Cautionary Note Regarding Forward Looking Information

The following discussion of GateHouse Media, Inc.'s and its subsidiaries ("we," "us" or "our") financial condition and results of operations should be read in conjunction with our historical condensed consolidated financial statements and notes to those statements appearing in this report. The discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, including but not limited to, those described under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. Such risks, uncertainties and other factors could cause actual future growth, results of operations, performance and business prospects and opportunities to differ materially from those expressed in, or implied by, such forward looking information.

Certain statements in this Quarterly Report on Form 10-Q may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect our current views regarding, among other things, our future growth, results of operations, performance and business prospects and opportunities, as well as other statements that are other than historical fact. Words such as "anticipate(s)," "expect(s)", "intend(s)", "plan(s)", "target(s)", "project(s)", "believe(s)", "will", "would", "seek(s)", "estimate(s)" and similar expressions are intended to identify such forward-looking statements.

Forward-looking statements are based on management's current expectations and beliefs and are subject to a number of known and unknown risks, uncertainties and other factors that could lead actual results to be materially different from those described in the forward-looking statements. We can give no assurance that our expectations will be attained. Factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks, uncertainties and other factors identified by us under the heading "Risk Factors" in our Annual Report on Form 10-K for the year ended December 31, 2008. Such forward-looking statements speak only as of the date on which they are made. Except to the extent required by law, we expressly disclaim any obligation to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or change in events, conditions or circumstances on which any statement is based.

Overview

We are one of the largest publishers of locally based print and online media in the United States as measured by number of daily publications. Our business model is to be the preeminent provider of local content and advertising in the small and midsize markets we serve. Our portfolio of products, which includes 494 community publications, more than 250 related websites, and seven yellow page directories, serves over 233,000 business advertising accounts and reaches approximately 10.0 million people on a weekly basis.

Our core products include:

• 90 daily newspapers with total paid circulation of approximately 780,000;

• 289 weekly newspapers (published up to three times per week) with total paid circulation of approximately 588,000 and total free circulation of approximately 931,000;

• 115 "shoppers" (generally advertising-only publications) with total circulation of approximately 1.9 million;

• over 250 locally focused websites, which extend our franchises onto the internet; and

• seven yellow page directories, with a distribution of approximately 813,000, that covers a population of approximately 2.0 million people.

In addition to our core products, we also opportunistically produce niche publications that address specific local market interests such as recreation, sports, healthcare and real estate. Over the last twelve months, we created approximately 81 niche publications.

We were incorporated in Delaware in 1997 for purposes of acquiring a portion of the daily and weekly newspapers owned by American Publishing Company. We accounted for the initial acquisition using the purchase method of accounting.

On May 9, 2005, FIF III Liberty Holdings LLC, an affiliate of Fortress Investment Group LLC, entered into an Agreement and Plan of Merger with the Company pursuant to which a wholly-owned subsidiary of FIF III Liberty Holdings LLC merged with and into the Company (the "Merger"). The Merger was effective on June 6, 2005, thus at the time making FIF III Liberty Holdings LLC our principal and controlling stockholder.

As of March 31, 2009, Fortress beneficially owned approximately 41.8% of our outstanding common stock.

Since 1998, we have acquired 416 daily and weekly newspapers and shoppers and launched numerous new products. We generate revenues from advertising, circulation and commercial printing. Advertising revenue is recognized upon publication of the advertisements. Circulation revenue from subscribers, which is billed to customers at the beginning of the subscription period, is recognized on a straight-line basis over the term of the related subscription. The revenue for commercial printing is recognized upon delivery of the printed product to our customers. Directory revenue is recognized on a straight-line basis over the 12-month period in which the corresponding directory is distributed and in use in the market.

Our advertising revenue tends to follow a seasonal pattern, with higher advertising revenue in months containing significant events or holidays. Accordingly, our first quarter, followed by our third quarter, historically are our weakest quarters of the year in terms of revenue. Correspondingly, our second and fourth fiscal quarters, historically, are our strongest quarters. We expect that this seasonality will continue to affect our advertising revenue in future periods.

