UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549






FORM
10-Q





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




For
the quarterly period ended: September 28, 2008




OR




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


For
The Transition Period From __________ To __________.





Commission
file numbers: 333-82084-01


333-82084


PAPERWEIGHT
      DEVELOPMENT CORP.
            APPLETON
      PAPERS INC.(Exact
      Name of Registrant as Specified in Its Charter)
            (Exact
      Name of Registrant as Specified in Its
Charter)




Wisconsin
            Delaware(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            (State
      or Other Jurisdiction of
              Incorporation
      or Organization)39-2014992
            36-2556469(I.R.S.
      Employer
              Identification
      No.)
            (I.R.S.
      Employer
              Identification
      No.)825
      East Wisconsin Avenue, P.O. Box 359,
              Appleton,
      Wisconsin
            54912-0359(Address
      of Principal Executive Offices)
            (Zip
      Code)




Registrants’
telephone number, including area code: (920) 734-9841




Indicate
by check mark whether each 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 x  No





Indicate
by check mark whether each of the registrants is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “small
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):


Large
accelerated filer
                                              Accelerated
filer 


Non-accelerated
filer x (do not
check if a smaller reporting
company)       Smaller reporting company





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





As of
November 1, 2008, 10,406,611 shares of Paperweight Development Corp. common
stock, $.01 par value, were outstanding. There is no trading market for the
common stock of Paperweight Development Corp. As of November 1, 2008, 100 shares
of Appleton Papers Inc.’s common stock, $100.00 par value, were outstanding.
There is no trading market for the common stock of Appleton Papers Inc. No
shares of Paperweight Development Corp. or Appleton Papers Inc. were held by
non-affiliates.




Appleton
Papers Inc. meets the conditions set forth in General Instruction H(1)(a) and
(b) and is therefore filing this form with the reduced disclosure
format.


1








INDEX




Page
              NumberPART I
            FINANCIAL
      INFORMATIONItem 1
            Financial
      Statements (unaudited)
            3a)
      Condensed Consolidated Balance Sheets
            3b)
      Condensed Consolidated Statements of Operations
            4c)
      Condensed Consolidated Statements of Cash Flows
            5d)
      Consolidated Statements of Redeemable Common Stock, Accumulated Deficit,
      Accumulated Other Comprehensive Income (Loss) and Comprehensive (Loss)
      Income
            6e)
      Notes to Condensed Consolidated Financial Statements
            7Item 2
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            30Item 3
            Quantitative
      and Qualitative Disclosures About Market Risk
            36Item 4
            Controls
      and Procedures
            36PART II
            OTHER
      INFORMATIONItem
      1
            Legal
      Proceedings
            37Item 1A
            Risk
      Factors
            37Item 6
            Exhibits
            39Signatures
            40


2


PART 1—FINANCIAL
INFORMATION


Item
1—Financial Statements (unaudited)





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED BALANCE SHEETS(unaudited)(dollars
      in thousands, except share data)September
      28,
                                                                      
                                                                      
                                                                      December
      29,2008
                                                                      
                                                                      
                                                                      2007ASSETSCurrent
      assetsCash
      and cash equivalents
                                                                      
                                                                      $
                                                                      7,834
                                                                      
                                                                      
                                                                      $
                                                                      44,838Accounts
      receivable, less allowance fordoubtful
      accounts of $1,726 and $1,480, respectively
                                                                      
                                                                      
                                                                      124,071
                                                                      
                                                                      
                                                                      
                                                                      116,762Inventories
                                                                      
                                                                      
                                                                      138,318
                                                                      
                                                                      
                                                                      
                                                                      124,078Other
      current assets
                                                                      
                                                                      
                                                                      42,372
                                                                      
                                                                      
                                                                      
                                                                      12,210Assets
      of discontinued operations
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      36,731Total
      current assets
                                                                      
                                                                      
                                                                      312,595
                                                                      
                                                                      
                                                                      
                                                                      334,619Property,
      plant and equipment, net of accumulated depreciation of$391,359
      and $353,975, respectively
                                                                      
                                                                      
                                                                      444,001
                                                                      
                                                                      
                                                                      
                                                                      393,742Goodwill
                                                                      
                                                                      
                                                                      32,562
                                                                      
                                                                      
                                                                      
                                                                      50,246Intangible
      assets, net
                                                                      
                                                                      
                                                                      73,910
                                                                      
                                                                      
                                                                      
                                                                      77,340Environmental
      indemnification receivable
                                                                      
                                                                      
                                                                      136,422
                                                                      
                                                                      
                                                                      
                                                                      165,198Other
      assets
                                                                      
                                                                      
                                                                      20,080
                                                                      
                                                                      
                                                                      
                                                                      24,617Assets
      of discontinued operations
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      57,646Total
      assets
                                                                      
                                                                      $
                                                                      1,019,570
                                                                      
                                                                      
                                                                      $
                                                                      1,103,408LIABILITIES,
      REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT ANDACCUMULATED
      OTHER COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
                                                                      
                                                                      $
                                                                      3,613
                                                                      
                                                                      
                                                                      $
                                                                      3,138Accounts
      payable
                                                                      
                                                                      
                                                                      87,196
                                                                      
                                                                      
                                                                      
                                                                      82,621Accrued
      interest
                                                                      
                                                                      
                                                                      11,119
                                                                      
                                                                      
                                                                      
                                                                      4,688Other
      accrued liabilities
                                                                      
                                                                      
                                                                      80,474
                                                                      
                                                                      
                                                                      
                                                                      81,348Liabilities
      of discontinued operations
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      21,685Total
      current liabilities
                                                                      
                                                                      
                                                                      182,402
                                                                      
                                                                      
                                                                      
                                                                      193,480Long-term
      debt
                                                                      
                                                                      
                                                                      595,147
                                                                      
                                                                      
                                                                      
                                                                      539,105Postretirement
      benefits other than pension
                                                                      
                                                                      
                                                                      46,365
                                                                      
                                                                      
                                                                      
                                                                      47,436Accrued
      pension
                                                                      
                                                                      
                                                                      9,350
                                                                      
                                                                      
                                                                      
                                                                      16,857Environmental
      liability
                                                                      
                                                                      
                                                                      136,422
                                                                      
                                                                      
                                                                      
                                                                      173,353Other
      long-term liabilities
                                                                      
                                                                      
                                                                      4,869
                                                                      
                                                                      
                                                                      
                                                                      6,794Liabilities
      of discontinued operations
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      20,750Commitments
      and contingencies  (Note 13)
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Redeemable
      common stock, $0.01 par value, shares authorized:
    30,000,000shares
      issued and outstanding: 10,793,121 and 11,116,751,
      respectively
                                                                      
                                                                      
                                                                      169,344
                                                                      
                                                                      
                                                                      
                                                                      182,040Accumulated
      deficit
                                                                      
                                                                      
                                                                      (129,375
                                                                      )
                                                                      
                                                                      
                                                                      (80,086
                                                                      )Accumulated
      other comprehensive income
                                                                      
                                                                      
                                                                      5,046
                                                                      
                                                                      
                                                                      
                                                                      3,679Total
      liabilities, redeemable common stock, accumulateddeficit
      and accumulated other comprehensive income
                                                                      
                                                                      $
                                                                      1,019,570
                                                                      
                                                                      
                                                                      $
                                                                      1,103,408The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.


3





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)(dollars
      in thousands)Three
      Months Ended
                                                                      
                                                                      Three
      Months Ended
                                                                      
                                                                      Nine
      Months Ended
                                                                      
                                                                      
                                                                      Nine
      Months EndedSeptember
      28, 2008
                                                                      
                                                                      September
      30, 2007
                                                                      
                                                                      September
      28, 2008
                                                                      
                                                                      
                                                                      September
      30, 2007Net
      sales
                                                                      $
                                                                      255,216
                                                                      
                                                                      $
                                                                      247,242
                                                                      
                                                                      $
                                                                      741,225
                                                                      
                                                                      
                                                                      $
                                                                      722,357Cost
      of sales
                                                                      
                                                                      211,173
                                                                      
                                                                      
                                                                      186,824
                                                                      
                                                                      
                                                                      592,022
                                                                      
                                                                      
                                                                      
                                                                      549,001Gross
      profit
                                                                      
                                                                      44,043
                                                                      
                                                                      
                                                                      60,418
                                                                      
                                                                      
                                                                      149,203
                                                                      
                                                                      
                                                                      
                                                                      173,356Selling,
      general and administrative expenses
                                                                      
                                                                      39,687
                                                                      
                                                                      
                                                                      42,223
                                                                      
                                                                      
                                                                      124,105
                                                                      
                                                                      
                                                                      
                                                                      129,469Goodwill
      impairment
                                                                      
                                                                      17,684
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      17,684
                                                                      
                                                                      
                                                                      
                                                                      -Restructuring
      and other charges
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      248
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      1,442Operating
      (loss) income
                                                                      
                                                                      (13,328
                                                                      )
                                                                      
                                                                      17,947
                                                                      
                                                                      
                                                                      7,414
                                                                      
                                                                      
                                                                      
                                                                      42,445Other
      expense (income)Interest
      expense
                                                                      
                                                                      10,748
                                                                      
                                                                      
                                                                      12,475
                                                                      
                                                                      
                                                                      32,034
                                                                      
                                                                      
                                                                      
                                                                      36,912Debt
      extinguishment expenses
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      88
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      1,141Interest
      income
                                                                      
                                                                      (128
                                                                      )
                                                                      
                                                                      (506
                                                                      )
                                                                      
                                                                      (365
                                                                      )
                                                                      
                                                                      
                                                                      (1,882
                                                                      )Litigation
      settlement, net (Note 13)
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      (22,274
                                                                      )
                                                                      
                                                                      
                                                                      -Foreign
      exchange loss (gain)
                                                                      
                                                                      1,774
                                                                      
                                                                      
                                                                      (627
                                                                      )
                                                                      
                                                                      2,000
                                                                      
                                                                      
                                                                      
                                                                      (1,301
                                                                      )(Loss)
      income from continuing operations before income taxes
                                                                      
                                                                      (25,722
                                                                      )
                                                                      
                                                                      6,517
                                                                      
                                                                      
                                                                      (3,981
                                                                      )
                                                                      
                                                                      
                                                                      7,575Provision
      (benefit) for income taxes
                                                                      
                                                                      85
                                                                      
                                                                      
                                                                      (238
                                                                      )
                                                                      
                                                                      177
                                                                      
                                                                      
                                                                      
                                                                      233(Loss)
      income from continuing operations
                                                                      
                                                                      (25,807
                                                                      )
                                                                      
                                                                      6,755
                                                                      
                                                                      
                                                                      (4,158
                                                                      )
                                                                      
                                                                      
                                                                      7,342Discontinued
      operations(Loss)
      income from discontinued operations, net of
                                                                        income
      taxes
                                                                      
                                                                      (4,224
                                                                      )
                                                                      
                                                                      524
                                                                      
                                                                      
                                                                      (47,149
                                                                      )
                                                                      
                                                                      
                                                                      (1,886
                                                                      )Net
      (loss) income
                                                                      $
                                                                      (30,031
                                                                      )
                                                                      $
                                                                      7,279
                                                                      
                                                                      $
                                                                      (51,307
                                                                      )
                                                                      
                                                                      $
                                                                      5,456The
      accompanying notes are an integral part of these condensed consolidated
      financial statements.





4




PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWSFOR
      THE NINE MONTHS ENDED(unaudited)(dollars
      in thousands)September
      28, 2008
                                                                              
                                                                              
                                                                              September
      30, 2007Cash
      flows from operating activities:Net
      (loss) income
                                                                              
                                                                              $
                                                                              (51,307
                                                                              )
                                                                              
                                                                              $
                                                                              5,456Adjustments
      to reconcile net (loss) income to net cash(used)
      provided by operating activities:Depreciation
                                                                              
                                                                              
                                                                              40,893
                                                                              
                                                                              
                                                                              
                                                                              47,372Amortization
      of intangible assets
                                                                              
                                                                              
                                                                              3,430
                                                                              
                                                                              
                                                                              
                                                                              5,821Impairment of continuing operations goodwill
                                                                              
                                                                              
                                                                              17,684
                                                                              
                                                                              
                                                                              
                                                                              -Impairment
      of discontinued operations goodwill and long-lived assets
                                                                              
                                                                              
                                                                              42,207
                                                                              
                                                                              
                                                                              
                                                                              -Amortization
      of financing fees
                                                                              
                                                                              
                                                                              1,765
                                                                              
                                                                              
                                                                              
                                                                              2,065Employer
      401(k) noncash matching contributions
                                                                              
                                                                              
                                                                              4,400
                                                                              
                                                                              
                                                                              
                                                                              5,158Foreign
      exchange loss (gain)
                                                                              
                                                                              
                                                                              2,399
                                                                              
                                                                              
                                                                              
                                                                              (1,251
                                                                              )Loss
      on disposals of equipment
                                                                              
                                                                              
                                                                              1,298
                                                                              
                                                                              
                                                                              
                                                                              970Accretion
      of capital lease obligation
                                                                              
                                                                              
                                                                              87
                                                                              
                                                                              
                                                                              
                                                                              117Debt
      extinguishment expenses
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              266(Increase)/decrease
      in assets and increase/(decrease) in liabilities:Accounts receivable
                                                                              
                                                                              
                                                                              (396
                                                                              )
                                                                              
                                                                              
                                                                              (5,752
                                                                              )Inventories
                                                                              
                                                                              
                                                                              (18,978
                                                                              )
                                                                              
                                                                              
                                                                              3,095Other current assets
                                                                              
                                                                              
                                                                              (63
                                                                              )
                                                                              
                                                                              
                                                                              (595
                                                                              )Accounts payable and other accrued liabilities
                                                                              
                                                                              
                                                                              (20,363
                                                                              )
                                                                              
                                                                              
                                                                              (7,396
                                                                              )Accrued pension
                                                                              
                                                                              
                                                                              (6,992
                                                                              )
                                                                              
                                                                              
                                                                              (5,698
                                                                              )Fox River liabilities
                                                                              
                                                                              
                                                                              (19,662
                                                                              )
                                                                              
                                                                              
                                                                              -Other, net
                                                                              
                                                                              
                                                                              (1,488
                                                                              )
                                                                              
                                                                              
                                                                              775Net
      cash (used) provided by operating activities
                                                                              
                                                                              
                                                                              (5,086
                                                                              )
                                                                              
                                                                              
                                                                              50,403Cash
      flows from investing activities:Proceeds
      from sale of equipment
                                                                              
                                                                              
                                                                              8
                                                                              
                                                                              
                                                                              
                                                                              4Net
      change in cash upon sale of Bemrose Group Limited
                                                                              
                                                                              
                                                                              (2,892
                                                                              )
                                                                              
                                                                              
                                                                              -Restricted
      cash for mill expansion
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (8,665
                                                                              )Additions
      to property, plant and equipment
                                                                              
                                                                              
                                                                              (74,638
                                                                              )
                                                                              
                                                                              
                                                                              (28,427
                                                                              )Net
      cash used by investing activities
                                                                              
                                                                              
                                                                              (77,522
                                                                              )
                                                                              
                                                                              
                                                                              (37,088
                                                                              )Cash
      flows from financing activities:Payments
      of senior secured notes payable
                                                                              
                                                                              
                                                                              (1,687
                                                                              )
                                                                              
                                                                              
                                                                              (196,095
                                                                              )Proceeds
      from senior secured notes payable
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              225,000Payments
      of senior notes payable
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (5,470
                                                                              )Debt
      acquisition costs
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              (2,229
                                                                              )Payments
      relating to capital lease obligation
                                                                              
                                                                              
                                                                              (548
                                                                              )
                                                                              
                                                                              
                                                                              (548
                                                                              )Proceeds
      from revolving lines of credit
                                                                              
                                                                              
                                                                              272,607
                                                                              
                                                                              
                                                                              
                                                                              72,129Payments
      of revolving lines of credit
                                                                              
                                                                              
                                                                              (214,272
                                                                              )
                                                                              
                                                                              
                                                                              (69,578
                                                                              )Proceeds
      from State of Ohio financing
                                                                              
                                                                              
                                                                              -
                                                                              
                                                                              
                                                                              
                                                                              9,105Payments
      of State of Ohio loan
                                                                              
                                                                              
                                                                              (130
                                                                              )
                                                                              
                                                                              
                                                                              -Proceeds
      from issuance of redeemable common stock
                                                                              
                                                                              
                                                                              3,721
                                                                              
                                                                              
                                                                              
                                                                              4,355Payments
      to redeem common stock
                                                                              
                                                                              
                                                                              (17,491
                                                                              )
                                                                              
                                                                              
                                                                              (28,590
                                                                              )Increase
      (decrease) in cash overdraft
                                                                              
                                                                              
                                                                              3,083
                                                                              
                                                                              
                                                                              
                                                                              (3,990
                                                                              )Net
      cash provided by financing activities
                                                                              
                                                                              
                                                                              45,283
                                                                              
                                                                              
                                                                              
                                                                              4,089Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                                                              
                                                                              
                                                                              321
                                                                              
                                                                              
                                                                              
                                                                              (247
                                                                              )Change
      in cash and cash equivalents
                                                                              
                                                                              
                                                                              (37,004
                                                                              )
                                                                              
                                                                              
                                                                              17,157Cash
      and cash equivalents at beginning of period
                                                                              
                                                                              
                                                                              44,838
                                                                              
                                                                              
                                                                              
                                                                              19,975Cash
      and cash equivalents at end of period
                                                                              
                                                                              $
                                                                              7,834
                                                                              
                                                                              
                                                                              $
                                                                              37,132


The
accompanying notes are an integral part of these condensed consolidated
financial statements.




