could cause actual results to differ materially from current expectations,
      include among others, the following: (i) general economic conditions, such
      as changes in non-residential construction spending, GDP growth, interest rates,
      employment rates, office vacancy rates, and government expenditures; (ii) a
      downturn in the architectural, engineering and construction industry; (iii)
      competition in our industry and innovation by our competitors; (iv) our
      failure to anticipate and adapt to future changes in our industry;
      (v) failure to continue to develop and introduce new products and services
      successfully; (vi) our inability to charge for value-added services we
      provide our customers to offset potential declines in print volume;
      (vii) adverse developments affecting the State of California, including
      general and local economic conditions, macroeconomic trends, and natural
      disasters; (viii) our inability to successfully identify and manage our
      acquisitions or open new branches; (ix) our inability to successfully
      monitor and manage the business operations of our subsidiaries and uncertainty
      regarding the effectiveness of financial and management policies and procedures
      we established to improve accounting controls; (x) adverse developments
      concerning our relationships with certain key vendors; (xi) the loss of key
      personnel and qualified technical staff; (xii) and failure to prevail upon
      appeal* ***.***





*Although
      we believe that the expectations reflected in the forward-looking statements
      are
      reasonable, we cannot guarantee future results, levels of activity, performance
      or achievements. These forward-looking statements are subject to numerous risks
      and uncertainties, including, but not limited to, the risks and uncertainties
      described in the “Risk Factors” section of our 2005 Annual Report on Form 10-K
      and our first quarter report on Form 10-Q dated May 15, 2006. You are urged
      to
      carefully consider these factors. All forward-looking statements attributable
      to
      us are expressly qualified in their entirety by the foregoing cautionary
      statements.*





15




**Executive
      Summary**




American
      Reprographics Company is the leading reprographics company in the United States.
      We provide business-to-business document management services to the
      architectural, engineering and construction industry, or AEC industry, through
      a
      nationwide network of independently branded service centers. The majority of
      our
      customers know us as a local reprographics provider, usually with a local brand
      and a long history in the community. We also serve a variety of clients and
      businesses outside the AEC industry in need of sophisticated document management
      services.




Our
      services apply to time-sensitive and graphic-intensive documents, and fall into
      four primary categories:




·
            Document
                management;


·
            Document
                distribution & logistics;


·
            Print-on-demand;
                and


·
            On-site
                services, frequently referred to as facilities management, or FMs,
                (any
                combination of the above services supplied at a customer’s
                location).





We
      deliver these services through our specialized technology, more than 775 sales
      and customer service employees interacting with our customers every day, and
      more than 2,500 on-site services facilities at our customers’ locations. All of
      our local service centers are connected by a digital infrastructure, allowing
      us
      to deliver services, products, and value to approximately 73,000 companies
      throughout the country.





Our
      divisions operate under local brand names. Each brand name typically represents
      a business or group of businesses that has been acquired in our 17-year history.
      We coordinate these operating divisions and consolidate their service offerings
      for large regional or national customers through a corporate-controlled “Premier
      Accounts” division.




A
      significant component of our growth has come from acquisitions. In the first
      six
      months of 2006, we paid $24.3 million for seven new acquisitions. In 2005,
      we
      acquired 14 businesses for $32.1 million. We acquired six businesses in
      2004 for $3.7 million, and acquired five businesses for $.9 million in 2003.
      Each acquisition was accounted for using the purchase method, and as such,
      our
      consolidated income statements reflect sales and expenses of acquired businesses
      only for post-acquisition periods. All acquisition amounts include
      acquisition-related costs.




As
      part
      of our growth strategy, in 2003 we began opening and operating branch service
      centers, which we view as a relatively low cost, rapid form of market expansion.
      Our branch openings require modest capital expenditures and are expected to
      generate operating profit within 12 months from opening. We opened 19 new
      branches in key markets in 2005. We opened ten new branches, including
      acquisitions, during the first six months of 2006. Including acquisitions,
      the
      Company expects to open approximately 15 branches in 2006. To date, we believe
      that each branch that has been open at least 12 months has generated
      operating profit.




In
      the
      following pages, we offer descriptions of how we manage and measure financial
      performance throughout the company. Our comments in this report represent our
      best estimates of current business trends and future trends that we think may
      affect our business. Actual results, however, may differ from what is presented
      here.




**Evaluating
      our Performance.** We
      measure our success in delivering value to our shareholders by:





·
            Creating
                consistent, profitable growth;


·
            Maintaining
                our industry leadership as measured by our geographical footprint,
                market
                share and revenue generation;


·
            Continuing
                to develop and invest in our products, services, and technology to
                meet
                the changing needs of our
                customers;


·
            Maintaining
                the lowest cost structure in the industry;
                and


·
            Maintaining
                a flexible capital structure that provides for both responsible debt
                service and pursuit of acquisitions and other high-return
                investments.





16




**Primary
      Financial Measures** We
      use
      net sales, costs and expenses and operating cash flow to operate and assess
      the
      performance of our business.




***Net
      Sales*** *.* Net
      sales represent total sales less returns, discounts and allowances. These sales
      consist of document management services, document distribution and logistics
      services, print-on-demand services, reprographics equipment, and reprographics
      equipment and supplies sales. We generate sales by individual orders through
      commissioned sales personnel and, in some cases, through national contracts.




The
      distinctions in our reportable revenue categories are based primarily on the
      similarities in their gross margins and other economic similarities. They are
      categorized as reprographics services, facilities management, and equipment
      and
      supplies. Our current service segmentation is likely to change in the future
      if
      our digital services revenue commands a greater and more distinctive role in
      our
      service mix. Digital services now **** comprise
      less than five percent of our overall revenue. We believe digital services
      will
      likely exceed 10% of our revenue mix by the end of 2007.




Software
      licenses and membership fees are derived over the term of the license or the
      membership agreement. Licensed technology includes PlanWell online planrooms,
      PlanWell Electronic Work Order (EWO), PlanWell BidCaster and MetaPrint. Revenues
      from these agreements are separate from digital services. Digital services
      include digital document management tasks, scanning and archiving digital
      documents, posting documents to the web and other related work performed on
      a
      computer. Software licenses, membership fees and digital services are
      categorized and reported as a part of “Reprographics services”.




Revenue
      from reprographics services is produced from document management, document
      distribution and logistics, and print-on-demand services, including the use
      of
      PlanWell by our customers. These services are typically invoiced to a customer
      as part of a combined per-square-foot printing cost and, as such, it is
      impractical to allocate revenue levels for each item separately. We include
      revenues for these services under the caption “Reprographics
      services”.




On-site
      services, or facilities management, revenues are generated from providing
      reprographics services in our customers’ locations using machines that we own or
      lease. Generally, this revenue is derived from a single cost per square foot
      of
      printed material, similar to our reprographics services.




Revenue
      from equipment and supplies is derived from the resale of such items to our
      customers. We do not manufacture such items but rather purchase them from our
      vendors at wholesale costs.




During
      the three and six months ended June 30, 2006, our reprographics services
      represented 75.7% and 75.1% of net sales, facilities management 16.3% and 16.3%,
      and sales of reprographics equipment and supplies 8.0% and 8.6%. Of the 75.1%
      of
      reprographics services during the six month period ended June 30, 2006, 6.4%
      was
      derived from digital services revenue. Software license revenue of
      $1.2 **** million
      during the six months period ended June 30, 2006, including PlanWell, and PEiR
      memberships have not, to date, contributed significant revenue. While we achieve
      modest cost recovery through membership, licensing and maintenance fees charged
      by the PEiR Group, we measure success in this area primarily by the adoption
      rate of our programs and products.




We
      identify reportable segments based on how management internally evaluates
      financial information, business activities and management responsibility. On
      that basis, we operate in a single reportable business segment.




While
      large orders involving thousands of documents and hundreds of recipients are
      common, the bulk of our customer orders consist of organizing, printing or
      distributing less than 200 drawings at a time. Such “short-run” orders are
      usually recurring, despite their tendency to arrive with no advance notice
      and a
      short turnaround requirement. Since we do not operate with a backlog, it is
      difficult to predict the number, size and profitability of reprographics work
      that we expect to undertake more than a few weeks in advance.




***Costs
      and Expenses*** *.* Our
      cost
      of sales consists primarily of paper, toner and other consumables, labor, and
      expenses for facilities and equipment. Facilities and equipment expenses include
      maintenance, repairs, rents, insurance, and depreciation. Paper is the largest
      component of our material cost. However, paper pricing typically does not affect
      our operating margins because changes are generally passed on to our customers.
      We closely monitor material cost as a percentage of net sales to measure volume
      and waste. We also track labor utilization, or net sales per employee, to
      measure productivity and determine staffing levels.




