**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**




**FORM
      10-Q**




**(Mark
      One)**




[ü]
      QUARTERLY REPORT
      PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934




For
      the
      Quarterly Period Ended June 30, 2007




or


[    ] TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
      ACT OF 1934




For
      the
      transition period from _________ to _____________





**333-142283**


Commission
      file number




**Verso
      Paper Holdings LLC**


****(Exact
      name of registrant as specified
      in its charter)




**Delaware**


(State
      or
      other jurisdiction of incorporation or organization)


**56-2597634**


(IRS
      Employer Identification Number)





**6775
      Lenox Center Court**


**Memphis,
      Tennessee 38115**


**(901)
      369-4100**


(Address
      of principal executive offices and 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    
No  ü




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer or a non-accelerated filer. See definition of accelerated
      filer and large accelerated filer in Rule 12b-2 of the Exchange
      Act.




Large
                accelerated filer
            
            Accelerated
                filer
            
            Non-accelerated
                filer ü




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


As
      of July
      31, 2007, there was one outstanding limited liability company interest of the
      issuer.











**INDEX**








**Page
                  No****Part
                  I.**
              **FINANCIAL
                  INFORMATION**Item
                1.
              Financial
                Statements (Unaudited) of Verso
                Paper Holdings LLC (Successor) and Coated and Supercalendered Papers
                Division of International Paper Company (Predecessor)
              3Successor’s
                Condensed Notes to Consolidated
                Condensed Financial Statements
              7Predecessor’s
                Condensed Notes to Combined
                Condensed Financial Statements
              22Item
                2.
              Management’s
                Discussion and Analysis of Financial
                Condition and Results of Operations
              26Item
                3.
              Quantitative
                And Qualitative Disclosures About Market
                Risks
              36Item
                4T.
              Controls
                and Procedures
              37**Part
                II.**
              **OTHER****INFORMATION**Item
                1.
              Legal
                Proceedings
              39Item
                2.
              Unregistered
                Sales of Equity Securities
              39Item
                3.
              Defaults
                Under Senior Securities
              39Item
                4.
              Submission
                of Matters to a Vote of Security
                Holders
              39Item
                5.
              Other
                Information
              39Item
                6.
              Exhibits
              39Signatures
              40





2




**PART
      I.  FINANCIAL INFORMATION**





**ITEM
      1.  FINANCIAL STATEMENTS**(**UNAUDITED)
      OF VERSO
      PAPER HOLDINGS LLC (SUCCESSOR) AND COATED AND SUPERCALENDERED PAPERS DIVISION
      OF
      INTERNATIONAL PAPER COMPANY (PREDECESSOR)**







**VERSO
                  PAPER HOLDINGS LLC****UNAUDITED
                  CONDENSED CONSOLIDATED BALANCE SHEETS****June
                  30,**
              
              
              **December
                  31,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2006****ASSETS**Current
                  AssetsCash
              
              $
              41,723
              
              
              $
              112,448Accounts
                  receivable - net
              
              
              111,398
              
              
              
              113,489Accounts
                  receivable from International Paper Company - net
              
              
              14,456
              
              
              
              8,217Inventories
              
              
              172,925
              
              
              
              140,503Prepaid
                  expenses and other assets
              
              
              2,220
              
              
              
              5,880Total Current Assets
              
              
              342,722
              
              
              
              380,537Property,
                  plant & equipment - net
              
              
              1,184,368
              
              
              
              1,212,002Intangibles
                  & other assets - net
              
              
              94,043
              
              
              
              89,304Goodwill
              
              
              10,551
              
              
              
              10,551Total
                  Assets
              
              $
              1,631,684
              
              
              $
              1,692,394**LIABILITIES
                  AND MEMBERS' EQUITY**Current
                  LiabilitiesAccounts
                  payable
              
              $
              114,175
              
              
              $
              117,103Accounts
                  payable to International Paper Company
              
              
              42,805
              
              
              
              29,273Accrued
                  liabilities
              
              
              81,701
              
              
              
              80,200Current
                  maturities of long-term debt
              
              
              2,850
              
              
              
              2,850Total Current Liabilities
              
              
              241,531
              
              
              
              229,426Long-term
                  debt
              
              
              1,155,013
              
              
              
              1,156,438Other
                  liabilities
              
              
              25,632
              
              
              
              26,817Total liabilities
              
              
              1,422,176
              
              
              
              1,412,681Members'
                  equity
              
              
              209,508
              
              
              
              279,713Total
                  Liabilities And Members' Equity
              
              $
              1,631,684
              
              
              $
              1,692,394




See
        notes
        to Successor's unaudited consolidated financial statements.






3




**VERSO
                  PAPER HOLDINGS LLC (SUCCESSOR) AND COATED &****SUPERCALENDERED
                  PAPERS DIVISION OF INTERNATIONAL PAPER COMPANY
                  (PREDECESSOR)****UNAUDITED
                  CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF
                  OPERATIONS****Successor**
              
              
              **Predecessor**
              
              
              **Successor**
              
              
              **Predecessor****Consolidated**
              
              
              **Combined**
              
              
              **Consolidated**
              
              
              **Combined****Three
                  Months**
              
              
              **Six
                  Months****Ended**
              
              
              **Ended****June
                  30,**
              
              
              **June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Net
                  sales
              
              $
              372,602
              
              
              $
              379,264
              
              
              $
              732,408
              
              
              $
              769,040Costs
                  and expensesCost of products sold -(exclusive of depreciation and amortization)
              
              
              332,843
              
              
              
              315,841
              
              
              
              649,194
              
              
              
