UNITED
        STATES
 SECURITIES
        AND EXCHANGE COMMISSION
 WASHINGTON,
        D.C. 20549
 
 **FORM
        10-Q**
 
 
 þ
              QUARTERLY
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        quarterly period ended **September 30, 2007**
 
 OR
 
 o
              TRANSITION
                  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
                  ACT OF
                  1934
 
 For
        the
        transition period from _________ to _________.
 
 Commission
        file number: 1-3203
 
 
 
 **CHESAPEAKE
                  CORPORATION**(Exact
                  name of registrant as specified in its charter)
 
 **Virginia**
              
              **54-0166880**(State
                  or other jurisdiction of incorporation or organization)
              
              (I.R.S.
                  Employer Identification No.)**1021
                  East Cary Street****Richmond,
                  Virginia**
              
              **23219**(Address
                  of principal executive offices)
              
              Zip
                  Code
 
 Registrant's
                  telephone number, including area code:
              
              **804-697-1000**
 
 **Not
                  Applicable**(Former
                  name, former address, and former fiscal year, if changed since
                  last
                  report)
 
 Indicate
        by check mark whether the registrant (1) has filed all reports required to
        be
        filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
        the
        preceding 12 months (or for such shorter period that the registrant was required
        to file such reports), and (2) has been subject to such filing requirements
        for
        the past 90 days.
 
 Yes
þ   No
        o
 
 Indicate
        by check mark whether the registrant is a large accelerated filer, an
        accelerated filer, or a non-accelerated filer.  See definition of
        "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
        Act (check one):
 
 Large
                  accelerated filer o
              Accelerated
                  filer þ
              Non-accelerated
                  filer  o
  Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act).
 
 Yes
o  No
þ
 
 Number
        of
        shares of $1.00 par value common stock outstanding as of  October 31,
        2007:
 19,859,847
        shares.
  
 **CHESAPEAKE
        CORPORATION**
 **FORM
        10-Q**
 **FOR
        THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2007**
 **INDEX**
 
 PART
                  I. FINANCIAL INFORMATION
              PAGE
                  NUMBERItem
                  1.
              Financial
                  Statements (Unaudited)Consolidated
                  Statements of Earnings - Quarters and Nine Months ended September
                  30,
                  2007, and October 1, 2006
              2Consolidated
                  Balance Sheets at September 30, 2007, and December 31,
                  2006
              3Consolidated
                  Statements of Cash Flows - Nine Months ended September 30, 2007,
                  and
                  October 1, 2006
              5Notes
                  to Consolidated Financial Statements
              6Item
                  2.
              Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations
              22Item
                  3.
              Quantitative
                  and Qualitative Disclosures About Market Risk
              30Item
                  4.
              Controls
                  and Procedures
              30PART
                  II. OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              31Item
                  1A.
              Risk
                  Factors
              31Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              31Item
                  6.
              Exhibits
              31Signature
              32
 
  1
 
 **PART
                  I - FINANCIAL INFORMATION****Item
                  1: Financial Statements****CHESAPEAKE
                  CORPORATION AND SUBSIDIARIES****CONSOLIDATED
                  STATEMENTS OF EARNINGS***(in
                  millions, except per share data;
                  unaudited)*
 
 Quarters
                  Ended
              
              
              Nine
                  Months EndedSept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006**Net
                  sales**
              
              $
              266.4
              
              
              $
              247.9
              
              
              $
              789.3
              
              
              $
              737.4**Costs
                  and expenses:**Cost
                  of products sold
              
              
              219.0
              
              
              
              205.2
              
              
              
              649.3
              
              
              
              608.6Selling,
                  general and administrative expenses
              
              
              35.2
              
              
              
              31.9
              
              
              
              104.5
              
              
              
              99.1Restructuring
                  expenses, asset impairments and other exit costs
              
              
              3.3
              
              
              
              1.6
              
              
              
              15.0
              
              
              
              7.7Gain
                  on divestiture
              
              
              -
              
              
              
              (4.1
              )
              
              
              -
              
              
              
              (3.1
              )Other
                  income, net
              
              
              1.0
              
              
              
              0.9
              
              
              
              2.0
              
              
              
              3.1**Operating
                  income**
              
              
              9.9
              
              
              
              14.2
              
              
              
              22.5
              
              
              
              28.2Interest
                  expense, net
              
              
              11.5
              
              
              
              10.1
              
              
              
              33.0
              
              
              
              29.1Loss
                  on extinguishment of debt
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0.6**(Loss)
                  income from continuing operations before taxes**
              
              
              (1.6
              )
              
              
              4.1
              
              
              
              (10.5
              )
              
              
              (1.5
              )Income
                  tax benefit
              
              
              (5.3
              )
              
              
              (1.3
              )
              
              
              (3.4
              )
              
              
              (2.4
              )**Income
                  (loss) from continuing operations**
              
              $
              3.7
              
              
              $
              5.4
              
              
              $
              (7.1
              )
              
              
              0.9**Discontinued
                  operations:**Loss
                  from discontinued operations, net of income tax of $0.5 and $0
                  for the
                  quarters ended September 30, 2007 and October 1, 2006, respectively,
                  and
                  $1.4 and $0 for the nine months ended September 30, 2007 and October
                  1,
                  2006, respectively
              
              
              (0.5
              )
              
              
              (1.3
              )
              
              
              (1.6
              )
              
              
              (6.3
              )**Net
                  income (loss)**
              
              $
              3.2
              
              
              $
              4.1
              
              
              $
              (8.7
              )
              
              $
              (5.4
              )**Basic
                  earnings per share:**Income
                  (loss) from continuing operations
              
              $
              0.19
              
              
              $
              0.28
              
              
              $
              (0.37
              )
              
              $
              0.04Discontinued
                  operations
              
              
              (0.03
              )
              
              
              (0.07
              )
              
              
              (0.08
              )
              
              
              (0.32
              )Net
                  income (loss)
              
              $
              0.16
              
              
              $
              0.21
              
              
              $
              (0.45
              )
              
              $
              (0.28
              )**Diluted
                  earnings per share:**Income
                  (loss) from continuing operations
              
              $
              0.19
              
              
              $
              0.28
              
              
              $
              (0.37
              )
              
              $
              0.04Discontinued
                  operations
              
              
              (0.03
              )
              
              
              (0.07
              )
              
              
              (0.08
              )
              
              
              (0.32
              )Net
                  income (loss)
              
              $
              0.16
              
              
              $
              0.21
              
              
              $
              (0.45
              )
              
              $
              (0.28
              )**Weighted
                  average number of common shares outstanding:**Basic
              
              
              19.4
              
              
              
              19.4
              
              
              
              19.4
              
              
              
              19.4Diluted
              
              
              19.4
              
              
              
              19.4
              
              
              
              19.4
              
              
              
              19.4
 
 *The
        accompanying Notes to Consolidated Financial Statements are an integral part
        of
        the financial statements.*
 
  2
 **CHESAPEAKE
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**
 *(in
        millions; unaudited)*
 
 Sept.
                  30, 2007
              
              
              Dec.
                  31, 2006**ASSETS****Current
                  assets:**Cash
                  and cash equivalents
              
              $
              4.3
              
              
              $
              7.8Accounts
                  receivable (less allowance of $4.4 and $3.9)
              
              
              161.9
              
              
              
              146.7**Inventories:**Finished
                  goods
              
              
              68.3
              
              
              
              59.5Work-in-process
              
              
              20.0
              
              
              
              21.3Materials
                  and supplies
              
              
              35.7
              
              
              
              28.6**Total
                  inventories**
              
              
              124.0
              
              
              
              109.4Prepaid
                  expenses and other current assets
              
              
              25.7
              
              
              
              20.4Income
                  taxes receivable
              
              
              10.9
              
              
              
              2.6**Total
                  current assets**
              
              
              326.8
              
              
              
              286.9Property,
                  plant and equipment, net
              
              
              366.1
              
              
              
              354.1Goodwill
              
              
              396.1
              
              
              
              381.2Other
                  assets
              
              
              101.7
              
              
              
              92.6**Total
                  assets**
              
              $
              1,190.7
              
              
              $
              1,114.8
 
 *The
        accompanying Notes to Consolidated Financial Statements are an integral part
        of
        the financial statements.*
  3
 **CHESAPEAKE
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        BALANCE SHEETS**, continued
 *(in
        millions, except shares and per share amounts; unaudited)*
 
 Sept.
                  30, 2007
              
              
              Dec.
                  31, 2006**LIABILITIES
                  AND STOCKHOLDERS' EQUITY****Current
                  liabilities:**Accounts
                  payable
              
              $
              141.2
              
              
              $
              136.8Accrued
                  expenses
              
              
              102.9
              
              
              
              83.9Income
                  taxes payable
              
              
              3.5
              
              
              
              18.1Current
                  maturities of long-term debt
              
              
              11.3
              
              
              
              11.8Dividends
                  payable
              
              
              -
              
              
              
              4.4**Total
                  current liabilities**
              
              
              258.9
              
              
              
              255.0Long-term
                  debt
              
              
              491.9
              
              
              
              456.0Environmental
                  liabilities
              
              
              50.5
              
              
              
              43.6Pensions
                  and postretirement benefits
              
              
              90.8
              
              
              
              102.7Deferred
                  income taxes
              
              
              5.3
              
              
              
              9.6Long-term
                  income taxes payable
              
              
              28.0
              
              
              
              -Other
                  long-term liabilities
              
              
              19.8
              
              
              
              14.2**Total
                  liabilities**
              
              
              945.2
              
              
              
              881.1**Stockholders'
                  equity:**Preferred
                  stock, $100 par value, issuable in series; authorized, 500,000
                  shares;
                  issued, none
              
              
              -
              
              
              
              -Common
                  stock, $1 par value; authorized, 60 million shares; outstanding, 19.9
                  million shares and 19.8 million shares, respectively
              
              
              19.9
              
              
              
              19.8Additional
                  paid-in-capital
              
              
              94.0
              
              
              
              93.6Accumulated
                  other comprehensive income (loss)
              
              
              5.8
              
              
              
              (16.7
              )Retained
                  earnings
              
              
              125.8
              
              
              
              137.0**Total
                  stockholders' equity**
              
              
              245.5
              
              
              
              233.7**Total
                  liabilities and stockholders' equity**
              
              $
              1,190.7
              
              
              $
              1,114.8
 
 *The
        accompanying Notes to Consolidated Financial Statements are an integral part
        of
        the financial statements.*
  4
  **CHESAPEAKE
        CORPORATION AND SUBSIDIARIES**
 **CONSOLIDATED
        STATEMENTS OF CASH FLOWS**
 *(in
        millions; unaudited)*
 
 Nine
                  Months EndedSept.
                  30, 2007
              
              
              Oct.
                  1, 2006**Operating
                  activities:**Net
                  loss
              
              $
              (8.7
              )
              
              $
              (5.4
              )Adjustments
                  to reconcile net loss to net cash provided by operating
                  activities:Depreciation
                  and amortization
              
              
              39.1
              
              
              
              42.8Deferred
                  income taxes
              
              
              (6.3
              )
              
              
              (3.0
              )Loss
                  on extinguishment of debt
              
              
              -
              
              
              
              0.6Gain
                  on divestiture
              
              
              -
              
              
              
              (1.7
              )Asset
                  impairment
              
              
              0.2
              
              
              
              3.0Defined
                  benefit pension and postretirement expense
              
              
              11.4
              
              
              
              15.1Gain
                  on sales of property, plant and equipment
              
              
              (0.5
              )
              
              
              (2.8
              )Changes
                  in operating assets and liabilities, net of acquisitions and
                  dispositions:Accounts
                  receivable, net
              
              
              (8.0
              )
              
              
              (21.4
              )Inventories
              
              
              (8.5
              )
              
              
              (1.4
              )Other
                  assets
              
              
              3.2
              
              
              
              5.7Accounts
                  payable
              
              
              (2.7
              )
              
              
              (4.9
              )Accrued
                  expenses
              
              
              12.2
              
              
              
              0.4Income
                  taxes payable and receivable, net
              
              
              1.1
              
              
              
              (2.1
              )Contributions
                  to defined benefit pension plans
              
              
              (18.7
              )
              
              
              (23.8
              )Other
              
              
              1.6
              
              
              
              0.4**Net
                  cash provided by operating activities**
              
              
              15.4
              
              
              
              1.5**Investing
                  activities:**Purchases
                  of property, plant and equipment
              
              
              (33.7
              )
              
              
              (25.9
              )Proceeds
                  from sales of property, plant and equipment
              
              
              3.0
              
              
              