Our operating costs consist primarily of labor, newsprint, and delivery costs. Our selling, general and administrative expenses consist primarily of labor costs.

We have experienced recent declines in certain advertising revenue streams and increased volatility of operating performance, despite our geographic diversity, well-balanced portfolio of products, strong local franchises, broad customer base and reliance on smaller markets. These recent declines in advertising revenue we have experienced are typical in the current slow economy. We believe our local advertising tends to be less sensitive to economic cycles than national advertising because local businesses generally have fewer advertising channels through which to reach their target audience.

Operating cost categories of newsprint, labor and delivery costs experienced increased upward price pressure in the industry over the three year period from 2003 to 2006. Newsprint prices declined in late 2006 and 2007. Newsprint prices rose again throughout 2008. While we expect newsprint costs to decline per metric ton in 2009, we have taken steps to mitigate some of these prior increases with consumption declines. In addition, we are a member of a newsprint-buying consortium which enables our local publishers to obtain favorable pricing versus the general market.

Labor represents just over 50% of our operating expenses. Beginning in 2008, we initiated an effort to drive efficiencies and centralization of work throughout the organization. Additionally, we have taken steps to cluster our operations thereby increasing the usage of facilities and equipment while increasing the productivity of our labor force. We expect to continue to employ these steps as part of our business and clustering strategy.

Recent Developments

The newspaper industry and the Company have experienced declining same store revenue over the past two years. This has led to increased losses, reduced cash flow from operations and the need to record impairment charges for certain long term assets. It has also made it more difficult for us to meet certain debt covenants and has eliminated the availability of additional borrowings under our revolving debt agreement. As a result of these trends in the industry and the Company, management has implemented plans to reduce costs and preserve cash flow. This includes suspending the payment of cash dividends, the issuance of preferred stock, the repayment of indebtedness, the continued implementation of cost reduction programs, and the sale of non-core assets. We believe these initiatives will provide the financial resources necessary to invest in the business and ensure our future success and provide sufficient cash flow to enable us to meet our commitments for the next year.

General economic conditions, including declines in consumer confidence, increases in unemployment levels, stock market declines, contraction of credit availability, declines in real estate values, and other trends, have impacted the markets in which we operate. These changes may continue to negatively impact our advertising and other revenue sources as well as increase our operating costs in the future. Management believes that we have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.

We performed testing for impairment of goodwill and newspaper mastheads as of December 31, June 30, 2008 and December 31, 2007. The fair value of our reporting units for goodwill impairment testing and individual newspaper mastheads were estimated using the expected present value of future cash flows and recent industry transaction multiples, using estimates, judgments and assumptions, that we believe were appropriate in the circumstances. Should general economic, market or business conditions continue to decline, and continue to have a negative impact on estimates of future cash flow and market transaction multiples, we may be required to record additional impairment charges in the future.

During 2008, our credit rating was downgraded to be rated below-investment grade by both Standard & Poor's and Moody's Investors Service and any future long-term borrowing or the extension or replacement of our short-term borrowing will reflect the negative impact of these ratings, increase our borrowing costs, limit our financing options and subject us to more restrictive covenants than our existing debt arrangements. Additional reductions in our credit ratings could further increase our borrowing cost, subject us to more onerous borrowing terms and reduce or eliminate our borrowing flexibility in the future.

We have a history of growth through acquisitions. The current economic environment has limited our ability to grow through acquisitions in the near-term future. As a result, we are focused on cost reductions and de-levering opportunities.

Critical Accounting Policy Disclosure

The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires management to make decisions based on estimates, assumptions and factors it considers relevant to the circumstances. Such decisions include the selection of applicable principles and the use of judgment in their application, the results of which could differ from those anticipated.

A summary of our significant accounting policies are described in Note 1 of our consolidated financial statements for the year ended December 31, 2008, included in our Annual Report filed on Form 10-K.

There have been no changes in critical accounting policies in the current year from those described in our Annual Report on Form 10-K for the year ended December 31, 2008.

