UNITED
STATES


SECURITIES
AND EXCHANGE
COMMISSION


Washington,
DC 20549









FORM
10-Q







(Mark
One)




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


For
      the quarterly period ended September 30,
  2008




OR





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


For
      the transition period from __________ to
  __________








Commission
file number:  333-142283








Verso
Paper
Holdings LLC


(Exact name of registrant as specified
in its charter)






Delaware
            56-2597634(State or other
      jurisdiction of incorporation or organization)
            (I.R.S. Employer
      Identification Number)







6775 Lenox Center Court, Suite
      400Memphis, Tennessee
      38115-4436
            (901)
      369-4100(Address of principal
      executive offices) (Zip Code)
            (Registrant’s
      telephone number, including area
code)







Indicate
by check mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.  Yes þ  No o





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








Large accelerated
      filer  o
            Accelerated
      filer  o
            Non-accelerated
      filer  þ
              (Do not check
      if a smaller reporting company)
            Smaller reporting
      company  o






Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o  No þ
  As of
October 31, 2008, there was one outstanding limited liability company interest
of the registrant.


TABLE
OF CONTENTS








PagePart I.
            
            FINANCIAL INFORMATIONItem 1.
              
              Item 2.
              
              Item 3.
              
              Item 4T.
            
            Unaudited Financial Statements of Verso Paper Holdings
      LLC
              
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              
              Quantitative and Qualitative Disclosures About Market
      Risk
              
              Controls and Procedures
            
            3
              
              24
              
              34
              
              36Part II.
            
            OTHER INFORMATIONItem 1.
              
              Item 1A.
              
              Item 2.
              
              Item 3.
              
              Item 4.
              
              Item 5.
              
              Item 6.
            
            Legal Proceedings
              
              Risk Factors
              
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              
              Defaults Upon Senior Securities
              
              Submission of Matters to a Vote of Security
      Holders
              
              Other Information
              
              Exhibits
            
            37
              
              37
              
              37
              
              37
              
              37
              
              37
              
              37SIGNATURES
            
            38EXHIBIT INDEX
            
            39







2





PART I.  FINANCIAL INFORMATION





ITEM 1.  UNAUDITED FINANCIAL STATEMENTS OF VERSO PAPER
HOLDINGS LLC







VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED BALANCE SHEETSSeptember
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007ASSETSCurrent
      Assets:Cash
              
              $
              16,907
              
              
              $
              58,499Accounts
      receivable - net
              
              
              138,326
              
              
              
              121,351Accounts
      receivable from related parties
              
              
              14,118
              
              
              
              12,318Inventories
              
              
              154,174
              
              
              
              119,620Prepaid
      expenses and other assets
              
              
              6,459
              
              
              
              3,935Total
      Current Assets
              
              
              329,984
              
              
              
              315,723Property,
      plant and equipment - net
              
              
              1,126,555
              
              
              
              1,159,918Intangibles
      and other assets - net
              
              
              98,011
              
              
              
              90,843Goodwill
              
              
              10,551
              
              
              
              10,551Total
      Assets
              
              $
              1,565,101
              
              
              $
              1,577,035LIABILITIES
      AND MEMBERS' EQUITYCurrent
      Liabilities:Accounts
      payable
              
              $
              125,324
              
              
              $
              128,149Accounts
      payable to related parties
              
              
              27,202
              
              
              
              3,872Accrued
      liabilities
              
              
              88,568
              
              
              
              88,127Current
      maturities of long-term debt
              
              
              2,850
              
              
              
              2,850Total
      Current Liabilities
              
              
              243,944
              
              
              
              222,998Long-term
      debt
              
              
              1,151,450
              
              
              
              1,153,588Other
      liabilities
              
              
              23,211
              
              
              
              25,596Total
      Liabilities
              
              
              1,418,605
              
              
              
              1,402,182Commitments
      and contingencies (Note 10)
              
              
              -
              
              
              
              -Members'
      EquityPaid-in-capital
              
              
              301,038
              
              
              
              289,911Retained
      deficit
              
              
              (132,571
              )
              
              
              (105,188
              )Accumulated
      other comprehensive loss
              
              
              (21,971
              )
              
              
              (9,870
              )Total
      Members' Equity
              
              
              146,496
              
              
              
              174,853Total
      Liabilities and Members' Equity
              
              $
              1,565,101
              
              
              $
              1,577,035See
      notes to unaudited condensed consolidated financial
      statements.


3





VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSThree
      Months
              
              
              Three
      Months
              
              
              Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      sales
              
              $
              485,423
              
              
              $
              450,548
              
              
              $
              1,390,932
              
              
              $
              1,182,956Costs
      and expenses:Cost
      of products sold - (exclusive ofdepreciation
      and amortization)
              
              
              385,560
              
              
              
              386,709
              
              
              
              1,137,859
              
              
              
              1,035,903Depreciation and amortization
              
              
              33,752
              
              
              
              31,019
              
              
              
              100,577
              
              
              
              90,638Selling,
      general and administrative expenses
              
              
              18,225
              
              
              
              17,712
              
              
              
              58,644
              
              
              
              37,047Restructuring
      and other charges
              
              
              1,117
              
              
              
              4,240
              
              
              
              26,553
              
              
              
              16,483Operating
      income
              
              
              46,769
              
              
              
              10,868
              
              
              
              67,299
              
              
              
              2,885Interest
      income
              
              
              (126
              )
              
              
              (238
              )
              
              
              (458
              )
              
              
              (1,333
              )Interest
      expense
              
              
              25,036
              
              
              
              28,430
              
              
              
              76,577
              
              
              
              85,355Net
      income (loss)
              
              $
              21,859
              
              
              $
              (17,324
              )
              
              $
              (8,820
              )
              
              $
              (81,137
              )Included
      in the financial statement line itemsabove
      are related-party transactions as follows(Notes
      8 and 9):Net
      sales
              
              $
              47,780
              
              
              $
              26,847
              
              
              $
              128,423
              
              
              $
              97,565Purchases
      included in cost of products sold
              
              
              1,450
              
              
              
              4,175
              
              
              
              5,711
              
              
              
              7,531Restructuring
      and other charges
              
              
              (41
              )
              
              
              1,998
              
              
              
              23,281
              
              
              
              7,483See
      notes to unaudited condensed consolidated financial
      statements.





4




VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'
      EQUITYFOR
      THE PERIODS ENDED SEPTEMBER 30, 2008 AND 2007AccumulatedOther
              
              
              TotalPaid-in-
              
              
              Retained
              
              
              Comprehensive
              
              
              Members'(In
      thousands of U.S. dollars)
              
              Capital
              
              
              Deficit
              
              
              Loss
              
              
              EquityBeginning
      balance - January 1, 2007
              
              $
              289,286
              
              
              $
              (1,832
              )
              
              $
              (7,741
              )
              
              $
              279,713Cash
      distributions
              
              
              
              
              
              
              (14,671
              )
              
              
              -
              
              
              
              (14,671
              )Net
      loss
              
              
              -
              
              
              
              (81,137
              )
              
              
              -
              
              
              
              (81,137
              )Other
      comprehensive income:Prior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              588
              
              
              
              588Total
      other comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              588
              
              
              
              588Comprehensive
      income (loss)
              
              
              -
              
              
              
              (81,137
              )
              
              
              588
              
              
              
              (80,549
              )Equity
      award expense
              
              
              548
              
              
              
              -
              
              
              
              -
              
              
              
              548Ending
      balance - September 30, 2007
              
              $
              289,834
              
              
              $
              (97,640
              )
              
              $
              (7,153
              )
              
              $
              185,041Beginning
      balance - January 1, 2008
              
              $
              289,911
              
              
              $
              (105,188
              )
              
              $
              (9,870
              )
              
              $
              174,853Cash
      distributions
              
              
              -
              
              
              
              (18,563
              )
              
              
              -
              
              
              
              (18,563
              )Net
      loss
              
              
              -
              
              
              
              (8,820
              )
              
              
              -
              
              
              
              (8,820
              )Other
      comprehensive income (loss):Net
      unrealized losses on derivativefinancial
      instruments
              
              
              -
              
              
              
              -
              
              
              
              (12,755
              )
              
              
              (12,755
              )Prior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              654
              
              
              
              654Total
      other comprehensive loss
              
              
              -
              
              
              
              -
              
              
              
              (12,101
              )
              
              
              (12,101
              )Comprehensive
      loss
              
              
              -
              
              
              
              (8,820
              )
              
              
              (12,101
              )
              
              
              (20,921
              )Equity
      award expense
              
              
              11,127
              
              
              
              -
              
              
              
              -
              
              
              
              11,127Ending
      balance - September 30, 2008
              
              $
              301,038
              
              
              $
              (132,571
              )
              
              $
              (21,971
              )
              
              $
              146,496See
      notes to unaudited condensed consolidated financial
      statements.






5




VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSNine
      Months
            
            
            Nine
      MonthsEnded
            
            
            EndedSeptember
      30,
            
            
            September
      30,(In
      thousands of U.S. dollars)
            
            2008
            
            
            2007Cash
      Flows From Operating Activities:Net
      loss
            
            $
            (8,820
            )
            
            $
            (81,137
            )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operating activities:Depreciation
      and amortization
            
            
            100,577
            
            
            
            90,638Amortization
      of debt issuance costs
            
            
            4,071
            
            
            
            4,068Loss
      (gain) on disposal of fixed assets
            
            
            213
            
            
            
            231Other
      - net
            
            
            (2,199
            )
            
            
            1,137Changes
      in assets and liabilities:Accounts
      receivable
            
            
            (18,775
            )
            
            
            (3,972
            )Inventories
            
            
            (34,554
            )
            
            
            5,983Prepaid
      expenses and other assets
            
            
            (19,349
            )
            
            
            (13,471
            )Accounts
      payable
            
            
            20,505
            
            
            
            (12,317
            )Accrued
      liabilities
            
            
            (3,036
            )
            
            
            (13,037
            )Net
      cash provided by (used in) operating activities
            
            
            38,633
            
            
            
            (21,877
            )Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
            
            
            108
            
            
            
            1,788Capital
      expenditures
            
            
            (59,632
            )
            
            
            (48,671
            )Net
      cash used in investing activities
            
            
            (59,524
            )
            
            
            (46,883
            )Cash
      Flows From Financing Activities:Repayments
      of debt
            
            
            (2,138
            )
            
            
            (2,138
            )Equity
      distributions
            
            
            (18,563
            )
            
            
            (14,671
            )Net
      cash used in financing activities
            
            
            (20,701
            )
            
            
            (16,809
            )Net
      decrease in cash
            
            
            (41,592
            )
            
            
            (85,569
            )Cash
      at beginning of period
            
            
            58,499
            
            
            
            112,448Cash
      at end of period
            
            $
            16,907
            
            
            $
            26,879See
      notes to unaudited condensed consolidated financial
      statements.






6




VERSO
PAPER HOLDINGS LLC





NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AS OF SEPTEMBER 30,
2008,


AND
FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2008 AND
2007





1.
            BACKGROUND
      AND BASIS OF PRESENTATION





The
accompanying consolidated financial statements include the accounts of Verso
Paper Holdings LLC and its subsidiaries.  Unless otherwise noted, the
terms the “Company”, “Verso Paper”, “we,” “us”, and “our” refer collectively to
Verso Paper Holdings LLC and its subsidiaries after giving effect to the
consummation of the Acquisition (as defined below).





On August
1, 2006, we acquired the assets and certain of the liabilities of the Coated and
Supercalendered Papers Division of International Paper Company (“International
Paper”) including the mills located in Jay, Maine, Bucksport, Maine, Quinnesec,
Michigan and Sartell, Minnesota, together with other related facilities and
assets and certain administrative and sales and marketing functions
(collectively, the “Acquisition”) pursuant to an Agreement of Purchase and Sale
dated June 4, 2006.  We were formed by Apollo Management, L.P.
and its affiliates (“Apollo”) for the purpose of consummating the
Acquisition.