              5.0Proceeds
                  from divestiture, net of transaction costs
              
              
              -
              
              
              
              19.4**Net
                  cash used in investing activities**
              
              
              (30.7
              )
              
              
              (1.5
              )**Financing
                  activities:**Net
                  borrowings on lines of credit
              
              
              20.3
              
              
              
              31.3Payments
                  on long-term debt
              
              
              (1.6
              )
              
              
              (23.0
              )Proceeds
                  from long-term debt
              
              
              -
              
              
              
              3.6Debt
                  issue costs
              
              
              (0.2
              )
              
              
              (0.8
              )Dividends
                  paid
              
              
              (8.5
              )
              
              
              (12.9
              )Other
              
              
              0.4
              
              
              
              -**Net
                  cash provided by (used in) financing activities**
              
              
              10.4
              
              
              
              (1.8
              )**Effect
                  of exchange rate changes on cash and cash
                  equivalents**
              
              
              1.4
              
              
              
              (0.1
              )Decrease
                  in cash and cash equivalents
              
              
              (3.5
              )
              
              
              (1.9
              )Cash
                  and cash equivalents at beginning of period
              
              
              7.8
              
              
              
              8.7Cash
                  and cash equivalents at end of period
              
              $
              4.3
              
              
              $
              6.8
 
 The
        accompanying Notes to Consolidated Financial Statements are an integral part
        of
        the financial statements.
  5
 **CHESAPEAKE
              CORPORATION AND SUBSIDIARIES**
 **NOTES
                TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
  **NOTE
          1. SUMMARY OF SIGNIFICANT ACCOUNTING
          POLICIES**
 
 **Basis
        of Presentation**
 
 The
        consolidated interim financial statements of Chesapeake Corporation and
        subsidiaries included herein are unaudited. The December 31, 2006 consolidated
        balance sheet was derived from audited financial statements. These statements
        have been prepared pursuant to the rules and regulations of the Securities
        and
        Exchange Commission ("SEC") and, in accordance with those rules and regulations,
        we have condensed or omitted certain information and footnotes normally included
        in financial statements prepared in accordance with generally accepted
        accounting principles in the United States of America ("GAAP"). We believe
        that
        the disclosures made are adequate for a fair presentation of results of our
        operations and financial position. In the opinion of management, the
        consolidated financial statements reflect all adjustments, all of a normal
        recurring nature, necessary to present fairly our consolidated financial
        position and results of operations for the interim periods presented herein.
        All
        significant intercompany accounts and transactions are eliminated. The
        preparation of consolidated financial statements in conformity with GAAP
        requires management to make extensive use of estimates and assumptions that
        affect the reported amounts and disclosures. Actual results could differ
        from
        these estimates.  Certain prior period amounts have been reclassified
        to conform to current presentations.  Specifically, certain amounts
        previously classified within "other income, net" have been reclassified to
        either "cost of goods sold" or "selling, general and administrative
        expenses."
 
 Our
        fiscal year ends on the Sunday nearest to December 31.
 
 These
        consolidated financial statements should be read in conjunction with the
        consolidated financial statements and the notes thereto included in our latest
        Annual Report on Form 10-K; additional details on our significant accounting
        policies are provided therein. The results of operations for the 2007 interim
        periods are not necessarily indicative of the results that may be expected
        for
        the full year.
 
 In
        this
        report, unless the context requires otherwise, references to "we," "us,"
        "our,"
        "Chesapeake" or the "Company" are intended to mean Chesapeake Corporation
        and
        its consolidated subsidiaries.
 
 **Adjustments
        for Items Related to Prior Periods**
 
 The
        consolidated statement of earnings for the nine months ended September 30,
        2007
        includes adjustments from prior periods that were recorded in the first quarter
        of 2007, the net impact of which reduced net income from continuing operations
        before taxes by $0.1 million, income from continuing operations by $0.7 million
        and net income by $0.5 million.  The adjustments, which were deemed
        immaterial to the current and prior periods, included (1) an understatement
        of
        taxable income in a non-U.S. tax jurisdiction related to shared expenses
        of
        subsidiaries and (2) balance sheet adjustments on central ledgers related
        to
        assets that had been previously disposed of or impaired.
 
 **New
        Accounting Pronouncements**
 
 In
        September 2006 the Financial Accounting Standards Board ("FASB") issued SFAS
        No.
        157, *Fair Value Measurements* ("SFAS 157"), which defines fair value,
        establishes a framework for measuring fair value in accordance with GAAP
        and
        expands disclosures about fair value measurements.  The provisions of
        SFAS 157 are effective for financial statements issued for fiscal years
        beginning after November 15, 2007 and interim periods within those fiscal
        years.  We are currently evaluating the
  6
 **CHESAPEAKE
            CORPORATION AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 impact
        SFAS 157 will have on our financial statements.
 
 In
        February 2007 the FASB issued SFAS No. 159, *The Fair Value
        Option for Financial Assets and Financial Liabilities-including an amendment
        of
        FAS 115* ("SFAS 159").  SFAS 159 allows companies to choose, at
        specified election dates, to measure eligible financial assets and liabilities
        at fair value that are not otherwise required to be measured at fair value.
        Unrealized gains and losses shall be reported on items for which the fair
        value
        option has been elected in earnings at each subsequent reporting date. 
SFAS 159 also establishes presentation and disclosure requirements.  SFAS
        159 is effective for fiscal years beginning after November 15, 2007 and will
        be
        applied prospectively.  We do not believe the adoption of SFAS159 will have a significant impact
        on our financial
        statements.
 
 **NOTE
        2. EARNINGS PER SHARE ("EPS")**
 
 **Calculation**
 
 Basic
        EPS
        is calculated using the weighted-average number of outstanding common shares
        during each period. Diluted EPS is calculated using the weighted-average
        number
        of diluted outstanding common shares during each period. Diluted EPS reflects
        the potential dilution that could occur if securities are exercised or converted
        into common stock, or result in the issuance of common stock that would then
        share in earnings. The difference between the weighted-average shares used
        for
        the basic and diluted calculation is due to the number of shares for which
        "in-the-money" stock options are outstanding.
 
 No
        dilutive shares were outstanding as of September 30, 2007 and October 1,
        2006
        for purposes of calculating diluted EPS. As of September 30, 2007 and October
        1,
        2006, 1.3 million and 1.5 million, respectively, of potentially dilutive
        common
        shares were not included in the computation of diluted EPS because the effect
        would be antidilutive.
 
  **NOTE
        3. COMPREHENSIVE INCOME**
  Comprehensive
        income is as follows:
 
 *(in
                  millions)*
              
              Quarters
                  Ended
              
              
              Nine
                  Months EndedSept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006Net
                  income (loss)
              
              $
              3.2
              
              
              $
              4.1
              
              
              $
              (8.7
              )
              
              $
              (5.4
              )Foreign
                  currency translation
              
              
              5.4
              
              
              
              (1.5
              )
              
              
              13.8
              
              
              
              22.5Change
                  in fair market value of derivatives, net of tax
              
              
              (0.3
              )
              
              
              1.6
              
              
              
              1.6
              
              
              
              2.7Amortization
                  of unrecognized amounts in net periodic benefit cost, net of
                  tax
              
              
              2.4
              
              
              
              (0.9
              )
              
              
              7.1
              
              
              
              (5.8
              )Comprehensive
                  income
              
              $
              10.7
              
              
              $
              3.3
              
              
              $
              13.8
              
              
              $
              14.0
 
 **NOTE
        4. RESTRUCTURING AND OTHER EXIT COSTS**
 
 During
        the fourth quarter of fiscal 2005 Chesapeake announced plans for a global
        cost
        savings program. The scope of this program was extensive and involved a number
        of locations being either sold, closed or downsized. The program also involved
        broad-based workforce reductions and a general reduction in overhead costs
        throughout the Company. Additionally, we targeted specific improvements in
        operating
  7
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 processes.   The
        cost of these initiatives during the two-year program was expected to range
        from
        $30 million to $40 million on a pre-tax basis, with the cash flow impact
        being
        less due to the sale of related real estate and assets.  Full
        implementation of this program was expected by the end of fiscal
        2007.  The ultimate costs and timing of this program was dependent on
        consultation and, in certain circumstances, negotiation with European works
        councils or other employee representatives.  Costs associated with the
        program have been recorded in "restructuring expenses, asset impairments
        and
        other exit costs" and "discontinued operations" in the accompanying consolidated
        statements of earnings.
 
 In
        addition to charges related to the global cost savings program, in the fourth
        quarter of fiscal 2006 we recorded an asset impairment charge of $24.9 million
        related to the fixed assets of our tobacco reporting unit of the Paperboard
        Packaging reporting segment.  In the first quarter of 2007 we recorded
        a correction to reduce this impairment charge by $0.5 million (see Note
        1 -"Adjustments for Items Related to Prior Periods"), which is also
        recorded in "restructuring expenses, asset impairments and other exit costs"
        in
        the accompanying consolidated statements of earnings.
 
 Charges
        recorded during the third quarter and first nine months of fiscal 2007 and
        fiscal 2006 were primarily within the Paperboard Packaging
        segment.  These charges are summarized as follows:
 
 *(in
                  millions)*
              
              Quarters
                  Ended
              
              
              Nine
                  Months EndedSept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006Employee-related
                  costs
              
              $
              2.6
              
              
              $
              1.2
              
              
              $
              14.4
              
              
              $
              7.7Asset
                  impairments
              
              
              0.7
              
              
              
              -
              
              
              
              0.2
              
              
              
              3.0Loss
                  on asset sales, redeployment costs, and other exit costs
              
              
              -
              
              
              
              0.3
              
              
              
              0.4
              
              
              
              0.9Total
                  restructuring expenses, asset impairments and other exit
                  costs
              
              
              3.3
              
              
              
              1.5
              
              
              
              15.0
              
              
              
              11.6Restructuring
                  expenses, asset impairments and other exit costs  attributed to
                  discontinued operations
              
              
              -
              
              
              
              0.1
              
              
              
              -
              
              
              
              (3.9
              )Restructuring
                  expenses, asset impairments and other exit costs attributed to
                  continuing
                  operations
              
              $
              3.3
              
              
              $
              1.6
              
              
              $
              15.0
              
              
              $
              7.7
 
 During
        the third quarter of fiscal 2005 we initiated a manufacturing reorganization
        within our branded products operating segment of the Paperboard Packaging
        reporting segment that included the closure of our carton operation at Oldbury,
        West Midlands, in the United Kingdom (the "Birmingham" site).  The
        closure was substantially completed during the first quarter of fiscal
        2006.  In connection with the closure, the Company recorded additional
        expenses of approximately $1.1 million during the first nine months of fiscal
        2006, of which $0.4 million was employee-related costs.
 
 During
        the fourth quarter of 2005 we began negotiations related to the closure of
        our
        rigid box operation at Ezy-sur-Eure, France (the "Ezy" site).  Under
        this reorganization, production of the products manufactured at the Ezy facility
        was transferred to other Company sites in Europe. During the first nine months
        of fiscal 2006 we recorded additional expenses of approximately $0.5 million
        related to this closure, which took place over the first six months of
        2006.  Prior to its closure, the Ezy facility formed part of our
        French luxury packaging business ("CLP").  We completed the sale of
        CLP on July 31, 2006.
  8
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 The
        historical operating results of Ezy, including restructuring activities
        associated with Ezy, have been reflected as discontinued
        operations.  (See Note 7.)
 
 During
        the first quarter of fiscal 2006 we initiated the closure of our paperboard
        packaging carton operation at Bedford in the United Kingdom.  Under
        the closure plan, production of products manufactured at the Bedford facility
        was transferred to other Company sites in the United Kingdom.  During
        the first nine months of fiscal 2006 we recorded approximately $2.1 million
        of
        expense associated with this closure, of which $2.0 million was employee-related
        costs.  This closure was completed in the third quarter of fiscal
        2006, and we expect to complete the sale of the facility during
        2008.  During the first nine months of fiscal 2007 we recorded
        approximately $0.7 million of additional restructuring expenses related to
        this
        facility.
  During
        the third quarter of 2006 we recorded an asset impairment charge related
        to the
        fixed assets of CLP in the amount of $3.0 million and employee severance
        costs
        of $0.5 million. We completed the sale of CLP on July 31, 2006.  The
        historical operating results of CLP, including restructuring activities
        associated with CLP, have been reflected as discontinued operations (see
        Note
        7).
  During
        the second quarter of 2007, as a result of the reduced sales volume in our
        tobacco operating segment within our Paperboard Packaging reporting segment,
        we
        began negotiations related to the closure of our operation in Bremen, Germany
        (the "Bremen" site) as well as negotiations of workforce reductions at other
        operations within the operating segment.  The reduction in sales
        volumes was primarily as a result of the previously announced supplier
        rationalization program by British American Tobacco, a major customer of
        our
        tobacco operating segment, which will substantially reduce our role as one
        of
        their packaging suppliers. During the third quarter and first nine months
        of
        fiscal 2007, we recorded approximately $1.0 million and $7.0 million,
        respectively, of employee-related costs related to the planned Bremen closure
        and other workforce reductions within this operating segment.  During
        the third quarter of 2007 we reached tentative agreement with a third party
        for
        the sale of the land, building and certain equipment at Bremen.  In
        addition, this agreement would include the assumption of the workforce by
        the
        third party.  We expect to complete this transaction during the fourth
        quarter of 2007.
 