Results of Operations

The following table summarizes our historical results of operations for the
three months ended March 31, 2009 and 2008.



                                                         Three months         Three months
                                                            ended                ended
                                                          March 31,            March 31,
                                                             2009                 2008
                                                                  (in thousands)
Revenues:
Advertising                                             $       94,759       $      118,349
Circulation                                                     35,737               35,302
Commercial printing and other                                    8,732               10,131

Total revenues                                                 139,228              163,782
Operating costs and expenses:
Operating costs                                                 88,745               95,402
Selling, general and administrative                             43,862               47,338
Depreciation and amortization                                   16,000               18,273
Integration and reorganization costs                               748                2,603
Impairment of long-lived assets                                      6                   -
(Gain) loss on sale of assets                                      164                   (6 )

Operating income (loss)                                        (10,297 )                172
Interest expense                                                17,393               24,416
Amortization of deferred financing costs                           340                  583
Unrealized loss on derivative instrument                         2,206                  719
Other expense                                                      795                   13

Loss from continuing operations before income taxes            (31,031 )            (25,559 )
Income tax expense                                                 300                2,471

Loss from continuing operations                         $      (31,331 )     $      (28,030 )

Three Months Ended March 31, 2009 Compared To Three Months Ended March 31, 2008

Revenue. Total revenue for the three months ended March 31, 2009 decreased by $24.6 million or 15.0% to $139.2 million from $163.8 million for the three months ended March 31, 2008. The difference between same store revenue and GAAP revenue for the current quarter is immaterial, therefore, further revenue discussions will be limited to GAAP results. The decrease in total revenue was comprised of a $23.6 million or 19.9% decrease in advertising revenue, a $0.4 million, or 1.2% increase in circulation revenue and a $1.4 million, or 13.8% decrease in commercial printing and other revenue. Advertising revenue declines were primarily driven by decreases in classified advertising. The weak economy, particularly in the sectors of employment, automotive and real estate, has led to declining classified revenues across the country. Circulation revenue remained stable. The slight increase over prior year is due to significant circulation levels of small publications acquired in 2008. The decrease in commercial printing and other revenue was due to declines in printing projects as a result of weak economic conditions.

Operating Costs. Operating costs for the three months ended March 31, 2009 decreased by $6.7 million, or 7.0%, to $88.7 million from $95.4 million for the three months ended March 31, 2008. The decrease in operating costs was primarily due to a decrease in compensation, supplies, postage, and professional expenses of $4.1 million, $0.5 million, $0.8 million and $0.7 million, respectively.

Selling, General and Administrative. Selling, general and administrative expenses for the three months ended March 31, 2009 decreased by $3.4 million, or 7.3%, to $43.9 million from $47.3 million three months ended March 31, 2008. The decrease in selling, general and administrative expenses was primarily due to a decrease in compensation, health insurance and pension expense of $2.3 million, $0.5 million and $0.2 million, respectively.

Depreciation and Amortization. Depreciation and amortization expense for the three months ended March 31, 2009 decreased by $2.3 million to $16.0 million from $18.3 million for the three months ended March 31, 2008. The decrease in depreciation and amortization expense was primarily due to a reduction in amortization expense due to the impairment of amortizable intangibles in June and December of 2008.

Interest Expense. Total interest expense for the three months ended March 31, 2009 decreased by $7.0 million, or 28.8%, to $17.4 million from $24.4 million for the three months ended March 31, 2008. The decrease was primarily due to declines in interest rates and their related impact on our unhedged debt position, as well as a decrease in our total outstanding debt.

Unrealized (Gain) Loss on Derivative Instrument. During the three months ended March 31, 2009 we recorded a net loss of $2.2 million comprised of accumulated other comprehensive income amortization related to swaps terminated in 2008 partially offset by the impact of the ineffectiveness of our remaining swap agreements.

During the three months ended March 31, 2008 we recorded a loss of $0.7 million due to ineffectiveness related to several of our interest rate swaps which we entered into in an effort to eliminate a significant portion of our exposure to fluctuations in LIBOR.