17




We
      maintain low levels of inventory and other working capital. Capital expenditure
      requirements are also low; most facilities and equipment are leased, with
      overall cash capital spending averaging approximately 1.2% of annual net sales
      over the last three years. Since we typically lease our reprographics equipment
      for a three to five year term, we are able to upgrade equipment in response
      to
      rapid changes in technology.




Technology
      development costs consist mainly of the salaries, leased building space, and
      computer equipment that comprise our data storage and development centers in
      Silicon Valley, California and Calcutta, India.




Our
      selling expenses generally include salaries and commissions paid to our sales
      professionals, along with promotional, travel and entertainment costs. Our
      general and administrative expenses generally include salaries and benefits
      paid
      to support personnel at our reprographics businesses and our corporate staff,
      as
      well as office rent, utilities, insurance, communications expenses, and various
      professional services.




***Operating
      Cash*** *.* Operating Cash or “Cash Flow from Operations” includes net income less common
      expenditures requiring cash and is used as a measure to control working
      capital.




***Other
      Common Financial Measures*** **.** We also
      use a variety of other common financial measures as indicators of our
      performance, including:


·
            Net
                income and earnings per share;


·
            EBIT;


·
            EBITDA;


·
            Revenue
                per geographical region;


·
            Material
                costs as a percentage of net sales;
                and


·
            Days
                Sales Outstanding/Days Sales Inventory/Days Accounts
                Payable.





In
      addition to using these financial measures at the corporate level, we monitor
      some of them daily and location-by-location through use of our proprietary
      company intranet and reporting tools. Our corporate operations staff also
      conducts a monthly variance analysis on the income statement, balance sheet,
      and
      cash flow statement of each operating division.




Not
      all
      of these financial measurements are represented directly on the Company’s
      consolidated financial statements, but meaningful discussions of each are part
      of our quarterly disclosures and presentations to the investment
      community.




**Measuring
      revenue by other means.** We also
      measure revenue generation by geographic region to manage the performance of
      our
      local and regional business units. This offers
      us operational insights into the effectiveness of our sales and marketing
      efforts and alerts us to significant business trends.




We
      estimate approximately 80% of our net sales come from the AEC market, while
      20%
      come from non-AEC sources. We believe this mix is optimal because it offers
      us
      the advantages of diversification without diminishing our focus on our core
      competencies.




Our
      six
      geographic operating regions are:





·
            East
                Coast - includes New England and the Mid-Atlantic
                states;


·
            Midwest
                - includes Canadian operations as well as commonly considered Midwestern
                states;


·
            Southern
                - our broadest region, spans Florida to Texas and north into Las
                Vegas;


·
            Southern
                California - with the Monterey Bay area as a rough dividing
                line;


·
            Northern
                California - includes Silicon Valley, the San Francisco Bay Area
                and the
                Greater Sacramento/Central Valley area;
                and


·
            Pacific
                Northwest - includes Oregon, Washington and British Columbia,
                Canada.





18










**Acquisitions.** Our
      disciplined approach to complementary acquisitions has led us to acquire
      reprographic businesses that fit our profile for performance potential and
      meet
      strategic criteria for gaining market share. In most cases, performance of
      newly
      acquired businesses improves almost immediately due to the application of
      financial best practices, significantly greater purchasing power, and
      productivity-enhancing technology.




According
      to the International Reprographics Association (IRgA), the reprographics
      industry is highly-fragmented and comprised primarily of small businesses of
      less than $5 million in annual sales. Our own experience in acquiring
      reprographic businesses over the past ten years reflects this estimate. Although
      none of the individual acquisitions we made in the past three years are material
      to our overall business, each was strategic from a marketing and regional market
      share point of view.




When
      we
      acquire businesses, our management typically uses the previous year’s sales
      figures as an informal basis for estimating future revenues for our company.
      We
      do not use this approach for formal accounting or reporting purposes but as
      an
      internal benchmark with which to measure the future effect of operating
      synergies, best practices and sound financial management on the acquired
      entity.




We
      also
      use previous year’s sales figures to assist us in determining how the company
      will be integrated into the overall management structure of our company. We
      categorize newly acquired businesses in one of two ways:





1.**
            *Standalone
                Acquisitions*.
                Post-acquisition, these businesses maintain their existing local
                brand and
                act as strategic platforms for the company to acquire market share
                in and
                around the specific geographical location.




2*.*
            *Branch/Fold-in
                Acquisitions*.
                These are equivalent to our opening a new or “greenfield” branch. They
                support an outlying portion of a larger market and rely on a larger
                centralized production facility nearby for strategic management,
                load
                balancing, for providing specialized services, and for administrative
                and
                other “back office” support. Wemaintain the staff and equipment of these businesses to a minimum
                to serve
                a small market or a single large customer, or we may physically integrate
                (fold-in) staff and equipment into a larger nearby production
                facility.




New
      acquisitions frequently carry a significant amount of goodwill in their purchase
      price, even in the case of a low purchase multiple. This goodwill represents
      the
      purchase price of an acquired business less tangible assets and identified
      intangible assets. We test our goodwill annually for impairment on
      September 30. The methodology for such testing is detailed further on page
      31 of this report.




19




**Recent
      Developments.** In
      order
      to facilitate the consummation of certain proposed business acquisitions, in
      July 2006, we amended our Second Amended and Restated Credit and Guaranty
      Agreement by adding additional borrowings of $30 million under the term loan
      facility in addition to amending certain other terms including the
      following:




·
            An
                increase in the aggregate purchase price limitation for business
                acquisitions commencing with fiscal year ending December 31,
                2006;




·
            An
                increase in the threshold for capital expenditures during any trailing
                twelve-month period;




·
            Reset
                the Incremental Term Loan amount at $50 million;
                and




·
            Permit
                the Company to issue certain shares of its common stock in connection
                with
                certain proposed business
                acquisitions.




Except
      as
      described above, all other material terms and conditions, including the maturity
      dates, of the Company’s existing senior secured credit facility remained similar
      to those as described in Note 5-“Long Term Debt” to our consolidated financial
      statements included in our 2005 Annual Report on Form 10-K.




During
      the six months ended June 30, 2006, we completed the acquisition of seven
      reprographics companies in the United States for a total purchase price of
      $24.3
      million.




**Economic
      Factors Affecting Financial Performance.** We
      estimate that sales to the AEC market accounted for 80% of our net sales for
      the
      year ended December 31, 2005, with the remaining 20% consisting of sales to
      non-AEC markets (based on our annual review of the top 30% of our customers,
      and
      designating customers as either AEC or non-AEC based on their primary use of
      our
      services). As a result, our operating results and financial condition can be
      significantly affected by economic factors that influence the AEC industry,
      such
      as non-residential construction spending, GDP growth, interest rates, employment
      rates, office vacancy rates, and government expenditures. Similar to the AEC
      industry, the reprographics industry typically lags a recovery in the broader
      economy.




**Non-GAAP
      Measures**




EBIT
      and
      EBITDA and related ratios presented in this report are supplemental measures
      of
      our performance that are not required by or presented in accordance with GAAP.
      These measures are not measurements of our financial performance under GAAP
      and
      should not be considered as alternatives to net income, income from operations,
      or any other performance measures derived in accordance with GAAP or as an
      alternative to cash flow from operating, investing or financing activities
      as a
      measure of our liquidity.




EBIT
      represents net income before interest and taxes. EBITDA represents net income
      before interest, taxes, depreciation and amortization. EBIT margin is a non-GAAP
      measure calculated by subtracting depreciation and amortization from EBITDA
      and
      dividing the result by net sales. EBITDA margin is a non-GAAP measure calculated
      by dividing EBITDA by net sales.




We
      present EBIT and EBITDA and related ratios because we consider them important
      supplemental measures of our performance and liquidity. We believe investors
      may
      also find these measures meaningful, given how our management makes use of
      them.
      The following is a discussion of our use of these measures.




We
      use
      EBIT to measure and compare the performance of our divisions. We operate our
      divisions as separate business units but manage debt and taxation at the
      corporate level. As a result, EBIT is the best measure of divisional
      profitability and the most useful metric by which to measure and compare the
      performance of our divisions. We also use EBIT to measure performance for
      determining division-level compensation and use EBITDA to measure performance
      for determining consolidated-level compensation. We also use EBITDA as a metric
      to manage cash flow from our divisions to the corporate level and to determine
      the financial health of each division. As noted above, because our divisions
      do
      not incur interest or income tax expense, the cash flow from each division
      should be equal to the corresponding EBITDA of each division, assuming no other
      changes to a division’s balance sheet. As a result, we reconcile EBITDA to cash
      flow monthly as one of our key internal controls. We also use EBIT and EBITDA
      to
      evaluate potential acquisitions and to evaluate whether to incur capital
      expenditures.




