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 June 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
              Smaller
      reporting company  o(Do
      not check if a smaller reporting company)






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





As of July
31, 2008, there was one outstanding limited liability company interest of the
registrant.











TABLE
OF CONTENTS






PagePart
      I.
              
              FINANCIAL
      INFORMATIONItem 1.
              
              Unaudited Financial Statements of Verso Paper Holdings
      LLC
              3Item 2.
              
              Management’s Discussion and Analysis of Financial
      Condition and Results of Operations
              24Item 3.
              
              Quantitative and Qualitative Disclosures About Market
      Risk
              34Item 4T.
              
              Controls and Procedures
              
              36Part
      II.
              
              OTHER
      INFORMATIONItem 1.
              
              Legal Proceedings
              
              37Item 1A.
              
              Risk Factors
              
              37Item 2.
              
              Unregistered Sales of Equity Securities and Use of
      Proceeds
              37Item 3.
              
              Defaults Upon Senior Securities
              
              37Item 4.
              
              Submission of Matters to a Vote of Security
      Holders
              37Item 5.
              
              Other Information
              
              37Item 6.
              
              Exhibits
              
              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 SHEETSJune
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007ASSETSCurrent
      Assets:Cash
              
              $
              48,327
              
              
              $
              58,499Accounts
      receivable - net
              
              
              125,492
              
              
              
              121,351Accounts
      receivable from related parties
              
              
              17,024
              
              
              
              12,318Inventories
              
              
              134,017
              
              
              
              119,620Prepaid
      expenses and other assets
              
              
              2,808
              
              
              
              3,935Total
      Current Assets
              
              
              327,668
              
              
              
              315,723Property,
      plant and equipment - net
              
              
              1,139,792
              
              
              
              1,159,918Intangibles
      and other assets - net
              
              
              104,385
              
              
              
              90,843Goodwill
              
              
              10,551
              
              
              
              10,551Total
      Assets
              
              $
              1,582,396
              
              
              $
              1,577,035LIABILITIES
      AND MEMBERS' EQUITYCurrent
      LiabilitiesAccounts
      payable
              
              $
              134,968
              
              
              $
              128,149Accounts
      payable to related parties
              
              
              30,154
              
              
              
              3,872Accrued
      liabilities
              
              
              84,355
              
              
              
              88,127Current
      maturities of long-term debt
              
              
              2,850
              
              
              
              2,850Total
      Current Liabilities
              
              
              252,327
              
              
              
              222,998Long-term
      debt
              
              
              1,152,163
              
              
              
              1,153,588Other
      liabilities
              
              
              26,139
              
              
              
              25,596Total
      Liabilities
              
              
              1,430,629
              
              
              
              1,402,182Commitments
      and contingencies (Note 10)
              
              
              -
              
              
              
              -Members'
      EquityPaid-in-capital
              
              
              300,890
              
              
              
              289,911Retained
      deficit
              
              
              (149,832
              )
              
              
              (105,188
              )Accumulated
      other comprehensive income (loss)
              
              
              709
              
              
              
              (9,870
              )Members'
      equity
              
              
              151,767
              
              
              
              174,853Total
      Liabilities and Members' Equity
              
              $
              1,582,396
              
              
              $
              1,577,035See
      notes to unaudited condensed consolidated financial
      statements.






3




VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSThree
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      sales
              
              $
              451,602
              
              
              $
              372,602
              
              
              $
              905,509
              
              
              $
              732,408Costs
      and expenses:Cost
      of products sold - (exclusive ofdepreciation
      and amortization)
              
              
              376,921
              
              
              
              332,843
              
              
              
              752,299
              
              
              
              649,194Depreciation
      and amortization
              
              
              34,688
              
              
              
              30,024
              
              
              
              66,825
              
              
              
              59,619Selling,
      general and administrative expenses
              
              
              26,316
              
              
              
              8,429
              
              
              
              40,419
              
              
              
              19,335Restructuring
      and other charges
              
              
              23,718
              
              
              
              6,970
              
              
              
              25,436
              
              
              
              12,243Operating
      income (loss)
              
              
              (10,041
              )
              
              
              (5,664
              )
              
              
              20,530
              
              
              
              (7,983
              )Interest
      income
              
              
              (141
              )
              
              
              (174
              )
              
              
              (332
              )
              
              
              (1,095
              )Interest
      expense
              
              
              24,821
              
              
              
              28,393
              
              
              
              51,541
              
              
              
              56,925Net
      loss
              
              $
              (34,721
              )
              
              $
              (33,883
              )
              
              $
              (30,679
              )
              
              $
              (63,813
              )Included
      in the financial statement line itemsabove
      are related-party transactions as follows(Notes
      8 and 9):Net
      sales
              
              $
              44,454
              
              
              $
              37,260
              
              
              $
              80,643
              
              
              $
              70,718Purchases
      included in cost of products sold
              
              
              3,222
              
              
              
              1,339
              
              
              
              4,261
              
              
              
              3,338Restructuring
      and other charges
              
              
              22,475
              
              
              
              2,563
              
              
              
              23,322
              
              
              
              5,503See
      notes to unaudited condensed consolidated financial
      statements.