              658,887Depreciation and amortization
              
              
              29,688
              
              
              
              31,450
              
              
              
              59,283
              
              
              
              62,958Selling, general and administrative expenses
              
              
              8,765
              
              
              
              15,254
              
              
              
              19,671
              
              
              
              30,937Restructuring and other charges
              
              
              6,970
              
              
              
              -
              
              
              
              12,243
              
              
              
              (322
              )Operating income (loss)
              
              
              (5,664
              )
              
              
              16,719
              
              
              
              (7,983
              )
              
              
              16,580Interest income
              
              
              (174
              )
              
              
              (13
              )
              
              
              (1,095
              )
              
              
              (19
              )Interest expense
              
              
              28,393
              
              
              
              3,633
              
              
              
              56,925
              
              
              
              7,159Income (loss) before income taxes
              
              
              (33,883
              )
              
              
              13,099
              
              
              
              (63,813
              )
              
              
              9,440Income tax expense
              
              
              -
              
              
              
              5,161
              
              
              
              -
              
              
              
              3,719Net income (loss)
              
              $
              (33,883
              )
              
              $
              7,938
              
              
              $
              (63,813
              )
              
              $
              5,721Included
                  in the financial statement line items aboveare
                related-party transactions as follows(Notes 3 and 9, respectively):Net
                  sales
              
              
              37,260
              
              
              
              39,401
              
              
              
              70,718
              
              
              
              70,001Purchases
                  included in cost of products sold
              
              
              1,499
              
              
              
              49,032
              
              
              
              2,661
              
              
              
              111,299Selling,
                  general and administrative expenses
              
              
              693
              
              
              
              8,809
              
              
              
              1,386
              
              
              
              17,059Restructuring
                  and other charges
              
              
              1,611
              
              
              
              -
              
              
              
              3,511
              
              
              
              -




See
        notes
        to Successor's unaudited consolidated financial statements and Predecessor's
        unaudited combined
        financial statements.






4




**VERSO
                  PAPER HOLDINGS LLC****UNAUDITED
                  CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN MEMBERS'
                  EQUITY****FOR
                  THE SIX MONTHS ENDED JUNE 30, 2007****Accumulated****Other**
              
              
              **Total****Retained**
              
              
              **Comprehensive**
              
              
              **Members'**(In
                  thousands of U.S. dollars)
              
              **Paid-in-Capital**
              
              
              **(Deficit)**
              
              
              **Loss**
              
              
              **Equity**Beginning
                  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
              
              
              
              393Comprehensive
                  income
              
              
              -
              
              
              
              (63,813
              )
              
              
              393
              
              
              
              (63,420
              )Cash
                  distribution
              
              
              -
              
              
              
              (7,256
              )
              
              
              -
              
              
              
              (7,256
              )Equity
                  award expense
              
              
              471
              
              
              
              -
              
              
              
              -
              
              
              
              471Ending
                  balance - June 30, 2007
              
              $
              289,757
              
              
              $
              (72,901
              )
              
              $
              (7,348
              )
              
              $
              209,508


See
        notes
        to Successor's unaudited consolidated financial statements.






5




**VERSO
                    PAPER HOLDINGS LLC (SUCCESSOR) AND COATED &****SUPERCALENDERED
                    PAPERS DIVISION OF INTERNATIONAL PAPER COMPANY
                    (PREDECESSOR)****UNAUDITED
                    CONDENSED CONSOLIDATED AND COMBINED STATEMENTS OF CASH
                    FLOWS****Successor**
                
                
                **Predecessor****Consolidated**
                
                
                **Combined****Six
                    Months****Ended
                    June 30,**(In
                    thousands of U.S. dollars)
                
                **2007**
                
                
                **2006****Cash
                    Flows From Operating Activities:**Net Income (Loss)
                
                $
                (63,813
                )
                
                $
                5,721Adjustments to reconcile net income to netcash provided by (used in) operating activitiesDepreciation
                
                
                59,283
                
                
                
                62,958Amortization
                
                
                2,716
                
                
                
                -Loss (gain) on disposal of fixed assets
                
                
                (48
                )
                
                
                1,239Other - net
                
                
                864
                
                
                
                1,089Changes in assets and liabilities:Accounts receivable
                
                
                (4,148
                )
                
                
                6,657Inventories
                
                
                (30,884
                )
                
                
                (50,747
                )Prepaid expenses and other assets
                
                
                (5,791
                )
                
                
                (9,363
                )Accounts payable
                
                
                10,604
                
                
                
                (4,659
                )Accrued liabilities
                
                
                117
                
                
                
                (3,375
                )Net cash provided by (used in) operating activities
                
                
                (31,100
                )
                
                
                9,520**Cash
                    Flows From Investing Activities:**Proceeds
                  from sale of fixed assets
                
                
                238
                
                
                
                32Capital
                  expenditures
                
                
                (31,182
                )
                
                
                (20,982
                )Net
                  cash used in investing
                  activities
                
                
                (30,944
                )
                
                
                (20,950
                )**Cash
                    Flows From Financing Activities:**Repayments of debt
                
                
                (1,425
                )
                
                
                (550
                )Equity contributions (distributions)
                
                
                (7,256
                )
                
                
                11,963Net cash provided by (used in) financing activities
                
                
                (8,681
                )
                
                
                11,413**Change
                    In Cash**
                
                
                (70,725
                )
                
                
                (17
                )Cash:Beginning of period
                
                
                112,448
                
                
                
                46End of period
                
                $
                41,723
                
                
                $
                29




See
      notes
      to Successor's unadudited consolidated financial statements and Predecessor's
      unaudited combined
      financial statements.