5


PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESCONSOLIDATED
      STATEMENTS OF REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT, ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) AND
      COMPREHENSIVE (LOSS) INCOMEFOR
      THE NINE MONTHS ENDED(unaudited)(dollars
      in thousands, except share data)Redeemable
      Common Stock
                                              
                                              
                                              
                                              
                                              
                                              AccumulatedOtherShares
                                              
                                              
                                              
                                              
                                              
                                              Accumulated
                                              
                                              
                                              Comprehensive
                                              
                                              
                                              ComprehensiveOutstanding
                                              
                                              
                                              Amount
                                              
                                              
                                              Deficit
                                              
                                              
                                              Income
      (Loss)
                                              
                                              
                                              (Loss)
      IncomeBalance,
      December 29, 2007
                                              
                                              
                                              11,116,751
                                              
                                              
                                              $
                                              182,040
                                              
                                              
                                              $
                                              (80,086
                                              )
                                              
                                              $
                                              3,679Comprehensive
      loss:Net
      loss
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (51,307
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              (51,307
                                              )SFAS
      158 pension liability adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              7,975
                                              
                                              
                                              
                                              7,975Foreign
      currency translation adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (8,112
                                              )
                                              
                                              
                                              (8,112
                                              )Realized
      and unrealized gain on derivatives
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,504
                                              
                                              
                                              
                                              1,504Total
      comprehensive loss
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              (49,940
                                              )Issuance
      of redeemable common stock
                                              
                                              
                                              253,936
                                              
                                              
                                              
                                              6,813
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Redemption
      of redeemable common stock
                                              
                                              
                                              (577,566
                                              )
                                              
                                              
                                              (17,491
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Accretion
      of redeemable common stock
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (2,018
                                              )
                                              
                                              
                                              2,018
                                              
                                              
                                              
                                              -Balance,
      September 28, 2008
                                              
                                              
                                              10,793,121
                                              
                                              
                                              $
                                              169,344
                                              
                                              
                                              $
                                              (129,375
                                              )
                                              
                                              $
                                              5,046Balance,
      December 30, 2006
                                              
                                              
                                              11,550,231
                                              
                                              
                                              $
                                              190,466
                                              
                                              
                                              $
                                              (67,885
                                              )
                                              
                                              $
                                              (5,010
                                              )Comprehensive
      income:Net
      income
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              5,456
                                              
                                              
                                              
                                              -
                                              
                                              
                                              $
                                              5,456Foreign
      currency translation adjustment
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              1,992
                                              
                                              
                                              
                                              1,992Realized
      and unrealized loss on derivatives
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              (835
                                              )
                                              
                                              
                                              (835
                                              )Total
      comprehensive income
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              
                                              $
                                              6,613Issuance
      of redeemable common stock
                                              
                                              
                                              241,924
                                              
                                              
                                              
                                              7,957
                                              
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Redemption
      of redeemable common stock
                                              
                                              
                                              (866,421
                                              )
                                              
                                              
                                              (28,590
                                              )
                                              
                                              
                                              -
                                              
                                              
                                              
                                              -Accretion
      of redeemable common stock
                                              
                                              
                                              -
                                              
                                              
                                              
                                              2,391
                                              
                                              
                                              
                                              (2,391
                                              )
                                              
                                              
                                              -Balance,
      September 30, 2007
                                              
                                              
                                              10,925,734
                                              
                                              
                                              $
                                              172,224
                                              
                                              
                                              $
                                              (64,820
                                              )
                                              
                                              $
                                              (3,853
                                              )





The
accompanying notes are an integral part of these condensed consolidated
financial statements.




6


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




(unaudited)








1.       BASIS
OF PRESENTATION





In the
opinion of management, all adjustments necessary for the fair presentation of
the results of operations for the three and nine months ended September 28, 2008
and September 30, 2007, the cash flows for the nine months ended September 28,
2008 and September 30, 2007 and financial position at September 28, 2008 have
been made. All adjustments made were of a normal recurring nature.





These
condensed financial statements should be read in conjunction with the audited
consolidated financial statements and notes of Paperweight Development Corp.
(“PDC”) and its wholly-owned subsidiaries (collectively the “Company”) for each
of the three years in the period ended December 29, 2007, which are included in
the annual report on Form 10-K for the year ended December 29, 2007. The
consolidated balance sheet data as of December 29, 2007, contained within these
condensed financial statements, was derived from the audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America. Appleton Papers
Inc. (“Appleton”) is a wholly-owned subsidiary of PDC.





The
results of operations for any interim period are not necessarily indicative of
the results to be expected for the full year. Certain prior year financial
statement amounts have been reclassified to conform to their current year
presentation. These reclassifications had no effect on net income.








2.       DISCONTINUED
OPERATIONS/SALE OF BUSINESS





Late in
2007, Appleton committed to a formal plan to sell Bemrose Group Limited
(“Bemrose”), its secure and specialized print services business based in Derby,
England. Bemrose is a leading U.K. provider of mission critical security and
specialized print services. At the time of its acquisition in December 2003,
Bemrose was expected to provide Appleton with a new product entry in the U.K.
security print market, with opportunities to expand into the U.S. market. After
conducting a strategic review in the fourth quarter of 2007, Appleton decided to
focus its attention and expand its leadership positions in its core
businesses. The operating results of Bemrose for the three and nine months
ended September 28, 2008 and September 30, 2007 have been reclassified and are
now reported separately as discontinued operations. In addition, Appleton
reclassified the assets and liabilities of Bemrose, at December 29, 2007, as
discontinued operations.





On August 1,
2008, Appleton completed the sale of Bemrose receiving $3.9 million of
cash and $6.4 million of notes receivable to be settled within 75 and 180 days
after closing. Payment was received on November 4, 2008 for the first
tranche. In anticipation of the sale transaction, the Company recorded
impairment charges aggregating $41.2 million related to goodwill and other
long-lived assets for the three months ended June 29, 2008. These charges
arose in the second quarter due to a decline in the value of the business
arising primarily as the result of deteriorating economic conditions and
tougher markets for Bemrose products, as well as increased funding requirements
of the Bemrose pension plan arising from negotiations with the plan
trustees. During the third quarter of 2008 Appleton
recorded additional loss from discontinued operations of $4.2 million
consisting of a $2.1 million operating loss and $2.1 million of additional
impairment relating to an out-of-period adjustment between quarters in fiscal
2008 that was considered not material to the Company’s consolidated
financial statements for any periods presented.





The
following table presents the net sales and (loss) income before income taxes
with respect to Bemrose (dollars in thousands):





For
      the Three
                        
                        
                        For
      the Three
                        
                        
                        For
      the Nine
                        
                        
                        For
      the NineMonths
      Ended
                        
                        
                        Months
      Ended
                        
                        
                        Months
      Ended
                        
                        
                        Months
      EndedSeptember
      28, 2008
                        
                        
                        September
      30, 2007
                        
                        
                        September
      28, 2008
                        
                        
                        September
      30, 2007Net
      sales
                        
                        $
                        8,522
                        
                        
                        $
                        25,705
                        
                        
                        $
                        55,675
                        
                        
                        $
                        71,126Operating
      (loss) income
                        
                        $
                        (2,151
                        )
                        
                        $
                        159
                        
                        
                        $
                        (4,942
                        )
                        
                        $
                        (4,183
                        )Impairment
      charge
                        
                        
                        (2,073
                        )
                        
                        
                        -
                        
                        
                        
                        (42,207
                        )
                        
                        
                        -(Loss)
      income before income taxes
                        
                        $
                        (4,224
                        )
                        
                        $
                        159
                        
                        
                        $
                        (47,149
                        )
                        
                        $
                        (4,183
                        )





Bemrose
was previously reported as a separate reportable segment.


7











PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)


(unaudited)





3.       GOODWILL
AND OTHER INTANGIBLE ASSETS




The
carrying amount of goodwill as of September 28, 2008 and December 29, 2007 was
$32.5 million and $50.2 million, respectively, and was assigned entirely to
the performance packaging segment.


Goodwill
and intangible assets with indefinite lives are not amortized; however, in
accordance with Statement of Financial Accounting Standards ("SFAS") 142,
"Goodwill and Other Intangible Assets," they must be tested for impairment
annually or more frequently if events or changes in circumstances
indicate an asset might be impaired. The goodwill impairment analysis
consists of a comparison of the fair value of the related reporting unit with
its carrying amount.  If the carrying amount of the reporting unit exceeds
its fair value, a second step test for impairment is performed.




As of
September 28, 2008, an impairment analysis was performed of the performance
packaging business due to the current depressed economic future outlook and
revised future cash flow projections.  Estimated fair value for
purposes of the impairment test was based on either discounted cash flow
projections or an independent third-party valuation.  As a
result, the Company recorded a $17.7 million goodwill impairment
charge for the three months ended September 28, 2008. To the extent current
market conditions persist or performance packaging's future operating results do
not meet expectations, the Company may record additional impairment charges that
could be material to the Company's consolidated financial statements.







The
Company’s other intangible assets consist of the following (dollars in
thousands):





As
      of September 28, 2008
                            
                            
                            As
      of December 29, 2007Gross
      Carrying
                            
                            
                            Accumulated
                            
                            
                            Gross
      Carrying
                            
                            
                            AccumulatedAmount
                            
                            
                            Amortization
                            
                            
                            Amount
                            
                            
                            AmortizationAmortizable
      intangible assets:Trademarks
                            
                            $
                            49,255
                            
                            
                            $
                            18,398
                            
                            
                            $
                            49,255
                            
                            
                            $
                            16,652Patents
                            
                            
                            30,979
                            
                            
                            
                            30,588
                            
                            
                            
                            30,979
                            
                            
                            
                            29,920Customer
      relationships
                            
                            
                            26,024
                            
                            
                            
                            6,237
                            
                            
                            
                            26,024
                            
                            
                            
                            5,261Non-compete
      agreements
                            
                            
                            932
                            
                            
                            
                            922
                            
                            
                            
                            932
                            
                            
                            
                            882Subtotal
                            
                            
                            107,190
                            
                            
                            $
                            56,145
                            
                            
                            
                            107,190
                            
                            
                            $
                            52,715Unamortizable
      intangible assets:Trademarks
                            
                            
                            22,865
                            
                            
                            
                            
                            
                            
                            
                            22,865Total
                            
                            $
                            130,055
                            
                            
                            
                            
                            
                            
                            $
                            130,055





Of the
$130.1 million of acquired intangible assets, $72.1 million was assigned to
registered trademarks. Trademarks of $44.6 million related to carbonless paper
and $4.6 million related to the Company’s 2003 and 2005 acquisitions are being
amortized over their estimated useful lives of 20 years, while the remaining
$22.9 million of trademarks are considered to have indefinite lives and are
not subject to amortization. The remaining acquired intangible assets are being
amortized over their estimated useful lives ranging from 3 to 25 years for
patents and customer relationships and 1 to 5 years for non-compete agreements.
Amortization expense for the three and nine months ended September 28, 2008
approximated $0.9 million and $3.4 million, respectively. Amortization expense
for the three and nine months ended September 30, 2007 approximated $1.6 million
and $5.2 million, respectively.





During
first quarter 2007, Appleton received formal notice from the Internal Revenue
Service that it agreed to settle Appleton’s refund claims filed for tax years
1999 and 2000. The total amount of the refund was $6.3 million, of which, $5.2
million was a refund of income tax paid and $1.1 million was interest. As this
refund related to tax periods prior to the November 9, 2001 acquisition date,
the $5.2 million was recorded as a reduction in purchase price via a decrease to
long-lived intangible assets. Of the $1.1 million of interest, approximately
$1.0 million pertained to the accrual of interest subsequent to the acquisition
date and, as such, was included in first quarter 2007 interest income. The
remaining $0.1 million of interest earned was related to tax periods prior to
the acquisition date and was also recorded as a reduction in purchase price via
a decrease to long-lived intangible assets. This refund was received by Appleton
in early April 2007. During second quarter 2007, Appleton filed claims for the
corresponding state income tax refunds. The total amount of these refund claims
was $0.4 million, of which, $0.3 million was a refund of state income tax paid
and $0.1 million was interest. As this refund also related to tax periods prior
to the acquisition date, $0.3 million of tax and interest was recorded as a
reduction in purchase price via a decrease to long-lived intangible assets. The
remaining $0.1 million of interest pertained to the accrual of interest
subsequent to the acquisition date and was included in second quarter 2007
interest income.















8


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





4.       RESTRUCTURING
AND OTHER CHARGES





In 1999,
the Company committed to exiting its New York distribution center in 2001
because it was no longer needed and recorded $6.0 million of related
restructuring and other charges expected to be incurred until the long-term
lease expired in July 2007. During 2005-2007, $1.9 million of additional
restructuring expense was recorded for lease payments and repairs to be made to
the facility in accordance with the expiration terms of the lease agreement.
During 2007, $0.2 million and $1.4 million was recorded as restructuring expense
for the three and nine months ended September 30, 2007,
respectively.








5.        INVENTORIES





Inventories
consist of the following (dollars in thousands):





September
      28, 2008
                            
                            
                            December
      29, 2007Finished
      goods
                            
                            $
                            72,977
                            
                            
                            $
                            67,596Raw
      materials, work in process and supplies
                            
                            
                            75,129
                            
                            
                            
                            66,575148,106
                            
                            
                            
                            134,171Inventory
      reserve
                            
                            
                            (3,431
                            )
                            
                            
                            (3,736
                            )144,675
                            
                            
                            
                            130,435LIFO
      reserve
                            
                            
                            (6,357
                            )
                            
                            
                            (6,357
                            )$
                            138,318
                            
                            
                            $
                            124,078





Stores
and spare parts inventory balances of $22.7 million and $22.0 million at
September 28, 2008 and December 29, 2007, respectively, are valued at average
cost and included in raw materials, work in process and supplies. Inventories
valued using the FIFO method approximated 16% of the Company’s total inventory
balance at September 28, 2008 and 12% of the Company’s total inventory balance
at December 29, 2007.







9


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





6.        PROPERTY,
PLANT AND EQUIPMENT





Property,
plant and equipment balances consist of the following (dollars in
thousands):





September
      28, 2008
                            
                            
                            December
      29, 2007Land
      and improvements
                            
                            $
                            9,772
                            
                            
                            $
                            9,603Buildings
      and improvements
                            
                            
                            96,288
                            
                            
                            
                            95,421Machinery
      and equipment
                            
                            
                            678,171
                            
                            
                            
                            560,323Software
                            
                            
                            34,057
                            
                            
                            
                            33,779Capital
      lease
                            
                            
                            4,764
                            
                            
                            
                            4,764Construction
      in progress
                            
                            
                            12,308
                            
                            
                            
                            43,827835,360
                            
                            
                            
                            747,717Accumulated
      depreciation/amortization
                            
                            
                            (391,359
                            )
                            
                            
                            (353,975
                            )$
                            444,001
                            
                            
                            $
                            393,742





Depreciation expense
for the three and nine months ended September 28, 2008 and September 30, 2007
consists of the following (dollars in thousands):





For
      the Three
                          
                          
                          For
      the Three
                          
                          
                          For
      the Nine
                          
                          
                          For
      the NineMonths
      Ended
                          
                          
                          Months
      Ended
                          
                          
                          Months
      Ended
                          
                          
                          Months
      EndedDepreciation
      Expense
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007
                          
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007Cost
      of sales
                          
                          $
                          12,062
                          
                          
                          $
                          12,188
                          
                          
                          $
                          35,366
                          
                          
                          $
                          37,251Selling,
      general and administrative expenses
                          
                          
                          1,731
                          
                          
                          
                          1,841
                          
                          
                          
                          5,527
                          
                          
                          
                          5,829$
                          13,793
                          
                          
                          $
                          14,029
                          
                          
                          $
                          40,893
                          
                          
                          $
                          43,080













7.        OTHER
ASSETS





Other
assets consist of the following (dollars in thousands):





September
      28, 2008
                      
                      
                      December
      29, 2007Deferred
      debt issuance costs
                      
                      $
                      12,135
                      
                      
                      $
                      13,900Restricted
      cash for mill expansion
                      
                      
                      2,707
                      
                      
                      
                      7,369Other
                      
                      
                      5,238
                      
                      
                      
                      3,348$
                      20,080
                      
                      
                      $
                      24,617













10


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





8.       OTHER
ACCRUED LIABILITIES





Other
accrued liabilities, as presented in the current liabilities section of the
condensed consolidated balance sheet, consist of the following (dollars in
thousands):





September
      28, 2008
                            
                            
                            December
      29, 2007Payroll
      and bonus
                            
                            $
                            8,320
                            
                            
                            $
                            19,596Trade
      discounts
                            
                            
                            19,065
                            
                            
                            
                            22,044Workers’
      compensation
                            
                            
                            3,419
                            
                            
                            
                            4,306Accrued
      insurance
                            
                            
                            2,677
                            
                            
                            
                            2,087Other
      accrued taxes
                            
                            
                            1,407
                            
                            
                            
                            2,299Postretirement
      benefits other than pension
                            
                            
                            3,283
                            
                            
                            
                            3,283Fox
      River liabilities
                            
                            
                            33,483
                            
                            
                            
                            20,645Other
                            
                            
                            8,820
                            
                            
                            
                            7,088$
                            80,474
                            
                            
                            $
                            81,348








9.       NEW
ACCOUNTING PRONOUNCEMENTS





In
March 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS
161, “Disclosures about Derivative Instruments and Hedging Activities, an
amendment of FASB Statement No. 133.”  This statement changes the
disclosure requirements for derivative instruments and hedging activities. SFAS
161 requires enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. These provisions are
effective for financial statements issued for fiscal years beginning after
November 15, 2008. PDC is currently evaluating the impact, if any, on its
financial statements.





In
September 2006, the FASB issued SFAS 157, “Fair Value
Measurements.”  SFAS 157 provides a single definition of fair value,
together with a framework for measuring it, and requires additional disclosure
about the use of fair value to measure assets and liabilities. SFAS 157 also
emphasizes that fair value is a market-based measurement, not an entity-specific
measurement. Fair value refers to the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants in the market in which the reporting entity transacts. The standard
clarifies the principle that fair value should be based on the assumptions
market participants would use when pricing the asset or liability. In support of
this principle, the standard establishes a fair value hierarchy that prioritizes
the information used to develop assumptions. The fair value hierarchy gives the
highest priority to quoted prices in active markets and the lowest priority to
unobservable data, for example, the reporting entity’s own data. Under the
standard, fair value measurements would be separately disclosed by level within
the fair value hierarchy. SFAS 157 is effective for fiscal years beginning after
November 15, 2007, except as it relates to nonrecurring fair value measurements
of nonfinancial assets and liabilities for which the standard is effective for
fiscal years beginning after November 15, 2008. In October 2008, the FASB issued
FASB Staff Position ("FSP") 157-3 which clarifies the application of SFAS 157 in
a market that is not active. The adoption of SFAS 157 with respect to financial
assets and liabilities, in the first quarter of 2008, did not have a significant
effect on the Company’s financial statements. The Company is currently
evaluating the impact, if any, of SFAS 157 for measuring nonfinancial assets and
liabilities on future results of operations and financial position.