20




EBIT,
      EBITDA and related ratios have limitations as analytical tools, and you should
      not consider them in isolation, or as a substitute for analysis of our results
      as reported under GAAP. Some of these limitations are as follows:




·
            They
                do not reflect our cash expenditures, or future requirements for
                capital
                expenditures and contractual
                commitments;




·
            They
                do not reflect changes in, or cash requirements for, our working
                capital
                needs;




·
            They
                do not reflect the significant interest expense, or the cash requirements
                necessary, to service interest or principal payments on our
                debt;




·
            Although
                depreciation and amortization are non-cash charges, the assets being
                depreciated and amortized will often have to be replaced in the future,
                and EBITDA does not reflect any cash requirements for such replacements;
                and




·
            Other
                companies, including companies in our industry, may calculate these
                measures differently than we do, limiting their usefulness as comparative
                measures.




Because
      of these limitations, EBIT, EBITDA, and related ratios should not be considered
      as measures of discretionary cash available to us to invest in business growth
      or to reduce our indebtedness. We compensate for these limitations by relying
      primarily on our GAAP results and using EBIT and EBITDA only as supplements.
      For
      more information, see our consolidated financial statements and related notes
      elsewhere in this report. Additionally, please refer to our 2005 Annual Report
      on Form 10-K.





We
      have
      presented adjusted net income and adjusted earnings per share for the three
      and
      six months ended June 30, 2006 to reflect the exclusion of the one-time
      litigation charge related to the Louis Frey bankruptcy litigation. This
      presentation facilitates a meaningful comparison of the Company’s operating
      results for the three and six months ended June 30, 2006 to the same period
      in
      2005, excluding a one-time income tax benefit taken in February of 2005 (refer
      to the Income Taxes section of Part I, Item 2 of this report for more
      information).




The
      following is a reconciliation of cash flows provided by operating activities
      to
      EBIT, EBITDA, and net income:




**Three
                months Ended June 30,**
            
            **Six
                months Ended June 30,****2005**
            
            **2006**
            
            **2005**
            
            **2006****(Dollars
                in thousands)**
            
            **(Dollars
                in thousands)**Cash
                flows provided by operating activities
            
            $
            22,030
            
            $
            27,222
            
            $
            24,589
            
            $
            42,400Changes
                in operating assets and liabilities
            
            
            (4,013
            )
            
            (15,430
            )
            
            9,699
            
            
            (9,011
            )Non-cash
                (expenses) income, including depreciation and amortization
            
            
            (6,634
            )
            
            (3,365
            )
            
            12,658
            
            
            (10,587
            )Income
                tax provision (benefit)
            
            
            7,612
            
            
            5,617
            
            
            (15,097
            )
            
            15,200Interest
                expense
            
            
            6,194
            
            
            7,001
            
            
            14,518
            
            
            11,460EBIT
            
            
            25,189
            
            
            21,045
            
            
            46,367
            
            
            49,462Depreciation
                and amortization
            
            
            4,459
            
            
            6,371
            
            
            8,889
            
            
            12,006EBITDA
            
            
            29,648
            
            
            27,416
            
            
            55,256
            
            
            61,468Interest
                expense
            
            
            (6,194
            )
            
            (7,001
            )
            
            (14,518
            )
            
            (11,460
            )Income
                tax (provision) benefit
            
            
            (7,612
            )
            
            (5,617
            )
            
            15,097
            
            
            (15,200
            )Depreciation
                and amortization
            
            
            (4,459
            )
            
            (6,371
            )
            
            (8,889
            )
            
            (12,006
            )Net
                income
            
            $
            11,383
            
            $
            8,427
            
            $
            46,946
            
            $
            22,802





21


The
      following is a reconciliation of net income to EBITDA:




**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2005**
            
            **2006**
            
            **2005**
            
            **2006****(Dollars
                in thousands)**
            
            **(Dollars
                in thousands)**Net
                income
            
            $
            11,383
            
            $
            8,427
            
            $
            46,946
            
            $
            22,802Interest
                expense, net
            
            
            6,194
            
            
            7,001
            
            
            14,518
            
            
            11,460Income
                tax provision (benefit)
            
            
            7,612
            
            
            5,617
            
            
            (15,097
            )
            
            15,200EBIT
            
            
            25,189
            
            
            21,045
            
            
            46,367
            
            
            49,462Depreciation
                and amortization
            
            
            4,459
            
            
            6,371
            
            
            8,889
            
            
            12,006EBITDA
            
            $
            29,648
            
            $
            27,416
            
            $
            55,256
            
            $
            61,468





The
      following is a reconciliation of our net income margin to EBIT margin and EBITDA
      margin:





**Three
                Months Ended June 30,**
            
            **Six
                Months Ended June 30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Net
                income margin
            
            
            9.1
            %
            
            5.6
            %
            
            19.4
            %
            
            7.8
            %Interest
                expense, net
            
            
            4.9
            %
            
            4.6
            %
            
            6.0
            %
            
            3.9
            %Income
                tax provision (benefit)
            
            
            6.1
            %
            
            3.7
            %
            
            (6.2
            )%
            
            5.2
            %EBIT
                margin
            
            
            20.1
            %
            
            13.9
            %
            
            19.2
            %
            
            16.9
            %Depreciation
                and amortization
            
            
            3.6
            %
            
            4.2
            %
            
            3.7
            %
            
            4.1
            %EBITDA
                margin
            
            
            23.7
            %
            
            18.1
            %
            
            22.9
            %
            
            21.0
            %




The
      following is a reconciliation of net income to adjusted net income and earnings
      per share to adjusted earnings per share:




**Three
                  Months Ended****June
                  30,**
            ****
            ****
            **Six
                Months Ended June
                30,**
            ********
            ****
            ****
            **2005**
            ****
            ****
            **2006**
            ****
            ****
            **2005**
            ****
            ****
            **2006**Net
                Income
            
            $
            11,383
            
            $
            8,427
            
            $
            46,946
            
            $
            22,802Litigation
                reserve
            
            
            
            
            
            11,262
            
            
            
            
            
            11,262Interest
                expense due to litigation reserve
            
            
            
            
            
            2,277
            
            
            
            
            
            2,277Income
                tax benefit due to litigation charge
            
            
            
            
            
            (5,416
            )
            
            
            
            
            (5,416
            )Income
                tax benefit due to Reorganization
            
            
            —
            
            
            —
            
            
            (27,701
            )
            
            —Unaudited
                pro forma incremental
              income
                tax provision
            
            
            —
            
            
            —
            
            
            (333
            )
            
            —Unaudited
                adjusted net income
            
            $
            11,383
            
            $
            16,550
            
            $
            18,912
            
            $
            30,925




Earning
                Per Share (Actual):Basic
            
            $
            0.26
            
            $
            0.19
            
            $
            1.13
            
            $
            0.51Diluted
            
            $
            0.25
            
            $
            0.18
            
            $
            1.10
            
            $
            0.50




Earning
                Per Share (adjusted):Basic
            
            $
            0.26
            
            $
            0.37
            
            $
            0.45
            
            $
            0.69Diluted
            
            $
            0.25
            
            $
            0.36
            
            $
            0.44
            
            $
            0.68




Weighted
                average common shares outstanding:Basic
            
            
            43,931,154
            
            
            44,932,873
            
            
            41,690,494
            
            
            44,779,662Diluted
            
            
            44,861,155
            
            
            45,510,158
            
            
            42,771,754
            
            
            45,312,592




22




**Results
      of Operations for the Three Months and Six Months Ended June 30, 2006 and
      2005**




The
      following table provides information on the percentages of certain items of
      selected financial data compared to net sales for the periods
      indicated:





**As
                a Percentage of Net Sales****Three
                Months ended June 30,**
            
            **Six
                Months ended June 30,****2005**
            
            **2006**
            
            **2005**
            
            **2006**Net
                sales
            
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %
            
            100.0
            %Cost
                of sales
            
            
            57.3
            
            
            56.6
            
            
            57.9
            
            
            56.8Gross
                profit
            
            
            42.7
            
            
            43.4
            
            
            42.1
            
            
            43.2Selling,
                general and administrative expenses
            
            
            22.4
            
            
            21.8
            
            
            22.7
            
            
            22.1Litigation
                reserve
            
            
            —
            
            
            7.4
            
            
            —
            
            
            3.9Amortization
                of intangibles
            
            
            0.3
            
            
            0.6
            
            
            0.3
            
            
            0.6Income
                from operations
            
            
            20.0
            
            
            13.6
            
            
            19.1
            
            
            16.6Other
                income
            
            
            0.1
            
            
            0.3
            
            
            0.1
            
            
            0.3Interest
                expense, net
            
            
            (4.9
            )
            
            (4.6
            )
            
            (6.0
            )
            
            (3.9
            )Income
                before income tax provision (benefit)
            
            
            15.2
            
            
            9.3
            
            
            13.2
            
            
            13.0Income
                tax provision (benefit)
            
            
            6.1
            
            
            3.7
            
            
            (6.2
            )
            
