##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---

FORM 10-Q



---

(Mark One)

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

For the Quarterly Period Ended September 30, 2006

OR



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

Commission file number  001-11112



---

AMERICAN MEDIA OPERATIONS, INC.

(Exact name of registrant as specified in its charter)



---



|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                       |  | 59-2094424                       
|(State or other jurisdiction of incorporation or organization) |  | (IRS Employer Identification No.)
|                                                               | 
|1000 American Media Way, Boca Raton, Florida                   |  | 33464                            
|(Address of principal executive offices)                       |  | (Zip Code)                       

Registrants telephone number, including area code: (561) 997-7733



---

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 ̈No  x

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.

Large accelerated filer ̈Accelerated
filer ̈Non-accelerated filer  x

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

As of April 30, 2007, there were 7,507.6 shares of common stock outstanding.



---



---

##### Table of Contents

RESTATEMENT EXPLANATORY NOTE

Unless the context otherwise requires, references in this Quarterly Report on Form 10-Q to the Company or us, we or our are to American Media Operations, Inc. and its
subsidiaries. In this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 (this Form 10-Q), we have restated: (i) our Unaudited Condensed Consolidated Statements of Loss for the fiscal quarter and
two fiscal quarters ended September 30, 2005, respectively; (ii) our Unaudited Condensed Consolidated Statement of Cash Flows for the two fiscal quarters ended September 30, 2005; and (iii) the Notes related thereto
(collectively, the Restatement).

As previously disclosed, subsequent to the issuance of our financial statements for the fiscal year ended
March 31, 2005, we determined that the financial statements included or otherwise summarized in our Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (including the accompanying report of our independent registered public
accounting firm) and in our Quarterly Reports on Form 10-Q for each of the quarters ended June 30, 2005 and September 30, 2005 should no longer be relied upon. We have not amended and do not intend to amend our previously filed Annual
Reports on Form 10-K or our Quarterly Reports on Form 10-Q for the periods affected by the Restatement that ended on or prior to September 30, 2005. For this reason, the consolidated financial statements, the report of our independent
registered public accounting firm and related financial information for the affected periods contained in such reports should no longer be relied upon.

The Restatement corrects the accounting, presentation and disclosure for the following: (i) deferred rack costs; (ii) subscription marketing programs; (iii) subscription selling agent costs; (iv) deferred rack cost
accruals and amortization; (v) terminal promotion costs and classification; (vi) accruals for retail display pockets and allowances; (vii) provision for income taxes; (viii) operating tax contingencies; (ix) inventory
matters; (x) paper consumption; (xi) paid time off; (xii) severance; (xiii) bonuses; (xiv) deferred advertising; (xv) revenue recognition; (xvi) segment reporting; (xvii) sale of Frontline Marketing, Inc.
(FMI); (xviii) editorial costs; (xix) errors in financial statement classification; and (xx) supplemental disclosures of cash flow information. For a detailed description of the adjustments involved in the Restatement and
their impact on the Unaudited Condensed Consolidated Financial Statements, see Note 2, Restatement of Previously Issued Financial Statements in the Notes to Unaudited Condensed Consolidated Financial Statements.



2



---

##### Table of Contents

AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES

INDEX TO FORM 10-Q

September 30, 2006



|                                                                                                                                                                 |  |        
|---------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------
|                                                                                                                                                                 |  | Page(s)
|CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS THAT COULD CAUSE THE COMPANYS ACTUAL RESULTS TO DIFFER FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS    |  | 4      
|                                                                                                                                                                 | 
|PART I. FINANCIAL INFORMATION                                                                                                                                    |  |        
|                                                                                                                                                                 | 
|Item 1. Financial Statements                                                                                                                                     |  |        
|                                                                                                                                                                 | 
|Unaudited Condensed Consolidated Balance Sheets as of March 31, 2006 and as of September 30, 2006                                                                |  | 5      
|                                                                                                                                                                 | 
|Unaudited Condensed Consolidated Statements of Loss for the Fiscal Quarter and Two Fiscal Quarters Ended September 30, 2005 (As Restated) and September 30, 2006 |  | 6      
|                                                                                                                                                                 | 
|Unaudited Condensed Consolidated Statements of Cash Flows for the Two Fiscal Quarters Ended September 30, 2005 (As Restated) and September 30, 2006              |  | 7      
|                                                                                                                                                                 | 
|Notes to Unaudited Condensed Consolidated Financial Statements                                                                                                   |  | 8      
|                                                                                                                                                                 | 
|Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations                                                                    |  | 25     
|                                                                                                                                                                 | 
|Item 3. Quantitative and Qualitative Disclosures about Market Risk                                                                                               |  | 36     
|                                                                                                                                                                 | 
|Item 4. Controls and Procedures                                                                                                                                  |  | 37     
|                                                                                                                                                                 | 
|PART II. OTHER INFORMATION                                                                                                                                       |  |        
|                                                                                                                                                                 | 
|Item 1. Legal Proceedings                                                                                                                                        |  | 38     
|Item 1A. Risk Factors                                                                                                                                            |  | 38     
|Item 6. Exhibits                                                                                                                                                 |  | 38     
|                                                                                                                                                                 | 
|Signatures                                                                                                                                                       |  | 39     



3



---

##### Table of Contents

CAUTIONARY STATEMENT IDENTIFYING IMPORTANT FACTORS

THAT COULD CAUSE THE COMPANYS ACTUAL RESULTS TO
DIFFER

FROM THOSE PROJECTED IN FORWARD-LOOKING STATEMENTS

In connection with the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, readers of this Form 10-Q are advised that this Form 10-Q contains both statements of historical facts
and forward-looking statements. Forward-looking statements are subject to certain risks and uncertainties, which could cause our actual results to differ materially from those indicated by the forward-looking statements. Examples of forward-looking
statements include, but are not limited to (i) projections of revenues, income or loss, capital expenditures, capital structure and other financial items, (ii) statements regarding our plans and objectives, including planned introductions
of new publications or other products, or estimates or predictions of actions by customers, advertisers, suppliers, competitors or regulatory authorities, (iii) statements of future economic performance, and (iv) statements of assumptions
underlying other statements and statements about our business.

Factors that could affect our actual results include the following:



| |  |  | our high degree of leverage and significant debt service obligations
| | - |  | --------------------------------------------------------------------



| |  |  | increased competition, including price competition and competition from other publications and forms of media, such as television and radio programs and
Internet sites concentrating on celebrity news
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | changes in demand for our services and products by our customers and advertisers
| | - |  | --------------------------------------------------------------------------------



| |  |  | changes in general economic and business conditions, both nationally and internationally, which can influence the readership level of our publications as
well as advertising and circulation revenue
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | our ability to attract and retain experienced and qualified personnel
| | - |  | ---------------------------------------------------------------------



| |  |  | our ability to obtain sufficient financing to continue to sustain or expand our operations
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | adverse results in litigation matters or any regulatory proceedings
| | - |  | -------------------------------------------------------------------



| |  |  | any downgrade in the rating of our securities
| | - |  | ---------------------------------------------



| |  |  | our ability to comply with covenant requirements in our agreements with our lenders and in our indentures
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | our ability to implement and maintain an effective system of internal controls over financial reporting
| | - |  | -------------------------------------------------------------------------------------------------------



| |  |  | our ability to realize expected benefits from cost savings and revenue enhancement initiatives
| | - |  | ----------------------------------------------------------------------------------------------

For a further discussion of risk factors which could cause actual results to differ materially from those indicated by the forward-looking statements, see Item 1A,
Risk Factors, in our Annual Report on Form 10-K for the fiscal year ended March 31, 2006 (the March 31, 2006 10-K). Any written or oral forward-looking statements made by us or on our behalf are subject to these factors.
Should one or more of these risks or uncertainties materialize, or should assumptions underlying the forward-looking statements prove incorrect, actual results, performance or achievements may vary materially from those described in this Form 10-Q
as intended, planned, anticipated, believed, estimated or expected. The risk factors included in this Form 10-Q and in the March 31, 2006 10-K are not necessarily all of the important factors that could cause actual results to differ materially
from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors could also harm our future results. Given these uncertainties, readers are cautioned not to place undue reliance on such forward-looking
statements.

The forward-looking statements included in this Form 10-Q are made only as of the date of this Form 10-Q. We do not intend, and do not assume
any obligations, to update these forward looking statements, except as required by law.



4



---

##### Table of Contents

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share information)



|                                                                                                     |  |                |           |   |                    |   |           |  
|---------------------------------------------------------------------------------------------------- |  | -------------- | --------- | - | ------------------ | - | --------- | -
|                                                                                                     |  | March 31, 2006 |           |   | September 30, 2006 |  
|ASSETS                                                                                               |  |                |           |   |                    |   |           |  
|CURRENT ASSETS:                                                                                      |  |                |           |   |                    |   |           |  
|Cash and cash equivalents                                                                            |  | $              | 19,591    |   |                    | $ | 22,518    |  
|Trade receivables, net of allowance for doubtful accounts of $9,211 and $6,805, respectively         |  |                | 50,373    |   |                    |   | 53,980    |  
|Inventories                                                                                          |  |                | 36,619    |   |                    |   | 23,682    |  
|Prepaid expenses and other current assets                                                            |  |                | 18,203    |   |                    |   | 15,234    |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total current assets                                                                                 |  |                | 124,786   |   |                    |   | 115,414   |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|PROPERTY AND EQUIPMENT, NET:                                                                         |  |                |           |   |                    |   |           |  
|Leasehold improvements                                                                               |  |                | 2,544     |   |                    |   | 1,712     |  
|Furniture, fixtures and equipment                                                                    |  |                | 39,308    |   |                    |   | 40,593    |  
|Less  accumulated depreciation and amortization                                                     |  |                | (31,262   | ) |                    |   | (33,758   | )
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total property and equipment, net                                                                    |  |                | 10,590    |   |                    |   | 8,547     |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|OTHER ASSETS:                                                                                        |  |                |           |   |                    |   |           |  
|Deferred debt costs, net                                                                             |  |                | 21,678    |   |                    |   | 21,905    |  
|Deferred rack costs, net                                                                             |  |                | 20,943    |   |                    |   | 13,428    |  
|Other long-term assets                                                                               |  |                | 2,987     |   |                    |   | 3,123     |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total other assets                                                                                   |  |                | 45,608    |   |                    |   | 38,456    |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|GOODWILL AND OTHER IDENTIFIED INTANGIBLE ASSETS:                                                     |  |                |           |   |                    |   |           |  
|Goodwill, net of accumulated amortization of $74,757                                                 |  |                | 623,617   |   |                    |   | 623,617   |  
|Other identified intangibles, net of accumulated amortization of $134,756 and $139,259, respectively |  |                | 484,713   |   |                    |   | 480,210   |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total goodwill and other identified intangible assets                                                |  |                | 1,108,330 |   |                    |   | 1,103,827 |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|TOTAL ASSETS                                                                                         |  | $              | 1,289,314 |   |                    | $ | 1,266,244 |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                       |  |                |           |   |                    |   |           |  
|CURRENT LIABILITIES:                                                                                 |  |                |           |   |                    |   |           |  
|Accounts payable                                                                                     |  | $              | 32,044    |   |                    | $ | 25,080    |  
|Accrued expenses and other current liabilities                                                       |  |                | 62,175    |   |                    |   | 51,420    |  
|Accrued interest                                                                                     |  |                | 25,656    |   |                    |   | 21,579    |  
|Deferred revenues                                                                                    |  |                | 43,691    |   |                    |   | 43,206    |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total current liabilities                                                                            |  |                | 163,566   |   |                    |   | 141,285   |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|NON-CURRENT LIABILITIES:                                                                             |  |                |           |   |                    |   |           |  
|Term loan and revolving credit facility                                                              |  |                | 450,000   |   |                    |   | 478,000   |  
|Senior subordinated notes, including bond premium                                                    |  |                | 550,321   |   |                    |   | 550,269   |  
|Deferred income taxes                                                                                |  |                | 116,103   |   |                    |   | 119,068   |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total liabilities                                                                                    |  |                | 1,279,990 |   |                    |   | 1,288,622 |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|COMMITMENTS AND CONTINGENCIES (Note 12)                                                              |  |                |           |   |                    |   |           |  
|STOCKHOLDERS EQUITY (DEFICIT):                                                                      |  |                |           |   |                    |   |           |  
|Common stock, $.20 par value; 10,000 shares authorized; 7,508 shares issued and outstanding          |  |                | 2         |   |                    |   | 2         |  
|Additional paid-in capital                                                                           |  |                | 281,671   |   |                    |   | 281,671   |  
|Accumulated deficit                                                                                  |  |                | (272,460  | ) |                    |   | (304,271  | )
|Accumulated other comprehensive income                                                               |  |                | 111       |   |                    |   | 220       |  
|                                                                                                     |  |                |           |   |                    |   |           |  
|Total stockholders equity (deficit)                                                                 |  |                | 9,324     |   |                    |   | (22,378   | )
|                                                                                                     |  |                |           |   |                    |   |           |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)                                                 |  | $              | 1,289,314 |   |                    | $ | 1,266,244 |  
|                                                                                                     |  |                |           |   |                    |   |           |  

The accompanying notes to the Unaudited Condensed Consolidated Financial Statements are an integral
part of these Unaudited Condensed Consolidated Financial Statements.



5



---

##### Table of Contents

AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF LOSS

(in thousands)



|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ------------------------------------------- | ------- | - | ------------------------- | - | ------- | ------------------------------------------- |  | - | ------------------ | - |  | - | ------- | -
|                                                                             |  | Fiscal Quarter Ended                        |         |   | Two Fiscal Quarters Ended |  
|                                                                             |  | September 30, 2005(As Restated,
See Note 2) |         |   | September 30, 2006        |   |         | September 30, 2005(As Restated,
See Note 2) |  |   | September 30, 2006 |  
|OPERATING REVENUES:                                                          |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Circulation                                                                  |  | $                                           | 75,715  |   |                           | $ | 74,305  |                                             |  | $ | 147,690            |   |  | $ | 141,274 |  
|Advertising                                                                  |  |                                             | 42,243  |   |                           |   | 44,345  |                                             |  |   | 86,949             |   |  |   | 86,311  |  
|Other                                                                        |  |                                             | 7,755   |   |                           |   | 7,534   |                                             |  |   | 15,005             |   |  |   | 15,001  |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Total operating revenues                                                     |  |                                             | 125,713 |   |                           |   | 126,184 |                                             |  |   | 249,644            |   |  |   | 242,586 |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|OPERATING EXPENSES:                                                          |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Editorial                                                                    |  |                                             | 15,519  |   |                           |   | 14,201  |                                             |  |   | 30,679             |   |  |   | 28,192  |  
|Production                                                                   |  |                                             | 39,562  |   |                           |   | 38,500  |                                             |  |   | 79,098             |   |  |   | 77,479  |  
|Distribution, circulation and other cost of sales                            |  |                                             | 23,080  |   |                           |   | 22,144  |                                             |  |   | 45,696             |   |  |   | 45,370  |  
|Selling, general and administrative                                          |  |                                             | 22,161  |   |                           |   | 25,581  |                                             |  |   | 45,716             |   |  |   | 57,252  |  
|Depreciation and amortization                                                |  |                                             | 6,701   |   |                           |   | 3,850   |                                             |  |   | 13,559             |   |  |   | 7,916   |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Total operating expenses                                                     |  |                                             | 107,023 |   |                           |   | 104,276 |                                             |  |   | 214,748            |   |  |   | 216,209 |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|OPERATING INCOME                                                             |  |                                             | 18,690  |   |                           |   | 21,908  |                                             |  |   | 34,896             |   |  |   | 26,377  |  
|                                                                             |  |                                             |         |  
|OTHER INCOME (EXPENSE):                                                      |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Interest expense                                                             |  |                                             | (22,209 | ) |                           |   | (23,665 | )                                           |  |   | (40,993            | ) |  |   | (48,006 | )
|Amortization of deferred debt costs                                          |  |                                             | (1,828  | ) |                           |   | (1,854  | )                                           |  |   | (3,433             | ) |  |   | (3,397  | )
|Other income, net                                                            |  |                                             | 67      |   |                           |   | 198     |                                             |  |   | 1,691              |   |  |   | 527     |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|Total other expense                                                          |  |                                             | (23,970 | ) |                           |   | (25,321 | )                                           |  |   | (42,735            | ) |  |   | (50,876 | )
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|LOSS BEFORE PROVISION FOR INCOME TAXES AND LOSS FROM DISCONTINUED OPERATIONS |  |                                             | (5,280  | ) |                           |   | (3,413  | )                                           |  |   | (7,839             | ) |  |   | (24,499 | )
|                                                                             |  |                                             |         |  
|PROVISION FOR INCOME TAXES                                                   |  |                                             | 1,232   |   |                           |   | 759     |                                             |  |   | 328                |   |  |   | 5,654   |  
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS                                              |  |                                             | (6,512  | ) |                           |   | (4,172  | )                                           |  |   | (8,167             | ) |  |   | (30,153 | )
|                                                                             |  |                                             |         |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES                       |  |                                             | (3,520  | ) |                           |   | (167    | )                                           |  |   | (5,274             | ) |  |   | (1,658  | )
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  
|NET LOSS                                                                     |  | $                                           | (10,032 | ) |                           | $ | (4,339  | )                                           |  | $ | (13,441            | ) |  | $ | (31,811 | )
|                                                                             |  |                                             |         |   |                           |   |         |                                             |  |   |                    |   |  |   |         |  

The accompanying notes to the Unaudited Condensed Consolidated Financial Statements are an integral
part of these Unaudited Condensed Consolidated Financial Statements.