 In
        addition to the initiatives described above, we recorded other employee-related
        costs of approximately $4.8 million during the first nine months of fiscal
        2006
        and approximately $7.4 million during the first nine months of fiscal 2007
        for
        broad-based workforce reductions.
 
 The
        following table displays the activity and balances of the restructuring charges,
        asset impairments and other exit costs for the first nine months of fiscal
        2007.
 
 (***in
                  millions***)
              
              **Employee-Related
                    Costs**
              
              
              **Asset
                    Impairments**
              
              
              **Other
                    Exit Costs**
              
              
              **Total**Balance
                  December 31, 2006
              
              $
              2.5
              
              
              $
              -
              
              
              $
              0.5
              
              
              $
              3.0Restructuring
                  charges, asset impairments and other exit costs, continuing
                  operations
              
              
              14.4
              
              
              
              0.2
              
              
              
              0.4
              
              
              
              15.0Cash
                  payments
              
              
              (7.9
              )
              
              
              -
              
              
              
              (0.9
              )
              
              
              (8.8
              )Asset
                  impairments
              
              
              -
              
              
              
              (0.2
              )
              
              
              -
              
              
              
              (0.2
              )Other
                  items - non-cash
              
              
              0.3
              
              
              
              -
              
              
              
              -
              
              
              
              0.3Balance
                  September 30, 2007
              
              $
              9.3
              
              
              $
              -
              
              
              $
              -
              
              
              $
              9.3
  9
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 **NOTE
        5. GAIN ON DIVESTITURE**
 
 ***Lurgan:***
 
 On
        March
        23, 2006 we completed the sale of our plastic packaging operation in Lurgan,
        Northern Ireland ("Lurgan") to a group led by existing management (the
        "Buyer").  The cash proceeds on sale, net of transaction costs,
        approximated $15 million.  We also received a subordinated loan note
        of 1.25 million pounds Sterling (approximately $2.2 million at the sale
        date).  The loan note has been fully reserved by management given our
        subordinated position and the extent of other acquisition indebtedness of
        the
        Buyer. The purchase and sale agreement included customary warranties and
        indemnities related to our operation of the business prior to the transaction
        closing date. The purchase and sale agreement also provided for an arrangement
        whereby we received additional proceeds from the Buyer upon the subsequent
        sale
        of certain real property conveyed with the operation which occurred in the
        third
        quarter of 2006.
 
 The
        divestiture resulted in a pre-tax net gain of $3.1 million ($2.9 million
        after
        tax) in fiscal 2006.  The net gain of $3.1 million includes a pre-tax
        loss of $1.0 million on the sale recorded in the first quarter of 2006, and
        a
        pre-tax gain of $4.1 million due to the receipt of additional proceeds of
        $3.2
        million and recovery of a portion of the subordinated loan note of $0.9 million
        recorded in the third quarter of 2006.  In connection with the
        divestiture, we made a contribution of approximately $5.9 million to the
        non-U.S. defined benefit pension plan which covered the employees of the
        Lurgan
        facility.
 
 **NOTE
        6. GOODWILL AND INTANGIBLE ASSETS**
 
 There
        were no changes in our goodwill balances during the first nine months of
        fiscal
        2007 other than the effects of foreign currency translation.
 
 In
        connection with our September 2005 acquisition of Impaxx Pharmaceutical
        Packaging Group, Inc. ("Arlington Press"), a portion of the purchase price
        was
        ascribed to certain finite-lived intangible assets, primarily customer
        relationships.  The cost and accumulated amortization of customer
        relationships as of September 30, 2007 were $16.2 million and $3.3 million,
        respectively.  The cost and accumulated amortization of customer
        relationships as of December 31, 2006 were $16.2 million and $2.1 million,
        respectively.  Amortization expense recorded during the first nine
        months of fiscal 2007 and fiscal 2006 for customer relationships was $1.2
        million.
 
 Amortization
        expense of our intangible assets for the next five fiscal years is estimated
        as
        follows (amounts in millions):
 
 2007
                  (remaining 3 months)
              
              $
              0.42008
              
              
              1.62009
              
              
              1.62010
              
              
              1.62011
              
              
              1.6
  10
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 **NOTE
        7. DISCONTINUED OPERATIONS**
 
 Summarized
        results of discontinued operations are shown separately in the accompanying
        consolidated financial statements, except for the consolidated statements
        of
        cash flows, which summarize the activity of continued and discontinued
        operations together.  Results for the prior periods have been restated
        for this presentation.
 
 Discontinued
        operations includes amounts related to CLP, our former French luxury packaging
        operation, as well as our former Land Development, Tissue and Merchandising
        and
        Specialty Packaging segments.
 
 On
        July
        31, 2006 we completed the sale of CLP to Sofavie.  CLP was included in
        our Paperboard Packaging segment.  The sale price was 0.5 million Euro
        (approximately $0.6 million at the sale date).  The sale resulted in a
        pre-tax and after-tax loss of $1.5 million in the third quarter of
        2006.  CLP's historical operating results have been reclassified and
        presented within "loss from discontinued operations" in the accompanying
        consolidated statements of earnings, as follows:
 
 *(in
                  millions)*
              
              **Quarter
                  ended**
                **Oct.
                  1, 2006**
              
              
              **Nine
                  months ended**
                **Oct.
                  1, 2006**Revenue
              
              $
              3.2
              
              
              $
              16.7Pre-tax
                  gain (loss)
              
              $
              0.2
              
              
              $
              (4.4
              )
 
 In
        the
        fourth quarter of 2000 we decided to sell the principal businesses that were
        included in our former Merchandising and Specialty Packaging segment and
        the
        remaining interest in our former Tissue segment, a 5 percent equity interest
        in
        Georgia-Pacific Tissue, LLC (the "Tissue JV").  These segments are
        accounted for as discontinued operations.  We completed the sales of
        all the components of these segments in 2001.  In the first nine
        months of 2007, we recorded approximately $2.2 million of expense related
        to the
        tax treatment of the disposition of assets of Wisconsin Tissue Mills Inc.
        in
        1999.  This was partially offset by adjustments that were made in the
        first quarter of 2007 related to prior period items (see Note 1).
 
 **NOTE
        8. INCOME TAXES**
 
 In
        June
        2006 the FASB issued FIN 48, which clarifies the accounting for uncertainty
        in
        income taxes. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. The interpretation
        requires that we recognize in the financial statements the impact of a tax
        position, if that position is more likely than not of being sustained on
        audit,
        based on the technical merits of the position. FIN 48 also provides guidance
        on
        derecognition and classification of income tax related liabilities, interest
        and
        penalties, accounting in interim periods and disclosure. The provisions of
        FIN
        48 are effective beginning January 1, 2007 with the cumulative effect of
        the change in accounting principle recorded as an adjustment to opening retained
        earnings. The adoption of FIN 48 resulted in an increase in our opening retained
        earnings of $1.8 million for fiscal 2007.
 
 As
        a
        result of the adoption of the provisions of FIN 48 on January 1, 2007, the
        Company recognized an increase in the current quarter of $0.7 million in
        the
        liability for unrecognized tax benefits.  The Company has a total of $28.0
        million of unrecognized tax benefits at September 30, 2007 of
        which
  11
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 $16.8
        million is for potential interest that could be due on unrecognized tax
        benefits.  The Company has adopted a policy to recognize interest and
        penalties related to unrecognized tax benefits in income tax
        expense.
 
 The
        comparability of our effective income tax rates is heavily affected by our
        inability to fully recognize a benefit from our U.S. tax losses and the
        inability to recognize the benefit of losses in certain non-U.S. tax
        jurisdictions.  Additionally, the tax rate is influenced by management's
        expectations as to the recovery of our U.S. and certain non-U.S. jurisdiction
        deferred income tax assets and any settlements of income tax contingencies
        with
        non-U.S. tax authorities.
 
 During
        July 2007 we completed negotiations with a non-U.S. tax authority to allow
        additional deductions of certain interest payments.  As a result, we
        recorded a $3.5 million income tax benefit in the third quarter of fiscal
        2007
        related to the fiscal 2005 and fiscal 2006 tax years and a $1.5 million benefit
        related to the first six months of 2007.  In addition, we recorded a
        net tax benefit of $1.2 million in the third quarter of 2007 resulting from
        a
        re-evaluation of our deferred taxes for changes in U.K. tax law and changes
        in
        statutory tax rates in Germany and the U.K. that become effective January
        1,
        2008.  The effective income tax rate for the first nine months of
        fiscal 2007 was adversely affected by approximately $0.6 million related
        to the
        tax effects of the prior period adjustments that were recorded in the first
        quarter of 2007 (see Note 1).
 
 Our
        fiscal 2006 effective income tax rate was adversely affected by a capital
        gains
        tax in the first quarter of fiscal 2006 of approximately $0.9 million on
        the
        sale of assets in connection with the divestiture of the Lurgan operation
        (see
        Note 5).  During the second quarter of 2006 we recorded an income tax
        benefit of $1.8 million associated with the favorable settlement of income
        tax
        filing positions with U.K. tax authorities.  During the third quarter
        of fiscal 2006 we recorded a $2.3 million income tax benefit as a result
        of
        management's reassessment of its valuation allowance for deferred income
        tax
        assets in France following the sale of our French luxury packaging
        business.
 
 **NOTE
        9. DEBT**
 
 We
        were
        in compliance with all of our debt covenants as of the end of the third quarter
        of fiscal 2007.  Under our senior secured bank credit facility (the
        "Credit Facility"), as of the beginning of the first quarter of 2008, the
        maximum leverage ratio permitted will decrease from 5.0x to 4.25x and the
        minimum interest coverage ratio permitted will increase from 2.25x to
        2.5x.  Based on our current projections, we may not be in compliance
        with these financial covenants at the end of the first quarter of
        2008.  However, we expect to avoid compliance issues with these
        financial covenants by improving cash flows, reducing outstanding indebtedness,
        replacing or amending the Credit Facility or obtaining waivers from our lenders,
        but there can be no assurances that these alternatives will be successfully
        implemented.  Failure to comply would be an event of default under the
        Credit Facility.  If such an event of default were to occur, the
        lenders under the Credit Facility could require immediate payment of all
        amounts
        outstanding under the Credit Facility and terminate their commitments to
        lend
        under the Credit Facility and, pursuant to cross-default provisions in many
        of
        the instruments that govern our other outstanding indebtedness, immediate
        payment of much of our other outstanding indebtedness could be required,
        all of
        which would likely have a material adverse effect on our business, results
        of
        operations and financial condition.
  12
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 In
        the
        first quarter of fiscal 2006 we redeemed 5.0 million pounds Sterling principal
        amount of our 10.375 percent senior subordinated notes due 2011 at a premium
        and
        recognized a loss of $0.6 million associated with the debt
        extinguishment.
 