11








PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





10.      EMPLOYEE
BENEFITS





Appleton
has both defined benefit and defined contribution pension plans. This includes a
Supplemental Executive Retirement Plan (“SERP”) to provide retirement benefits
for management and other highly compensated employees whose benefits are reduced
by the tax-qualified plan limitations of the pension plan for eligible
non-bargaining unit employees. The components of the corresponding net periodic
pension cost include the following (dollars in thousands):





For
      the
                          
                          
                          For
      the
                          
                          
                          For
      the
                          
                          
                          For
      theThree
      Months
                          
                          
                          Three
      Months
                          
                          
                          Nine
      Months
                          
                          
                          Nine
      MonthsEnded
                          
                          
                          Ended
                          
                          
                          Ended
                          
                          
                          EndedPension
      Benefits
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007
                          
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007Net
      periodic benefit costService
      cost
                          
                          $
                          1,539
                          
                          
                          $
                          1,911
                          
                          
                          $
                          4,616
                          
                          
                          $
                          5,731Interest
      cost
                          
                          
                          4,488
                          
                          
                          
                          4,232
                          
                          
                          
                          13,464
                          
                          
                          
                          12,695Expected
      return on plan assets
                          
                          
                          (5,187
                          )
                          
                          
                          (4,716
                          )
                          
                          
                          (15,559
                          )
                          
                          
                          (14,148
                          )Amortization
      ofPrior
      service cost
                          
                          
                          48
                          
                          
                          
                          56
                          
                          
                          
                          144
                          
                          
                          
                          169Actuarial
      loss
                          
                          
                          -
                          
                          
                          
                          471
                          
                          
                          
                          -
                          
                          
                          
                          1,414Net
      periodic benefit cost
                          
                          $
                          888
                          
                          
                          $
                          1,954
                          
                          
                          $
                          2,665
                          
                          
                          $
                          5,861





Effective
January 1, 2008, Appleton amended the Appleton Papers Inc. Retirement Plan (the
“Plan”) to provide that no previously eligible non-bargaining unit individuals
hired or re-hired on or after January 1, 2008 shall be eligible to participate
in the Plan. Also, plan benefits accrued under the Plan were frozen as of April
1, 2008, with respect to Plan participants who elected to participate in a
“Mandatory Profit Sharing Contribution” under the Appleton Papers Inc.
Retirement Savings and Employee Stock Ownership Plan (the “KSOP”) or January 1,
2015, in the case of any other affected non-bargaining unit Plan participants.
These changes resulted in curtailment expense of $0.4 million in fiscal 2007 and
a reduction in the pension benefit obligation of $9.8 million.





During
the first nine months of 2008, Appleton contributed approximately $10 million to
its U.S. pension plan for plan year 2007.








12







PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





11.      POSTRETIREMENT
BENEFIT PLANS OTHER THAN PENSIONS





Appleton
has defined postretirement benefit plans that provide medical, dental and life
insurance for certain retirees and eligible dependents. The components of other
postretirement benefit cost include the following (dollars in
thousands):





For
      the
                          
                          
                          For
      the
                          
                          
                          For
      the
                          
                          
                          For
      theThree
      Months
                          
                          
                          Three
      Months
                          
                          
                          Nine
      Months
                          
                          
                          Nine
      MonthsEnded
                          
                          
                          Ended
                          
                          
                          Ended
                          
                          
                          EndedOther
      Postretirement Benefits
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007
                          
                          
                          September
      28, 2008
                          
                          
                          September
      30, 2007Net
      periodic benefit costService
      cost
                          
                          $
                          233
                          
                          
                          $
                          209
                          
                          
                          $
                          698
                          
                          
                          $
                          625Interest
      cost
                          
                          
                          769
                          
                          
                          
                          647
                          
                          
                          
                          2,309
                          
                          
                          
                          1,943Amortization
      ofPrior
      service cost
                          
                          
                          (539
                          )
                          
                          
                          (539
                          )
                          
                          
                          (1,617
                          )
                          
                          
                          (1,617
                          )Actuarial
      loss
                          
                          
                          1
                          
                          
                          
                          -
                          
                          
                          
                          3
                          
                          
                          
                          -Net
      periodic benefit cost
                          
                          $
                          464
                          
                          
                          $
                          317
                          
                          
                          $
                          1,393
                          
                          
                          $
                          951








12.      SHARE-BASED
COMPENSATION





In
December 2001, Appleton adopted the Appleton Papers Inc. Long-Term Incentive
Plan. In July 2002, Appleton adopted the Appleton Papers Canada Ltd. Share
Appreciation Rights Plan. These plans provide officers and key employees the
opportunity to earn phantom stock units, the value of which is related to the
change in the fair market value of PDC’s common stock under the terms of the
employee stock ownership plan (the “ESOP”) prior to the grant date or the
exercise date, as applicable. As of January 1, 2008, 365,000 new phantom stock
units were issued under the Appleton Papers Inc. Long-Term Incentive Plan at a
share price of $33.41.  There was no expense activity for this plan
during the three months ended September 28, 2008. As a result of a
decline in share price, during the first nine months of 2008, the Company
recorded reductions to compensation expense of $2.7 million within
selling, general and administrative expenses. The Company also recorded
reductions to compensation expense of $0.8 million and $1.1 million for the
three and nine months ended September 30, 2007, respectively.




In
addition, as of January 1, 2008, 3,143 new share units were issued to the
non-employee directors pursuant to agreements containing terms and conditions
substantially similar to the Long-Term Incentive Plan. On July 1, 2008, another
3,941 share units were issued to the non-employee directors.  During
the three and nine months ended September 28, 2008, the Company recorded $0.1
million of expense related to this arrangement.  During the first nine
months of 2007, the Company recorded $0.1 million of expense related to this
arrangement.





13.      COMMITMENTS
AND CONTINGENCIES




Lower
Fox River




Introduction.  Various
federal and state government agencies and Native American tribes have asserted
claims against Appleton and others with respect to historic discharges of
polychlorinated biphenyls (“PCBs”) into the Lower Fox River in Wisconsin. The
claims generally fall within three categories of potential liability - remedial
action, natural resource damages (“NRDs”) and interim restoration and
remediation.




13





PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





The
United States Environmental Protection Agency (“EPA”) published a notice in 1997
that it intended to list the Lower Fox River on the National Priorities List of
Contaminated Sites pursuant to the federal Comprehensive Environmental Response,
Compensation, and Liability Act (“CERCLA” or “Superfund”). The EPA identified
seven potentially responsible parties (“PRPs”) for PCB contamination in the
Lower Fox River, including NCR, Appleton, Georgia-Pacific, P.H. Glatfelter
Company, WTMI Co., owned by Chesapeake Corporation, Riverside Paper Corporation
and U.S. Paper Mills Corp., which is now owned by Sonoco Products
Company.




Remedial
Action.  The EPA and the Wisconsin Department of Natural
Resources (“DNR”) issued two Records of Decision (“ROD”) in 2003 estimating
total costs for the Lower Fox River remedial action plan of approximately $400
million over a 7 to 18-year time period. Other estimates obtained by the PRPs
range from a low of $450 million to as much as $1.6 billion. More recent
estimates place the cost between $594 million and $900 million.




In
February 2007, the EPA issued a General Notice letter seeking to have one or
more of the PRPs enter into an agreement to implement all remaining remedial
action for segments two, three, four and five of the river. The EPA asked the
PRPs to submit a written proposal to conduct the remedial action as well as to
address various governmental agencies’ (“Intergovernmental Partners” or “IGP”)
additional claims for unreimbursed costs and NRDs. In June 2007, the EPA and DNR
issued an amended ROD which modified the remedial action plan for the Lower Fox
River.





Following
several months of discussions with PRPs, the EPA issued an administrative order
in November 2007, directing the PRPs to implement the remedial action of the Fox
River. In response, in December 2007, the PRPs submitted a work plan to the EPA
for the clean up of the Fox River. After a review, the EPA requested
modifications be incorporated into the work plan. The PRPs have initiated
preliminary work under the work plan and are negotiating to reach a funding
arrangement to enable the complete work plan to be implemented.





Appleton
and NCR filed a lawsuit in January 2008 in federal court against P.H. Glatfelter
Company, Menasha Corporation and George A. Whiting Paper Company in an
effort to require other PRPs to contribute to the cost of cleaning up PCB
contamination sediment in the Fox River. During the second and third quarters of
2008, the lawsuit was amended to name additional defendants, including certain
municipalities.




Interim
Restoration and Remediation Consent Decree.  Appleton and NCR
collectively paid $41.5 million for interim restoration and remediation efforts
pursuant to a 2001 consent decree with the IGP. This consent decree expired in
2005. In addition, Appleton and NCR collectively paid approximately $750,000
toward interim restoration efforts and the preparation of a report analyzing
progress toward the restoration goals related to the Lower Fox River pursuant to
a 2006 consent decree with the IGP. The 2006 consent decree expired in 2006.
Appleton and NCR paid $2.8 million in 2007 to fund a land acquisition in partial
settlement of NRD claims. Neither consent decree nor the land acquisition
constitutes a final settlement or provides protection against future claims;
however, Appleton and NCR will receive full credit against remediation costs and
NRD claims for all monies expended pursuant to the consent decrees.





14








PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)




Appleton’s
Liability.  The U.S. Fish and Wildlife Service (“FWS”) study
completed in 2000 offered a preliminary conclusion that the discharges from the
Appleton plant and the Combined Locks paper mill were responsible for a
percentage in the range of 36% to 52% of the total PCBs discharged. These
preliminary estimates have not been finalized and are not binding on the PRPs.
Appleton has obtained its own historical and technical analyses which suggest
that the percentage of PCBs discharged from the Appleton and Combined Locks
facilities is less than 20% of the total PCBs discharged.





A portion
of Appleton’s potential liability for the Lower Fox River may be joint and
several. If, in the future, one or more of the other PRPs were to become
insolvent or unable to pay its respective share(s) of the potential liability,
Appleton could be responsible for a portion of its share(s). Based on a review
of publicly available financial information, Appleton believes that the other
PRPs will be required, and have adequate financial resources, to pay their
shares of the remediation and natural resource damage claims for the Lower Fox
River.




Estimates of
Liability.  Appleton cannot precisely estimate its ultimate
share of liability due to uncertainties regarding the scope and cost of
implementing the final remediation plan, the scope of restoration and final
valuation of NRD assessments, the evolving nature of remediation and restoration
technologies and governmental policies, and Appleton’s share of liability
relative to other PRPs. However, the issuance of the RODs, the receipt of bid
proposals and the beginning of remediation activities provide evidence to
reasonably estimate a range of Appleton’s potential liability.




Accordingly,
Appleton has recorded a reserve for its potential liability for the Lower Fox
River. At December 29, 2007 this reserve approximated $194.0 million.
During the first nine months of 2008, $24.1 million of payments were made
against this reserve resulting in a remaining reserve of $169.9 million as of
September 28, 2008, of which $33.5 million is recorded in other accrued
liabilities and $136.4 million is recorded as a long-term environmental
liability.





The
following assumptions were used in evaluating Appleton’s potential Lower Fox
River liability and establishing a remediation reserve:




●total remediation
costs of $600 million, based on the most recent bids received with a range from
$594 million to $900 million;




●the FWS preliminary
estimate that discharges from the Appleton plant and the Combined Locks mill
represent 36% to 52% of the total PCBs discharged by the PRPs, which is
substantially greater
than Appleton’s estimate;




●costs to settle NRD
claims against Appleton and NCR, estimated at $20 million or less, based on the
IGP’s settlement of other NRD claims;




●Appleton’s
responsibility for over half of the claims asserted against Appleton and NCR,
based on our interim settlement agreement with NCR and the arbitration
determination; and




●$38 million in fees
and expenses through 2010.




15








PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





Although
Appleton believes its recorded environmental liability reflects a reasonable
estimate of its liabilities associated with the Lower Fox River, the actual
amount of liabilities associated with the Lower Fox River could prove to be
significantly larger than the recorded environmental liability.




Arjo Wiggins
Appleton Limited (“AWA”) Indemnification.  PDC and Appleton
entered into two indemnification agreements in conjunction with the 2001
acquisition, under which AWA agreed to indemnify PDC and PDC agreed to indemnify
Appleton for costs, expenses and liabilities related to certain governmental and
third-party environmental claims, which are defined in the indemnification
agreements as the Fox River Liabilities.





Under the
indemnification agreements, Appleton is indemnified for the first $75 million of
Fox River Liabilities and for amounts in excess of $100 million. Appleton is
responsible for the $25 million of liabilities between $75 million and $100
million. Pursuant to these agreements, AWA has paid $75.0 million in connection
with Fox River Liabilities incurred through September 28, 2008. At September 28,
2008, $19.7 million of payments were made by the Company against its $25 million
Fox River liability. As of the end of October 2008, Appleton’s responsibility
for the $25 million of Fox River Liabilities has been completely satisfied and,
as such, AWA has resumed responsibility for any remaining Fox River
Liabilities.




In
connection with the indemnification agreements, AWA purchased and fully paid for
indemnity claim insurance from Commerce & Industry Insurance Company, an
affiliate of American International Group, Inc. The insurance policy is designed
to provide up to $250 million of coverage for Fox River Liabilities, subject to
certain limitations defined in the policy. AWA’s obligations to maintain
indemnity claim insurance covering the Fox River Liabilities are defined in and
limited by the terms of the Fox River AWA Environmental Indemnity Agreement, as
amended. The indemnification agreements negotiated with AWA and Commerce
& Industry Insurance Company are designed to ensure that Appleton will not
be required to fund any of the indemnified costs and expenses in relation to the
Fox River Liabilities and to assure the ESOP Trustee and Appleton’s lenders and
investors that Appleton will not have to rely solely on AWA itself to make these
payments. This arrangement is working as designed and is expected to continue to
protect Appleton with respect to the indemnified costs and expenses, based on
Appleton’s review of the insurance policy and the financial condition of AWA and
Commerce & Industry Insurance Company.  AWA, PDC, the special
purpose subsidiaries and the policyholder entered into a Relationship Agreement,
which, among other things and subject to certain limited exceptions, prohibits
AWA and PDC from taking any actions that would result in any change to this
design structure.




In March
2008, Appleton received favorable jury verdicts in a federal court declaratory
judgment relating to insurance coverage of its environmental claims involving
the Fox River. The jury determined:  (1) there is insurance coverage
for Appleton’s liability relating to the Fox River and (2) Appleton did not
provide late notice to the insurers and did not make misrepresentations on its
applications for insurance. Appleton anticipates the insurers may file an
appeal. Under the terms of the indemnification agreement, recoveries from
insurance are reimbursed to AWA to the extent of its indemnification
obligation.





At
September 28, 2008, the total indemnification receivable from AWA was $164.6
million, of which $28.2 million is recorded in other current assets and $136.4
million is recorded as an environmental indemnification receivable.





West
Carrollton Mill





The West
Carrollton mill operates pursuant to various state and federal permits for
discharges and emissions to air and water. As a result of the de-inking of
carbonless paper containing PCBs through the early 1970s, there have been
releases of PCBs and volatile organic compounds into the soil in the area of
thewastewater
impoundments at the West Carrollton facility and low levels of PCBs have been
detected in groundwater immediately under this area. In addition, PCB
contamination is present in sediment in the adjacent Great Miami River, but it
is believed that this contamination is from a source other than the West
Carrollton mill.





Based on
investigation and delineation of PCB contamination in soil and groundwater in
the area of the wastewater impoundments, Appleton believes that it could be
necessary to undertake remedial action in the future, although Appleton is
currently under no obligation to do so. Appleton has not had any discussions or
communications with any federal, state or local agencies or authorities
regarding remedial action to address PCB contamination at the West Carrollton
mill. The cost for remedial action, which could include installation of a cap,
long-term pumping, treating and/or monitoring of groundwater and removal of
sediment in the Great Miami River, was estimated in 2001 to range up to
approximately $10.5 million, with approximately $3 million in short-term costs
and the remainder to be incurred over a period of 30 years. However, costs could
exceed this amount if additional contamination is discovered, if additional
remedial action is necessary or if the remedial action costs are more than
expected.







16








PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)


Because
of the uncertainty surrounding the ultimate course of action for the West
Carrollton mill property, the Great Miami River remediation and Appleton’s share
of these remediation costs, if any, and since Appleton is currently under no
obligation to undertake remedial action in the future, no provision has been
recorded in the accompanying financial statements for estimated remediation
costs. In conjunction with the acquisition of PDC by the ESOP in 2001, and as
limited by the terms of the purchase agreement, AWA agreed to indemnify PDC for
50% of all environmental liabilities at the West Carrollton mill up to $5.0
million and 100% of all such environmental costs exceeding $5.0 million. In
addition, the former owners and operators of the West Carrollton mill may be
liable for all or part of the cost of remediation of historic PCB
contamination.


Litigation
Settlement





In 1996,
after being named as a defendant in a lawsuit, Appleton notified its insurance
carriers of a coverage claim under policies in effect at the time. The lawsuit
ultimately was resolved and Appleton recovered expenses from three of four
insurers. The fourth insurer disputed coverage for its share of previously
incurred costs. As a result, Appleton filed a lawsuit against the
insurer. In 2007, a Wisconsin state appellate court issued an
order estopping the insurer from denying its obligation to cover
Appleton. Pursuant to a judgment in favor of Appleton which was entered in
March 2008, and subsequent settlement negotiations with the insurer, Appleton
recorded $22.3 million of income, net of fees, in the three-month period ended
March 30, 2008. These proceeds were received in April 2008.








Anti-dumping




Prices
for lightweight thermal papers (“LWTP”) have been adversely affected by
increased imports of low-priced products from China, Germany and Korea. In
September 2007, Appleton filed anti-dumping petitions against imports of certain
LWTP from China, Germany and Korea and a countervailing duty petition against
such imports from China. The U.S. International Trade Commission (“ITC”) ruled
in November 2007, that there is a reasonable indication that the U.S. industry
producing LWTP is being materially injured or threatened with material injury
due to unfairly traded imports from China and Germany.  The ITC
further ruled that imports from Korea are negligible because they represent less
than three percent of imports into the United States. As a result of the
preliminary ITC ruling, the U.S. Department of Commerce (“Department”)
investigated Appleton’s allegations that imports from China and Germany are
being dumped in the United States market and that the Chinese government
is subsidizing exports of lightweight thermal paper to the United
States.  The Department issued its preliminary
determination regarding the Chinese subsidy on March 10, 2008, finding
margins that range from 0.57% to 59.5%. Interim duties were imposed to offset
the levels of subsidization found in the amount of these margins. On May 7,
2008, the Department imposed preliminary anti-dumping duties in the amount
of 133% against China and 6.5% against Germany.





On
September 26, 2008, the Department issued its final determination,
affirming that certain Chinese producers and exporters of LWTP sold the product
in the U. S. at prices below fair value, and imposing final duties of 19.77% to
115.29% on those imports. The Department also affirmed that German producers and
exporters of LWTP sold the product in the U.S. at prices below fair value and
imposed final duties on those imports of 6.5%.  In addition, the
Department announced its final determination concerning the imposition of
countervailing duties on imports of LWTP from China to offset the subsidies that
Chinese producers receive from the Chinese government. For all but one Chinese
producer, the Department imposed duties of between 13.17% and 137.25%. Between
the countervailing and anti-dumping duties, the Department imposed total duties
of 19.77% to 252.54% on imports of LWTP from China.  On October 30,
2008, the ITC made a final determination that there is a reasonable indication
that the U.S. industry producing certain LWTP is threatened with material injury
due to unfairly traded imports from China and Germany.  As a result,
the final duties will go into effect on or about November 21, 2008. These duties
will be paid directly to the U.S. federal government and will not have a direct
impact on Appleton's net income.  Germany and/or China may file an
appeal to the U.S. Court of International Trade.