            5.2Net
                income
            
            
            9.1
            %
            
            5.6
            %
            
            19.4
            %
            
            7.8
            %




**Three
      and Six Months Ended June 30, 2006 Compared to Three and Six Months Ended June
      30, 2005**




**Three
                Months Ended**
            
            
            
            **Six
                Months Ended****June
                30,**
            
            **Increase
                (decrease)**
            
            **June
                30,**
            
            **Increase
                (decrease)****2005**
            
            **2006**
            
            **(In
                dollars)**
            
            **(Percent)**
            
            **2005**
            
            **2006**
            
            **(In
                dollars)**
            
            **(Percent)****(In
                millions)**
            
            
            
            **(In
                millions)**Reprographics
                services
            
            $
            94.7
            
            $
            114.6
            
            $
            19.9
            
            
            21.0
            %
            $
            182.4
            
            $
            219.5
            
            $
            37.1
            
            
            20.3
            %Facilities
                management
            
            
            21.1
            
            
            24.7
            
            
            3.6
            
            
            17.1
            %
            
            40.2
            
            
            47.6
            
            
            7.4
            
            
            18.4
            %Equipment
                and supplies sales
            
            
            9.8
            
            
            12.2
            
            
            2.4
            
            
            24.5
            %
            
            19.4
            
            
            25.2
            
            
            5.8
            
            
            29.9
            %Total
                net sales
            
            
            125.6
            
            
            151.5
            
            
            25.9
            
            
            20.6
            %
            
            242.0
            
            
            292.3
            
            
            50.3
            
            
            20.8
            %Gross
                profit
            
            
            53.7
            
            
            65.8
            
            
            12.1
            
            
            22.5
            %
            
            102.0
            
            
            126.2
            
            
            24.2
            
            
            23.7
            %Selling,
                general and administrative expenses
            
            
            28.1
            
            
            33.1
            
            
            5.0
            
            
            17.8
            %
            
            55.0
            
            
            64.6
            
            
            9.6
            
            
            17.5
            %Litigation
                reserve
            
            
            —
            
            
            11.3
            
            
            11.3
            
            
            100.0
            %
            
            —
            
            
            11.3
            
            
            11.3
            
            
            100.0
            %Amortization
                of intangibles
            
            
            0.4
            
            
            0.9
            
            
            0.5
            
            
            125.0
            %
            
            0.8
            
            
            1.7
            
            
            0.9
            
            
            112.5
            %Interest
                expense, net
            
            
            6.2
            
            
            7.0
            
            
            0.8
            
            
            12.9
            %
            
            14.5
            
            
            11.4
            
            
            (3.1
            )
            
            (21.4
            )%Income
                taxes
            
            
            7.6
            
            
            5.6
            
            
            (2.0
            )
            
            (26.3
            )%
            
            (15.1
            )
            
            15.2
            
            
            30.3
            
            
            200.7
            %Net
                income
            
            
            11.4
            
            
            8.4
            
            
            (3.0
            )
            
            (26.4
            )%
            
            46.9
            
            
            22.8
            
            
            (24.1
            )
            
            (51.4
            )%EBITDA
            
            
            29.6
            
            
            27.4
            
            
            (2.2
            )
            
            (7.4
            )%
            
            55.3
            
            
            61.5
            
            
            6.2
            
            
            11.2
            %




**Net
      Sales.**





Net
      sales
      increased by 20.6% for the three months ended June 30, 2006 compared to the
      three months ended June 30, 2005. Net sales increased by 20.8% for the six
      months ended June 30, 2006 compared to the same period in 2005.




23




In
      the
      three months ended June 30, 2006, 10.4% of the 20.6% net sales increase was
      related to our standalone acquisitions since June 30, 2005. (See page 20 of
      this
      document for an explanation of acquisition types.)




In
        the
        six months ended June 30, 2006, 8.8% of the 20.8% net sales increase was
        related to our standalone acquisitions since June 30, 2005.




*Reprographics
      services.* Net
      sales
      during the three months ended June 30, 2006 increased compared to the same
      period in 2005 due to increased construction spending throughout the U.S. and
      the expansion of our market share through branch openings and acquisitions.
      We
      acquired five businesses during the three month period ended June 30, 2006,
      each
      with a primary focus on reprographics services. Significant sales increases
      were
      reported in both Southern and Northern California that were both market-driven
      and due to a continued focus on best sales practices.




During
      the six months ended June 30, 2006, we acquired a total of seven businesses,
      each with its primary focus on reprographics services. In addition to
      significant sales increases in California as noted above, Las Vegas also showed
      strong sales growth during the early part of 2006.




Company-wide,
      pricing remained at similar levels to the same period in 2005, with the
      exception of increased fuel and energy costs surcharges, indicating that revenue
      increases were due primarily to volume.




*Facilities
      management* .
      The
      increase in on-site or facilities management services continued to post solid
      dollar volume and period-over-period percentage gains in the three and six
      months ended June 30, 2006. This revenue is derived from a single cost per
      square foot of printed material, similar to our “Reprographics Services”
revenue. As convenience and speed continue to characterize our customers’ needs,
      and as printing equipment continues to become smaller and more affordable,
      the
      trend of placing equipment (and sometimes staff) in an architectural studio
      or
      construction company office remains strong as evidenced by the eight-year
      compounded annual growth rate of 30% in new on-site services contracts. By
      placing such equipment on-site and billing on a per use and per project basis,
      the invoice continues to be issued by us, just as if the work were produced
      in
      one of our centralized production facilities. The resulting benefit is the
      convenience of on-site production with a pass-through or reimbursable cost
      of
      business that many customers continue to find attractive. The highly renewable
      nature of most on-site service contracts leads us to believe that this source
      of
      revenue will continue to increase in the near term.




*Equipment
      and supplies sales.* During
      the three month period ended June 30, 2006, our equipment and supplies sales
      increased by 24.5% as compared to the same period in 2005.




In
      the
      six month period ending June 30, 2006, equipment and supply sales increased
      by
      nearly 30%.




During
      the past four years, our facilities management sales efforts made steady
      progress against the outright sale of equipment and supplies by converting
      such
      sales contracts to on-site service agreements. Two acquisitions in the Midwest
      in 2005 and one late in 2004 continue to reverse this trend, as each possesses
      a
      strong equipment and supply business unit. Trends in smaller, less expensive
      and
      more convenient printing equipment are gaining popularity with customers who
      want the convenience of in-house production, but have no compelling reimbursable
      invoice volume to offset the cost of placing the equipment. In the future,
      we
      expect this market to grow and intend to target this type of customer through
      increased marketing and sales efforts.




**Gross
      Profit.**





Our
      gross
      profit and gross profit margin increased to $65.8 million and 43.4% during
      the
      three months ended June 30, 2006 compared to $53.7 million and 42.7% during
      the
      same period in 2005, on sales growth of $25.9 million.




During
      the six month period ended June 30, 2006, gross profit and gross profit margin
      increased to $126.2 million and 43.2% compared to $102.0 million and 42.1%
      for
      the six months ended June 30, 2005, on sales growth of $50.3
      million.




24




Increases
      in revenues coupled with the fixed cost nature of some of our cost of goods
      sold
      expenses, such as machine cost and facility rent, contributed to increases
      in
      gross profit during the three and six months ended June 30, 2006. Gross margins
      reflected the added revenue and leverage benefit and increased during the three
      and six months ended June 30, 2006. These increases were partially offset by
      lower gross margins of acquired companies and new branch openings that tend
      to
      depress gross margins temporarily.




Facilities
      management revenues are a significant component of our gross margins. We believe
      that this service will continue to be a strong margin producer in the
      foreseeable future. Customers continue to view on-site services and digital
      equipment as a premium “convenience” offering, and we believe the market for
      this service will continue to expand. We believe that more customers will adopt
      these services as the equipment continues to become smaller and more
      affordable.




Our
      increased purchasing power as a result of our expanding geographical footprint
      continues to keep our material cost and purchasing costs low by industry
      standards. Production labor cost as a percentage of net sales decreased slightly
      from 22.9% in the six month period ended June 30, 2005 to 22.8% in the same
      period in 2006 due to our increased use of outsourced labor, particularly for
      our delivery services. Production overhead as a percentage of revenue decreased
      from 16.9% in the first six months of 2005 to 15.3% in 2006 due to the fixed
      cost nature of the expense coupled with the net sales increase.




**Selling,
      General and Administrative Expenses.**




Selling,
      general and administrative expenses increased by $5.0 million or 17.8% during
      the second quarter of 2006 over the same period in 2005.




Selling,
      general and administrative expenses increased by $9.6 million, or 17.5% in
      the
      six months ended June 30, 2006, over the same period in 2005.