Income Tax Expense. Income tax expense for the three months ended March 31, 2009 was $0.3 million compared to $2.5 million for the three months ended March 31, 2008. The change of $2.2 million was primarily due to a change in the valuation allowance recognized in relation to the income tax benefit.

Net Loss from Continuing Operations. Net loss from continuing operations for the three months ended March 31, 2009 was $31.3 million. Net loss from continuing operations for the three months ended March 31, 2008 was $28.0 million. Our net loss from continuing operations increased due to the factors noted above.

Liquidity and Capital Resources

Our primary cash requirements are for working capital, debt obligations and capital expenditures. We have no material outstanding commitments for capital expenditures. Our principal sources of funds have historically been, and will be, cash provided by operating activities and term loan borrowings for significant acquisitions.

On February 27, 2007, we entered into an Amended and Restated Credit Agreement with a syndicate of financial institutions with Wachovia Bank, National Association as administrative agent, referred to as the 2007 Credit Facility. The 2007 Credit Facility initially provided for a $670.0 million term loan facility which matures in August, 2014, a delayed draw term loan of up to $250.0 million which matures in August 2014 and a revolving credit agreement with a $40.0 million aggregate loan commitment available, including a $15.0 million sub-facility for letters of credit and a $10.0 million swingline facility, which matures in February 2014.

On May 7, 2007, we amended the 2007 Credit Facility and increased our borrowing by $275.0 million. This incremental borrowing has an interest rate of LIBOR + 2.25% or the Alternate Base Rate + 1.25%, depending upon the designation of the borrowing.

In accordance with the First Amendment, the rate on the previously existing borrowings of $920.0 million was changed to bear interest at LIBOR + 2.00% or the Alternate Base Rate + 1.00% depending upon the designation of the borrowing. The terms of the previously outstanding borrowings were also modified to include a 1% premium if the debt is called within one year and an interest feature that grants the previously outstanding debt an interest rate of .25% below the highest rate of any borrowing under the 2007 Credit Facility.

On February 15, 2008, we entered into our 2008 Bridge Facility with Barclays, as syndication agent, sole arranger and book runner. The 2008 Bridge Facility provides for a $20.6 term loan facility that was initially subject to extensions through August 15, 2009. On October 17, 2008, Barclays granted us a waiver from compliance with the total leverage ratio covenant with respect to the quarter ended September 30, 2008.

On August 21, 2008, FIF III Liberty Holdings LLC ("FIF III") purchased an aggregate of $11.5 million in 10% cumulative preferred stock of GateHouse Media Macomb Holdings, Inc. ("Macomb"), an operating subsidiary of ours. The preferred stock was issued on August 21, 2008. Macomb, an Unrestricted Subsidiary under the terms of our 2007 Credit Facility, used the proceeds from such sale of preferred stock to make an $11.5 million cash investment in Holdco non-voting 10% cumulative preferred stock. FIF III may require us to purchase its Macomb preferred stock during the five-year period following our full repayment of the 2008 Bridge Facility for an amount equal to the original purchase price, plus accrued but unpaid dividends. FIF III is an affiliate of Fortress Investment Group, LLC, the owner of approximately 41.8% of our outstanding Common Stock.

On February 3, 2009, we again amended our 2007 Credit Facility and reduced the amounts available under the credit agreement, as follows: (i) for revolving loans, from $40,000,000 to $20,000,000; (ii) for the letter of credit subfacility, from $15,000,000 to $5,000,000; and (iii) for the swingline loan subfacility, from $10,000,000 to $5,000,000.

On February 12, 2009, we amended the 2008 Bridge Facility and Barclays granted us a waiver from compliance with the total leverage ratio covenant for the quarter ended December 31, 2008. The amendment set the applicable margin for the Bridge Facility at 12.00% and eliminated the covenant requiring compliance with the Total Leverage Ratio of such facility. The amendment also established an amortization schedule for the outstanding balance due which runs through December 31, 2009.