 **NOTE
        10. EMPLOYEE RETIREMENT AND POSTRETIREMENT BENEFITS**
 
 The
        components of the net periodic benefit cost recognized during the quarters
        and
        nine month periods ended September 30, 2007 and October 1 , 2006 were as
        follows:
 
 Pension
                  Benefits
              
              
              Postretirement
                  Benefits Other Than Pensions***(in
                  millions)***
              
              U.S.
                  Plans
              
              
              Non-U.S.
                  PlansQuarters
                  ended:
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006Service
                  cost
              
              $
              -
              
              
              $
              -
              
              
              $
              1.7
              
              
              $
              1.8
              
              
              $
              -
              
              
              $
              -Interest
                  cost
              
              
              1.0
              
              
              
              0.9
              
              
              
              5.7
              
              
              
              5.5
              
              
              
              0.2
              
              
              
              0.2Expected
                  return on plan assets
              
              
              (1.2
              )
              
              
              (1.1
              )
              
              
              (5.9
              )
              
              
              (5.1
              )
              
              
              -
              
              
              
              -Recognized
                  actuarial loss
              
              
              0.4
              
              
              
              0.3
              
              
              
              1.9
              
              
              
              2.5
              
              
              
              0.1
              
              
              
              0.1Net
                  pension expense
              
              $
              0.2
              
              
              $
              0.1
              
              
              $
              3.4
              
              
              $
              4.7
              
              
              $
              0.3
              
              
              $
              0.3
 
 
 
 Pension
                  Benefits
              
              
              Postretirement
                  Benefits Other Than Pensions***(in
                  millions)***
              
              U.S.
                  Plans
              
              
              Non-U.S.
                  PlansNine
                  months ended:
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006Service
                  cost
              
              $
              0.1
              
              
              $
              -
              
              
              $
              4.9
              
              
              $
              5.3
              
              
              $
              -
              
              
              $
              -Interest
                  cost
              
              
              2.9
              
              
              
              2.7
              
              
              
              16.7
              
              
              
              16.0
              
              
              
              0.6
              
              
              
              0.6Expected
                  return on plan assets
              
              
              (3.5
              )
              
              
              (3.3
              )
              
              
              (17.4
              )
              
              
              (15.0
              )
              
              
              -
              
              
              
              -Recognized
                  actuarial loss
              
              
              1.0
              
              
              
              1.0
              
              
              
              5.8
              
              
              
              7.4
              
              
              
              0.3
              
              
              
              0.3Curtailment
                  loss
              
              
              -
              
              
              
              0.1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  pension expense
              
              $
              0.5
              
              
              $
              0.5
              
              
              $
              10.0
              
              
              $
              13.7
              
              
              $
              0.9
              
              
              $
              0.9
 
 In
        connection with the December 2005 freezing of benefits under certain of our
        U.S.
        defined benefit pension plans, we recorded a curtailment loss of $0.1 million
        during the first quarter of fiscal 2006.  As a result of permanently
        freezing benefits under these plans, we changed the amortization period for
        unrecognized actuarial losses for the affected plans, effective January 2,
        2006,
        to the average remaining life expectancy of the participants.
 13
 
 **CHESAPEAKE
            CORPORATION AND SUBSIDIARIES**
 **NOTES
              TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 **NOTE
        11. COMMITMENTS AND CONTINGENCIES**
 
 **Environmental
        Matters**
 
 The
        costs
        of compliance with existing environmental regulations are not expected to
        have a
        material adverse effect on our financial position or results of
        operations.
 
 The
        Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
        and similar state "Superfund" laws impose liability, without regard to fault
        or
        to the legality of the original action, on certain classes of persons (referred
        to as potentially responsible parties or "PRPs") associated with a release
        or
        threat of a release of hazardous substances into the environment. Financial
        responsibility for the remediation and restoration of contaminated property
        and
        for natural resource damages can extend to previously owned or used properties,
        waterways and properties owned by third parties, as well as to properties
        currently owned and used by a company even if contamination is attributable
        entirely to prior owners. As discussed below the U.S. Environmental Protection
        Agency ("EPA") has given notice of its intent to list the Lower Fox River
        in
        Wisconsin on the National Priorities List under CERCLA and identified our
        subsidiary, Wisconsin Tissue Mills Inc., now WTM I Company ("WT"), as a PRP
        for
        the Lower Fox River site.
 
 Except
        for the Fox River matter we have not been identified as a PRP at any other
        CERCLA-related sites. However, there can be no assurance that we will not
        be
        named as a PRP at any other sites in the future or that the costs associated
        with additional sites would not be material to our financial position or
        results
        of operations.
 
 In
        June
        1994 the U.S. Department of Interior, Fish and Wildlife Service ("FWS"),
        a
        federal natural resources trustee, notified WT that it had identified WT
        as a
        PRP for natural resources damage liability under CERCLA arising from alleged
        releases of polychlorinatedbiphenyls ("PCBs") in the Fox River and Green
        Bay
        System in Wisconsin from WT's former recycled tissue mill in Menasha, Wisconsin.
        In addition to WT six other companies (Appleton Papers, Inc., Fort Howard
        Corporation, P.H. Glatfelter Company ("Glatfelter"), NCR Corporation, Riverside
        Paper Corporation and U.S. Paper Mills Corporation) have been identified
        as PRPs
        for the Fox River site. The FWS and other governmental and tribal entities,
        including the State of Wisconsin ("Wisconsin"), allege that natural resources,
        including federal lands, state lands, endangered species, fish, birds, tribal
        lands or lands held by the U.S. in trust for various Indian tribes, have
        been
        exposed to PCBs that were released from facilities located along the Lower
        Fox
        River. On January 31, 1997 the FWS notified WT of its intent to file suit,
        subject to final approval by the U.S. Department of Justice ("DOJ"), against
        WT
        to recover alleged natural resource damages, but the FWS has not yet instituted
        such litigation. On June 18, 1997 the EPA announced that it was initiating
        the
        process of listing the Lower Fox River on the CERCLA National Priorities
        List of
        hazardous waste sites. On September 30, 2003 EPA and the Wisconsin Department
        of
        Natural Resources ("DNR"), in connection with the issuance of General Notice
        Letters under CERCLA to the PRPs requesting a good faith offer to conduct
        the
        remedial design for downstream portions of the Lower Fox River site, also
        notified Menasha Corporation and Sonoco Products Company that those companies
        were also considered potentially liable for the cost of response activities
        at
        the Lower Fox River site.
 
 In
        January 2003 DNR and EPA released a Record of Decision (the
        "OU1-2 ROD") for Operable Units 1 and 2 ("OU1" and "OU2") of the Fox River
        site.
        OU1 is the reach of the river that is the farthest upstream and is immediately
        adjacent to the former WT mill. The OU1-2 ROD selected a remedy, consisting
        primarily of dredging, to remove substantially all sediment in OU1 with
        concentrations of
  14
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 PCBs
        of
        more than 1 part per million in order to achieve a surface weighted-average
        PCB
        concentration level ("SWAC") of not more than 0.25 parts per million. The
        OU1-2
        ROD estimated the present-worth cost of the proposed remedy for OU1 as $66.2
        million. Present-worth cost as stated in the OU1-2 ROD means capital costs
        in
        undiscounted 2001 dollars and long-term operation, maintenance and monitoring
        costs discounted at 6 percent. This estimate was an engineering cost estimate
        and the OU1-2 ROD stated that the actual project cost was expected to be
        within
        +50 percent to -30 percent of the estimate. The OU1-2 ROD estimated that
        the
        proposed dredging remedy for OU1 would be accomplished over a six-year period
        after commencement of dredging. For OU2, the reach of the river covering
        approximately 20 miles downstream from OU1, the OU1-2 ROD was amended as
        of June
        2007 by a Record of Decision Amendment (the "Amended OU2-5 ROD") to provide
        for
        dredging and disposal of a single deposit in OU2.  The remainder of
        OU2 will be addressed by monitored natural recovery as provided in the original
        OU1-2 ROD.
 
 On
        July
        1, 2003 DNR and EPA announced that they had signed an agreement with WT under
        which WT will complete the design work for the sediment clean-up in OU1.
        On
        April 12, 2004, a Consent Decree (the "Consent Decree") regarding the
        remediation of OU1 by WT and Glatfelter was entered by a federal court. Under
        the terms of the Consent Decree, WT and Glatfelter agreed to perform appropriate
        remedial action in OU1 in accordance with the OU1-2 ROD under oversight by
        EPA
        and DNR. To fund the remedial action, WT and Glatfelter each paid $25 million
        to
        an escrow account, and EPA and Wisconsin obtained an additional $10 million
        from
        another source to supplement the funding. Contributions and cooperation may
        also
        be obtained from local municipalities, and additional assistance may be sought
        from other potentially liable parties. As provided in the Consent Decree,
        WT has
        been reimbursed from the escrow account for $2 million of OU1 design costs
        expended under the July 1, 2003, design agreement.
 
 Upon
        completion of the remedial action for OU1 to the satisfaction of EPA and
        Wisconsin, WT and Glatfelter will receive covenants not to sue from EPA and
        Wisconsin for OU1, subject to conditions typical of settlements under
        CERCLA.  In March 2007, as an alternative to a determination by EPA
        and Wisconsin that the funds remaining in the Consent Decree escrow account
        would be insufficient to complete the OU1 remedial action described in the
        OU1-2
        ROD, WT and Glatfelter agreed with EPA and Wisconsin on an Agreed Supplement
        to
        Consent Decree (the "First Supplement") which was filed with the federal
        court
        on March 28, 2007. Under the provisions of the First Supplement, WT will
        deposit
        an additional total of $6 million in the Consent Decree escrow account in
        equal
        installments of $2 million each on or before April 10, 2007; July 10, 2007;
        and
        January 10, 2008 as additional funding for remediation of OU1.  The WT
        payments required to date have been made.  Glatfelter has also agreed
        to provide an additional $6 million for the Consent Decree escrow
        account.  If the funding provided through the Consent Decree escrow
        account is not adequate to pay for the required OU1 remedial action, WT and
        Glatfelter have the option, but not the obligation, to again contribute
        additional funds to complete the remedial action.  WT remains
        potentially liable for the additional costs necessary to achieve the performance
        standards for OU1 specified in the OU1-2 ROD.
 
 We
        are
        evaluating and discussing with EPA and Wisconsin alternative remedial actions
        for OU1.  We have presented to EPA and Wisconsin an alternative for
        OU1 remedial action which is less intrusive than that selected for OU1 in
        the
        OU1-2 ROD, more environmentally appropriate, more cost effective and a more
        responsible method of managing the risks attributable to sediment contamination
        in OU1.  No alternative remedial action for OU1 has been approved, but
        EPA and Wisconsin have indicated that they are considering proposing an
        amendment to the OU1-2 ROD which would reduce the amount of dredging required
        and provide for capping or sand cover where specified criteria are met in
        OU1.  Based
  15
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 on
        the
        assumption of approval by EPA and Wisconsin of an amendment to the OU1-2
        ROD for
        OU1, WT and Glatfelter have indicated to EPA and Wisconsin their intent to
        agree
        to complete the remediation of OU1 as required by an amended OU1-2 ROD, the
        estimated cost of which is $21 million in excess of funds already committed
        under the Consent Decree and the First Supplement.  A third party has
        agreed to contribute $7 million to additional costs in OU1.
 
 Under
        the terms of the Consent Decree WT also paid EPA and the
        State of Wisconsin $375,000 for past response costs, and paid $1.5 million
        for
        natural resource damages ("NRD") for the Fox River site and $150,000 for
        past
        NRD assessment costs. These payments have been credited toward WT's potential
        liability for response costs and NRD associated with the Fox River site as
        a
        whole. As discussed later in this section we believe that WT is entitled
        to
        substantial indemnification from a prior owner of WT with respect to these
        costs, and the prior owner has reimbursed WT for the payments made as required
        in the Consent Decree.
  In
        July
        2003 EPA and DNR announced a Record of Decision (the "OU3-5 ROD") for Operable
        Units 3, 4 and 5 ("OU3," "OU4" and "OU5," respectively), the remaining operable
        units for this site. The OU3-5 ROD requires primarily dredging and disposal
        of
        PCB contaminated sediments from OU3 and OU4 (the downstream portion of the
        river) and monitored natural recovery in OU5 (Green Bay). In June 2007 EPA
        and
        Wisconsin issued the Amended OU2-5 ROD.  The Amended OU2-5 ROD
        modifies the remediation requirements for OUs 3 and 4 by reducing the volume
        of
        sediment to be dredged and providing for capping or sand cover as prescribed
        remediation where specific criteria are met.  For OUs 2 and 5 the
        remedy is unchanged except that dredging is now required in a single deposit
        in
        OU2 and at the mouth of the Fox River in OU5.  The estimated cost of
        the amended OU2-5 ROD is $390.3 million in 2005 dollars, including the present
        worth of long-term maintenance and monitoring over 100 years.
 