6



---

##### Table of Contents

AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)



|                                                                            |  |                                              |         |   |                    |   |         |  
|--------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | ------------------ | - | ------- | -
|                                                                            |  | Two Fiscal Quarters Ended                    |        
|                                                                            |  | September 30, 2005 (As Restated, See Note
2) |         |   | September 30, 2006 |  
|Cash Flows from Operating Activities:                                       |  |                                              |         |   |                    |   |         |  
|Net loss                                                                    |  | $                                            | (13,441 | ) |                    | $ | (31,811 | )
|Adjustments to reconcile net loss to net cash used in operating activities: |  |                                              |         |   |                    |   |         |  
|Depreciation of property and equipment                                      |  |                                              | 6,516   |   |                    |   | 3,413   |  
|Amortization of identified intangibles                                      |  |                                              | 7,043   |   |                    |   | 4,503   |  
|Provision for bad debts                                                     |  |                                              | 4,240   |   |                    |   | 1,513   |  
|Amortization of deferred debt costs                                         |  |                                              | 3,433   |   |                    |   | 3,397   |  
|Amortization of deferred rack costs                                         |  |                                              | 12,535  |   |                    |   | 9,812   |  
|Write-off of deferred racks and property and equipment                      |  |                                              |        |   |                    |   | 1,144   |  
|Gain on sale of investment                                                  |  |                                              | (1,607  | ) |                    |   |        |  
|Provision for excess and obsolete inventory                                 |  |                                              | 412     |   |                    |   |        |  
|Deferred income tax provision                                               |  |                                              | 265     |   |                    |   | 5,331   |  
|Other                                                                       |  |                                              | (694    | ) |                    |   | (148    | )
|Decrease (increase) in operating assets:                                    |  |                                              |         |   |                    |   |         |  
|Trade receivables                                                           |  |                                              | (9,963  | ) |                    |   | (5,120  | )
|Inventories                                                                 |  |                                              | (3,194  | ) |                    |   | 12,937  |  
|Prepaid expenses and other current assets                                   |  |                                              | (1,795  | ) |                    |   | 1,166   |  
|Deferred rack costs                                                         |  |                                              | (13,156 | ) |                    |   | (3,205  | )
|Other long-term assets                                                      |  |                                              | (232    | ) |                    |   | (136    | )
|Increase (decrease) in operating liabilities:                               |  |                                              |         |   |                    |   |         |  
|Accounts payable                                                            |  |                                              | (9,888  | ) |                    |   | (6,964  | )
|Accrued expenses and other current liabilities                              |  |                                              | 4,965   |   |                    |   | (10,758 | )
|Accrued interest                                                            |  |                                              | 1,440   |   |                    |   | (4,077  | )
|Deferred revenues                                                           |  |                                              | 3,299   |   |                    |   | (485    | )
|                                                                            |  |                                              |         |   |                    |   |         |  
|Total adjustments                                                           |  |                                              | 3,619   |   |                    |   | 12,323  |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Net cash used in operating activities                                       |  |                                              | (9,822  | ) |                    |   | (19,488 | )
|                                                                            |  |                                              |         |   |                    |   |         |  
|Cash Flows from Investing Activities:                                       |  |                                              |         |   |                    |   |         |  
|Purchases of property and equipment                                         |  |                                              | (2,480  | ) |                    |   | (1,662  | )
|Investment in Mr. Olympia, LLC                                              |  |                                              | (600    | ) |                    |   | (300    | )
|Proceeds from sale of investment                                            |  |                                              | 1,607   |   |                    |   |        |  
|Proceeds from the sale of fixed assets                                      |  |                                              | 53      |   |                    |   | 198     |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Net cash used in investing activities                                       |  |                                              | (1,420  | ) |                    |   | (1,764  | )
|                                                                            |  |                                              |         |   |                    |   |         |  
|Cash Flows from Financing Activities:                                       |  |                                              |         |   |                    |   |         |  
|Term loan and revolving credit facility principal repayments                |  |                                              | (68,398 | ) |                    |   | (40,000 | )
|Proceeds from revolving credit facility borrowings                          |  |                                              | 80,500  |   |                    |   | 68,000  |  
|Return of equity investment                                                 |  |                                              | (30     | ) |                    |   |        |  
|Payment of deferred debt costs                                              |  |                                              | (1,197  | ) |                    |   | (3,975  | )
|                                                                            |  |                                              |         |   |                    |   |         |  
|Net cash provided by financing activities                                   |  |                                              | 10,875  |   |                    |   | 24,025  |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Effect of exchange rate changes on cash                                     |  |                                              | (7      | ) |                    |   | 154     |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Net (Decrease) Increase in Cash and Cash Equivalents                        |  |                                              | (374    | ) |                    |   | 2,927   |  
|Cash and Cash Equivalents, Beginning of Period                              |  |                                              | 3,994   |   |                    |   | 19,591  |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Cash and Cash Equivalents, End of Period                                    |  | $                                            | 3,620   |   |                    | $ | 22,518  |  
|                                                                            |  |                                              |         |   |                    |   |         |  
|Supplemental Disclosures of Cash Flow Information:                          |  |                                              |         |   |                    |   |         |  
|Cash paid during the period for -                                           |  |                                              |         |   |                    |   |         |  
|Income taxes                                                                |  | $                                            | 473     |   |                    | $ | 816     |  
|Interest                                                                    |  | $                                            | 39,478  |   |                    | $ | 51,747  |  

The accompanying notes to the Unaudited Condensed Consolidated Financial Statements are an integral
part of these Unaudited Condensed Consolidated Financial Statements.



7



---

##### Table of Contents

AMERICAN MEDIA OPERATIONS, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS

September 30, 2006

(1) Basis of Presentation

The Unaudited Condensed Consolidated Financial Statements of American Media Operations, Inc. and subsidiaries
(collectively, the Company) include the accounts of the Company and all of its wholly owned subsidiaries. The Company consolidates all majority owned subsidiaries and investments in entities in which it has a controlling influence.
Non-majority owned investments are accounted for using the equity method when the Company has the ability to significantly influence the operating decisions of the issuer. When the Company does not have the ability to significantly influence the
operating decisions of an issuer, the cost method is used. For entities that are considered variable interest entities, the Company applies the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46-R,
Consolidation of Variable Interest Entities  An Interpretation of ARB No. 51. All significant intercompany accounts and transactions have been eliminated in consolidation.

In the opinion of management, the accompanying Unaudited Condensed Consolidated Financial Statements reflect all normal and recurring adjustments which are necessary for
a fair presentation of the Companys financial position, results of operations, and cash flows as of the dates and for the periods presented. The Unaudited Condensed Consolidated Financial Statements have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission (the SEC) regarding interim financial reporting. Accordingly, these statements do not include all the disclosures normally required by accounting principles generally accepted in the
United States of America for annual financial statements and should be read in conjunction with the financial statements and notes thereto for the year ended March 31, 2006 included in the Companys Annual Report on Form 10-K for the
fiscal year ended March 31, 2006 (the March 31, 2006 10-K), including the summary of significant accounting policies set forth in Note 1 thereof. The Unaudited Condensed Consolidated Statements of Loss for the fiscal quarter and two
fiscal quarters ended September 30, 2006 are not necessarily indicative of the results to be expected for any future period or for the full fiscal year.

(2) Restatement of Previously Issued Financial Statements

Subsequent to the issuance of the Companys fiscal year 2005 financial
statements, the Companys management determined that errors existed in previously issued financial statements. As a result, the Company has restated the accompanying Unaudited Condensed Consolidated Statements of Loss for the fiscal quarter and
two fiscal quarters ended September 30, 2005, respectively, Unaudited Condensed Consolidated Statement of Cash Flows for the two fiscal quarters ended September 30, 2005, and Notes related thereto from amounts previously reported
(collectively, the Restatement) to correct the accounting, presentation and disclosure for the following: (i) deferred rack costs; (ii) subscription marketing programs; (iii) subscription selling agent costs;
(iv) deferred rack cost accruals and amortization; (v) terminal promotion costs and classification; (vi) accruals for retail display pockets and allowances; (vii) provision for income taxes; (viii) operating tax
contingencies; (ix) inventory matters; (x) paper consumption; (xi) paid time off; (xii) severance; (xiii) bonuses; (xiv) deferred advertising; (xv) revenue recognition; (xvi) segment reporting;
(xvii) sale of Frontline Marketing, Inc. (FMI); (xviii) editorial costs; (xix) errors in financial statement classification; and (xx) supplemental disclosures of cash flow information.

The effect of these Restatement adjustments increased (decreased) the March 31, 2005 ending accumulated deficit and accumulated other comprehensive loss by $37.1
million and $(0.6) million, respectively.

A summary of the increase (decrease) effect on net income as a result of the Restatement is as follows (in
thousands):



8



---

##### Table of Contents

|                            |  |                                         |       |   |                                              |   |        |  
|--------------------------- |  | --------------------------------------- | ----- | - | -------------------------------------------- | - | ------ | -
|                            |  | Fiscal Quarter Ended September 30, 2005 |       |   | Two Fiscal Quarters Ended September 30, 2005 |  
|Circulation                 |  | $                                       | 24    |   |                                              | $ | (1,966 | )
|Operating Tax Contingencies |  |                                         | (424  | ) |                                              |   | (848   | )
|Production                  |  |                                         | 393   |   |                                              |   | 71     |  
|Employee Related Costs      |  |                                         | 875   |   |                                              |   | 944    |  
|Weider Acquisition          |  |                                         | (65   | ) |                                              |   | 202    |  
|Revenue Recognition         |  |                                         | (18   | ) |                                              |   | 1,552  |  
|Other                       |  |                                         | 312   |   |                                              |   | (572   | )
|                            |  |                                         |       |   |                                              |   |        |  
|Pre-tax Income Effect       |  |                                         | 1,097 |   |                                              |   | (617   | )
|Income Taxes                |  |                                         | (220  | ) |                                              |   | 364    |  
|                            |  |                                         |       |   |                                              |   |        |  
|Net Income Effect           |  | $                                       | 877   |   |                                              | $ | (253   | )
|                            |  |                                         |       |   |                                              |   |        |  

Circulation



| |  |  | Deferred Rack Costs: Deferred rack costs previously reported as a component of furniture, fixtures and equipment should have been reported as a deferred
cost. As a result, the Company has restated its classification of such amounts to deferred rack costs, net. In addition, the amortization of display racks previously reported as depreciation and amortization should have been recognized as a
reduction to circulation revenues on the Unaudited Condensed Consolidated Statements of Loss, in accordance with Emerging Issues Task Force No. 01-9, Accounting for Consideration Given by a Vendor to a Customer. The Company previously
reflected deferred rack costs as cash flows from investing activities. Such costs are now reflected as cash flows from operating activities in the Unaudited Condensed Consolidated Statements of Cash Flows.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The effect of this correction was a decrease in both circulation revenue and depreciation expense of $5.0 million and $9.9 million for the fiscal quarter
and two fiscal quarters ended September 30, 2005, respectively. This correction did not have any effect on the Companys operating income.



| |  |  | Subscription Marketing Programs:Subscription related revenue was incorrectly recorded for certain subscriptions sold by third party agents due to the
Companys inability to estimate payment percentages due to a lack of historical information. In addition, commissions paid to such agents were previously deferred and amortized, but should have been expensed when incurred.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The effect of this correction was an increase in circulation revenue of $0.3 million and an increase in selling, general
and administrative expense of $0.1 million for the fiscal quarter ended September 30, 2005. Circulation revenue decreased by $35 thousand and selling, general and administrative expense increased $0.1 million for the two fiscal quarters ended
September 30, 2005.



| |  |  | Subscription Selling Agent Costs: Certain payments to subscription selling agents for generating new subscriptions should have been expensed as incurred.
Previously, the Company deferred these costs and amortized them over the related subscription period. As a result of this Restatement adjustment, the previously recorded amortization expense has been reversed and the total amount of payments to the
subscription selling agents have been expensed in the period incurred. The effect of this correction was a decrease in distribution, circulation and other cost of sales of $0.9 million and $0.5 million for the fiscal quarter and two fiscal quarters
ended September 30, 2005, respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Deferred Rack Cost Accruals and Amortization:Certain deferred rack costs were incorrectly recorded upon the processing of payments rather than accrued when
placed in service. In addition, the related amortization expense relating to such racks should have commenced when placed into service. Additionally, certain rack payments were previously being amortized over the incorrect useful life. The effect of
this correction was a decrease in circulation revenue of $1.0 million and $1.8 million for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Terminal Promotion Costs and Classification:Certain terminal promotion costs relating to the placement of the Companys publications at transportation
terminals were previously being amortized over the incorrect useful life. In addition, certain terminal promotion costs were incorrectly recorded in distribution, circulation and other cost of sales expense rather than as a reduction in circulation
revenue. The effect of this correction was a decrease in circulation revenue of $0.4 million and $0.9 million for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively, and a decrease to distribution, circulation and
other cost of sales expense of $0.3 million and $0.6 million for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



9



---

##### Table of Contents

| |  |  | Accruals for Retail Display Pockets and Allowances: The Company has determined that errors existed with respect to certain retail display pocket and
allowance accruals. The accruals recorded were insufficient. The effect of this correction was a decrease in circulation revenue of $0.1 million and $0.2 million for the fiscal quarter and two fiscal quarters ended September 30, 2005,
respectively.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Taxes



| |  |  | Provision for Income Taxes:The tax effect of book income restatement items has been reflected as a reduction to income tax expense. Deferred tax assets or
liabilities associated with these items have also been recorded. The Company is also correcting for tax provision errors relating to state and foreign income taxes and adjustments to the carrying amounts of deferred tax assets and liabilities.
Furthermore, certain income tax contingencies were not properly recorded.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Operating Tax Contingencies: Tax contingencies related to sales taxes were incorrectly reported as income taxes. The Company has also recorded other sales
tax contingencies as part of the Restatement. Restatement adjustments to correct this have been recorded as adjustments to circulation revenue. Additionally, the Company has recorded additional tax contingencies related to franchise taxes for the
fiscal quarter and two fiscal quarters ended September 30, 2005, respectively, which are reflected in selling, general and administrative expenses. The Company has also recorded interest expense related to these operating tax contingencies.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                                                |  |                                         |      |   |                                              |   |      |  
|------------------------------------------------------------------------------- |  | --------------------------------------- | ---- | - | -------------------------------------------- | - | ---- | -
|Impact on Financial Statements Increase (Decrease) to Net Income (in thousands) |  | Fiscal Quarter Ended September 30, 2005 |      |   | Two Fiscal Quarters Ended September 30, 2005 |  
|                                                                                | 
|(Provision) Benefit for Income Taxes                                            |  |                                         |      |   |                                              |   |      |  
|Tax effect of book income restatements                                          |  | $                                       | (406 | ) |                                              | $ | 242  |  
|Tax provision errors                                                            |  |                                         | 186  |   |                                              |   | 122  |  
|                                                                                |  |                                         |      |   |                                              |   |      |  
|Total Income Taxes                                                              |  | $                                       | (220 | ) |                                              | $ | 364  |  
|                                                                                |  |                                         |      |   |                                              |   |      |  
|Circulation revenue                                                             |  | $                                       | (310 | ) |                                              | $ | (620 | )
|Selling, general and administrative expense                                     |  |                                         | (114 | ) |                                              |   | (228 | )
|                                                                                |  |                                         |      |   |                                              |   |      |  
|Total Operating Tax Contingencies                                               |  | $                                       | (424 | ) |                                              | $ | (848 | )
|                                                                                |  |                                         |      |   |                                              |   |      |  

Production



| |  |  | Inventory Matters:Inventory charges should have been provided for estimated excess paper inventory for the fiscal quarter and two fiscal quarters ended
September 30, 2005 in the amounts of $0.1 million and $0.4 million, respectively, resulting in increases to production expense for the same amounts.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

In addition, the paper inventory account was reconciled incorrectly for the fiscal quarter and two fiscal quarters ended September 30, 2005 resulting in an increase in inventory by $0.3 million and $0.4 million,
respectively. The effects of this correction were decreases to production expense by the same amounts.



| |  |  | Paper Consumption:The Company has determined that errors existed with respect to certain paper consumption accruals. The effect of this correction were
decreases in the amounts of $0.2 million and $0.1 million to production expense for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



10



---

##### Table of Contents

Employee Related Costs



| |  |  | Paid Time Off (PTO): The Company has determined that errors existed with respect to certain PTO accruals. The effects of this correction were
decreases of $0.8 million and of $0.5 million in selling, general and administrative expense for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Severance:The Company has determined that errors existed with respect to certain severance accruals. The effects of this correction were a $0.1 million
decrease and a $0.2 million increase to selling, general, and administrative expense for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Bonuses: The Company has determined that errors existed with respect to certain bonus accruals. The effect of this correction was a decrease in selling,
general, and administrative expense of $0.7 million for the two fiscal quarters ended September 30, 2005. There was no effect on net income for the fiscal quarter ended September 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Weider Acquisition



| |  |  | Deferred Advertising:The Company incorrectly amortized deferred revenue associated with an obligation to provide advertising at a discounted rate in certain
of the Companys publications. The Company was previously amortizing the deferred revenue based on actual advertising pages used rather than on the maximum number of pages which expire annually. In addition, the Company incorrectly recognized
all of the revenue as advertising revenue. The Company should have recognized advertising revenue for actual advertising pages used with the remaining revenue recognized in other revenue. The liability was established as part of the Weider
acquisition in fiscal year 2003. As a result of this Restatement adjustment, advertising revenue decreased by $0.4 million, other revenue increased by $0.4 million and editorial expense increased by $0.1 million for the fiscal quarter ended
September 30, 2005. Advertising revenue decreased by $0.4 million, other revenue increased by $0.7 million and editorial expense increased by $0.2 million for the two fiscal quarters ended September 30, 2005.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Revenue Recognition



| |  |  | Advertising, subscription and newsstand revenue relating to the Companys monthly publications was previously recognized in the incorrect period. The effects
of this correction were a decrease in operating revenue of $0.5 million and a decrease in operating expense of $0.5 million for the fiscal quarter ended September 30, 2005 and an increase in operating revenue of $0.6 million and a decrease in
operating expense of $0.9 million for the two fiscal quarters ended September 30, 2005.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Other



| |  |  | Segment Reporting: The Company has concluded that it operates in five reporting segments: Newspaper Publications, Celebrity Publications, Womens Health
and Fitness Publications, Distribution Services and Corporate/Other, rather than aggregated into one reporting segment as previously reported. The aggregation of the Companys business is based upon the Companys publications having the
following similarities: economic characteristics including gross margins, types of products and services, types of production processes, type or class of customer, and method of distribution, as required by Statement of Financial Accounting
Standards (SFAS) No. 131, Disclosures about Segments of an Enterprise and Related Information (SFAS No. 131). As a result, the Company has included segment reporting and enterprise-wide
disclosures as part of its financial presentation. See Note 13, Business Segment Information, for further discussion.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Sale of Frontline Marketing, Inc. (FMI):Gains recorded on the sale in fiscal year 2001 of the Companys 80% owned subsidiary, FMI, should have been
deferred until cash was received for the net realizable value of the note rather than recognized in fiscal year 2001 through fiscal year 2003. In addition, all cash payments on a related $2.0 million note receivable should have been recorded on a
cost recovery method of accounting. As a result of this Restatement adjustment, other income decreased by a total of $9 thousand for the two fiscal quarters ended September 30, 2005. There was no effect on net income for the fiscal quarter
ended September 30, 2005.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Editorial Costs: The Company has determined that errors existed with respect to certain editorial cost accruals. The effects of this correction were a
decrease in editorial expense of $0.3 million for the fiscal quarter ended September 30, 2005 and a $0.8 million increase in editorial expense for the two fiscal quarters ended September 30, 2005.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



11



---

##### Table of Contents

| |  |  | Errors in Financial Statement Classification:Certain amounts in the Unaudited Condensed Consolidated Statement of Cash Flows for the two fiscal quarters
ended September 30, 2005 were incorrectly classified. These amounts have been reclassified to conform to the two fiscal quarters ended September 30, 2006 presentation, including classifying in the two fiscal quarters ended
September 30, 2005: (1) $80.5 million of proceeds from revolving credit facility borrowings and $68.4 million of term loan and revolving credit facility principal repayments rather than presenting the $15.0 million of term loan and
revolving credit facility principal borrowings and $2.9 million of term loan and revolving credit facility principal repayments and (2) $1.6 million of proceeds from sale of investment as cash provided by investing activities and a $1.6 million
gain on sale of investment in operating activities rather than netting both of these amounts in cash flows from operating activities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Certain amounts in the Unaudited Condensed Consolidated Balance Sheet as of September 30, 2005 were incorrectly classified. These amounts have been reclassified to conform to the March 31, 2006 presentation,
including classifying $8.1 million of book overdrafts as a reduction of cash and cash equivalents rather than as an increase to cash and cash equivalents and accounts payable. The book overdrafts primarily related to a zero balance bank account
where a right of offset existed against certain of the Companys other bank accounts. This reclassification did not affect previously reported cash flows from operations.



| |  |  | Supplemental Disclosures of Cash Flow Information: The Company has determined that errors existed with respect to cash paid for taxes for the two
fiscal quarters ended September 30, 2005. The effect of this correction was an increase to taxes paid of $0.1 million.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Restatement Summary

The Companys accompanying Unaudited Condensed Consolidated Financial Statements for the fiscal quarter and two
fiscal quarters ended September 30, 2005, respectively, have been restated to give effect to the adjustments described above. The following tables summarize the impact of the Restatement and the discontinued operations on the Unaudited
Condensed Consolidated Statements of Loss for each of the fiscal quarter and two fiscal quarters ended September 30, 2005 and the Unaudited Condensed Consolidated Statement of Cash Flows for the two fiscal quarters ended September 30,
2005. See Note 11, Discontinued Operations, for a discussion regarding discontinued operations.