4






VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN MEMBERS'
      EQUITYFOR
      THE PERIODS ENDED JUNE 30, 2008 AND 2007AccumulatedOther
              
              
              TotalPaid-in-
              
              
              Retained
              
              
              Comprehensive
              
              
              Members'(In
      thousands of U.S. dollars)
              
              Capital
              
              
              (Deficit)
              
              
              Income
      (Loss)
              
              
              EquityBeginning
      balance - January 1, 2007
              
              $
              289,286
              
              
              $
              (1,832
              )
              
              $
              (7,741
              )
              
              $
              279,713Net
      loss
              
              
              -
              
              
              
              (63,813
              )
              
              
              -
              
              
              
              (63,813
              )Other
      comprehensive income:Prior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              393
              
              
              
              393Total
      other comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              393
              
              
              
              393Comprehensive
      income (loss)
              
              
              -
              
              
              
              (63,813
              )
              
              
              393
              
              
              
              (63,420
              )Cash
      distributions
              
              
              -
              
              
              
              (7,256
              )
              
              
              -
              
              
              
              (7,256
              )Equity
      award expense
              
              
              471
              
              
              
              -
              
              
              
              -
              
              
              
              471Ending
      balance - June 30, 2007
              
              $
              289,757
              
              
              $
              (72,901
              )
              
              $
              (7,348
              )
              
              $
              209,508Beginning
      balance - January 1, 2008
              
              $
              289,911
              
              
              $
              (105,188
              )
              
              $
              (9,870
              )
              
              $
              174,853Net
      loss
              
              
              -
              
              
              
              (30,679
              )
              
              
              -
              
              
              
              (30,679
              )Other
      comprehensive income:Net
      unrealized gains on derivative financialinstruments
              
              
              -
              
              
              
              -
              
              
              
              10,143
              
              
              
              10,143Prior
      service cost amortization
              
              
              -
              
              
              
              -
              
              
              
              436
              
              
              
              436Total
      other comprehensive income
              
              
              -
              
              
              
              -
              
              
              
              10,579
              
              
              
              10,579Comprehensive
      income (loss)
              
              
              -
              
              
              
              (30,679
              )
              
              
              10,579
              
              
              
              (20,100
              )Cash
      distributions
              
              
              -
              
              
              
              (13,965
              )
              
              
              -
              
              
              
              (13,965
              )Equity
      award expense
              
              
              10,979
              
              
              
              -
              
              
              
              -
              
              
              
              10,979Ending
      balance - June 30, 2008
              
              $
              300,890
              
              
              $
              (149,832
              )
              
              $
              709
              
              
              $
              151,767See
      notes to unaudited condensed consolidated financial
      statements.






5




VERSO
      PAPER HOLDINGS LLCUNAUDITED
      CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSSix
      Months
              
              
              Six
      MonthsEnded
              
              
              EndedJune
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Cash
      Flows From Operating Activities:Net
      loss
              
              $
              (30,679
              )
              
              $
              (63,813
              )Adjustments
      to reconcile net loss tonet
      cash provided by (used in) operating activities:Depreciation
      and amortization
              
              
              66,825
              
              
              
              59,619Amortization
      of debt issuance costs
              
              
              2,714
              
              
              
              2,716Loss
      on disposal of fixed assets
              
              
              21
              
              
              
              (48
              )Other - net
              
              
              20,732
              
              
              
              864Changes
      in assets and liabilities:Accounts
      receivable
              
              
              (8,847
              )
              
              
              (4,148
              )Inventories
              
              
              (14,397
              )
              
              
              (30,884
              )Prepaid
      expenses and other assets
              
              
              (18,621
              )
              
              
              (6,127
              )Accounts
      payable
              
              
              33,100
              
              
              
              10,604Accrued
      liabilities
              
              
              (4,320
              )
              
              
              117Net
      cash provided by (used in) operating activities
              
              
              46,528
              
              
              
              (31,100
              )Cash
      Flows From Investing Activities:Proceeds
      from sale of fixed assets
              
              
              82
              
              
              
              238Capital
      expenditures
              
              
              (41,392
              )
              
              
              (31,182
              )Net
      cash used in investing activities
              
              
              (41,310
              )
              
              
              (30,944
              )Cash
      Flows From Financing Activities:Repayments
      of debt
              
              
              (1,425
              )
              
              
              (1,425
              )Equity
      distributions
              
              
              (13,965
              )
              
              
              (7,256
              )Net
      cash used in financing activities
              
              
              (15,390
              )
              
              
              (8,681
              )Net
      decrease in cash
              
              
              (10,172
              )
              
              
              (70,725
              )Cash
      at beginning of period
              
              
              58,499
              
              
              
              112,448Cash
      at end of period
              
              $
              48,327
              
              
              $
              41,723See
      notes to unaudited condensed consolidated financial
      statements.






6




VERSO
PAPER HOLDINGS LLC




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


AND
FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 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 six-month periods ended June 30, 2008 and 2007.  In the opinion of
management, the accompanying unaudited 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.  Results for the periods ended June 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 the Company’s 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. The Company’s 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.  The Company includes mills and related woodyards in
Bucksport and Jay, Maine; Quinnesec, Michigan; and Sartell, Minnesota. The
Company also includes an investment in an energy producing asset located at the
Bucksport, Maine, facility.





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:






June
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Raw
      materials
              
              $
              19,200
              
              
              $
              19,918Woodyard
      logs
              
              
              4,771
              
              
              
              3,209Work-in-process
              
              
              19,120
              
              
              
              19,565Finished
      goods
              
              
              65,214
              
              
              
              48,167Replacement
      parts and other supplies
              
              
              25,712
              
              
              
              28,761Inventories
              
              $
              134,017
              
              
              $
              119,620







On June
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




Six
      Months
              
              
              Six
      MonthsEnded
              
              
              EndedJune
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Asset
      retirement obligations, January 1
              
              $
              11,614
              
              
              $
              11,855New
      liabilities
              
              
              1,091
              
              
              
              310Accretion
      expense
              
              
              285
              
              
              
              295Settlement
      of existing liabilities
              
              
              (385
              )
              
              
              (81
              )Adjustment
      to existing liabilities
              
              
              2,273
              
              
              
              104Asset
      retirement obligations, June 30
              
              $
              14,878
              
              
              $
              12,483





Depreciation
expense was $32.8 million and $63.3 million for the three-month and six-month
periods ended June 30, 2008, compared to $29.6 million and $58.9 million for the
three-month and six-month periods ended June 30, 2007,
respectively.