Other





From time
to time, Appleton may be subject to various demands, claims, suits or other
legal proceedings arising in the ordinary course of its business. A
comprehensive insurance program is maintained to provide a measure of financial
protection against such matters, though not all such exposures are, or can be,
addressed by insurance. Estimated costs are recorded for such demands, claims,
suits or proceedings of this nature when reasonably determinable. The Company
has successfully defended such claims, settling some for amounts which are not
material to the business and obtaining dismissals in others. While the Company
vigorously defends itself and expects to prevail in any similar cases that may
be brought against Appleton in the future, there can be no assurance that the
Company will be successful in its defense.





Except as
described above, assuming the Company’s expectations regarding defending such
demands, claims, suits or other legal or regulatory proceedings prove accurate,
Appleton does not believe that any pending or threatened demands, claims, suits
or other legal proceedings will have, individually or in the aggregate, a
materially adverse effect on its financial position.









17








PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)





14.         EMPLOYEE
STOCK OWNERSHIP PLAN




Appleton’s matching contributions charged to expense was $1.3 million and $1.6
million for the three months ended September 28, 2008 and September 30, 2007,
respectively. Appleton’s matching contributions charged to expense was $4.4
million and $5.2 million for the nine months ended September 28, 2008 and
September 30, 2007, respectively. As a result of hardship withdrawals, required
diversifications and employee terminations, 577,566 shares of PDC redeemable
common stock were repurchased during the first nine months of 2008 at an
aggregate price of approximately $17.5 million. During the same period, the ESOP
trustee purchased 137,861 shares of PDC redeemable common stock for an aggregate
price of $3.7 million from pre-tax deferrals, rollovers and loan payments made
by employees, while Appleton’s matching contribution for this same period
resulted in an additional 116,075 shares of redeemable common stock being
issued.




Redeemable common stock is being accreted up to the earliest redemption date
based upon the estimated fair market value of the redeemable common stock as of
September 28, 2008. Due to a reduction in the June 29, 2008 share
price, redeemable common stock accretion was reduced by $2.0 million for
the nine months ended September 28, 2008. Based upon the estimated fair value of
the redeemable common stock, an ultimate redemption liability of approximately
$288 million was determined. The redeemable common stock recorded book value as
of September 28, 2008 was $169 million, which leaves a remaining unrecognized
liability to be accreted of approximately $119 million.








15.         LONG-TERM
OBLIGATIONS





Long-term
obligations, excluding the capital lease obligation, consist of the following
(dollars in thousands):





September
      28, 2008
                                  
                                  
                                  December
      29, 2007Senior
      secured variable rate notes payable at LIBOR plus 1.75%,$563
      due quarterly with $209,812 due June 5, 2014
                                  
                                  $
                                  222,750
                                  
                                  
                                  $
                                  224,438Revolving
      line of credit at LIBOR plus 1.75%
                                  
                                  
                                  58,335
                                  
                                  
                                  
                                  -281,085
                                  
                                  
                                  
                                  224,438Less
      obligations due within one year
                                  
                                  
                                  (2,813
                                  )
                                  
                                  
                                  (2,813
                                  )278,272
                                  
                                  
                                  
                                  221,625Unsecured
      variable rate industrial development bonds, 2.5% averageinterest
      rate at September 28, 2008, $2,650 due in 2013 and $6,000due
      in 2027
                                  
                                  
                                  8,650
                                  
                                  
                                  
                                  8,650State
      of Ohio assistance loan at 6%, approximately $100 duemonthly
      and final payment due May 15, 2017
                                  
                                  
                                  8,975
                                  
                                  
                                  
                                  9,105Less
      obligations due within one year
                                  
                                  
                                  (800
                                  )
                                  
                                  
                                  (325
                                  )8,175
                                  
                                  
                                  
                                  8,780Senior
      notes payable at 8.125%, due June 15, 2011
                                  
                                  
                                  150,050
                                  
                                  
                                  
                                  150,050Senior
      subordinated notes payable at 9.75%, due June 15, 2014
                                  
                                  
                                  150,000
                                  
                                  
                                  
                                  150,000





In each
of the three quarters of 2008, Appleton made a $0.6 million mandatory debt
repayment, plus interest, on its senior credit facility. Also during third
quarter, Appleton borrowed $93.6 million and repaid $76.5 million against its
revolving line of credit, leaving an outstanding balance of $58.3
million. Approximately $14.1 million of the revolving credit facility was
used to support outstanding letters of credit. At September 28, 2008, there
was approximately $77.6 million of unused borrowing capacity under the $150
million revolving credit facility for working capital and other corporate
purposes. The
availability of the unused borrowing capacity is subject to the Company's
ability to remain in compliance with the financial ratios and limitations of its
respective debt agreements.A commitment fee of 0.35% per annum is
assessed on the unused borrowing capacity.





18


PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)


In
February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million of
its variable rate notes with a five-year interest rate swap contract. In March
2008, Appleton fixed the interest rate, at 5.40%, on an additional $75.0 million
of its variable rate notes with a five-year interest rate swap contract. The
interest rate swaps are being accounted for as cash flow hedges. As of September
28, 2008, these swap contracts, or derivatives, were recorded as $1.7 million of
assets based on fair value measurements using Level 2 inputs as described in
SFAS 157, "Fair Value Measurements."





In July
2007, Appleton entered into a new $12.1 million Loan and Security Agreement with
the Director of Development of the State of Ohio, consisting of a $9.1 million
State Assistance Loan and a $3.0 million State Loan (together “the Ohio Loans”).
Proceeds of the Ohio Loans will be used to fund a portion of the costs of
acquiring and installing paper coating and production equipment at the Company’s
paper mill in West Carrollton, Ohio. As of September 28, 2008, Appleton had only
received the proceeds of the $9.1 million State Assistance Loan. To date, the
Company has spent $6.4 million of these proceeds with the remaining $2.7 million
recorded as restricted cash within long-term other assets as its use is
restricted to funding capital additions. The Ohio State Assistance Loan provides
for monthly principal payments and interest at 6% and, upon receipt of the
funds, the State Loan provides for monthly principal payments and interest of 1%
for the first two years and 3% thereafter.





For the
three and nine months ended September 30, 2007, the Company recorded debt
extinguishment expenses of $0.1 million and $1.1 million, respectively, in
conjunction with the June 2007 refinancing of its senior credit
facility.









September
      28, 2008
                              
                              
                              December
      29, 2007Carrying
                              
                              
                              Fair
                              
                              
                              Carrying
                              
                              
                              FairAmount
                              
                              
                              Value
                              
                              
                              Amount
                              
                              
                              ValueSenior
      subordinated notes payable
                              
                              $
                              150,000
                              
                              
                              $
                              114,938
                              
                              
                              $
                              150,000
                              
                              
                              $
                              148,500Senior
      notes payable
                              
                              
                              150,050
                              
                              
                              
                              131,481
                              
                              
                              
                              150,050
                              
                              
                              
                              147,237Senior
      credit facility
                              
                              
                              222,750
                              
                              
                              
                              192,679
                              
                              
                              
                              224,438
                              
                              
                              
                              212,655State
      of Ohio assistance loan
                              
                              
                              8,975
                              
                              
                              
                              8,679
                              
                              
                              
                              9,105
                              
                              
                              
                              9,378Industrial
      development bonds
                              
                              
                              8,650
                              
                              
                              
                              8,650
                              
                              
                              
                              8,650
                              
                              
                              
                              8,650$
                              540,425
                              
                              
                              $
                              456,427
                              
                              
                              $
                              542,243
                              
                              
                              $
                              526,420Lease
      obligation
                              
                              $
                              1,470
                              
                              
                              $
                              1,470
                              
                              
                              $
                              1,931
                              
                              
                              $
                              1,931









The senior
credit facility, senior notes and 9.75% senior subordinated notes contain
affirmative and negative covenants.  In general, the covenants
contained in the senior credit facility are more restrictive than those of the
senior notes and 9.75% senior subordinated notes.  Among other
restrictions, the covenants contained in the senior credit facility require
Appleton to meet specified financial tests, including leverage and interest
coverage ratios, which become more restrictive over the term of the
debt.  Appleton was in compliance with such covenants as of September
28, 2008.  However, given current economic conditions, both nationally
and globally, Appleton may not be able to meet its leverage coverage ratio in
future periods. The Company is implementing plans to remain in compliance with
all covenants using current volume and operating forecasts, however, if Appleton
is ultimately not in compliance with the leverage coverage ratio, it will need
to seek a waiver of the covenant defaults which may require paying a fee to its
senior credit lenders or amend the terms of its senior credit facility which
could increase Appleton’s cost of credit and adversely impact its
operations.





A breach
of any of these covenants or our inability to meet the required financial tests
could result in a default in respect of the related indebtedness. If a default
occurs, the relevant lenders could elect to declare the indebtedness, together
with accrued interest and other fees, to be immediately due and payable and
proceed against any collateral securing that indebtedness.




These
limitations, together with our highly leveraged position, could limit our
ability to finance our operations with debt or equity in the future. In
addition, these restrictions and our leveraged position may restrict our ability
to respond to competitive market conditions, make capital expenditures beyond
those permitted in the agreements relating to the indebtedness or take advantage
of other business opportunities, including making acquisitions. This loss of
operating flexibility may have a material adverse affect on our ability to
achieve our financial objectives or our ability to sustain our current or past
levels of revenue, earnings and cash flow.








19




PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)


16.      SEGMENT
INFORMATION
 
 The
Company’s four reportable segments are as follows:  coated solutions,
thermal papers, security papers and performance packaging. Management evaluates
the performance of the segments based primarily on operating income. Items
excluded from the determination of segment operating income are unallocated
corporate charges, business development costs not associated with specific
segments, interest income, interest expense, debt extinguishment
expenses, foreign currency gains and losses and the nonrecurring litigation
settlement.


The Company
does not allocate total assets internally in assessing operating performance.
Net sales, operating income and depreciation and amortization, as determined by
the Company for its reportable segments, are as follows (dollars in
thousands):






For
      the Three
                                                      
                                                      
                                                      For
      the Three
                                                      
                                                      
                                                      For
      the Nine
                                                      
                                                      
                                                      For
      the NineMonths
      Ended
                                                      
                                                      
                                                      Months
      Ended
                                                      
                                                      
                                                      Months
      Ended
                                                      
                                                      
                                                      Months
      EndedSeptember
      28, 2008
                                                      
                                                      
                                                      September
      30, 2007
                                                      
                                                      
                                                      September
      28, 2008
                                                      
                                                      
                                                      September
      30, 2007Net
      salesTechnical
      PapersCoated
      solutions
                                                      
                                                      $
                                                      138,485
                                                      
                                                      
                                                      $
                                                      145,686
                                                      
                                                      
                                                      $
                                                      418,761
                                                      
                                                      
                                                      $
                                                      430,743Thermal
      papers
                                                      
                                                      
                                                      78,793
                                                      
                                                      
                                                      
                                                      69,156
                                                      
                                                      
                                                      
                                                      212,577
                                                      
                                                      
                                                      
                                                      194,251Security
      papers
                                                      
                                                      
                                                      8,294
                                                      
                                                      
                                                      
                                                      7,658
                                                      
                                                      
                                                      
                                                      25,962
                                                      
                                                      
                                                      
                                                      23,485225,572
                                                      
                                                      
                                                      
                                                      222,500
                                                      
                                                      
                                                      
                                                      657,300
                                                      
                                                      
                                                      
                                                      648,479Performance
      packaging
                                                      
                                                      
                                                      29,644
                                                      
                                                      
                                                      
                                                      24,742
                                                      
                                                      
                                                      
                                                      83,925
                                                      
                                                      
                                                      
                                                      73,878Total
                                                      
                                                      $
                                                      255,216
                                                      
                                                      
                                                      $
                                                      247,242
                                                      
                                                      
                                                      $
                                                      741,225
                                                      
                                                      
                                                      $
                                                      722,357Operating
      income (loss)Technical
      PapersCoated
      solutions
                                                      
                                                      $
                                                      6,103
                                                      
                                                      
                                                      $
                                                      17,242
                                                      
                                                      
                                                      $
                                                      25,019
                                                      
                                                      
                                                      $
                                                      43,134Thermal
      papers
                                                      
                                                      
                                                      (2,862
                                                      )
                                                      
                                                      
                                                      851
                                                      
                                                      
                                                      
                                                      870
                                                      
                                                      
                                                      
                                                      5,532Security
      papers
                                                      
                                                      
                                                      1,194
                                                      
                                                      
                                                      
                                                      1,054
                                                      
                                                      
                                                      
                                                      2,966
                                                      
                                                      
                                                      
                                                      2,4954,435
                                                      
                                                      
                                                      
                                                      19,147
                                                      
                                                      
                                                      
                                                      28,855
                                                      
                                                      
                                                      
                                                      51,161Performance
      packaging
                                                      
                                                      
                                                      (15,157
                                                      )
                                                      
                                                      
                                                      1,976
                                                      
                                                      
                                                      
                                                      (11,936
                                                      )
                                                      
                                                      
                                                      4,097Unallocated
      corporate charges and business development costs
                                                      
                                                      
                                                      (2,606
                                                      )
                                                      
                                                      
                                                      (3,176
                                                      )
                                                      
                                                      
                                                      (9,505
                                                      )
                                                      
                                                      
                                                      (12,813
                                                      )Total
                                                      
                                                      $
                                                      (13,328
                                                      )
                                                      
                                                      $
                                                      17,947
                                                      
                                                      
                                                      $
                                                      7,414
                                                      
                                                      
                                                      $
                                                      42,445Depreciation
      and amortizationTechnical
      PapersCoated
      solutions
                                                      
                                                      $
                                                      8,558
                                                      
                                                      
                                                      $
                                                      9,967
                                                      
                                                      
                                                      $
                                                      26,900
                                                      
                                                      
                                                      $
                                                      30,530Thermal
      papers
                                                      
                                                      
                                                      3,944
                                                      
                                                      
                                                      
                                                      3,505
                                                      
                                                      
                                                      
                                                      10,239
                                                      
                                                      
                                                      
                                                      10,833Security
      papers
                                                      
                                                      
                                                      761
                                                      
                                                      
                                                      
                                                      700
                                                      
                                                      
                                                      
                                                      2,283
                                                      
                                                      
                                                      
                                                      2,10213,263
                                                      
                                                      
                                                      
                                                      14,172
                                                      
                                                      
                                                      
                                                      39,422
                                                      
                                                      
                                                      
                                                      43,465Performance
      packaging
                                                      
                                                      
                                                      19,163
                                                      
                                                      
                                                      
                                                      1,426
                                                      
                                                      
                                                      
                                                      22,537
                                                      
                                                      
                                                      
                                                      4,788Unallocated
      corporate charges
                                                      
                                                      
                                                      15
                                                      
                                                      
                                                      
                                                      13
                                                      
                                                      
                                                      
                                                      48
                                                      
                                                      
                                                      
                                                      40Total
                                                      
                                                      $
                                                      32,441
                                                      
                                                      
                                                      $
                                                      15,611
                                                      
                                                      
                                                      $
                                                      62,007
                                                      
                                                      
                                                      $
                                                      48,293


As
discussed in Note 3 of the Notes to condensed Consolidated Financial Statements,
the Company recorded a $17.7 million goodwill impairment charge for the
three and nine months ended September 28, 2008. This charge is included above in
the depreciation and amortization presented for performance packaging. To the
extent current market conditions persist or performance packaging's future
operating results do not meet expectations, the Company may record additional
impairment charges that could be material to the Company's consolidated
financial statements.




During
the third quarter of 2007, the Company recorded restructuring costs of $0.2
million in unallocated corporate charges. During the second quarter of 2007, the
Company recorded restructuring costs of $0.2 million in unallocated corporate
charges. During the first quarter of 2007, the Company recorded restructuring
costs within its reportable segments as follows:  $0.1 million in
coated solutions, $0.3 million in thermal papers, $0.2 million in performance
packaging and $0.4 million in unallocated corporate charges. In addition,
Appleton recorded $1.9 million in unallocated corporate charges during the 2007
year-to-date period for consulting fee expense associated with the income tax
refund claims described in Note 3.








20
  PAPERWEIGHT
DEVELOPMENT CORP. AND SUBSIDIARIES





NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Continued)




(unaudited)


17.     GUARANTOR
FINANCIAL INFORMATION
 
 Appleton
(the “Issuer”) has issued senior notes and senior subordinated notes which have
been guaranteed by PDC (the “Parent Guarantor”), C&H Packaging Company,
Inc., American Plastics Company, Inc., Rose Holdings Limited and New England
Extrusion Inc., each of which is a wholly-owned subsidiary of Appleton (the
“Subsidiary Guarantors”). These guarantees are full, unconditional and joint and
several. Bemrose
Group Limited, The Henry Booth Group Limited, BemroseBooth Limited, HBGI
Holdings Limited and Bemrose Security & Promotional Printing Limited were
Subsidiary Guarantors that were classified as discontinued operations as of
December 29, 2007 and disposed of in the third quarter as discussed in Note 2 to
the Consolidated Financial Statements.
  Presented
below is condensed consolidating financial information for the Parent Guarantor,
the Issuer, the Subsidiary Guarantors and a wholly-owned non-guarantor
subsidiary (the “Non-Guarantor Subsidiary”) as of September 28, 2008 and
December 29, 2007 and for the three and nine months ended September 28,
2008 and September 30, 2007. This financial information should be read in
conjunction with the condensed consolidated financial statements and other notes
related thereto.
 Separate
financial statements for the Parent and Subsidiary Guarantors are not presented
based on management’s determination that they would not provide additional
information that is material to readers of these financial
statements.





The
senior credit facility, the senior notes and the senior subordinated notes place
restrictions on the subsidiaries of the Issuer that would limit dividend
distributions by these subsidiaries.