12



---

##### Table of Contents

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF LOSS

(in thousands)



|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|---------------------------------------------------------------------------- |  | --------------------------------------- | ------- | - | ------------------ | - | ------ | ----------------------- |  | - | --------------------------- | ---- |  | - | ------- | -
|                                                                             |  | Fiscal Quarter Ended September 30, 2005 |        
|                                                                             |  | As PreviouslyReported                   |         |   | RestatementAmounts |   |        | ReclassificationAmounts |  |   | As Restatedand Reclassified |     
|OPERATING REVENUES:                                                          |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Circulation                                                                  |  | $                                       | 83,702  |   |                    | $ | (6,538 | )                       |  | $ | (1,449                      | )(B) |  | $ | 75,715  |  
|Advertising                                                                  |  |                                         | 43,520  |   |                    |   | (583   | )                       |  |   | (694                        | )(B) |  |   | 42,243  |  
|Other                                                                        |  |                                         | 7,448   |   |                    |   | 315    |                         |  |   | (7                          | )(B) |  |   | 7,755   |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Total operating revenues                                                     |  |                                         | 134,670 |   |                    |   | (6,806 | )                       |  |   | (2,150                      | )    |  |   | 125,713 |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|OPERATING EXPENSES:                                                          |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Editorial                                                                    |  |                                         | 17,241  |   |                    |   | (374   | )                       |  |   | (1,348                      | )(B) |  |   | 15,519  |  
|Production                                                                   |  |                                         | 42,932  |   |                    |   | (868   | )                       |  |   | (2,502                      | )(B) |  |   | 39,562  |  
|Distribution, circulation and other cost of sales                            |  |                                         | 24,455  |   |                    |   | (726   | )                       |  |   | (649                        | )(B) |  |   | 23,080  |  
|Selling, general and administrative                                          |  |                                         | 23,364  |   |                    |   | (980   | )                       |  |   | (221                        | )(B) |  |   | 22,161  |  
|Depreciation and amortization                                                |  |                                         | 11,656  |   |                    |   | (4,955 | )                       |  |   |                            | (B)  |  |   | 6,701   |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Total operating expenses                                                     |  |                                         | 119,648 |   |                    |   | (7,903 | )                       |  |   | (4,720                      | )    |  |   | 107,023 |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|OPERATING INCOME                                                             |  |                                         | 15,022  |   |                    |   | 1,097  |                         |  |   | 2,570                       |      |  |   | 18,690  |  
|                                                                             |  |                                         |         |  
|OTHER INCOME (EXPENSE):                                                      |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Interest expense                                                             |  |                                         | (24,037 | ) |                    |   |       |                         |  |   | 1,828                       | (A)  |  |   | (22,209 | )
|Amortization of deferred debt costs                                          |  |                                         |        |   |                    |   |       |                         |  |   | (1,828                      | )(A) |  |   | (1,828  | )
|Other income, net                                                            |  |                                         | 67      |   |                    |   |       |                         |  |   |                            |      |  |   | 67      |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|Total other expense                                                          |  |                                         | (23,970 | ) |                    |   |       |                         |  |   |                            |      |  |   | (23,970 | )
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|LOSS BEFORE PROVISION FOR INCOME TAXES AND LOSS FROM DISCONTINUED OPERATIONS |  |                                         | (8,948  | ) |                    |   | 1,097  |                         |  |   | 2,570                       |      |  |   | (5,280  | )
|                                                                             |  |                                         |         |  
|PROVISION FOR INCOME TAXES                                                   |  |                                         | 1,962   |   |                    |   | 220    |                         |  |   | (950                        | )(B) |  |   | 1,232   |  
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS                                              |  |                                         | (10,910 | ) |                    |   | 877    |                         |  |   | 3,520                       | (B)  |  |   | (6,512  | )
|                                                                             |  |                                         |         |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES                       |  |                                         |        |   |                    |   |       |                         |  |   | (3,520                      | )(B) |  |   | (3,520  | )
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  
|NET LOSS                                                                     |  | $                                       | (10,910 | ) |                    | $ | 877    |                         |  | $ |                            |      |  | $ | (10,032 | )
|                                                                             |  |                                         |         |   |                    |   |        |                         |  |   |                             |      |  |   |         |  

---

|(A) | Amount was reclassified to conform with the fiscal quarter ended September 30, 2006 presentation of separately presenting amortization of deferred debt costs.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Amount was reclassified to conform with the fiscal quarter ended September 30, 2006 presentation of discontinued operations.
|--- | ----------------------------------------------------------------------------------------------------------------------------



13



---

##### Table of Contents

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF LOSS

(in thousands)



|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|---------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | ------------------ | - | ------- | ----------------------- |  | - | --------------------------- | ---- |  | - | ------- | -
|                                                                             |  | Two Fiscal Quarters Ended September 30, 2005 |        
|                                                                             |  | As PreviouslyReported                        |         |   | RestatementAmounts |   |         | ReclassificationAmounts |  |   | As Restatedand Reclassified |     
|OPERATING REVENUES:                                                          |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Circulation                                                                  |  | $                                            | 164,647 |   |                    | $ | (14,379 | )                       |  | $ | (2,578                      | )(B) |  | $ | 147,690 |  
|Advertising                                                                  |  |                                              | 86,624  |   |                    |   | 1,521   |                         |  |   | (1,196                      | )(B) |  |   | 86,949  |  
|Other                                                                        |  |                                              | 14,530  |   |                    |   | 488     |                         |  |   | (12                         | )(B) |  |   | 15,005  |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Total operating revenues                                                     |  |                                              | 265,801 |   |                    |   | (12,370 | )                       |  |   | (3,786                      | )    |  |   | 249,644 |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|OPERATING EXPENSES:                                                          |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Editorial                                                                    |  |                                              | 32,653  |   |                    |   | 894     |                         |  |   | (2,868                      | )(B) |  |   | 30,679  |  
|Production                                                                   |  |                                              | 83,689  |   |                    |   | (360    | )                       |  |   | (4,231                      | )(B) |  |   | 79,098  |  
|Distribution, circulation and other cost of sales                            |  |                                              | 47,985  |   |                    |   | (1,040  | )                       |  |   | (1,249                      | )(B) |  |   | 45,696  |  
|Selling, general and administrative                                          |  |                                              | 47,605  |   |                    |   | (1,173  | )                       |  |   | (714                        | )(B) |  |   | 45,716  |  
|Depreciation and amortization                                                |  |                                              | 23,631  |   |                    |   | (10,074 | )                       |  |   | 2                           | (B)  |  |   | 13,559  |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Total operating expenses                                                     |  |                                              | 235,563 |   |                    |   | (11,753 | )                       |  |   | (9,060                      | )    |  |   | 214,748 |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|OPERATING INCOME                                                             |  |                                              | 30,238  |   |                    |   | (617    | )                       |  |   | 5,274                       |      |  |   | 34,896  |  
|                                                                             |  |                                              |         |  
|OTHER INCOME (EXPENSE):                                                      |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Interest expense                                                             |  |                                              | (44,426 | ) |                    |   |        |                         |  |   | 3,433                       | (A)  |  |   | (40,993 | )
|Amortization of deferred debt costs                                          |  |                                              |        |   |                    |   |        |                         |  |   | (3,433                      | )(A) |  |   | (3,433  | )
|Other income, net                                                            |  |                                              | 1,691   |   |                    |   |        |                         |  |   |                            |      |  |   | 1,691   |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|Total other expense                                                          |  |                                              | (42,735 | ) |                    |   |        |                         |  |   |                            |      |  |   | (42,735 | )
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|LOSS BEFORE PROVISION FOR INCOME TAXES AND LOSS FROM DISCONTINUED OPERATIONS |  |                                              | (12,497 | ) |                    |   | (617    | )                       |  |   | 5,274                       |      |  |   | (7,839  | )
|                                                                             |  |                                              |         |  
|PROVISION FOR INCOME TAXES                                                   |  |                                              | 692     |   |                    |   | (364    | )                       |  |   |                            | (B)  |  |   | 328     |  
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|LOSS FROM CONTINUING OPERATIONS                                              |  |                                              | (13,189 | ) |                    |   | (253    | )                       |  |   | 5,274                       | (B)  |  |   | (8,167  | )
|                                                                             |  |                                              |         |  
|LOSS FROM DISCONTINUED OPERATIONS, NET OF INCOME TAXES                       |  |                                              |        |   |                    |   |        |                         |  |   | (5,274                      | )(B) |  |   | (5,274  | )
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  
|NET LOSS                                                                     |  | $                                            | (13,189 | ) |                    | $ | (253    | )                       |  | $ |                            |      |  | $ | (13,441 | )
|                                                                             |  |                                              |         |   |                    |   |         |                         |  |   |                             |      |  |   |         |  

---

|(A) | Amount was reclassified to conform with the two fiscal quarters ended September 30, 2006 presentation of separately presenting amortization of deferred debt costs.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(B) | Amount was reclassified to conform with the two fiscal quarters ended September 30, 2006 presentation of discontinued operations.
|--- | ---------------------------------------------------------------------------------------------------------------------------------



14



---

##### Table of Contents

UNAUDITED CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(in thousands)



|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|----------------------------------------------------------------------------------------- |  | -------------------------------------------- | ------- | - | ----------- | - | ------- | ----------- |  | - | ------- | -
|                                                                                          |  | Two Fiscal Quarters Ended September 30, 2005 |        
|                                                                                          |  | As PreviouslyReported                        |         |   | Adjustments |   |         | As Restated | 
|Cash Flows from Operating Activities:                                                     |  |                                              |         |   |             |   |         |             |  |   |         |  
|Net loss                                                                                  |  | $                                            | (13,189 | ) |             | $ | (252    | )           |  | $ | (13,441 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operating activities: |  |                                              |         |   |             |   |         |             |  |   |         |  
|Gain on sale of fixed assets                                                              |  |                                              | (22     | ) |             |   | 22      |             |  |   |        |  
|Bond premium amortization                                                                 |  |                                              | (52     | ) |             |   | 52      |             |  |   |        |  
|Depreciation of property and equipment and amortization of intangible assets              |  |                                              | 23,631  |   |             |   | (23,631 | )           |  |   |        |  
|Depreciation of property and equipment                                                    |  |                                              |        |   |             |   | 6,516   |             |  |   | 6,516   |  
|Amortization of identified intangibles                                                    |  |                                              |        |   |             |   | 7,043   |             |  |   | 7,043   |  
|Provision for bad debts                                                                   |  |                                              |        |   |             |   | 4,240   |             |  |   | 4,240   |  
|Amortization of deferred debt costs                                                       |  |                                              | 3,433   |   |             |   |        |             |  |   | 3,433   |  
|Amortization of deferred rack costs                                                       |  |                                              |        |   |             |   | 12,535  |             |  |   | 12,535  |  
|Gain on sale of investment                                                                |  |                                              |        |   |             |   | (1,607  | )           |  |   | (1,607  | )
|Provision for excess and obsolete inventory                                               |  |                                              |        |   |             |   | 412     |             |  |   | 412     |  
|Deferred income tax provision                                                             |  |                                              | 3,809   |   |             |   | (3,544  | )           |  |   | 265     |  
|Other                                                                                     |  |                                              |        |   |             |   | (694    | )           |  |   | (694    | )
|Decrease (increase) in operating assets:                                                  |  |                                              |         |   |             |   |         |             |  |   |         |  
|Trade receivables                                                                         |  |                                              | (1,017  | ) |             |   | (8,946  | )           |  |   | (9,963  | )
|Income tax receivable                                                                     |  |                                              | (1,800  | ) |             |   | 1,800   |             |  |   |        |  
|Inventories                                                                               |  |                                              | (1,852  | ) |             |   | (1,342  | )           |  |   | (3,194  | )
|Prepaid expenses and other current assets                                                 |  |                                              | (950    | ) |             |   | (845    | )           |  |   | (1,795  | )
|Deferred rack costs                                                                       |  |                                              |        |   |             |   | (13,156 | )           |  |   | (13,156 | )
|Other long-term assets                                                                    |  |                                              | 465     |   |             |   | (697    | )           |  |   | (232    | )
|Increase (decrease) in operating liabilities:                                             |  |                                              |         |   |             |   |         |             |  |   |         |  
|Accounts payable                                                                          |  |                                              | (1,412  | ) |             |   | (8,476  | )           |  |   | (9,888  | )
|Accrued expenses and other current liabilities                                            |  |                                              | 417     |   |             |   | 4,548   |             |  |   | 4,965   |  
|Accrued interest                                                                          |  |                                              | 1,440   |   |             |   |        |             |  |   | 1,440   |  
|Deferred revenues                                                                         |  |                                              | (2,061  | ) |             |   | 5,360   |             |  |   | 3,299   |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Total adjustments                                                                         |  |                                              | 24,029  |   |             |   | (20,410 | )           |  |   | 3,619   |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Net cash provided by (used in) operating activities                                       |  |                                              | 10,840  |   |             |   | (20,662 | )           |  |   | (9,822  | )
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Cash Flows from Investing Activities:                                                     |  |                                              |         |   |             |   |         |             |  |   |         |  
|Purchases of property and equipment                                                       |  |                                              | (17,904 | ) |             |   | 15,424  |             |  |   | (2,480  | )
|Investment in Mr. Olympia, LLC                                                            |  |                                              | (600    | ) |             |   |        |             |  |   | (600    | )
|Proceeds from sale of investment                                                          |  |                                              |        |   |             |   | 1,607   |             |  |   | 1,607   |  
|Proceeds from the sale of fixed assets                                                    |  |                                              | 53      |   |             |   |        |             |  |   | 53      |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Net cash used in investing activities                                                     |  |                                              | (18,451 | ) |             |   | 17,031  |             |  |   | (1,420  | )
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Cash Flows from Financing Activities:                                                     |  |                                              |         |   |             |   |         |             |  |   |         |  
|Term loan and revolving credit facility principal repayments                              |  |                                              | (2,898  | ) |             |   | (65,500 | )           |  |   | (68,398 | )
|Proceeds from revolving credit facility borrowings                                        |  |                                              | 15,000  |   |             |   | 65,500  |             |  |   | 80,500  |  
|Return of equity investment                                                               |  |                                              | (30     | ) |             |   |        |             |  |   | (30     | )
|Payment of deferred debt costs                                                            |  |                                              | (1,197  | ) |             |   |        |             |  |   | (1,197  | )
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Net cash provided by financing activities                                                 |  |                                              | 10,875  |   |             |   |        |             |  |   | 10,875  |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Effect of exchange rate changes on cash                                                   |  |                                              | (628    | ) |             |   | 621     |             |  |   | (7      | )
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                      |  |                                              | 2,636   |   |             |   | (3,010  | )           |  |   | (374    | )
|Cash and Cash Equivalents, Beginning of Period                                            |  |                                              | 9,121   |   |             |   | (5,127  | )           |  |   | 3,994   |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Cash and Cash Equivalents, End of Period                                                  |  | $                                            | 11,757  |   |             | $ | (8,137  | )           |  | $ | 3,620   |  
|                                                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Supplemental Disclosures of Cash Flow Information:                                        |  |                                              |         |   |             |   |         |             |  |   |         |  
|Cash paid during the period for                                                          |  |                                              |         |   |             |   |         |             |  |   |         |  
|Income taxes                                                                              |  | $                                            | 408     |   |             | $ | 65      |             |  | $ | 473     |  
|Interest                                                                                  |  | $                                            | 39,478  |   |             | $ |        |             |  | $ | 39,478  |  



15



---

##### Table of Contents

(3) Comprehensive Loss

The change in the components of other comprehensive loss is comprised of foreign currency translation adjustments and is reported as follows (in thousands):



|                                         |  |                      |         |   |                           |   |        |                    |  |   |                    |   |  |   |         |  
|---------------------------------------- |  | -------------------- | ------- | - | ------------------------- | - | ------ | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                         |  | Fiscal Quarter Ended |         |   | Two Fiscal Quarters Ended |  
|                                         |  | September 30, 2005   |         |   | September 30, 2006        |   |        | September 30, 2005 |  |   | September 30, 2006 |  
|Net loss                                 |  | $                    | (10,032 | ) |                           | $ | (4,339 | )                  |  | $ | (13,441            | ) |  | $ | (31,811 | )
|Foreign currency translation adjustments |  |                      | (85     | ) |                           |   | 67     |                    |  |   | (628               | ) |  |   | 109     |  
|                                         |  |                      |         |   |                           |   |        |                    |  |   |                    |   |  |   |         |  
|Comprehensive loss                       |  | $                    | (10,117 | ) |                           | $ | (4,272 | )                  |  | $ | (14,069            | ) |  | $ | (31,702 | )
|                                         |  |                      |         |   |                           |   |        |                    |  |   |                    |   |  |   |         |  

(4) Inventories

Inventories are stated at the lower of cost or market. Cost is determined on the first-in, first-out (FIFO) method. The Company writes down inventory for estimated obsolescence and/or excess or damaged inventory. Inventories are comprised
of the following (in thousands):



|                                                                             |  |                |        |                    |   |       
|---------------------------------------------------------------------------- |  | -------------- | ------ | ------------------ | - | ------
|                                                                             |  | March 31, 2006 |        | September 30, 2006
|Raw materials  paper                                                        |  | $              | 28,620 |                    | $ | 18,650
|Finished product  paper, production and distribution costs of future issues |  |                | 7,999  |                    |   | 5,032 
|                                                                             |  |                |        |                    |   |       
|Total inventory                                                              |  | $              | 36,619 |                    | $ | 23,682
|                                                                             |  |                |        |                    |   |       

(5) Fair Value of Financial Instruments

The estimated fair value of the Companys financial instruments is as follows (in thousands):



|                                     |  |                |         |     |                    |   |         |                |  |   |            |     |  |   |         |    
|------------------------------------ |  | -------------- | ------- | --- | ------------------ | - | ------- | -------------- |  | - | ---------- | --- |  | - | ------- | ---
|                                     |  | March 31, 2006 |         |     | September 30, 2006 |  
|                                     |  | CarryingAmount |         |     | Fair Value         |   |         | CarryingAmount |  |   | Fair Value |    
|Term loan, including current portion |  | $              | 450,000 |     |                    | $ | 450,000 |                |  | $ | 450,000    |     |  | $ | 450,000 |    
|Revolving credit facility            |  |                |        |     |                    |   |        |                |  |   | 28,000     |     |  |   | 28,000  |    
|Subordinated indebtedness            |  |                | 550,000 | (a) |                    |   | 491,250 | (a)            |  |   | 550,000    | (a) |  |   | 504,625 | (a)
|Interest rate swap liability         |  |                | (2,742  | )   |                    |   | (2,742  | )              |  |   | (1,417     | )   |  |   | (1,417  | )  

---

(a) Amount does not
include bond premium.