4.  INTANGIBLES
& OTHER ASSETS





Intangibles
and other assets consist of the following:






June
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007Amortizable
      intangible assets:Customer
      relationships - net of accumulated amortization of $2.5 million
      and$1.8
      million, respectively
              
              $
              10,745
              
              
              $
              11,470Patents
      - net of accumulated amortization of $0.22 million and $0.16
      million,respectively
              
              
              928
              
              
              
              985Total
      amortizable intangible assets
              
              
              11,673
              
              
              
              12,455Unamortizable
      intangible assets:Trademarks
              
              
              21,473
              
              
              
              21,473Other
      assets:Financing
      costs-net of accumulated amortization of $10.4 million and$7.7million,
      respectively
              
              
              33,753
              
              
              
              36,468Deferred
      major repair
              
              
              11,003
              
              
              
              5,328Deferred
      software cost-net of accumulated amortization of $2.2millionand
      $1.3 million, respectively
              
              
              3,423
              
              
              
              3,765Replacement
      parts-net
              
              
              6,487
              
              
              
              4,932Other
              
              
              16,573
              
              
              
              6,422Total
      other assets
              
              
              71,239
              
              
              
              56,915Intangibles
      and other assets
              
              $
              104,385
              
              
              $
              90,843





10




Amortization
of intangible assets reflected in depreciation and amortization expense was $0.4
million and $0.8 million for the three-month and six-month periods ended June
30, 2008, compared to $0.1 million and $0.3 million for the three-month and
six-month periods ended June 30, 2007, respectively.





Estimated
amortization expense of intangibles for the remainder of 2008 is expected to be
$0.8 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 $0.4 million and $0.8 million for the three-month and
six-month periods ended June 30, 2008, compared to $0.2 million and $0.4 million
for the three-month and six-month periods ended June 30, 2007,
respectively.







5.  LONG-TERM
DEBT





A summary
of long-term debt is as follows:







June
      30,
              
              
              December
      31,(In
      thousands of U.S. dollars)
              Maturity
              
              Rate
              
              
              2008
              
              
              2007First
      Priority Term Loan B
              8/1/2013
              
              LIBOR
      + 1.75
              %
              
              $
              255,013
              
              
              $
              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
              
              
              
              300,0001,155,013
              
              
              
              1,156,438Less
      current maturities
              
              
              
              
              
              
              
              (2,850
              )
              
              
              (2,850
              )Long-term
      debt
              
              
              
              
              
              
              $
              1,152,163
              
              
              $
              1,153,588




Interest
expense was $23.8 million while $7.6 million of interest was paid during second
quarter 2008.  Interest expense was $49.6 million while $51.3 million
of interest was paid during the six months ended June 30,
2008.  Interest expense was $27.3 million while $10.5 million of
interest was paid during second quarter 2007.  Interest expense was
$54.6 million while $54.6 million of interest was paid during the six months
ended June 30, 2007.





Amortization
of debt issuance costs, included in interest expense in the accompanying
condensed consolidated statements of operations, was $1.3 million and $2.7
million for the three-month and six-month periods ended June 30, 2008, compared
to $1.3 million and $2.7 million for the three-month and six-month periods ended
June 30, 2007, respectively, and is included in interest expense in the
accompanying condensed consolidated statements of operations.





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 six 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., of which Verso Paper Finance Holdings LLC is an indirect,
wholly-owned subsidiary,  used 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 to repay $138 million of the outstanding principal of
this loan, and the 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 $6.9 million in second quarter 2008 and $14.0 million for the
six months ended June 30, 2008.  Additionally, the Company paid
distributions of $7.3 million in second quarter 2007.  The Company has
no obligation to make distributions to Verso Paper Finance Holdings
LLC.






11




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 second quarter
2008, the Company made contributions of $2.1 million attributable to the 2008
plan year.  For the six months, contributions totaled $3.7 million,
with $2.2 million attributable to the 2008 plan year and $1.5 million
attributable to the 2007 plan year.  The Company currently expects to
make additional contributions of $7.8 million with $6.3 million related to the
2008 plan year and $1.5 million related to the 2007 plan year.





The
following table summarizes the components of net periodic expense:





Three
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Components
      of net periodic pension cost:Service
      cost
              
              $
              1,319
              
              
              $
              1,253
              
              
              $
              2,638
              
              
              $
              2,506Interest
      cost
              
              
              251
              
              
              
              149
              
              
              
              501
              
              
              
              298Amortization
      of prior service cost
              
              
              218
              
              
              
              196
              
              
              
              436
              
              
              
              392Net
      periodic pension cost
              
              $
              1,788
              
              
              $
              1,598
              
              
              $
              3,575
              
              
              $
              3,196





7.  MANAGEMENT
EQUITY AWARDS





Simultaneously
with the consummation of the initial public offering of common stock of Verso
Paper Corp. (the “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.






12




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 six-month periods ended June 30, 2008, was $10.9 million and $11.0 million,
respectively, which 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 six-month periods ended June 30, 2007,
respectively.




As of June
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 1.5 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 are 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 are 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 six-months ended June 30, 2008,
were $0.2 million, compared to $1.9 million and $4.1 million for the three-month
and six-month periods ended June 30, 2007, respectively.  As of
September 30, 2007, we substantially discontinued the usage of services under
this agreement.





The
Company had net sales to International Paper of $44.5 million and $80.6 million
for the three-month and six-month periods ended June 30, 2008, compared to $37.3
million and $70.7 million for the three-month and six-month periods ended June
30, 2007, respectively.  The Company had purchases included in cost of
products sold from International Paper of $3.2 million and $4.3 million for the
three-month and six-month periods ended June 30, 2008, compared to $1.3 million
and $3.3 million for the three-month and six-month periods ended June 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 $1.4 million for the six-month period ended June 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.






13




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 six 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 the 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 $6.9 million
in second quarter 2008 and $14.0 million for the six months ended June 30,
2008.  Additionally, the Company paid distributions of $7.3 million in
second quarter 2007.  The Company has no obligation to make
distributions to Verso Paper Finance Holdings LLC.