21




PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING BALANCE SHEETSEPTEMBER
      28, 2008(unaudited)(dollars
      in thousands)Parent
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      
                                                                                      Subsidiary
                                                                                      
                                                                                      
                                                                                      Non-GuarantorGuarantor
                                                                                      
                                                                                      
                                                                                      Issuer
                                                                                      
                                                                                      
                                                                                      Guarantors
                                                                                      
                                                                                      
                                                                                      Subsidiary
                                                                                      
                                                                                      
                                                                                      Eliminations
                                                                                      
                                                                                      
                                                                                      ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      6,324
                                                                                      
                                                                                      
                                                                                      $
                                                                                      299
                                                                                      
                                                                                      
                                                                                      $
                                                                                      1,211
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      7,834Accounts
      receivable, net
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      102,901
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,807
                                                                                      
                                                                                      
                                                                                      
                                                                                      6,363
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      124,071Inventories
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      115,844
                                                                                      
                                                                                      
                                                                                      
                                                                                      20,594
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,880
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      138,318Other
      current assets
                                                                                      
                                                                                      
                                                                                      28,145
                                                                                      
                                                                                      
                                                                                      
                                                                                      7,491
                                                                                      
                                                                                      
                                                                                      
                                                                                      6,463
                                                                                      
                                                                                      
                                                                                      
                                                                                      273
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      42,372Total
      current assets
                                                                                      
                                                                                      
                                                                                      28,145
                                                                                      
                                                                                      
                                                                                      
                                                                                      232,560
                                                                                      
                                                                                      
                                                                                      
                                                                                      42,163
                                                                                      
                                                                                      
                                                                                      
                                                                                      9,727
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      312,595Property,
      plant and equipment, net
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      416,009
                                                                                      
                                                                                      
                                                                                      
                                                                                      27,970
                                                                                      
                                                                                      
                                                                                      
                                                                                      22
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      444,001Investment
      in subsidiaries
                                                                                      
                                                                                      
                                                                                      290,001
                                                                                      
                                                                                      
                                                                                      
                                                                                      149,571
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (439,572
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -Other
      assets
                                                                                      
                                                                                      
                                                                                      136,434
                                                                                      
                                                                                      
                                                                                      
                                                                                      73,711
                                                                                      
                                                                                      
                                                                                      
                                                                                      52,781
                                                                                      
                                                                                      
                                                                                      
                                                                                      48
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      262,974Total
      assets
                                                                                      
                                                                                      $
                                                                                      454,580
                                                                                      
                                                                                      
                                                                                      $
                                                                                      871,851
                                                                                      
                                                                                      
                                                                                      $
                                                                                      122,914
                                                                                      
                                                                                      
                                                                                      $
                                                                                      9,797
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (439,572
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      1,019,570LIABILITIES, REDEEMABLE COMMON
      STOCK, ACCUMULATED DEFICIT AND ACCUMULATED OTHER
      COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,613
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      -
                                                                                      
                                                                                      
                                                                                      $
                                                                                      3,613Accounts
      payable
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      84,821
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,271
                                                                                      
                                                                                      
                                                                                      
                                                                                      104
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      87,196Due
      to (from) parent and
                                                                                        affiliated
      companies
                                                                                      
                                                                                      
                                                                                      409,565
                                                                                      
                                                                                      
                                                                                      
                                                                                      (386,447
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (17,676
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (5,442
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Other
      accrued liabilities
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      87,670
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,952
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,971
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      91,593Total
      current liabilities
                                                                                      
                                                                                      
                                                                                      409,565
                                                                                      
                                                                                      
                                                                                      
                                                                                      (210,343
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (13,453
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (3,367
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      182,402Long-term
      debt
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      595,147
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      595,147Other
      long-term liabilities
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      197,046
                                                                                      
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      (40
                                                                                      )
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      197,006Redeemable
      common stock,accumulated
      deficit and
                                                                                        accumulated
      othercomprehensive
      income
                                                                                      
                                                                                      
                                                                                      45,015
                                                                                      
                                                                                      
                                                                                      
                                                                                      290,001
                                                                                      
                                                                                      
                                                                                      
                                                                                      136,367
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,204
                                                                                      
                                                                                      
                                                                                      
                                                                                      (439,572
                                                                                      )
                                                                                      
                                                                                      
                                                                                      45,015Total
      liabilities, redeemable
                                                                                        common
      stock, accumulateddeficit
      and accumulated othercomprehensive
      income
                                                                                      
                                                                                      $
                                                                                      454,580
                                                                                      
                                                                                      
                                                                                      $
                                                                                      871,851
                                                                                      
                                                                                      
                                                                                      $
                                                                                      122,914
                                                                                      
                                                                                      
                                                                                      $
                                                                                      9,797
                                                                                      
                                                                                      
                                                                                      $
                                                                                      (439,572
                                                                                      )
                                                                                      
                                                                                      $
                                                                                      1,019,570





22





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)(unaudited)CONDENSED
      CONSOLIDATING BALANCE SHEETDECEMBER
      29, 2007(dollars
      in thousands)Parent
                                                              
                                                              
                                                              
                                                              
                                                              
                                                              Subsidiary
                                                              
                                                              
                                                              Non-GuarantorGuarantor
                                                              
                                                              
                                                              Issuer
                                                              
                                                              
                                                              Guarantors
                                                              
                                                              
                                                              Subsidiary
                                                              
                                                              
                                                              Eliminations
                                                              
                                                              
                                                              ConsolidatedASSETSCurrent
      assetsCash
      and cash equivalents
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              33,567
                                                              
                                                              
                                                              $
                                                              9,247
                                                              
                                                              
                                                              $
                                                              2,024
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              44,838Accounts
      receivable, net
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              97,424
                                                              
                                                              
                                                              
                                                              11,191
                                                              
                                                              
                                                              
                                                              8,147
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              116,762Inventories
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              108,721
                                                              
                                                              
                                                              
                                                              13,092
                                                              
                                                              
                                                              
                                                              2,265
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              124,078Other
      current assets
                                                              
                                                              
                                                              3,800
                                                              
                                                              
                                                              
                                                              7,565
                                                              
                                                              
                                                              
                                                              447
                                                              
                                                              
                                                              
                                                              398
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              12,210Assets
      of discontinued operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              36,731
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              36,731Total
      current assets
                                                              
                                                              
                                                              3,800
                                                              
                                                              
                                                              
                                                              247,277
                                                              
                                                              
                                                              
                                                              70,708
                                                              
                                                              
                                                              
                                                              12,834
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              334,619Property,
      plant and equipment, net
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              363,541
                                                              
                                                              
                                                              
                                                              30,170
                                                              
                                                              
                                                              
                                                              31
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              393,742Investment
      in subsidiaries
                                                              
                                                              
                                                              331,128
                                                              
                                                              
                                                              
                                                              155,533
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              (486,661
                                                              )
                                                              
                                                              
                                                              -Other
      assets
                                                              
                                                              
                                                              165,274
                                                              
                                                              
                                                              
                                                              80,439
                                                              
                                                              
                                                              
                                                              71,637
                                                              
                                                              
                                                              
                                                              51
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              317,401Assets
      of discontinued operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              57,646
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              57,646Total
      assets
                                                              
                                                              $
                                                              500,202
                                                              
                                                              
                                                              $
                                                              846,790
                                                              
                                                              
                                                              $
                                                              230,161
                                                              
                                                              
                                                              $
                                                              12,916
                                                              
                                                              
                                                              $
                                                              (486,661
                                                              )
                                                              
                                                              $
                                                              1,103,408LIABILITIES,
      REDEEMABLE COMMON STOCK,ACCUMULATED
      DEFICIT AND ACCUMULATEDOTHER
      COMPREHENSIVE INCOMECurrent
      liabilitiesCurrent
      portion of long-term debt
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              3,138
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              -
                                                              
                                                              
                                                              $
                                                              3,138Accounts
      payable
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              78,001
                                                              
                                                              
                                                              
                                                              4,387
                                                              
                                                              
                                                              
                                                              233
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              82,621Due
      to (from) parent and
                                                                affiliated
      companies
                                                              
                                                              
                                                              394,569
                                                              
                                                              
                                                              
                                                              (431,078
                                                              )
                                                              
                                                              
                                                              39,718
                                                              
                                                              
                                                              
                                                              (3,209
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -Other
      accrued liabilities
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              82,117
                                                              
                                                              
                                                              
                                                              1,942
                                                              
                                                              
                                                              
                                                              1,977
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              86,036Liabilities
      of discontinued
                                                                operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              21,685
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              21,685Total
      current liabilities
                                                              
                                                              
                                                              394,569
                                                              
                                                              
                                                              
                                                              (267,822
                                                              )
                                                              
                                                              
                                                              67,732
                                                              
                                                              
                                                              
                                                              (999
                                                              )
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              193,480Long-term
      debt
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              539,105
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              539,105Other
      long-term liabilities
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              244,379
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              61
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              244,440Liabilities
      of discontinued
                                                                operations
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              20,750
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              -
                                                              
                                                              
                                                              
                                                              20,750Redeemable
      common stock,accumulated
      deficit and
                                                                accumulated
      other comprehensiveincome
                                                              
                                                              
                                                              105,633
                                                              
                                                              
                                                              
                                                              331,128
                                                              
                                                              
                                                              
                                                              141,679
                                                              
                                                              
                                                              
                                                              13,854
                                                              
                                                              
                                                              
                                                              (486,661
                                                              )
                                                              
                                                              
                                                              105,633Total
      liabilities, redeemable
                                                                common
      stock, accumulateddeficit
      and accumulated othercomprehensive
      income
                                                              
                                                              $
                                                              500,202
                                                              
                                                              
                                                              $
                                                              846,790
                                                              
                                                              
                                                              $
                                                              230,161
                                                              
                                                              
                                                              $
                                                              12,916
                                                              
                                                              
                                                              $
                                                              (486,661
                                                              )
                                                              
                                                              $
                                                              1,103,408





23





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE NINE MONTHS ENDED SEPTEMBER 28, 2008(unaudited)(dollars
      in thousands)Parent
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              
                                                                                              Subsidiary
                                                                                              
                                                                                              
                                                                                              Non-GuarantorGuarantor
                                                                                              
                                                                                              
                                                                                              Issuer
                                                                                              
                                                                                              
                                                                                              Guarantors
                                                                                              
                                                                                              
                                                                                              Subsidiary
                                                                                              
                                                                                              
                                                                                              Eliminations
                                                                                              
                                                                                              
                                                                                              ConsolidatedNet
      sales
                                                                                              
                                                                                              $
                                                                                              -
                                                                                              
                                                                                              
                                                                                              $
                                                                                              655,557
                                                                                              
                                                                                              
                                                                                              $
                                                                                              83,929
                                                                                              
                                                                                              
                                                                                              $
                                                                                              45,087
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (43,348
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              741,225Cost
      of sales
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              524,666
                                                                                              
                                                                                              
                                                                                              
                                                                                              67,336
                                                                                              
                                                                                              
                                                                                              
                                                                                              43,684
                                                                                              
                                                                                              
                                                                                              
                                                                                              (43,664
                                                                                              )
                                                                                              
                                                                                              
                                                                                              592,022Gross
      profit
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              130,891
                                                                                              
                                                                                              
                                                                                              
                                                                                              16,593
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,403
                                                                                              
                                                                                              
                                                                                              
                                                                                              316
                                                                                              
                                                                                              
                                                                                              
                                                                                              149,203Selling,
      general and administrative expenses
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              111,439
                                                                                              
                                                                                              
                                                                                              
                                                                                              11,091
                                                                                              
                                                                                              
                                                                                              
                                                                                              1,575
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              124,105Goodwill
      impairment
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,684
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              17,684Operating
      income (loss)
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              19,452
                                                                                              
                                                                                              
                                                                                              
                                                                                              (12,182
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (172
                                                                                              )
                                                                                              
                                                                                              
                                                                                              316
                                                                                              
                                                                                              
                                                                                              
                                                                                              7,414Interest
      expense
                                                                                              
                                                                                              
                                                                                              8,814
                                                                                              
                                                                                              
                                                                                              
                                                                                              32,034
                                                                                              
                                                                                              
                                                                                              
                                                                                              53
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (8,867
                                                                                              )
                                                                                              
                                                                                              
                                                                                              32,034Interest
      income
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (11,742
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (78)
                                                                                              
                                                                                              
                                                                                              
                                                                                              (54
                                                                                              )
                                                                                              
                                                                                              
                                                                                              11,509
                                                                                              
                                                                                              
                                                                                              
                                                                                              (365
                                                                                              )Loss in
      equity investments
                                                                                              
                                                                                              
                                                                                              42,493
                                                                                              
                                                                                              
                                                                                              
                                                                                              59,977
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (102,470
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -Litigation
      settlement, net
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (22,274
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (22,274
                                                                                              )Other
      expense
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              987
                                                                                              
                                                                                              
                                                                                              
                                                                                              453
                                                                                              
                                                                                              
                                                                                              
                                                                                              591
                                                                                              
                                                                                              
                                                                                              
                                                                                              (31
                                                                                              )
                                                                                              
                                                                                              
                                                                                              2,000Loss
      from continuingoperations
      before income taxes
                                                                                              
                                                                                              
                                                                                              (51,307
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (39,530
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (12,610
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (709
                                                                                              )
                                                                                              
                                                                                              
                                                                                              100,175
                                                                                              
                                                                                              
                                                                                              
                                                                                              (3,981
                                                                                              )Provision
      for income taxes
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              138
                                                                                              
                                                                                              
                                                                                              
                                                                                              39
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              177Loss
      from continuing operations
                                                                                              
                                                                                              
                                                                                              (51,307
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (39,668
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (12,649
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (709
                                                                                              )
                                                                                              
                                                                                              
                                                                                              100,175
                                                                                              
                                                                                              
                                                                                              
                                                                                              (4,158
                                                                                              )Loss
      from discontinued operations, net of income taxes
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              (2,825
                                                                                              )
                                                                                              
                                                                                              
                                                                                              (46,966
                                                                                              )
                                                                                              
                                                                                              
                                                                                              -
                                                                                              
                                                                                              
                                                                                              
                                                                                              2,642
                                                                                              
                                                                                              
                                                                                              
                                                                                              (47,149
                                                                                              )Net
      loss
                                                                                              
                                                                                              $
                                                                                              (51,307
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (42,493
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (59,615
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              (709
                                                                                              )
                                                                                              
                                                                                              $
                                                                                              102,817
                                                                                              
                                                                                              
                                                                                              $
                                                                                              (51,307
                                                                                              )





24








PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007(unaudited)(dollars
      in thousands)Parent
                                        
                                        
                                        
                                        
                                        
                                        Subsidiary
                                        
                                        
                                        Non-GuarantorGuarantor
                                        
                                        
                                        Issuer
                                        
                                        
                                        Guarantors
                                        
                                        
                                        Subsidiary
                                        
                                        
                                        Eliminations
                                        
                                        
                                        ConsolidatedNet
      sales
                                        
                                        $
                                        -
                                        
                                        
                                        $
                                        647,450
                                        
                                        
                                        $
                                        73,757
                                        
                                        
                                        $
                                        45,820
                                        
                                        
                                        $
                                        (44,670
                                        )
                                        
                                        $
                                        722,357Cost
      of sales
                                        
                                        
                                        -
                                        
                                        
                                        
                                        490,773
                                        
                                        
                                        
                                        59,034
                                        
                                        
                                        
                                        44,003
                                        
                                        
                                        
                                        (44,809
                                        )
                                        
                                        
                                        549,001Gross
      profit
                                        
                                        
                                        -
                                        
                                        
                                        
                                        156,677
                                        
                                        
                                        
                                        14,723
                                        
                                        
                                        
                                        1,817
                                        
                                        
                                        
                                        139
                                        
                                        
                                        
                                        173,356Selling,
      general and administrative expenses
                                        
                                        
                                        -
                                        
                                        
                                        
                                        116,694
                                        
                                        
                                        
                                        10,818
                                        
                                        
                                        
                                        1,648
                                        
                                        
                                        
                                        309
                                        
                                        
                                        
                                        129,469Restructuring
      and other charges
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,302
                                        
                                        
                                        
                                        140
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,442Operating
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        38,681
                                        
                                        
                                        
                                        3,765
                                        
                                        
                                        
                                        169
                                        
                                        
                                        
                                        (170
                                        )
                                        
                                        
                                        42,445Interest
      expense
                                        
                                        
                                        8,172
                                        
                                        
                                        
                                        36,908
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        4
                                        
                                        
                                        
                                        (8,172
                                        )
                                        
                                        
                                        36,912Debt
      extinguishment expenses
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,141
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        1,141Interest
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (12,971
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (45
                                        )
                                        
                                        
                                        11,134
                                        
                                        
                                        
                                        (1,882
                                        )(Income)
      loss in equity investments
                                        
                                        
                                        (13,628
                                        )
                                        
                                        
                                        263
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        13,365
                                        
                                        
                                        
                                        -Other
      income
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (393
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (1,099
                                        )
                                        
                                        
                                        191
                                        
                                        
                                        
                                        (1,301
                                        )Income
      from continuingoperations
      before income taxes
                                        
                                        
                                        5,456
                                        
                                        
                                        
                                        13,733
                                        
                                        
                                        
                                        3,765
                                        
                                        
                                        
                                        1,309
                                        
                                        
                                        
                                        (16,688
                                        )
                                        
                                        
                                        7,575Provision
      for income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        105
                                        
                                        
                                        
                                        53
                                        
                                        
                                        
                                        75
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        233Income
      from continuing operations
                                        
                                        
                                        5,456
                                        
                                        
                                        
                                        13,628
                                        
                                        
                                        
                                        3,712
                                        
                                        
                                        
                                        1,234
                                        
                                        
                                        
                                        (16,688
                                        )
                                        
                                        
                                        7,342Loss
      from discontinued operations, net of income taxes
                                        
                                        
                                        -
                                        
                                        
                                        
                                        -
                                        
                                        
                                        
                                        (5,157
                                        )
                                        
                                        
                                        -
                                        
                                        
                                        
                                        3,271
                                        
                                        
                                        
                                        (1,886
                                        )Net
      income (loss)
                                        
                                        $
                                        5,456
                                        
                                        
                                        $
                                        13,628
                                        
                                        
                                        $
                                        (1,445
                                        )
                                        
                                        $
                                        1,234
                                        
                                        
                                        $
                                        (13,417
                                        )
                                        
                                        $
                                        5,456





25





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED SEPTEMBER 28, 2008(unaudited)(dollars
      in thousands)Parent
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          
                                                                                          Subsidiary
                                                                                          
                                                                                          
                                                                                          Non-GuarantorGuarantor
                                                                                          
                                                                                          
                                                                                          Issuer
                                                                                          
                                                                                          
                                                                                          Guarantors
                                                                                          
                                                                                          
                                                                                          Subsidiary
                                                                                          
                                                                                          
                                                                                          Eliminations
                                                                                          
                                                                                          
                                                                                          ConsolidatedNet
      sales
                                                                                          
                                                                                          $
                                                                                          -
                                                                                          
                                                                                          
                                                                                          $
                                                                                          222,203
                                                                                          
                                                                                          
                                                                                          $
                                                                                          29,700
                                                                                          
                                                                                          
                                                                                          $
                                                                                          15,237
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (11,924
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          255,216Cost
      of sales
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          185,193
                                                                                          
                                                                                          
                                                                                          
                                                                                          23,588
                                                                                          
                                                                                          
                                                                                          
                                                                                          14,247
                                                                                          
                                                                                          
                                                                                          
                                                                                          (11,855
                                                                                          )
                                                                                          