Included
in this report are the financial statements of Verso Paper for the three-month
and nine-month periods ended September 30, 2008 and 2007.  In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments that are necessary for the fair
presentation of Verso Paper’s financial position, results of operations, and
cash flows for the interim periods presented.  Except as disclosed in
the notes to the unaudited consolidated financial statements, such adjustments
are of a normal, recurring nature.  Certain previously reported
amounts have been reclassified to agree with current
presentation.  Results for the periods ended September 30, 2008 and
2007, may not necessarily be indicative of full-year results.  It is
suggested that these financial statements be read in conjunction with our
audited consolidated financial statements and notes thereto as of December 31,
2007, included in our annual report on Form 10-K for the year ended December 31,
2007.





We
operate, through our subsidiaries, in the following three segments: coated and
supercalendared papers; hardwood market pulp; and other, consisting of specialty
industrial paper. Our core business platform is as a producer of coated
freesheet, coated groundwood, and uncoated supercalendered papers. These
products serve customers in the catalog, magazine, inserts, and commercial print
markets.








2.
            RECENT
      ACCOUNTING DEVELOPMENTS





Derivatives and
Hedging Activities—In March 2008, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities. SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 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. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008. Since SFAS
No. 161 only addresses disclosure requirements, the adoption of SFAS No. 161
will have no impact on our consolidated results of operations or consolidated
financial position.




7





Business
Combinations—In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations. SFAS No. 141-R establishes principles and requirements
for how an acquirer recognizes and measures identifiable assets acquired,
liabilities assumed and noncontrolling interests; recognizes and measures
goodwill acquired in a business combination or gain from a bargain purchase; and
establishes disclosure requirements.  SFAS No. 141-R is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  Early adoption is prohibited.  The Company will
apply the provisions of SFAS No. 141-R to any future
acquisitions.





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This standard is effective, on a
prospective basis, for fiscal years, and interim periods within those years,
beginning on or after December 15, 2008.  The presentation and
disclosure requirements for existing minority interests should be applied
retrospectively for all periods presented.  Early adoption is
prohibited.  The impact of adopting SFAS No. 160 is not expected to
have a material impact on the Company’s consolidated results of operations or
consolidated financial position.





Fair Value Option
for Financial Assets and Financial Liabilities—In February 2007, the FASB
issued SFAS No. 159, Fair
Value Option for Financial Assets and Financial Liabilities—including an
amendment of FASB Statement No. 115, which permits an entity to measure
certain financial assets and financial liabilities at fair value.  The
Statement’s objective is to improve financial reporting by allowing entities to
mitigate volatility in reported earnings caused by the measurement of related
assets and liabilities using different attributes, without having to apply
complex hedge accounting provisions.  The Statement was effective as
of the beginning of an entity’s fiscal year beginning after November 15,
2007.  The adoption of SFAS No. 159 did not have a material impact on
the Company’s consolidated results of operations or consolidated financial
position.





Fair Value
Measurements—In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 does not address “what” to measure at fair value; instead, it
addresses “how” to measure fair value. SFAS No. 157 applies (with limited
exceptions) to existing standards that require assets and liabilities to be
measured at fair value. SFAS No. 157 establishes a fair value hierarchy,
giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data and requires new disclosures for assets and
liabilities measured at fair value based on their level in the hierarchy. SFAS
No. 157 was effective for financial statements issued for fiscal years
beginning after November 15, 2007.  However, FSP 157-2,
“Effective Date of FASB Statement No. 157,” delayed the implementation of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis, to years beginning after November 15, 2008.  The
impact of adopting the initial provisions of SFAS No. 157 did not have a
material impact on the Company’s consolidated results of operations or
consolidated financial position.  The impact of adopting the remaining
provisions of SFAS No. 157 is not expected to have a material impact on the
Company’s consolidated results of operations or consolidated financial
position.





Sales, Use and
Excise Taxes—In June 2006, the FASB ratified the consensuses reached by
the Emerging Issues Task Force in Issue No. 06-3, How Taxes Collected from Customers
and Remitted to Governmental Authorities Should be Presented in the Income
Statement (That is, Gross Versus Net Presentation). Issue No. 06-3
requires disclosure of an entity’s accounting policy regarding the presentation
of taxes assessed by a governmental authority that are directly imposed on a
revenue-producing transaction between a seller and a customer, including sales,
use, value added and some excise taxes. The Company presents such taxes on a net
basis (excluded from revenues and costs). The adoption of Issue No. 06-3 in
2007 had no impact on the Company’s consolidated results of operations or
consolidated financial position.




8





Accounting for
Uncertainty in Income Taxes—In June 2006, the FASB issued Interpretation
No. 48 (FIN 48), Accounting for Uncertainty in Income
Taxes—an interpretation of FASB Statement No. 109. FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. FIN 48 also
provides guidance on description, classification, interest and penalties,
accounting in interim periods, disclosure, and transition. FIN 48 was
effective for fiscal years beginning after December 15, 2006. The Company
applied the provisions of this interpretation beginning January 1,
2007.  The adoption of FIN 48 did not have a material impact on the
Company’s consolidated results of operations or consolidated financial
position.





3.
            SUPPLEMENTAL
      FINANCIAL STATEMENT INFORMATION





Inventories
by major category include the following:




September
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Raw
      materials
              
              $
              27,549
              
              
              $
              19,918Woodyard
      logs
              
              
              6,272
              
              
              
              3,209Work-in-process
              
              
              12,934
              
              
              
              19,565Finished
      goods
              
              
              81,841
              
              
              
              48,167Replacement
      parts and other supplies
              
              
              25,578
              
              
              
              28,761Inventories
              
              $
              154,174
              
              
              $
              119,620


On
September 30, 2008, the Company had approximately $0.8 million of restricted
cash reflected in Other assets related to an asset retirement obligation in the
state of Michigan.  This cash deposit is required by the state and may
only be used for the future closure of a landfill.  The following
table presents an analysis related to the company’s asset retirement obligations
included in Other liabilities in the accompanying condensed consolidated balance
sheet:




9




Nine
      Months
            
            
            Nine
      MonthsEnded
            
            
            EndedSeptember
      30,
            
            
            September
      30,(In
      thousands of U.S. dollars)
            
            2008
            
            
            2007Asset
      retirement obligations, January 1
            
            $
            11,614
            
            
            $
            11,855New
      liabilities
            
            
            1,091
            
            
            
            310Accretion
      expense
            
            
            435
            
            
            
            450Settlement
      of existing liabilities
            
            
            (1,020
            )
            
            
            (960
            )Adjustment
      to existing liabilities
            
            
            2,030
            
            
            
            104Asset
      retirement obligations, September 30
            
            $
            14,150
            
            
            $
            11,759




Depreciation
expense was $31.7 million and $95.0 million for the three-month and nine-month
periods ended September 30, 2008, compared to $29.7 million and $88.6 million
for the three-month and nine-month periods ended September 30, 2007,
respectively.





4.  INTANGIBLES
& OTHER ASSETS





Intangibles
and other assets consist of the following:




September
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Amortizable
      intangible assets:Customer
      relationships - net of accumulated amortization of $2.9 million
      and$1.8
      million, respectively
              
              $
              10,382
              
              
              $
              11,470Patents
      - net of accumulated amortization of $0.25 million and $0.16
      million,respectively
              
              
              899
              
              
              
              985Total
      amortizable intangible assets
              
              
              11,281
              
              
              
              12,455Unamortizable
      intangible assets:Trademarks
              
              
              21,473
              
              
              
              21,473Other
      assets:Financing
      costs-net of accumulated amortization of $11.8 million and$7.7
      million, respectively
              
              
              32,398
              
              
              
              36,468Deferred
      major repair
              
              
              12,444
              
              
              
              5,328Deferred
      software cost-net of accumulated amortization of $2.6millionand
      $1.3 million, respectively
              
              
              3,127
              
              
              
              3,765Replacement
      parts-net
              
              
              6,325
              
              
              
              4,932Other
              
              
              10,963
              
              
              
              6,422Total
      other assets
              
              
              65,257
              
              
              
              56,915Intangibles
      and other assets
              
              $
              98,011
              
              
              $
              90,843


10





Amortization
of intangible assets reflected in depreciation and amortization expense was $0.4
million and $1.2 million for the three-month and nine-month periods ended
September 30, 2008, compared to $1.0 million and $1.3 million for the
three-month and nine-month periods ended September 30, 2007,
respectively.





Estimated
amortization expense of intangibles for the remainder of 2008 is expected to be
$0.4 million and is expected to be approximately $1.4 million, $1.3 million,
$1.1 million and $0.9 million for the twelve-month periods of 2009, 2010, 2011
and 2012, respectively.





Software
cost incurred as part of a major systems project was capitalized and is being
amortized over its anticipated useful life of approximately three
years.  Amortization of software reflected in depreciation and
amortization expense was $0.5 million and $1.3 million for the three-month and
nine-month periods ended September 30, 2008, compared to $0.4 million and $0.7
million for the three-month and nine-month periods ended September 30, 2007,
respectively.







5.
            LONG-TERM
      DEBT





A summary
of long-term debt is as follows:





September
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              Maturity
              
              Rate
              
              
              2008
              
              
              2007First
      Priority Term Loan B
              8/1/2013
              
              LIBOR
      + 1.75
              %
              
              
              254,300
              
              
              
              256,438Second
      Priority Senior Secured Notes - Fixed
              8/1/2014
              
              
              9.13
              %
              
              
              350,000
              
              
              
              350,000Second
      Priority Senior Secured Notes - Floating
              8/1/2014
              
              LIBOR
      + 3.75
              %
              
              
              250,000
              
              
              
              250,000Senior
      Subordinated Notes
              8/1/2016
              
              
              11.38
              %
              
              
              300,000
              
              
              
              300,0001,154,300
              
              
              
              1,156,438Less
      current maturities
              
              
              
              
              
              
              
              (2,850
              )
              
              
              (2,850
              )Long-term
      debt
              
              
              
              
              
              
              $
              1,151,450
              
              
              $
              1,153,588





Interest
expense was $24.1 million while $40.7 million of interest was paid during third
quarter 2008.  Interest expense was $73.7 million while $92.0 million
of interest was paid during the nine months ended September 30,
2008.  Interest expense was $28.4 million while $43.9 million of
interest was paid during third quarter 2007.  Interest expense was
$85.3 million while $98.6 million of interest was paid during the nine months
ended September 30, 2007.





Amortization
of debt issuance costs, included in interest expense in the accompanying
condensed consolidated statements of operations, was $1.4 million and $4.1
million for the three-month and nine-month periods ended September 30, 2008,
compared to $1.4 million and $4.1 million for the three-month and nine-month
periods ended September 30, 2007, respectively.





We are an
indirect, wholly-owned subsidiary of Verso Paper Finance Holdings
LLC.  In January 2007, Verso Paper Finance Holdings LLC entered into a
$250 million senior unsecured floating-rate term loan facility with a maturity
of nine years.  The proceeds of the loan were used for a distribution
to equity holders and to pay related fees and expenses.




11




In May
2008, Verso Paper Corp., of which Verso Paper Finance Holdings LLC is an
indirect, wholly-owned subsidiary, contributed a portion of the net proceeds
from an initial public offering of 14 million shares of its common stock at an
offering price of $12.00 per share (the “IPO”) to repay $138 million of the
outstanding principal of this loan and a 1.0% prepayment penalty related
thereto.  Verso Paper Finance Holdings LLC can, at its option, pay
interest either in cash or in kind through the accumulation of the outstanding
principal amount.  The Company has not guaranteed the loan nor have
any of the Company’s assets been used for the collateral.  Verso Paper
Finance Holdings LLC has no independent operations; consequently, all cash flows
used to service the debt obligation will need to be received via a distribution
from the Company.  The Company paid distributions to Verso Paper
Finance Holdings LLC of $3.3 million in third quarter 2008 and $17.3 million for
the nine months ended September 30, 2008.  Additionally, the Company
paid distributions of $7.4 million in third quarter 2007 and $14.7 million for
the nine months ended September 30, 2007.  The Company has no
obligation to make distributions to Verso Paper Finance Holdings
LLC.





