Certain statements found in this document 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 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 ability to refinance such indebtedness, if necessary, and our ability to incur additional indebtedness, may affect our financial health; the financial condition, including bankruptcies, of our clients, suppliers, senior secured credit facility lenders or other counterparties; 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; ongoing disruptions in the credit markets that make it difficult for companies to secure financing; 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; we may be required to recognize additional impairment charges against goodwill and intangible assets in the future; court approval of the settlement agreement among the parties to the pending ADVO securities class action lawsuit; our current litigation with News America Incorporated may be costly and divert management's attention; possible governmental regulation or litigation affecting aspects of our business; the credit and liquidity crisis in the financial markets could continue to affect our results of operations and financial condition; reductions of our credit ratings may have an adverse impact on our business; counterparties to our secured credit facility and interest rate swaps may not be able to fulfill their obligations due to disruptions in the global credit markets; uncertainty in the application and interpretation of applicable state sales tax laws may expose us to additional sales tax liability; and general economic conditions, whether nationally, internationally, or in the market areas in which we conduct our business, including the adverse impact of the ongoing economic downturn on the marketing expenditures and activities of our clients and prospective clients as well as our vendors, with whom we rely on to provide us with quality materials at the right prices and in a timely manner. 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 2008, or the 2008 Form 10-K, and other filings by us with the United States Securities and Exchange Commission ("SEC").

Overview

We are one of the nation's leading media and marketing services companies, offering unparalleled reach and scale to more than 15,000 advertisers. Our RedPlum ® portfolio of products and services delivers value on a weekly basis to more than 100 million shoppers across a multi-media platform, in the mailbox, in the newspaper, on the doorstep, in store and online. We provide our products and services to the masses or targeted audiences, providing our clients with blended media solutions, including shared mail and newspaper delivery. We offer the only national shared mail distribution network in the industry. We utilize a patent-pending targeting tool that provides our clients with multi-media recommendations with a quick turnaround. 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.

Since late 2008, we have faced challenges due to the ongoing economic recession. Advertising spending is particularly sensitive to changes in the economic environment, as clients' advertising spending is discretionary and may be more constricted during such times. As a result of this environment, we adopted a profit maximization plan in the last quarter of 2008 (the "2009 Profit Maximization Plan"). The purpose of our 2009 Profit Maximization Plan was to effectively reduce costs, increase production efficiencies and focus on the greatest growth and profit opportunities for the future. We have successfully executed against this plan in 2009, exceeding our original cost savings expectations. We believe these cost management efforts will improve our cost structure for the future.

During the third quarter of 2009, we reported revenues of $544.1 million, representing a decrease of 3.5% compared to $563.7 million for the third quarter of 2008. This decrease is due primarily to the negative effect the economic slowdown has had on our clients' marketing budgets, as well as divested and discontinued businesses which contributed $3.8 million to revenue in the prior year period. Third quarter of 2009 net earnings were $13.8 million, compared to a $5.2 million net loss in the third quarter of 2008. This was due primarily to our improved cost structure as the result of business optimization and cost containment efforts. Third quarter of 2009 diluted earnings per share, or EPS, were $0.28, up from $0.11 loss per share in the third quarter of 2008.

For the nine months ended September 30, 2009, we reported revenues of $1,639.3 million, representing a decrease of 6.6% compared to $1,755.7 million for the prior year period. This decrease was due to the negative impact of the economic slowdown, as well as divested and discontinued businesses which contributed $21.6 million to revenue in the prior year period. Net earnings for the nine months ended September 30, 2009 were $42.8 million, representing an increase of 246.3% from $12.4 million in the prior year period (after retrospective application of ASC 470-20 as described in Note 1 to our unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). This was due primarily to our improved cost structure as the result of business optimization and cost containment efforts. For the nine months ended September 30, 2009, EPS was $0.87, representing an increase of 234.6% from $0.26 for the prior year period.