6




**VERSO
      PAPER HOLDINGS LLC
      (SUCCESSOR)**




**CONDENSED
      NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
      STATEMENTS**


**AS
        OF JUNE 30, 2007 AND FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE
        30,
        2007**







**1.  
        BACKGROUND AND BASIS OF PRESENTATION**
  Unless
      otherwise noted, the terms the “Company”, “Verso Paper”, “we,” “us”, and “our”
refer collectively to Verso Paper Holdings LLC, a newly formed Delaware limited
      liability company, and its subsidiaries after giving effect to the consummation
      of the Transactions (as defined below).  References to the “Division”,
“C&SC Papers” or “Predecessor” refer to the Coated and Supercalendered
      Papers Division of International Paper Company.





On
      August
      1, 2006, we acquired the assets and certain of the liabilities of the Coated
      and
      Supercalendered Papers Division of International Paper Company located at the
      mills in Jay, Maine, Bucksport, Maine, Quinnesec, Michigan and Sartell,
      Minnesota, together with related other facilities and assets and certain
      administrative and sales and marketing functions (collectively, the
“Acquisition”) pursuant to the terms of an Agreement of Purchase and Sale (the
“Purchase and Sale Agreement”) we entered into with International Paper Company
      (“International Paper”) on June 4, 2006.





We
      were
      formed by affiliates of Apollo Management, L.P. (“Apollo”) for the purpose of
      consummating the Acquisition. In connection with the Acquisition we issued
      $1,185 million of debt (the “Financing”), consisting of a $285 million term loan
      B facility (the “Term Loan B”), $600 million of second-priority senior secured
      notes, and $300 million of senior subordinated notes.  We also raised
      a $200 million revolving credit facility (together with the Term Loan B, the
      “Senior Secured Credit Facilities”), which was undrawn at the closing of the
      Acquisition.  In addition to the Financing, affiliates of Apollo,
      International Paper and certain members of our senior management team
      contributed approximately $289 million of equity to our parent
      companies.





As
      used in
      this report, the term “Transactions” means, collectively, the Acquisition and
      the Financing.  Included in this report are financial statements for
      the Predecessor for the three-month and six-month periods ended on June 30,
      2006, the date prior to Acquisition.  The financial statements of
      Verso Paper are presented for the three-month and six-month periods ended on
      June 30, 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 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, 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,
      2006, included in our registration statement on Form S-4.




Verso
      Paper, a wholly-owned subsidiary of Verso Paper Finance Holdings LLC
      (“Holdings”), operates in three operating segments: Coated & 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.




7
 
  **2.  
          RECENT ACCOUNTING DEVELOPMENTS**


***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. The
      Company has not evaluated the provisions of SFAS No. 157 to determine the 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 is effective as of the beginning of an
      entity’s fiscal year beginning after November 15, 2007.  The Company
      has not evaluated the provisions of SFAS No. 159 to determine the impact on
      the
      Company’s consolidated results of operations or consolidated financial
      position.





***Accounting
      for Uncertainty in Income Taxes***—In June 2006, the FASB issued
      Interpretation No. 48, *Accounting for Uncertainty in Income Taxes—an
      interpretation of FASB Statement No. 109* (“FIN 48”). 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 is
      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 financial statements.





***Accounting
      for Certain Hybrid Financial Instruments***—In February 2006, the
      FASB issued SFAS No. 155, *Accounting for Certain Hybrid Financial
      Instruments—an Amendment of FASB Statements No. 133 and 140*, which
      provides entities relief from having to separately determine the fair value
      of
      an embedded derivative that would otherwise be required to be bifurcated in
      accordance with SFAS No. 133. This statement was effective for all
      financial instruments acquired, issued, or subject to a remeasurement event
      occurring after January 1, 2007. The adoption of SFAS No. 155 did not
      have a material impact on the Company’s consolidated financial
      statements.






8




**3.  
        ACQUISITION**





On
      August
      1, 2006, Verso Paper acquired C&SC Papers, a producer of coated freesheet,
      coated groundwood, and uncoated supercalendered papers.  The purchase
      price for C&SC Papers as of the acquisition date was $1.4
      billion.  The purchase price was paid partially in cash and partially
      through a 10% limited partnership interest in Verso Paper Investments, L.P.,
      Verso Paper’s indirect parent company. The acquisition agreement contains
      various representations, warranties and covenants customary to transactions
      of
      this type.




**4.  
        SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION**




Inventories
      by major category include the following:





**June
                  30,**
              
              
              **December
                  31,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2006**Raw
                  materials
              
              $
              21,743
              
              
              $
              22,147Woodyard
                  logs
              
              
              4,735
              
              
              
              5,026Work-in-process
              
              
              17,485
              
              
              
              19,012Finished
                  goods
              
              
              97,188
              
              
              
              63,894Replacement
                  parts and other supplies
              
              
              31,774
              
              
              
              30,424Inventories
              
              $
              172,925
              
              
              $
              140,503





The
      Company had approximately $0.7 million of restricted cash related to an asset
      retirement obligation in the state of Michigan that is reflected in Other assets
      in the accompanying balance sheet on June 30, 2007.  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:





**Six
                  Months****Ended****June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2007**Asset
                  retirement obligations, January 1
              
              $
              11,855New
                  liabilities
              
              
              310Accretion
                  expense
              
              
              295Adjustment
                  to existing liabilities
              
              
              23Asset
                  retirement obligations, June 30
              
              $
              12,483





This
      liability is included in Other liabilities in the accompanying consolidated
      balance sheet.