6.
            RETIREMENT
      PLANS





The
Company maintains a defined benefit pension plan that provides retirement
benefits to hourly employees in Jay, Bucksport and Sartell.  The plan
provides defined benefits based on years of credited service times a specified
flat dollar benefit rate.





The
Company makes contributions that are sufficient to fully fund its actuarially
determined costs, generally equal to the minimum amounts required by the
Employee Retirement Income Security Act (ERISA).  In third quarter
2008, the Company made contributions of $3.6 million with $2.1 million
attributable to the 2008 plan year and $1.5 million attributable to the 2007
plan year.  For the nine months, contributions totaled $7.3 million,
with $4.3 million attributable to the 2008 plan year and $3.0 million
attributable to the 2007 plan year.  The Company made a contribution
of $2.2 million in October 2008 related to the 2008 plan year and expects to
make an additional contribution of $2.1 million related to the 2008 plan year in
2009.





The
following table summarizes the components of net periodic expense:




Three
      Months
              
              
              Three
      Months
              
              
              Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Components
      of net periodic pension cost:Service
      cost
              
              $
              1,320
              
              
              $
              1,253
              
              
              $
              3,958
              
              
              $
              3,760Interest
      cost
              
              
              251
              
              
              
              149
              
              
              
              752
              
              
              
              447Amortization
      of prior service cost
              
              
              218
              
              
              
              196
              
              
              
              654
              
              
              
              588Net
      periodic pension cost
              
              $
              1,789
              
              
              $
              1,598
              
              
              $
              5,364
              
              
              $
              4,795






12





7.  MANAGEMENT
EQUITY AWARDS





Simultaneously
with the consummation of Verso Paper Corp.’s IPO, the limited partnership
agreement of Verso Paper Corp.’s parent, Verso Paper Management LP (the
“Partnership”), was amended to, among other things, change its equity structure
from multiple classes of units representing limited partner interests in the
Partnership to a single class of units representing such
interests.  The conversion from the prior multiple-class unit
structure (referred to herein as “Legacy Units”) to a new single class of units
was designed to correlate the equity structure of the Partnership with the
post-IPO equity structure of Verso Paper Corp.





As part of
the amendment of the limited partnership agreement of the Partnership, the
Legacy Class C Units of the Partnership previously granted to certain members of
our management became vested immediately.  Prior to the amendment, the
Legacy Class C Units were to vest only if certain performance targets were
met.  As a result of the accelerated vesting of the Legacy Class C
Units, the Company recognized $10.8 million of additional equity compensation
expense.





Certain
members of our management have been granted Legacy Class B Units, which vest
over a five-year period at the rate of 20% per year on each anniversary of the
grant date.  Our directors have been granted Legacy Class D Units,
which were vested upon grant.





The fair
value of the Legacy Class B Units granted to management and the Legacy Class D
Units granted to directors in 2008 and 2007 was approximately $0.1 million and
$0.6 million, respectively.  Equity award expense for the three-month
and nine-month periods ended September 30, 2008, was $0.1 million and $11.1
million, respectively, which for the nine-month period, includes the $10.8
million related to the vesting of the Legacy Class C Units.  Equity
award expense was $0.1 million and $0.5 million for the three-month and
nine-month periods ended September 30, 2007, respectively.




As of
September 30, 2008, there was approximately $0.8 million of unrecognized
compensation cost related to unvested Legacy Class B Units. This cost is
expected to be recognized over a weighted-average period of approximately 2.8
years.




The
Company estimates the fair value of management equity awards using the
Black-Scholes valuation model.  Key input assumptions applied under
the Black-Scholes option pricing model were as follows:  expected term
of five years, volatility rate of 36.65% based on industry historical volatility
rate, no expected dividends and average risk free rates of 3.0% in 2008, 4.2% to
4.7% in 2007.




Assumptions
applied under the Black-Scholes option pricing model for the Legacy Class C
Units were as follows:  expected term of one year, volatility rate of
36.65% based on industry historical volatility rate, expected dividend rate of
1%, and average risk free rate of 2.0%.




8.  RELATED
PARTY TRANSACTIONS




In
conjunction with the Acquisition, we entered into a transition service agreement
with International Paper whereby International Paper agreed to continue to
provide certain services specified in the agreement that are necessary for us to
run as a stand-alone business. The charges for nine-months ended September 30,
2008, were $0.2 million, compared to $1.3 million and $5.4 million for the
three-month and nine-month periods ended September 30, 2007,
respectively.  As of September 30, 2007, we substantially discontinued
the usage of services under this agreement.




13





The
Company had net sales to International Paper of $47.8 million and $128.4 million
for the three-month and nine-month periods ended September 30, 2008, compared to
$26.9 million and $97.6 million for the three-month and nine-month periods ended
September 30, 2007, respectively.  The Company had purchases included
in cost of products sold from International Paper of $1.4 million and $5.7
million for the three-month and nine-month periods ended September 30, 2008,
compared to $4.2 million and $7.5 million for the three-month and nine-month
periods ended September 30, 2007, respectively.





Subsequent
to the Acquisition, we entered into a management agreement with Apollo relating
to the provision of certain financial and strategic advisory services and
consulting services.  Management fees to Apollo for these services
were $0.7 million and $2.1 million for the three-month and nine-month periods
ended September 30, 2007.  Upon consummation of the IPO, Apollo
terminated the annual fee arrangement under the management agreement for its
consulting and advisory services in exchange for a one-time fee corresponding to
the present value of all future annual fee payments pursuant to the terms of the
management agreement. The amount of this one-time fee was $23.1
million.  Although the annual fee arrangement was terminated in
connection with the IPO, the management agreement remains in effect and will
expire on August 1, 2018.




We are a
wholly-owned subsidiary of Verso Paper Finance Holdings LLC.  In
January 2007, Verso Paper Finance Holdings LLC entered into a $250 million
senior unsecured floating-rate term loan facility with a maturity of nine
years.  The proceeds of the loan were used for a distribution to
equity holders and to pay related fees and expenses.  In May 2008,
Verso Paper Corp. used a portion of the net proceeds from the IPO to repay $138
million of the outstanding principal of this loan and a 1.0% prepayment penalty
related thereto.  Verso Paper Finance Holdings LLC can, at its option,
pay interest either in cash or in kind through the accumulation of the
outstanding principal amount.  The Company has not guaranteed the loan
nor have any of the Company’s assets been used for the
collateral.  Verso Paper Finance Holdings LLC has no independent
operations; consequently, all cash flows used to service the debt obligation
will need to be received via a distribution from the Company.  The
Company paid distributions to Verso Paper Finance Holdings LLC of $3.3 million
in third quarter 2008 and $17.3 million for the nine months ended September 30,
2008.  The Company paid distributions of $7.4 million in third quarter
2007 and $14.7 million for the nine months ended September 30,
2007.  Additionally, through September 30, 2008, Verso Paper Holdings
LLC paid $0.3 million related to expenses on behalf of Verso Paper Finance
Holdings LLC and $1.0 million related to expenses on behalf of Verso Paper Corp.
The Company has no obligation to make distributions to Verso Paper Finance
Holdings LLC.





On
September 30, 2008, the Company had current receivables of $2.2 million due from
Verso Paper Corp. and its subsidiaries.





9.
RESTRUCTURING AND OTHER CHARGES





Restructuring
and other charges are comprised of transition and other non-recurring costs
associated with the acquisition and carve out of our operations from those of
International Paper; including costs of a transition service agreement with
International Paper, technology migration costs, consulting and legal fees, and
other one-time costs related to us operating as a stand-alone business. The
charges for the three-month and nine-month periods ended September 30, 2008,
were $1.1 million and $26.5 million, compared to $4.2 million and $16.5 million
for the three-month and nine-month periods ended September 30, 2007,
respectively.  The charges in 2008 included the one-time fee of $23.1
million to terminate the annual fee arrangement under the management agreement
with Apollo, and $0.2 million of transition service agreement
costs.  Restructuring and other charges included $1.3 million and $5.4
million of transition service agreement costs for the three-month and nine-month
periods ended September 30, 2007, respectively.  As of September 30,
2007, we substantially discontinued the usage of services under this
agreement.




14





10.
COMMITMENTS AND CONTINGENCIES





Contingencies— On
August 6, 2008, Verso Paper Corp. filed a declaratory judgment suit in the
United States District Court for the Eastern District of Wisconsin against
NewPage Corporation and NewPage Wisconsin System Inc., in response to a patent
infringement claim recently asserted by NewPage regarding certain of our coated
paper products.  The action seeks a ruling that our coated paper
products do not infringe the NewPage patent and that the NewPage patent is
invalid.  While no assurances can be given regarding the outcome, if
the outcome of this matter is unfavorable, our business, financial condition,
results of operations and cash flows could be materially adversely
affected.





Contingent
liabilities arise in the ordinary course of business, including those related to
litigation. Various claims are pending against the Company and its
subsidiaries.  Although the Company cannot predict the outcome of
these claims, after consulting with counsel, management is of the opinion that
when resolved, these claims, except as noted in the foregoing paragraph, will
not have a material adverse effect on our business, financial condition, results
of operations and cash flows.





In
connection with the Acquisition, we assumed a twelve-year supply agreement with
Thilmany LLC for the products produced from our paper machine No. 5 at the Jay
mill.  This agreement requires Thilmany to pay us a variable charge
for the paper purchased and a fixed charge for the availability of the No. 5
paper machine.  We are responsible for the No. 5 machine’s routine
maintenance and Thilmany is responsible for any capital expenditures specific to
the machine.  As defined in the agreement, Thilmany has the right to
terminate the agreement if certain events occur.





The
Company has a joint ownership interest with Bucksport Energy LLC, an unrelated
third party, in a cogeneration power plant producing steam and
electricity.  The plant was built in 2000 by the two parties and is
located in Bucksport, Maine.  Each owner, Verso Bucksport LLC and
Bucksport Energy LLC, owns its proportional share of the assets.  The
plant supports the Bucksport mill.  The mill owns 28% of the steam and
electricity produced by the plant.  The mill may purchase its
remaining electrical needs from the plant at market rates.  The mill
is obligated to purchase the remaining 72% of the steam output at fuel cost plus
a contractually fixed fee per unit of steam.  Power generation and
operating expenses are divided on the same basis as ownership.  The
Bucksport mill has cash which is restricted in its use and may be used only to
fund the ongoing energy operations of this investment.  Approximately
$0.2 million of restricted cash is included in Other assets in the accompanying
condensed consolidated balancesheet
at September 30, 2008.




15




11.  INFORMATION
BY INDUSTRY SEGMENT





The
Company operates in three operating segments: coated and supercalendered papers;
hardwood market pulp; and other, consisting of specialty industrial paper. The
Company operates in one geographic segment, the United States. The Company’s
core business platform is as a producer of coated freesheet, coated groundwood,
and uncoated supercalendared papers. These products serve customers in the
catalog, magazine, inserts, and commercial print markets.