The fair value of the Companys financial instruments is estimated based on the quoted market prices for the same or similar
issues, or on the current rate offered to the Company for financial instruments of the same remaining maturities. The carrying amount for cash and cash equivalents, accounts receivable, accounts payable and accrued expenses approximates fair value
because of the short maturity of those instruments.

Effective August 20, 2003, the Company entered into an interest rate swap agreement, which
effectively converted a portion of the Companys fixed-rate debt to variable rate debt. On July 28, 2006, the Company paid $1.6 million in connection with the interim settlement of the Companys swap agreement. At each reset date the
Company either received or paid money based on the current interest rates as of that date. The final settlement date was January 15, 2007, which coincided with the swap agreement termination date. On January 24, 2007, the Company paid $1.6
million in connection with the final settlement of this swap agreement. The change in the fair value of the swap has been recognized as a net addition (reduction) to interest expense of $1.4 million and $0.1 million for the fiscal quarter and two
fiscal quarters ended September 30, 2005, respectively, and ($0.3) million and $0.3 million for the fiscal quarter and two fiscal quarters ended September 30, 2006, respectively.



16



---

##### Table of Contents

(6) Income Taxes

The
Company established a $2.1 million and $15.5 million valuation allowance during the fiscal quarter and two fiscal quarters ended September 30, 2006, respectively, associated with its book loss and tax amortization of its indefinite-lived
intangibles as the Company does not believe that it is more likely than not that those benefits will be realized. The Companys deferred tax liabilities related to the amortization of indefinite-lived intangibles are not considered a future
source of income to support the realization of deferred tax assets within the carryforward period. As a result, the Company recorded a $0.8 million and $5.7 million provision for income taxes primarily associated with the deferred tax liability
related to tax amortization of indefinite-lived intangibles for the fiscal quarter and two fiscal quarters ended September 30, 2006, respectively.

(7) Credit Agreement

On January 30, 2006, the Company entered into a bank credit agreement (as amended, the 2006 Credit
Agreement), replacing its then existing Amended and Restated Credit Agreement dated as of January 23, 2003 (the 2003 Credit Agreement).

The 2006 Credit Agreement allows for revolving loans, term loans, swingline loans and letters of credit in an aggregate principal amount of up to $510.0 million. The Companys revolving credit commitment matures in January 2012 but may
mature sooner if the Company does not refinance its outstanding 10.25% senior subordinated notes due 2009 (the 2009 Notes) on or prior to February 1, 2009 in accordance with the requirements of the 2006 Credit Agreement (in which
case the maturity date will be February 1, 2009) or the Company does not refinance its outstanding 8.875% senior subordinated notes due 2011 (the 2011 Notes and, together with the 2009 Notes, the Notes) on or prior to
October 15, 2010 in accordance with the requirements of the 2006 Credit Agreement (in which case the maturity date will be October 15, 2010). The 2006 Credit Agreement includes certain representations and warranties, conditions precedent,
affirmative covenants, negative covenants and events of default. The negative covenants include financial maintenance covenants comprised of a leverage ratio, a senior secured leverage ratio, a consolidated interest expense coverage ratio, and
capital expenditure limits. The 2006 Credit Agreement also contains certain covenants that, subject to certain exceptions, restrict paying cash dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments,
entering into certain mergers or consolidations and selling or otherwise disposing of assets. The Company has obtained a number of waivers and amendments to the 2006 Credit Agreement since January 30, 2006. As of September 30, 2006, the
Company was in compliance with these covenants under the 2006 Credit Agreement. Although there can be no assurances, the Company anticipates that, based on current projections, its operating results for fiscal year 2008 will be sufficient to satisfy
the financial covenants under the 2006 Credit Agreement. The indebtedness under the 2006 Credit Agreement is secured by security interests in substantially all of the Companys assets and the assets of all of its domestic subsidiaries. In
addition, the Companys obligations are secured by a pledge of all of the issued and outstanding shares of, or other equity interests in, substantially all of its existing or subsequently acquired or organized domestic subsidiaries and a
percentage of the capital stock of, or other equity interests in, certain of its subsequently acquired or organized subsidiaries.

Included in the 2006
Credit Agreement is a $60.0 million revolving credit facility and a term loan agreement. At September 30, 2006, under the 2006 Credit Agreement, the Company had $450.0 million of borrowings under the term loan commitments and $28.0 million
outstanding under the revolving credit commitment.

As of February 13, 2006, the Company entered into an Amendment and Waiver Agreement with respect
to certain provisions of the 2006 Credit Agreement (the February 2006 Waiver). The February 2006 Waiver, among other things, provided for the waiver (the Restatement Waiver) of certain specified defaults or events of default
for specified periods under the 2006 Credit Agreement as a result of the Restatement so long as the Restatement did not result in changes in operating income and Consolidated EBITDA (calculated in accordance with the 2006 Credit Agreement) in excess
of certain specified amounts for specified periods. The February 2006 Waiver also provided for (a) an extension of the period for delivery of the Companys financial statements for the quarter ended December 31, 2005, until
June 28, 2006 (at which point the restated financial statements for prior periods were also to be delivered), (b) the waiver (the Cross Default Waiver) of any cross default resulting from any failure by the Company to comply
with the indentures governing the Notes by failing to timely file its periodic reports with the SEC unless the trustee or the noteholders deliver certain notices to the Company with respect to its failure to comply with its reporting covenants or
commence any proceeding with respect to their rights and remedies thereunder, (c) the continued treatment of display rack costs as capital expenditures for purposes of the 2006 Credit Agreement, (d) an increase in the margins
applicable to borrowings under the 2006 Credit Agreement during the period that the Restatement was in process, and (e) additional limitations (the Additional Limitations) affecting the Companys ability to repurchase the
Notes, make certain restricted payments and to give consideration to noteholders to waive the failure to comply with the reporting covenant under its indentures, in each case during the period that the Restatement was in process. The February
2006 Waiver also provided for an increase in margins applicable to borrowings in the event of a downgrade in the ratings by Moodys Investors Service, Inc. or Standard & Poors Ratings Services of the debt under the 2006 Credit
Agreement to the extent such downgrade is effective within one month after completion of the Restatement and was expressly attributable to the Restatement.



17



---

##### Table of Contents

Pursuant to the February 2006 Waiver, the Company paid amendment fees in cash equal to $1.00 per $1,000 of the outstanding and available credit facilities
(totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $0.5 million.

On June 23, 2006, the Company entered into
another Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the June 2006 Waiver). The June 2006 Waiver, among other things, provided for (i) extensions of the Restatement Waiver (with
certain changes to the conditions), the Cross Default Waiver and the Additional Limitations, (ii) an extension of the deadline for delivery of the Companys financial statements for periods through June 30, 2006, (iii) certain
amendments and waivers to the financial covenants under the 2006 Credit Agreement, (iv) the approval of the sale of the assets as described in Note 10, Restructuring Activities, and (v) the approval of certain other changes
relating to the foregoing items. Pursuant to the June 2006 Waiver, the Company paid amendment fees in cash equal to $2.50 per $1,000 of the outstanding and available credit facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an
aggregate payment of $1.3 million.

On August 18, 2006, the Company entered into another Amendment and Waiver Agreement with respect to certain
provisions of the 2006 Credit Agreement (the August 2006 Waiver). The August 2006 Waiver, among other things, provided for (i) extensions of the Restatement Waiver, the Cross Default Waiver and the Additional Limitations and
(ii) an extension of the deadline for delivery of the Companys financial statements for periods through September 30, 2006. Pursuant to the August 2006 Waiver, the Company paid amendment fees in cash equal to $1.25 per $1,000 of the
outstanding and available credit facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $0.6 million.

On
October 26, 2006, the Company entered into another Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the October 2006 Waiver). The October 2006 Waiver, among other things, provided for
(i) extensions of the Restatement Waiver, the Cross Default Waiver and the Additional Limitations, (ii) an extension of the deadline for delivery of the Companys financial statements for periods through December 31, 2006 and
(iii) certain amendments and waivers to the financial covenants under the 2006 Credit Agreement. Pursuant to the October 2006 Waiver, the Company paid amendment fees in cash equal to $2.50 per $1,000 of the outstanding and available credit
facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $1.3 million. Under the October 2006 Waiver, the period for extension of the deadlines for delivery of the Companys financial statements was
contingent on obtaining similar extensions from the holders of the 2009 Notes and 2011 Notes (the Company subsequently obtained such extensions but was required to pay additional fees under the October 2006 Waiver equal to $1.25 per $1,000 of the
outstanding and available credit facilities because the Company paid similar fees to the holders of the 2009 Notes and 2011 Notes to obtain such extensions).

On February 9, 2007, the Company entered into an Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the February 2007 Waiver). The February 2007 Waiver provided, among other
things, for an extension of the existing waiver of certain specified defaults or events of default for specified periods under the 2006 Credit Agreement as a result of the Restatement, so long as the Restatement does not result in changes in
operating income and Consolidated EBITDA (calculated in accordance with the 2006 Credit Agreement) in excess of certain specified amounts for specified periods as amended pursuant to the February 2007 Waiver. The February 2007 Waiver also provided,
among other things for (a) the extension for delivery of the Companys financial statements for: (i) the fiscal quarter ended December 31, 2005 to March 15, 2007, (ii) the fiscal year ended March 31, 2006 to
March 15, 2007, (iii) the fiscal quarter ended June 30, 2006 to April 15, 2007, (iv) the fiscal quarter ended September 30, 2006 to April 15, 2007 and (v) the fiscal quarter ended December 31, 2006 to
April 15, 2007 (failure to satisfy the foregoing delivery deadlines does not become an Event of Default under the 2006 Credit Agreement unless such failure continues unremedied for 30 days after the Company receives notice of
such failure from the administrative agent), (b) the continuing waiver of any cross default resulting from any failure by the Company to comply with the indentures governing the Notes by failing to timely file its periodic reports with the SEC,
unless the trustee or the noteholders (i) deliver certain notices to the Company as a result of the Companys failure to comply with its reporting covenants or (ii) commence any proceeding with respect to their rights and remedies
thereunder, (c) an increase in the margins applicable to borrowings under the 2006 Credit Agreement, (d) certain additional reporting requirements for a limited period, (e) certain amendments and waivers to the financial covenants
under the 2006 Credit Agreement, (f) the issuance of additional notes to the holders of the Notes under certain circumstances, (g) the continuation of limitations affecting the Companys ability to (i) repurchase its outstanding
senior subordinated notes, (ii) make certain restricted payments and (iii) give consideration to noteholders to waive the failure to comply with the reporting covenant under its indentures, in each case during the period that the
Restatement is in process, and (h) a further increase in margins applicable to borrowings in the event of a specified downgrade in the ratings by Moodys Investors Service, Inc. or Standard & Poors Ratings Services of the
debt under the 2006 Credit Agreement or in the event certain payments are made to the holders of the Notes. Pursuant to the February 2007 Waiver, the Company paid an amendment fee in cash to lenders who approved the February 2007 Waiver equal to
$1.25 per $1,000 in principal amount of the outstanding and available credit facilities of such lenders resulting in an aggregate payment of $0.5 million.

On April 16, 2007, the Company entered into an Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the April 2007 Waiver). The April 2007 Waiver provided, among other things, for
extensions of the applicable deadlines for delivery of the Companys financial statements for the following periods: (i) for the fiscal quarter ended June 30, 2006 to May 15, 2007, (ii) for the fiscal quarter ended
September 30, 2006 to the earlier of (A) the date that is 30 days following delivery of the financial statements for the fiscal quarter ended June 30, 2006 and (B) June 15, 2007, (iii) for the fiscal quarter ended



18



---

##### Table of Contents

December 31, 2006 to the earlier of (A) the date that is 30 days following delivery of the financial statements for the fiscal quarter ended
September 30, 2006 and (B) July 15, 2007, (iv) for the fiscal year ended March 31, 2007 to August 31, 2007 and (v) for the fiscal quarter ending June 30, 2007 to the earlier of (A) the date that is 30
days following delivery of the financial statements for the fiscal year ended March 31, 2007 and (B) September 30, 2007. The April 2007 Waiver also amended a provision of the 2006 Credit Agreement which restricts the giving of any
consideration to or for the benefit of any holder of Notes for any amendment, modification or waiver relating to a financial reporting violation, among other things, to reduce the requirement that the Company maintain a minimum amount of liquidity
such that the provision now requires that the Companys cash and cash equivalents and unused availability under the 2006 Credit Agreement are at least $25.0 million. Pursuant to the April 2007 Waiver, the Company paid an amendment fee in cash
to lenders who approved the April 2007 Waiver equal to $0.50 per $1,000 in principal amount of the outstanding and available credit facilities of such lenders resulting in an aggregate payment of $0.3 million.

(8) Senior Subordinated Indebtedness

On June 26, 2006, the
Company entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011
Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively, the June 2006 Subordinated Debt Consent Agreements). Pursuant to the June 2006 Subordinated Debt Consent Agreements, the holders
of a majority in principal amount of each series of Notes provided their consents to specified amendments to the related Indentures. Pursuant to the June 2006 Subordinated Debt Consent Agreements, the Company paid in cash $2.50 per $1,000 in
principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $1.4 million. In addition, pursuant to the requirements of the June 2006 Subordinated Debt Consent Agreements, the Company entered into (i) a
Fourth Supplemental Indenture, dated as of June 26, 2006, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Second Supplemental Indenture, dated as of
June 26, 2006, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2011 Notes (collectively, the June 2006 Supplemental Indentures). The principal purpose of the June 2006
Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its quarterly report on Form
10-Q for the quarter ended December 31, 2005 (the Third Quarter 2006 Form 10-Q) to August 15, 2006, (ii) its annual report on Form 10-K for the fiscal year ended March 31, 2006 (the 2006 Form 10-K) to
September 15, 2006 and (iii) the quarterly report on Form 10-Q for the quarter ended June 30, 2006 (the First Quarter 2007 Form 10-Q) to September 29, 2006.

On August 18, 2006, the Company entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the
outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively, the August 2006
Subordinated Debt Consent Agreements). Pursuant to the August 2006 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes provided their consents to specified amendments to the related
Indentures. Pursuant to the August 2006 Subordinated Debt Consent Agreements, the Company paid in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $0.7 million. In addition,
pursuant to the requirements of the August 2006 Subordinated Debt Consent Agreements, on August 18, 2006, the Company entered into (i) a Fifth Supplemental Indenture, dated as of August 18, 2006, among the Company, the Note Guarantors
names therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Third Supplemental Indenture, dated as of August 18, 2006, among the Company, the Note Guarantors named therein and the trustee, relating to the
Indenture governing the 2011 Notes (collectively, the August 2006 Supplemental Indentures). The principal purpose of the August 2006 Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by
which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its Third Quarter 2006 Form 10-Q to October 31, 2006, (ii) its 2006 Form 10-K to October 31, 2006, (iii) the
First Quarter 2007 Form 10-Q to December 15, 2006 and (iv) the quarterly report on Form 10-Q for the quarter ended September 30, 2006 (the Second Quarter 2007 Form 10-Q) to January 31, 2007.

On November 2, 2006, the Company entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the
outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively, the November 2006
Subordinated Debt Consent Agreements). Pursuant to the November 2006 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes provided their consents to specified amendments to the related
Indentures. Pursuant to the November 2006 Subordinated Debt Consent Agreements, the Company paid in cash $2.50 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $1.4 million. In
addition, pursuant to the requirements of the November 2006 Subordinated Debt Consent Agreements, on November 2, 2006, the Company entered into (i) a Sixth Supplemental Indenture, dated as of November 2, 2006, among the Company, the
Note Guarantors named therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Fourth Supplemental Indenture, dated as of November 2, 2006, among the Company, the Note Guarantors named therein and the
trustee, relating to the Indenture governing the 2011 Notes



19



---

##### Table of Contents

(collectively, the November 2006 Supplemental Indentures). The principal purpose of the November 2006 Supplemental Indentures was to amend the
related Indenture to permit the Company to extend the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its Third Quarter 2006 Form 10-Q to January 16, 2007,
(ii) its 2006 Form 10-K to January 16, 2007, (iii) its First Quarter 2007 Form 10-Q to February 15, 2007 (iv) its Second Quarter 2007 Form 10-Q to February 15, 2007 and (v) its quarterly report on Form 10-Q for the
quarter ended December 31, 2006 (the Third Quarter 2007 Form 10-Q) to February 15, 2007. In addition, each of the November 2006 Supplemental Indentures permits the Company, upon notice to the trustee, to extend the filing dates
of (x) the Third Quarter 2006 Form 10-Q and the 2006 Form 10-K to February 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount and (y) the First Quarter 2007 Form 10-Q, the Second
Quarter 2007 Form 10-Q and the Third Quarter 2007 Form 10-Q to March 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount.

In January 2007, pursuant to the November 2006 Supplemental Indentures, the Company extended the filing date for the Third Quarter 2006 Form 10-Q and the 2006 Form 10-K to February 15, 2007. In February 2007,
pursuant to the November 2006 Supplemental Indentures, the Company extended the filing date of the First Quarter 2007, Second Quarter 2007 and Third Quarter 2007 Forms 10-Q, respectively, to March 15, 2007. Accordingly, in January 2007, the
Company paid in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all note holders of $0.7 million. In addition, in February 2007, the Company paid in cash $1.25 per $1,000 in principal amount of
Notes to each holder of Notes, for an aggregate payment to all Note holders of $0.7 million.

On February 15, 2007, the Company entered into
(i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively
held a majority of the outstanding principal amount of the 2011 Notes (collectively, the February 2007 Subordinated Debt Consent Agreements). Pursuant to the February 2007 Subordinated Debt Consent Agreements, the holders of a majority
in principal amount of each series of Notes have provided their consents to specified amendments to the related Indentures. Pursuant to the February 2007 Subordinated Debt Consent Agreements, the Company paid in cash $1.25 per $1,000 in principal
amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $0.7 million. In addition, pursuant to the requirements of the February 2007 Subordinated Debt Consent Agreements, on February 15, 2007, the Company
entered into (i) a Seventh Supplemental Indenture, dated as of February 15, 2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Fifth Supplemental
Indenture, dated as of February 15, 2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2011 Notes (collectively, the February 2007 Supplemental Indentures). The
principal purpose of the February 2007 Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes
(i) its Third Quarter 2006 Form 10-Q to April 16, 2007 and (ii) its 2006 Form 10-K to April 16, 2007. In addition, each of the February 2007 Supplemental Indentures permits the Company, upon notice to the trustee, to extend the
filing dates of its First Quarter 2007, Second Quarter 2007 and Third Quarter 2007 Forms 10-Q to May 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount. The Company extended the filing dates
for these quarterly reports to May 15, 2007.

