Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," including, specifically, statements made in "Overview," and elsewhere in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks and uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others, the following: price competition from our existing competitors; new competitors in any of our businesses; a shift in client preference for different promotional materials, strategies or coupon delivery methods; including, without limitation, as a result of declines in newspaper circulation; an unforeseen increase in our paper or postal costs; changes which affect the businesses of our clients and lead to reduced sales promotion spending, including, without limitation, a decrease of marketing budgets which are generally discretionary in nature and easier to reduce in the short-term than other expenses; our substantial indebtedness, and our ability to refinance such indebtedness, if necessary; and our ability to incur additional indebtedness, may affect our financial health; the financial condition of our clients, suppliers or other counterparties; the adverse impact of the ongoing economic downturn on the marketing expenditures and activities of our clients and prospective clients; our ability to comply with or obtain modifications or waivers of the financial covenants contained in our debt documents; certain covenants in our debt documents could adversely restrict our financial and operating flexibility; fluctuations in the amount, timing, pages, weight and kinds of advertising pieces from period to period, due to a change in our clients' promotional needs, inventories and other factors; our failure to attract and retain qualified personnel may affect our business and results of operations; a rise in interest rates could increase our borrowing costs; the outcome of ADVO's pending shareholder lawsuits; possible governmental regulation or litigation affecting aspects of our business; and general economic conditions, whether nationally or in the market areas in which we conduct business, may be less favorable than expected. We disclaim any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Additional risks include, but are not limited to those risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2007 (the "2007 Form 10-K") and our other filings with the United States Securities and Exchange Commission ("SEC").

Overview

Valassis is one of the nation's leading media and marketing services companies, offering our clients a weekly reach of over 100 million shoppers across a multi-media platform, in the mailbox, in the newspaper, on the doorstep, in store and online. Redplum.com - the newest addition to our diverse offerings
- extends our print advertisers' reach online and offers consumers compelling national and local deals.

We are the only company in our industry to blend a one-of-a-kind shared mail network with newspaper distribution. We are committed to providing innovative marketing solutions to maximize the efficiency and effectiveness of promotions for our clients and to deliver value to consumers how, when and where they want.

For the quarter ended September 30, 2008, we achieved revenues of $563.7 million, a decrease of 7.2% compared to $607.2 million for the third quarter of 2007. Third quarter net loss was $5.2 million, compared to net income of $16.4 million in the third quarter of 2007. These decreases are primarily due to the challenging global macroeconomic environment and its impact on revenue across all of our business segments. Third quarter loss per share was $0.11, a decrease from net earnings per share of $0.34 in the third quarter of 2007.

On November 4, 2008, our Board of Directors approved the 2009 Profit Maximization Plan, which includes a workforce reduction of approximately 3% of our U.S. employee base. These reductions will take place prior to December 31, 2008 and are in response to the challenging global economic environment and its adverse impact on our results for the quarter ended September 30, 2008. We currently expect to record approximately $3.5 million in charges for severance benefits, all of which will be in the form of cash payments, during the fourth quarter ending December 31, 2008.

Segment Results

Shared Mail (ADVO)

Shared Mail (ADVO) revenues for the third quarter of 2008 were $327.0 million, a 5.7% decrease from $346.6 million in the third quarter of 2007. For the nine months ended September 30, 2008, Shared Mail revenues were $1,033.7 million compared to $807.1 million in the prior year period. Revenues for the nine months ended September 30, 2007 represented revenues from the ADVO acquisition date of March 2, 2007 to September 30, 2007 and did not reflect a full nine-month period.

The challenging economic environment contributed to the decrease in Shared Mail revenues for the third quarter of 2008. Seven out of Shared Mail's top 10 advertising categories experienced revenue declines. In addition, revenues from the RedPlum® wrap product experienced a decrease due to lower sell-through rates and challenges in category diversification. Total Shared Mail pieces decreased 0.8% to 8.5 billion pieces when compared to the third quarter of 2007. Shared Mail packages delivered for the third quarter increased 0.9% to 1.0 billion packages and the average number of pieces per package decreased 1.0% to 7.9 average pieces for the third quarter of 2008.