On June
30, 2008, the Company had current payables of $2.6 million due to 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 six-month periods ended June 30, 2008, were
$23.8 million and $25.5 million, compared to $7.0 million and $12.3 million for
the three-month and six-month periods ended June 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.  In 2007, restructuring and other charges included $1.9 million
and $4.1 million of transition service agreement costs for the three-month and
six-month periods ended June 30, respectively.  As of September 30,
2007, we substantially discontinued the usage of services under this
agreement.





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.






14




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 paper 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 June 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
six-month periods ended June 30, 2008 and 2007:







Three
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      Sales:Coated
      and supercalendered
              
              $
              402,315
              
              
              $
              326,110
              
              
              $
              807,246
              
              
              $
              640,872Hardwood
      market pulp
              
              
              38,735
              
              
              
              36,663
              
              
              
              77,842
              
              
              
              72,710Other
              
              
              10,552
              
              
              
              9,829
              
              
              
              20,421
              
              
              
              18,826Total
              
              $
              451,602
              
              
              $
              372,602
              
              
              $
              905,509
              
              
              $
              732,408Operating
      Income (Loss):Coated
      and supercalendered
              
              $
              (15,872
              )
              
              $
              (13,060
              )
              
              $
              5,502
              
              
              $
              (20,877
              )Hardwood
      market pulp
              
              
              6,785
              
              
              
              8,279
              
              
              
              17,283
              
              
              
              15,104Other
              
              
              (954
              )
              
              
              (883
              )
              
              
              (2,255
              )
              
              
              (2,210
              )Total
              
              $
              (10,041
              )
              
              $
              (5,664
              )
              
              $
              20,530
              
              
              $
              (7,983
              )Depreciation
      and Amortization:Coated
      and supercalendered
              
              $
              29,696
              
              
              $
              24,711
              
              
              $
              56,466
              
              
              $
              49,436Hardwood
      market pulp
              
              
              4,257
              
              
              
              4,616
              
              
              
              8,904
              
              
              
              8,834Other
              
              
              735
              
              
              
              697
              
              
              
              1,455
              
              
              
              1,349Total
              
              $
              34,688
              
              
              $
              30,024
              
              
              $
              66,825
              
              
              $
              59,619Capital
      Spending:Coated
      and supercalendered
              
              $
              23,487
              
              
              $
              19,005
              
              
              $
              32,895
              
              
              $
              29,383Hardwood
      market pulp
              
              
              4,022
              
              
              
              653
              
              
              
              6,895
              
              
              
              827Other
              
              
              1,289
              
              
              
              500
              
              
              
              1,602
              
              
              
              972Total
              
              $
              28,798
              
              
              $
              20,158
              
              
              $
              41,392
              
              
              $
              31,182






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 other
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 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.





Net
settlements on these swaps resulted in decreases of $3.3 million and $2.7
million to cost of products sold for the three-month and six-month periods ended
June 30, 2008, respectively.  On June 30, 2008, the balance sheet
impacts of these swaps were derivative assets of $6.8 million and derivative
liabilities of $0.7 million.  Unrealized gains representing the
ineffective portion of these hedges recognized in cost of products sold were
$0.1 million in 2008.  In addition, net gains related to the effective
portion of SFAS No. 133 hedges of $5.9 million were recorded in accumulated
other comprehensive income on June 30, 2008.  Net gains included in
other comprehensive income on June 30, 2008, are expected to be reclassified
into cost of products sold in the same period when the hedged cash flows affect
earnings and will decrease income or increase expense on the respective hedged
cash flows. Assuming no change in open cash flow derivative hedge positions, the
net gains are expected to be reclassified into earnings through September
2009.  For the quarter ended June 30, 2007, prior to the swaps being
designated under SFAS No. 133, net losses of $1.5 million were recognized in
cost of products sold.






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
June 30, 2008, the fair value of this swap was an unrealized gain of $2.2
million.  In addition, net gains of $2.1 million were recorded in
accumulated other comprehensive income on June 30, 2008.  Net gains
included in other comprehensive income on June 30, 2008, are expected to be
reclassified into interest expense in the same period when the hedged cash flows
affect earnings and will decrease or increase interest expense on the respective
hedged cash flows.  Net gains reclassified from other comprehensive
income decreased interest expense by $0.1 million and $0.3 million for the
three-month and six-month periods ended June 30, 2008,
respectively.  Net gains of approximately $0.8 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 inactive


markets.


▪  Level
3: Unobservable inputs reflecting management’s own assumption about the inputs
used in pricing


the
asset or liability at the measurement date.







18




As of June
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
      3ASSETSNatural
      gas swaps (a)
              
              $
              6,848
              
              
              $
              -
              
              
              $
              6,848
              
              
              $
              -Interest
      rate swaps (b)
              
              
              2,192
              
              
              
              -
              
              
              
              2,192
              
              
              
              -Deferred
      compensation assets (a)
              
              
              160
              
              
              
              160
              
              
              
              -
              
              
              
              -Total
      assets at fair value on June 30, 2008
              
              $
              9,200
              
              
              $
              160
              
              
              $
              9,040
              
              
              $
              -LIABILITIESNatural
      gas swaps (a)
              
              $
              698
              
              
              $
              -
              
              
              $
              698
              
              
              $
              -Deferred
      compensation liabilities (a)
              
              
              160
              
              
              
              160
              
              
              
              -
              
              
              
              -Total
      liabilities at fair value on June 30, 2008
              
              $
              858
              
              
              $
              160
              
              
              $
              698
              
              
              $
              -(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 (the “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 June 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedASSETSCurrent
      assets
              
              $
              -
              
              
              $
              -
              
              
              $
              327,668
              
              
              $
              -
              
              
              $
              327,668Property
      and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,139,792
              
              
              
              -
              
              
              
              1,139,792Intercompany
      receivable
              
              
              1,219,301
              
              
              
              -
              
              
              
              -
              
              
              
              (1,219,301
              )
              