On May 15, 2007, the Company entered into (i) a Consent Agreement with certain holders of the
2009 Notes, who collectively held a majority of the outstanding principal amount of the 2009 Notes and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the
2011 Notes (collectively, the May 2007 Subordinated Debt Consent Agreements). Pursuant to the May 2007 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes have provided their
consents to specified amendments to the related Indentures. Pursuant to the May 2007 Subordinated Debt Consent Agreements, the Company will pay in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment
to all Note holders of $0.7 million. In addition, pursuant to the requirements of the May 2007 Subordinated Debt Consent Agreements, on May 15, 2007, the Company entered into (i) an Eighth Supplemental Indenture, dated as of May 15,
2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Sixth Supplemental Indenture dated as of May 15, 2007, among the Company, the Note Guarantors named
therein and the trustee, relating to the Indenture governing the 2011 Notes (collectively, the May 2007 Supplemental Indentures). The principal purpose of the May 2007 Supplemental Indentures was to amend the related Indenture to permit
the Company to extend the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its Second Quarter 2007 10-Q to June 15, 2007, (ii) its Third Quarter 2007 10-Q to
July 16, 2007, (iii) its annual report on Form 10-K for the year ended March 31, 2007 (the 2007 10-K) to August 31, 2007 and (iv) its quarterly report on Form 10-Q for the quarter ended June 30, 2007 (the
First Quarter 2008 10-Q) to October 1, 2007. In addition, each Supplemental Indenture permits the Company, upon notice to the Trustee, to extend the filing dates of its Second Quarter 2007 10-Q to July 16, 2007, its Third
Quarter 2007 10-Q to August 15, 2007, its 2007 10-K to October 1, 2007, and its First Quarter 2008 10-Q to October 31, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount.



20



---

##### Table of Contents

(9) Deferred Debt Costs

In connection with the June 2006 Waiver and the June 2006 Subordinated Debt Consent Agreements, the Company deferred approximately $2.7 million in debt costs and is amortizing that amount over the life of the related debt in accordance with
Emerging Issues Task Force (EITF) No. 96-19, Debtors Accounting for a Modification or Exchange of Debt Instruments (EITF 96-19).

In connection with the August 2006 Waiver and the August 2006 Subordinated Debt Consent Agreements, the Company deferred approximately $1.3 million in debt costs and is amortizing that amount over the life of the
related debt in accordance with EITF 96-19.

In connection with the October 2006 Waiver and the November 2006 Subordinated Debt Consent Agreements, the
Company deferred approximately $5.3 million in debt costs and is amortizing that amount over the life of the related debt in accordance with EITF 96-19.

In connection with the February 2007 Waiver and the February 2007 Subordinated Debt Consent Agreements, the Company deferred approximately $1.2 million in debt costs and is amortizing that amount over the life of the related debt in
accordance with EITF 96-19.

In connection with the April 2007 Waiver, the Company deferred approximately $0.3 million in debt costs and is amortizing that
amount over the life of the related debt in accordance with EITF 96-19.

In connection with the May 2007 Subordinated Debt Consent Agreements, the Company
deferred approximately $0.7 million in debt costs and is amortizing that amount over the life of the related debt in accordance with EITF 96-19.

(10) Restructuring Activities

During the fourth quarter of fiscal year 2005, the Company initiated a plan to relocate National
Enquirer to New York City. The Companys relocation plan involved the termination of 34 employees. The Company has completed this restructuring plan. The remaining severance benefits will be paid by the third fiscal quarter ended
December 31, 2006.

The following table sets forth the detail and activity in the restructuring expense accrual related to this activity during the
two fiscal quarters ended September 30, 2006 (in thousands):



|                                |  |                        |     |                          |   |                   |  |   |                            |   |  |   |   
|------------------------------- |  | ---------------------- | --- | ------------------------ | - | ----------------- |  | - | -------------------------- | - |  | - | --
|Relocation of National Enquirer |  | BalancesMarch 31, 2006 |     | 2007RestructuringExpense |   | 2007 CashPayments |  |   | BalancesSeptember 30, 2006
|Accrued liabilities:            |  |                        |     |                          |   |                   |  |   |                            |   |  |   |   
|Severance                       |  | $                      | 138 |                          | $ |                  |  | $ | (114                       | ) |  | $ | 24
|                                |  |                        |     |                          |   |                   |  |   |                            |   |  |   |   

On April 4, 2006, the board of directors of the Company committed to a plan (the Plan) to
restructure certain of its operations. The Plan was adopted to improve the Companys profitability and future net cash flows, and includes actions that the Company has taken and intends to take, including: discontinuing the publication of
Celebrity Living Weekly, MPH and Shape En Espanol, the relocation of the operations associated with National Enquirer from New York City back to Boca Raton, Florida, centralizing certain operations, and reducing certain
other operating, general and administrative expenses. The Companys relocation plan involved the termination of approximately 50 employees. This activity resulted in a charge of $2.3 million for termination benefits, $0.1 million for costs
associated with the relocation of employees, $0.6 million for facility closures and $0.9 million for deferred rack cost write-offs. $2.9 million of these charges was included in selling, general and administrative expense and $1.1 million of these
charges was included in loss from discontinued operations in the accompanying Unaudited Condensed Consolidated Statement of Loss for the two fiscal quarters ended September 30, 2006. In addition, these restructuring charges were primarily
incurred in the Newspaper Publication and Corporate/Other reporting segments. Through September 30, 2006, the Company has paid termination benefits of $2.0 million, $0.1 million for relocation costs and $0.4 million for costs associated with
facility closures. The Company has an accrual at September 30, 2006 of $0.4 million associated with this action which approximates fair value due to the short-term nature of the payments.



21



---

##### Table of Contents

The following table sets forth the detail and activity in the restructuring expense accrual related to this activity
during the two fiscal quarters ended September 30, 2006 (in thousands):



|                         |  |                        |   |                          |   |                   |  |   |                  |   |  |                            |        |   |  |   |    
|------------------------ |  | ---------------------- | - | ------------------------ | - | ----------------- |  | - | ---------------- | - |  | -------------------------- | ------ | - |  | - | ---
|2007 Restructuring       |  | BalancesMarch 31, 2006 |   | 2007RestructuringExpense |   | 2007 CashPayments |  |   | Asset Write-Offs |   |  | BalancesSeptember 30, 2006
|Accrued liabilities:     |  |                        |   |                          |   |                   |  |   |                  |   |  |                            |        |   |  |   |    
|Severance                |  | $                      |  |                          | $ | 2,349             |  | $ | (1,963           | ) |  | $                          |       |   |  | $ | 386
|Relocation               |  |                        |  |                          |   | 70                |  |   | (61              | ) |  |                            |       |   |  |   | 9  
|Facility Closures        |  |                        |  |                          |   | 642               |  |   | (396             | ) |  |                            | (236   | ) |  |   | 10 
|Deferred Rack Write-Offs |  |                        |  |                          |   | 908               |  |   |                 |   |  |                            | (908   | ) |  |   |   
|                         |  |                        |   |                          |   |                   |  |   |                  |   |  |                            |        |   |  |   |    
|                         |  | $                      |  |                          | $ | 3,969             |  | $ | (2,420           | ) |  | $                          | (1,144 | ) |  | $ | 405
|                         |  |                        |   |                          |   |                   |  |   |                  |   |  |                            |        |   |  |   |    

On June 14, 2006, the Company announced that it was implementing a strategy to refocus the Company and devote
its full resources to growing its core brands. As part of this strategy, the Company announced that it will explore the sale of its five market leading special interest titles: Muscle & Fitness, Flex, Muscle & Fitness Hers,
Country Weekly, and Mira!. These publications collectively represented total revenues and operating income of $40.6 million and $13.2 million, respectively, for the two fiscal quarters ended September 30, 2006. As a result of the
Restatement, we have not been able to provide financial statements for these titles, which are necessary in order to proceed with any potential sale transaction.

(11) Discontinued Operations

In order to improve the Companys profitability and future net cash flows, in April 2006, the
Company discontinued the Celebrity Living Weekly, MPH and Shape En Espanol publications in accordance with the provisions of SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets
(SFAS No. 144). Operating results of these publications have been classified as discontinued operations for all periods presented. These publications were previously included in the Corporate/Other segment.

The following table sets forth total operating revenues, pre-tax loss from discontinued operations, provision for income taxes and loss from discontinued operations for
the fiscal quarter and two fiscal quarters ended September 30, 2005 and 2006, respectively (in thousands):



|                                          |  |                                    |        |   |                                         |   |      |      |  |   |        |   |  |   |        |  
|----------------------------------------- |  | ---------------------------------- | ------ | - | --------------------------------------- | - | ---- | ---- |  | - | ------ | - |  | - | ------ | -
|                                          |  | Fiscal Quarter Ended September 30, |        |   | Two Fiscal Quarters Ended September 30, |  
|                                          |  | 2005                               |        |   | 2006                                    |   |      | 2005 |  |   | 2006   |  
|Total operating revenues                  |  | $                                  | 2,150  |   |                                         | $ | (16  | )    |  | $ | 3,786  |   |  | $ | 846    |  
|                                          |  |                                    |        |   |                                         |   |      |      |  |   |        |   |  |   |        |  
|Pre-tax loss from discontinued operations |  | $                                  | (2,570 | ) |                                         | $ | (167 | )    |  | $ | (5,274 | ) |  | $ | (1,658 | )
|Provision for income taxes                |  |                                    | 950    |   |                                         |   |     |      |  |   |       |   |  |   |       |  
|                                          |  |                                    |        |   |                                         |   |      |      |  |   |        |   |  |   |        |  
|Loss from discontinued operations         |  | $                                  | (3,520 | ) |                                         | $ | (167 | )    |  | $ | (5,274 | ) |  | $ | (1,658 | )
|                                          |  |                                    |        |   |                                         |   |      |      |  |   |        |   |  |   |        |  

(12) Litigation

Various suits and claims arising from the publication of the Companys magazines have been instituted against the Company. The Company has insurance policies that likely would be available to recover any reasonably foreseeable material
litigation costs and expenses. The Company periodically evaluates and assesses the risks and uncertainties associated with litigation independent from those associated with the Companys potential claim for recovery from third party insurance
carriers. At present, in the opinion of management, after consultation with outside legal counsel, the liability resulting from litigation, if any, will not have a material effect on the Companys Unaudited Condensed Consolidated Financial
Statements.



22



---

##### Table of Contents

(13) Business Segment Information

The Company has aggregated its business into five reporting segments: Celebrity Publications, Newspaper Publications, Womens Health and Fitness Publications, Distribution Services and Corporate/Other. The
aggregation of the Companys business is based upon the Companys publications having the following similarities: economic characteristics including gross margins, types of products and services, types of production processes, type or
class of customer, and method of distribution, as required by SFAS No. 131.

The Celebrity Publications segment aggregation includes StarandCountry Weekly.

The Newspaper Publications segment aggregation includes National Enquirer, Globe,and National Examiner.

The Womens Health and Fitness Publications segment aggregation includes ShapeandFit Pregnancy.

The Distribution Services segment is comprised of Distribution Services, Inc. (DSI) which arranges for the placement of the Companys publications and
third-party publications with retailers and monitors through its merchandising staff that these publications are properly displayed in stores, primarily large supermarkets and major retail chains such as Wal-Mart and Target. DSI coordinates (also
known as acting as a category captain) the racking of magazine fixtures for selected retailers. In addition, DSI provides sales of marketing, merchandising and information gathering services for third parties including non-magazine
clients.

The Corporate/Other segment aggregation includes the following publications: Muscle & Fitness, Mens Fitness,
Muscle & Fitness Hers, Flex, Natural Health, Weekly World News, Sun, and Mira!In addition, the Corporate/Other segment also includes ancillary sales and corporate overhead. Ancillary sales primarily relate to licensing, syndication,
new media and product merchandise sales. Corporate expenses not allocated to other segments include production and circulation department costs, and support departments such as information technology, accounting, legal, human resources and
administration. While most of the publications aggregated in the Corporate/Other segment have certain similar economic characteristics and also similar products and services, production process, type or class of customer, and method of distribution
as some of the other publications which are aggregated into the other reporting segments (Celebrity Publications, Newspaper Publications and Womens Health and Fitness Publications), their gross margins are dissimilar with such other
publications. Accordingly, the Company has aggregated those publications into the Corporate/Other reporting segment.

The Companys accounting
policies are the same for all reportable segments.

See Note 2, Restatement of Previously Issued Financial Statements, for a related discussion
regarding segment reporting.

Segment Data

The
following table presents the results of and assets employed in the Companys five reporting segments for the fiscal quarter and two fiscal quarters ended September 30, 2005 and 2006, respectively. The information includes certain
intersegment transactions and is, therefore, not necessarily indicative of the results had the operations existed as stand-alone businesses. Intersegment transactions represent intercompany advertising and other services, which are billed at what
management believes are prevailing market rates. These intersegment transactions, which represent transactions between operating units in different business segments, are eliminated in consolidation. The results of operations exclude the results of
our discontinued operations for all periods presented. See Note 11, Discontinued Operations, for a discussion regarding discontinued operations.



23



---

##### Table of Contents

|                                    |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|----------------------------------- |  | ---- |  | ---------------------- | ------- | --- | ---------------------- | - | ------- | -------------------------------------- |  | --------------------- | ------- |  | ---------------- | ------ | --- | ------------------- | - | ------- | ------------------ |  | - | ------ | ----- |  | - | ---------
|                                    |  |      |  | Segment (in thousands) |         |     | (in thousands)        
|                                    |  |      |  | Celebrity Publications |         |     | Newspaper Publications |   |         | WomensHealth and Fitness Publications |  | Distribution Services |         |  | Corporate/ Other |        |     | Elimination Entries |   |         | Consolidated Total
|                                    |  |      |  | (1)                    |         |     | (1)                    |   |         | (1)                                    |  | (1)                   |         |  | (1)(2)           |        |     | (1)                 |   |         | (1)               
|Operating revenues                  |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|Quarter ended September             |  | 2005 |  | $                      | 37,133  |     |                        | $ | 35,595  |                                        |  | $                     | 20,588  |  | $                | 8,025  |     |                     | $ | 26,801  |                    |  | $ | (2,429 | ) (3) |  | $ | 125,713  
|                                    |  | 2006 |  | $                      | 35,341  |     |                        | $ | 37,424  |                                        |  | $                     | 20,349  |  | $                | 7,782  |     |                     | $ | 27,671  |                    |  | $ | (2,383 | ) (3) |  | $ | 126,184  
|                                    |  |      |  |                        |         |     |                        |  
|Two Quarters ended September        |  | 2005 |  | $                      | 70,806  |     |                        | $ | 74,122  |                                        |  | $                     | 41,231  |  | $                | 15,414 |     |                     | $ | 52,894  |                    |  | $ | (4,823 | ) (3) |  | $ | 249,644  
|                                    |  | 2006 |  | $                      | 64,135  |     |                        | $ | 72,036  |                                        |  | $                     | 41,081  |  | $                | 15,101 |     |                     | $ | 54,827  |                    |  | $ | (4,594 | ) (3) |  | $ | 242,586  
|Operating income (loss)             |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|Quarter ended September             |  | 2005 |  | $                      | 11,421  |     |                        | $ | 12,884  |                                        |  | $                     | 7,652   |  | $                | 1,761  |     |                     | $ | (15,028 | )                  |  | $ |       |       |  | $ | 18,690   
|                                    |  | 2006 |  | $                      | 8,861   |     |                        | $ | 17,456  |                                        |  | $                     | 7,207   |  | $                | 2,265  |     |                     | $ | (13,881 | )                  |  | $ |       |       |  | $ | 21,908   
|                                    |  |      |  |                        |         |     |                        |  
|Two Quarters ended September        |  | 2005 |  | $                      | 20,148  |     |                        | $ | 29,091  |                                        |  | $                     | 16,036  |  | $                | 3,430  |     |                     | $ | (33,809 | )                  |  | $ |       |       |  | $ | 34,896   
|                                    |  | 2006 |  | $                      | 9,673   |     |                        | $ | 30,313  |                                        |  | $                     | 15,181  |  | $                | 3,755  |     |                     | $ | (32,545 | )                  |  | $ |       |       |  | $ | 26,377   
|Depreciation and amortization       |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|Quarter ended September             |  | 2005 |  | $                      | 494     |     |                        | $ | 569     |                                        |  | $                     |        |  | $                | 147    |     |                     | $ | 5,491   |                    |  | $ |       |       |  | $ | 6,701    
|                                    |  | 2006 |  | $                      | 492     |     |                        | $ | 658     |                                        |  | $                     |        |  | $                | 86     |     |                     | $ | 2,614   |                    |  | $ |       |       |  | $ | 3,850    
|                                    |  |      |  |                        |         |     |                        |  
|Two Quarters ended September        |  | 2005 |  | $                      | 1,026   |     |                        | $ | 1,270   |                                        |  | $                     |        |  | $                | 292    |     |                     | $ | 10,971  |                    |  | $ |       |       |  | $ | 13,559   
|                                    |  | 2006 |  | $                      | 984     |     |                        | $ | 1,315   |                                        |  | $                     |        |  | $                | 176    |     |                     | $ | 5,441   |                    |  | $ |       |       |  | $ | 7,916    
|Amortization of deferred rack costs |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|Quarter ended September             |  | 2005 |  | $                      | 1,331   |     |                        | $ | 4,001   |                                        |  | $                     | 123     |  | $                |       |     |                     | $ | 859     |                    |  | $ |       |       |  | $ | 6,314    
|                                    |  | 2006 |  | $                      | 1,312   |     |                        | $ | 1,612   |                                        |  | $                     | 132     |  | $                |       |     |                     | $ | 1,565   |                    |  | $ |       |       |  | $ | 4,621    
|                                    |  |      |  |                        |         |     |                        |  
|Two Quarters ended September        |  | 2005 |  | $                      | 2,603   |     |                        | $ | 5,469   |                                        |  | $                     | 246     |  | $                |       |     |                     | $ | 4,217   |                    |  | $ |       |       |  | $ | 12,535   
|                                    |  | 2006 |  | $                      | 2,327   |     |                        | $ | 3,710   |                                        |  | $                     | 258     |  | $                |       |     |                     | $ | 3,517   |                    |  | $ |       |       |  | $ | 9,812    
|Total Assets                        |  |      |  |                        |         |     |                        |   |         |                                        |  |                       |         |  |                  |        |     |                     |   |         |                    |  |   |        |       |  |   |          
|At March 31, 2006                   |  |      |  | $                      | 323,121 | (4) |                        | $ | 437,913 | (4)                                    |  | $                     | 99,756  |  | $                | 32,554 | (4) |                     | $ | 395,970 | (4)                |  | $ |       |       |  | $ | 1,289,314
|At September 30, 2006               |  |      |  | $                      | 321,102 |     |                        | $ | 436,624 |                                        |  | $                     | 101,244 |  | $                | 23,967 |     |                     | $ | 383,307 |                    |  | $ |       |       |  | $ | 1,266,244

---

|(1) | The quarter and two quarters ended September 30, 2005 have been restated.
|--- | -------------------------------------------------------------------------

|(2) | Income tax expense of $1.2 million and $0.8 million, interest expense of $22.2 million and $23.7 million, and amortization of deferred debt costs of
$1.8 million and $1.9 million for the quarter ended September 30, 2005 and September 30, 2006, respectively, are included in the Corporate/Other segment. Income tax expense of $0.3 million and $5.7 million, interest
expense of $41.0 million and $48.0 million, and amortization of deferred debt costs of $3.4 million and $3.4 million for the two quarters ended September 30, 2005 and September 30, 2006, respectively, are included in
the Corporate/Other segment.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Amount represents revenues from transactions with other operating segments of the Company.
|--- | ------------------------------------------------------------------------------------------

|(4) | The Company revised the March 31, 2006 total assets for Celebrity Publications (previously reported as $318.2 million), Newspaper Publications (previously reported as
$480.4 million), Distribution Services (previously reported as $23.9 million) and Corporate/Other (previously reported as $367.0 million) to properly present certain cash amounts in the appropriate segments. Consolidated Total Assets
at March 31, 2006 were not affected by these revisions.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

(14) Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial
LiabilitiesIncluding an amendment of FASB Statement No. 115 (SFAS No. 159). SFAS No. 159 provides entities with an option to choose to measure eligible items at fair value at specified election dates. If
elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few exceptions, such as investments otherwise accounted for
by the equity method; is irrevocable (unless a new election date occurs); and is applied only to entire instruments and not to portions of instruments. The Company is currently evaluating the impact of the adoption of SFAS No. 159 on its
financial statements, which is effective beginning in fiscal year 2008.