Shared Mail's gross margin percentage was 22.7% for the third quarter of 2008, a decrease of 1.4 percentage points from the third quarter of 2007. Contributing to the decrease in gross margin quarter over quarter was the increase in unused postage as a percentage of base postage. The decrease in average pieces per package increased unused postage costs for the third quarter of 2008. In addition, a decrease in the RedPlum ® wrap sell-through percentage also contributed to the third quarter margin decline. Offsetting the above were lower production costs resulting from operational efficiencies in the Shared Mail facilities and ongoing package optimization efforts.

Shared Mail segment profit was $13.2 million for the third quarter of 2008, a decrease of $10.5 million from the third quarter of 2007. This 44.3% decrease was primarily attributable to the revenue decline experienced during the third quarter. For the nine-month period ended September 30, 2008, Shared Mail segment profit was $67.0 million. Prior year's nine-month year-to-date segment profit was $48.3 million; however, as noted above this amount does not represent a full nine-month period.

Neighborhood Targeted

Our Neighborhood Targeted product revenues were $107.0 million in the quarter ended September 30, 2008, a decrease of $10.4 million, or 8.9%, compared to the quarter ended September 30, 2007. This decrease was primarily due to previous Neighborhood Targeted business that shifted into the Shared Mail product and decreased client spending specifically in the telecom and food service categories. Segment profit decreased 74.7% to $5.0 million in the third quarter of 2008 from $19.8 million in the third quarter of 2007, due to a volume decline and corresponding effect on plant cost absorption as well as a shift in customer mix to lower margin Run of Press ("ROP") customers.

For the nine months ended September 30, 2008, Neighborhood Targeted product revenues decreased 6.7% to $315.5 million from $338.1 million for the nine months ended September 30, 2007. This decline was primarily due to a shift of business to Shared Mail products and a general slowdown in the economy. Segment profit for the nine months ended September 30, 2008 was $27.8 million compared with $45.2 million in the prior period, due to the revenue decline. In addition, we experienced a shift in ROP customer mix to lower margin customers.

FSI

In the quarter ended September 30, 2008, FSI revenues were $91.4 million, a decrease of 10.9% from $102.6 million in the quarter ended September 30, 2007. For the nine months ended September 30, 2008, segment revenues were $278.7 million, a decrease of 10.4% from $311.0 million in the prior year period. The decrease in revenues for the quarter was attributable to an anticipated low-to-mid-single digit percentage reduction in FSI pricing, as well as a decline in industry volume of 5.2%. The decrease in revenue for the nine months ended September 30, 2008 was the result of the price decline and a lower market share as compared to the nine months ended September 30, 2007. FSI cost of goods sold increased for the three and nine months ended September 30, 2008 from the comparable prior year periods on a cost-per-thousand basis, primarily due to increases in the cost of paper and transportation.

FSI segment profit was $0.2 million for the quarter ended September 30, 2008, a decrease from segment profit of $3.7 million in the prior year quarter. This decline was due to the anticipated reduction in pricing and increased costs of goods sold. For the nine months ended September 30, 2008, segment loss was $0.2 million compared to segment profit of $19.0 million in the prior year period.

International, Digital Media & Services

Due to their size in relation to other segments, we have combined the segments previously known as International and Services and Household Targeted into one segment - International, Digital Media & Services. This segment includes all of our lines of business not included in a separate reportable segment, including NCH, international, direct mail, VRMS, security services, interactive and in-store. Total third quarter 2008 revenues for this segment were $38.3 million, a decrease of 5.7% from the third quarter of 2007, due primarily to the sale of the French business during the quarter. This segment experienced a segment loss of $4.0 million for the third quarter of 2008, compared to segment profit of $1.8 million for the third quarter of 2007, due primarily to continued losses incurred in connection with our new business initiatives of approximately $3.5 million.

For the nine months ended September 30, 2008, this segment recorded revenues of $127.8 million, an increase of 2.7%, from $124.5 million in the prior year period, due to strong coupon clearing volumes partially offset by the sale of the French business in the third quarter. Segment loss for the nine months ended September 30, 2008 was $3.2 million, compared to a profit of $6.0 million in the prior year period due primarily to approximately $3.8 million of losses incurred as part of our interactive initiative and $1.9 million of costs related to our European restructuring.

Selling, General and Administrative Costs

Selling, general and administrative (SG&A) costs decreased in the third quarter of 2008 to $93.9 million from $96.3 million in the third quarter of 2007. Although management has been successful in reducing recurring SG&A expenses, legal costs related to our lawsuit against News America in the amount of $1.8 million during the third quarter of 2008 partially offset these reductions. For the nine months ended September 30, 2008, SG&A was $287.9 million, an increase from $247.2 million in the prior year period. The increase was due to the inclusion of Shared Mail SG&A costs for the full nine months ended September 30, 2008 compared to the prior year period in which Shared Mail SG&A costs are included only from the date of the ADVO acquisition on March 2, 2007.