The
following table summarizes the industry segment data for the three-month and
nine-month periods ended September 30, 2008 and 2007:




Three
      Months
              
              
              Three
      Months
              
              
              Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      Sales:Coated
      and supercalendered
              
              $
              432,608
              
              
              $
              406,234
              
              
              $
              1,239,854
              
              
              $
              1,047,106Hardwood
      market pulp
              
              
              41,019
              
              
              
              34,953
              
              
              
              118,861
              
              
              
              107,663Other
              
              
              11,796
              
              
              
              9,361
              
              
              
              32,217
              
              
              
              28,187Total
              
              $
              485,423
              
              
              $
              450,548
              
              
              $
              1,390,932
              
              
              $
              1,182,956Operating
      Income (Loss):Coated
      and supercalendered
              
              $
              37,707
              
              
              $
              2,297
              
              
              $
              43,209
              
              
              $
              (18,580
              )Hardwood
      market pulp
              
              
              9,857
              
              
              
              8,850
              
              
              
              27,140
              
              
              
              23,954Other
              
              
              (795
              )
              
              
              (279
              )
              
              
              (3,050
              )
              
              
              (2,489
              )Total
              
              $
              46,769
              
              
              $
              10,868
              
              
              $
              67,299
              
              
              $
              2,885Depreciation
      and Amortization:Coated
      and supercalendered
              
              $
              27,920
              
              
              $
              25,866
              
              
              $
              84,386
              
              
              $
              75,302Hardwood
      market pulp
              
              
              5,119
              
              
              
              4,478
              
              
              
              14,023
              
              
              
              13,312Other
              
              
              713
              
              
              
              675
              
              
              
              2,168
              
              
              
              2,024Total
              
              $
              33,752
              
              
              $
              31,019
              
              
              $
              100,577
              
              
              $
              90,638Capital
      Spending:Coated
      and supercalendered
              
              $
              16,825
              
              
              $
              16,568
              
              
              $
              49,720
              
              
              $
              45,951Hardwood
      market pulp
              
              
              1,138
              
              
              
              521
              
              
              
              8,033
              
              
              
              1,348Other
              
              
              277
              
              
              
              400
              
              
              
              1,879
              
              
              
              1,372Total
              
              $
              18,240
              
              
              $
              17,489
              
              
              $
              59,632
              
              
              $
              48,671






16





12.
            DERIVATIVE
      INSTRUMENTS AND HEDGES





In the
normal course of business, the Company utilizes derivatives contracts as part of
its risk management strategy to manage our exposure to market fluctuations in
energy prices and interest rates.  These instruments are subject to
credit and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles. Controls and
monitoring procedures for these instruments have been established and are
routinely reevaluated.  Credit risk represents the potential loss that
may occur because a party to a transaction fails to perform according to the
terms of the contract. The measure of credit exposure is the replacement cost of
contracts with a positive fair value. The Company manages credit risk by
entering into financial instrument transactions only through approved
counterparties. Market risk represents the potential loss due to the decrease in
the value of a financial instrument caused primarily by changes in commodity
prices. The Company manages market risk by establishing and monitoring limits on
the types and degree of risk that may be undertaken.





Derivative
instruments are recorded on the balance sheet as other assets or accrued
liabilities measured at fair value. Fair value is defined as the price that
would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement
date.  Where available, fair value is based on observable market
prices or parameters or derived from such prices or parameters.  Where
observable prices or inputs are not available, valuation models may be
applied.  For a cash flow hedge accounted for under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” changes in the
fair value of the derivative instrument, to the extent that it is effective, are
recorded in accumulated other comprehensive income and subsequently reclassified
to earnings as the hedged transaction impacts net income. Any ineffective
portion of a cash flow hedge is recognized currently in
earnings.  Cash flows from derivative contracts are reported as
operating activities on the unaudited condensed consolidated statements of cash
flows.





The
Company enters into short-term, fixed-price energy swaps as hedges designed to
mitigate the risk of changes in commodity prices for future purchase
commitments.  These fixed-price swaps involve the exchange of net cash
settlements, based on changes in the price of the underlying commodity index
compared to the fixed price offering, at specified intervals without the
exchange of any underlying principal.  Effective November 1, 2007, the
Company designated its energy hedging relationships as cash flow hedges under
SFAS No. 133.  For the period of time these hedge relationships were
not designated under SFAS No. 133, the swaps were measured at fair value with
gains or losses included in current earnings.  Subsequent to
designation, net gains or losses attributable to effective hedging are recorded
in accumulated other comprehensive income, and the ineffective portion continues
to be recognized in cost of products sold.





In
addition to the hedges designated under SFAS No. 133, the Company has entered
into short-term energy swaps for the purpose of creating an economic hedge
designed to mitigate the risk of changes in commodity prices for future energy
purchase and sale commitments.  The balance sheet impacts of these
swaps were derivative assets of $2.3 million and derivative liabilities of $1.0
million on September 30, 2008.  All gains and losses, realized or
unrealized, from derivative contracts not designated as SFAS No. 133 hedges have
been recognized in current earnings.  Net realized gains of $0.3
million and net unrealized gains of $1.3 million were recognized in cost of
products sold in 2008.





Net
settlements on SFAS No. 133 hedges increased cost of products sold by $1.3
million in third quarter 2008, and decreased cost of products sold by $1.4
million for the nine months ended September 30, 2008.  On September
30, 2008, the balance sheet impact of these swaps was a derivative liability of
$16.2 million.  Unrealized losses representing the ineffective portion
of these hedges recognized in cost of products sold were negligible in
2008.  Net losses of $16.3 million related to the effective portion of
SFAS No. 133 hedges were recorded in accumulated other comprehensive income on
September 30, 2008 and are expected to be reclassified into cost of products
sold in the period in which the hedged cash flows affect
earnings.  Assuming no change in open hedge positions, the net losses
are expected to be reclassified into earnings through December
2009.  Prior to the swaps being designated under SFAS No. 133, net
losses of $0.7 million and $2.2 million were recognized in cost of products sold
for the three months and nine months ended September 30, 2007,
respectively.




17





In
February 2008, the Company entered into a $250 million notional value
receive-variable, pay-fixed interest rate swap in connection with the Company’s
outstanding floating rate notes that mature in 2014.  The notes pay
interest quarterly based on a three-month LIBOR.  The Company is
hedging the cash flow exposure on its quarterly variable-rate interest payments
due to changes in the benchmark interest rate (three-month LIBOR).  On
September 30, 2008, the fair value of this swap was an unrealized gain of $1.4
million.  In addition, net gains of $1.4 million were recorded in
accumulated other comprehensive income on September 30, 2008, and are expected
to be reclassified into interest expense in the period in which the hedged cash
flows affect earnings.  Net gains reclassified from other
comprehensive income decreased interest expense by $0.3 million in
2008.  Net gains of approximately $1.0 million are expected to be
reclassified from accumulated other comprehensive income into earnings within
the next 12 months.





13.
            FAIR
      VALUE OF FINANCIAL INSTRUMENTS





In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value, and
expands disclosures about fair value measurements.  The Company
adopted SFAS No. 157 as it relates to financial assets and liabilities as of
January 1, 2008.  The FASB deferred the effective date of SFAS No. 157
as it relates to fair value measurement for nonfinancial assets and liabilities
that are not remeasured at fair value on a recurring basis to years beginning
after November 15, 2008.  The adoption of the initial provisions of
SFAS No. 157 did not have a material impact on the Company’s financial
statements.





The fair
value framework requires the categorization of assets and liabilities into three
levels based upon the assumptions used to value the assets or
liabilities.  Level 1 provides the most reliable measure of fair
value, whereas Level 3 generally requires significant management
judgment.  The three levels are defined as follows:




●
            Level
    1:
            Unadjusted quoted
      prices in active markets for identical assets or liabilities at the
      measurement date.●
            Level
    2:
            Observable inputs
      other than those included in Level 1.  For example, quoted
      prices for similar assets
      or liabilities in active markets or quoted prices for identical assets or
      liabilities in inactivemarkets.●
            Level
    3:
            Unobservable inputs
      reflecting management’s own assumptions about the inputs used in pricing
      the
      asset or liability at the measurement
  date.







18




As of
September 30, 2008, the fair values of our financial assets and liabilities are
categorized as follows:




(In
      thousands of U.S. dollars)
              
              Total
              
              
              Level
      1
              
              
              Level
      2
              
              
              Level
      3ASSETSCommodity
      swaps (a)
              
              $
              2,326
              
              
              $
              -
              
              
              $
              2,326
              
              
              $
              -Interest
      rate swaps (b)
              
              
              1,449
              
              
              
              -
              
              
              
              1,449
              
              
              
              -Deferred
      compensation assets (a)
              
              
              169
              
              
              
              169
              
              
              
              -
              
              
              
              -Regional
      Greenhouse Gas Initiative carbon credits (a)
              
              
              211
              
              
              
              -
              
              
              
              211
              
              
              
              -Total
      assets at fair value on September 30, 2008
              
              $
              4,155
              
              
              $
              169
              
              
              $
              3,986
              
              
              $
              -LIABILITIESCommodity
      swaps (a)
              
              $
              17,171
              
              
              $
              -
              
              
              $
              17,171
              
              
              $
              -Deferred
      compensation liabilities (a)
              
              
              169
              
              
              
              169
              
              
              
              -
              
              
              
              -Total
      liabilities at fair value on September 30, 2008
              
              $
              17,340
              
              
              $
              169
              
              
              $
              17,171
              
              
              $
              -(a)
      Based on observable market data.(b)
      Based on observable inputs for the liability (interest rates and yield
      curves observable at specific intervals).


14.  UNAUDITED
CONDENSED CONSOLIDATING FINANCIAL INFORMATION




Verso
Paper Holdings LLC (“Parent Issuer”) and Verso Paper Inc., (“Co-Issuer”) are the
issuers of 91⁄8% second-priority senior secured fixed rate notes due 2014,
second-priority senior secured floating rate notes due 2014, and 113⁄8% senior
subordinated notes due 2014 (the “notes”).  The notes are jointly and
severally guaranteed on a full and unconditional basis by the Company’s 100%
owned subsidiaries, except Verso Paper Inc. (“Guarantor
Subsidiaries”).  All subsidiaries other than the Guarantor
Subsidiaries are minor.  Presented on the following pages are the
Company’s condensed consolidating balance sheets, statements of income and
statements of cash flows, as required by Rule 3-10 of Regulation S-X
of the Securities Exchange Act of 1934, as amended.





The
following condensed consolidating financial statements have been prepared from
the Company’s financial information on the same basis of accounting as the
consolidated financial statements. Investments in our subsidiaries are accounted
for under the equity method. Accordingly, the entries necessary to consolidate
the Parent Issuer and Guarantor Subsidiaries are reflected in the Intercompany
Eliminations column.




19





Unaudited
      Condensed Consolidating Balance Sheetas
      of September 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assets
              
              $
              -
              
              
              $
              -
              
              
              $
              329,984
              
              
              $
              -
              
              
              $
              329,984Property
      and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,126,555
              
              
              
              -
              
              
              
              1,126,555Intercompany
      receivable
              
              
              1,200,646
              
              
              
              -
              
              
              
              -
              
              
              
              (1,200,646
              )
              
              
              -Investment
      in subsidiaries
              
              
              114,099
              
              
              
              -
              
              
              
              -
              
              
              
              (114,099
              )
              
              
              -Non-current
      assets
              
              
              -
              
              
              
              -
              
              
              
              108,562
              
              
              
              -
              
              
              
              108,562Total
      assets
              
              $
              1,314,745
              
              
              $
              -
              
              
              $
              1,565,101
              
              
              $
              (1,314,745
              )
              
              $
              1,565,101LIABILITIES
      AND MEMBERS’ EQUITYCurrent
      liabilities
              
              $
              16,799
              
              
              $
              -
              
              
              $
              227,145
              
              
              $
              -
              
              
              $
              243,944Intercompany
      payable
              
              
              -
              
              
              
              -
              
              
              
              1,200,646
              
              
              
              (1,200,646
              )
              
              
              -Long-term
      debt
              
              
              1,151,450
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,151,450Other
      long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              23,211
              
              
              
              -
              
              
              
              23,211Members’
      equity
              
              
              146,496
              
              
              
              -
              
              
              
              114,099
              
              
              
              (114,099
              )
              
              
              146,496Total
      liabilities and members’ equity
              
              $
              1,314,745
              
              
              $
              -
              
              
              $
              1,565,101
              
              
              $
              (1,314,745
              )
              
              $
              1,565,101Unaudited
      Condensed Consolidating Balance Sheetas
      of December 31, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assets
              
              $
              -
              
              
              $
              -
              
              
              $
              315,723
              
              
              $
              -
              
              
              $
              315,723Property
      and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,159,918
              
              
              
              -
              
              
              
              1,159,918Intercompany
      receivable
              
              
              1,224,307
              
              
              
              -
              
              
              
              -
              
              
              
              (1,224,307
              )
              
              
              -Investment
      in subsidiaries
              
              
              138,385
              
              
              
              -
              
              
              
              -
              
              
              
              (138,385
              )
              
              
              -Non-current
      assets
              
              
              -
              
              
              