 Based
        on
        information available to us at this time we believe that the range of reasonable
        estimates of the remaining total cost of remediation and restoration for
        the Fox
        River site is $475 million to $1.0 billion. The low end of this range assumes
        that the remedy for OU1 will be amended to be substantially consistent with
        the
        remedy in the Amended OU2-5 ROD and relies on consultant estimates of future
        OU1
        costs.  For OU2-5, the low end of this range is based on the costs
        estimated in the Amended OU2-5 ROD. The upper end of the range assumes
        substantial additional dredging in OUs 1, 3 and 4 and costs substantially
        exceeding those estimated by the consultants and in the Amended 2-5
        ROD.  The active remediation components of the alternative remedy
        proposed for OU1 are  expected to take approximately two more years,
        while the Amended OU2-5 ROD indicates that active remediation is expected
        to
        take approximately nine years from the commencement of substantial activity.
        Any
        enforcement of a definitive remedial action plan may be subject to judicial
        review.
  On
        October 25, 2000 the federal and tribal natural resources
        trustees released a Restoration and Compensation Determination Plan ("RCDP")
        presenting the federal and tribal trustees' planned approach for restoring
        injured federal and tribal natural resources and compensating the public
        for
        losses caused by the release of PCBs at the Fox River site. The RCDP states
        that
        the final natural resource damage claim (which is separate from, and in addition
        to, the remediation and restoration costs that will be associated with remedial
        action plans) will depend on the extent of PCB clean-up undertaken by EPA
        and
        DNR, but estimates past interim damages to be $65 million, and, for illustrative
        purposes only, estimates additional costs of restoration to address present
        and
        future PCB damages in a range of $111 million to $268 million. To date Wisconsin
        has not issued any estimate of natural resource damages. We believe, based
        on
        the information currently available to us, that the estimate of natural resource
        damages in the RCDP represents the reasonably likely upper limit of the total
        natural resource damages. We
  16
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 believe
        that the alleged damages to natural resources are overstated in the RCDP
        and
        joined in the PRP group comments on the RCDP to that effect. No final assessment
        of natural resource damages has been issued.
  Under
        CERCLA each PRP generally will be jointly and severally liable for the full
        amount of the remediation and restoration costs and natural resource damages,
        subject to a right of contribution from other PRPs. In practice PRPs generally
        negotiate among themselves to determine their respective contributions to
        any
        multi-party activities based upon factors including their respective
        contributions to the alleged contamination, equitable considerations and
        their
        ability to pay. In draft analyses by DNR and federal government consultants
        the
        volume of WT's PCB discharges into the Fox River has been estimated to range
        from 2.72 percent to 10 percent of the total discharges of PCBs. This range
        may
        not be indicative of the share of the cost of the remediation and restoration
        costs and natural resource damages that ultimately will be allocated to WT
        because of: inaccuracies or incompleteness of information about mill operations
        and discharges; inadequate consideration of the nature and location of various
        discharges of PCBs to the river, including discharges by persons other than
        the
        named PRPs and the relationship of those discharges to identified contamination;
        uncertainty of the geographic location of the remediation and restoration
        eventually performed; uncertainty about the ability of other PRPs to participate
        in paying the costs and damages; and uncertainty about the extent of
        responsibility of the manufacturers of the carbonless paper recycled by WT
        which
        contained the PCBs. We have evaluated the ability of other PRPs to participate
        in paying the remediation and restoration costs and natural resource damages
        based on our estimate of their reasonably possible shares of the liability
        and
        on public financial information indicating their ability to pay such shares.
        While we are unable to determine at this time what shares of the liability
        for
        the Fox River costs will be paid by the other identified PRPs (or other entities
        who are subsequently determined to have liability), based on information
        currently available to us and the analysis described above, we believe that
        most
        of the other PRPs have the ability to pay their reasonably possible shares
        of
        the liability.
  The
        ultimate cost to WT of remediation and restoration costs and
        natural resource damages related to the Fox River site and the time periods
        over
        which the costs and damages may be incurred cannot be predicted with certainty
        at this time due to uncertainties with respect to: what remediation and
        restoration will be implemented; the actual cost of that remediation and
        restoration; WT's share of any multi-party remediation and restoration costs
        and
        natural resource damages; the outcome of the federal and state natural resource
        damage assessments; the timing of any remediation and restoration; the evolving
        nature of remediation and restoration technologies and governmental regulations;
        controlling legal precedent; the extent to which contributions will be available
        from other parties; and the scope of potential recoveries from insurance
        carriers and prior owners of WT. While such costs and damages cannot be
        predicted with certainty at this time, we believe that WT's reasonably likely
        share of the ultimate remediation and restoration costs and natural resource
        damages associated with the Fox River site, including disbursement on behalf
        of
        WT of the remaining amount deposited by WT under the terms of the Consent
        Decree, may fall within the range of $35 million to $144 million, payable
        over a
        period of up to 40 years.  In our estimate of the lower end of the
        range we have assumed remediation and restoration costs as estimated by our
        consultants for OU1 and as estimated in the Amended OU2-5 ROD, and the low
        end
        of the governments' estimates of natural resource damages and WT's share
        of the
        aggregate liability. In our estimate of the upper end of the range we have
        assumed higher costs in all OUs and that our share of the ultimate aggregate
        liability for all PRPs will be higher than we believe it will ultimately
        be
        determined to be. We have accrued an amount for the Fox River liability based
        on
        our estimate of the reasonably probable costs within the range as described
        above.
  17
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 We
        believe that, pursuant to the terms of a stock purchase agreement between
        Chesapeake and Philip Morris Incorporated (now known as Philip Morris USA
        Inc.,
        or "PM USA," a wholly owned subsidiary of Altria Group, Inc.), a former owner
        of
        WT, we are entitled to substantial indemnification from PM USA with respect
        to
        the liabilities related to this matter. Based on the terms of that indemnity
        we
        believe that the costs and damages within our estimated range of liability
        should be indemnified by PM USA. We understand, however, that PM USA is subject
        to certain risks (including litigation risk in cases relating to health concerns
        regarding the use of tobacco products). Accordingly, there can be no assurance
        that PM USA will be able to satisfy its indemnification obligations in the
        future. However, PM USA is currently meeting its indemnification obligations
        under the stock purchase agreement and, based on our review of currently
        available financial information, we believe that PM USA has the financial
        ability to continue to meet its indemnification obligations.
  Pursuant
        to the Joint Venture Agreement with Georgia-Pacific Corporation for
        Georgia-Pacific Tissue, LLC, WT has retained liability for, and the third
        party
        indemnity rights associated with, the discharge of PCBs and other hazardous
        materials in the Fox River and Green Bay System. Based on currently available
        information we believe that if remediation and restoration are done in an
        environmentally appropriate, cost effective and responsible manner, and if
        natural resource damages are determined in a reasonable manner, the matter
        is
        unlikely to have a material adverse effect on our financial position or results
        of operations. However, because of the uncertainties described above, there
        can
        be no assurance that the ultimate liability with respect to the Lower Fox
        River
        site will not have a material adverse effect on our financial position or
        results of operations.
 
 In
        the third quarter of 2007, we reviewed, and adjusted our
        estimate of our reasonably probable environmental costs based on remediation
        activities to date and other developments. Our accrued environmental liabilities
        totaled approximately $68.1 million as of September 30, 2007, of which $17.6
        million was considered short-term, and $53.5 million as of December 31, 2006,
        of
        which $9.9 million was considered short-term.
 
 **Legal
        and Other Commitments**
 
 Chesapeake
        is a party to various other legal actions and tax audits which are ordinary
        and
        incidental to our business. While the outcome of environmental, tax and legal
        actions cannot be predicted with certainty, we believe the outcome of any
        of
        these proceedings, or all of them combined, will not have a material adverse
        effect on our consolidated financial position or results of
        operations.
 
 The
        Internal Revenue Service ("IRS") has proposed certain Federal income tax
        adjustments relating to a transfer of assets in 1999 by our subsidiary, WT,
        to a
        joint venture with Georgia-Pacific Corporation.  The IRS issued a Notice of
        Deficiency based on those adjustments on May 25, 2006.  After unsuccessful
        negotiations to resolve the matter, we filed a petition in United States
        Tax
        Court in July, 2006 seeking a determination that the alleged deficiency is
        in
        error.  Taking into account correlative adjustments to our tax liability
        for other years, the net amount in dispute, including interest through September
        30, 2007, is approximately $35 million.  In April 2007, the IRS amended its
        response to our petition to add an additional claim for an accuracy related
        20
        percent penalty for an alleged substantial understatement of federal income
        tax
        in 1999.
  18
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 We
        are
        defending our position vigorously with respect to the asserted deficiency. 
We have estimated our maximum potential exposure with respect to the matter
        to
        be approximately $35 million.  However, we continue to believe that our tax
        treatment of the transaction was appropriate, that the recent claim for an
        accuracy related penalty is without merit and that we should prevail in this
        dispute with the IRS.  We do not expect the ultimate resolution of this
        matter will have a material adverse effect on our financial condition or
        results
        of operations.
 
 **Guarantees
        and Indemnifications**
 
 We
        have
        entered into agreements for the sale of assets or businesses that contain
        provisions in which we agree to indemnify the buyers or third parties involved
        in the sale for certain liabilities or risks related to the sale. In these
        sale
        agreements we typically agree to indemnify the buyers or other involved third
        parties against a broadly-defined range of potential "losses" (typically
        including, but not limited to, claims, costs, damages, judgments, liabilities,
        fines or penalties, and attorneys' fees) arising from:  (i) a breach
        of our representations or warranties in the sale agreement or ancillary
        documents; (ii) our failure to perform any of the covenants or obligations
        of
        the sale agreement or ancillary documents; and (iii) other liabilities expressly
        retained or assumed by us related to the sale.  Most of our indemnity
        obligations under these sale agreements are:  (i) limited to a maximum
        dollar value significantly less than the final purchase price; (ii) limited
        by
        time within which indemnification claims must be asserted (often between
        one and
        three years); and (iii) subject to a deductible or "basket." Many of the
        potential indemnification liabilities under these sale agreements are unknown,
        remote or highly contingent, and most are unlikely to ever require an indemnity
        payment.  Furthermore, even in the event that an indemnification claim
        is asserted, liability for indemnification is subject to determination under
        the
        terms of the applicable sale agreement, and any payments may be limited or
        barred by a monetary cap, a time limitation or a deductible or
        basket.  For these reasons we are unable to estimate the maximum
        potential amount of the potential future liability under the indemnity
        provisions of the sale agreements.  However, we accrue for any
        potentially indemnifiable liability or risk under these sale agreements for
        which we believe a future payment is probable and a range of loss can be
        reasonably estimated.  Other than the Fox River matter discussed in
        Environmental Matters above, as of September 30, 2007, we believe our liability
        under such indemnification obligations was immaterial.
 
 In
        the
        ordinary course of our business we may enter into agreements for the supply
        of
        goods or services to customers that provide warranties to their customers
        on one
        or more of the following:  (i) the quality of the goods and services
        supplied by us; (ii) the performance of the goods supplied by us; and (iii)
        our
        compliance with certain specifications and applicable laws and regulations
        in
        supplying the goods and services.  Liability under such warranties
        often is limited to a maximum amount by the nature of the claim or by the
        time
        period within which a claim must be asserted.  As of September 30,
        2007 we believe our warranty obligations under such supply agreements were
        immaterial.
 
 In
        the
        ordinary course of our business we may enter into service agreements with
        service providers in which we agree to indemnify the service provider against
        certain losses and liabilities arising from the service provider's performance
        of the agreement.  Generally, such indemnification obligations do not
        apply in situations in which the service provider is grossly negligent, engages
        in willful misconduct or acts in bad faith.  As of September 30, 2007
        we believe our liability under such service agreements was
        immaterial.
 
 In
        the
        ordinary course of our business, we may enter into supply agreements (such
        as
        those discussed above), service agreements (such as those discussed above),
        purchase agreements, leases, and other
  19
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
 types
        of
        agreements in which we agree to indemnify the party or parties with whom
        we are
        contracting against certain losses and liabilities arising from, among other
        things: (i) our breach of the agreement or representations or warranties
        under
        the agreement; (ii) our failure to perform any of our obligations under the
        agreement; (iii) certain defined actions or omissions by us; and (iv) our
        failure to comply with certain laws, regulations, rules, policies, or
        specifications.  As of September 30, 2007 we believe our liability
        under these agreements was immaterial.
 
 **NOTE
        12. SEGMENT DISCLOSURE**
 
 During
        July 2007 we announced a reorganization that included the realignment of
        operating segments.  As of September 30, 2007 we conduct our business
        in three operating segments:  Plastic Packaging, Pharmaceutical and
        Healthcare Packaging ("Pharma"), and Branded Products Packaging ("Branded
        Products").  The Branded Products operating segment includes the
        former Tobacco operating segment.  The Pharma and Branded Products
        operating segments are aggregated into the Paperboard Packaging reportable
        segment.  Our Paperboard Packaging segment designs and manufactures
        folding cartons, spirally wound composite tubes, leaflets, labels and other
        paper and paperboard packaging products.  The primary end-use markets
        for this segment are pharmaceutical and healthcare and branded products (such
        as
        alcoholic drinks, confectioneries, foods and tobacco).  The Plastic
        Packaging segment designs and manufactures plastic containers, bottles, preforms
        and closures.  The primary end-use markets for this segment are
        agrochemicals and other specialty chemicals, and food and
        beverages.  General corporate expenses are shown as
        Corporate.
 