Amortization Expense

Amortization expense of $2.3 million and $6.9 million were recorded for the three and nine months ended September 30, 2008, respectively. As a result of the allocation of the purchase price for the ADVO acquisition, $180 million of amortizable intangibles were recorded with an average life of 20 years.

Non-operating Items

Interest expense was $23.9 million in the third quarter of 2008, compared to $24.6 million in the third quarter of 2007. The decrease was due to reductions in debt made with free cash flow. For the nine months ended September 30, 2008, interest expense was $72.0 million compared to $60.4 million in the prior year period, due to debt incurred in connection with the acquisition of ADVO on March 2, 2007.

Net Earnings and Loss

Net loss was $5.2 million in the third quarter of 2008, a decrease of $21.6 million from a profit of $16.4 million for the third quarter of 2007. The decrease in earnings was due primarily to the impact of the challenging economic environment as well as a decline in FSI pricing, softness in the Shared Mail segment and additional legal expense of $1.8 million associated with the News America lawsuit. Diluted loss per share was $0.11 in the third quarter of 2008, compared to net earnings per share of $0.34 in the third quarter of 2007.

Net earnings for the nine months ended September 30, 2008 were $14.5 million, representing a decrease of $23.0 million, or 61.3%, from $37.5 million during the prior year period. Diluted earnings per share were $0.30 for the nine months ended September 30, 2008, compared to $0.78 for the nine months ended September 30, 2007.

Financial Condition, Liquidity and Sources of Capital

We believe that we have sufficient liquidity to support the ongoing activities of our business, repay our existing debt obligations and to invest in future growth opportunities. Operating cash flows are our primary source of liquidity and are expected to be used for, among other things, interest and principal payments on our debt obligations and capital expenditures necessary to support growth and productivity improvement.

The following table presents our available sources of liquidity as of September 30, 2008:

                                              Facility          Amount
  Source of Liquidity (in millions)            Amount         Outstanding    Available
  Cash and cash equivalents                                                 $     147.6
  Debt facilities:
  Senior Secured Revolving Credit Facility   $    109.5 (1)            -          109.5

  Total Available                                                           $     257.1

(1) Net of $10.5 million in outstanding letters of credit.

Sources and Uses of Cash and Cash Equivalents

Cash and cash equivalents totaled $147.6 million at September 30, 2008 compared to $125.2 million at December 31, 2007. This was the result of cash provided by operating and investing activities of $64.7 million and $13.1 million, respectively, offset by $58.2 million of cash used for financing activities during the nine-month period ended September 30, 2008.

Cash flow from operating activities was $64.7 million during the nine months ended September 30, 2008 compared to $117.4 million during the nine months ended September 30, 2007. The $52.7 million decrease was due to lower net earnings of $22.9 million, changes in assets and liabilities and non-cash charges. These changes are more fully described below:

• Non-cash charges of depreciation and amortization of tangible and intangible assets increased by $8.1 million during the nine months ended September 30, 2008 reflecting nine months of depreciation of assets acquired in the ADVO acquisition while the prior period only reflects approximately seven months of depreciation as a result of the ADVO acquisition occurring on March 2, 2007;

• The repurchase of our Senior Secured Convertible Notes due 2033 (the "2033 Secured Notes") resulted in a related $15.3 million deferred tax liability becoming payable as of September 30, 2008; this is the primary driver of the change in deferred taxes and income tax payable as compared to the same prior year period;

• A decrease in accounts payable and accounts receivable related to a reduction in gross ROP billings and related media costs; and

• An additional decrease in accounts receivable due to improvement in customer collections.

Net cash provided by investing activities was $13.1 million, due primarily to $28.9 million in proceeds from the sale of property, plant and equipment and $3.6 million in net proceeds from the sale of our French subsidiary, offset by $19.4 million in capital acquisitions of property, plant and equipment. The net cash used in investing activities in the comparable prior year period was $1.1 billion as a result of the ADVO acquisition, offset by the purchase and sale of auction rate securities.