              -
              
              
              
              101,394
              
              
              
              -
              
              
              
              101,394Total
      assets
              
              $
              1,362,692
              
              
              $
              -
              
              
              $
              1,577,035
              
              
              $
              (1,362,692
              )
              
              $
              1,577,035LIABILITIES
      AND MEMBERS’ EQUITYCurrent
      liabilities
              
              $
              34,251
              
              
              $
              -
              
              
              $
              188,747
              
              
              $
              -
              
              
              $
              222,998Intercompany
      payable
              
              
              -
              
              
              
              -
              
              
              
              1,224,307
              
              
              
              (1,224,307
              )
              
              
              -Long-term
      debt
              
              
              1,153,588
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,153,588Other
      long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              25,596
              
              
              
              -
              
              
              
              25,596Members’
      equity
              
              
              174,853
              
              
              
              -
              
              
              
              138,385
              
              
              
              (138,385
              )
              
              
              174,853Total
      liabilities and members’ equity
              
              $
              1,362,692
              
              
              $
              -
              
              
              $
              1,577,035
              
              
              $
              (1,362,692
              )
              
              $
              1,577,035







20




Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended September 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              485,423
              
              
              $
              -
              
              
              $
              485,423Cost
      of products sold (exclusiveof
      depreciation and amortization)
              
              
              -
              
              
              
              -
              
              
              
              385,560
              
              
              
              -
              
              
              
              385,560Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              33,752
              
              
              
              -
              
              
              
              33,752Selling,
      general and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              18,225
              
              
              
              -
              
              
              
              18,225Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              1,117
              
              
              
              -
              
              
              
              1,117Interest
      and other income
              
              
              (28,759
              )
              
              
              -
              
              
              
              (126
              )
              
              
              28,759
              
              
              
              (126
              )Interest
      expense
              
              
              25,416
              
              
              
              -
              
              
              
              25,036
              
              
              
              (25,416
              )
              
              
              25,036Equity
      in net income of subsidiaries
              
              
              21,859
              
              
              
              -
              
              
              
              -
              
              
              
              (21,859
              )
              
              
              -Net
      income (loss)
              
              $
              25,202
              
              
              $
              -
              
              
              $
              21,859
              
              
              $
              (25,202
              )
              
              $
              21,859Unaudited
      Condensed Consolidating Statements of OperationsNine
      Months Ended September 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              1,390,932
              
              
              $
              -
              
              
              $
              1,390,932Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              1,137,859
              
              
              
              -
              
              
              
              1,137,859Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              100,577
              
              
              
              -
              
              
              
              100,577Selling,
      general and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              58,644
              
              
              
              -
              
              
              
              58,644Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              26,553
              
              
              
              -
              
              
              
              26,553Interest
      and other income
              
              
              (95,370
              )
              
              
              -
              
              
              
              (458
              )
              
              
              95,370
              
              
              
              (458
              )Interest
      expense
              
              
              78,062
              
              
              
              -
              
              
              
              76,577
              
              
              
              (78,062
              )
              
              
              76,577Equity
      in net loss of subsidiaries
              
              
              (8,820
              )
              
              
              -
              
              
              
              -
              
              
              
              8,820
              
              
              
              -Net
      income (loss)
              
              $
              8,488
              
              
              $
              -
              
              
              $
              (8,820
              )
              
              $
              (8,488
              )
              
              $
              (8,820
              )






21




Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended September 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              450,548
              
              
              $
              -
              
              
              $
              450,548Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              386,709
              
              
              
              -
              
              
              
              386,709Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              31,019
              
              
              
              -
              
              
              
              31,019Selling,
      general, and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              17,712
              
              
              
              -
              
              
              
              17,712Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              4,240
              
              
              
              -
              
              
              
              4,240Interest
      income
              
              
              (28,357
              )
              
              
              -
              
              
              
              (238
              )
              
              
              28,357
              
              
              
              (238
              )Interest
      expense
              
              
              28,357
              
              
              
              -
              
              
              
              28,430
              
              
              
              (28,357
              )
              
              
              28,430Equity
      in net loss of subsidiaries
              
              
              (17,324
              )
              
              
              -
              
              
              
              -
              
              
              
              17,324
              
              
              
              -Net
      income (loss)
              
              $
              (17,324
              )
              
              $
              -
              
              
              $
              (17,324
              )
              
              $
              17,324
              
              
              $
              (17,324
              )Unaudited
      Condensed Consolidating Statements of OperationsNine
      Months Ended September 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              1,182,956
              
              
              $
              -
              
              
              $
              1,182,956Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              1,035,903
              
              
              
              -
              
              
              
              1,035,903Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              90,638
              
              
              
              -
              
              
              
              90,638Selling,
      general and administrative expenses
              
              
              -
              
              
              
              -
              
              
              
              37,047
              
              
              
              -
              
              
              
              37,047Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              16,483
              
              
              
              -
              
              
              
              16,483Interest
      income
              
              
              (84,843
              )
              
              
              -
              
              
              
              (1,333
              )
              
              
              84,843
              
              
              
              (1,333
              )Interest
      expense
              
              
              84,843
              
              
              
              -
              
              
              
              85,355
              
              
              
              (84,843
              )
              
              
              85,355Equity
      in net loss of subsidiaries
              
              
              (81,137
              )
              
              
              -
              
              
              
              -
              
              
              
              81,137
              
              
              
              -Net
      income (loss)
              
              $
              (81,137
              )
              
              $
              -
              
              
              $
              (81,137
              )
              
              $
              81,137
              
              
              $
              (81,137
              )






22




Unaudited
      Condensed Consolidating Statements of Cash FlowsNine
      Months Ended September 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      cash provided byoperating
      activities
              
              $
              17,308
              
              
              $
              -
              
              
              $
              21,325
              
              
              $
              -
              
              
              $
              38,633Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              108
              
              
              
              -
              
              
              
              108Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              (59,632
              )
              
              
              -
              
              
              
              (59,632
              )Return
      of investment in subsidiaries
              
              
              1,255
              
              
              
              -
              
              
              
              (1,255
              )
              
              
              -
              
              
              
              -Net
      cash provided by (used in) investing activities
              
              
              1,255
              
              
              
              -
              
              
              
              (60,779
              )
              
              
              -
              
              
              
              (59,524
              )Cash
      flows from financing activities:Equity
      distributions
              
              
              (18,563
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (18,563
              )Repayment
      of advances to subsidiaries
              
              
              2,138
              
              
              
              -
              
              
              
              (2,138
              )
              
              
              -
              
              
              
              -Payments
      on long-term debtunder
      credit agreement
              
              
              (2,138
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,138
              )Net
      cash used in financing activities
              
              
              (18,563
              )
              
              
              -
              
              
              
              (2,138
              )
              
              
              -
              
              
              
              (20,701
              )Net
      change in cash
              
              
              -
              
              
              
              -
              
              
              
              (41,592
              )
              
              
              -
              
              
              
              (41,592
              )Cash
      at beginning of period
              
              
              -
              
              
              
              -
              
              
              
              58,499
              
              
              
              -
              
              
              
              58,499Cash
      at end of period
              
              $
              -
              
              
              $
              -
              
              
              $
              16,907
              
              
              $
              -
              
              
              $
              16,907Unaudited
      Condensed Consolidating Statements of Cash FlowsNine
      Months Ended September 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      cash used in operating activities
              
              $
              -
              
              
              $
              -
              
              
              $
              (21,877
              )
              
              
              
              
              
              $
              (21,877
              )Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              1,788
              
              
              
              -
              
              
              
              1,788Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              (48,671
              )
              
              
              -
              
              
              
              (48,671
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              -
              
              
              
              (46,883
              )
              
              
              -
              
              
              
              (46,883
              )Cash
      flows from financing activities:Equity
      distributions
              
              
              -
              
              
              
              -
              
              
              
              (14,671
              )
              
              
              -
              
              
              
              (14,671
              )Repayment
      of advances to subsidiaries
              
              
              2,138
              
              
              
              -
              
              
              
              (2,138
              )
              
              
              
              
              
              
              -Payments
      on long-term debtunder
      credit agreement
              
              
              (2,138
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (2,138
              )Net
      cash used in financing activities
              
              
              -
              
              
              
              -
              
              
              
              (16,809
              )
              
              
              -
              
              
              
              (16,809
              )Net
      change in cash
              
              
              -
              
              
              
              -
              
              
              
              (85,569
              )
              
              
              -
              
              
              
              (85,569
              )Cash
      at beginning of period
              
              
              -
              
              
              
              -
              
              
              
              112,448
              
              
              
              -
              
              
              
              112,448Cash
      at end of period
              
              $
              -
              
              
              $
              -
              
              
              $
              26,879
              
              
              $
              -
              
              
              $
              26,879






23




ITEM 2.   MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Overview





We are one
of the leading North American suppliers of coated papers to catalog and magazine
publishers.  Coated paper is used primarily in media and marketing
applications, including catalogs, magazines, commercial printing applications,
such as high-end advertising brochures, annual reports and direct mail
advertising.  We are North America’s second largest producer of coated
groundwood paper, which is used primarily for catalogs and
magazines.  We are also one of North America’s largest producers of
coated freesheet paper, which is used primarily for upscale catalogs and
magazines, annual reports, and magazine covers.  To complete our
product offering to catalog and magazine customers, we have a strategic presence
in supercalendered paper, which is primarily used for retail inserts due to its
relatively low cost.  In addition, we produce and sell market pulp,
which is used in the manufacture of printing and writing paper grades and tissue
products.





Financial
Summary





Verso
Paper’s third quarter 2008 results reflect significant improvement with
operating income of $46.8 million compared to $10.9 million for the same period
last year.  Net sales increased 7.7% driven by a 20.1% increase in
weighted average sales prices compared with third quarter last year, partially
offset by a 10.3% decline in sales volume.  This decline in sales
volume reflected lower coated paper demand in a difficult economic environment,
as well as unusually strong demand in third quarter last year.  In
response, and consistent with our commitment to balance demand for our products
with our production, we took approximately 13,000 tons of downtime in third
quarter.  As previously announced, we intend to take an additional
80,000 tons of downtime during the fourth quarter based on our expectations
relative to demand.





During the
quarter, we generated significant margin improvement on a comparable-quarter
basis through higher paper prices, proactive production management and improved
operating efficiencies.  Our gross margin improved to 20.6% in third
quarter 2008 from 14.2% last year despite significantly increased input prices
for our key direct expenses.  We expect favorable pricing in the
fourth quarter and continued historically high costs for key input items,
although cost trends for certain of these items began to improve late in the
third quarter and are expected to continue to ease in the fourth
quarter.




24





Three
      Months
              
              
              Three
      Months
              
              
              Nine
      Months
              
              
              Nine
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedSeptember
      30,
              
              
              September
      30,
              
              
              September
      30,
              
              
              September
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      sales
              
              $
              485,423
              
              
              $
              450,548
              
              
              $
              1,390,932
              
              
              $
              1,182,956Costs
      and expenses:Cost
      of products sold - exclusive ofdepreciation
      and amortization
              
              
              385,560
              
              
              
              386,709
              
              
              
              1,137,859
              
              
              
              1,035,903Depreciation
      and amortization
              
              
              33,752
              
              
              
              31,019
              
              
              
              100,577
              
              
              
              90,638Selling,
      general and administrative expenses
              
              
              18,225
              
              
              
              17,712
              
              
              
              58,644
              
              
              
              37,047Restructuring
      and other charges
              
              
              1,117
              
              
              
              4,240
              
              
              
              26,553
              
              
              
              16,483Operating
      income
              
              
              46,769
              
              
              
              10,868
              
              
              
              67,299
              
              
              
              2,885Interest
      income
              
              
              (126
              )
              
              
              (238
              )
              
              
              (458
              )
              
              
              (1,333
              )Interest
      expense
              
              
              25,036
              
              
              
              28,430
              
              
              
              76,577
              
              
              
              85,355Net
      income (loss)
              
              $
              21,859
              
              
              $
              (17,324
              )
              
              $
              (8,820
              )
              
              $
              (81,137
              )
 Certain
previously reported amounts have been reclassified to agree with current
presentation.