                                                                                          
                                                                                          211,173Gross
      profit
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          37,010
                                                                                          
                                                                                          
                                                                                          
                                                                                          6,112
                                                                                          
                                                                                          
                                                                                          
                                                                                          990
                                                                                          
                                                                                          
                                                                                          
                                                                                          (69
                                                                                          )
                                                                                          
                                                                                          
                                                                                          44,043Selling,
      general and administrative expenses
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          35,519
                                                                                          
                                                                                          
                                                                                          
                                                                                          3,614
                                                                                          
                                                                                          
                                                                                          
                                                                                          554
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          39,687Goodwill
      impairment
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          17,684
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          17,684Operating
      income (loss)
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,491
                                                                                          
                                                                                          
                                                                                          
                                                                                          (15,186
                                                                                          )
                                                                                          
                                                                                          
                                                                                          436
                                                                                          
                                                                                          
                                                                                          
                                                                                          (69
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (13,328
                                                                                          )Interest
      expense
                                                                                          
                                                                                          
                                                                                          2,985
                                                                                          
                                                                                          
                                                                                          
                                                                                          10,748
                                                                                          
                                                                                          
                                                                                          
                                                                                          53
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (3,038
                                                                                          )
                                                                                          
                                                                                          
                                                                                          10,748Interest
      income
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (3,455
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (78
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (21
                                                                                          )
                                                                                          
                                                                                          
                                                                                          3,426
                                                                                          
                                                                                          
                                                                                          
                                                                                          (128
                                                                                          )Loss in
      equity investments
                                                                                          
                                                                                          
                                                                                          27,046
                                                                                          
                                                                                          
                                                                                          
                                                                                          18,317
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (45,363
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -Other
      expense
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          1,120
                                                                                          
                                                                                          
                                                                                          
                                                                                          453
                                                                                          
                                                                                          
                                                                                          
                                                                                          302
                                                                                          
                                                                                          
                                                                                          
                                                                                          (101
                                                                                          )
                                                                                          
                                                                                          
                                                                                          1,774(Loss)
      income from continuingoperations
      before income taxes
                                                                                          
                                                                                          
                                                                                          (30,031
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (25,239
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (15,614
                                                                                          )
                                                                                          
                                                                                          
                                                                                          155
                                                                                          
                                                                                          
                                                                                          
                                                                                          45,007
                                                                                          
                                                                                          
                                                                                          
                                                                                          (25,722
                                                                                          )Provision
      for income taxes
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          75
                                                                                          
                                                                                          
                                                                                          
                                                                                          10
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          85(Loss)
      income from continuing operations
                                                                                          
                                                                                          
                                                                                          (30,031
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (25,314
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (15,624
                                                                                          )
                                                                                          
                                                                                          
                                                                                          155
                                                                                          
                                                                                          
                                                                                          
                                                                                          45,007
                                                                                          
                                                                                          
                                                                                          
                                                                                          (25,807
                                                                                          )Loss
      from discontinued operations, net of income taxes
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          (1,732
                                                                                          )
                                                                                          
                                                                                          
                                                                                          (2,880
                                                                                          )
                                                                                          
                                                                                          
                                                                                          -
                                                                                          
                                                                                          
                                                                                          
                                                                                          388
                                                                                          
                                                                                          
                                                                                          
                                                                                          (4,224
                                                                                          )Net
      (loss) income
                                                                                          
                                                                                          $
                                                                                          (30,031
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (27,046
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          (18,504
                                                                                          )
                                                                                          
                                                                                          $
                                                                                          155
                                                                                          
                                                                                          
                                                                                          $
                                                                                          45,395
                                                                                          
                                                                                          
                                                                                          $
                                                                                          (30,031
                                                                                          )





26








PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF OPERATIONSFOR
      THE THREE MONTHS ENDED SEPTEMBER 30, 2007(unaudited)(dollars
      in thousands)Parent
                                          
                                          
                                          
                                          
                                          
                                          Subsidiary
                                          
                                          
                                          Non-GuarantorGuarantor
                                          
                                          
                                          Issuer
                                          
                                          
                                          Guarantors
                                          
                                          
                                          Subsidiary
                                          
                                          
                                          Eliminations
                                          
                                          
                                          ConsolidatedNet
      sales
                                          
                                          $
                                          -
                                          
                                          
                                          $
                                          223,267
                                          
                                          
                                          $
                                          24,681
                                          
                                          
                                          $
                                          14,475
                                          
                                          
                                          $
                                          (15,181
                                          )
                                          
                                          $
                                          247,242Cost
      of sales
                                          
                                          
                                          -
                                          
                                          
                                          
                                          168,225
                                          
                                          
                                          
                                          19,215
                                          
                                          
                                          
                                          14,845
                                          
                                          
                                          
                                          (15,461
                                          )
                                          
                                          
                                          186,824Gross
      profit (loss)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          55,042
                                          
                                          
                                          
                                          5,466
                                          
                                          
                                          
                                          (370
                                          )
                                          
                                          
                                          280
                                          
                                          
                                          
                                          60,418Selling,
      general and administrative expenses
                                          
                                          
                                          -
                                          
                                          
                                          
                                          37,924
                                          
                                          
                                          
                                          3,624
                                          
                                          
                                          
                                          552
                                          
                                          
                                          
                                          123
                                          
                                          
                                          
                                          42,223Restructuring
      and other charges
                                          
                                          
                                          -
                                          
                                          
                                          
                                          248
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          248Operating
      income (loss)
                                          
                                          
                                          -
                                          
                                          
                                          
                                          16,870
                                          
                                          
                                          
                                          1,842
                                          
                                          
                                          
                                          (922
                                          )
                                          
                                          
                                          157
                                          
                                          
                                          
                                          17,947Interest
      expense
                                          
                                          
                                          2,819
                                          
                                          
                                          
                                          12,471
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          4
                                          
                                          
                                          
                                          (2,819
                                          )
                                          
                                          
                                          12,475Debt
      extinguishment expenses
                                          
                                          
                                          -
                                          
                                          
                                          
                                          88
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          88Interest
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (4,354
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (18
                                          )
                                          
                                          
                                          3,866
                                          
                                          
                                          
                                          (506
                                          )Income
      in equity investments
                                          
                                          
                                          (10,098
                                          )
                                          
                                          
                                          (1,227
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          11,325
                                          
                                          
                                          
                                          -Other
      income
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (259
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (425
                                          )
                                          
                                          
                                          57
                                          
                                          
                                          
                                          (627
                                          )Income
      (loss) from continuingoperations
      before income taxes
                                          
                                          
                                          7,279
                                          
                                          
                                          
                                          10,151
                                          
                                          
                                          
                                          1,842
                                          
                                          
                                          
                                          (483
                                          )
                                          
                                          
                                          (12,272
                                          )
                                          
                                          
                                          6,517Provision
      (benefit) for income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          53
                                          
                                          
                                          
                                          15
                                          
                                          
                                          
                                          (306
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (238
                                          )Income
      (loss) from continuing operations
                                          
                                          
                                          7,279
                                          
                                          
                                          
                                          10,098
                                          
                                          
                                          
                                          1,827
                                          
                                          
                                          
                                          (177
                                          )
                                          
                                          
                                          (12,272
                                          )
                                          
                                          
                                          6,755Loss
      from discontinued operations, net of income taxes
                                          
                                          
                                          -
                                          
                                          
                                          
                                          -
                                          
                                          
                                          
                                          (646
                                          )
                                          
                                          
                                          -
                                          
                                          
                                          
                                          1,170
                                          
                                          
                                          
                                          524Net
      income (loss)
                                          
                                          $
                                          7,279
                                          
                                          
                                          $
                                          10,098
                                          
                                          
                                          $
                                          1,181
                                          
                                          
                                          $
                                          (177
                                          )
                                          
                                          $
                                          (11,102
                                          )
                                          
                                          $
                                          7,279





27




PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE NINE MONTHS ENDED SEPTEMBER 28, 2008(unaudited)(dollars
      in thousands)Parent
                                                      
                                                      
                                                      
                                                      
                                                      
                                                      Subsidiary
                                                      
                                                      
                                                      Non-GuarantorGuarantor
                                                      
                                                      
                                                      Issuer
                                                      
                                                      
                                                      Guarantors
                                                      
                                                      
                                                      Subsidiary
                                                      
                                                      
                                                      Eliminations
                                                      
                                                      
                                                      ConsolidatedCash
      flows from operating activities:Net
      loss
                                                      
                                                      $
                                                      (51,307
                                                      )
                                                      
                                                      $
                                                      (42,493
                                                      )
                                                      
                                                      $
                                                      (59,615
                                                      )
                                                      
                                                      $
                                                      (709
                                                      )
                                                      
                                                      $
                                                      102,817
                                                      
                                                      
                                                      $
                                                      (51,307
                                                      )Adjustments
      to reconcile net (loss)
                                                        income
      to net cash (used) provided
                                                        by
      operating activities:Depreciation
      and amortization
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      39,981
                                                      
                                                      
                                                      
                                                      4,334
                                                      
                                                      
                                                      
                                                      8
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      44,323Impairment of continuing operations
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      17,684
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      17,684Impairment
      of discontinued
                                                        operations
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      42,207
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      42,207Other
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      9,094
                                                      
                                                      
                                                      
                                                      264
                                                      
                                                      
                                                      
                                                      591
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      9,949Change
      in assets and liabilities, net
                                                      
                                                      
                                                      50,081
                                                      
                                                      
                                                      
                                                      (68,338
                                                      )
                                                      
                                                      
                                                      51,602
                                                      
                                                      
                                                      
                                                      1,530
                                                      
                                                      
                                                      
                                                      (102,817
                                                      )
                                                      
                                                      
                                                      (67,942
                                                      )Net
      cash (used) provided by
                                                        operating
      activities
                                                      
                                                      
                                                      (1,226
                                                      )
                                                      
                                                      
                                                      (61,756
                                                      )
                                                      
                                                      
                                                      56,476
                                                      
                                                      
                                                      
                                                      1,420
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (5,086
                                                      )Cash
      flows from investing activities:Proceeds
      from sale of equipment
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      8
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      8Net
      change in cash balance upon sale of
                                                        Bemrose Group Limited
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,913
                                                      
                                                      
                                                      
                                                      (6,805
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (2,892
                                                      )Additions
      to property, plant and
                                                        equipment
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (73,413
                                                      )
                                                      
                                                      
                                                      (1,225
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (74,638
                                                      )Net
      cash used by investing activities
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (69,492
                                                      )
                                                      
                                                      
                                                      (8,030
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (77,522
                                                      )Cash
      flows from financing activities:Payments
      of senior secured notes
                                                        payable
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,687
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (1,687
                                                      )Payments
      relating to capital lease
                                                        obligation
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (548
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (548
                                                      )Proceeds
      from revolving line of
                                                        credit
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      272,607
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      272,607Payments
      of revolving line of credit
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (214,272
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (214,272
                                                      )Payments
      of State of Ohio financing
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (130
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (130
                                                      )Due
      to parent and affiliated
                                                        companies,
      net
                                                      
                                                      
                                                      14,996
                                                      
                                                      
                                                      
                                                      44,631
                                                      
                                                      
                                                      
                                                      (57,394
                                                      )
                                                      
                                                      
                                                      (2,233
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -Proceeds
      from issuance of
                                                        redeemable
      common stock
                                                      
                                                      
                                                      3,721
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,721Payments
      to redeem common stock
                                                      
                                                      
                                                      (17,491
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (17,491
                                                      )Increase
      in cash overdraft
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,083
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      3,083Net
      cash provided (used) by
                                                        financing
      activities
                                                      
                                                      
                                                      1,226
                                                      
                                                      
                                                      
                                                      103,684
                                                      
                                                      
                                                      
                                                      (57,394
                                                      )
                                                      
                                                      
                                                      (2,233
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      45,283Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      321
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      321Change
      in cash and cash equivalents
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (27,243
                                                      )
                                                      
                                                      
                                                      (8,948
                                                      )
                                                      
                                                      
                                                      (813
                                                      )
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      (37,004
                                                      )Cash
      and cash equivalents at beginning of period
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      33,567
                                                      
                                                      
                                                      
                                                      9,247
                                                      
                                                      
                                                      
                                                      2,024
                                                      
                                                      
                                                      
                                                      -
                                                      
                                                      
                                                      
                                                      44,838Cash
      and cash equivalents at end of period
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      6,324
                                                      
                                                      
                                                      $
                                                      299
                                                      
                                                      
                                                      $
                                                      1,211
                                                      
                                                      
                                                      $
                                                      -
                                                      
                                                      
                                                      $
                                                      7,834


28





PAPERWEIGHT
      DEVELOPMENT CORP. AND SUBSIDIARIESNOTES
      TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -
    (Continued)CONDENSED
      CONSOLIDATING STATEMENT OF CASH FLOWSFOR
      THE NINE MONTHS ENDED SEPTEMBER 30, 2007(unaudited)(dollars
      in thousands)Parent
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    Subsidiary
                                                    
                                                    
                                                    Non-GuarantorGuarantor
                                                    
                                                    
                                                    Issuer
                                                    
                                                    
                                                    Guarantors
                                                    
                                                    
                                                    Subsidiary
                                                    
                                                    
                                                    Eliminations
                                                    
                                                    
                                                    ConsolidatedCash
      flows from operating activities:Net
      income (loss)
                                                    
                                                    $
                                                    5,456
                                                    
                                                    
                                                    $
                                                    13,628
                                                    
                                                    
                                                    $
                                                    (1,445
                                                    )
                                                    
                                                    $
                                                    1,234
                                                    
                                                    
                                                    $
                                                    (13,417
                                                    )
                                                    
                                                    $
                                                    5,456Adjustments
      to reconcile net income
                                                      (loss)
      to net cash (used) provided by
                                                      operating
      activities:Depreciation
      and amortization
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    43,883
                                                    
                                                    
                                                    
                                                    9,298
                                                    
                                                    
                                                    
                                                    12
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    53,193Other
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    7,894
                                                    
                                                    
                                                    
                                                    530
                                                    
                                                    
                                                    
                                                    (1,099
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    7,325Change
      in assets and liabilities, net
                                                    
                                                    
                                                    (55,477
                                                    )
                                                    
                                                    
                                                    29,245
                                                    
                                                    
                                                    
                                                    (5,314
                                                    )
                                                    
                                                    
                                                    2,558
                                                    
                                                    
                                                    
                                                    13,417
                                                    
                                                    
                                                    
                                                    (15,571
                                                    )Net
      cash (used) provided by
                                                      operating
      activities
                                                    
                                                    
                                                    (50,021
                                                    )
                                                    
                                                    
                                                    94,650
                                                    
                                                    
                                                    
                                                    3,069
                                                    
                                                    
                                                    
                                                    2,705
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    50,403Cash
      flows from investing activities:Proceeds
      from sale of equipment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4Restricted
      cash for mill expansion
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (8,665
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (8,665
                                                    )Additions
      to property, plant and
                                                      equipment
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (24,960
                                                    )
                                                    
                                                    
                                                    (3,453
                                                    )
                                                    
                                                    
                                                    (14
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (28,427
                                                    )Net
      cash used by investing activities
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (33,621
                                                    )
                                                    
                                                    
                                                    (3,453
                                                    )
                                                    
                                                    
                                                    (14
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (37,088
                                                    )Cash
      flows from financing activities:
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    -Payments
      of long-term debt
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (196,095
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (196,095
                                                    )Proceeds
      from long-term debt
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    225,000
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    225,000Payments
      of senior notes payable
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (5,470
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    
                                                    (5,470
                                                    )Debt
      acquisition costs
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,229
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (2,229
                                                    )Payments
      relating to capital lease
                                                      obligation
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (548
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (548
                                                    )Proceeds
      from revolving lines of
                                                      credit
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    67,550
                                                    
                                                    
                                                    
                                                    4,579
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    72,129Payments
      of revolving lines of credit
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (67,550
                                                    )
                                                    
                                                    
                                                    (2,028
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (69,578
                                                    )Proceeds
      from State of Ohio
                                                      financing
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    9,105
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    9,105Due
      to parent and affiliated
                                                      companies,
      net
                                                    
                                                    
                                                    74,256
                                                    
                                                    
                                                    
                                                    (71,121
                                                    )
                                                    
                                                    
                                                    (2,325
                                                    )
                                                    
                                                    
                                                    (810
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -Proceeds
      from issuance of
                                                      redeemable
      common stock
                                                    
                                                    
                                                    4,355
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4,355Payments
      to redeem common stock
                                                    
                                                    
                                                    (28,590
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (28,590
                                                    )Decrease
      in cash overdraft
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (3,990
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (3,990
                                                    )Net
      cash provided (used) by
                                                      financing
      activities
                                                    
                                                    
                                                    50,021
                                                    
                                                    
                                                    
                                                    (45,348
                                                    )
                                                    
                                                    
                                                    226
                                                    
                                                    
                                                    
                                                    (810
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    4,089Effect
      of foreign exchange rate changes on cash and cash
    equivalents
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (247
                                                    )
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    (247
                                                    )Change
      in cash and cash equivalents
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    15,434
                                                    
                                                    
                                                    
                                                    (158
                                                    )
                                                    
                                                    
                                                    1,881
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17,157Cash
      and cash equivalents at beginning of period
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    17,249
                                                    
                                                    
                                                    
                                                    817
                                                    
                                                    
                                                    
                                                    1,909
                                                    
                                                    
                                                    
                                                    -
                                                    
                                                    
                                                    
                                                    19,975Cash
      and cash equivalents at end of period
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    32,683
                                                    
                                                    
                                                    $
                                                    659
                                                    
                                                    
                                                    $
                                                    3,790
                                                    
                                                    
                                                    $
                                                    -
                                                    
                                                    
                                                    $
                                                    37,132





29





Item 2 — Management’s
Discussion and Analysis of Financial Condition and Results of
Operations




Unless
stated to the contrary or the context requires otherwise, all references to
“Paperweight Development,” “PDC,” “we,” “us,” or “our” refer to Paperweight
Development Corp. and its subsidiaries and predecessors. Appleton Papers Inc. is
a wholly-owned subsidiary of Paperweight Development, which we refer to as
“Appleton” in this report.





Overview




This
discussion summarizes significant factors affecting the consolidated operating
results, financial condition and liquidity of PDC and Appleton for the quarter
ended September 28, 2008. This discussion should be read in conjunction with the
accompanying Condensed Consolidated Financial Statements and related
Notes.




Reference
should also be made to the Annual Report on Form 10-K for the year ended
December 29, 2007, the consolidated financial statements and related notes
included therein.








Financial
Highlights




Net sales
for third quarter 2008 totaled $255.2 million, compared to $247.2 million for
third quarter 2007. The 3.2% year over year increase in net sales for the
quarter included a 4.9% increase due to price improvement and a 1.7% decrease
due to lower volume. As described more completely below, the Thermal Papers,
Security Papers and Performance Packaging segments reported increased net sales,
which offset a decrease in net sales reported by the Coated Solutions segment.
Net sales for the nine months ended September 28, 2008 totaled $741.2 million,
compared to $722.4 million for the nine months ended September 30,
2007.