Segment Results

Shared Mail

Revenues for the Shared Mail segment were $319.5 million in the third quarter of 2009 decreasing $7.5 million, or 2.3%, from $327.0 million in the third quarter of 2008. The decrease in revenue was primarily due to volume declines of unprofitable packages, as well as client shifts to lighter weight inserts.

For the nine months ended September 30, 2009, the Shared Mail segment reported revenue of $944.0 million, an 8.7% decrease from $1,033.7 million reported in the prior year period reflecting the challenging economic environment of the past year which has been negatively affecting our clients' advertising budgets. The reduced client advertising spending was apparent as six out of our top 10 advertising categories experienced year-over-year revenue declines, most notably, clients in the mass merchandising category. This decrease in revenues resulted from volume declines of packages and shifts to lower priced and lighter weight inserts as experienced in the third quarter. Also contributing to the year-over-year decrease was lower sell rates from the Red Plum® wrap product.

The volume decline was demonstrated in the package and piece statistics for both the three and nine-month periods. Total Shared Mail pieces were 8.3 billion and 24.5 billion for the three and nine months ended September 30, 2009, respectively, decreasing 2.0% and 3.1%, respectively, from the prior year periods. Shared Mail packages were 0.9 billion and 2.9 billion for the three and nine months ended September 30, 2009, respectively, decreasing 9.1% and 6.5%, respectively, from the prior year periods. Our business optimization efforts and reduction in underperforming packages drove the decrease in Shared Mail packages. Average pieces per package were 8.5 pieces and 8.2 pieces for the three and nine months ended September 30, 2009, respectively, increasing 7.5% and 3.7%, respectively, from the prior year periods.

Shared Mail's gross margin percentage was 26.4% for the third quarter of 2009 increasing 3.7 percentage points from the third quarter of 2008. The increase in gross margin was due to the distribution savings from fewer packages and from recently formed newspaper alliances which became operational during 2009, as well as, lower print and paper costs. Also contributing to the gross margin improvement was the increase in average pieces per package and resultant efficiencies in unused postage. Unused postage as a percentage of base postage was 19.7% for the third quarter of 2009 decreasing 2.6 percentage points from the prior year quarter. For the nine months ended September 30, 2009, gross margin increased 0.8 percentage points to 25.1% from the prior year period. The positive gross margin gains of the third quarter were partially offset by year-to-date lower volumes, the reduction of Red Plum® wrap sell rates and the lighter weight inserts from grocery clients.

Shared Mail segment profit for the third quarter of 2009 was $29.6 million increasing $16.4 million, or 124.2%, from $13.2 million in profit reported for the third quarter of 2008. Effective cost management, including package optimization efforts, newspaper alliances and reductions in selling, general and administrative (SG&A) spending due to cost controls contributed to the Shared Mail segment profit improvement. For the nine months ended September 30, 2009, Shared Mail segment profit was $71.8 million increasing $4.8 million from $67.0 million during the prior year period.

Neighborhood Targeted

Our Neighborhood Targeted revenues were $92.0 million in the third quarter of 2009, representing a decrease of 14.0% from $107.0 million in the third quarter of 2008. Revenues from solo preprints increased in excess of 15% as we continued to have success with our cross-selling efforts, but were more than offset by decreases in Run-of-Press (ROP) revenues due to reduced advertising spending by clients in our financial services and telecommunications verticals and a reduction in sampling and polybag advertising. Declines in sampling and polybag advertising are attributable primarily to the economic downturn, as these products are tied to store grand openings and new product introductions, and continue to be our most cyclical products. Segment profit was $3.9 million for the third quarter of 2009 compared to $5.0 million for the third quarter of 2008, due primarily to the revenue reduction and a shift in product mix.