              
              -Investment
      in subsidiaries
              
              
              118,013
              
              
              
              -
              
              
              
              -
              
              
              
              (118,013
              )
              
              
              -Non-current
      assets
              
              
              -
              
              
              
              -
              
              
              
              114,936
              
              
              
              -
              
              
              
              114,936Total
      assets
              
              $
              1,337,314
              
              
              $
              -
              
              
              $
              1,582,396
              
              
              $
              (1,337,314
              )
              
              $
              1,582,396LIABILITIES
      AND MEMBERS’ EQUITYCurrent
      liabilities
              
              $
              33,384
              
              
              $
              -
              
              
              $
              218,943
              
              
              $
              -
              
              
              $
              252,327Intercompany
      payable
              
              
              -
              
              
              
              -
              
              
              
              1,219,301
              
              
              
              (1,219,301
              )
              
              
              -Long-term
      debt
              
              
              1,152,163
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,152,163Other
      long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              26,139
              
              
              
              -
              
              
              
              26,139Members’
      equity
              
              
              151,767
              
              
              
              -
              
              
              
              118,013
              
              
              
              (118,013
              )
              
              
              151,767Total
      liabilities and members’ equity
              
              $
              1,337,314
              
              
              $
              -
              
              
              $
              1,582,396
              
              
              $
              (1,337,314
              )
              
              $
              1,582,396








Unaudited
      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 June 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              451,602
              
              
              $
              -
              
              
              $
              451,602Cost
      of products sold (exclusiveof
      depreciation and amortization)
              
              
              -
              
              
              
              -
              
              
              
              376,921
              
              
              
              -
              
              
              
              376,921Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              34,688
              
              
              
              -
              
              
              
              34,688Selling,
      general and adminstrative
              
              
              -
              
              
              
              -
              
              
              
              26,316
              
              
              
              -
              
              
              
              26,316Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              23,718
              
              
              
              -
              
              
              
              23,718Interest
      income
              
              
              (32,157
              )
              
              
              -
              
              
              
              (141
              )
              
              
              32,157
              
              
              
              (141
              )Interest
      expense
              
              
              25,323
              
              
              
              -
              
              
              
              24,821
              
              
              
              (25,323
              )
              
              
              24,821Equity
      in net loss of subsidiaries
              
              
              (34,721
              )
              
              
              -
              
              
              
              -
              
              
              
              34,721
              
              
              
              -Income
      (loss) beforeincome
      taxes
              
              
              (27,887
              )
              
              
              -
              
              
              
              (34,721
              )
              
              
              27,887
              
              
              
              (34,721
              )Income
      tax (benefit) expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income (loss)
              
              $
              (27,887
              )
              
              $
              -
              
              
              $
              (34,721
              )
              
              $
              27,887
              
              
              $
              (34,721
              )




Unaudited
      Condensed Consolidating Statements of OperationsSix
      Months Ended June 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              905,509
              
              
              $
              -
              
              
              $
              905,509Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              752,299
              
              
              
              -
              
              
              
              752,299Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              66,825
              
              
              
              -
              
              
              
              66,825Selling,
      general and adminstrative
              
              
              -
              
              
              
              -
              
              
              
              40,419
              
              
              
              -
              
              
              
              40,419Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              25,436
              
              
              
              -
              
              
              
              25,436Interest
      and other income
              
              
              (66,611
              )
              
              
              -
              
              
              
              (332
              )
              
              
              66,611
              
              
              
              (332
              )Interest
      expense
              
              
              52,646
              
              
              
              -
              
              
              
              51,541
              
              
              
              (52,646
              )
              
              
              51,541Equity
      in net loss of subsidiaries
              
              
              (30,679
              )
              
              
              -
              
              
              
              -
              
              
              
              30,679
              
              
              
              -Income
      (loss) before income taxes
              
              
              (16,714
              )
              
              
              -
              
              
              
              (30,679
              )
              
              
              16,714
              
              
              
              (30,679
              )Income
      tax (benefit) expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income (loss)
              
              $
              (16,714
              )
              
              $
              -
              
              
              $
              (30,679
              )
              
              $
              16,714
              
              
              $
              (30,679
              )






21




Unaudited
      Condensed Consolidating Statements of OperationsThree
      Months Ended June 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              372,602
              
              
              $
              -
              
              
              $
              372,602Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              332,843
              
              
              
              -
              
              
              
              332,843Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              29,688
              
              
              
              -
              
              
              
              29,688Selling,
      general, and adminstrative
              
              
              -
              
              
              
              -
              
              
              
              8,765
              
              
              
              -
              
              
              
              8,765Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              6,970
              
              
              
              -
              
              
              
              6,970Interest
      income
              
              
              (28,294
              )
              
              
              -
              
              
              
              (174
              )
              
              
              28,294
              
              
              
              (174
              )Interest
      expense
              
              
              28,294
              
              
              
              -
              
              
              
              28,393
              
              
              
              (28,294
              )
              
              
              28,393Equity
      in net loss of subsidiaries
              
              
              (33,883
              )
              
              
              -
              
              
              
              -
              
              
              
              33,883
              
              
              
              -Income
      (loss) beforeincome
      taxes
              
              
              (33,883
              )
              
              
              -
              
              
              
              (33,883
              )
              
              
              33,883
              
              
              
              (33,883
              )Income
      tax (benefit) expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income (loss)
              
              $
              (33,883
              )
              
              $
              -
              
              
              $
              (33,883
              )
              
              $
              33,883
              
              
              $
              (33,883
              )




Unaudited
      Condensed Consolidating Statements of OperationsSix
      Months Ended June 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      sales
              
              $
              -
              
              
              $
              -
              
              
              $
              732,408
              
              
              $
              -
              
              
              $
              732,408Cost
      of products sold (exclusive ofdepreciation
      and amortization)
              
              
              -
              
              
              
              -
              
              
              
              649,194
              
              
              
              -
              
              
              