24



---

##### Table of Contents

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

Introduction

The following is a discussion of our financial condition and results of operations for the fiscal
quarter and two fiscal quarters ended September 30, 2006, respectively. This discussion should be read in conjunction with our Unaudited Condensed Consolidated Financial Statements and the Notes thereto. The accompanying Managements
Discussion and Analysis of Financial Condition and Results of Operations gives effect to the Restatement of the Unaudited Condensed Consolidated Financial Statements for the fiscal quarter and two fiscal quarters ended September 30, 2005,
respectively, as described in Note 2, Restatement of Previously Issued Financial Statements, in the Notes to Unaudited Condensed Consolidated Financial Statements and excludes the results of our discontinued operations for the fiscal
quarter and two fiscal quarters ended September 30, 2006 and 2005, respectively. See Note 11, Discontinued Operations, in the Notes to Unaudited Condensed Consolidated Financial Statements included herein for a discussion regarding
discontinued operations.

Restatement

Pursuant to Rule
15d-15(b) of the Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2005, the Companys management performed an evaluation, under the supervision and with the participation of the Companys
principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 15d-15(e)). Based upon that evaluation, our principal
executive officer and principal financial officer concluded that a material weakness existed in our internal control over financial reporting. As a result of this material weakness, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures were not effective. It was determined that the material weakness in internal control over financial reporting as of March 31, 2005 related to the fact that we lacked a sufficient
complement of personnel with a level of financial reporting expertise commensurate with our financial reporting requirements to resolve non-routine or complex accounting matters. This material weakness continued to exist as of September 30,
2006.

Subsequent to March 31, 2005, the Companys board of directors and management took steps to remediate the material weakness described
above, including the hiring in December 2005 of a new chief financial officer who served from January 2006 to August 2006. That chief financial officer, as part of his review of the Companys accounting practices, found a number of issues
which he brought to the attention of the Companys board of directors and senior management. Consequently, on February 8, 2006, the board of directors concluded that the Companys previously issued financial statements included
or otherwise summarized in its Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (including the accompanying report of the Companys independent registered public accounting firm) and its Quarterly Reports on Form 10-Q
for each of the quarters ended June 30, 2005 and September 30, 2005 should no longer be relied upon.

In connection with the then chief financial
officers review, and the continued review by a new chief financial officer hired in August 2006, a number of errors were found in the Companys previously issued Unaudited Condensed Consolidated Financial Statements. The errors are
discussed in greater detail in Note 2, Restatement of Previously Issued Financial Statements, in the Notes to Unaudited Condensed Consolidated Financial Statements included herein.

The audit committee of the board of directors of the Company commenced an inquiry into the accounting issues aided by an independent law firm and forensic accountants.
Based on the audit committees inquiry and upon recommendations made by the audit committee and its advisors, the Companys board of directors and its senior management implemented a number of remedial actions, including the hiring of a
new chief accounting officer and other members of its financial reporting staff, as well as a new executive vice president of consumer marketing responsible for subscription circulation, data and processes. Other remedial actions also are being
implemented.

Executive Summary

We are a leading
publisher in the field of celebrity journalism and health & fitness magazines. Our publications includeStar, Shape, Mens Fitness, Fit Pregnancy, Natural Health, Muscle & Fitness, Muscle & Fitness Hers, Flex,
Looking Good Now, National Enquirer, Globe, Country Weekly, Sun, National Examiner, Weekly World News, Mira!,and other publications. Our magazines comprise approximately 23% of total U.S. and Canadian circulation for audited weekly
publications. For the two fiscal quarters ended September 30, 2006, total average newsstand and subscription circulation per issue for all of our publications that are currently published and have a frequency of six or more times per year is
approximately 8.4 million copies.

For the two fiscal quarters ended September 30, 2006 and 2005, approximately 58% and 59%, respectively, of our
total operating

revenues were from circulation. Single copy sales accounted for approximately 84% and 83%, respectively, of such circulation revenues in
the two fiscal quarters ended September 30, 2006 and 2005 and the remainder was from subscription sales.



25



---

##### Table of Contents

Our advertising revenues are generated by national advertisers, including sports nutrition products, automotive,
entertainment, packaged goods, pharmaceutical, sports apparel, beauty and cosmetics, fashion and direct response. For the two fiscal quarters ended September 30, 2006 and 2005, approximately 36% and 35%, respectively, of our total operating
revenues was from advertising.

Our primary operating costs and expenses are comprised of editorial, production, distribution, circulation and selling,
general and administrative expenses. The largest components of our costs are related to production, which includes printing and paper expenses, and circulation. Circulation costs primarily include the costs associated with subscription fulfillment
and subscription postage.

On April 4, 2006, our board of directors committed to a plan (the Plan) to restructure certain of our
operations. The Plan was adopted to improve our profitability and future net cash flows, and includes: discontinuing the publication of Celebrity Living Weekly, MPH and Shape En Espanol, the relocation of the operations
associated with National Enquirer from New York City back to Boca Raton, Florida, centralizing certain operations, and reducing certain other operating, general and administrative expenses. The Companys relocation plan involved the
termination of approximately 50 employees. This activity resulted in a charge of $4.0 million for the two fiscal quarters ended September 30, 2006, which included $2.3 million for termination benefits, $0.1 million for costs associated
with the relocation of employees, $0.6 million for facility closures and $0.9 million for deferred rack cost write-offs. The loss from discontinued operations was $1.7 million and $5.3 million, net of taxes, for the two fiscal quarters ended
September 30, 2006 and September 30, 2005, respectively.

On June 14, 2006 we announced that we were implementing a strategy to refocus the
Company and devote its full resources to growing its core brands. As part of this strategy we announced that we will explore the sale of our five market leading special interest titles  Muscle & Fitness, Flex, Muscle &
Fitness Hers, Country Weekly, and Mira!. These publications collectively represented total revenues and operating income of $40.6 million and $13.2 million, respectively, for the two fiscal quarters ended September 30, 2006.
As a result of the Restatement, we have not been able to provide financial statements for these titles, which are necessary in order to proceed with any potential sale transaction.

RESULTS OF OPERATIONS

The following table presents our results of operations by segment for the periods indicated.



|                                        |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|--------------------------------------- |  | ---------------------------- | ------- | - | --------------------------------- | - | ------- | ------------------ |  | - | ------------------ | - |  | - | ------- | -
|                                        |  | For the Fiscal Quarter Ended |         |   | For the Two Fiscal Quarters Ended |  
|                                        |  | September 30, 2005           |         |   | September 30, 2006                |   |         | September 30, 2005 |  |   | September 30, 2006 |  
|Operating Revenue                       |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|Celebrity Publications                  |  | $                            | 37,133  |   |                                   | $ | 35,341  |                    |  | $ | 70,806             |   |  | $ | 64,135  |  
|Newspaper Publications                  |  |                              | 35,595  |   |                                   |   | 37,424  |                    |  |   | 74,122             |   |  |   | 72,036  |  
|Womens Health and Fitness Publications |  |                              | 20,588  |   |                                   |   | 20,349  |                    |  |   | 41,231             |   |  |   | 41,081  |  
|Distribution Services                   |  |                              | 8,025   |   |                                   |   | 7,782   |                    |  |   | 15,414             |   |  |   | 15,101  |  
|Corporate/Other                         |  |                              | 26,801  |   |                                   |   | 27,671  |                    |  |   | 52,894             |   |  |   | 54,827  |  
|Intersegment Eliminations               |  |                              | (2,429  | ) |                                   |   | (2,383  | )                  |  |   | (4,823             | ) |  |   | (4,594  | )
|                                        |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|Total Operating Revenue                 |  | $                            | 125,713 |   |                                   | $ | 126,184 |                    |  | $ | 249,644            |   |  | $ | 242,586 |  
|                                        |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|Operating Income (Loss)                 |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|Celebrity Publications                  |  | $                            | 11,421  |   |                                   | $ | 8,861   |                    |  | $ | 20,148             |   |  | $ | 9,673   |  
|Newspaper Publications                  |  |                              | 12,884  |   |                                   |   | 17,456  |                    |  |   | 29,091             |   |  |   | 30,313  |  
|Womens Health and Fitness Publications |  |                              | 7,652   |   |                                   |   | 7,207   |                    |  |   | 16,036             |   |  |   | 15,181  |  
|Distribution Services                   |  |                              | 1,761   |   |                                   |   | 2,265   |                    |  |   | 3,430              |   |  |   | 3,755   |  
|Corporate/Other                         |  |                              | (15,028 | ) |                                   |   | (13,881 | )                  |  |   | (33,809            | ) |  |   | (32,545 | )
|                                        |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  
|Total Operating Income                  |  | $                            | 18,690  |   |                                   | $ | 21,908  |                    |  | $ | 34,896             |   |  | $ | 26,377  |  
|                                        |  |                              |         |   |                                   |   |         |                    |  |   |                    |   |  |   |         |  

Comparison ofFiscal Quarter Ended September 30, 2006 vs. Fiscal Quarter Ended
September 30, 2005

Operating Revenue

Total operating revenue was $126.2 million and $125.7 million for the fiscal quarters ended September 30, 2006 and September 30, 2005, respectively, representing an increase in revenue of $0.5 million, or 0.4%. This increase in
operating revenue is primarily attributable to a $1.8 million increase in operating revenue relating to our Newspaper Publications and a $0.9 million increase in Corporate/Other. These items were partially offset by a decrease in operating revenue
relating to our Celebrity Publications of $1.8 million.



26



---

##### Table of Contents

Single copy revenue consists of copies sold primarily to four wholesalers, which we estimate represent 85% of the
newsstand distribution market, as well as several smaller wholesalers who represent the remaining 15%. Operating revenue generated by these wholesalers is included in the Celebrity Publications, Newspaper Publications, Womens Health and
Fitness Publications and Corporate/Other segments. In each of the fiscal quarters ended September 30, 2006 and 2005, two wholesalers each accounted for greater than 10% of our total operating revenue and in the aggregate accounted for 36% and
35%, respectively, of our total operating revenue. We have service agreements with our wholesalers, three of which require at least 120 days prior notice of termination, with terms expiring on December 31, 2007. The fourth wholesaler agreement
will terminate on June 30, 2007. Our operating results could be materially adversely affected if one or more of those service agreements were to end or the service were no longer available.

Operating Expense

Total operating expense was $104.3 million and
$107.0 million for the fiscal quarters ended September 30, 2006 and September 30, 2005, respectively, representing a decrease of $2.7 million, or 2.6%. This decrease in operating expense is primarily due to a $2.9 million decrease in
depreciation and amortization expense primarily due to certain assets becoming fully depreciated and amortized and a $3.3 million combined decrease in editorial, production and distribution, circulation and other cost of sales primarily attributable
to lower circulation in certain titles as well as tighter controls on spending levels. These expenses were partially offset by an increase in selling, general and administrative expense of $3.4 million primarily attributable to Restatement related
costs.

Interest Expense

Interest expense was $23.7
million and $22.2 million for the fiscal quarters ended September 30, 2006 and September 30, 2005, respectively, representing an increase of $1.5 million, or 6.6%. This increase in interest expense relates to a higher effective
weighted-average interest rate during the fiscal quarter ended September 30, 2006 of 8.2% as compared to 6.0% in the prior years comparable fiscal quarter.

Discontinued Operations

In order to improve our profitability and future net cash flows, in April 2006, we
discontinued the Celebrity Living Weekly, MPH and Shape En Espanol publications in accordance with the provisions of SFAS No. 144. Operating results of these publications have been classified as discontinued operations for all
periods presented. These publications were previously included in the Corporate/Other segment. See Note 11, Discontinued Operations, in the Notes to Unaudited Condensed Consolidated Financial Statements herein for further discussion.

Income Taxes

We established a $2.1 million valuation
allowance during the fiscal quarter ended September 30, 2006 associated with our book loss and tax amortization of our indefinite-lived intangibles as we do not believe that it is more likely than not that those benefits will be realized. Our
deferred tax liabilities related to the amortization of indefinite-lived intangibles are not considered a future source of income to support the realization of deferred tax assets within the carryforward period. As a result, we have recorded a $0.8
million

provision for income taxes primarily associated with the deferred tax liability related to tax amortization of indefinite-lived intangibles for the
fiscal quarter ended September 30, 2006.

Celebrity Publications Segment

Operating Revenue

Total operating revenue in the Celebrity
Publications segment was $35.3 million for the fiscal quarter ended September 30, 2006, representing a decrease of $1.8 million, or 4.8%, from the prior years comparable period. This decrease in revenue was primarily attributable to a
decrease in operating revenue for Star of $1.7 million primarily due to a decrease in circulation revenue.



27



---

##### Table of Contents

Operating Income

Operating income in the Celebrity Publications segment decreased in the fiscal quarter ended September 30, 2006 by $2.6 million, or 22.4%, to $8.9 million from the prior years comparable period. The operating income decrease
was primarily attributable to increased Starsubscription related costs of $0.4 million and increased Star production related costs of $0.7 million required to maintain the rate base and the above mentioned revenue decrease. These
items were partially offset by decreasedStareditorial related costs of $0.6 million.

Newspaper Publications Segment

Operating Revenue

Total operating revenue in
the Newspaper Publications segment was $37.4 million for the fiscal quarter ended September 30, 2006, representing an increase of $1.8 million, or 5.1%, from the prior years comparable period. This increase in revenue is primarily a
result of increased circulation and advertising revenue of Globe of $0.9 million and $0.4 million, respectively, and a $1.0 million increase in National Enquirer advertising revenue. These items were partially offset by a $0.5
million decrease in Examiner circulation revenue.

Operating Income

Operating income in the Newspaper Publications segment increased in the fiscal quarter ended September 30, 2006 by $4.6 million, or 35.5%, to $17.5 million from the prior years comparable period. This
increase in operating income is primarily attributable to the above mentioned revenue increase as well as decreases in editorial, production and transportation, distribution and other cost of sales of $2.8 million for National Enquirer.

Womens Health and Fitness Publications Segment

Operating Revenue

Total operating revenue in the Womens Health and Fitness Publications segment was
$20.3 million for the fiscal quarter ended September 30, 2006, representing a decrease of $0.2 million, or 1.2%, from the prior years comparable period.

Operating Income

Operating income in the Womens Health and Fitness Publications segment decreased by $0.4
million to $7.2 million in the fiscal quarter ended September 30, 2006. This decrease was primarily attributable to increased Shapesubscription related costs of $0.2 million and by the above mentioned revenue decrease.

Distribution Services Segment

Operating
Revenue

Total operating revenue in the Distribution Services segment was $5.4 million, net of eliminations, for the fiscal quarter ended
September 30, 2006, representing a decrease of $0.2 million, or 3.5%, from the prior years comparable period.

Operating Income

Operating income in the Distribution Services segment increased in the fiscal quarter ended September 30, 2006 by $0.5 million, or 28.6%, to
$2.3 million from the prior years comparable period. This increase in operating income is primarily attributable to a decrease of $0.7 million in direct costs of the services provided partially offset by the above mentioned revenue
decrease.



28



---

##### Table of Contents

Corporate/Other Segment

Operating Revenue

Total operating revenue in the Corporate/Other segment was $27.7 million for the fiscal quarter
ended September 30, 2006, representing an increase of $0.9 million, or 3.2%, from the prior years comparable period. This increase is attributable to a $0.2 million increase in Flex advertising revenue, a $0.3 million increase
in Natural Health advertising revenue and a $0.3 million increase in Muscle & Fitness advertising revenue.

Operating Loss

Operating loss in the Corporate/Other segment decreased in the fiscal quarter ended September 30, 2006 by $1.1 million, or 7.6%, to $13.9 million,
from the prior years comparable period. This decrease in operating loss is primarily due to a decrease in depreciation and amortization expense of $2.8 million primarily due to certain assets becoming fully depreciated and amortized and by the
above mentioned revenue increase, partially offset by a $2.3 million increase in Restatement related expenses included in selling, general and administrative expense.

Comparison ofTwo Fiscal Quarters Ended September 30, 2006 vs. Two Fiscal Quarters Ended September 30, 2005

Operating Revenue

Total operating revenue was $242.6 million and $249.6 million for the two fiscal quarters ended
September 30, 2006 and September 30, 2005, respectively, representing a decrease in revenue of $7.0 million, or 2.8%. This decrease in operating revenue is primarily attributable to a $6.7 million decrease in operating revenue
relating to our Celebrity Publications and a decrease in operating revenue relating to our Newspaper Publications of $2.1 million. These items were partially offset by an increase in operating revenues of $1.9 million in Corporate/Other.

Single copy revenue consists of copies sold primarily to four wholesalers, which we estimate represent 85% of the newsstand distribution market, as well
as several smaller wholesalers who represent the remaining 15%. Operating revenue generated by these wholesalers is included in the Celebrity Publications, Newspaper Publications, Womens Health and Fitness Publications and Corporate/Other
segments. In each of the two fiscal quarters ended September 30, 2006 and September 30, 2005, respectively, two wholesalers each accounted for greater than 10% of our total operating revenue and in the aggregate accounted for 36% of our
total operating revenue. We have service agreements with our wholesalers, three of which require at least 120 days prior notice of termination, with terms expiring on December 31, 2007. The fourth wholesaler agreement will terminate on
June 30, 2007. Our operating results could be materially adversely affected if one or more of those service agreements were to end or the service were no longer available.