Results
of Operations – Comparison of Third Quarter 2008 to Third Quarter
2007




Net Sales.  Net
sales for third quarter 2008 increased 7.7% to $485.4 million from $450.6
million in third quarter 2007.  The improvement was the result of a
20.1% increase in average sales prices, while sales volume decreased 10.3% from
third quarter 2007 reflecting lower coated paper demand in a difficult economic
environment compared to unusually strong demand last year.





Net sales
for our coated and supercalendered papers segment increased 6.5% to $432.6
million in third quarter 2008 from $406.2 million in third quarter
2007.  The increase reflects a 22.0% increase in average paper sales
prices and a 12.7% decrease in paper sales volumes for third quarter 2008
compared to the same period last year.





Net sales
for our market pulp segment increased 17.4% to $41.0 million in third quarter
2008 from $35.0 million for the same period in 2007.  This increase
was due to a 12.1% increase in average sales prices combined with a 4.7%
increase in sales volume compared to third quarter 2007.





Net sales
for our other segment increased 26.0% to $11.8 million in third quarter 2008
from $9.4 million in third quarter 2007.  The improvement in 2008
reflects a 14.2% increase in average sales prices and a 10.3% increase in sales
volume compared to third quarter 2007.





Cost of
sales.  Although sales volume decreased 10.3% in third quarter
2008, cost of sales remained relatively flat at $419.3 million compared to
$417.7 million in third quarter 2007, primarily driven by higher input costs.
Our gross margin, excluding depreciation and amortization, was 20.6% for third
quarter 2008, compared to 14.2% for third quarter 2007.  This increase
reflects the higher average sales prices during third quarter
2008.  Depreciation and amortization expense was $33.7 million in
third quarter 2008 compared to $31.0 million in third quarter 2007.





Selling, general and
administrative.  Selling, general and administrative expenses
were $18.2 million in third quarter 2008 compared to $17.8 million for the same
period in 2007.




25





Interest
expense.  Interest expense for third quarter 2008 was $25.0
million compared to $28.4 million for the same period in 2007.  The
decline in interest expense was primarily due to lower interest rates on
floating rate debt in third quarter 2008 compared to 2007.





Restructuring and other
charges.Restructuring
and other charges for third quarter 2008 were $1.1 million compared to $4.2
million for third quarter 2007.  Restructuring and other charges are
comprised of transition and other non-recurring costs associated with the
acquisition and carve out of our operations from those of International Paper;
including costs of a transition service agreement with International Paper,
technology migration costs, consulting and legal fees, and other one-time costs
related to us operating as a stand-alone business. Subsequent to the
Acquisition, we entered into a management agreement with Apollo relating to the
provision of certain financial and strategic advisory services and consulting
services.  Upon consummation of Verso Paper Corp.’s IPO, Apollo
terminated the annual fee arrangement for its consulting and advisory services
pursuant to the terms of the management agreement.  The charges in
2007 included $1.3 million of transition service agreement costs and $0.7
million of charges under the management agreement.




Results
of Operations – Comparison of First Nine Months of 2008 to First Nine Months of
2007





Net Sales.  Net
sales for the nine months ended September 30, 2008, increased 17.6% to $1,390.9
million from $1,183.0 million for the nine months ended September 30,
2007.  The improvement primarily reflects a 17.2% increase in average
sales price while sales volume remained relatively flat for the nine months
ended September 30, 2008, compared to the nine months ended September 30,
2007.





Net sales
for our papers segment increased 18.4% to $1,239.8 million for the nine months
ended September 30, 2008, from $1,047.1 million for the nine months ended
September 30, 2007.  The increase was primarily due to higher paper
sales prices, which increased 17.6% for the nine months ended September 30,
2008, compared to the nine months ended September 30, 2007.  Paper
sales volumes increased 0.7% over the comparable period.





Net sales
for our market pulp segment were $118.9 million for the nine months ended
September 30, 2008, compared to $107.7 million for the nine months ended
September 30, 2007.  The increase was due to a 12.6% increase in
average sales price, which was partially offset by a 1.9% decrease in sales
volume.





Net sales
for our other segment were $32.2 million for the nine months ended September 30,
2008, compared to $28.2 million for the nine months ended September 30,
2007.  The increase was primarily due to a 13.2% increase in sales
price for the nine months ended September 30, 2008, compared to the nine months
ended September 30, 2007.  Sales volumes increased 0.9% over the
comparable period.





Cost of sales.Cost of sales
for the nine months ended September 30, 2008, was $1,238.5 million compared to
$1,126.5 million for the nine months ended September 30, 2007, an increase of
9.9%, driven by higher input costs.  Our gross margin, excluding
depreciation and amortization, was 18.2% for the nine months ended September 30,
2008, compared to 12.4% for the same period in 2007.  This increase
reflects the higher average sales prices for the nine months ended September 30,
2008.  Depreciation and amortization expense for the nine months ended
September 30, 2008, was $100.6 million compared to $90.6 million for the nine
months ended September 30, 2007.





Selling, general and
administrative.Selling,
general and administrative expenses were $58.6 million for the nine months ended
September 30, 2008 compared to $37.1 million for the same period in 2007.
Included in expense for the nine months ended September
30, 2008, is a one-time charge of $10.8 million due to the accelerated vesting
of the Legacy Class C Units in connection with Verso Paper Corp.’s
IPO.




26





Interest
expense.  Interest expense for the nine months ended September
30, 2008, was $76.5 million compared to $85.3 million for the same period in
2007.  The decrease was primarily due to lower interest rates on
floating rate debt in 2008 compared to 2007.





Restructuring and other
charges.  Restructuring and other charges for the nine months
ended September 30, 2008 were $26.5 million compared to $16.5 million for the
same period in 2007.  Restructuring and other charges are comprised of
transition and other non-recurring costs associated with the acquisition and
carve out of our operations from those of International Paper; including costs
of a transition service agreement with International Paper, technology migration
costs, consulting and legal fees, and other one-time costs related to us
operating as a stand-alone business. Subsequent to the Acquisition, we entered
into a management agreement with Apollo relating to the provision of certain
financial and strategic advisory services and consulting
services.  Upon consummation of Verso Paper Corp.’s IPO, Apollo
terminated the annual fee arrangement for its consulting and advisory services
pursuant to the terms of the management agreement for a one-time fee of $23.1
million.  The charges in 2008 reflect this one-time
fee.  The charges in 2007 included $5.4 million of transition service
agreement costs and $2.1 million of charges under the management
agreement.  As of September 30, 2007, we substantially discontinued
the usage of services under the transition service agreement.




Seasonality





We are
exposed to fluctuations in quarterly net sales volumes and expenses due to
seasonal factors.  These seasonal factors are common in the paper
industry.  Typically, the first two quarters are our slowest quarters
due to lower demand for coated paper during this period.  Our third
quarter is generally our strongest quarter, reflecting an increase in printing
related to end-of-year magazines, increased end-of-year direct mailings and
holiday season catalogs.  Our working capital, including accounts
receivable, generally peaks in the third quarter, while inventory generally
peaks in the nine months ended September 30, in anticipation of the third
quarter season.  We expect our seasonality trends to continue for the
foreseeable future.





Liquidity
and Capital Resources





We rely
primarily upon cash flow from operations and borrowings under our revolving
credit facility to finance operations, capital expenditures and fluctuations in
debt service requirements. As of September 30, 2008, we had $167 million of
availability under our revolving credit facility after deducting $33 million of
standby letters of credit that we have issued.  Our aggregate
indebtedness on September 30, 2008, was $1,154 million.





We believe
that our ability to manage cash flow and working capital levels, particularly
inventory and accounts payable, will allow us to meet our current and future
obligations, pay scheduled principal and interest payments, and provide funds
for working capital, capital expenditures and other needs of the business for at
least the next twelve months. However, no assurance can be given that this will
be the case, and we may require additional debt or equity financing to meet our
working capital requirements.





Net cash flows from operating
activities.For the nine months ended September 30, 2008, operating
activities provided net cash of $38.6 million, compared to $21.9 million of net
cash used during the nine months ended September 30, 2007.  The
improvement in net cash provided by operating activities was primarily due to
improved performance, with a net loss of $8.8 million in 2008 compared to a net
loss of $81.1 million in 2007.




27





Net cash flows from investing
activities.For the nine-month periods ended September 30, 2008 and 2007,
we used $59.5 million and $46.9 million, respectively, of net cash in investing
activities due to investments in capital expenditures.





Net cash flows from financing
activities.For the nine months ended September 30, 2008, our financing
activities used net cash of $20.7 million, which reflected $2.1 million
principal payments on debt and $17.3 million in distributions paid to Verso
Paper Finance Holdings LLC to service Verso Paper Finance Holdings LLC’s
interest obligations. This compares to $16.8 million net cash used in financing
activities for the nine months ended September 30, 2007, which was comprised of
$2.1 million principal payments on debt and $14.7 million in distributions to
Verso Paper Finance Holdings LLC.





The
Company entered into senior secured credit facilities on August 1, 2006,
consisting of:





●
            a
      $285 million term loan facility, with a maturity of seven years, which was
      fully drawn on August 1, 2006;


●
            a
      $200 million revolving credit facility with a maturity of nine
      years.  No amounts were outstanding as of September 30,
      2008.  Letters of credit of $33.4 million were issued as ofSeptember
      30, 2008.





The senior
secured credit facilities are secured by first priority pledges of all the
equity interests owned by us in our subsidiaries. These senior secured credit
facilities are also secured by first priority interests in, and mortgages on,
substantially all tangible and intangible assets and each of our direct and
indirect subsidiaries.  The term loan facility bears interest at a
rate equal to LIBOR plus 1.75% and the interest rate was 4.6% at September 30,
2008.





On August
1, 2006, the Company completed an offering of $350 million in aggregate
principal amount of 91⁄8% second-priority senior secured fixed rate notes due
2014, $250 million in aggregate principal amount of second-priority senior
secured floating rate notes due 2014, and $300 million in aggregate principal
amount of 113⁄8% senior subordinated notes due 2016. The floating rate notes bear
interest at a rate equal to LIBOR plus 3.75% and the interest rate was 6.6% at
September 30, 2008.  The proceeds of the offerings were used to
finance the Acquisition and to pay related fees and expenses.  The
second-priority senior secured notes have the benefit of second-priority
security interest in the collateral securing the senior secured credit
facilities.  The fixed rate notes pay interest semi-annually and the
variable portion pays interest quarterly.  The senior subordinated
notes are unsecured and pay interest semi-annually.





The senior
secured credit facilities contain various restrictive covenants. They prohibit
us from prepaying other indebtedness and require us to maintain a maximum
consolidated first lien leverage ratio. In addition, the senior secured credit
facilities, among other things, limit our ability to incur indebtedness or
liens, make investments or declare or pay any dividends. The indentures
governing the second-priority senior secured notes and the senior subordinated
notes limit our ability to, among other things, (i) incur additional
indebtedness; (ii) pay dividends or make other distributions or repurchase or
redeem our stock; (iii) make investments; (iv) sell assets, including capital
stock of restricted subsidiaries; (v) enter into agreements restricting our
subsidiaries’ ability to pay dividends; (vi) consolidate, merge, sell or
otherwise dispose of all or substantially all of our assets; (vii) enter into
transactions with our affiliates; and (viii) incur liens.