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






9
 
  **5.  
          INTANGIBLES & OTHER ASSETS**





Intangibles
      and other assets consist of the following:





**June
                  30,**
              
              
              **December
                  31,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2006**Amortizable
                  intangible assets:Customer
                  relationships - net of accumulated amortization of $0.5 million
                  and****$0.2
                  million,****respectively
              
              $
              12,813
              
              
              $
              13,070Patents
                  - net of accumulated amortization of $0.11 million and $0.05
                  million,respectively
              
              
              1,033
              
              
              
              1,100Total
                  amortizable intangible assets
              
              
              13,846
              
              
              
              14,170Unamortizable
                  intangible assets:Trademarks
              
              
              21,473
              
              
              
              21,473Other
                  assets:Financing
                  costs-net of accumulated amortization of $5.0 million and$2.3****million,
                  respectively
              
              
              39,177
              
              
              
              41,893Deferred
                  major repair
              
              
              6,757
              
              
              
              6,008Deferred
                  software cost-net of accumulated amortization of $0.3
                  million
              
              
              3,565
              
              
              
              -Replacement
                  parts-net
              
              
              2,097
              
              
              
              1,729Other
              
              
              7,128
              
              
              
              4,031Total
                  other assets
              
              
              58,724
              
              
              
              53,661Intangibles
                  and other assets
              
              $
              94,043
              
              
              $
              89,304


Approximately
      $0.1 million and $0.3 million of intangible amortization are reflected in
      depreciation and amortization expense for the three-month and six-month periods
      ended June 30, 2007, 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.  Approximately $0.2 million and $0.3 million of software
      amortization are reflected in selling, general and administrative expenses
      for
      the three-month and six-month periods ended June 30, 2007,
      respectively.






10




**6.
        LONG-TERM DEBT**




A
      summary
      of long-term debt is as follows:




**June
                  30,**
              
              
              **December
                  31,**(In
                  thousands of U.S. dollars)
              Maturity
              
              Rate
              
              
              **2007**
              
              
              **2006**Term
                  Loan B
              8/1/2013
              
              Libor
                  + 1.75
              %
              
              
              257,863
              
              
              
              259,288Second
                  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
              
              
              
              300,0001,157,863
              
              
              
              1,159,288Less
                  current maturities
              
              
              
              
              
              
              
              (2,850
              )
              
              
              (2,850
              )Long-term
                  debt
              
              
              
              
              
              
              $
              1,155,013
              
              
              $
              1,156,438





Interest
      expense was approximately $28.4 million and $10.5 million interest was paid
      during the three-month period ended June 30, 2007.  Interest expense
      was approximately $56.9 million and $54.6 million interest was paid during
      the
      six-month period ended June 30, 2007.  In conjunction with the
      Acquisition, Verso Paper assumed none of the historical debt of the
      Predecessor.





Amortization
      of debt issuance costs was approximately $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 consolidated statement of
      operations.





The
      Company is a 100% owned subsidiary of our parent, Holdings.  In
      January 2007, Holdings entered into a $250 million senior unsecured floating
      rate term loan facility with a maturity of six years.  The Company has
      not guaranteed the loan nor have any of the Company’s assets been used for the
      collateral.  Holdings 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 a distribution of
      $7.3 million to Holdings in second quarter 2007.  The Company has no
      obligation to issue distributions to Holdings.  Holdings can, at its
      option, choose to forgo cash interest payments on the loan and choose to instead
      pay interest in kind.




**7.  
      RETIREMENT PLANS**




The
      company maintains a defined benefit pension plan that provides retirement
      benefits to hourly employees in Androscoggin, 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).  The Company made a
      contribution of $1.6 million in second quarter 2007 which is attributable to
      the
      2007 plan year.  The Company currently expects to make additional
      contributions of $5.2 million in 2007, of which approximately $2.2 million
      is
      related to the 2006 plan year.





11
 
  **7.  
          RETIREMENT PLANS (CONTINUED)**


The
      following table summarizes the components of net periodic expense:




**Three
                  Months**
              
              
              **Six
                  Months****Ended**
              
              
              **Ended****June
                  30,**
              
              
              **June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2007**Components
                  of net periodic pension cost:Service
                  cost
              
              $
              1,253
              
              
              $
              2,507Interest
                  cost
              
              
              149
              
              
              
              298Amortization
                  of prior service cost
              
              
              196
              
              
              
              392Net
                  periodic pension cost
              
              $
              1,598
              
              
              $
              3,197





**8.
        MANAGEMENT EQUITY AWARDS**





Certain
      members of management were granted the right to purchase “Class A” units of
      Verso Paper Management LP (a limited partner of the ultimate parent of Verso
      Paper Holdings, LLC).  In addition, certain members of management were
      granted “Class B” and “Class C” units.  The Class B units vest over a
      5 year period, 20% at the end of each year of service.  The Class C
      units will vest only if certain performance targets are
      met.  Directors were granted “Class D” units of Verso Paper Management
      LP, which are currently vested.





During
      the
      six-month period ended June 30, 2007, additional “Class B” and “Class D” units
      were granted.  The fair value of the additional units granted was
      approximately $0.6 million.  Equity award expense of $0.1 million and
      $0.5 million was recognized in the three-month and six-month periods ended
      June
      30, 2007, respectively.




**9.  
      RELATED PARTY TRANSACTIONS**




In
      conjunction with the Transaction, we entered into a Transition Service Agreement
      with International Paper whereby International Paper will continue to provide
      certain services specified in the agreement that are necessary for us to run
      as
      a stand-alone business.  The charges for the three-month and six-month
      periods ended June 30, 2007, were $1.6 million and $3.5 million,
      respectively.