As a holding company, we have no operations of our own and accordingly have no independent means of generating revenue, and our internal sources of funds to meet our cash needs, including payment of expenses, are dividends and other permitted payments from our subsidiaries. Our 2007 Credit Facility imposes upon us certain financial and operating covenants, including, among others, requirements that we satisfy certain financial tests, including a total leverage ratio if there are outstanding extensions of credit under the revolving facility, a minimum fixed charge ratio, and restrictions on our ability to incur debt, pay dividends or take certain other corporate actions. We are in compliance with these covenants. Management believes that we have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.

Although we are currently in compliance with all of our covenants and obligations under the 2007 Credit Facility and the 2008 Bridge Facility, due to restrictive covenants and conditions within each of the facilities, we currently do not have the ability to draw upon the revolving credit facility portion of the 2007 Credit Facility for any immediate short-term funding needs or to incur additional long-term debt.

Future compliance with our financial and operating covenants will depend on the future performance of the business and our ability to curtail the negative revenue trends experience as well as our ability to address other risks and challenges set forth herein and in our Annual Report on Form 10-K for the year ended December 31, 2008. We believe that we have adequate capital resources and liquidity to meet our working capital needs, borrowing obligations and all required capital expenditures for at least the next twelve months.

Our leverage may adversely affect our business and financial performance and may restrict our operating flexibility. The level of our indebtedness and our on-going cash flow requirements may expose us to a risk that a substantial decrease in operating cash flows due to, among other things, continued or additional adverse economic developments or adverse developments in our business, could make it difficult for us to meet the financial and operating covenants contained in our credit facilities. In addition, our leverage may limit cash flow available for general corporate purposes such as capital expenditures and our flexibility to react to competitive, technological and other changes in our industry and economic conditions generally.

Cash Flows

The following table summarizes our historical cash flows.



                                                 Three months ended            Three months ended
                                                   March 31, 2009                March 31, 2008
Cash provided by (used in) operating
activities                                      $             (3,786 )        $              7,713
Cash provided by (used in) investing
activities                                                     1,278                       (16,066 )
Cash provided by financing activities                             -                          6,879

Cash Flows from Operating Activities. Net cash used in operating activities for the three months ended March 31, 2009 was $3.8 million, a decrease of $11.5 million when compared to $7.7 million of cash provided by operating activities for the three months ended March 31, 2008. This $11.5 million decrease was the result of a decrease in cash provided by working capital of $2.5 million, a decrease in non-cash charges of $5.9 million, and an increase in net loss from continuing operations of $3.1 million.

The $2.5 million decrease in cash provided by working capital for the three months ended March 31, 2009 when compared to the three months ended March 31, 2008 is primarily attributable to decreases in accounts payable and accrued interest, partially offset by increases in accrued expenses.

The $5.9 million decrease in non-cash charges primarily consisted of a decrease in depreciation and amortization of $2.8 million, a decrease in deferred income taxes of $2.4 million, a decrease in impairment of long-lived assets of $1.2 million, a decrease in non-cash interest of $0.3 million, and a decrease in amortization of deferred financing costs of $0.2 million, partially offset by an increase in unrealized net losses on derivative instruments of $1.5 million.

During the first quarter of 2009, we experienced negative operating cash flow for the first time since our initial public offering. This is a result of the seasonality of our business, and continued negative economic trends, combined with the fact that historically our weakest operating results occur during the first quarter of the year. We continue to aggressively manage costs and anticipate operating improvements in the second quarter of 2009.

Cash Flows from Investing Activities. Net cash provided by investing activities for the three months ended March 31, 2009 was $1.3 million. During the three months ended March 31, 2009, we received $2.8 million from the sale of publications and other assets, which was partially offset by $0.2 million, net of cash acquired, used for acquisitions and $1.3 million used for capital expenditures.

Net cash used in investing activities for the three months ended March 31, 2008 was $16.1 million. During the three months ended March 31, 2008, we used $22.9 million, net of cash acquired, for acquisitions and $2.6 million for capital . . .