              649,194Depreciation
      and amortization
              
              
              -
              
              
              
              -
              
              
              
              59,283
              
              
              
              -
              
              
              
              59,283Selling,
      general and adminstrative
              
              
              -
              
              
              
              -
              
              
              
              19,671
              
              
              
              -
              
              
              
              19,671Restructuring
      and other charges
              
              
              -
              
              
              
              -
              
              
              
              12,243
              
              
              
              -
              
              
              
              12,243Interest
      income
              
              
              (56,486
              )
              
              
              -
              
              
              
              (1,095
              )
              
              
              56,486
              
              
              
              (1,095
              )Interest
      expense
              
              
              56,486
              
              
              
              -
              
              
              
              56,925
              
              
              
              (56,486
              )
              
              
              56,925Equity
      in net loss of subsidiaries
              
              
              (63,813
              )
              
              
              -
              
              
              
              -
              
              
              
              63,813
              
              
              
              -Income
      (loss) before income taxes
              
              
              (63,813
              )
              
              
              -
              
              
              
              (63,813
              )
              
              
              63,813
              
              
              
              (63,813
              )Income
      tax (benefit) expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
      income (loss)
              
              $
              (63,813
              )
              
              $
              -
              
              
              $
              (63,813
              )
              
              $
              63,813
              
              
              $
              (63,813
              )






22


Unaudited
      Condensed Consolidating Statements of Cash FlowsSix
      Months Ended June 30, 2008Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      cash provided by (used in)operating
      activities
              
              $
              13,965
              
              
              $
              -
              
              
              $
              32,563
              
              
              
              
              
              $
              46,528Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              82
              
              
              
              -
              
              
              
              82Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              (41,392
              )
              
              
              -
              
              
              
              (41,392
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              -
              
              
              
              (41,310
              )
              
              
              -
              
              
              
              (41,310
              )Cash
      flows from financing activities:Equity
      distributions
              
              
              (13,965
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (13,965
              )Repayment
      of advances to subsidiaries
              
              
              1,425
              
              
              
              -
              
              
              
              (1,425
              )
              
              
              -
              
              
              
              -Payments
      on long-term debtunder
      credit agreement
              
              
              (1,425
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,425
              )Net
      cash used in financing activities
              
              
              (13,965
              )
              
              
              -
              
              
              
              (1,425
              )
              
              
              -
              
              
              
              (15,390
              )Net
      change in cash
              
              
              -
              
              
              
              -
              
              
              
              (10,172
              )
              
              
              -
              
              
              
              (10,172
              )Cash
      at beginning of period
              
              
              -
              
              
              
              -
              
              
              
              58,499
              
              
              
              -
              
              
              
              58,499Cash
      at end of period
              
              $
              -
              
              
              $
              -
              
              
              $
              48,327
              
              
              $
              -
              
              
              $
              48,327






Unaudited
      Condensed Consolidating Statements of Cash FlowsSix
      Months Ended June 30, 2007Parent
              
              
              Subsidiary
              
              
              Guarantor
              
              
              Intercompany(In
      thousands of U.S. dollars)
              
              Issuer
              
              
              Issuer
              
              
              Subsidiaries
              
              
              Eliminations
              
              
              ConsolidatedNet
      cash used in operating activities
              
              $
              -
              
              
              $
              -
              
              
              $
              (31,100
              )
              
              
              
              
              $
              (31,100
              )Cash
      flows from investing activities:Proceeds
      from sale of fixed assets
              
              
              -
              
              
              
              -
              
              
              
              238
              
              
              
              -
              
              
              
              238Capital
      expenditures
              
              
              -
              
              
              
              -
              
              
              
              (31,182
              )
              
              
              -
              
              
              
              (31,182
              )Net
      cash used in investing activities
              
              
              -
              
              
              
              -
              
              
              
              (30,944
              )
              
              
              -
              
              
              
              (30,944
              )Cash
      flows from financing activities:Equity
      distributions
              
              
              -
              
              
              
              -
              
              
              
              (7,256
              )
              
              
              -
              
              
              
              (7,256
              )Repayment
      of advances to subsidiaries
              
              
              1,425
              
              
              
              -
              
              
              
              (1,425
              )
              
              
              
              
              
              
              -Payments
      on long-term debtunder
      credit agreement
              
              
              (1,425
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,425
              )Net
      cash used in financing activities
              
              
              -
              
              
              
              -
              
              
              
              (8,681
              )
              
              
              -
              
              
              
              (8,681
              )Net
      change in cash
              
              
              -
              
              
              
              -
              
              
              
              (70,725
              )
              
              
              -
              
              
              
              (70,725
              )Cash
      at beginning of period
              
              
              -
              
              
              
              -
              
              
              
              112,448
              
              
              
              -
              
              
              
              112,448Cash
      at end of period
              
              $
              -
              
              
              $
              -
              
              
              $
              41,723
              
              
              $
              -
              
              
              $
              41,723






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 second quarter 2008 results reflect significant improvement over last
year as net sales increased 21% driven by the favorable pricing environment and
higher volumes.  Our weighted average paper prices have steadily
increased since second quarter 2007, and we expect this trend to continue into
the third quarter of 2008.





During the
quarter, in addition to improved volumes and sales prices, our operations ran
efficiently and generated cost improvements compared to last
year.  These improvements were partially offset by several planned
maintenance outages at our facilities during the second quarter, totaling 19,000
tons of downtime, as well as significantly increased input prices for our key
direct expenses related to energy, fiber, chemical and
transportation.  In the face of some of these increases, our gross
margin improved by almost 6% from last year’s second quarter
results.