 Segments
        are determined by the "management approach" as described in SFAS No. 131,
        *Disclosures about Segments of an Enterprise and Related
        Information*.  Management assesses continuing operations based on
        operating income before interest and taxes derived from similar groupings
        of
        products and services.  Consistent with management's assessment of
        performance, goodwill impairments, gains (losses) on divestitures and
        restructuring expenses, asset impairments and other exit costs are excluded
        from
        segment operating income.
 
 There
        were no material intersegment sales during the third quarter and first nine
        months of fiscal 2007 or fiscal 2006.  Segment identifiable assets are
        those that are directly used in segment operations.  Corporate assets
        are primarily cash, certain nontrade receivables and other
        assets.
  20
 
 **CHESAPEAKE
          CORPORATION AND SUBSIDIARIES**
 **NOTES
            TO CONSOLIDATED FINANCIAL STATEMENTS
*(unaudited)***
  *(in
                  millions)*
              
              **Third
                  Quarter**
              
              
              **Year
                  to Date****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006****Net
                  sales:**Paperboard
                  Packaging
              
              $
              224.6
              
              
              $
              214.4
              
              
              $
              657.1
              
              
              $
              622.3Plastic
                  Packaging
              
              
              41.8
              
              
              
              33.5
              
              
              
              132.2
              
              
              
              115.1Consolidated
                  net sales
              
              $
              266.4
              
              
              $
              247.9
              
              
              $
              789.3
              
              
              $
              737.4**Operating
                  income:**Paperboard
                  Packaging
              
              $
              13.7
              
              
              $
              12.3
              
              
              $
              33.5
              
              
              $
              32.2Plastic
                  Packaging
              
              
              3.1
              
              
              
              2.7
              
              
              
              16.1
              
              
              
              11.9Corporate
              
              
              (3.6
              )
              
              
              (3.3
              )
              
              
              (12.1
              )
              
              
              (11.3
              )Restructuring
                  expenses, asset impairments and other exit costs
              
              
              (3.3
              )
              
              
              (1.6
              )
              
              
              (15.0
              )
              
              
              (7.7
              )Gain
                  on divestiture
              
              
              -
              
              
              
              4.1
              
              
              
              -
              
              
              
              3.1Consolidated
                  operating income
              
              $
              9.9
              
              
              $
              14.2
              
              
              $
              22.5
              
              
              $
              28.2**Depreciation
                  and amortization:**Paperboard
                  Packaging
              
              $
              11.4
              
              
              $
              12.2
              
              
              $
              33.7
              
              
              $
              36.4Plastic
                  Packaging
              
              
              1.8
              
              
              
              1.8
              
              
              
              5.3
              
              
              
              6.1Corporate
              
              
              -
              
              
              
              -
              
              
              
              0.1
              
              
              
              0.1Discontinued
                  operations
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              0.2Consolidated
                  depreciation and amortization
              
              $
              13.2
              
              
              $
              14.0
              
              
              $
              39.1
              
              
              $
              42.8
 
 *(in
                  millions)*
              
              **Sept.
                  30, 2007**
              
              
              **Dec.
                  31, 2006****Identifiable
                  assets:**Paperboard
                  Packaging
              
              $
              893.5
              
              
              $
              859.9Plastic
                  Packaging
              
              
              194.2
              
              
              
              171.2Corporate
              
              
              103.0
              
              
              
              83.7Total
              
              $
              1,190.7
              
              
              $
              1,114.8
  21
  **Item
                  2:**
              **Management's
                  Discussion and Analysis of Financial Condition and Results of
                  Operations**
 
 **Overview**
 
 The
        consolidated statement of earnings for the nine months ended September 30,
        2007
        includes adjustments from prior periods that were recorded in the first quarter
        of 2007, the net impact of which reduced net income from continuing operations
        before taxes by $0.1 million, income from continuing operations by $0.7 million
        and net income by $0.5 million.  The adjustments, which were deemed
        immaterial to the current and prior periods, included (1) an understatement
        of
        taxable income in a non-U.S. tax jurisdiction related to shared expenses
        of
        subsidiaries and (2) balance sheet adjustments on central ledgers related
        to
        assets that had been previously disposed of or impaired.
 
 Consistent
        with our segment reporting described in Note 12 to the Consolidated Financial
        Statements, operating income by segment excludes any goodwill impairments,
        gains
        or losses related to divestitures and restructuring expenses, asset impairments
        and other exit costs. Excluding these amounts from our calculation of segment
        operating income is consistent with how our management reviews segment
        performance and, we believe, affords the reader consistent measures of
        our operating performance.
 
 The
        following table sets forth third quarter and year-to-date net sales from
        continuing operations and operating income by reportable business
        segment:
 
 **Sales
                  and EBIT by Segment**Quarter
                  Ended
              
              
              Quarter
                  Ended
              
              
              Nine
                  Months Ended
              
              
              Nine
                  Months Ended*(in
                  millions)*
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006
              
              
              Sept.
                  30, 2007
              
              
              Oct.
                  1, 2006Net
                  Sales
              
              
              Operating
                  Income
              
              
              Net
                  Sales
              
              
              Operating
                  Income
              
              
              Net
                  Sales
              
              
              Operating
                  Income
              
              
              Net
                  Sales
              
              
              Operating
                  IncomePaperboard
                  Packaging
              
              $
              224.6
              
              
              $
              13.7
              
              
              $
              214.4
              
              
              $
              12.3
              
              
              $
              657.1
              
              
              $
              33.5
              
              
              $
              622.3
              
              
              $
              32.2Plastic
                  Packaging
              
              
              41.8
              
              
              
              3.1
              
              
              
              33.5
              
              
              
              2.7
              
              
              
              132.2
              
              
              
              16.1
              
              
              
              115.1
              
              
              
              11.9Corporate
              
              
              -
              
              
              
              (3.6
              )
              
              
              -
              
              
              
              (3.3
              )
              
              
              -
              
              
              
              (12.1
              )
              
              
              -
              
              
              
              (11.3
              )Restructuring
                  expenses, asset impairments and other exit costs
              
              
              -
              
              
              
              (3.3
              )
              
              
              -
              
              
              
              (1.6
              )
              
              
              -
              
              
              
              (15.0
              )
              
              
              -
              
              
              
              (7.7
              )Gain
                  on divestiture
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              4.1
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              3.1Total
              
              $
              266.4
              
              
              $
              9.9
              
              
              $
              247.9
              
              
              $
              14.2
              
              
              $
              789.3
              
              
              $
              22.5
              
              
              $
              737.4
              
              
              $
              28.2
 
 Net
        sales
        from continuing operations for the third quarter of fiscal 2007 were $266.4
        million, an increase of $18.5 million, or 7 percent, from the comparable
        period
        in fiscal 2006. Excluding changes in foreign currency exchange rates, which
        increased sales by $17.0 million, sales were up 1% compared to the third
        quarter
        fiscal 2006.  Net sales from continuing operations for the first nine
        months of fiscal 2007 were $789.3 million, an increase of $51.9 million,
        or 7
        percent, over the comparable period in fiscal 2006.  Excluding changes
        in foreign currency exchange rates, which increased net sales by $50.8 million,
        and the combined effect of acquisitions and divestitures, sales were up 1
        percent for the first nine months of fiscal 2007 compared to the first nine
        months of fiscal 2006.****For the third quarter and first
        nine months of fiscal 2007 reduced sales of branded products packaging were
        offset by the partial pass-through of higher raw material costs and increased
        volume within certain of our plastic packaging markets.
  22
 Gross
        margin, which is defined as net sales less cost of products sold, for the
        third
        quarter of fiscal 2007 was $47.4 million, an increase of $4.7 million, or
        11
        percent, compared to gross margin of $42.7 million for the third quarter
        of
        fiscal 2006.  Gross margin was $140.0 million for the first nine
        months of fiscal 2007 compared to gross margin of $128.8 million for the
        same
        period in fiscal 2006.  As a percentage of sales, gross margin
        increased from 17 percent to 18 percent for the third quarter and first nine
        months of fiscal 2007 versus fiscal 2006.  For the third quarter and
        first nine months of fiscal 2007 lower sales of tobacco packaging, as well
        as a
        less favorable product mix of other branded products packaging, were partially
        offset by increased volume within certain of our plastic packaging markets
        and
        the effect of reduced depreciation expense as a result of the fixed asset
        impairment in the tobacco reporting unit in the Paperboard Packaging reporting
        segment, which was recorded in the fourth quarter of fiscal 2006.
 
 Selling,
        general and administrative ("SG&A") expenses as a percentage of net sales
        for the third quarter and first nine months of fiscal 2007 remained flat
        at 13
        percent compared to SG&A for the third quarter and first nine months of
        fiscal 2006.  Decreases in pension costs as well as cost savings under
        the Company's global cost savings program were offset by costs incurred in
        connection with strategic initiatives.
 
 Operating
        income for the third quarter of fiscal 2007 was $9.9 million compared to
        operating income of $14.2 million for the third quarter of fiscal
        2006.  Operating income for the third quarter of fiscal 2007 included
        restructuring expenses and other exit costs of $3.3 million related to the
        Company's cost savings program and other employee-related costs for workforce
        reductions within our tobacco packaging manufacturing
        facilities.  Operating income for the third quarter of fiscal 2006
        included restructuring expenses and other exit costs of $1.6 million related
        to
        the Company's cost savings program and a gain on divestiture of $4.1 million
        related to the sale of the Company's plastic packaging operation in Lurgan,
        Northern Ireland.  Changes in foreign currency exchange rates
        increased operating income by $1.0 million for the third quarter of fiscal
        2007.
 
 Operating
        income for the first nine months of fiscal 2007 and fiscal 2006 was $22.5
        million and $28.2 million, respectively.  Operating income for the
        first nine months of fiscal 2007 included restructuring expenses and other
        exit
        costs of $15.0 million related to the Company's cost savings program and
        other
        employee-related costs for workforce reductions within our tobacco packaging
        manufacturing facilities. Operating income for the first nine months of fiscal
        2006 included restructuring expenses and other exit costs of $7.7 million
        related to the Company's cost savings program and a $3.1 million gain on
        the
        divestiture of the Company's plastic packaging operation in Lurgan, Northern
        Ireland.  Changes in foreign currency exchange rates increased
        operating income by approximately $2.3 million for the first nine months
        of
        fiscal 2007.
 
 Net
        interest expense was $11.5 million for the third quarter of fiscal 2007,
        an
        increase of $1.4 million compared to the third quarter of fiscal 2006. Net
        interest expense was $33.0 million for the first nine months of fiscal 2007
        compared to $29.1 million for the first nine months of fiscal
        2006.  The increase in net interest expense for both the third quarter
        and first nine months of fiscal 2007 was primarily due to changes in foreign
        currency exchange rates, which increased interest expense
        approximately****$0.5 million and $1.7 million, respectively,
        increased borrowing levels during fiscal 2007, and higher average interest
        rates
        on borrowings under our lines of credit.  During the first quarter of
        fiscal 2006, the Company recognized a pre-tax and after-tax loss of $0.6
        million, or $0.03 per share, on the early redemption of £5.0 million principal
        amount of its 10.375% senior subordinated notes due 2011.
 
  23
 The
        comparability of our effective income tax rates is heavily affected by our
        inability to fully recognize a benefit from our U.S. tax losses and the
        inability to recognize the benefit of losses in certain non-U.S. tax
        jurisdictions.  Additionally, the tax rates are influenced by
        management's expectations as to the recovery of our U.S. and certain non-U.S.
        jurisdiction deferred income tax assets and any settlements of income tax
        contingencies with non-U.S. tax authorities.
 
 The
        effective income tax rates for continuing operations for the third quarter
        and
        first nine months of fiscal 2007 were 331 percent and 32 percent,
        respectively.During
        July 2007 we completed negotiations with a non-U.S. tax authority to allow
        additional deductions of certain interest payments.  As a result, we
        recorded a $3.5 million income tax benefit in the third quarter of fiscal
        2007
        related to fiscal 2005 and fiscal 2006 tax years and a $1.5 million benefit
        related to the first six months of 2007.  In addition, we recorded a
        net tax benefit of $1.2 million in the third quarter of 2007 resulting from
        a
        re-evaluation of our deferred taxes for changes in U.K. tax law and changes
        in
        statutory tax rates in Germany and the U.K. that become effective January
        1,
        2008.  The effective income tax rate for the first nine months of
        fiscal 2007 was adversely affected by approximately $0.6 million related
        to the
        tax effects of the prior period adjustments that were recorded in the first
        quarter of 2007 (see Note 1).
 