28




The
Company is a 100% owned subsidiary of our parent, Verso Paper Finance Holdings
LLC.  In January 2007, Verso Paper Finance Holdings LLC entered into a
$250 million senior unsecured floating-rate term loan facility with a maturity
of nine years. The proceeds of the loan were used for a distribution to equity
holders and to pay related fees and expenses.  In May 2008, Verso
Paper Corp. issued 14 million shares of its common stock at an offering price of
$12.00 per share through an IPO and contributed a portion of the net proceeds
which were used to repay $138 million of the outstanding principal of this loan,
and a 1.0% prepayment penalty related thereto.  Verso Paper Finance
Holdings LLC can, at its option, pay interest either in cash or in kind through
the accumulation of the outstanding principal amount.  The senior
unsecured term loan facility bears interest at a rate equal to LIBOR plus 6.25%,
or 9.0% at September 30, 2008.  The Company has not guaranteed the
loan nor have any of the Company’s assets been used for the
collateral.  Verso Paper Finance Holdings LLC has no independent
operations; consequently, all cash flows used to service the debt obligation
will need to be received via a distribution from the Company.  The
Company paid distributions to Verso Paper Finance Holdings LLC of $3.3 million
in third quarter 2008 and $17.3 million for the nine months ended September 30,
2008.  Additionally, the Company paid distributions of $7.4 million in
third quarter 2007 and $14.7 million for the nine months ended September 30,
2007.  The Company has no obligation to make distributions to Verso
Paper Finance Holdings LLC.





Critical
Accounting Policies





The
Company’s accounting policies are fundamental to understanding management’s
discussion and analysis of results of operations and financial condition. The
consolidated condensed financial statements of the Company are prepared in
conformity with accounting principles generally accepted in the United States of
America and follow general practices within the industries in which it operates.
The preparation of the financial statements requires management to make certain
judgments and assumptions in determining accounting estimates. Accounting
estimates are considered critical if the estimate requires management to make
assumptions about matters that were highly uncertain at the time the accounting
estimate was made, and different estimates reasonably could have been used in
the current period, or changes in the accounting estimate are reasonably likely
to occur from period to period, that would have a material impact on the
presentation of the Company’s financial condition, changes in financial
condition or results of operations.





Management
believes the following critical accounting policies are both important to the
portrayal of the company’s financial condition and results of operations and
require subjective or complex judgments. These judgments about critical
accounting estimates are based on information available as of the date of the
financial statements.





Accounting
policies whose application may have a significant effect on the reported results
of operations and financial position, and that can require judgments by
management that affect their application, include SFAS No. 5, Accounting for Contingencies,
SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets, SFAS No. 142,
Goodwill and Other Intangible
Assets, SFAS No. 87, Employers’ Accounting for
Pensions, and SFAS No. 158, Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans.





Impairment of long-lived assets and
goodwill.  Long-lived assets are reviewed for impairment upon
the occurrence of events or changes in circumstances that indicate that the
carrying value of the assets may not be recoverable, as measured by comparing
their net book value to the estimated undiscounted future cash flows generated
by their use.





Goodwill
and other intangible assets are accounted for in accordance with Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible
Assets.  Intangible assets primarily consist of trademarks,
customer-related intangible assets and patents obtained through business
acquisitions.  Impairment is the condition that exists when the
carrying amount of goodwill exceeds its implied fair value.  The
impairment evaluation of the carrying amount of goodwill and other intangible
assets with indefinite lives is conducted annually or more frequently if events
or changes in circumstances indicate that an asset might be
impaired.  Goodwill is evaluated at the reporting unit
level.  Goodwill has been allocated to the “Coated”
segment.




29





The
evaluation for impairment is performed by comparing the carrying amount of these
assets to their estimated fair value.  If impairment is indicated,
then an impairment charge is recorded to reduce the asset to its estimated fair
value.  The estimated fair value is generally determined on the basis
of discounted future cash flows.  Management believes the accounting
estimates associated with determining fair value as part of the impairment test
is a "critical accounting estimate" because estimates and assumptions are made
about the Company’s future performance and cash flows. While management uses the
best information available to estimate future performance and cash flows, future
adjustments to management’s projections may be necessary if economic conditions
differ substantially from the assumptions used in making the
estimates.




Pension and Postretirement Benefit
Obligations.The Company offers various pension plans to
employees.  The calculation of the obligations and related expenses
under these plans requires the use of actuarial valuation methods and
assumptions, including the expected long-term rate of return on plan assets,
discount rates, projected future compensation increases, health care cost trend
rates and mortality rates.  Actuarial valuations and assumptions used
in the determination of future values of plan assets and liabilities are subject
to management judgment and may differ significantly if different assumptions are
used.




Contingent
liabilities.A liability is contingent if the amount or
outcome is not presently known, but may become known in the future as a result
of the occurrence of some uncertain future event. The Company estimates its
contingent liabilities based on management’s estimates about the probability of
outcomes and their ability to estimate the range of exposure. Accounting
standards require that a liability be recorded if management determines that it
is probable that a loss has occurred and the loss can be reasonably estimated.
In addition, it must be probable that the loss will be confirmed by some future
event. As part of the estimation process, management is required to make
assumptions about matters that are by their nature highly
uncertain.





The
assessment of contingent liabilities, including legal contingencies, asset
retirement obligations and environ-mental costs and obligations, involves the
use of critical estimates, assumptions and judgments. Management’s estimates are
based on their belief that future events will validate the current assumptions
regarding the ultimate outcome of these exposures. However, there can be no
assurance that future events will not differ from management’s
assessments.





Accounting
changes





Derivatives and
Hedging Activities—In March 2008, the Financial Accounting Standards
Board, or FASB, issued SFAS No. 161, Disclosures about Derivative Instruments
and Hedging Activities. SFAS No. 161 changes the disclosure requirements for
derivative instruments and hedging activities. Entities are required to provide
enhanced disclosures about (a) how and why an entity uses derivative
instruments, (b) how derivative instruments and related hedged items are
accounted for under Statement 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. SFAS No. 161 is effective for
fiscal years and interim periods beginning after November 15, 2008. Since SFAS
No. 161 only addresses disclosure requirements, the adoption of SFAS No. 161
will have no impact on our combined results of operations or combined financial
position.





Business
Combinations—In December 2007, the FASB issued SFAS No. 141 (revised
2007), Business
Combinations. SFAS No. 141-R establishes principles and requirements
for how an acquirer recognizes and measures identifiable assets acquired,
liabilities assumed and noncontrolling interests; recognizes and measures
goodwill acquired in a business combination or gain from a bargain purchase; and
establishes disclosure requirements.  SFAS No. 141-R is effective for
business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.  Early adoption is prohibited.  The Company will
apply the provisions of SFAS No. 141-R to any future acquisitions.
  30





In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements – an amendment of ARB No.
51.  SFAS No. 160 establishes accounting and reporting
standards for the noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary.  This standard is effective, on a
prospective basis, for fiscal years, and interim periods within those years,
beginning on or after December 15, 2008.  The presentation and
disclosure requirements for existing minority interests should be applied
retrospectively for all periods presented.  Early adoption is
prohibited.  The impact of adopting SFAS No. 160 is not expected to
have a material impact on the Company’s consolidated results of operations or
consolidated financial position.





Fair Value
Measurements—In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS
No. 157 does not address “what” to measure at fair value; instead, it
addresses “how” to measure fair value. SFAS No. 157 applies (with limited
exceptions) to existing standards that require assets and liabilities to be
measured at fair value. SFAS No. 157 establishes a fair value hierarchy,
giving the highest priority to quoted prices in active markets and the lowest
priority to unobservable data and requires new disclosures for assets and
liabilities measured at fair value based on their level in the hierarchy. SFAS
No. 157 is effective for financial statements issued for fiscal years
beginning after November 15, 2007.  However, FSP 157-2,
“Effective Date of FASB Statement No. 157,” delayed the implementation of SFAS
No. 157 for nonfinancial assets and nonfinancial liabilities, except for items
that are recognized or disclosed at fair value in the financial statements on a
recurring basis, to years beginning after November 15, 2008.  The
impact of adopting the initial provisions of SFAS No. 157 did not have a
material impact on the Company’s consolidated results of operations or
consolidated financial position.  The impact of adopting the remaining
provisions of SFAS No. 157 is not expected to have a material impact on the
Company’s consolidated results of operations or consolidated financial
position.





Forward-Looking
and Cautionary Statements





Certain
statements in this quarterly report are forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E
of the Securities Exchange Act of 1934, as amended. In addition, our management
may from time to time make oral forward-looking statements. Forward-looking
statements may be identified by the words “believe,” “expect,” “anticipate,”
“project,” “plan,” “estimate,” “intend” and similar expressions. The
forward-looking statements reflect our current views with respect to future
events and are based on our currently available financial, economic and
competitive data and on current business plans. Actual results could vary
materially depending on risks and uncertainties that may affect our operations,
markets, services, prices and other factors. Important factors that could cause
actual results to differ materially from those in the forward-looking statements
include, but are not limited to: economic factors such as an interruption in the
supply of or increased pricing of raw materials, competitive factors such as
pricing actions by our competitors that could affect our operating margins, and
regulatory factors such as changes in governmental regulations involving our
products that lead to environmental and legal matters, and the other risks and
uncertainties described in Item 3 of Part I of this report and under the caption
“Risk Factors” included in our annual report on Form 10-K for the year ended
December 31, 2007.




31





Covenant
Compliance





Certain
covenants contained in the credit agreement governing our senior secured credit
facilities and the indentures governing our outstanding notes (i) require the
maintenance of a net first lien secured debt to Adjusted EBITDA ratio (as
defined below) of 3.25 to 1.0 and (ii) restrict our ability to take certain
actions such as incurring additional debt or making acquisitions if we are
unable to meet defined Adjusted EBITDA to Fixed Charges (as defined below) and
net senior secured debt to Adjusted EBITDA ratios. The covenants restricting our
ability to incur additional indebtedness and make future acquisitions require a
ratio of Adjusted EBITDA to Fixed Charges of 2.0 to 1.0 and a net senior secured
debt to Adjusted EBITDA ratio of 6.0 to 1.0, in each case measured on a trailing
four-quarter basis.  Although we do not expect to violate any of the
provisions in the agreements governing our outstanding indebtedness, these
covenants can result in limiting our long-term growth prospects by hindering our
ability to incur future indebtedness or grow through acquisitions.





Fixed
Charges, or cash interest expense, represents consolidated interest expense
excluding the amortization or write-off of deferred financing costs. Adjusted
EBITDA is EBITDA further adjusted to exclude unusual items and other pro forma
adjustments permitted in calculating covenant compliance in the indentures
governing our outstanding notes to test the permissibility of certain types of
transactions. We believe that the inclusion of the supplemental adjustments
applied in calculating Adjusted EBITDA are appropriate to provide additional
information to investors to demonstrate our compliance with our financial
covenants and assess our ability to incur additional indebtedness in the future.
However, Adjusted EBITDA is not a measurement of financial performance under
U.S. GAAP, and Adjusted EBITDA may not be comparable to similarly titled
measures of other companies. You should not consider our Adjusted EBITDA as an
alternative to operating or net income, determined in accordance with U.S. GAAP,
as an indicator of our operating performance, or as an alternative to cash flows
from operating activities, determined in accordance with U.S. GAAP, as an
indicator of our cash flows or as a measure of liquidity.