Three
      Months
              
              
              Three
      Months
              
              
              Six
      Months
              
              
              Six
      MonthsEnded
              
              
              Ended
              
              
              Ended
              
              
              EndedJune
      30,
              
              
              June
      30,
              
              
              June
      30,
              
              
              June
      30,(In
      thousands of U.S. dollars)
              
              2008
              
              
              2007
              
              
              2008
              
              
              2007Net
      sales
              
              $
              451,602
              
              
              $
              372,602
              
              
              $
              905,509
              
              
              $
              732,408Costs
      and expenses:Cost
      of products sold - exclusive ofdepreciation
      and amortization
              
              
              376,921
              
              
              
              332,843
              
              
              
              752,299
              
              
              
              649,194Depreciation
      and amortization
              
              
              34,688
              
              
              
              30,024
              
              
              
              66,825
              
              
              
              59,283Selling,
      general and administrative expenses
              
              
              26,316
              
              
              
              8,429
              
              
              
              40,419
              
              
              
              19,671Restructuring
      and other charges
              
              
              23,718
              
              
              
              6,970
              
              
              
              25,436
              
              
              
              12,243Operating
      income (loss)
              
              
              (10,041
              )
              
              
              (5,664
              )
              
              
              20,530
              
              
              
              (7,983
              )Interest
      income
              
              
              (141
              )
              
              
              (174
              )
              
              
              (332
              )
              
              
              (1,095
              )Interest
      expense
              
              
              24,821
              
              
              
              28,393
              
              
              
              51,541
              
              
              
              56,925Net
      loss
              
              $
              (34,721
              )
              
              $
              (33,883
              )
              
              $
              (30,679
              )
              
              $
              (63,813
              )





24




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







Net Sales.  Net
sales for second quarter 2008 increased 21% to $451.6 million from $372.6
million in second quarter 2007.  The improvement was the result of a
1.9% increase in sales volume coupled with an 18.9% increase in average sales
prices for second quarter 2008 compared to the same period in 2007.





Net sales
for our coated and supercalendered papers segment increased 23% to $402.3
million in second quarter 2008 from $326.1 million in second quarter
2007.  The increase reflects a 3.8% increase in paper volumes and an
18.8% increase in average paper sales prices for second quarter 2008 compared to
second quarter 2007.





Net sales
for our market pulp segment were $38.8 million for second quarter 2008 compared
to $36.7 million for the same period in 2007.  This increase was due
to a 14.3% increase in average sales prices compared to second quarter
2007.  Partially offsetting this increase was a 7.6% decline in volume
as internal consumption increased.





Net sales
for our other segment were $10.5 million for second quarter 2008 compared to
$9.8 million for second quarter 2007.  The improvement in second
quarter 2008 reflects a 14.4% increase in average sales prices, partially offset
by a 6.1% decrease in sales volume compared to second quarter 2007.





Cost of
sales.  Cost of sales increased 13.4% to $411.5 million in
second quarter 2008 compared to $362.9 million for the same period in 2007,
primarily driven higher input costs. Our gross margin, excluding depreciation
and amortization, was 16.5% for second quarter 2008, compared to 10.7% for
second quarter 2007.  This increase reflects the higher average sales
prices during second quarter 2008.  Depreciation and amortization
expense was $34.6 million in second quarter 2008 compared to $30.0 million in
2007.





Selling, general and
administrative.  Selling, general and administrative expenses
increased to $26.3 million in second quarter 2008 from $8.4 million for the same
period in 2007, primarily reflecting a one-time charge of $10.8 million due to
the accelerated vesting of the Legacy Class C Units in connection with the
initial public offering of Verso Paper Corp.’s common stock and a charge of $0.7
million related to unusual bad debt losses.





Interest
expense.  Interest expense for second quarter 2008 was $24.8
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 second quarter 2008 compared to 2007.





Restructuring and other
charges.  Restructuring and other charges for second quarter
2008 were $23.8 million compared to $7.0 million for second 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 initial public offering, 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 second quarter 2008 reflect a final accrual
of $22.5 million for this one-time fee.  The charges in 2007 included
$1.9 million of transition service agreement costs and $0.7 million of charges
under the management agreement.






25




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





Net Sales.  Net
sales for the six months ended June 30, 2008, increased 24% to $905.5 million
from $732.4 million for the six months ended June 30, 2007.  The
increase was the result of a 15.8% increase in average sales price and a 6.8%
increase in volume for the six months ended June 30, 2008, compared to the six
months ended June 30, 2007.





Net sales
for our papers segment increased 26% to $807.2 million for the six months ended
June 30, 2008, from $640.9 million for the six months ended June 30,
2007.  The increase was due to higher paper sales prices, which
increased 15.4% for the six months ended June 30, 2008, compared to paper prices
for the six months ended June 30, 2007.  This was enhanced by a 9.2%
increase in paper volumes over the comparable period.





Net sales
for our market pulp segment were $77.9 million for the six months ended June 30,
2008, compared to $72.7 million for the six months ended June 30,
2007.  The increase was due to a 12.8% increase in price, which was
partially offset by a 5.0% decrease in volume.  The decrease in volume
was mainly due to our increase in internal consumption.





Net sales
for our other segment were $20.4 million for the six months ended June 30, 2008,
compared to $18.8 million for the six months ended June 30,
2007.   The increase was due to an 12.6% increase in sales price,
which was partially offset by a 3.7% decrease in volume.





Cost of sales.Cost of sales
for the six months ended June 30, 2008, was $819.1 million, compared to $708.8
million for the six months ended June 30, 2007, an increase of 15.6%, driven by
higher sales volume and increased input costs.  Our gross margin,
excluding depreciation and amortization, was 16.9% for the six months ended June
30, 2008, compared to 11.4% for the same period in 2007.  This
increase reflects the higher average sales prices for the six months ended June
30, 2008.  Depreciation and amortization expense for the six months
ended June 30, 2008, was $66.8 million compared to $59.6 million for the six
months ended June 30, 2007.





Selling, general and
administrative.Selling,
general and administrative expenses were $40.4 million for the six months ended
June 30, 2008 compared to $19.3 million for the same period in 2007, primarily
reflecting a one-time charge of $10.8 million due to the accelerated vesting of
the Legacy Class C Units in connection with the initial public offering of Verso
Paper Corp.’s common stock and a charge of $0.7 million related to unusual bad
debt losses.