Increases
      during the three and six month period ended June 30, 2006 are attributable
      to
      the increase in our sales volume during the same period. Specifically, expenses
      rose primarily due to increases in sales salaries and commissions of $1.7 and
      $3.4 million, incentive payments and bonus accruals of $0.4 and $1.1 million
      that accompany sales growth, $0.3 and $0.8 million of advertising costs, and
      $0.5 and $1.0 million of legal and accounting fees due to compliance costs
      as a
      public company during the three and six months ended June 30, 2006,
      respectively. In April
      2006, the company completed a secondary stock offering, primarily to facilitate
      the sale of shares owned by its financial sponsors, Code Hennessy & Simmons
      LLC, of Chicago. Administrative and legal fees for the secondary offering
      amounted to approximately $0.7 million. As
      a
      percentage of net sales, selling, general and administrative expenses declined
      from 22.4% in the second quarter of 2005 to 21.8% in the second quarter of
      2006
      and from 22.7% in the six months ended June 30, 2005 to 22.1% in the same period
      of 2006 as a result of continued regional consolidation of accounting and
      finance functions, and a maturing regional management structure. Our regional
      management structure, instituted in 2003, continues to bear positive results
      in
      the dissemination of best business practices, better administrative controls,
      and greater consolidation of common regional resources.




**Litigation
      Reserve.**




On
      July
      28, 2006, a decision was rendered against us in the previously disclosed Louis
      Frey bankruptcy litigation in the United States Bankruptcy Court, Southern
      District of New York. The judge determined that damages should be awarded to
      the
      plaintiff in the amount of $11.06 million, interest expense of $2.28 million
      through June 30, 2006, and $0.20 million in preference claims. We continue
      to
      believe our position is meritorious, and remain committed to vigorously
      defending our position through the appellate process. In accordance with
      generally accepted accounting principles (GAAP), we have accounted for the
      judgment by recording a one-time, non-recurring litigation charge of $13.54
      million that includes a $11.26 million litigation reserve ($11.06 million in
      awarded damages and $0.20 million in preference claims), and interest expense
      of
      $2.28 million. These charges are offset by a corresponding tax benefit of $5.42
      million, resulting in a net impact of $8.12 million to the net income during
      the
      three and six months ended June 30, 2006. This one-time, non-recurring
      litigation reserve of $11.3 million represents 7.4% and 3.9% of net sales for
      the three and six months ended June 30, 2006.




**Amortization
      of Intangibles.**




25




Amortization
      of intangibles increased $0.5 million during the three months ended June 30,
      2006 compared to the same period in 2005 primarily due to an increase in
      identified intangible assets such as customer relationships, and trade names
      associated with acquired businesses.




Amortization
      of intangibles increased $0.9 million during the six months ended June 30,
      2006
      primarily for the same reasons above.




**Interest
      Expense, Net.**




Net
      interest expense increased to $7.0 million during the three months ended June
      30, 2006 compared to $6.2 million during the same period in 2005, an increase
      of
      12.9%.




Net
      interest expense decreased to $11.4 million during the six months ended June
      30,
      2006 compared to $14.5 million during the same period in 2005, a decrease of
      21.4%.




The
      increase during the three months ended June 30, 2006 reflects interest expense
      of approximately $2.3 million related to the Louis Frey bankruptcy litigation.
      The increase was partially offset by interest savings from the refinance of
      our
      second lien debt in December 2005.




The
      decrease in the six months ended June 30, 2006 was due primarily to the
      refinance of our second lien debt in December 2005, offset by approximately
      $2.3
      million interest related to the Louis Frey bankruptcy litigation.




**Income
      Taxes.**




Our
      effective income tax rate increased from 39% to 40%, excluding our one-time
      benefit as a result of our reorganization in February 2005. The increase is
      due
      to our entire company being subject to corporate income taxation in 2006 as
      compared to 2005 in which a portion of our business was operated within a
      limited liability company and treated as a partnership for income tax purposes
      until February 3, 2005.




**Net
      Income.**




Net
      income decreased to $8.4 million during the three months ended June 30, 2006
      compared to $11.4 million in the same period in 2005 due to the Louis Frey
      bankruptcy litigation charge, net of taxes, of $8.1 million. Excluding the
      litigation charge, net income increased to $16.6 million during the three months
      ended June 30, 2006 compared to $11.4 million in the same period in 2005
      primarily due to the increase in sales.




Net
      income decreased to $22.8 million during the six months ended June 30, 2006,
      primarily due to a one time tax benefit of $27.7 million as a result of our
      reorganization in February 2005, and from the litigation charge associated
      with
      the Louis Frey bankruptcy litigation. Excluding the one-time tax benefit of
      $27.7, and the litigation charge, net of taxes, of $8.1 million, net income
      increased by $12.0 million during the six months ended June 30, 2006 compared
      to
      the same period in 2005 primarily due to increased sales as overall construction
      activity in the U.S. expanded in most regions and due to lower interest
      expense resulting from the refinance of our debt.




The
      litigation charge, net of taxes, of $8.1 million had a $0.18 adverse impact
      on
      basic and diluted earning per share during the three and six months ended June
      30, 2006. For a reconciliation of net income to adjusted net income and adjusted
      earning per share, please see “Non-GAAP Measures” above.




**EBITDA.**




EBITDA
      margin decreased to 18.1% during the three months ended June 30, 2006 compared
      to 23.7% during the same period in 2005 due to the one-time, non-recurring
      litigation charge for the Louis Frey bankruptcy litigation case. The litigation
      charge had a 7.4% adverse effect on EBITDA margin during the three months ended
      June 30, 2006.




26




The
      EBITDA margin decreased to 21.0% during the six months ended June 30, 2006
      compared to 22.9% during the same period in 2005 due to the litigation charge
      mentioned above. The litigation charge had a 3.9% adverse effect on EBITDA
      margin during the six months ended June 30, 2006.




Absent
      the litigation charge, the EBITDA increases in both periods are attributable
      to
      higher sales. For a reconciliation of EBITDA to net income, please see “Non-GAAP
      Measures” above.




**Impact
      of Inflation**




Inflation
      has not had a significant effect on our operations. Price increases for raw
      materials such as paper typically have been, and we expect will continue to
      be,
      passed on to customers in the ordinary course of business.




**Liquidity
      and Capital Resources**




Our
      principal sources of cash have been operations and borrowings under our bank
      credit facilities or debt agreements. Our historical uses of cash have been
      for
      acquisitions of reprographics businesses, payment of principal and interest
      on
      outstanding debt obligations, capital expenditures and tax-related distributions
      to members of Holdings. Supplemental information pertaining to our historical
      sources and uses of cash is presented as follows and should be read in
      conjunction with our consolidated statements of cash flows and notes thereto
      included elsewhere in this report.




**Six
                Months Ended June 30,****2005**
            
            **2006****(Unaudited)**
              **(Dollars
                in thousands)**Net
                cash provided by operating activities
            
            $
            24,589
            
            $
            42,400Net
                cash used in investing activities
            
            $
            (6,761
            )
            $
            (20,116
            )Net
                cash used in financing activities
            
            $
            (19,063
            )
            $
            (21,828
            )


**Operating
      Activities**




Net
      cash
      of $42.4 million provided by operating activities for the six months ended
      June
      30, 2006, represents a year-over-year increase primarily related to net income
      of $22.8 million. It also includes depreciation and amortization of
      $12.0 million and an increase in accounts payable and accrued expenses of
      $21.1 million primarily due to the litigation charge related to the Louis Frey
      bankruptcy case and the timing of payments on trade payables on several
      operating divisions. These timing of payments increased our days in accounts
      payable by approximately 9.8%. These factors were offset by the growth in
      accounts receivable, net of effect of business acquisitions, of
      $12.7 million, primarily related to increased sales.




**Investing
      Activities**




Net
      cash
      of $20.1 million for the six months ended June 30, 2006 used in investing
      activities primarily relates to the acquisition of businesses and capital
      expenditures at all our operating divisions. Payments for businesses acquired,
      net of cash acquired and including other cash payments and earnout payments
      associated with the acquisitions, amounted to $16.1 million during the six
      months ended June 30, 2006. We incurred capital expenditures totaling
      $3.8 million during the six months ended June 30, 2006.





**Financing
      Activities**




Net
      cash
      of $21.8 million used during the six months ended June 30, 2006 primarily
      relates to the net repayment of debt and capital lease obligations of
      $26.9 million, offset by net proceeds from issuance of common stock under
      our Employee Stock Purchase Plan and stock option exercises of $1.9 million.
      Also included in financing activities is a $3.4 million excess tax benefit
      related to stock options exercised.




27




Our
      cash
      position, working capital, and debt obligations as of June 30, 2006 are shown
      below and should be read in conjunction with our consolidated balance sheets
      and
      notes thereto elsewhere in this report.