32





The
following table reconciles cash flow from operating activities to EBITDA and
Adjusted EBITDA for the periods presented:




Nine
      Months
              
              
              Year
              
              
              Nine
      Months
              
              
              Twelve
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedSeptember
      30,
              
              
              December
      31,
              
              
              September
      30,
              
              
              September
      30,(in
      millions of U.S. dollars)
              
              
              
              
              2007
              
              
              2007
              
              
              2008
              
              
              2008Cash
      flow from operating activities
              
              
              
              
              
              $
              (21.9
              )
              
              $
              38.8
              
              
              $
              38.6
              
              
              $
              99.3Amortization
      of debt issuance costs
              
              
              
              
              
              
              (4.1
              )
              
              
              (5.4
              )
              
              
              (4.1
              )
              
              
              (5.4
              )Interest
      income
              
              
              
              
              
              
              (1.3
              )
              
              
              (1.5
              )
              
              
              (0.4
              )
              
              
              (0.6
              )Interest
      expense
              
              
              
              
              
              
              85.3
              
              
              
              113.9
              
              
              
              76.5
              
              
              
              105.1Loss
      on disposal of fixed assets
              
              
              
              
              
              
              (0.2
              )
              
              
              (1.0
              )
              
              
              (0.2
              )
              
              
              (1.0
              )Other,
      net
              
              
              
              
              
              
              (1.1
              )
              
              
              1.5
              
              
              
              2.2
              
              
              
              4.8Changes
      in assets and liabilities, net
              
              
              
              
              
              
              36.8
              
              
              
              7.9
              
              
              
              55.3
              
              
              
              26.4EBITDA
              
              
              
              
              
              
              93.5
              
              
              
              154.2
              
              
              
              167.9
              
              
              
              228.6Restructuring,
      severance and other (1)
              
              
              
              
              
              
              16.5
              
              
              
              19.4
              
              
              
              26.5
              
              
              
              29.4Non-cash
      compensation/benefits (2)
              
              
              
              
              
              
              0.5
              
              
              
              0.6
              
              
              
              11.1
              
              
              
              11.2Other
      items, net (3)
              
              
              
              
              
              
              6.9
              
              
              
              8.0
              
              
              
              1.7
              
              
              
              2.8Adjusted
      EBITDA
              
              
              
              
              
              $
              117.4
              
              
              $
              182.2
              
              
              $
              207.2
              
              
              $
              272.0As
      adjusted cash interest expense (4)
              
              
              
              
              
              $
              82.1
              
              
              $
              109.2
              
              
              $
              73.7
              
              
              $
              100.8Adjusted
      EBITDA to cash interest expense
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              2.7Net
      senior secured debt to Adjusted EBITDA
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3.1Net
      first-lien secured debt to Adjusted EBITDA
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              0.9
  (1)
              Includes
      restructuring and severance as per our financial
      statements. Restructuring includes transition and other non-recurring
      costs associated with the Acquisition.(2)
              Represents
      amortization of non-cash incentive compensation.(3)
              Represents
      earnings adjustments for legal and consulting fees, and other
      miscellaneous non-recurring items.(4)
              Cash
      interest expense represents gross interest expense related to the debt,
      excluding amortization of debt issuance costs.NOTE:
              To
      construct financials for the twelve months ended September 30, 2008,
      amounts have been calculated by subtracting the data for the nine months
      ended September 30, 2007, from the data for the year ended December 31,
      2007, and then adding the nine months ended September 30,
      2008.







33


ITEM 3.   QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK





We are
exposed to market risk from fluctuations in our paper prices, interest rates and
commodity prices for our inputs.





Paper
prices—Our sales, which we report net of rebates, allowances and
discounts, are a function of the number of tons of paper that we sell and the
price at which we sell our paper. The coated paper industry is cyclical, which
results in changes in both volume and price. Paper prices historically have been
a function of macro-economic factors, which influences supply and demand. Price
has historically been substantially more variable than volume and can change
significantly over relatively short time periods.





We are
primarily focused on serving two end-user segments: (i) catalogs and (ii)
magazines. Coated paper demand is primarily driven by advertising and print
media usage. Advertising spending and magazine and catalog circulation tend to
be correlated with GDP in the United States and rise with a strong economy. The
majority of our products are sold via contracts we maintain with our customers.
Contracted sales are more prevalent for coated groundwood paper, as opposed to
coated freesheet paper, which is more often sold without a contract. Our
contracts generally specify the volumes to be sold to the customer over the
contract term, as well as the pricing parameters for those sales. The large
portion of contracted sales allows us to plan our production runs well in
advance, optimizing production over our integrated mill system and thereby
reducing costs and increasing overall efficiency.





We reach
our end-users through several channels, including printers, brokers, paper
merchants and direct sales to end-users. We sell and market our products to
approximately 100 customers. In 2008, no single customer accounted for more than
10% of our total net sales.





Interest Rate
Risk—We issued fixed- and floating-rate debt to finance the Acquisition
in order to manage our variability to cash flows from interest rates. Borrowings
under our senior secured credit facilities and our floating-rate notes accrue
interest at variable rates, and a 100 basis point increase in quoted interest
rates on our debt balances outstanding as of September 30, 2008, under our
senior secured credit facilities and our floating-rate notes would increase our
annual interest expense by $5.0 million. While we may enter into agreements
limiting our exposure to higher interest rates, any such agreements may not
offer complete protection from this risk.





Derivatives.In
the normal course of business, we utilize derivatives contracts as part of our
risk management strategy to manage our exposure to market fluctuations in energy
prices and interest rates.  These instruments are subject to credit
and market risks in excess of the amount recorded on the balance sheet in
accordance with generally accepted accounting principles. Controls and
monitoring procedures for these instruments have been established and are
routinely reevaluated.  We have an Energy Risk Management Policy adopted by
the Executive Committee of our Board of Directors and monitored by an Energy
Risk Management Committee, which is comprised of senior management. In addition,
we have an Interest Rate Risk Committee which was formed to monitor our Interest
Rate Risk Management Policy.  Credit risk represents the potential
loss that may occur because a party to a transaction fails to perform
according to the terms of the contract. The measure of credit exposure is
the replacement cost of contracts with a positive fair value.  We
manage credit risk by entering into financial instrument transactions only
through approved counterparties.  Market risk represents the potential loss
due to the decrease in the value of a financial instrument caused primarily
by changes in commodity prices or interest rates.  We manage market
risk by establishing and monitoring limits on the types and degree of risk that
may be undertaken.




34




We do not
hedge the entire exposure of our operations from commodity price volatility for
a variety of reasons. To the extent we do not hedge against commodity price
volatility, our results of operations may be affected either favorably or
unfavorably by a shift in the future price curve. As of September 30, 2008, we
had net unrealized losses of $14.8 million on open commodity contracts
with maturities of one to fifteen months. These derivative instruments involve
the exchange of net cash settlements, based on changes in the price of the
underlying commodity index compared to the fixed price offering, at specified
intervals without the exchange of any underlying principal.  A 10%
decrease in commodity prices would have a negative impact of approximately $6.6
million on the fair value of such instruments. This quantification of
exposure to market risk does not take into account the offsetting impact of
changes in prices on anticipated future energy purchases.





We entered
into a $250 million notional value receive-variable, pay-fixed interest rate
swap in connection with the Company’s outstanding floating rate notes that
mature in 2014.  The Company is hedging the cash flow exposure on its
quarterly variable-rate interest payments due to changes in the benchmark
interest rate (three-month LIBOR).  On September 30, 2008, the fair
value of this swap was an unrealized gain of $1.4 million.  A 10%
decrease in interest rates would have a negative impact of approximately $1.2
million on the fair value of this instrument.





Commodity Price
Risk—We are subject to changes in our cost of sales caused by movements
underlying commodity prices. The principal components of our cost
of sales are chemicals, wood, energy, labor, maintenance and depreciation
and amortization. Costs for commodities, including chemicals, wood and energy,
are the most variable component of our cost of sales because their prices can
fluctuate substantially, sometimes within a relatively short period of time. In
addition, our aggregate commodity purchases fluctuate based on the volume of
paper that we produce.





Chemicals.
Chemicals utilized in the manufacturing of coated papers include latex, starch,
calcium carbonate, titanium dioxide and others. We purchase these chemicals from
a variety of suppliers and are not dependent on any single supplier to satisfy
our chemical needs. In the near term, we expect the rate of inflation for our
total chemical costs to be lower than that experienced over the last two years.
However, we expect imbalances in supply and demand will drive higher prices for
certain chemicals such as starch and sodium chlorate.





Wood. Our
costs to purchase wood are affected directly by market costs of wood in our
regional markets and indirectly by the effect of higher fuel costs on logging
and transportation of timber to our facilities. While we have in place fiber
supply agreements that ensure a substantial portion of our wood requirements,
purchases under these agreements are typically at market rates. In 2008, as
we begin to utilize wood harvested from our 23,000-acre hybrid poplar fiber
farm located near Alexandria, Minnesota, our ongoing wood costs should be
positively impacted.





Energy. We
produce a large portion of our energy requirements, historically producing
approximately 50% of our energy needs for our coated paper mills from sources
such as waste wood and paper, hydroelectric facilities, chemicals from our
pulping process, our own steam recovery boilers and internal energy cogeneration
facilities. Our external energy purchases vary across each of our mills and
include fuel oil, natural gas, coal and electricity. While our internal energy
production capacity mitigates the volatility of our overall energy expenditures,
we expect prices for energy to remain volatile for the foreseeable future, and
our energy costs will increase in a high energy cost environment.  As
prices fluctuate, we have some ability to switch between certain energy sources
in order to minimize costs.  We also utilize derivatives contracts as
part of our risk management strategy to manage our exposure to market
fluctuations in energy prices.




35





ITEM 4T.  CONTROLS AND PROCEDURES





Disclosure
Controls and Procedures





We
maintain disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934.  Our
disclosure controls and procedures are designed to ensure that information
required to be disclosed in our Exchange Act reports is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms and is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.  Any controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives.





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, has evaluated the effectiveness of the design and operation
of our disclosure controls and procedures as of September 30, 2008. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of September 30, 2008, our disclosure controls and procedures
were effective to accomplish their objectives.





Our Chief
Executive Officer and Chief Financial Officer do not expect that our disclosure
controls and procedures or our internal controls will prevent all error and all
fraud.  The design of a control system must reflect the fact that
there are resource constraints, and the benefit of controls must be considered
relative to their cost.  Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
we have detected all of our control issues and all instances of fraud, if
any.  The design of any system of controls also is based partly on
certain assumptions about the likelihood of future events, and there can be no
assurance that any design will succeed in achieving our stated goals under all
potential future conditions.





Internal
Control Over Financial Reporting





There were
no changes in our internal control over financing reporting that occurred during
the fiscal quarter ended September 30, 2008, that have materially affected, or
are reasonably likely to materially affect, our internal control over financial
reporting.




36




PART II.  OTHER INFORMATION





ITEM 1.   LEGAL
PROCEEDINGS





On August
6, 2008, Verso Paper Corp. filed a declaratory judgment suit in the United
States District Court for the Eastern District of Wisconsin against NewPage
Corporation and NewPage Wisconsin System Inc., in response to a patent
infringement claim recently asserted by NewPage regarding certain of our coated
paper products.  The action seeks a ruling that our coated paper
products do not infringe the NewPage patent and that the NewPage patent is
invalid.  While no assurances can be given regarding the outcome, if
the outcome of this matter is unfavorable, our business, financial condition,
results of operations and cash flows could be materially adversely
affected.





ITEM 1A. RISK
FACTORS





Not
applicable.





ITEM 2.   UNREGISTERED SALES OF
EQUITY SECURITIES AND USE OF PROCEEDS





Not
applicable.





ITEM 3.   DEFAULTS UPON SENIOR
SECURITIES





Not
applicable.





ITEM4.   SUBMISSION OF MATTERS TO A
VOTE OF SECURITY HOLDERS





Not
applicable.





ITEM 5.   OTHER
INFORMATION





Not
applicable.





ITEM 6.   EXHIBITS





The
following exhibits are filed as part of this report:





Exhibit
              Number
            Description31.1
            Certification
      of Principal Executive Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act of 1934.


31.2
            Certification
      of Principal Financial Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act of 1934.


32.1
            Certification
      of Principal Executive Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18
      of the United States Code.


32.2
            Certification
      of Principal Financial Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18
      of the United States Code.






37





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.




Date:  November
      13, 2008VERSO
      PAPER HOLDINGS LLCBy:
            
            /s/
      Michael A. JacksonMichael
      A. Jackson
              President
      and Chief Executive Officer
              (Principal
      Executive Officer)




By:
            
            /s/
      Robert P. MundyRobert
      P. Mundy
              Senior
      Vice President and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)








38





EXHIBIT INDEX





The
following exhibits are filed as part of this report:




Exhibit
                Number
              Description31.1
              Certification
      of Principal Executive Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act of 1934.
 31.2
              Certification
      of Principal Financial Officer pursuant to Rule 15d-14(a) under the
      Securities Exchange Act of 1934.
 32.1
              Certification
      of Principal Executive Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18
      of the United States Code.
 32.2
              Certification
      of Principal Financial Officer pursuant to Rule 15d-14(b) under the
      Securities Exchange Act of 1934 and Section 1350 of Chapter 63 of Title 18
      of the United States Code.








39