Interest
expense.  Interest expense for the six months ended June 30,
2008, was $51.5 million compared to $56.9 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 six months
ended June 30, 2008 were $25.5 million compared to $12.3 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 initial public
offering, 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 and $0.2 million of transition service agreement
costs.  The charges in 2007 included $4.1 million of transition
service agreement costs and $1.4 million of charges under the management
agreement.  As of September 30, 2007, we substantially discontinued
the usage of services under this agreement






26




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 six months ended June 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. We currently have $170 million of availability under
our revolving credit facility, which is currently undrawn, after deducting for
$30 million of standby letters of credit that we have issued.  Our
aggregate indebtedness on June 30, 2008, was $1,155 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 six months ended June 30, 2008, operating activities
provided net cash of $46.5 million, compared to $31.1 million of net cash used
during the six months ended June 30, 2007.  The improvement in net
cash provided by operating activities was primarily due to improved performance,
with a net loss of $30.7 million in 2008 compared to a net loss of $63.8 million
in 2007, working capital improvements, and positive non-cash adjustments related
to depreciation and amortization expense, non-cash compensation expense and
hedging transactions.





Net cash flows from investing
activities.For the six-month periods ended June 30, 2008 and 2007, we
used $41.3 million and $30.9 million, respectively, of net cash in investing
activities due to investments in capital expenditures.





Net cash flows from financing
activities.For the six months ended June 30, 2008, our financing
activities used net cash of $15.4 million, which reflected $1.4 million
principal payments on debt and $14.0 million in distributions paid to Verso
Paper Finance Holdings LLC to service Verso Paper Finance Holdings LLC’s
interest obligations. This compares to $8.7 million net cash used in financing
activities for the six months ended June 30, 2007, which was comprised of $1.4
million principal payments on debt and $7.3 million in distributions to Verso
Paper Finance Holdings LLC.






27




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 six
      years.  No amounts were outstanding as of June 30,
      2008.  Letters of credit of $30.1 million were issued as of June
      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 4.4% at June 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
June 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.





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 six 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 an initial public
offering of 14 million shares of its common stock at an offering price of $12.00
per share to repay $138 million of the outstanding principal of this loan, and
the 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%
and the interest rate at June 30, 2008 was 8.7%.  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 $6.9 million
in second quarter 2008 and $14.0 million for the six months ended June 30,
2008.  Additionally, the Company paid distributions of $7.3 million in
second quarter 2007.  The Company has no obligation to make
distributions to Verso Paper Finance Holdings LLC.






28




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.





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.






29




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.





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.






30




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.






31




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, the management
of Verso Paper Holdings LLC 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 the
Company’s 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.





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:







Six
      Months
                
                Year
                
                Six
      Months
                
                Twelve
      MonthsEnded
                
                Ended
                
                Ended
                
                EndedJune
      30,
                
                December
      31,
                
                June
      30,
                
                June
      30,(in
      millions of U.S. dollars)
                
                
                2007
                
                2007
                
                2008
                
                2008Cash
      flow from operating activities
                
                
                ($31.1)
                
                $38.8
                
                $46.5
                
                $116.4Amortization
      of debt issuance costs
                
                
                (2.7)
                
                (5.4)
                
                (2.7)
                
                (5.4)Interest
      income
                
                
                (1.1)
                
                (1.5)
                
                (0.3)
                
                (0.7)Interest
      expense
                
                
                56.9
                
                113.9
                
                51.5
                
                108.5Loss
      on disposal of fixed assets
                
                
                -
                
                (1.0)
                
                -
                
                (1.0)Other,
      net
                
                
                (0.9)
                
                1.5
                
                (20.7)
                
                (18.3)Changes
      in assets and liabilities, net
                
                
                30.1
                
                7.9
                
                13.1
                
                (9.1)EBITDA
                
                
                51.2
                
                154.2
                
                87.4
                
                190.4Restructuring,
      severance and other (1)
                
                
                12.3
                
                19.4
                
                25.4
                
                32.5Non-cash
      compensation/benefits (2)
                
                
                0.5
                
                0.6
                
                11.0
                
                11.1Other
      items, net (3)
                
                
                0.1
                
                8.0
                
                1.5
                
                9.4Adjusted
      EBITDA
                
                
                $64.1
                
                $182.2
                
                $125.3
                
                $243.4Cash
      interest expense (4)
                
                
                $54.8
                
                $109.2
                
                $49.7
                
                $104.1Adjusted
      EBITDA to cash interest expense
                
                
                
                
                
                
                2.3Net
      senior secured debt to Adjusted EBITDA
                
                
                
                
                
                
                3.3Net
      first-lien secured debt to Adjusted EBITDA
                
                
                
                
                
                
                0.8(1)
                Includes
      restructuring and severance as per our financial
      statements.  Restructuring includes transition and other
      non-recurringcosts
      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 interest expense related to the debt,
      excluding amortization of debt issuance costs.NOTE:
                To
      construct financials for the twelve months ended June 30, 2008, amounts
      have been calculated by subtracting the data forthe
      six months ended June 30, 2007, from the data for the year ended December
      31, 2007, and then adding the six monthsended
      June 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 June 30, 2008, under our senior
secured credit facilities and our floating-rate notes would increase our annual
interest expense by $5.1 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.





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 June 30, 2008, we had
net unrealized gains of $6.2 million on open commodity swaps with
maturities of one to fifteen months. 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.  A 10%
decrease in commodity prices would have a negative impact of approximately $4.6
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.






34




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 June 30, 2008, the fair value
of this swap was an unrealized gain of $2.2 million.  A 10% decrease
in interest rates would have a negative impact of approximately $1.4 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 June 30, 2008. Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer have
concluded that, as of June 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 June 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.





ITEM
4.   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:  August
      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                                                                                                                                                 Description


31.1
            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.