**December
                31, 2005**
            
            
            **June
                30, 2006****(Unaudited)****(Dollars
                in thousands)**Cash
                and cash equivalents
            
            $
            22,643
            
            $
            23,099Working
                capital
            
            
            35,797
            
            
            39,438Borrowings
                from senior secured credit facilities
            
            
            230,423
            
            
            216,487Other
                debt obligations
            
            
            43,389
            
            
            51,941Total
                debt obligations
            
            $
            273,812
            
            $
            268,428





We
      expect
      a positive effect on our liquidity and results of operations going forward
      due
      to lower interest expense as net proceeds of approximately $92.7 million from
      our initial public offering were used to reduce our existing debt obligations.
      Our overall interest expense may also be reduced as rates applicable to future
      borrowings on our revolving credit facility may decrease since the margin for
      loans made under the revolving facility is based on the ratio of our
      consolidated indebtedness to our consolidated EBITDA (as defined in our credit
      facilities). The applicable margin on our revolving facility ranges between
      2.00% and 2.75% for LIBOR rate loans and ranges between 1.00% and 1.75% for
      index rate loans.





These
      positive factors will be offset to a certain extent by the amendment consummated
      on July 17, 2006 that increases the Term Loan Facility by $30 million. The
      positive factors will also be partially offset by rising market interest rates
      on our debt obligations under our senior secured credit facilities, which are
      subject to variable interest rates. As discussed in “Quantitative and
      Qualitative Disclosure about Market Risk,” we had $268.4 million of total
      debt outstanding as of June 30, 2006, of which $216.5 million was
      bearing interest at variable rates. A 1.0% change in interest rates on our
      variable rate debt would have resulted in interest expense fluctuating by
      approximately $0.6 million and $1.1 million during the three and six months
      ended June 30, 2006, respectively.




We
      believe that our cash flow provided by operations will be adequate to cover
      our
      2006 working capital needs, debt service requirements, and planned capital
      expenditures, to the extent such items are known or are reasonably determinable
      based on current business and market conditions. However, we may elect to
      finance certain of our capital expenditure requirements through borrowings
      under
      our credit facilities or the issuance of additional debt.




We
      continually evaluate potential acquisitions. Absent a compelling strategic
      reason, we target potential acquisitions that would be cash flow accretive
      within six months. Currently, we are not a party to any agreements or engaged
      in
      any negotiations regarding a material acquisition **.** We
      expect
      to fund future acquisitions through cash flow provided by operations, additional
      borrowings, or the issuance of our equity. The extent to which we will be
      willing or able to use our equity or a mix of equity and cash payments to make
      acquisitions will depend on the market value of our shares from time to time,
      and the willingness of potential sellers to accept equity as full or partial
      payment .




**Debt
      Obligations**




**Senior
      Secured Credit Facilities.**  On
      December 21, 2005, we entered into a Second Amended and Restated Credit and
      Guaranty Agreement (the Second Amended and Restated Credit Agreement), which
      replaced our Amended and Restated Credit and Guaranty Agreement dated as of
      June 30, 2005 (First Amended and Restated Credit and Guaranty Agreement).
      The Second Amended and Restated Credit Agreement provides for senior secured
      credit facilities aggregating up to $310,600,000, consisting of a $280,600,000
      term loan facility and a $30,000,000 revolving credit facility. We used the
      proceeds from the incremental new term loan, in the amount of $157,500,000,
      to
      prepay in full all principal and interest payable under our then existing Second
      Lien Credit and Guaranty Agreement, dated December 18, 2003. The remaining
      balance of the increased term loan facility of $50,000,000 is available for
      our
      use, subject to the terms of the Second Amended and Restated Credit Agreement.
      Our obligations are guaranteed by our domestic subsidiaries and, subject to
      certain limited exceptions, are collateralized by first priority security
      interests granted in all of our and the guarantors’ personal and real property,
      and 65% of the assets of our foreign subsidiaries. Term loans are amortized
      over
      the term with the final payment due June 18, 2009. Amounts borrowed under
      the revolving credit facility must be repaid by December 18,
      2008 .




28




Loans
      made under the credit facilities bear interest at one of two floating rates,
      at
      our option. The floating rates may be priced as either an Index Rate Loan or
      as
      Eurodollar Rate Loan. Term loans that are Index Rate Loans bear interest at
      the
      Index Rate plus .75%. The Index Rate is defined as the higher of (i) the
      rate of interest publicly quoted from time to time by *The
      Wall Street Journal* as the
      base rate on corporate loans posted by the nation’s largest banks and
      (ii) the Federal Reserve reported overnight funds rate plus .5%. Term Loans
      which are Eurodollar Rate Loans bear interest at the Adjusted Eurodollar Rate
      plus 1.75% .




Revolving
      Loans that are Index Rate Loans bear interest at the Index Rate plus an
      Applicable Margin. Revolving Loans that are Eurodollar Rate Loans bear interest
      at the Adjusted Eurodollar Rate plus an Applicable Margin. The Applicable Margin
      is determined by a grid based on the ratio of the consolidated indebtedness
      of
      us and our subsidiaries to the consolidated adjusted EBITDA (as defined in
      the
      credit facilities) of us and our subsidiaries for the most recently ended four
      fiscal quarters and range between 2.00% and 2.75% for Eurodollar Rate Loans
      and
      range between 1.00% and 1.75% for Index Rate Loans .




In
      addition, under the revolving facility, we are required to pay a fee equal
      to
      0.50% of the total unused commitment amount. We may also draw upon this credit
      facility through letters of credit, which carry specific fees.




On
      July
      17, 2006 the Company entered into a First Amendment to Second Amended and
      Restated Credit and Guaranty Agreement (the First Amendment) in order to
      facilitate the consummation of certain proposed acquisitions. The First
      Amendment provided the Company with a $30 million increase to its T  erm
      Loan
      Facility in addition to amending certain other terms including the
      following:





·
            An
                increase in the aggregate purchase price limitation for business
                acquisitions commencing with fiscal year ending December 31,
                2006;


·
            An
                increase in the threshold for capital expenditures during any trailing
                twelve-month period;


·
            Reset
                the Incremental Term Loan amount at $50 million;
                and


·
            Permit
                the Company to issue certain shares of its common stock in connection
                with
                certain proposed acquisitions.





Except
      as
      described above, all other material terms and conditions, including the maturity
      dates of the Company’s existing senior secured credit facilities remained
      similar to those as described in Note 5-“Long Term Debt” to our consolidated
      financial statements included in our 2005 Annual Report on Form 10-K.





**Seller
      Notes.**  As
      of
      June 30, 2006, we had $18 million of seller notes outstanding, with
      interest rates ranging between 5% and 7% and maturities between 2006 and 2011.
      These notes were issued in connection with prior acquisitions .




**Off-Balance
      Sheet Arrangements**




As
      of
      December 31, 2005 and June 30, 2006, we did not have any relationships with
      unconsolidated entities or financial partnerships, such as entities often
      referred to as structured finance or special purpose entities, which would
      have
      been established for the purpose of facilitating off-balance sheet arrangements
      or other contractually narrow or limited purposes.




**Contractual
      Obligations and Other Commitments**




Our
      future contractual obligations as of June 30, 2006, by fiscal year are as
      follows:




**Six
                Months Ending**
            
            
            **Twelve
                Months Ending December 31,****December 31,****2006**
            
            
            **2007**
            
            
            **2008**
            
            
            **2009**
            
            
            **2010**
            
            
            **Thereafter****(Dollars
                in thousands)**Debt
                obligations
            
            $
            3,097
            
            $
            6,030
            
            $
            117,239
            
            $
            103,937
            
            $
            3,311
            
            $
            867Capital
                lease obligations
            
            
            6,297
            
            
            11,498
            
            
            8,659
            
            
            4,033
            
            
            2,217
            
            
            1,243Operating
                lease obligations
            
            
            16,772
            
            
            25,965
            
            
            18,037
            
            
            12,450
            
            
            8,713
            
            
            28,380Total
            
            $
            26,166
            
            $
            43,493
            
            $
            143,935
            
            $
            120,420
            
            $
            14,241
            
            $
            30,490






29




***Operating
      Leases.***  We
      have
      entered into various non-cancelable operating leases primarily related to
      facilities, equipment and vehicles used in the ordinary course of our
      business .




***Contingent
      Transaction Consideration.*** We
      have
      entered into earnout agreements in connection with prior acquisitions. If the
      acquired businesses generate operating profits in excess of predetermined
      targets, we are obligated to make additional cash payments in accordance with
      the terms of such earnout agreements. As of June 30, 2006, we have potential
      future earnout obligations aggregating $7.4 million through 2010 if the
      operating profits exceed the predetermined targets. Earnout payments are
      recorded as additional purchase price (as goodwill) when the contingent payments
      are earned and become payable and consist of a combination of cash and notes
      payable issued to the seller.