The
      Company had net sales to International Paper of approximately $37.3 million
      and
      $70.7 million for the three months and six months ended June 30, 2007,
      respectively.  The Company had purchases from International Paper of
      approximately $1.5 million and $2.7 million for the three months and six months
      ended June 30, 2007, respectively.





Under
      a
      management agreement, we paid Apollo and its affiliates an annual fee of $2.8
      million of which $0.7 million and $1.4 million was expensed during the
      three-month and six-month periods ended June 30, 2007,
      respectively.







12
 
  **9.  
          RELATED PARTY TRANSACTIONS (CONTINUED)**


In
      January
      2007, Holdings, our indirect parent company, entered into a $250 million senior
      unsecured floating-rate term loan facility with a maturity of six
      years.  Holdings 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 a distribution of
      $7.3 million to Holdings in second quarter 2007.  The Company has no
      obligation to issue distributions to Holdings.  Holdings can, at its
      option, choose to forgo cash interest payments on the loan and choose to instead
      pay interest in kind.





**10.
       RESTRUCTURING AND OTHER CHARGES**





Included
      in restructuring and other charges are one-time costs for us to operate as
      a
      stand-alone business. The charges for the three-month period ended June 30,
      2007, were $7.0 million, which included $1.6 million of Transition Service
      Agreement costs.  The charges for the six-month period ended June 30,
      2007, were $12.3 million, which included $3.5 million of Transition Service
      Agreement costs.





**11. 
      COMMITMENTS AND CONTINGENCIES**





***Contingencies***— 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 will not have a material adverse effect on the consolidated financial
      statements of the Company.





In
      December 2006, a federal grand jury in Connecticut indicted Stora Enso North
      America Corporation (“SENA”) for allegedly participating in a price-fixing
      conspiracy with a competitor with respect to the sale of coated
      papers.  The federal government alleged that the price-fixing activity
      occurred between August 2002 and June 2003, a period when our business was
      a
      division of International Paper.  In July 2007, the federal government
      prosecuted its case against SENA before a jury in the federal district court
      in
      Connecticut.  During the trial, it was revealed that the alleged
      co-conspirator of SENA was a competitor other than International
      Paper.  At the conclusion of the trial, the jury acquitted SENA of the
      price-fixing charge.  The Company understands that related civil cases
      against SENA remain pending. Based on these developments, management believes
      that the Company will not incur any material liabilities arising from the
      alleged price-fixing activities or the ensuing litigation.




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
      Androscoggin 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.






13




**11. 
      COMMITMENTS AND CONTINGENCIES (CONTINUED)**





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 balance sheet
      at
      June 30, 2007.










14
 
  **12.  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 for the three-month and
      six-month periods ended June 30, 2007:





**Three
                  Months**
              
              
              **Six
                  Months****Ended**
              
              
              **Ended****June
                  30,**
              
              
              **June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2007**Net
                  Sales:Coated
              
              $
              326,110
              
              
              $
              640,872Pulp
              
              
              36,663
              
              
              
              72,710Other
              
              
              9,829
              
              
              
              18,826Total
              
              $
              372,602
              
              
              $
              732,408Operating
                  Loss:Coated
              
              $
              (13,060
              )
              
              $
              (20,877
              )Pulp
              
              
              8,279
              
              
              
              15,104Other
              
              
              (883
              )
              
              
              (2,210
              )Total
              
              $
              (5,664
              )
              
              $
              (7,983
              )Depreciation
                  and Amortization:Coated
              
              $
              24,375
              
              
              $
              49,100Pulp
              
              
              4,616
              
              
              
              8,834Other
              
              
              697
              
              
              
              1,349Total
              
              $
              29,688
              
              
              $
              59,283Capital
                  Spending:Coated
              
              $
              18,995
              
              
              $
              29,373Pulp
              
              
              653
              
              
              
              827Other
              
              
              510
              
              
              
              982Total
              
              $
              20,158
              
              
              $
              31,182






15




**13.  DERIVATIVES**




In
      the
      normal course of business, the Company utilizes derivatives contracts as part
      of
      its risk management strategy to manage risks associated with market fluctuations
      in energy prices.  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 amount the
      Company would receive or pay in the market to replace the derivatives as of
      the
      valuation date. Fair value is determined using available market information. The
      Company enters into fixed-price swaps as economic hedges designed to mitigate
      the risk of changes in commodity prices for future purchase
      commitments.  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. Net losses on open derivative contracts
      of
      $1.5 million were recorded at June 30, 2007.  These net losses were
      recognized in cost of products sold for the quarter ended June 30,
      2007.





**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION**




Verso
      Paper Holdings LLC (the “Company” or “Parent Issuer”) and Verso Paper Inc,
      (“Co-Issuer”) are the issuers of 9.125% of Second Priority Senior Secured Fixed
      Rate Notes due 2014, Second Priority Senior Secured Floating Rate Notes due
      2014
      and 11.375% 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.  Prior to the
      Acquisition, the Predecessor was operated as a Division of International Paper
      Company and there were no separate legal entities.




16




**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)**


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.