For third
quarter 2008, Appleton’s loss from continuing operations was $25.8 million
compared to $6.8 million of income from continuing operations in third quarter
2007.  Appleton's third quarter 2008 net loss was $30.0 million and
included a $17.7 million goodwill impairment charge within performance
packaging and $4.2 million of losses recorded in discontinued operations.
Current quarter results were negatively impacted by lower volumes, higher
raw material, energy, start-up and transportation costs and goodwill impairment
which offset price improvements.




For the
nine months ended September 28, 2008, the Company reported a net loss of $51.3
million compared to net income of $5.4 million for the nine months ended
September 30, 2007. Current year results were impacted adversely by lower
volumes, higher input and start-up costs, goodwill impairment and losses from
discontinued operations, which offset favorable
pricing, lower headquarters costs and a $22.3 million net gain from a
litigation settlement.




Results
for the three and nine months ended September 28, 2008 included start-up costs
associated with the expansion project at Appleton’s paper mill in West
Carrollton, Ohio of $5.2 million and $9.0 million,
respectively.  Start-up costs are expected to continue in the fourth
quarter of 2008.




On
August 1, 2008, Appleton completed the sale of Bemrose Group
Limited receiving $3.9 million of cash and $6.4 million of notes receivable
to be settled within 75 and 180 days after closing. Payment was
received on November 4, 2008 for the first tranche. In anticipation of the sale
transaction, the Company recorded impairment charges aggregating $41.2 million
related to goodwill and other long-lived assets for the three months ended June
29, 2008. These charges arose in the second quarter due to a decline in the
value of the business arising primarily as the result of deteriorating
economic conditions and tougher markets for Bemrose products, as well as
increased funding requirements of the Bemrose pension plan arising from
negotiations with the plan trustees. During the third quarter of 2008
Appleton recorded additional loss from discontinued operations of $4.2
million consisting of a $2.1 million operating loss and $2.1 million of
additional impairment relating to an out-of-period adjustment between quarters
in fiscal 2008 that was considered not material to the Company’s
consolidated financial statements for any periods presented.








30


Comparison
of Results of Operations for the Quarters Ended September 28, 2008 and September
30, 2007






For
      the Quarter EndedSeptember
    28,
                                                                
                                                                
                                                                September
      30,
                                                                
                                                                %2008
                                                                
                                                                
                                                                2007
                                                                
                                                                Chg(dollars
      in millions)Net
      sales
                                                                
                                                                $
                                                                255.2
                                                                
                                                                
                                                                $
                                                                247.2
                                                                
                                                                3.2
                                                                %Cost
      of sales
                                                                
                                                                
                                                                211.2
                                                                
                                                                
                                                                
                                                                186.8
                                                                
                                                                13.1
                                                                %Gross
      profit
                                                                
                                                                
                                                                44.0
                                                                
                                                                
                                                                
                                                                60.4
                                                                
                                                                -27.2
                                                                %Selling,
      general and administrative expenses
                                                                
                                                                
                                                                39.6
                                                                
                                                                
                                                                
                                                                42.3
                                                                
                                                                -6.4
                                                                %Goodwill
      impairment
                                                                
                                                                
                                                                17.7
                                                                
                                                                
                                                                
                                                                -
                                                                
                                                                nmRestructuring
      and other charges
                                                                
                                                                
                                                                -
                                                                
                                                                
                                                                
                                                                0.2
                                                                
                                                                -100.0
                                                                %Operating
      (loss) income
                                                                
                                                                
                                                                (13.3
                                                                )
                                                                
                                                                
                                                                17.9
                                                                
                                                                -174.3
                                                                %Interest
      expense, net
                                                                
                                                                
                                                                10.6
                                                                
                                                                
                                                                
                                                                12.0
                                                                
                                                                -11.7
                                                                %Other
      non-operating loss (income), net
                                                                
                                                                
                                                                1.8
                                                                
                                                                
                                                                
                                                                (0.6
                                                                )
                                                                nm(Loss)
      income from continuing operations before income taxes
                                                                
                                                                
                                                                (25.7
                                                                )
                                                                
                                                                
                                                                6.5
                                                                
                                                                nmProvision
      (benefit) for income taxes
                                                                
                                                                
                                                                0.1
                                                                
                                                                
                                                                
                                                                (0.3
                                                                )
                                                                nm(Loss)
      income from continuing operations
                                                                
                                                                
                                                                (25.8
                                                                )
                                                                
                                                                
                                                                6.8
                                                                
                                                                nm(Loss)
      income from discontinued operations, net of income taxes
                                                                
                                                                
                                                                (4.2
                                                                )
                                                                
                                                                
                                                                0.5
                                                                
                                                                nmNet
      (loss) income
                                                                
                                                                $
                                                                (30.0
                                                                )
                                                                
                                                                $
                                                                7.3
                                                                
                                                                nmComparison
      as a % of net salesCost
      of sales
                                                                
                                                                
                                                                82.8
                                                                %
                                                                
                                                                
                                                                75.6
                                                                %
                                                                7.2
                                                                %Gross
      margin
                                                                
                                                                
                                                                17.2
                                                                %
                                                                
                                                                
                                                                24.4
                                                                %
                                                                -7.2
                                                                %Selling,
      general and administrative expenses
                                                                
                                                                
                                                                15.5
                                                                %
                                                                
                                                                
                                                                17.1
                                                                %
                                                                -1.6
                                                                %Operating
      margin
                                                                
                                                                
                                                                -5.2
                                                                %
                                                                
                                                                
                                                                7.2
                                                                %
                                                                -12.4
                                                                %(Loss)
      income from continuing operations before income taxes
                                                                
                                                                
                                                                -10.1
                                                                %
                                                                
                                                                
                                                                2.6
                                                                %
                                                                -12.7
                                                                %(Loss)
      income from continuing operations
                                                                
                                                                
                                                                -10.1
                                                                %
                                                                
                                                                
                                                                2.8
                                                                %
                                                                -12.9
                                                                %(Loss)
      income from discontinued operations, net of income taxes
                                                                
                                                                
                                                                -1.6
                                                                %
                                                                
                                                                
                                                                0.2
                                                                %
                                                                -1.8
                                                                %Net
      (loss) income
                                                                
                                                                
                                                                -11.7
                                                                %
                                                                
                                                                
                                                                3.0
                                                                %
                                                                -14.7
                                                                %





Net sales
for third quarter 2008 were $255.2 million, an increase of $8.0 million, or
3.2%, compared to the prior year period. Net sales for third quarter 2008
increased relative to the prior year quarter because of improved
pricing.




Operating
income in third quarter 2008 declined 174.3% to a loss of $13.3 million.
Operating margins were adversely affected by reduced gross margins which offset
lower headquarters expenses. Gross margins were unfavorably impacted by
approximately $14.6 million of higher raw material and energy costs and
$5.2 million of start-up costs associated with the West Carrollton, Ohio
expansion project in the technical papers business, which offset the effects of
price improvement. Selling, general and administrative expenses included $2.5
million of higher distribution costs and $0.9 million of anti-dumping
litigation costs compared to the year earlier period. The third quarter 2008
operating loss also included a goodwill impairment charge of $17.7 million. In
accordance with SFAS 142, "Goodwill and Other Intangible Assets," Appleton
reviews the carrying value of goodwill and intangible assets with indefinite
lives for impairment annually or more frequently if events or circumstances
indicate an asset might be impaired. As of
September 28, 2008, an impairment analysis was performed of the performance
packaging business due to the current depressed economic future outlook and
revised future cash flow projections.  Estimated fair value for
purposes of the impairment test was based on either discounted cash flow
projections or an independent third-party valuation.To the extent
current market conditions persist or performance packaging's operating results
do not meet expectations, the Company may record additional impairment charges
that could be material to the Company's consolidated financial statements. These
increased expenses were partially offset by employee cost savings of
approximately $4.7 million.








A $25.8
million loss from continuing operations was recorded in third quarter 2008
compared to income from continuing operations of $6.8 million recorded in third
quarter 2007. Third quarter 2008 interest expense was $1.4 million lower than
third quarter 2007 due to interest capitalized as part of the West Carrollton,
Ohio expansion project.





31


In third
quarter 2008, Appleton recorded a loss from discontinued operations of $4.2
million compared to $0.5 million of income from discontinued operations in the
year earlier period. On August 1, 2008, Appleton completed the sale of
Bemrose Group Limited receiving $3.9 million of cash and $6.4 million of
notes receivable to be settled within 75 and 180 days after
closing. Payment in the amount of $1.9 million was received on November 4,
2008 for the first tranche. In anticipation of the sale transaction, the Company
recorded impairment charges aggregating $41.2 million related to goodwill and
other long-lived assets for the three months ended June 29, 2008. These
charges arose in the second quarter due to a decline in the value of the
business arising primarily as the result of deteriorating economic
conditions and tougher markets for Bemrose products, as well as increased
funding requirements of the Bemrose pension plan arising from negotiations with
the plan trustees. During the third quarter of 2008 Appleton
recorded additional loss from discontinued operations of $4.2 million
consisting of a $2.1 million operating loss and $2.1 million of additional
impairment relating to an out-of-period adjustment between quarters in fiscal
2008 that was considered not material to the Company’s consolidated
financial statements for any periods presented.








Comparison
of Results of Operations for the Nine Months Ended September 28, 2008 and
September 30, 2007





For
      the Nine Months EndedSeptember
      28,
                              
                              
                              September
      30,
                              
                              
                              %2008
                              
                              
                              2007
                              
                              
                              Chg(dollars
      in millions)Net
      sales
                              
                              $
                              741.2
                              
                              
                              $
                              722.4
                              
                              
                              
                              2.6
                              %Cost
      of sales
                              
                              
                              592.0
                              
                              
                              
                              549.0
                              
                              
                              
                              7.8
                              %Gross
      profit
                              
                              
                              149.2
                              
                              
                              
                              173.4
                              
                              
                              
                              -14.0
                              %Selling,
      general and administrative expenses
                              
                              
                              124.1
                              
                              
                              
                              129.5
                              
                              
                              
                              -4.2
                              %Goodwill
      impairment
                              
                              
                              17.7
                              
                              
                              
                              -
                              
                              
                              
                              nmRestructuring
      and other charges
                              
                              
                              -
                              
                              
                              
                              1.4
                              
                              
                              
                              -100.0
                              %Operating
      income
                              
                              
                              7.4
                              
                              
                              
                              42.5
                              
                              
                              
                              -82.6
                              %Interest
      expense, net
                              
                              
                              31.7
                              
                              
                              
                              36.2
                              
                              
                              
                              -12.4
                              %Other
      non-operating income, net
                              
                              
                              (20.3
                              )
                              
                              
                              (1.3
                              )
                              
                              nm(Loss)
      income from continuing operations before income taxes
                              
                              
                              (4.0
                              )
                              
                              
                              7.6
                              
                              
                              -152.6
                              %Provision
      for income taxes
                              
                              
                              0.2
                              
                              
                              
                              0.3
                              
                              
                              
                              -33.3
                              %(Loss)
      income from continuing operations
                              
                              
                              (4.2
                              )
                              
                              
                              7.3
                              
                              
                              -157.5
                              %Loss
      from discontinued operations, net of income taxes
                              
                              
                              (47.1
                              )
                              
                              
                              (1.9
                              )
                              
                              
                              nmNet
      (loss) income
                              
                              $
                              (51.3)
                              
                              
                              $
                              5.4
                              
                              
                              nmComparison
      as a % of net salesCost
      of sales
                              
                              
                              79.9
                              %
                              
                              
                              76.0
                              %
                              
                              
                              3.9
                              %Gross
      margin
                              
                              
                              20.1
                              %
                              
                              
                              24.0
                              %
                              
                              
                              -3.9
                              %Selling,
      general and administrative expenses
                              
                              
                              16.7
                              %
                              
                              
                              17.9
                              %
                              
                              
                              -1.2
                              %Operating
      margin
                              
                              
                              1.0
                              %
                              
                              
                              5.9
                              %
                              
                              
                              -4.9
                              %(Loss)
      income from continuing operations before income taxes
                              
                              
                              -.5
                              %
                              
                              
                              1.1
                              %
                              
                              
                              -1.6
                              %(Loss)
      income from continuing operations
                              
                              
                              -.6
                              %
                              
                              
                              1.0
                              %
                              
                              
                              -1.6
                              %Loss
      from discontinued operations, net of income taxes
                              
                              
                              -6.3
                              %
                              
                              
                              -0.3
                              %
                              
                              
                              -6.0
                              %Net
      (loss) income
                              
                              
                              -6.9
                              %
                              
                              
                              0.7
                              %
                              
                              
                              -7.6
                              %


Net sales for
the first nine months of 2008 were $741.2 million, an increase of $18.8 million,
or 2.6%, compared to the prior year period. Net sales for the first nine months
of 2008 increased relative to the prior year period because improved
pricing offset lower shipment volumes.





32


Operating
income in the first nine months of 2008 declined 82.6% to $7.4 million.
Operating margins were adversely affected by reduced gross margins which offset
lower headquarters expenses. Gross margins were unfavorably impacted by
approximately $35.0 million of higher raw material and energy costs and $9.0
million of start-up costs associated with the West Carrollton, Ohio expansion
project in the technical papers business, which offset the effects of price
improvement. Selling, general and administrative expenses
included $5.7 million of higher distribution costs and $2.4 million of
anti-dumping litigation costs. Year-to-date operating income also included
a goodwill impairment charge of $17.7 million within the performance packaging
segment. To the extent current market conditions persist or performance
packaging's future operating results do not meet expectations, the Company may
record additional impairment charges that could be material to the Company's
consolidated financial statements. These year-to-date September 28, 2008
increased expenses were partially offset by lower employee costs and a $1.9
million consulting fee expense that was recorded in the prior year
period, incurred in connection with income tax refunds obtained for the
1999 and 2000 tax periods. The year earlier period also included restructuring
charges of $1.4 million largely for U.S. employee termination
benefits.


In the
first nine months of 2008, income from continuing operations decreased $11.5
million compared to the first nine months of 2007. Other non-operating income
included a $22.3 million litigation settlement gain, net of
fees, as the result of prevailing in a lawsuit to recover previously
incurred costs from an insurance carrier. Interest expense for the nine
months ended September 2008 was $4.5 million lower than the same period in
2007.




During
the first nine months of 2008, a $47.1 million loss from discontinued operations
was recorded compared to a $1.9 million loss from discontinued operations in the
year earlier period. On August 1, 2008, Appleton completed the sale of
Bemrose Group Limited receiving $3.9 million of cash and $6.4 million of notes
receivable to be settled within 75 and 180 days after closing. Payment in
the amount of $1.9 million was received on November 4, 2008 for the first
tranche. In anticipation of the sale transaction, the Company recorded
impairment charges aggregating $41.2 million related to goodwill and other
long-lived assets for the three months ended June 29, 2008. These charges
arose in the second quarter due to a decline in the value of the business
arising primarily as the result of deteriorating economic conditions and
tougher markets for Bemrose products, as well as increased funding requirements
of the Bemrose pension plan arising from negotiations with the plan
trustees. During the third quarter of 2008 Appleton recorded additional
loss from discontinued operations of $4.2 million consisting of a $2.1
million operating loss and $2.1 million of additional impairment relating to an
out-of-period adjustment between quarters in fiscal 2008 that
was considered not material to the Company’s consolidated financial
statements for any periods presented.





Business
Segment Discussion





Technical
Papers





●
            Third
      quarter 2008 coated solutions net sales totaled $138.5 million, a decrease
      of $7.2 million, or 4.9%, compared to third quarter 2007. During the first
      nine months of 2008, coated solutions segment net sales totaled $418.8
      million, a decrease of $12.0 million, or 2.8%, from prior year
      levels. Third quarter and year-to-date 2008 carbonless shipment
      volumes were 8.7% and 5.2% lower, respectively, than the same periods
      in 2007. The adverse impact of lower shipment volumes and unfavorable mix
      was partially offset by favorable pricing when compared to the same period
      of 2007.
              
              Third quarter 2008 coated solutions operating
      income decreased $11.1 million compared to third quarter 2007. During
      the first nine months of 2008, coated solutions operating income decreased
      $18.1 million compared to the first nine months of
      2007. Operating margins in 2008 continue to be adversely affected by
      lower shipment volumes, unfavorable mix and higher raw material and
      distribution costs which offset improved pricing, manufacturing gains and
      lower employee costs compared to the prior year
  periods.




●
              Third
      quarter 2008 thermal papers net sales were $78.8 million, an increase of
      $9.6 million, or 13.9%, from the prior year period due to 10.4% increased
      volume and 3.7% improved pricing.  During the first nine months
      of 2008, thermal papers net sales were $212.6 million, an increase of
      $18.3 million, or 9.4%, over the same period last year largely due to
      8.3% increased shipment volumes and improved pricing.
                  
                  Third quarter 2008 thermal papers operating income
      decreased by $3.7 million compared to third quarter 2007. Thermal papers
      2008 year-to-date operating income decreased $4.7 million. Despite
      increased shipment volumes, 2008 operating margins continue to be
      adversely affected by unfavorable mix and higher raw material and
      distribution costs. In addition, third quarter 2008 margins were impacted
      by $5.2 million of start-up costs associated with the expansion project at
      Appleton's paper mill in West Carrollton, Ohio. Start-up costs are
      expected to continue in the fourth quarter of
      2008.




●
            Third
      quarter 2008 security papers net sales were $8.3 million, an increase of
      $0.6 million, or 8.3%, from third quarter 2007. Year-to-date 2008 security
      papers net sales were $26.0 million, an increase of $2.5 million, or
      10.5%, when compared to year-to-date 2007. These increases were due to
      increased shipment volumes and improved pricing.
              
              Security papers operating income for third
      quarter 2008 increased by $0.1 million in comparison to third quarter
      2007. Year-to-date 2008 security papers operating income increased $0.5
      million compared to year-to-date 2007. The favorable impact of increased
      shipment volumes, manufacturing gains and improved pricing were partially
      offset by higher raw material and distribution
  costs.




33




Performance
Packaging




●
            Third
      quarter 2008 performance packaging segment net sales totaled $29.6
      million. This was a $4.9 million, or 19.8%, increase over third quarter
      2007. During the first nine months of 2008, this segment recorded net
      sales of $83.9 million which was an increase of $10.0 million, or 13.6%,
      over the first nine months of 2007. During 2008, the segment
      benefited from improved pricing and favorable
  mix.