Net cash used in financing activities was $58.2 million, as a result of principal payments on the term loan B and delayed draw term loan portions of our senior secured credit facility. Additional financing activity included the draw down of the delayed draw portion of our senior secured credit facility from which proceeds of $159.9 million were used to pay holders of our 2033 Secured Notes. Cash provided by financing activities in the comparable prior year period related to borrowings of long-term debt to fund the acquisition of ADVO, offset by a voluntary principal payment on this debt subsequent to the acquisition.

We intend to use cash generated by operating activities to meet interest and principal repayment obligations, for general corporate purposes and to reduce our indebtedness, and we believe we will generate sufficient funds from operations and will have sufficient existing cash balances and lines of credit available to meet currently anticipated liquidity needs, including interest and required payments of indebtedness.

Current and Long-term Debt

As of September 30, 2008, we had outstanding $1,252.3 million in aggregate indebtedness, which consisted of approximately $100.0 million aggregate principal amount of the 6 5/8% Senior Secured Notes due 2009 (the "2009 Senior Secured Notes"), $540.0 million of our unsecured 8 1/4% Senior Notes due 2015 (the "2015 Notes"), $459.8 million and $152.4 million under the term loan B and delayed draw term loan portions, respectively, of our senior secured credit facility and $0.1 million of the 2033 Secured Notes. All of our indentures governing the 2009 Senior Secured Notes, 2033 Secured Notes and the 2015 Notes contain cross-default provisions which become applicable if we default under any mortgage, indebtedness or instrument for money borrowed by us and the default results in the acceleration of such indebtedness in excess of $25.0 million. Our senior secured credit facility contains a cross-default provision which becomes applicable if we default under any mortgage, indebtedness or instrument for money borrowed by us in excess of $25.0 million. As of September 30, 2008, we had total outstanding letters of credit of approximately $10.5 million.

Our Senior Secured Credit Facility

We entered into our senior secured credit facility on March 2, 2007 in connection with our acquisition of ADVO.

The facility consists of the following:

• a five-year revolving line of credit in an aggregate principal amount of $120.0 million;

• a seven-year term loan B in an aggregate principal amount of $590.0 million, with principal repayable in quarterly installments at a rate of 1.0% per year during the first six years of the term loan B, with the remaining balance thereafter to be paid in full on the seventh anniversary of the closing date of the term loan B at which time the remaining balance will be payable in full;

• a seven-year amortizing delayed draw term loan in an aggregate principal amount of $160.0 million, with principal repayable in quarterly installments at a rate of 1.0% per year during first six years of the delayed draw term loan, with the remaining balance thereafter to be paid in full on the maturity date of the term loan B; and

• an incremental facility pursuant to which, prior to the maturity of the senior secured credit facility, we may incur additional indebtedness under our senior secured credit facility in an additional amount up to $150.0 million under either the revolving line of credit or the term loan B or a combination thereof.

Borrowings under our senior secured credit facility bear interest, at our option, at either the base rate (defined as the higher of the prime rate announced by the commercial bank selected by the administrative agent to the facility or the federal funds effective rate, plus 0.5%), or at a Eurodollar rate (as defined in the credit agreement), in each case, plus an applicable margin. The applicable margins for the revolving line of credit may be subject to a downward adjustment based upon the ratio of our secured debt to our consolidated adjusted EBITDA (as defined in the credit agreement) being within certain defined ranges.

Our senior secured credit facility requires us to comply with a maximum senior secured leverage ratio, as defined in the credit agreement (generally, the ratio of our consolidated senior secured indebtedness to consolidated EBITDA for the most recent four quarters), ranging from 4.25 to 1.00 to 3.50 to 1.00 (depending on the applicable period), and a minimum consolidated interest coverage ratio, as defined in the credit agreement (generally, the ratio of our consolidated EBITDA for such period to consolidated interest expense for such period), ranging from 1.60 to 1.00 to 2.00 to 1.00 (depending on the applicable period).

In April 2008, we drew down the entire $160.0 million available under the delayed draw term loan portion of our senior secured credit facility to finance our tender offer conducted to satisfy the put rights of the holders of our 2033 Secured Notes that were exercisable on May 22, 2008. Pricing and interest payments on the delayed draw term loan are consistent with the term loan B portion of our senior secured credit facility. See the discussion below of our 2033 Secured Notes for further information.

In July 2008, we used proceeds of $28.8 million from a sale and leaseback transaction to reduce the term loan B and delayed draw term loan portions of our senior secured credit facility.