***State
      Sales Tax.*** **** We
      were
      involved in a state tax authority dispute related to unresolved sales tax issues
      which arose from such state tax authority’s audit findings from their sales tax
      audit of certain of our operating divisions for the period from October 1998
      to
      September 2001. Those unresolved issues related to the application of sales
      taxes on certain discounts we granted to our customers. Based on the position
      taken by the state tax authority on these unresolved issues, they claimed that
      an additional $1.2 million of sales taxes were due from us for the period in
      question, plus $489,000 of interest. At an appeals conference held on
      December 14, 2004, the appeals board ruled that we were liable in
      connection with one component of the dispute involving approximately $40,000,
      which we had previously paid. We paid the tax in May of 2005 but we strongly
      disagreed with the state tax authority’s position and filed a petition for
      redetermination requesting an appeals conference to resolve these issues. We
      were granted another appeals conference in April 2006 to resolve the
      remaining issues. We lost on appeal. Our accrued expenses in our consolidated
      balance sheet as of June 30, 2006 include $489,000 **** of
      accrued interest related to this matter, which was paid in July of
      2006 **.**




**Impact
      of Conversion from an LLC to a Corporation**




Immediately
      prior to our initial public offering in February 2005, we reorganized from
      a
      California limited liability company to a Delaware corporation, American
      Reprographics Company. In the reorganization, the members of Holdings exchanged
      their common units and options to purchase common units for shares of our common
      stock and options to purchase shares of our common stock. As required by the
      operating agreement of Holdings, we used a portion of the net proceeds from
      our
      initial public offering to repurchase all of the preferred equity of Holdings
      upon the closing of our initial public offering. As part of the reorganization,
      all outstanding warrants to purchase common units were exchanged for shares
      of
      our common stock. We do not expect any significant effect on operations from
      the
      reorganization apart from an increase in our effective tax rate due to
      corporate-level taxes, which will be offset by the elimination of tax
      distributions to our members and the recognition of deferred income taxes upon
      our conversion from a California limited liability company to a Delaware
      corporation .




**Income
      Taxes**




Prior
      to
      February 3, 2005, a portion of our business was operated as a limited liability
      company that was taxed as a partnership. As a result, the Company owners paid
      income taxes on the earnings. Several of our divisions were treated as separate
      corporate entities for income tax purposes. These corporations paid income
      tax
      and record provisions for income taxes in their financial statements .




As
      a
      result of the reorganization to a Delaware corporation, our total earnings
      are
      subject to federal, state and local taxes at a combined statutory rate of
      approximately 40%. The unaudited pro forma incremental income tax provision
      and
      unaudited pro forma earnings per common member unit amounts three and six months
      ended June 30, 2005. were calculated as if our reorganization became effective
      on January 1, 2001 .
      These
      figures are shown in the non-GAAP measures section of Part I, Item 2 of this
      report.




30




**Critical
      Accounting Policies**




Our
      management prepares financial statements in conformity with accounting
      principles generally accepted in the United States. This requires us to make
      estimates and assumptions that affect the amounts reported in the consolidated
      financial statements and accompanying notes. We evaluate our estimates and
      assumptions on an ongoing basis and rely on historical experience and other
      factors that we believe are reasonable under the circumstances. Actual results
      could differ from those estimates and such differences may be material to the
      consolidated financial statements. We believe the critical accounting policies
      and areas that require more significant judgments and estimates used in the
      preparation of our consolidated financial statements to be the following:
      goodwill and other intangible assets; allowance for doubtful accounts; and
      commitments and contingencies.




***Goodwill
      and Other Intangible Assets***




Effective
      January 1, 2002, we adopted Statement of Financial Accounting Standard
      (SFAS) No. 142, “Goodwill and Other Intangible Assets,” which
      requires, among other things, the use of a nonamortization approach for
      purchased goodwill and certain intangibles. Under a nonamortization approach,
      goodwill and intangibles that have an indefinite life are not amortized but
      instead will be reviewed for impairment at least annually, or more frequently
      should an event occur or circumstances indicate that the carrying amount may
      be
      impaired. Such events or circumstances may be a significant change in business
      climate, economic and industry trends, legal factors, negative operating
      performance indicators, significant competition, changes in our strategy, or
      disposition of a reporting unit or a portion thereof. Goodwill impairment
      testing is performed at the reporting unit level .




SFAS 142
      requires a two-step test for goodwill impairment. The first step identifies
      potential impairment by comparing the fair value of a reporting unit with its
      carrying amount, including goodwill. If the fair value exceeds its carrying
      amount, goodwill is not considered impaired and the second step of the test
      is
      unnecessary. If the carrying amount exceeds its fair value, the second step
      measures the impairment loss, if any. The second step compares the implied
      fair
      value of goodwill with the carrying amount of that goodwill. The implied fair
      value of goodwill is determined in the same manner as the amount of goodwill
      recognized in a business combination. If the carrying amount goodwill exceeds
      the implied fair value of that goodwill, an impairment loss is recognized in
      an
      amount equal to that excess .




The
      goodwill impairment test requires judgment, including the identification of
      reporting units, assignment of assets and liabilities to such reporting units,
      assignment of goodwill to such reporting units, and determination of the fair
      value of each reporting unit. The fair value of each reporting unit is estimated
      using a discounted cash flow methodology. This requires significant judgments,
      including estimation of future cash flows (which is dependent on internal
      forecasts), estimation of the long-term growth rate for our business, the useful
      life over which cash flows will occur, and determination of our weighted average
      cost of capital. Changes in these estimates and assumptions could materially
      affect the determination of fair value and/or goodwill impairment for each
      reporting unit .




31




We
      have
      selected September 30 as the date we will perform our annual goodwill
      impairment test. Based on our valuation of goodwill, no impairment charges
      related to the write-down of goodwill were recognized for the years ended
      December 31, 2003, 2004, and 2005 .




Other
      intangible assets that have finite useful lives are amortized over their useful
      lives. An impaired asset is written down to fair value. Intangible assets with
      finite useful lives consist primarily of not-to-compete covenants, trade names,
      and customer relationships and are amortized over the expected period of
      benefit, which ranges from two to twenty years using the straight-line and
      accelerated methods. Customer relationships are amortized under an accelerated
      method that reflects the related customer attrition rates, and trade names
      are
      amortized using the straight-line method .




***Allowance
      for Doubtful Accounts***




We
      perform periodic credit evaluations of the financial condition of our customers,
      monitor collections and payments from customers, and generally do not require
      collateral. Receivables are generally due within 30 days. We provide for
      the possible inability to collect accounts receivable by recording an allowance
      for doubtful accounts. We write off an account when it is considered
      uncollectible. We estimate our allowance for doubtful accounts based on
      historical experience, aging of accounts receivable, and information regarding
      the creditworthiness of our customers. To date, uncollectible amounts have
      been
      within the range of management’s expectations .




***Commitments
      and Contingencies***




In
      the
      normal course of business, we estimate potential future loss accruals related
      to
      legal, tax and other contingencies. These accruals require management’s judgment
      on the outcome of various events based on the best available information.
      However, due to changes in facts and circumstances, the ultimate outcomes could
      differ from management’s estimates .




**Recent
      Accounting Pronouncements**




In
      April
      2005, the United States Securities and Exchange Commission (SEC) approved a
      new
      rule that delayed the effective date of Statement of Financial Accounting
      Standards (SFAS) No. 123R, Share-Based Payment. Except for this deferral of
      the
      effective date, the guidance in SFAS No. 123R was unchanged. Under the SEC's
      rule, SFAS No. 123R became effective for the Company for annual, rather than
      interim, periods that began after June 15, 2005. The Company began applying
      this
      Statement to all awards granted on or after January 1, 2006 and to awards
      modified, repurchased, or cancelled after that date. The implementation of
      this
      standard is further discussed in Note 2, Stock-Based Compensation.





Also,
      in
      November 2005, the Financial Accounting Standards Board (FASB) issued FASB
      Staff
      Position No. FAS 123R-3 (FSP 123R-3), Transition Election Related to Accounting
      for the Tax Effects of Share-Based Payment Awards. FSP 123R-3 provides an
      elective alternative transition method for calculating the pool of excess tax
      benefits available to absorb tax short falls recognized subsequent to the
      adoption of FAS 123R. Companies may take up to one year from the effective
      date
      of FSP 123R-3 to evaluate the available transition alternatives and make a
      one-time election as to which method to adopt. The Company is currently in
      the
      process of evaluating the alternative methods.





On
      July
      13, 2006, the FASB issued Interpretation No. 48 (FIN No. 48) "Accounting for
      Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109."
      This
      interpretation clarifies the accounting for uncertainty in income taxes
      recognized in an entity's financial statements in accordance with SFAS No.
      109,
      "Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold
      and
      measurement principles for financial statement disclosure of tax positions
      taken
      or expected to be taken on a tax return. This interpretation is effective for
      fiscal years beginning after December 15, 2006, or fiscal year 2007 for the
      Company. The Company is assessing the impact the adoption of FIN No. 48 will
      have on the Company's consolidated financial position and results of operations.