Operating
income recorded during third quarter 2008 was $17.1 million lower than third
quarter 2007. Operating income for the first nine months 2008 was $16.0
million lower than the same period in 2007. In
accordance with SFAS 142, "Goodwill and Other Intangible Assets," Appleton
reviews the carrying value of goodwill and intangible assets with indefinite
lives for impairment annually or more frequently if events or circumstances
indicate an asset might be impaired. As of
September 28, 2008, an impairment analysis was performed of the performance
packaging business due to the current depressed economic future outlook and
revised future cash flow projections. Estimated fair value for purposes of
the impairment test was based on either discounted cash flow projections or an
independent third-party valuation. As a result,the Company recorded a
$17.7 million goodwill impairment charge for the three months ended
September 28, 2008. This impairment charge negated the current year positive
impact of improved pricing, favorable mix and manufacturing gains. To the extent
current market conditions persist or performance packaging's future operating
results do not meet expectations, the Company may record additional impairment
charges that could be material to the Company's consolidated financial
statements.







Unallocated Corporate
Charges and Business Development Costs




●
            Unallocated
      corporate charges and business development costs decreased $0.6 million
      and $3.3 million during the three and nine months ended September 28,
      2008, respectively, when compared to the same periods of 2007. The
      reductions in 2008 reflect lower compensation and benefits expense and
      lower consulting fees. Charges recorded during 2007 included $1.9 million
      of consulting fee expense incurred in connection with income tax refunds
      obtained for the 1999 and 2000 tax
periods.




Liquidity
and Capital Resources




Overview. Appleton’s primary
sources of liquidity and capital resources are cash provided by operations and
available borrowings under its credit facility. Appleton expects that cash on
hand, internally generated cash flow and available credit from its credit
facility will provide the necessary funds for the reasonably foreseeable
operating and recurring cash needs (e.g., working capital, debt service, other
contractual obligations and capital expenditures). Appleton currently has
approximately $77.6 million of unused borrowing capacity under its revolving
credit facility. The
availability of the unused borrowing capacity is subject to the Company's
ability to remain in compliance with the financial ratios and limitations of its
respective debt agreements.




Cash Flows from Operating
Activities. Net cash used by operating activities for the first nine
months of 2008 was $5.1 million compared to net cash provided of $50.4 million
for the first nine months 2007. Net loss, adjusted for non-cash charges,
provided $62.8 million in operating cash for the 2008 period. Non-cash charges
included $44.3 million of depreciation and amortization, $59.9 million
of impairment charges, $4.4 million in non-cash employer matching
contributions to the KSOP and $5.5 million of other non-cash charges. Uses of
cash included a $39.8 million unfavorable change in working
capital.




Major
components of the $39.8 million increase in working capital during the first
nine months 2008, were a $19.0 million increase in inventories and a $20.4
million reduction in accounts payable and other accrued liabilities. Inventories
increased during the first nine months of 2008 in anticipation of planned
reduced mill output during completion of the expansion project at Appleton’s
paper mill in West Carrollton, Ohio. Cash flows from operating activities also
included $19.7 million of payments made against Appleton's $25.0 million
Fox River Liability.




Cash Flows from Investing
Activities.Net cash used by investing activities in the first nine
months 2008 totaled $77.5 million versus $37.1 million in the first nine months
2007. The increased 2008 spending is for the expansion project underway at the
West Carrollton, Ohio paper mill. Construction spending on this expansion
project is expected to extend into fourth quarter 2008. The expansion project is
being funded through cash flows from operations, special financing provided by
the State of Ohio and borrowings under Appleton’s senior secured credit
facility.





34





Cash Flows from Financing
Activities.Net cash provided by financing activities was $45.3 million
for the first nine months of 2008, while $4.1 million was provided in the
comparable 2007 period. During the first nine months of 2008, Appleton borrowed
a net $58.3 million more on its revolving credit facility than it paid. In June
2007, Appleton entered into a new $375 million senior secured credit facility
consisting of a seven-year, $225 million term loan and access to a six-year,
$150 million revolving line of credit. Proceeds of the new term loan were used
to repay outstanding balances on Appleton’s previous senior secured notes
payable and revolving line of credit.





In
February 2008, Appleton fixed the interest rate, at 5.45%, on $75.0 million
of its variable rate notes with a five-year interest rate swap contract. Also
during first quarter 2008, Appleton fixed the interest rate, at 5.40%, on an
additional $75.0 million of its variable rate notes with a five-year interest
rate swap contract. As of September 28, 2008, these swap contracts, or
derivatives, were recorded at a combined asset value of $1.7 million based
on fair value measurements using Level 2 inputs as described in SFAS 157, "Fair
Value Measurements."




Cash
overdrafts increased by $3.1 million during the first nine months 2008. Cash
overdrafts represent checks issued (thereby eliminating the corresponding
accounts payable) but not yet cleared through the banking system. Fluctuations
in the balance are a function of quarter-end payment patterns and the speed with
which the payees deposit the checks.





The senior credit facility, senior notes and 9.75% senior subordinated notes
contain affirmative and negative covenants.  In general, the covenants
contained in the senior credit facility are more restrictive than those of the
senior notes and 9.75% senior subordinated notes.  Among other
restrictions, the covenants contained in the senior credit facility require
Appleton to meet specified financial tests, including leverage and interest
coverage ratios, which become more restrictive over the term of the
debt.  Appleton was in compliance with such covenants as of September
28, 2008.  However, given current economic conditions, both nationally
and globally, Appleton may not be able to meet its leverage coverage ratio in
future periods. The Company is implementing plans to remain in compliance with
all covenants using current volume and operating forecasts, however, if Appleton
is ultimately not in compliance with the leverage coverage ratio, it will need
to seek a waiver of the covenant defaults which may require paying a fee to its
senior credit lenders or amend the terms of its senior credit facility which
could increase Appleton’s cost of credit and adversely impact its
operations.





A breach of any of these covenants or our inability to meet the required
financial tests could result in a default in respect of the related
indebtedness. If a default occurs, the relevant lenders could elect to declare
the indebtedness, together with accrued interest and other fees, to be
immediately due and payable and proceed against any collateral securing that
indebtedness.




These limitations, together with our highly leveraged position, could limit our
ability to finance our operations with debt or equity in the future. In
addition, these restrictions and our leveraged position may restrict our ability
to respond to competitive market conditions, make capital expenditures beyond
those permitted in the agreements relating to the indebtedness or take advantage
of other business opportunities, including making acquisitions. This loss of
operating flexibility may have a material adverse affect on our ability to
achieve our financial objectives or our ability to sustain our current or past
levels of revenue, earnings and cash flow.





New
Accounting Pronouncements




In
March 2008, the Financial Accounting Standards Board (“FASB”) issued
SFAS 161, “Disclosures about Derivative Instruments and Hedging Activities,
an amendment of FASB Statement No. 133.” This statement changes the disclosure
requirements for derivative instruments and hedging activities. SFAS 161
requires enhanced disclosures about (a) how and why an entity uses
derivative instruments, (b) how derivative instruments and related hedged
items are accounted for under SFAS 133 and its related interpretations, and
(c) how derivative instruments and related hedged items affect an entity’s
financial position, financial performance and cash flows. These provisions are
effective for financial statements issued for fiscal years beginning after
November 15, 2008. PDC is currently evaluating the impact, if any, on its
financial statements.





In
September 2006, the FASB issued SFAS 157, “Fair Value Measurements.” SFAS 157
provides a single definition of fair value, together with a framework for
measuring it, and requires additional disclosure about the use of fair value to
measure assets and liabilities. SFAS 157 also emphasizes that fair value is a
market-based measurement, not an entity-specific measurement. Fair value refers
to the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. The standard clarifies the principle that
fair value should be based on the assumptions market participants would use when
pricing the asset or liability. In support of this principle, the standard
establishes a fair value hierarchy that prioritizes the information used to
develop assumptions. The fair value hierarchy gives the highest priority to
quoted prices in active markets and the lowest priority to unobservable data,
for example, the reporting entity’s own data. Under the standard, fair value
measurements would be separately disclosed by level within the fair value
hierarchy. SFAS 157 is effective for fiscal years beginning after November 15,
2007, except as it relates to nonrecurring fair value measurements of
nonfinancial assets and liabilities for which the standard is effective for
fiscal years beginning after November 15, 2008. In October 2008, the FASB issued
FASB Staff Position ("FSP") 157-3 which clarifies the application of SFAS 157 in
a market that is not active. The adoption of SFAS 157 with respect to financial
assets and liabilities, in the first quarter of 2008, did not have a significant
effect on the Company’s financial statements. The Company is currently
evaluating the impact, if any, of SFAS 157 for measuring nonfinancial assets and
liabilities on future results of operations and financial position.




35





Item 3—Quantitative and
Qualitative Disclosures About Market Risk




For
information regarding quantitative and qualitative disclosures about market
risk, see the Annual Report on Form 10-K for the year ended December 29,
2007. There have been no other material changes in the quantitative or
qualitative exposure to market risk from that described in the Form
10-K.




Item 4—Controls and
Procedures




Internal Controls Over
Financial Reporting




There
were no changes in the internal control over financial reporting of Appleton or
PDC during the fiscal quarter covered by this report that have materially
affected, or are reasonably likely to materially affect, the internal control
over financial reporting.




Disclosure Controls
and Procedures




Appleton
and PDC carried out an evaluation, under the supervision and with the
participation of their management, including their respective principal
executive officer and principal financial officer, of the effectiveness of the
design and operation of their disclosure controls and procedures as such terms
are defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934, as amended (the “Exchange Act”). Appleton and PDC maintain disclosure
controls and procedures that are designed to ensure that information required to
be disclosed by Appleton and PDC in the reports filed or submitted by them under
the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules and forms. The disclosure controls and
procedures are also designed to ensure that the information is accumulated and
communicated to management, including their respective principal executive and
principal financial officers, to allow timely decisions regarding required
disclosures. Based on their evaluation, the Chief Executive Officer and Chief
Financial Officer of Appleton and PDC have concluded that their disclosure
controls and procedures are effective as of the end of the period covered by
this Form 10-Q.





36








PART
II – OTHER INFORMATION




Item 1
– Legal Proceedings





Information
regarding legal proceedings is contained in Note 13 to the Condensed
Consolidated Financial Statements contained in this report and is incorporated
herein by reference.





Item 1A
– Risk Factors





Other
than with respect to the risk factors set forth below, there have been no
material changes in the risk factors disclosed in the Annual Report on Form 10-K
for the year ended December 29, 2007.





Compliance
with the covenants relating to our indebtedness may limit our operating
flexibility.




The
agreements relating to our indebtedness, including the senior credit facility,
the senior notes and the senior subordinated notes, contain numerous covenants
that include certain financial tests, including various debt and cash flow
ratios. The covenants related to our indebtedness, among other things, prohibit
or restrict our ability, as well as the ability of PDC and our subsidiaries
to:




•
            pay
      dividends on or purchase or redeem capital
  stock;




•
            repay
      other indebtedness;




•
            make
      loans and investments;




•
            acquire
      assets, stock or debt securities of another
  person;




•
            incur
      or guarantee additional
indebtedness;




•
            use
      assets as security in other
transactions;




•
            sell
      assets or merge with or into other
companies;




•
            enter
      into sale and leaseback
transactions;




•
            enter
      into transactions with affiliates;




•
            create
      liens;




•
            sell
      equity interests in our
subsidiaries;




•
            amend
      or terminate particular agreements relating to our transaction with AWA
      and the ESOP;




•
            engage
      in new lines of business; and




•
            take,
      or fail to take, any actions that would cause PDC to lose its subchapter S
      corporation status.




A breach
of any of these covenants or our inability to meet the required financial tests
could result in a default in respect of the related indebtedness. If a default
occurs, the relevant lenders could elect to declare the indebtedness, together
with accrued interest and other fees, to be immediately due and payable and
proceed against any collateral securing that indebtedness.




These
limitations, together with our highly leveraged position, could limit our
ability to finance our operations with debt or equity in the future. In
addition, these restrictions and our leveraged position may restrict our ability
to respond to competitive market conditions, make capital expenditures beyond
those permitted in the agreements relating to the indebtedness or take advantage
of other business opportunities, including making acquisitions. This loss of
operating flexibility may have a material adverse affect on our ability to
achieve our financial objectives or our ability to sustain our current or past
levels of revenue, earnings and cash flow.





As of
September 28, 2008, we were in full compliance with all financial covenants in
our senior credit facility. However, given current economic conditions, both
nationally and globally, Appleton may not be able to meet its leverage coverage
ratio in future periods. The Company is implementing plans to remain in
compliance with all covenants using current volume and operating forecasts,
however, if Appleton is ultimately not in compliance with the leverage coverage
ratio, it will need to seek a waiver of the covenant defaults which may require
paying a fee to its senior credit lenders or amend the terms of its senior
credit facility which could increase Appleton’s cost of credit and adversely
impact its operations.


37





We
have competitors in our various markets and we may not be able to maintain
prices and margins for our products.




We face
strong competition in all of our business segments. Our competitors vary in size
and the breadth of their product offerings and some of our competitors have
significantly greater financial, technical and marketing resources than we do.
Regardless of the continuing quality of our primary products, we may be unable
to maintain our prices or margins due to:




•
            declining
      overall carbonless market size;




•
            accelerating
      decline in carbonless sheet sales;




•
            variations
      in demand for, or pricing of, carbonless
  products;




•
            increasing
      manufacturing costs;




•
            increasing
      competition in international markets or from domestic or foreign
      producers; or




•
            declining
      general economic conditions.




Our
inability to compete effectively or to maintain our prices and margins could
have a material adverse effect on our earnings and cash flow.




Our North
American market is highly competitive. We compete based on a number of factors,
including price, product availability, quality and customer service.
Additionally, we compete with domestic production and imports from Europe and
Asia. We believe that competitors in China, Germany and Korea have
illegally dumped lightweight thermal paper into the United States and that
competitors in China have been subsidized by the Chinese Government.
The U.S. Department of Commerce (“Department”) issued its preliminary
determination regarding the Chinese subsidy on March 10, 2008, finding
margins that range from 0.57% to 59.5%. Interim duties have
been imposed to offset the levels of subsidization found in the amount of
these margins. On May 7, 2008, the Department imposed preliminary anti-dumping
duties in the amount of 133% against China and 6.5% against
Germany.





On
September 26, 2008, the Department issued its final determination,
affirming that certain Chinese producers and exporters of LWTP sold the product
in the U. S. at prices below fair value, and imposing final duties of 19.77% to
115.29% on those imports. The Department also affirmed that German producers and
exporters of LWTP sold the product in the U.S. at prices below fair value and
imposed final duties on those imports of 6.5%.  In addition, the
Department announced its final determination concerning the imposition of
countervailing duties on imports of LWTP from China to offset the subsidies that
Chinese producers receive from the Chinese government. For all but one Chinese
producer, the Department imposed duties of between 13.17% and 137.25%. Between
the countervailing and anti-dumping duties, the Department imposed total duties
of 19.77% to 252.54% on imports of LWTP from China.  On October 30,
2008, the ITC made a final determination that there is a reasonable indication
that the U.S. industry producing certain LWTP is threatened with material injury
due to unfairly traded imports from China and Germany.  As a result,
the final duties will go into effect on or about November 21, 2008. These duties
are paid directly to the U.S. federal government and will not have a direct
impact on Appleton's net income.  Germany and/or China may file an
appeal to the U.S. Court of International Trade.




The
global credit market crisis and economic weakness may adversely affect our
customers and suppliers.
  Global
financial and credit markets recently have been, and continue to be, extremely
unstable and unpredictable.  Worldwide economic conditions have been
weak and may be further deteriorating.  The instability of the markets
and weakness of the economy could affect the demand for our customers' products,
the amount, timing and stability of their orders from us, the financial strength
of our customers and suppliers, their ability or willingness to do business with
us, our willingness to do business with them, and/or our suppliers' and
customers' ability to fulfill their obligations to us.  These factors
could adversely affect our operations, earnings and financial condition.





38





SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS




This
report contains forward-looking statements. The words “will,” “may,” “should,”
“believes,” “anticipates,” “intends,” “estimates,” “expects,” “projects,”
“plans,” “seek” or similar expressions are intended to identify forward-looking
statements. All statements in this report other than statements of historical
fact, including statements which address Appleton’s strategy, future operations,
future financial position, estimated revenues, projected costs, prospects, plans
and objectives of management and events or developments that Appleton expects or
anticipates will occur, are forward-looking statements. All forward-looking
statements speak only as of the date on which they are made. They rely on a
number of assumptions concerning future events and are subject to a number of
risks and uncertainties, many of which are outside the Company’s control that
could cause actual results to differ materially from such statements. These
risks and uncertainties include, but are not limited to, the factors listed
under “Item 1A – Risk Factors” in the Annual Report on Form 10-K for the year
ended December 29, 2007, as well as in the Quarterly Report on Form 10-Q
for the quarters ended March 30, 2008 and June 29, 2008, as well as the current
quarter ended September 28, 2008, which factors are incorporated herein by
reference and as updated above. Many of these factors are beyond Appleton’s
ability to control or predict. Given these uncertainties, you should not place
undue reliance on the forward-looking statements. Appleton disclaims any
obligation to update or revise publicly any forward-looking statements, whether
as a result of new information, future events or otherwise.




Item 6—Exhibits




31.1
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to Rule 15d-14(a) of the Securities
      Exchange Act of 1934 as amended.31.2
            Certification
      of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.3
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to Rule 15d-14(a) of the
      Securities Exchange Act of 1934 as amended.31.4
            Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to Rule 15d-14(a) of the Securities Exchange
      Act of 1934 as amended.32.1
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Appleton Papers Inc., pursuant to 18 U.S.C. Section
  1350.32.2
            Certification
      of Thomas J. Ferree, Vice President Finance, Chief Financial Officer and
      Treasurer of Appleton Papers Inc., pursuant to 18 U.S.C. Section
      1350.32.3
            Certification
      of Mark R. Richards, Chairman, President and Chief Executive Officer of
      Paperweight Development Corp., pursuant to 18 U.S.C. Section
      1350.32.4
            Certification
      of Thomas J. Ferree, Chief Financial Officer and Treasurer of Paperweight
      Development Corp., pursuant to 18 U.S.C. Section
  1350.




39








SIGNATURES




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




APPLETON
      PAPERS INC.
              (Registrant)Date:
      November 10, 2008
            /s/ Thomas J. FerreeThomas
      J. FerreeVice
      President Finance, Chief Financial Officer and Treasurer
              (Signing
      on behalf of the Registrant and as the Principal Financial
      Officer)




40











SIGNATURES




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




PAPERWEIGHT
      DEVELOPMENT CORP.
              (Registrant)Date:
      November 10, 2008
            /s/ Thomas J. FerreeThomas
      J. FerreeChief
      Financial Officer and Treasurer
              (Signing
      on behalf of the Registrant and as the Principal Financial
      Officer)




41