 The
        effective income tax rates for continuing operations for the third quarter
        and
        first nine months of fiscal 2006 were (32) percent and 160 percent,
        respectively.   Our fiscal 2006 effective income tax rate was
        adversely affected by a capital gains tax in the first quarter of fiscal
        2006 of
        approximately $0.9 million on the sale of assets in connection with the
        divestiture of the Lurgan operation (see Note 5).  During the second
        quarter of 2006, we recorded an income tax benefit of $1.8 million associated
        with the favorable settlement of income tax filing positions with U.K. tax
        authorities.  During the third quarter of fiscal 2006, we recorded a
        $2.3 million income tax benefit as a result of management's reassessment
        of its
        valuation allowance for deferred income tax assets in France following the
        sale
        of our French luxury packaging business.
 
 Income
        from continuing operations for the third quarter of fiscal 2007 was $3.7
        million, or $0.19 per diluted share, compared to $5.4 million, or $0.28 per
        diluted share, for the third quarter of fiscal 2006.  Loss from
        continuing operations for the first nine months of fiscal 2007 was $7.1 million,
        or $0.37 per diluted share, compared to income from continuing operations
        of
        $0.9 million, or $0.04 per diluted share, in the first nine months of fiscal
        2006.
 
 **Chesapeake's
        $25-Million Cost Savings Program**
 
 During
        the fourth quarter of fiscal 2005 Chesapeake announced plans for a $25-million
        global cost savings program. The scope of this program was extensive and
        ultimately involved a number of locations being either sold, closed or
        downsized. We also made broad-based workforce reductions and a general reduction
        in overhead costs throughout the company. Additionally, we targeted specific
        improvements in operating processes.   The cost of these
        initiatives was expected to range from $30 million to $40 million on a pre-tax
        basis, with the cash flow impact being less due to the sale of related real
        estate and assets.  Full implementation of this program was expected
        by the end of fiscal 2007.  The ultimate costs and timing of this
        program were dependent on consultation and, in certain circumstances,
        negotiation with European works councils or employee
        representatives.  Over the course of 2006 and 2007 we have realized
        cost savings in excess of our $25 million goal.  We are now evaluating
        potential additional restructuring and cost savings actions. Costs associated
        with the program have been classified as "restructuring expenses, asset
        impairments and other exit costs" and "discontinued operations" in the
        accompanying consolidated statements of earnings.
  24
 During
        the third quarter of fiscal 2007 we recorded restructuring costs, asset
        impairments and other exit costs of approximately $2.3 million associated
        with
        this program and made cash payments under the program of approximately
        $3.4****million.  During the first nine months of
        fiscal 2007 we recorded restructuring costs, asset impairments and other
        exit
        costs of approximately $8.0 million associated with this program and made
        cash
        payments under the program of approximately $7.6****million.
        During the third quarter of fiscal 2006 we recorded restructuring costs,
        asset
        impairments and other exit costs of approximately $1.5 million associated
        with
        this program, of which $(0.1) million was related to discontinued
        operations.  These charges were more than offset by a gain on
        divestiture of $4.1 million associated with this
        program.   During the first nine months of fiscal 2006 the
        Company recorded restructuring costs, asset impairments and other exit costs
        of
        approximately $11.6 million associated with this program, of which $3.9 million
        was related to discontinued operations.  These charges were partially
        offset by a gain on divestiture of $3.1 million associated with this
        program.  We made cash payments under the program during the third
        quarter and first nine months of fiscal 2006 of approximately
        $3.1****million and $13.1 million,
        respectively.  (See Note 4.)
 
 **Other
        Restructuring Expenses, Asset Impairments and Exit Costs**
 
 During
        the first quarter of fiscal 2007 the Company recorded a credit of $0.5 million
        ($0.2 million after tax) as a correction to the fixed asset impairment of
        our
        tobacco reporting unit of the Paperboard Packaging segment.  The
        impairment of $24.9 million ($21.1 million after tax) was recorded in the
        fourth
        quarter of fiscal 2006.  In addition, during the third quarter and
        first nine months of fiscal 2007 we recorded employee-related costs related
        to
        the planned Bremen plant closure and other workforce reductions as a result
        of
        the reduced sales of tobacco packaging of approximately $1.0 million and
        $7.0
        million, respectively.  During the third quarter of 2007 we made cash
        payments related to these workforce reductions of approximately
        $1.2****million.
 
 **Discontinued
        Operations**
 
 On
        July
        31, 2006 we completed the sale of our French luxury packaging business which
        was
        previously included in our Paperboard Packaging segment.  In addition,
        discontinued operations includes amounts related to our former Land Development,
        Tissue and Merchandising and Specialty Packaging segments.  (See Note
        7.)
 
 **Segment
        Information**
 
 *Paperboard
        Packaging*
 
 *(in
                  millions)*
              
              
              
              
              
              
              
              Increase2007
              
              
              2006
              
              
              $
              
              
              
              %Nine
                  months:Net
                  sales
              
              $
              657.1
              
              
              $
              622.3
              
              
              
              34.8
              
              
              
              5.6Operating
                  income
              
              
              33.5
              
              
              
              32.2
              
              
              
              1.3
              
              
              
              4.0Operating
                  income margin %
              
              
              5.1
              %
              
              
              5.2
              %
 
 *(in
                  millions)*
              
              
              
              
              
              
              
              Increase2007
              
              
              2006
              
              
              $
              
              
              
              %Third
                  quarter:Net
                  sales
              
              $
              224.6
              
              
              $
              214.4
              
              
              
              10.2
              
              
              
              4.8Operating
                  income
              
              
              13.7
              
              
              
              12.3
              
              
              
              1.4
              
              
              
              11.4Operating
                  income margin %
              
              
              6.1
              %
              
              
              5.7
              %
  25
 Net
        sales
        for the Paperboard Packaging segment were $224.6 million for the third quarter
        of fiscal 2007, an increase of $10.2 million, or 5 percent, from the comparable
        period in 2006.  Excluding changes in foreign currency exchange rates,
        which increased net sales by $15.0 million, net sales were down 2 percent
        for
        the third quarter of fiscal 2007 compared to the third quarter of fiscal
        2006.  The decline in sales for the third quarter was primarily due to
        lower sales of branded products packaging.  The decline in sales in
        branded products packaging was due to decreased sales of tobacco packaging
        resulting from BAT's previously announced supplier rationalization program,
        partially offset by increased sales of confectionary packaging.  Sales
        of pharmaceutical packaging in the third quarter of 2007 were comparable
        with
        the same period in 2006.
   Net
        sales
        for the Paperboard Packaging segment for the first nine months of fiscal
        2007
        were $657.1 million, an increase of $34.8 million, or 6 percent, compared
        to the
        first nine months of fiscal 2006.  Excluding changes in foreign
        currency exchange rates, which increased net sales by $48.6 million, net
        sales
        were down 2 percent for the first nine months of fiscal 2007 compared to
        the
        first nine months of fiscal 2006.  The decrease in net sales was
        primarily due to reduced volumes of tobacco products packaging.
  Operating
        income for the Paperboard Packaging segment for the third quarter of fiscal
        2007
        was $13.7 million, an increase of $1.4 million, or 11 percent, versus the
        comparable period in fiscal 2006. Excluding changes in foreign currency exchange
        rates, which increased operating income by $0.8 million, operating income
        increased 4 percent for the third quarter of fiscal 2007 compared to the
        third
        quarter of fiscal 2006.  The improvement in operating income was
        primarily due to reductions in pension and other postretirement benefits
        expense, partially offset by lower operating income from sales of tobacco
        packaging and start up costs incurred for the introduction of multi-shaped
        tube
        designs.
 
 Operating
        income for the first nine months of fiscal 2007 was $33.5 million, an increase
        of $1.3 million, or 4 percent, from the first nine months of fiscal
        2006.  Excluding changes in foreign currency exchange rates, which
        increased operating income by $2.6 million, operating income was down 4 percent
        for the first nine months of fiscal 2007 compared to the first nine months
        of
        fiscal 2006.****The decrease in operating income for the
        first nine months of fiscal 2007 was primarily due to lower sales of tobacco
        products packaging, as well as a less favorable mix of other branded products
        packaging, partially offset by reductions in pension and other postretirement
        benefits expense.
 
 *Plastic
        Packaging*
 
 *(in
                  millions)*
              
              
              
              
              
              
              
              Increase2007
              
              
              2006
              
              
              $
              
              
              
              %Nine
                  months:Net
                  sales
              
              $
              132.2
              
              
              $
              115.1
              
              
              
              17.1
              
              
              
              14.9Operating
                  income
              
              
              16.1
              
              
              
              11.9
              
              
              
              4.2
              
              
              
              35.3Operating
                  income margin %
              
              
              12.2
              %
              
              
              10.3
              %
 
 *(in
                  millions)*
              
              
              
              
              
              
              
              Increase2007
              
              
              2006
              
              
              $
              
              
              $
              %Third
                  quarter:Net
                  sales
              
              $
              41.8
              
              
              $
              33.5
              
              
              
              8.3
              
              
              
              24.8Operating
                  income
              
              
              3.1
              
              
              
              2.7
              
              
              
              0.4
              
              
              
              14.8Operating
                  income margin %
              
              
              7.4
              %
              
              
              8.1
              %
 26
 Net
        sales
        for the Plastic Packaging segment for the third quarter of fiscal 2007 were
        $41.8 million, an increase of $8.3 million, or 25 percent, from the comparable
        period in fiscal 2006.  Excluding changes in foreign currency exchange
        rates, which increased net sales by $2.0 million, net sales were up 19 percent
        for the third quarter of fiscal 2007 compared to the third quarter of fiscal
        2006.  Net sales for the Plastic Packaging segment were $132.2 million
        for the first nine months of fiscal 2007, an increase of $17.1 million, or
        15
        percent, over the comparable period in fiscal 2006.  The first nine
        months of fiscal 2006 included sales of $7.1 million by the Lurgan operation
        which was sold in the first quarter of fiscal 2006.  Excluding changes
        in foreign currency exchange rates, which increased net sales by $2.2 million,
        and the combined effect of acquisitions and divestitures, net sales were
        up 20
        percent for the first nine months of fiscal 2007 compared to the first nine
        months of fiscal 2006.  For the third quarter and first nine months of
        fiscal 2007 the increase in net sales relative to the prior year was due
        to
        increased volume throughout the segment, particularly in our South Africa
        beverage operation, and the partial pass-through of higher raw material
        costs.
 
 Operating
        income for the Plastic Packaging segment for the third quarter of fiscal
        2007
        was $3.1 million, an increase of $0.4 million, or 15 percent, from the
        comparable period in fiscal 2006. Excluding changes in foreign currency exchange
        rates, which increased operating income by $0.2 million, operating income
        was up
        7 percent for the third quarter of fiscal 2007 compared to the third quarter
        of
        fiscal 2006. Operating income for the first nine months of fiscal 2007 was
        $16.1
        million, an increase of $4.2 million, or 35 percent, compared to the first
        nine
        months of fiscal 2006.  Excluding changes in foreign currency exchange
        rates, which increased operating income by $0.8 million, and the combined
        effect
        of acquisitions and divestitures, operating income was up 29 percent for
        the
        first nine months of fiscal 2007 compared to the first nine months of fiscal
        2006.  Increases in operating income for the third quarter and first
        nine months of fiscal 2007 were the result of increased volume throughout
        the
        Plastic Packaging segment.
 
 **Liquidity
        and Financial Position**
 
 Net
        cash
        provided by operating activities was $15.4 million for the first nine months
        of
        fiscal 2007 compared to $1.5 million for the first nine months of fiscal
        2006.  For the first nine months of fiscal 2007, the increase in net
        cash provided by operating activities primarily reflects reduced spending
        under
        our global cost savings program, reduced pension funding, and lower working
        capital requirements.
 
 Net
        cash
        used in investing activities in the first nine months of fiscal 2007 was
        $30.7
        million compared to $1.5 million in the first nine months of fiscal 2006.
        Net
        cash used in investing activities during the first nine months of fiscal
        2006
        reflects capital spending offset in part by the cash proceeds received on
        the
        divestiture of the Lurgan operation.  The Company's total capital
        spending was $33.7 million for the first nine months of fiscal 2007 compared
        to
        $25.9 million for the first nine months of fiscal 2006.   The
        increase in capital spending is primarily related to our growth initiatives
        in
        South Africa, China and Hungary.
 