**Unaudited
                  Condensed Consolidating Balance Sheet****as
                  of December 31, 2006**(In
                  thousands of U.S. dollars)
              
              **Parent**
                  Issuer
              
              
              **Subsidiary**
                **Issuer**
              
              
              **Guarantor**
                  Subsidiaries
              
              
              **Intercompany**
                **Eliminations**
              
              
              **Consolidated****ASSETS**Current
                  assets
              
              $
              -
              
              
              $
              -
              
              
              $
              380,537
              
              
              $
              -
              
              
              $
              380,537Property
                  and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,212,002
              
              
              
              -
              
              
              
              1,212,002Intercompany
                  receivable
              
              
              1,191,057
              
              
              
              -
              
              
              
              -
              
              
              
              (1,191,057
              )
              
              
              -Investment
                  in subsidiaries
              
              
              237,820
              
              
              
              -
              
              
              
              -
              
              
              
              (237,820
              )
              
              
              -Non-current
                  assets
              
              
              41,893
              
              
              
              -
              
              
              
              57,962
              
              
              
              -
              
              
              
              99,855Total
                  assets
              
              $
              1,470,770
              
              
              $
              -
              
              
              $
              1,650,501
              
              
              $
              (1,428,877
              )
              
              $
              1,692,394**LIABILITIES
                  AND MEMBERS’ EQUITY**Current
                  liabilities
              
              $
              34,619
              
              
              $
              -
              
              
              $
              194,807
              
              
              $
              -
              
              
              $
              229,426Intercompany
                  payable
              
              
              -
              
              
              
              -
              
              
              
              1,191,057
              
              
              
              (1,191,057
              )
              
              
              -Long-term
                  debt
              
              
              1,156,438
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,156,438Other
                  long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              26,817
              
              
              
              -
              
              
              
              26,817Members’
                  equity
              
              
              279,713
              
              
              
              -
              
              
              
              237,820
              
              
              
              (237,820
              )
              
              
              279,713Total
                  liabilities and members’ equity
              
              $
              1,470,770
              
              
              $
              -
              
              
              $
              1,650,501
              
              
              $
              (1,428,877
              )
              
              $
              1,692,394




Certain
      previously reported amounts have been reclassified to agree with current
      presentation.






17




**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)**





**Unaudited
                  Condensed Consolidating Balance Sheet****as
                  of June 30, 2007**(In
                  thousands of U.S. dollars)
              
              **Parent**
                **Issuer**
              
              
              **Subsidiary**
                **Issuer**
              
              
              **Guarantor**
                **Subsidiaries**
              
              
              **Intercompany**
                **Eliminations**
              
              
              **Consolidated****ASSETS**Current
                  assets
              
              $
              -
              
              
              $
              -
              
              
              $
              342,722
              
              
              $
              -
              
              
              $
              342,722Property
                  and equipment, net
              
              
              -
              
              
              
              -
              
              
              
              1,184,368
              
              
              
              -
              
              
              
              1,184,368Intercompany
                  receivable
              
              
              1,189,570
              
              
              
              -
              
              
              
              -
              
              
              
              (1,189,570
              )
              
              
              -Investment
                  in subsidiaries
              
              
              170,331
              
              
              
              -
              
              
              
              -
              
              
              
              (170,331
              )
              
              
              -Non-current
                  assets
              
              
              39,177
              
              
              
              -
              
              
              
              65,417
              
              
              
              -
              
              
              
              104,594Total
                  assets
              
              $
              1,399,078
              
              
              $
              -
              
              
              $
              1,592,507
              
              
              $
              (1,359,901
              )
              
              $
              1,631,684**LIABILITIES
                  AND MEMBERS’ EQUITY**Current
                  liabilities
              
              $
              34,557
              
              
              $
              -
              
              
              $
              206,974
              
              
              $
              -
              
              
              $
              241,531Intercompany
                  payable
              
              
              -
              
              
              
              -
              
              
              
              1,189,570
              
              
              
              (1,189,570
              )
              
              
              -Long-term
                  debt
              
              
              1,155,013
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              1,155,013Other
                  long-term liabilities
              
              
              -
              
              
              
              -
              
              
              
              25,632
              
              
              
              -
              
              
              
              25,632Members’
                  equity
              
              
              209,508
              
              
              
              -
              
              
              
              170,331
              
              
              
              (170,331
              )
              
              
              209,508Total
                  liabilities and members’ equity
              
              $
              1,399,078
              
              
              $
              -
              
              
              $
              1,592,507
              
              
              $
              (1,359,901
              )
              
              $
              1,631,684







18




**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)**





**Unaudited
                  Condensed Consolidating Statements of
                  Operations****Three
                  Months Ended June 30, 2007****Parent**
              
              
              **Subsidiary**
              
              
              **Guarantor**
              
              
              **Intercompany**(In
                  thousands of U.S. dollars)
              
              **Issuer**
              
              
              **Issuer**
              
              
              **Subsidiaries**
              
              
              **Eliminations**
              
              
              **Consolidated**Net
                  sales
              
              $
              -
              
              
              $
              -
              
              
              $
              372,602
              
              
              $
              -
              
              
              $
              372,602Cost
                  of products sold (exclusiveof depreciation 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
                  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
              )


19




**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)**




**Unaudited
                  Condensed Consolidating Statements of
                  Operations****Six
                  Months Ended June 30, 2007****Parent**
              
              
              **Subsidiary**
              
              
              **Guarantor**
              
              
              **Intercompany**(In
                  thousands of U.S. dollars)
              
              **Issuer**
              
              
              **Issuer**
              
              
              **Subsidiaries**
              
              
              **Eliminations**
              
              
              **Consolidated**Net
                  sales
              
              $
              -
              
              
              $
              -
              
              
              $
              732,408
              
              
              $
              -
              
              
              $
              732,408Cost
                  of products sold (exclusive ofdepreciation and amortization)
              
              
              -
              
              
              
              -
              
              
              
              649,194
              
              
              
              -
              
              
              
              648,577Depreciation
                  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
                  income (loss) beforeincome
                  taxes
              