During the nine months ended September 30, 2009, Neighborhood Targeted revenues decreased 3.8% to $303.6 million from $315.5 million during the prior year period. Significant increases in revenue from the financial services sector in the first quarter of 2009 were offset by declines in the third quarter of 2009. As in the third quarter, although preprint revenue was up significantly, the increase was more than offset by declines in ROP and sampling/polybag advertising revenues. Segment profit for the nine months ended September 30, 2009 was $25.0 million compared to $27.8 million in the prior year period. This reduction was due to the revenue decline.

FSI

Third quarter 2009 FSI revenues were $92.6 million, representing an increase of 1.3% from $91.4 million during the third quarter of 2008. The increased revenues were attributable to growth of 3.4% in industry units for the quarter. Revenues for the first nine months of 2009 were $278.3 million, flat compared to $278.7 million in the prior year period. Continued price deterioration offset volume gains. Industry units grew approximately 4.2% during the first nine months of 2009 compared to the prior year period. FSI cost of goods sold decreased for the three and nine months ended September 30, 2009 from the respective prior year periods on a cost-per-thousand (CPM) basis, due to lower paper costs and efficiencies gained in media and print costs due to increased volume.

FSI segment profit was $2.3 million during the quarter ended September 30, 2009, compared to $0.2 million during the prior year quarter. During the nine months ended September 30, 2009, FSI segment profit was $7.1 million compared to a loss of $0.2 million in the prior year period. These increases were due to the effect of higher volume and the positive impact on our cost structure from our cost management efforts.

International, Digital Media & Services

Third quarter 2009 revenues for this segment were $40.0 million, an increase of 4.4% from $38.3 million during the third quarter of 2008. This increase was primarily due to an increase in coupon clearing volume, which more than offset decreases due to divested or discontinued businesses during the second half of 2008, which accounted for $3.8 million of revenues (representing 0.7% of our consolidated revenues) in the prior year quarter, as well as foreign currency fluctuations. This segment experienced segment profit of $6.9 million during the third quarter of 2009 compared to a $4.0 million loss during the third quarter of 2008, primarily due to the discontinuance of the unprofitable businesses described above, as well as a significant increase in U.S. coupon clearing volume.

For the nine months ended September 30, 2009, this segment recorded revenues of $113.4 million, a decrease of 11.3% from $127.8 million in the prior year period. This decrease was primarily attributable to the divested and discontinued businesses mentioned above, which accounted for $21.6 million of revenues in the nine months ended September 30, 2008.

Selling, General and Administrative Costs

Selling, general and administrative (SG&A) costs decreased in the third quarter of 2009 to $90.7 million from $93.9 million in the third quarter of 2008. For the nine months ended September 30, 2009, SG&A costs decreased to $263.5 million from $287.9 million in the prior year period. These decreases were primarily attributable to reductions in headcount and discretionary spending as part of our cost containment efforts and divested and discontinued businesses. These decreases were partially offset by additional incentive-based compensation expense as the result of increased profitability, as well as stock price appreciation, which had the effect of accelerating the vesting of certain executive officers' performance-based stock options.

Amortization Expense

We recorded amortization expense of $3.2 million during the third quarter of 2009, an increase of $0.9 million from the third quarter of 2008. For the nine months ended September 30, 2009, amortization expense was $9.5 million compared to $6.9 million for the nine months ended September 30, 2008. These increases were due to a decrease in the estimated remaining life of an intangible asset.

Other Expenses (Income)

Interest expense was $23.2 million in the third quarter of 2009, compared to $23.9 million in the third quarter of 2008. The decrease was due to lower debt balances as a result of voluntary term loan repurchases under our senior secured credit facility discussed below, as well as the repayment of $51.8 million of our 6 5/8% Senior Secured Notes due 2009, or the 2009 Secured Notes, in January 2009, offset by a net increase of $2.8 million relating to changes in the fair value of our interest rate swap contracts and related amortization of the deferred losses on these contracts. During the quarter ended September 30, 2009, we repurchased, at a weighted average discount to par of 2.6%, an aggregate principal amount of $39.3 million of outstanding term loans under our senior secured credit facility, which we refer to as "Term Loan Repurchases," pursuant to modified Dutch auctions for an aggregate purchase price of $38.7 million, including fees. As a result of these repurchases, a pre-tax gain of $0.6 million, which represents the difference between the face amounts (par value) of the term loans repurchased and the actual repurchase prices of the term loans, including fees, was recognized in the quarter and included in other income, net, in our condensed consolidated statements of income.