 Net
        cash
        provided by financing activities in the first nine months of fiscal 2007
        was
        $10.4 million, compared to net cash used in financing activities of $1.8
        million
        in the first nine months of fiscal 2006.  During the first nine months
        of fiscal 2007 we made debt repayments of $1.6 million, which were more than
        offset by an increase in borrowings on our credit lines of $20.3
        million.  During the first nine months of fiscal 2006, we made debt
        repayments of $23.0 million, which were more than offset by an increase in
        borrowings on our credit lines of $31.3 million.  We paid cash
        dividends of $8.5 million, or $0.44 per share, in the first nine months of
        fiscal 2007, and $12.9 million, or $0.66 per share, in the first nine months
        of
        fiscal 2006.
  27
 On
        May 1,
        2007, our Board of Directors suspended the payment of dividends on our common
        stock, in light of the incremental cash requirements of our growth initiatives
        and the additional investment required in Western Europe and throughout the
        company to continue to improve our cost structure.
 
 Our
        debt
        at September 30, 2007 was $503.2 million, up $35.4 million compared to December
        31, 2006. Our debt-to-capital ratio was 67.2 percent as of September 30,
        2007,
        compared to 66.7 percent at December 31, 2006. Capital for this purpose is
        defined as debt and stockholders' equity.
 
 We
        believe we will have adequate financial resources to support anticipated
        short-term and long-term capital needs and commitments, and we were in
        compliance with all of our debt covenants as of the end of the third quarter
        of
        fiscal 2007.
 
 Under
        our
        senior secured bank credit facility (the "Credit Facility"), as of the beginning
        of the first quarter of 2008, the maximum leverage ratio permitted will decrease
        from 5.0x to 4.25x and the minimum interest coverage ratio permitted will
        increase from 2.25x to 2.5x.  Based on our current projections, we may
        not be in compliance with these financial covenants at the end of the first
        quarter of 2008.  However, we expect to avoid compliance issues with
        these financial covenants by improving cash flows, reducing outstanding
        indebtedness, replacing or amending the Credit Facility or obtaining waivers
        from our lenders, but there can be no assurances that these alternatives
        will be
        successfully implemented.  Failure to comply would be an event of
        default under the Credit Facility.  If such an event of default were
        to occur, the lenders under the Credit Facility could require immediate payment
        of all amounts outstanding under the Credit Facility and terminate their
        commitments to lend under the Credit Facility and, pursuant to cross-default
        provisions in many of the instruments that govern our other outstanding
        indebtedness, immediate payment of much of our other outstanding indebtedness
        could be required, all of which would likely have a material adverse effect
        on
        our business, results of operations and financial condition.
 
 **Critical
        Accounting Policies**
 
 Our
        consolidated financial statements have been prepared by management in accordance
        with GAAP. The preparation of financial statements in conformity with GAAP
        requires management to make estimates and assumptions that affect the reported
        amounts of assets and liabilities, disclosure of contingent assets and
        liabilities and the reported amounts of revenue and expenses. We believe
        that
        the estimates, assumptions and judgments described in the section "Management's
        Discussion and Analysis of Financial Condition and Results of Operations
        -
        Critical Accounting Policies" of our most recent Annual Report on Form 10-K
        have
        the greatest potential impact on our financial statements, so we consider
        these
        to be our critical accounting policies. These policies include our accounting
        for: (a) goodwill and other long-lived asset valuations; (b) environmental
        and
        other contingencies; (c) pension and other postretirement employee benefits;
        (d)
        income taxes; and (e) restructuring and other exit costs. Because of the
        uncertainty inherent in these matters, reported results could have been
        materially different using a different set of assumptions and estimates for
        these critical accounting policies. We believe that the consistent application
        of these policies enables us to provide readers of our financial statements
        with
        useful and reliable information about our operating results and financial
        condition. There has been no significant change in these policies, or the
        estimates used in the application of the policies, since our 2006 fiscal
        year
        end.
  28
 **Environmental**
 
 See
        Note
        11 to the Consolidated Financial Statements for additional information on
        environmental matters.
 
 **Seasonality**
 
 Our
        Paperboard Packaging segment competes in several end-use markets, such as
        alcoholic drinks and confectioneries, that are seasonal in nature.  As
        a result, our Paperboard Packaging segment's earnings stream is seasonal,
        with
        peak operational activity during the third and fourth quarters of the
        year.  Our Plastic Packaging segment's markets include beverage and
        agrochemical markets in the southern hemisphere, and agrochemical markets
        in the
        northern hemisphere, that are seasonal in nature.  As a result, our
        Plastic Packaging segment's earnings stream is also seasonal, with peak
        operational activity during the first and fourth quarters of the
        year.
 
 **Adoption
        of FASB Interpretation No. 48 ("FIN 48"), *Accounting for Uncertainty in
        Income Taxes-an interpretation of FASB Statement No. 109, Accounting for
        Income
        Taxes***
 
 In
        June
        2006 the FASB issued FIN 48, which clarifies the accounting for uncertainty
        in
        income taxes. FIN 48 prescribes a recognition threshold and measurement
        attribute for the financial statement recognition and measurement of a tax
        position taken or expected to be taken in a tax return. The interpretation
        requires that we recognize in the financial statements, the impact of a tax
        position, if that position is more likely than not of being sustained on
        audit,
        based on the technical merits of the position. FIN 48 also provides guidance
        on
        derecognition and classification of income tax related liabilities, interest
        and
        penalties, accounting in interim periods and disclosure. The provisions of
        FIN
        48 are effective beginning January 1, 2007 with the cumulative effect of
        the change in accounting principle recorded as an adjustment to opening retained
        earnings. The adoption of FIN 48 resulted in an increase in our opening retained
        earnings of $1.8 million for fiscal 2007.
 
 As
        a
        result of the adoption of the provisions of FIN 48 on January 1, 2007, the
        Company recognized an increase in the current quarter of $0.7 million in
        the
        liability for unrecognized tax benefits.  The Company has a total of $28.0
        million of unrecognized tax benefits at September 30, 2007 of which $16.8
        million is for potential interest that could be due on unrecognized tax
        benefits.
 
 **New
        Accounting Pronouncements**
 
 In
        September 2006 the FASB issued SFAS No. 157, *Fair Value Measurements*
        ("SFAS 157"), which defines fair value, establishes a framework for measuring
        fair value in accordance with GAAP and expands disclosures about fair value
        measurements.  The provisions of SFAS 157 are effective for financial
        statements issued for fiscal years beginning after November 15, 2007, and
        interim periods within those fiscal years.  We are currently
        evaluating the impact SFAS 157 will have on our financial
        statements.
 
 In
        February 2007 the FASB issued SFAS No. 159, *The Fair Value Option for
        Financial Assets and Financial Liabilities-including an amendment of FAS
        115* ("SFAS 159").  SFAS 159 allows companies to choose, at specified
        election dates, to measure at fair value eligible financial assets and
        liabilities that are not otherwise required to be measured at fair value.
        Unrealized gains and losses shall be reported at each subsequent reporting
        date
        on items for which the fair value option has been elected in earnings. 
SFAS 159 also establishes presentation and disclosure requirements.  SFAS
        159 is effective for fiscal
  29
  years
        beginning after November 15, 2007 and will be applied prospectively.  We do
        not believe the adoption of SFAS 159 will have a significant impact on our
        financial statements.
 
 **Forward-Looking
        Statements**
 
 Forward-looking
        statements in the foregoing Management's Discussion and Analysis of Financial
        Condition and Results of Operations include statements that are identified
        by
        the use of words or phrases including, but not limited to, the following:
        "will
        likely result," "expected to," "will continue," "is anticipated," "estimated,"
        "project," "believe," "expect," and words or phrases of similar import. Changes
        in the following important factors, among others, could cause our actual
        results
        to differ materially from those expressed in any such forward-looking
        statements: our inability to realize the full extent of the expected savings
        or
        benefits from the $25-million global cost savings program and to complete
        such
        activities in accordance with its planned timetable and within the expected
        cost
        range; the effects of competitive products and pricing; changes in production
        costs, particularly for raw materials such as folding carton and plastics
        materials and our ability to pass through increases in raw materials costs
        to
        our customers; fluctuations in demand; possible recessionary trends in United
        States and global economies; changes in governmental policies and regulations;
        changes in interest rates and credit availability; fluctuations in foreign
        currency exchange rates; our ability to remain in compliance with our debt
        covenants; and other risks that are detailed from time to time in reports
        we
        file with the SEC.
  **Item
                  3.**
              **Quantitative
                  and Qualitative Disclosure about Market
                  Risk**
 
 There
        are
        no material changes to the disclosure on this matter made in our Annual Report
        on Form 10-K for the year ended December 31, 2006.
 
 **Item
                  4.**
              **Controls
                  and Procedures**
 
 *Conclusion
        Regarding the Effectiveness of Disclosure Controls and
        Procedures*
 
 We
        maintain disclosure controls and procedures that are designed to ensure that
        information required to be disclosed in the reports that we file or submit
        under
        the Securities Exchange Act of 1934, as amended, is recorded, processed,
        summarized and reported within the time periods specified in the rules and
        forms
        of the SEC and that such information is accumulated and communicated to our
        management, including our Chief Executive Officer and Chief Financial Officer,
        to allow timely decisions regarding required disclosure.
 
 An
        evaluation was performed under the supervision and with the participation
        of our
        management, including our Chief Executive Officer and our Chief Financial
        Officer, of the effectiveness of our disclosure controls and procedures (as
        defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act
        of
        1934) as of September 30, 2007. Based upon that evaluation our management,
        including our Chief Executive Officer and our Chief Financial Officer, concluded
        that our disclosure controls and procedures were effective as of September
        30,
        2007.
 
 *Changes
        in Internal Control over Financial Reporting*
 
 There
        was
        no change in our internal control over financial reporting during the third
        quarter and first nine months of fiscal 2007 that materially affected, or
        is
        reasonably likely to materially affect, our internal control over financial
        reporting.
  30
  **PART
        II - OTHER INFORMATION**
 
 **Item
                  1.**
              **Legal
                  Proceedings**
 
 Reference
        is made to Note 11 of the Notes to Consolidated Financial Statements included
        herein.
 
 **Item
                  1A**
              **Risk
                  Factors**
 
 Item
        1A
        of our Annual Report on Form 10-K for the year ended December 31, 2006 describes
        some of the risks and uncertainties associated with our
        business.  These risks and uncertainties have the potential to
        materially affect our results of operations and our financial
        condition.  We do not believe that there have been any material
        changes to the risk factors previously disclosed in our Annual Report on
        Form
        10-K for the year ended December 31, 2006.
 
 **Item
                  2.**
              **Unrecognized
                  Sales of Equity Securities and Use of
                  Proceeds**
 
  The
        Corporation is the plan sponsor for the Chesapeake Corporation 401(k) Savings
        Plan (the "Plan"), a savings plan for employees of Chesapeake Pharmaceutical
        Packaging Company Inc.  The Plan became effective on November 1, 2005, and
        includes the Corporation's common stock as one of several investment
        options.  The Corporation did not file a registration statement on Form S-8
        with respect to the Plan until August 13, 2007.  From the Plan's
        effective date until the filing of the Form S-8, pursuant to participant
        elections a total of approximately 20,300 shares of common stock were purchased
        by the Plan trustee for the accounts of 38 Plan participants at the prevailing
        market price per share at the respective times of purchase.  All of those
        shares were purchased by the Plan trustee in open market transactions, and
        no
        proceeds were received by the Corporation.   The Corporation believes
        that purchases of common stock by the Plan trustee for participant accounts
        was
        a private placement that was exempt from the registration requirements of
        the
        Securities Act of 1933 (the "Securities Act"), pursuant to the exemption
        afforded by Section 4(2) of the Securities Act. We believe that any
        potential liability associated with this matter would be immaterial to our
        financial position and to our results of operations.
  
 **Item
                  6.**
              **Exhibits**
 
 (a)
              Exhibits:10.1
              Notice
                  of Non-Renewal of the Amended and Restated Executive Employment
                  Agreement,
                  dated April 22, 2003, between Chesapeake Corporation and J.P. Causey
                  Jr.31.1
              Certification
                  of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200231.2
              Certification
                  of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of
                  200232
              Certifications
                  of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant
                  to
                  Section 906 of the Sarbanes-Oxley Act of
                  2002
 
 
  31
  
 
 **SIGNATURE**
 
 
 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.
 
 
 CHESAPEAKE
                  CORPORATION(Registrant)Date:  November
                  7, 2007
              BY:
              /s/
                  Guy N. A. FallerGuy
                  N. A. FallerController(Principal
                  Accounting Officer)
 
 
  32