32




**Item
              3.**
            **Quantitative
                and Qualitative Disclosure About Market
                Risk**




Our
      primary exposure to market risk is interest rate risk associated with our debt
      instruments. We use both fixed and variable rate debt as sources of financing.
      We have an interest rate collar agreement that will expire in December 2006.
      Except as set forth below, there have been no material changes in market risk
      from the information reported in Item 7A “Quantitative and Qualitative
      Disclosures about Market Risk” in our 2005 Annual Report on Form
      10-K.




In
      March
      2006, we entered into an interest rate collar agreement that becomes effective
      on December 23, 2006 and has a fixed notional amount of $76.7 million until
      December 23, 2007, then decreases to $67.0 million until termination of the
      collar on December 23, 2008. The interest rate collar has a cap strike three
      month LIBOR rate of 5.50% and a floor strike three month LIBOR rate of
      4.70%.




As
      of
      June 30, 2006, we had $268.4 million of total debt obligations of which $216.5
      million was bearing interest at variable rates approximating 7.1% on a weighted
      average basis. A 1.0% change in interest rates on our variable rate debt would
      have resulted in interest expense fluctuating by approximately $.6 million
      and
      $1.1 million during the three and six months ended June 30, 2006,
      respectively.




We
      have
      not, and do not plan to, enter into any derivative financial instruments for
      trading or speculative purposes. As of June 30, 2006, we had no other
      significant material exposure to market risk, including foreign exchange risk
      and commodity risks.




**Item
              4.**
            **Controls
                and Procedures**




**Disclosure
      Controls and Procedures**




We
      maintain disclosure controls and procedures that are designed to ensure that
      information required to be disclosed in our reports under the Securities
      Exchange Act of 1934 is recorded, processed, summarized, and reported within
      the
      time periods specified in the Securities and Exchange Commission’s rules and
      forms, and that such information is accumulated and communicated to our
      management, including our Chief Executive Officer and Chief Financial Officer,
      as appropriate, to allow timely decisions regarding required
      disclosures.




Under
      the
      supervision and with the participation of our management, including our Chief
      Executive Officer and Chief Financial Officer we conducted an evaluation of
      the
      effectiveness of our disclosure controls and procedures (as defined in Rule
      13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of June
      30, 2006. Based on that evaluation, our Chief Executive Officer and Chief
      Financial Officer concluded that as of June 30, 2006, these disclosure controls
      and procedures were effective.




**Changes
      in Internal Controls Over Financial Reporting**




There
      were no significant changes to internal controls over financial reporting during
      the second quarter ended June 30, 2006 that have materially affected, or are
      reasonably likely to materially affect, our internal controls over financial
      reporting.




33


**PART
      II**




**Item
      1. Legal Proceedings**




On
      July
      28, 2006, a decision was rendered against us in the previously disclosed Louis
      Frey bankruptcy litigation in the United States Bankruptcy Court, Southern
      District of New York. The judge determined that damages should be awarded to
      the
      plaintiff in the amount of $11.06 million, interest expense of $2.28 million
      through June 30, 2006, and $0.20 million in preference claims. We continue
      to
      believe our position is meritorious, and remain committed to vigorously
      defending our position through the appellate process. In accordance with
      generally accepted accounting principles (GAAP), we have accounted for the
      judgment by recording a one-time, non-recurring litigation charge of $13.54
      million that includes a $11.26 million litigation reserve ($11.06 million in
      awarded damages and $0.20 million in preference claims), and interest expense
      of
      $2.28 million. These charges are offset by a corresponding tax benefit of $5.42
      million, resulting in a net impact of $8.12 million to the net income during
      the
      three and six months ended June 30, 2006.




**Item
      1A. Risk Factors**




There
      have been no material changes to the risk factors disclosed in our Annual Report
      on Form 10-K for the year ended December 31, 2005, except for the addition
      of
      the following risk factor:




On
      July
      28, 2006, a decision was rendered against us in the previously disclosed Louis
      Frey bankruptcy litigation in the United States Bankruptcy Court, Southern
      District of New York. The judge determined that damages should be awarded to
      the
      plaintiff in the amount of approximately $11.06 million, interest expense of
      $2.28 million through June 30, 2006 and $0.20 million in preference claims.
      In
      accordance with generally accepted accounting principles (GAAP), we have
      accounted for the judgment by recording a one-time, non-recurring litigation
      charge of $13.54 million that includes a $11.26 million litigation reserve
      ($11.06 million in awarded damages and $0.2 million in preference claims),
      and
      interest expense of $2.28 million. These charges are offset by a corresponding
      tax benefit of $5.42 million, resulting in a net impact of $8.12 million to
      the
      net income during the three and six months ended June 30, 2006.





We
      continue to believe our position is meritorious, and remain committed to
      vigorously defending our position through the appellate process. We cannot
      predict the final outcome of the appellate process. If we are unsuccessful
      in
      our appeal, it could have an adverse effect on the Company's financial position
      and results of operations.




**Item
      2.**  **Unregistered Sales of Equity Securities and Use of
      Proceeds**




Our
      senior secured credit facilities contain restrictive covenants which, among
      other things, provide limitations on capital expenditures, restrictions on
      indebtedness and dividend distributions to our stockholders. Additionally,
      we
      are required to meet debt covenants based on certain financial ratio thresholds,
      including minimum interest coverage, maximum leverage and minimum fixed charge
      coverage ratios. The credit facilities also limit our ability and the ability
      of
      our domestic subsidiaries to, among other things, incur liens, make certain
      investments, sell certain assets, engage in reorganizations or mergers, or
      change the character of our business. We are in compliance with all such
      covenants as of June 30, 2006.





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




On
      May
      22, 2006, the annual meeting of the stockholders of the Company was held in
      Glendale, California. There were 44,658,115 shares of common stock outstanding
      on the record date and entitled to vote at the annual meeting. At the annual
      meeting, the stockholders voted as indicated below on the following matters:




(a)  Election
      of the following directors to serve until the next annual meeting of
      stockholders or until their successors are elected and qualified (included
      as
      Proposal 1 in the proxy statement):




34




**VOTE
                FOR**
            
            **VOTE
                WITHHELD**Sathiyamurthy
                Chandramohan
            
            41,009,089
            
            70,760Kumarakulasingam
                Suriyakumar
            
            41,009,089
            
            70,760Thomas
                J. Formolo
            
            41,009,089
            
            70,760Dewitt
                Kerry McCluggage
            
            41,009,089
            
            70,760Mark
                W. Mealy
            
            41,009,089
            
            70,760Manuel
                Perez de la Mesa
            
            41,009,089
            
            70,760Eriberto
                R. Scocimara
            
            41,009,089
            
            70,760




There
      were no abstentions and no broker non-votes.




(b)  Ratification
      of the appointment of PricewaterhouseCoopers, LLP as the Company’s independent
      auditors for the fiscal year ending December 31, 2006 (included as Proposal
      2 in
      the proxy statement):




For:  41,054,234




Against:   24,610




Abstain:
      1,005




This
      proposal was approved by a majority of the shares represented and voting
      (including abstentions) with respect to this proposal, which shares voting
      affirmatively also constituted a majority of the required quorum.




**Item
      5.**   **Other Information:**




Attached
      hereto as Exhibit 99.1 is the press release concerning the accounting treatment
      of the judgment in the Louis Frey case as disclosed throughout this Form
      10-Q. ****




**Item
      6.**  **Exhibits**




INDEX
      TO
      EXHIBITS




**Number**
            
            **Description**10.1
            
            First
                Amendment to Second Amended and Restated Credit and Guaranty Agreement
                dated effective as of July 17, 2006, by and among American Reprographics
                Company L.L.C., a California limited liability company, American
                Reprographics Company, a Delaware corporation, certain financial
                institutions listed in the signature pages thereto, Goldman Sachs
                Credit
                Partners L.P., as Sole Lead Arranger and Joint Bookrunner, JPMorgan
                Securities, Inc., as Joint Bookrunner, General Electric Capital
                Corporation, as Administrative Agent and as Collateral Agent and
                the
                Credit Support Parties listed on the signature pages thereto.
                *31.1
            
            Certification
                by the Chief Executive Officer pursuant to Rules 13a-14(a)/15d-14(a)
                of
                the Securities Exchange Act of 1934. *31.2
            
            Certification
                by the Chief Financial Officer pursuant to Rules 13a-14(a)/15d-14(a)
                of
                the Securities Exchange Act of 1934. *32.1
            
            Certification
                by the Chief Executive Officer and Chief Financial Officer pursuant
                to 18
                U.S.C. Section 1350, as adopted pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002. *99.1
            
            American
                Reprographics Company press release dated August 14, 2006.
                *





*  Filed
      herewith




35


36





**SIGNATURE
      PAGE**




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 on August 14, 2006.


AMERICAN
              REPROGRAPHICS COMPANYBy:
            /s/ Sathiyamurthy
              ChandramohanChairman
                of the Board of Directors and
              Chief
                Executive Officer


By:
            /s/ Mark
              W.
              LeggChief
              Financial Officer and Secretary


37