Operating Expense

Total operating expense was $216.2 million and $214.7 million for the two fiscal
quarters ended September 30, 2006 and September 30, 2005, respectively, representing an increase of $1.5 million, or 0.7%. This increase in operating expense is primarily due to an $11.5 million increase in selling, general and
administrative expense primarily attributable to $7.0 million of Restatement related costs and $3.5 million of restructuring charges. These expenses were partially offset by a decrease in depreciation and amortization expense of
$5.6 million primarily due to certain assets becoming fully depreciated and amortized and a $4.4 million combined decrease in editorial, production and distribution, circulation and other cost of sales attributable to lower circulation.

Interest Expense

Interest expense was $48.0 million
and $41.0 million for the two fiscal quarters ended September 30, 2006 and September 30, 2005, respectively, representing an increase of $7.0 million, or 17.1%. This increase in interest expense relates to a higher effective
weighted-average interest rate during the two fiscal quarters ended September 30, 2006 of 8.2% as compared to 6.1% in the prior years comparable period as well as a higher average outstanding balance during the two fiscal quarters ended
September 30, 2006 as compared to the prior years comparable period.



29



---

##### Table of Contents

Other Income, Net

Other income, net decreased by $1.2 million from $1.7 million for the two fiscal quarters ended September 30, 2005 to $0.5 million for the two fiscal quarters ended September 30, 2006. During the two fiscal quarters
ended September 30, 2005, the Company received $1.6 million in cash from the sale of stock. We had provided advertising to a third party during fiscal year 2001, resulting in a receivable due from such third party, which we previously
deemed to be worthless. In fiscal year 2003, we exchanged the receivable associated with that advertising for stock in the third party, which we sold in the fiscal quarter ended June 30, 2005.

Discontinued Operations

In order to improve our profitability and
future net cash flows, in April 2006, we discontinued the Celebrity Living Weekly, MPH and Shape En Espanol publications in accordance with the provisions of SFAS No. 144. Operating results of these publications have been
classified as discontinued operations for all periods presented. These publications were previously included in the Corporate/Other segment. See Note 11, Discontinued Operations, in the Notes to Unaudited Condensed Consolidated Financial
Statements herein for further discussion.

Income Taxes

We established a $15.5 million valuation allowance during the two fiscal quarters ended September 30, 2006 associated with our book loss and tax amortization of our indefinite-lived intangibles as we do not believe that it is more
likely than not that those benefits will be realized. Our deferred tax liabilities related to the amortization of indefinite-lived intangibles are not considered a future source of income to support the realization of deferred tax assets within the
carryforward period. As a result, we have recorded a $5.7 million provision for income taxes primarily associated with the deferred tax liability related to tax amortization of indefinite-lived intangibles for the two fiscal quarters ended
September 30, 2006.

Celebrity Publications Segment

Operating Revenue

Total operating revenue in the Celebrity Publications segment was $64.1 million for the two
fiscal quarters ended September 30, 2006, representing a decrease of $6.7 million, or 9.4%, from the prior years comparable period. This decrease in revenue was primarily attributable to a decrease in operating revenue for
Star of $5.9 million primarily due to a decrease in circulation revenue.

Operating Income

Operating income in the Celebrity Publications segment decreased in the two fiscal quarters ended September 30, 2006 by $10.5 million, or 52.0%, to
$9.7 million from the prior years comparable period. The operating income decrease was primarily attributable to increased Starsubscription related costs of $2.3 million required to maintain the rate base, increasedStaradvertising related costs of $1.0 million and the above mentioned revenue decrease.

Newspaper Publications Segment

Operating Revenue

Total operating revenue in
the Newspaper Publications segment was $72.0 million for the two fiscal quarters ended September 30, 2006, representing a decrease of $2.1 million, or 2.8%, from the prior years comparable period. This decrease in revenue is
primarily a result of decreased circulation revenue of National Enquirer of $1.4 million and decreased circulation revenue of National Examiner of $1.1 million from the prior years comparable period.

Operating Income

Operating income in the Newspaper Publications
segment increased in the two fiscal quarters ended September 30, 2006 by $1.2 million, or 4.2%, to $30.3 million from the prior years comparable period. This increase in operating income is primarily attributable to a
$1.7 million decline in National Enquirer editorial expenses, a $2.3 million decline in National Enquirer production expenses and a $1.8 million decline inNational Enquirertransportation, distribution and other
cost of sales as a result of circulation declines. These items were partially offset by the above mentioned revenue decrease, an increase of $1.3 million in restructuring costs and a $0.5 million increase in selling, general and
administrative expenses primarily attributable to legal expenses.



30



---

##### Table of Contents

Womens Health and Fitness Publications Segment

Operating Revenue

Total operating revenue in the Womens Health
and Fitness Publications segment was $41.1 million and $41.2 million for the two fiscal quarters ended September 30, 2006 and 2005, respectively.

Operating Income

Operating income in the Womens Health and Fitness Publications segment decreased by $0.9 million to
$15.2 million in the two fiscal quarters ended September 30, 2006. This decrease was primarily attributable to increased Shapesubscription related costs of $0.6 million.

Distribution Services Segment

Operating
Revenue

Total operating revenue in the Distribution Services segment was $10.5 million, net of eliminations, for the two fiscal quarters ended
September 30, 2006, representing a decrease of $0.1 million, or 0.8%, from the prior years comparable period.

Operating Income

Operating income in the Distribution Services segment increased in the two fiscal quarters ended September 30, 2006 by $0.3 million, or 9.5%,
to $3.8 million from the prior years comparable period. This increase in operating income is primarily attributable to an decrease of $0.8 million in direct costs of the services provided partially offset by a $0.2 million
increase in severance charges and the above mentioned revenue decrease.

Corporate/Other Segment

Operating Revenue

Total operating revenue in the Corporate/Other
segment was $54.8 million for the two fiscal quarters ended September 30, 2006, representing an increase of $1.9 million, or 3.7%, from the prior years comparable period. This increase is attributable to a $0.5 million
increase in Flex advertising revenue, a $0.2 million increase in Looking Good Now circulation revenue, a $0.4 million increase in Muscle & Fitness Hers circulation and advertising revenue, a $0.8 million
increase in Muscle & Fitness advertising revenue, a $0.3 million increase in Mira! circulation and a $0.5 million increase in Natural Health advertising revenue. These increases were partially offset by a
$1.2 million decrease in Weekly World News circulation revenue.

Operating Loss

Operating loss in the Corporate/Other segment decreased in the two fiscal quarters ended September 30, 2006 by $1.3 million, or 3.7%, to $32.5 million,
from the prior years comparable period. This decrease in operating loss is attributable to the above mentioned revenue increase as well as a decrease in depreciation and amortization expense of $5.5 million primarily due to certain assets
becoming fully depreciated and amortized and a combined decrease in editorial and production related costs of $1.2 million attributable to reduced circulation. These items were partially offset by a $7.0 million increase in Restatement
related costs and $0.8 million increase in restructuring related costs.



31



---

##### Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity are cash generated from operations and amounts available to be borrowed under our credit agreement dated as of January 30, 2006 (as amended, the 2006 Credit
Agreement).

As of September 30, 2006, we had cash and cash equivalents of $22.5 million, $28.0 million outstanding on the revolving credit
facility under the 2006 Credit Agreement, and a working capital deficit of $25.9 million. As of December 31, 2006, we had cash and cash equivalents of $64.8 million and an outstanding balance on the revolving credit facility under the 2006
Credit Agreement of $60.0 million. The decrease in working capital deficit of $12.9 million from $38.8 million at March 31, 2006 to $25.9 million at September 30, 2006, primarily resulted from a $7.0 million decrease in accounts payable, a
$10.8 million decrease in accrued expenses and other current liabilities, a $4.1 million decrease in accrued interest, a $2.9 million increase in cash and cash equivalents and a $3.6 million increase in trade receivables. These items were partially
offset by a $12.9 million decrease in inventories and a $3.0 million decrease in prepaid expenses and other current assets.

We currently believe that
available funds and cash flows generated by operations, if any, will be sufficient to fund our working capital and capital expenditure requirements for at least the next 12 months. We believe that available cash at September 30, 2006 should
help mitigate future possible cash flow requirements. Our revolving credit commitment matures in January 2012 but may mature sooner if we do not refinance our outstanding 10.25% senior subordinated notes due 2009 (the 2009 Notes) on or
prior to February 1, 2009 in accordance with the requirements of the 2006 Credit Agreement (in which case the maturity date will be February 1, 2009) or we do not refinance our outstanding 8.875% senior subordinated notes due 2011 (the
2011 Notes and, together with the 2009 Notes, the Notes) on or prior to October 15, 2010 in accordance with the requirements of the 2006 Credit Agreement (in which case the maturity date will be October 15, 2010).
To the extent we make future acquisitions, we may require new sources of funding, including additional debt, equity financing or some combination thereof. There can be no assurances that we will be able to secure additional sources of funding or
that such additional sources of funding will be available to us on acceptable terms.

At September 30, 2006, our outstanding indebtedness totaled $1.0
billion, of which $478.0 million represented borrowings under the 2006 Credit Agreement and $550.0 million represented our senior subordinated notes.

Effective August 20, 2003, we entered into an interest rate swap agreement, which effectively converted a portion of our fixed-rate debt to variable rate debt. On July 28, 2006, we paid $1.6 million in connection with the interim
settlement of our swap agreement. At each reset date we either received or paid money based on the current interest rates as of that date. The final settlement date was January 15, 2007, which coincided with the swap agreement termination date.
On January 24, 2007, we paid $1.6 million in connection with the final settlement of this swap agreement. The change in the fair value of the swap has been recognized as a net addition (reduction) to interest expense of $1.4 million and $0.1
million for the fiscal quarter and two fiscal quarters ended September 30, 2005, respectively, and ($0.3) million and $0.3 million for the fiscal quarter and the two fiscal quarters ended September 30, 2006, respectively.

Cash Flows

Net cash used in operating activities was $19.5
million for the two fiscal quarters ended September 30, 2006, as compared to $9.8 million for the two fiscal quarters ended September 30, 2005. During the two fiscal quarters ended September 30, 2006, net cash used in operating
activities was primarily attributable to a $31.8 million net loss, a $10.8 million decrease in accrued expenses and other current liabilities, a $7.0 million decrease in accounts payable, a $4.1 million decease in accrued interest and a $5.1 million
increase in trade receivables. These items were partially offset by a $12.9 million decrease in inventories, $18.2 million of non-cash expenses (excluding amortization and write-off of deferred rack costs) and a net decrease in deferred rack costs
of $7.5 million. During the two fiscal quarters ended September 30, 2005, net cash used in operating activities was primarily attributable to $13.4 million net loss, a

$9.9 million decrease in accounts payable, a $10.0 million increase in trade receivables and a $3.2 million increase in inventories. These items were partially offset by $19.6 million of non-cash expenses, a $5.0
million increase in accrued expenses and other current liabilities and a $3.3 million increase in deferred revenues.

Net cash used in investing activities
was $1.8 million for the two fiscal quarters ended September 30, 2006 as compared to $1.4 million for the two fiscal quarters ended September 30, 2005. Net cash used in investing activities for the two fiscal quarters ended
September 30, 2006 were primarily attributable to $1.7 million for purchases of property and equipment and $0.3 million related to the investment in Mr. Olympia, LLC partially offset by $0.2 million related to proceeds from
the sale of fixed assets. Net cash used in investing activities in the two fiscal quarters ended September 30, 2005 were primarily attributable to $2.5 million for purchases of property and equipment and $0.6 million related to the
investment in Mr. Olympia, LLC. These items were partially offset by the $1.6 million of proceeds related to the sale of an investment.

Net cash
provided by financing activities was $24.0 million for the two fiscal quarters ended September 30, 2006, as compared to



32



---

##### Table of Contents

$10.9 million for the two fiscal quarters ended September 30, 2005. Net cash provided by financing activities for the two fiscal quarters ended
September 30, 2006 primarily consisted of proceeds of $68.0 million from the revolving credit facility partially offset by repayments of $40.0 million on the revolving credit facility and payments of $4.0 million related to deferred debt costs.
Net cash provided by financing activities for the two fiscal quarters ended September 30, 2005 primarily consisted of proceeds of $80.5 million from the revolving credit facility partially offset by repayments of $68.4 million on the term loan
and revolving credit facility and payments of $1.2 million related to deferred debt costs.

Credit Agreement and Subordinated Indebtedness

On January 30, 2006, we entered into the 2006 Credit Agreement, replacing the then existing Amended and Restated Credit Agreement dated as of
January 23, 2003 (the 2003 Credit Agreement).

The 2006 Credit Agreement allows for revolving loans, term loans, swingline loans and
letters of credit in an aggregate principal amount of up to $510.0 million. The 2006 Credit Agreement includes certain representations and warranties, conditions precedent, affirmative covenants, negative covenants and events of default. The
negative covenants include financial maintenance covenants comprised of a leverage ratio, a senior secured leverage ratio, a consolidated interest expense coverage ratio, and capital expenditure limits. The 2006 Credit Agreement also contains
certain covenants that, subject to certain exceptions, restrict paying cash dividends, incurring additional indebtedness, creating liens, making acquisitions or other investments, entering into certain mergers or consolidations and selling or
otherwise disposing of assets. The Company has obtained a number of waivers and amendments to the 2006 Credit Agreement since January 30, 2006. As of September 30, 2006, the Company was in compliance with these covenants under the 2006
Credit Agreement. Although there can be no assurances, the Company anticipates that, based on current projections, its operating results for fiscal year 2008 will be sufficient to satisfy the financial covenants under the 2006 Credit Agreement. The
indebtedness under the 2006 Credit Agreement is secured by security interests in substantially all of the Companys assets and the assets of all of its domestic subsidiaries. In addition, the Companys obligations are secured by a pledge
of all of the issued and outstanding shares of, or other equity interests in, substantially all of its existing or subsequently acquired or organized domestic subsidiaries and a percentage of the capital stock of, or other equity interests in,
certain of its subsequently acquired or organized subsidiaries.

As of February 13, 2006, the Company entered into an Amendment and Waiver Agreement
with respect to certain provisions of the 2006 Credit Agreement (the February 2006 Waiver). The February 2006 Waiver, among other things, provided for the waiver (the Restatement Waiver) of certain specified defaults or
events of default for specified periods under the 2006 Credit Agreement as a result of the Restatement so long as the Restatement did not result in changes in operating income and Consolidated EBITDA (calculated in accordance with the 2006 Credit
Agreement) in excess of certain specified amounts for specified periods. The February 2006 Waiver also provided for (a) an extension of the period for delivery of the Companys financial statements for the quarter ended December 31,
2005, until June 28, 2006 (at which point the restated financial statements for prior periods were also to be delivered), (b) the waiver (the Cross Default Waiver) of any cross default resulting from any failure by the Company
to comply with the indentures governing the Notes by failing to timely file its periodic reports with the SEC unless the trustee or the noteholders deliver certain notices to the Company with respect to its failure to comply with its reporting
covenants or commence any proceeding with respect to their rights and remedies thereunder, (c) the continued treatment of display rack costs as capital expenditures for purposes of the 2006 Credit Agreement, (d) an increase in the
margins applicable to borrowings under the 2006 Credit Agreement during the period that the Restatement was in process, and (e) additional limitations (the Additional Limitations) affecting the Companys ability to repurchase
the Notes, make certain restricted payments and to give consideration to noteholders to waive the failure to comply with the reporting covenant under its indentures, in each case during the period that the Restatement was in process. The
February 2006 Waiver also provided for an increase in margins applicable to borrowings in the event of a downgrade in the ratings by Moodys Investors Service, Inc. or Standard & Poors Ratings Services of the debt under the 2006
Credit Agreement to the extent such downgrade is effective within one month after completion of the Restatement and was expressly attributable to the Restatement. Pursuant to the February 2006 Waiver, the Company paid amendment fees in cash equal to
$1.00 per $1,000 of the outstanding and available credit facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $0.5 million.

On June 23, 2006, we entered into another Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the June 2006 Waiver). The June 2006 Waiver, among other
things, provided for (i) extensions of the Restatement Waiver (with certain changes to the conditions), the Cross Default Waiver and the Additional Limitations, (ii) an extension of the deadline for delivery of the Companys financial
statements for periods through June 30, 2006, (iii) certain amendments and waivers to the financial covenants under the 2006 Credit Agreement, (iv) the approval of the sale of the assets as described in Note 10 to the Notes to
Unaudited Condensed Consolidated Financial Statements, and (v) the approval of certain other changes relating to the foregoing items. Pursuant to the June 2006 Waiver, we paid amendment fees in cash equal to $2.50 per $1,000 of the outstanding
and available credit facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $1.3 million.



33



---

##### Table of Contents

On June 26, 2006, we entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who
collectively held a majority of the outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes
(collectively, the June 2006 Subordinated Debt Consent Agreements). Pursuant to the June 2006 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes provided their consents to
specified amendments to the related Indentures. Pursuant to the June 2006 Subordinated Debt Consent Agreements, the Company paid in cash $2.50 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note
holders of $1.4 million. In addition, pursuant to the requirements of the June 2006 Subordinated Debt Consent Agreements, the Company entered into (i) a Fourth Supplemental Indenture, dated as of June 26, 2006, among the Company, the Note
Guarantors named therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Second Supplemental Indenture, dated as of June 26, 2006, among the Company, the Note Guarantors named therein and the trustee,
relating to the Indenture governing the 2011 Notes (collectively, the June 2006 Supplemental Indentures). The principal purpose of the June 2006 Supplemental Indentures was to amend the related Indenture to permit the Company to extend
the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its quarterly report on Form 10-Q for the quarter ended December 31, 2005 to August 15, 2006, (ii) its
annual report on Form 10-K for the fiscal year ended March 31, 2006 to September 15, 2006 and (iii) the quarterly report on Form 10-Q for the quarter ended June 30, 2006 to September 29, 2006.

On August 18, 2006, we entered into another Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the August 2006
Waiver). The August 2006 Waiver, among other things, provided for (i) extensions of the Restatement Waiver, the Cross Default Waiver and the Additional Limitations and (ii) an extension of the deadline for delivery of our financial
statements for periods through September 30, 2006. Pursuant to the August 2006 Waiver, we paid amendment fees in cash equal to $1.25 per $1,000 of the outstanding and available credit facilities (totaling $510.0 million) under the 2006 Credit
Agreement, for an aggregate payment of $0.6 million.