See our 2007 Form 10-K for further information regarding the interest, fees, guarantees, security and covenants related to our senior secured credit facility.

2009 Secured Notes

In January 1999, we issued $100.0 million aggregate principal amount of our 2009 Secured Senior Notes in a private placement transaction. We pay interest at the rate of 6 5/8 per annum on the 2009 Senior Secured Notes on January 15 and July 15 of each year until maturity of the notes on January 15, 2009. Our 2009 Senior Secured Notes are secured on an equal and ratable basis with the indebtedness under our senior secured credit facility to the extent required by the indenture governing the 2009 Senior Secured Notes.

We may redeem all or any of the 2009 Senior Secured Notes at any time at a price equal to the greater of (i) 100% of the principal amount of the 2009 Senior Secured Notes to be redeemed or (ii) the sum of the present values of the remaining scheduled payments discounted to the redemption date on a semiannual basis at the Treasury Rate plus 50 basis points, plus any accrued and unpaid interest to the applicable redemption date. There are no mandatory redemption provisions.

Subsequent to September 30, 2008, we reduced our outstanding 2009 Senior Secured Notes by approximately $14.7 million. The remaining debt under the 2009 Senior Secured Notes matures on January 15, 2009; these Notes have been classified as current debt on the September 30, 2008 balance sheet.

2033 Secured Notes

In May 2003, we issued $239,794,000 aggregate principal amount of the 2033 Secured Notes in a private placement transaction at an issue price of $667.24 per note, resulting in gross proceeds to us of $160.0 million. During the second quarter of 2008, we conducted a cash tender offer for the 2033 Secured Notes that was intended to satisfy the put rights of the holders of such notes that were exercisable on May 22, 2008 under the indenture governing such notes. Pursuant to the tender offer we repurchased an aggregate principal amount of $239.7 million (or $159.9 million net of discount) for an aggregate of $159.9 million. As of September 30, 2008, an aggregate principal amount of $85,000 (or approximately $56,000 net of discount) of the 2033 Secured Notes remained outstanding. We used the delayed draw term loan portion of our senior secured credit facility to finance the tender offer. See "Our Senior Secured Credit Facility" above for additional information regarding the delayed draw term loan.

Through May 2008, we paid cash interest on the 2033 Secured Notes. Beginning on May 22, 2008, original issue discount has accrued on each outstanding 2033 Secured Note at 1 5/8% per annum on a semi-annual bond equivalent basis. Our 2033 Secured Notes are secured on an equal and ratable basis with the indebtedness under our senior secured credit facility to the extent required by the indenture governing the 2033 Secured Notes.

The remaining holders of the 2033 Secured Notes may require us to purchase all or a portion of their notes on May 22, 2013, May 22, 2018, May 22, 2023 and May 22, 2028 at a price of $723.48, $784.46, $850.58 and $922.27 per Note, respectively, payable in cash. Also, each holder may require us to repurchase all or a portion of such holder's 2033 Secured Notes if we experience a change of control. We, at our option, may redeem all or a portion of the 2033 Secured Notes at their accreted value at any time for cash. The 2033 Secured Notes are currently convertible; however, the conversion price is out-of-the-money.

2015 Secured Notes

On March 2, 2007, we issued in a private placement $540.0 million aggregate principal amount of the 2015 Notes. Interest on the 2015 Notes is payable every six months on March 1 and September 1, commencing September 1, 2007. The 2015 Notes are fully and unconditionally guaranteed, jointly and severally, by substantially all of our existing and future domestic restricted subsidiaries on a senior unsecured basis. In August 2007, in accordance with the terms of the registration rights agreement between us and the initial purchasers of the 2015 Notes, we completed an exchange offer to exchange the original notes issued in the private placement for a like principal amount of exchange notes registered under the Securities Act of 1933, as amended. An aggregate principal amount of $539,925,000 original notes were exchanged for exchange notes in the exchange offer. The remaining $75,000 principal amount of the original notes remains outstanding. The exchange notes are substantially identical to the original notes, except that the exchange notes are not subject to certain transfer restrictions.

Subject to a number of exceptions, the 2015 indenture restricts our ability and the ability of our subsidiaries to incur or guarantee additional indebtedness, transfer or sell assets, make certain investments, pay dividends or make distributions or other restricted payments, create certain liens, merge or consolidate, repurchase stock and enter into transactions with affiliates.

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