              
              (63,813
              )
              
              
              -
              
              
              
              (63,813
              )
              
              
              63,813
              
              
              
              (63,813
              )Income
                  tax (benefit) expense
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              -Net
                  income (loss)
              
              $
              (63,813
              )
              
              $
              -
              
              
              $
              (63,813
              )
              
              $
              63,813
              
              
              $
              (63,813
              )






20




**14.  UNAUDITED
      CONDENSED CONSOLIDATING FINANCIAL INFORMATION (CONTINUED)**





**Unaudited
                  Condensed Consolidating Statements of Cash Flows****Six
                  Months Ended June 30, 2007****Parent**
              
              
              **Subsidiary**
              
              
              **Guarantor**
              
              
              **Intercompany**(In
                  thousands of U.S. dollars)
              
              **Issuer**
              
              
              **Issuer**
              
              
              **Subsidiaries**
              
              
              **Eliminations**
              
              
              **Consolidated**Net
                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 tosubsidiaries
              
              
              1,425
              
              
              
              -
              
              
              
              (1,425
              )
              
              
              -
              
              
              
              -Payments
                  on long-term debtunder
                  credit agreement
              
              
              (1,425
              )
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (1,425
              )Net
                  cash used infinancing
                  activities
              
              
              -
              
              
              
              -
              
              
              
              (8,681
              )
              
              
              -
              
              
              
              (8,681
              )Net
                  change in cash andcash
                  equivalents
              
              
              -
              
              
              
              -
              
              
              
              (70,725
              )
              
              
              -
              
              
              
              (70,725
              )Cash
                  and cash equivalents:Beginning
                  of period
              
              
              -
              
              
              
              -
              
              
              
              112,448
              
              
              
              -
              
              
              
              112,448End
                  of period
              
              $
              -
              
              
              $
              -
              
              
              $
              41,723
              
              
              $
              -
              
              
              $
              41,723






21




**COATED
      & SUPERCALENDERED PAPERS DIVISION OF****INTERNATIONAL
      PAPER COMPANY (PREDECESSOR)**




**CONDENSED
      NOTES TO UNAUDITED CONDENSED COMBINED FINANCIAL STATEMENTS**


**FOR
        THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2006**
 
  **1.  
          BASIS OF PRESENTATION**
  In
        the
        opinion of Management, the accompanying unaudited combined financial statements
        include all adjustments that are necessary for the fair presentation of the
        Coated & Supercalendered Papers Division (“C&SC Papers” or
        the “Division”) of International Paper Company (“IPCO” or
        the “Company”) financial position, results of operations, and cash flows
        for the interim periods presented. Except as disclosed in the condensed Notes
        to
        combined financial statements, such adjustments are of a normal, recurring
        nature. Results for the first six months of the year may not necessarily
        be
        indicative of full-year results.




The
      Division operates in three operating segments: Coated & supercalendared
      papers, Hardwood market pulp, and Other, consisting of uncoated copy paper
      and
      specialty industrial paper. The Division’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 Division includes mills and related woodyards
      in
      Bucksport and Jay, Maine; Quinnesec, Michigan; and Sartell, Minnesota. The
      Division also includes investments in two energy-producing assets located at
      the
      Bucksport and Jay, Maine, facilities.




During
      the
      periods presented, the Division was under the control of IPCO. The operating
      results and financial position of the Division were impacted by the nature
      of
      this relationship (see Note 3).




**2.  
      RESTRUCTURING AND OTHER CHARGES**




In
      March
      2006, the reserve related to the permanent closure of No. 1 paper machine at
      the
      Jay, Maine mill was adjusted to reflect actual costs, resulting in a reversal
      of
      approximately $0.3 million of the recorded reserve.  Amounts are
      reflected in Restructuring and other charges in the accompanying combined
      statements of operations.




**3.  
      TRANSACTIONS WITH IPCO AND AFFILIATES**




Certain
      services are provided to the Division by IPCO, including corporate management,
      legal, accounting and tax, treasury, payroll and benefits administration,
      certain incentive compensation, risk management, information technology and
      centralized transaction processing. These expenses are included in Selling,
      general and administrative expenses and Cost of products sold in the
      accompanying combined statements of operations. Expenses for such corporate
      services included in Selling, general and administrative expenses totaled
      $8.8 million and $17.1 million for the three months and six months ended
      June 30, 2006, respectively.  Expenses for such corporate services
      included in Cost of products sold totaled $2.8 million and $4.8 million for
      the three months and six months ended June 30, 2006,
      respectively.  These costs are allocated from IPCO to the Division
      based on various methods, including direct consumption, percent of capital
      employed, and number of employees.




22




**3.
        TRANSACTIONS WITH IPCO AND AFFILIATES
      (CONTINUED)**




Substantially
      all employees hired prior to July 2004, and retirees of the Division,
      participate in IPCO’s pension plans and are eligible to receive retirement
      benefits. IPCO allocates service cost to the Division based upon a
      percent-of-pay for salaried employees and a calculated flat amount for hourly
      employees. IPCO allocated periodic pension costs to the Division of $3.1 million
      and $6.4 million during the three-month and six-month periods ended June 30,
      2006, respectively.




IPCO
      provides certain retiree health care and life insurance benefits to a majority
      of the Division’s salaried employees and certain of the Division’s hourly
      employees. IPCO allocates postretirement benefit costs to the Division based
      upon a percent-of-pay for salaried employees and a calculated flat amount for
      hourly employees. IPCO allocated postretirement benefit costs to the Division
      of
      $0.3 million and $0.7 million during the three-month and six-month periods
      ended June 30, 2006, respectively.