On August 18, 2006, we entered into (i) a Consent Agreement with certain holders of the
2009 Notes, who collectively held a majority of the outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the
2011 Notes (collectively, the August 2006 Subordinated Debt Consent Agreements). Pursuant to the August 2006 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes provided their
consents to specified amendments to the related Indentures. Pursuant to the August 2006 Subordinated Debt Consent Agreements, the Company paid in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to
all Note holders of $0.7 million. In addition, pursuant to the requirements of the August 2006 Subordinated Debt Consent Agreements, on August 18, 2006, the Company entered into (i) a Fifth Supplemental Indenture, dated as of
August 18, 2006, among the Company, the Note Guarantors names therein and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Third Supplemental Indenture, dated as of August 18, 2006, among the Company, the
Note Guarantors named therein and the trustee, relating to the Indenture governing the 2011 Notes (collectively, the August 2006 Supplemental Indentures). The principal purpose of the August 2006 Supplemental Indentures was to amend the
related Indenture to permit the Company to extend the date by which it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its quarterly report on Form 10-Q for the quarter ended
December 31, 2005 (the Third Quarter 2006 Form 10-Q) to October 31, 2006, (ii) its annual report on Form 10-K for the fiscal year ended March 31, 2006 (the 2006 Form 10-K) to October 31, 2006,
(iii) its quarterly report on Form 10-Q for the quarter ended June 30, 2006 (the First Quarter 2007 Form 10-Q) to December 15, 2006 and (iv) its quarterly report on Form 10-Q for the quarter ended September 30,
2006 (the Second Quarter 2007 Form 10-Q) to January 31, 2007.

On October 26, 2006, we entered into another Amendment and Waiver
Agreement with respect to certain provisions of the 2006 Credit Agreement (the October 2006 Waiver). The October 2006 Waiver, among other things, provided for (i) extensions of the Restatement Waiver, the Cross Default Waiver and
the Additional Limitations, (ii) an extension of the deadline for delivery of our financial statements for periods through December 31, 2006 and (iii) certain amendments and waivers to the financial covenants under the 2006 Credit
Agreement. Pursuant to the October 2006 Waiver, we paid amendment fees in cash equal to $2.50 per $1,000 of the outstanding and available credit facilities (totaling $510.0 million) under the 2006 Credit Agreement, for an aggregate payment of $1.3
million. Under the October 2006 Waiver, the period for extension of the deadlines for delivery of our financial statements was contingent on obtaining similar extensions from the holders of the 2009 Notes and 2011 Notes (we subsequently obtained
such extensions but were required to pay additional fees under the October 2006 Waiver equal to $1.25 per $1,000 of the outstanding and available credit facilities because we paid similar fees to the holders of the 2009 Notes and 2011 Notes to
obtain such extensions).

On November 2, 2006, we entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively
held a majority of the outstanding principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively,
the November 2006 Subordinated Debt Consent Agreements). Pursuant to the November 2006 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes provided their consents to specified
amendments to the related Indentures. Pursuant to the November 2006 Subordinated Debt Consent Agreements, the Company paid in cash $2.50 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of
$1.4 million. In addition, pursuant to the requirements of the November 2006 Subordinated Debt Consent Agreements, on November 2, 2006, the Company entered into (i) a



34



---

##### Table of Contents

Sixth Supplemental Indenture, dated as of November 2, 2006, among the Company, the Note Guarantors named therein and the trustee, relating to the
Indenture governing the 2009 Notes, and (ii) a Fourth Supplemental Indenture, dated as of November 2, 2006, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2011 Notes
(collectively, the November 2006 Supplemental Indentures). The principal purpose of the November 2006 Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by which it is required under such
Indenture to file with the SEC and provide the trustee and holders of Notes (i) its Third Quarter 2006 Form 10-Q to January 16, 2007, (ii) its 2006 Form 10-K to January 16, 2007, (iii) its First Quarter 2007 Form 10-Q to
February 15, 2007, (iv) its Second Quarter 2007 Form 10-Q to February 15, 2007 and (v) its quarterly report on Form 10-Q for he quarter ended December 31, 2006 (the Third Quarter 2007 Form 10-Q) to
February 15, 2007. In addition, each of the November 2006 Supplemental Indentures permits the Company, upon notice to the trustee, to extend the filing dates of (x) the Third Quarter 2006 Form 10-Q and the 2006 Form 10-K to
February 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount and (y) the First Quarter 2007 Form 10-Q, the Second Quarter 2007 Form 10-Q and the Third Quarter 2007 Form 10-Q to
March 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount.

In January 2007, pursuant to the
November 2006 Supplemental Indentures, we extended the filing date for the Third Quarter 2006 Form 10-Q and the 2006 Form 10-K to February 15, 2007. In February 2007, pursuant to the November 2006 Supplemental Indentures, we extended the filing
date of the First Quarter 2007 Form 10-Q, the Second Quarter 2007 Form 10-Q and the Third Quarter 2007 Form 10-Q, respectively, to March 15, 2007. Accordingly, in January 2007, we paid in cash $1.25 per $1,000 in principal amount of Notes to
each holder of Notes, for an aggregate payment to all note holders of $0.7 million. In addition, in February 2007, we paid in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of
$0.7 million.

On February 9, 2007, we entered into an Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement
(the February 2007 Waiver). The February 2007 Waiver provided, among other things, for an extension of the existing waiver of certain specified defaults or events of default for specified periods under the 2006 Credit Agreement as a
result of the Restatement, so long as the Restatement does not result in changes in operating income and Consolidated EBITDA (calculated in accordance with the 2006 Credit Agreement) in excess of certain specified amounts for specified periods as
amended pursuant to the February 2007 Waiver. The February 2007 Waiver also provided, among other things for (a) the extension for delivery of the Companys financial statements for: (i) the fiscal quarter ended December 31, 2005
to March 15, 2007, (ii) the fiscal year ended March 31, 2006 to March 15, 2007, (iii) the fiscal quarter ended June 30, 2006 to April 15, 2007, (iv) the fiscal quarter ended September 30, 2006 to
April 15, 2007 and (v) the fiscal quarter ended December 31, 2006 to April 15, 2007 (failure to satisfy the foregoing delivery deadlines does not become an Event of Default under the 2006 Credit Agreement unless
such failure continues unremedied for 30 days after the Company receives notice of such failure from the administrative agent), (b) the continuing waiver of any cross default resulting from any failure by the Company to comply with the
indentures governing the Notes by failing to timely file its periodic reports with the SEC, unless the trustee or the noteholders (i) deliver certain notices to the Company as a result of the Companys failure to comply with its reporting
covenants or (ii) commence any proceeding with respect to their rights and remedies thereunder, (c) an increase in the margins applicable to borrowings under the 2006 Credit Agreement, (d) certain additional reporting requirements for
a limited period, (e) certain amendments and waivers to the financial covenants under the 2006 Credit Agreement, (f) the issuance of additional notes to the holders of the Notes under certain circumstances, (g) the continuation of
limitations affecting the Companys ability to (i) repurchase its outstanding senior subordinated notes, (ii) make certain restricted payments and (iii) give consideration to noteholders to waive the failure to comply with the
reporting covenant under its indentures, in each case during the period that the Restatement is in process, and (h) a further increase in margins applicable to borrowings in the event of a specified downgrade in the ratings by Moodys
Investors Service, Inc. or Standard & Poors Ratings Services of the debt under the 2006 Credit Agreement or in the event certain payments are made to the holders of the Notes. Pursuant to the February 2007 Waiver, we paid an amendment
fee in cash to lenders who approved the February 2007 Waiver equal to $1.25 per $1,000 in principal amount of the outstanding and available credit facilities of such lenders resulting in an aggregate payment of $0.5 million.

On February 15, 2007, we entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the outstanding
principal amount of the 2009 Notes, and (ii) a Consent Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively, the February 2007 Subordinated
Debt Consent Agreements). Pursuant to the February 2007 Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes have provided their consents to specified amendments to the related Indentures.
Pursuant to the February 2007 Subordinated Debt Consent Agreements, we paid in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $0.7 million. In addition, pursuant to the
requirements of the February 2007 Subordinated Debt Consent Agreements, on February 15, 2007, we entered into (i) a Seventh Supplemental Indenture, dated as of February 15, 2007, among the Company, the Note Guarantors named therein
and the trustee, relating to the Indenture governing the 2009 Notes, and (ii) a Fifth Supplemental Indenture, dated as of February 15, 2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture
governing the 2011 Notes (collectively, the February 2007 Supplemental Indentures). The principal purpose of the February 2007 Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by which
it is required under such Indenture to file with the SEC and provide the trustee and holders of Notes (i) its Third Quarter 2006 Form 10-Q to April 16, 2007 and (ii) its 2006 Form 10-K to April 16, 2007. In addition, each of the
February 2007 Supplemental Indentures permits the Company, upon notice to the trustee, to extend the filing



35



---

##### Table of Contents

dates of its First Quarter 2007 Form 10-Q, Second Quarter 2007 Form 10-Q and Third Quarter 2007 Form 10-Q, respectively, from March 15, 2007 to
May 15, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount. We extended the filing dates for these three quarterly reports to May 15, 2007.

On April 16, 2007, we entered into an Amendment and Waiver Agreement with respect to certain provisions of the 2006 Credit Agreement (the April 2007
Waiver). The April 2007 Waiver provided, among other things, for extensions of the applicable deadlines for delivery of our financial statements for the following periods: (i) for the fiscal quarter ended June 30, 2006 to
May 15, 2007, (ii) for the fiscal quarter ended September 30, 2006 to the earlier of (A) the date that is 30 days following delivery of the financial statements for the fiscal quarter ended June 30, 2006 and
(B) June 15, 2007, (iii) for the fiscal quarter ended December 31, 2006 to the earlier of (A) the date that is 30 days following delivery of the financial statements for the fiscal quarter ended September 30, 2006 and
(B) July 15, 2007, (iv) for the fiscal year ended March 31, 2007 to August 31, 2007, and (v) for the fiscal quarter ending June 30, 2007 to the earlier of (A) the date that is 30 days following delivery of the
financial statements for the fiscal year ended March 31, 2007 and (B) September 30, 2007. The April 2007 Waiver also amended a provision of the 2006 Credit Agreement which restricts the giving of any consideration to or for the
benefit of any holder of Notes for any amendment, modification or waiver relating to a financial reporting violation, among other things, to reduce the requirement that the Company maintain a minimum amount of liquidity such that the provision now
requires that the Companys cash and cash equivalents and unused availability under the 2006 Credit Agreement are at least $25.0 million. Pursuant to the April 2007 Waiver, we paid an amendment fee in cash to lenders who approved the April 2007
Waiver equal to $0.50 per $1,000 in principal amount of the outstanding and available credit facilities of such lenders, resulting in an aggregate payment of $0.3 million.

On May 15, 2007, we entered into (i) a Consent Agreement with certain holders of the 2009 Notes, who collectively held a majority of the outstanding principal amount of the 2009 Notes and (ii) a Consent
Agreement with certain holders of the 2011 Notes, who collectively held a majority of the outstanding principal amount of the 2011 Notes (collectively, the May 2007 Subordinated Debt Consent Agreements). Pursuant to the May 2007
Subordinated Debt Consent Agreements, the holders of a majority in principal amount of each series of Notes have provided their consents to specified amendments to the related Indentures. Pursuant to the May 2007 Subordinated Debt Consent
Agreements, we will pay in cash $1.25 per $1,000 in principal amount of Notes to each holder of Notes, for an aggregate payment to all Note holders of $0.7 million. In addition, pursuant to the requirements of the May 2007 Subordinated Debt Consent
Agreements, on May 15, 2007, the Company entered into (i) an Eighth Supplemental Indenture, dated as of May 15, 2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2009
Notes, and (ii) a Sixth Supplemental Indenture dated as of May 15, 2007, among the Company, the Note Guarantors named therein and the trustee, relating to the Indenture governing the 2011 Notes (collectively, the May 2007
Supplemental Indentures). The principal purpose of the May 2007 Supplemental Indentures was to amend the related Indenture to permit the Company to extend the date by which it is required under such Indenture to file with the SEC and provide
the trustee and holders of Notes (i) its Second Quarter 2007 10-Q to June 15, 2007, (ii) its Third Quarter 2007 10-Q to July 16, 2007, (iii) its annual report on Form 10-K for the year ended March 31, 2007 (the
2007 10-K) to August 31, 2007 and (iv) its quarterly report on Form 10-Q for the quarter ended June 30, 2007 (the First Quarter 2008 10-Q) to October 1, 2007. In addition, each Supplemental Indenture
permits the Company, upon notice to the Trustee, to extend the filing dates of its Second Quarter 2007 10-Q to July 16, 2007, its Third Quarter 2007 10-Q to August 15, 2007, its 2007 10-K to October 1, 2007, and its First Quarter 2008
10-Q to October 31, 2007 in return for a cash payment to all holders of Notes equal to $1.25 per $1,000 principal amount.

New Accounting
Pronouncements

In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159 (SFAS
No. 159), The Fair Value Option for Financial Assets and Financial LiabilitiesIncluding an amendment of FASB Statement No. 115. SFAS No. 159 provides entities with an option to choose to measure eligible
items at fair value at specified election dates. If elected, an entity must report unrealized gains and losses on the item in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument, with a few
exceptions, such as investments otherwise accounted for by the equity method; is irrevocable (unless a new election date occurs); and is applied only to entire instruments and not to portions of instruments. We are currently evaluating the impact of
adopting SFAS No. 159 on our financial statements, which is effective beginning in fiscal year 2008.



|Item 3. | Quantitative and Qualitative Disclosures about Market Risk
|------- | ----------------------------------------------------------

During
the fiscal quarter ended September 30, 2006, there were no significant changes related to the Companys market risk exposure since March 31, 2006.



36



---

##### Table of Contents

|Item 4. | Controls and Procedures
|------- | -----------------------

Pursuant to Rule 15d-15(b) of the
Securities Exchange Act of 1934, as amended (the Exchange Act), as of March 31, 2005, the Companys management performed an evaluation, under the supervision and with the participation of the Companys principal executive
officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Exchange Act Rule 15d-15(e)). Disclosure controls and procedures are designed to ensure that the
information required to be disclosed in our reports that we file or submit under the Exchange Act is (i) accumulated and communicated to our management (including the principal executive officer and principal financial officer) as appropriate
to allow timely decisions regarding required disclosures, and (ii) recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms. Based upon that evaluation, our principal executive officer and
principal financial officer concluded that a material weakness existed in our internal control over financial reporting. As a result of this material weakness, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were not effective. It was determined that the material weakness in internal control over financial reporting as of March 31, 2005 related to the fact that we lacked a sufficient complement of personnel with a
level of financial reporting expertise commensurate with our financial reporting requirements to resolve non-routine or complex accounting matters. This material weakness continued to exist as of September 30, 2006.

Subsequent to March 31, 2005, the Companys board of directors and management took steps to remediate the material weakness described above, including the
hiring in December 2005 of a new chief financial officer who served from January 2006 to August 2006. That chief financial officer, as part of his review of the Companys accounting practices, found a number of issues which he brought to
the attention of the Companys board of directors and senior management. Consequently, on February 8, 2006, the board of directors concluded that the Companys previously issued financial statements included or otherwise
summarized in its Annual Report on Form 10-K for the fiscal year ended March 31, 2005 (including the accompanying report of the Companys independent registered public accounting firm) and its Quarterly Reports on Form 10-Q for each of the
quarters ended June 30, 2005 and September 30, 2005 should no longer be relied upon.

In connection with the then chief financial officers
review, and the continued review by a new chief financial officer hired in August 2006, a number of errors were found in the Companys previously issued Unaudited Condensed Consolidated Financial Statements. The errors are discussed in
greater detail in Note 2, Restatement of Previously Issued Financial Statements, in the Notes to Unaudited Condensed Consolidated Financial Statements included herein. In addition, the audit committee of the Companys board of
directors, aided by an independent law firm and forensic accountants, conducted an inquiry.

Based on further evaluations performed by management with
assistance from its consultants, and based on information obtained in connection with the audit committees inquiry, management identified additional deficiencies related to the internal control system, including deficiencies in the controls
related to the Companys monthly financial close and financial reporting processes and accounting systems. Specifically, the deficiencies resulted from the absence of the following controls: (i) oversight of accounting and
financial reporting personnel; (ii) certain key reconciliation controls; (iii) controls over the appropriate application of generally accepted accounting principles, including accounting for income taxes; (iv) review procedures;
(v) controls over the ability of financial management to override financial reporting and accounting systems; (vi) controls over information technology system development, program changes, system access and end-user computing; and
(vii) an effective control environment. Management evaluated the impact of the deficiencies and has concluded that each of the control deficiencies described above represents a material weakness as of September 30, 2006.

Based on the inquiry commenced by the audit committee and on recommendations made by the audit committee and its advisors, the Companys board of directors and
its senior management implemented a number of remedial actions, including the hiring of a new chief accounting officer and other members of its financial reporting staff, as well as a new executive vice president of consumer marketing responsible
for subscription circulation data and processes. Other remedial actions are also being implemented. The Company also continues to take steps to enhance its financial close process and financial reporting system. Although such efforts are well
underway, these enhancements will not be considered effective until the remedial process is implemented in full and operational for a period of time, and our principal executive officer and principal financial officer conclude that our disclosure
controls and procedures are operating effectively. As of September 30, 2006, therefore, our disclosure controls and procedures continued to be ineffective.

In light of the material weaknesses described above, the Company performed additional procedures to ensure that the Unaudited Condensed Consolidated Financial Statements are prepared in accordance with generally accepted accounting
principles. Accordingly, management has concluded that the Companys Unaudited Condensed Consolidated Financial Statements for the periods covered in this Form 10-Q are fairly stated in all material aspects in accordance with generally accepted
accounting principles.



37



---

##### Table of Contents

PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

Because the focus of some of our publications
often involves celebrities or controversial subjects, the risk of defamation or invasion of privacy litigation exists. Our experience indicates that the claims for damages made in such lawsuits are usually defensible and heavily inflated and,
in any event, any reasonably foreseeable material liability or settlement would likely be covered by insurance. There are currently no claims pending that we believe would have a material adverse effect on our operations.



|Item 1A. | Risk Factors
|-------- | ------------

There have been no material changes to the
Companys risk factors, as previously disclosed in the Companys March 31, 2006 10-K in response to Item 1A thereof, during the fiscal quarter ended September 30, 2006.



|Item 6. | Exhibits
|------- | --------



|             |  |                                                                                                                                        
|------------ |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit 31.1 |  | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|             | 
|Exhibit 31.2 |  | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|             | 
|Exhibit 32   |  | Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



38



---

##### Table of Contents

SIGNATURES

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



|                   |  |  |  |                                                       |  | 
|------------------ |  |  |  | ----------------------------------------------------- |  | 
|                   |  |  |  | AMERICAN MEDIA OPERATIONS, INC.                      
|                   |  |  |  | Registrant                                           
|                   |  | 
|Date: May 24, 2007 |  |  |  | /s/ DAVID J. PECKER                                  
|                   |  |  |  | David J. Pecker                                      
|                   |  |  |  | Chief Executive Officer (principal executive officer)
|                   |  | 
|Date: May 24, 2007 |  |  |  | /s/ JOHN F. CRAVEN                                   
|                   |  |  |  | John F. Craven                                       
|                   |  |  |  | Chief Financial Officer (principal financial officer)



39



---

##### Table of Contents

Exhibit Index



|            |  |                                                                                                                                        
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                            
|31.1        |  | Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|            | 
|31.2        |  | Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                
|            | 
|32          |  | Certification of principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



40