Interest expense was $66.2 million in the nine months ended September 30, 2009, compared to $75.3 million (after retrospective application of ASC 470-20 as discussed in Note 1 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q) in the nine months ended September 30, 2008. This decrease was due to lower debt levels as described above. Term loan repurchases during the nine months ended September 30, 2009 resulted in a pre-tax gain of $9.4 million which is included in other income for the period.

Net Earnings

Net earnings were $13.8 million for the third quarter of 2009, an increase of $19.0 million from a net loss of $5.2 million in the third quarter of 2008. The increase in earnings was due to our improved cost structure as the result of our business optimization and cost containment efforts, reduced interest expense due to lower debt levels and a gain of $0.4 million, net of tax, from the Term Loan Repurchases. Diluted earnings per share were $0.28 in the third quarter of 2009, compared to a loss per share of $0.11 in the third quarter of 2008.

Net earnings for the nine months ended September 30, 2009 were $42.8 million, representing an increase of 246.3% from $12.4 million for the nine months ended September 30, 2008. The increase was the result of our improved cost structure, reduced interest expense due to lower debt levels and a gain of $5.8 million, net of tax, from the Term Loan Repurchases. Diluted earnings per share were $0.87 for the nine months ended September 30, 2009 compared to $0.26 in the prior year period.

Financial Condition, Liquidity and Sources of Capital

The following table presents our available sources of liquidity as of
September 30, 2009:



                                             Facility           Amount
 Source of Liquidity (in millions)            Amount          Outstanding    Available

 Cash and cash equivalents                                                  $     110.9
 Debt facilities:
 Senior Secured Revolving Credit Facility   $     89.6 (1)            -            89.6

 Total Available                                                            $     200.5

(1) On January 22, 2009, we amended our credit agreement and voluntarily reduced the aggregate revolving credit commitments thereunder from $120.0 million to $100.0 million. The amount above is net of $10.4 million in outstanding letters of credit.

Sources and Uses of Cash and Cash Equivalents

Cash and cash equivalents totaled $110.9 million at September 30, 2009 compared to $126.6 million at December 31, 2008. This was the result of cash flows from operating activities of $137.4 million, offset by cash used in investing and financing activities of $13.4 million and $140.2 million, respectively, during the nine months ended September 30, 2009.

Cash flows from operating activities were $137.4 million during the nine months ended September 30, 2009 compared to $64.7 million during the year-ago period. For the nine months ended September 30, 2009, net earnings and non-cash items such as the pre-tax gain on debt extinguishment of $9.4 million, deferred income taxes and depreciation and amortization, increased by $32.0 million from the year-ago period in 2008. In addition to this increase, $40.7 million of net changes in assets and liabilities increased cash from operations and are further described below:

• a decrease in inventory balances due to lower paper costs and efforts to reduce inventory on hand;

• cash outflows from accrued expenses, compensation and interest were lower in 2009 compared to 2008 as a result of lower interest payments as outstanding debt balances have decreased and the timing of compensation bonus payments changed from semi-annual payments in 2008 to annual payments in 2009; and

• the decrease in cash inflows from accounts receivable in 2009 compared to 2008 were offset by the decrease in cash outflows related to accounts payable for the same period. These reductions are a result of reduced ROP business and related media costs.

Net cash used in investing activities was $13.4 million for the nine months ended September 30, 2009 due to capital acquisitions of property, plant and equipment. Cash provided by investing activities during the nine months ended September 30, 2008 included $28.9 million from the sale and leaseback of our Windsor, Connecticut facilities and $3.6 million from the sale of our French subsidiary, offset by $19.4 million in capital acquisitions of property, plant and equipment.

Net cash used in financing activities for the nine months ended September 30, 2009 was $140.2 million. This included $51.8 million related to the satisfaction of our 2009 Secured Notes and $88.4 million in Term Loan Repurchases and related fees. Net cash used in financing activities in the year-ago period was a result of principal payments on the term loan B portion of our senior secured credit facility, as well as 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 Senior Secured Convertible Notes due 2033, or the 2033 Secured Notes.

Operating cash flows are our primary source of liquidity. We intend to use cash generated by operations 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, 2009, we had outstanding $1.1 billion in aggregate indebtedness, which consisted of $540.0 million of our unsecured 8 1/4% Senior Notes due 2015 (2015 Notes), $385.7 million and $126.7 million under the term loan B and delayed draw term loan portions of our senior secured credit facility, respectively, and $0.1 million of our 2033 Secured Notes. As of September 30, 2009, we had total outstanding letters of credit of approximately $10.4 million.

Our Senior Secured Credit Facility

General

On March 2, 2007, in connection with our acquisition of ADVO, Inc., we entered into a senior secured credit facility with Bear Stearns Corporate Lending Inc., as Administrative Agent, and a syndicate of lenders jointly arranged by Bear, Stearns & Co. Inc. and Banc of America Securities LLC.

Our senior secured credit facility originally consisted of the following:

• a five-year revolving line of credit in an aggregate principal amount of $120.0 million, including $35.0 million available in euros, British Pounds Sterling, Mexican Pesos or Canadian Dollars, $40.0 million available for letters of credit and a $20.0 million swingline loan subfacility (the "revolving line of credit");

• a seven-year term loan B in an aggregate principal amount equal to $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 on the seventh anniversary of the closing date of the term loan B (the "term loan B");

• a seven-year amortizing delayed draw term loan in an aggregate principal amount equal to $160.0 million, with principal repayable in quarterly installments at a rate of 1.0% per year during the first six years of the delayed draw term loan, with the remaining balance thereafter to be repaid in full on the maturity date of the term loan B (the "delayed draw term loan"); 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 (the "incremental facility"). The obligations under the incremental facility will constitute secured obligations under our senior secured credit facility.

On January 22, 2009, we entered into the First Amendment to our senior secured credit facility, or the Amendment. As a result of the Amendment, we are permitted to repurchase from tendering lenders term loans outstanding under the senior secured credit facility at prices below par acceptable to such lenders through one or more modified Dutch auctions. The Amendment provides that we may use up to an aggregate of $125.0 million to effect modified Dutch auctions at any time or times during 2009. In connection with the Amendment, we agreed to voluntarily permanently reduce the aggregate revolving credit commitments under the senior secured credit facility from $120.0 million to $100.0 million in exchange for the ability to keep $20.0 million of revolving credit loans outstanding during any modified Dutch auction. The Amendment also made certain technical and conforming changes to the terms of our senior secured credit facility. During the nine months ended September 30, 2009, we repurchased an aggregate principal amount of approximately $93.7 million of our outstanding term loans under our senior secured credit facility at prices below par, resulting in a pre-tax gain of $9.4 million, recorded as other income, net, in our condensed consolidated statements of income. This pre-tax gain represents the difference between the face amounts (par value) of the term loans repurchased and the actual repurchase prices of the term loans, including fees. Taxes on this gain will be deferred for five years and are then payable at 20% per year for each of the next five years.

All borrowings under our senior secured credit facility, including, without limitation, amounts drawn under the revolving line of credit, are subject to the satisfaction of customary conditions, including absence of a default and accuracy of representations and warranties. As of September 30, 2009, we had $385.7 million and $126.7 million outstanding under the term loan B and delayed draw term loan portions, respectively, and $89.6 million available under the revolving line of credit portion (after giving effect to the reduction in the revolving line of credit availability pursuant to the Amendment and outstanding letters of credit), of our senior secured credit facility.

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