The
      Division had net sales to IPCO of approximately $39.4 million and $70.0
      million for the three months and six months ended June 30, 2006, respectively.
      The Division had purchases from IPCO of approximately $49.0 million and
      $111.3 million for the three months and six months ended June 30, 2006,
      respectively.




**4.  
        SUPPLEMENTAL FINANCIAL STATEMENT INFORMATION**




Interest
      payments of $4.0 million and $7.3 million were made during the three-month
      and
      six-month periods ended June 30, 2006, respectively.  Total interest
      expense was $3.7 million and $7.2 million for the three-month and six-month
      periods ended June 30, 2006, respectively.




**5.  
        INCOME TAXES**




The
      results of operations of the Division are included in the income tax returns
      of
      IPCO. In the accompanying combined financial statements, the Division has
      reflected U.S. federal and state income tax expense / (benefit) on its gains
      /
      (losses) based on an allocated rate of 39.4% for six months ended June 30,
      2006.




**6.  
        COMMITMENTS AND CONTINGENCIES**


***Litigation***—In
      May 2004, the press reported that European, U.S., and Canadian antitrust
      authorities were investigating possible cartel activity relating to publication
      papers. Following these press reports, a number of private plaintiffs filed
      purported class actions on behalf of purchasers of publication papers in various
      U.S. federal and state courts. These class actions allege that manufacturers
      of
      publication papers, including International Paper, participated in a
      price-fixing conspiracy from 1993 to the present. The cases filed in federal
      court assert a violation of the federal antitrust laws, while the cases filed
      in
      the state court allege violations of state antitrust and consumer protection
      statutes. These lawsuits seek injunctive relief, as well as treble damages
      and
      other costs associated with the litigation. The federal and state cases were
      consolidated for pre-trial purposes in December 2004 in the federal court for
      the District of Connecticut. Discovery and related pre-trial proceedings have
      begun in the consolidated federal case. The Company is vigorously defending
      this
      case and believes it has valid defenses, and as such, has not accrued any
      amounts at June 30, 2006.




23




**6.  
        COMMITMENTS AND CONTINGENCIES (CONTINUED)**


In
      March
      2006, the Division received approximately $1.0 million from Androscoggin Energy
      LLC (“AELLC”), as a result of the settlement of a billing
      dispute.  AELLC was a supplier of energy to the Jay, Maine facility
      that ceased operations in November 2004 and filed for Chapter 11
      bankruptcy.




The
      Division has various other lawsuits, claims, and contingent liabilities arising
      from the conduct of its business; however, in the opinion of management, they
      are not expected to have a material adverse effect on the combined results
      of
      operations, cash flows, or financial position of the Division.






24
 
  **7.  
          INFORMATION BY INDUSTRY SEGMENT**


The
      Division operates in three operating segments, Coated and supercalendered
      papers, Hardwood market pulp, and Other, consisting of uncoated copy paper
      and
      specialty industrial paper. The Division operates in one geographic segment,
      the
      United States. The Division’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. For management purposes, the operating performance of the Division
      is
      reported based on earnings before interest and taxes, excluding the cumulative
      effect of accounting changes:




**Three
                  Months**
              
              
              **Six
                  Months****Ended**
              
              
              **Ended****June
                  30,**
              
              
              **June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2006**
              
              
              **2006**Net
                  Sales:Coated
              
              $
              331,248
              
              
              $
              672,977Pulp
              
              
              38,155
              
              
              
              76,719Other
              
              
              9,861
              
              
              
              19,344Total
              
              $
              379,264
              
              
              $
              769,040Operating
                  Income:Coated
              
              $
              11,892
              
              
              $
              10,082Pulp
              
              
              4,041
              
              
              
              5,684Other
              
              
              786
              
              
              
              814Total
              
              $
              16,719
              
              
              $
              16,580Depreciation
                  and Amortization:Coated
              
              $
              26,442
              
              
              $
              52,686Pulp
              
              
              4,477
              
              
              
              9,062Other
              
              
              531
              
              
              
              1,211Total
              
              $
              31,450
              
              
              $
              62,959






25





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





*The
      following discussion and analysis of our financial condition and results of
      operations covers periods prior to the acquisition of the
      Company.  For comparison purposes, we have presented the results of
      operations for the  quarter and six months ended June 30, 2006, based
      on the historical results of our Predecessor.  Accordingly, the
      discussion and analysis of historical periods does not fully reflect the
      significant impact that the acquisition had on our financial
      statements.  See “Management’s Discussion and Analysis of Financial
      Condition and Results of Operations”  in our registration statement on
      Form S-4 for the year ended December 31, 2006, for more information regarding
      the comparability of our Predecessor’s results of operations.*





**Forward-Looking
      and Cautionary Statements**





Certain
      statements in this quarterly report, including without limitation, statements
      made under the caption “Overview” 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 contained herein 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 due to natural disasters, competitive factors such as pricing
      actions by our competitors that could affect our operating margins, labor
      disruptions, and regulatory factors such as changes in governmental regulations
      involving our products that lead to environmental and legal
      matters.





**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 have the leading North American market share in
      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 (SC) 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.





**Stand-Alone
      Company**






26




On
      August
      1, 2006, an affiliate of Apollo Management L.P. purchased the Coated and
      Supercalendered Papers Division of International Paper Company for approximately
      $1.4 billion. The Division was acquired under an asset purchase
      agreement.  The Predecessor financial statements for the periods
      presented represent the Division’s historical combined financial statements. The
      preparation of this information was based on certain assumptions and estimates,
      including allocations of costs from International Paper. This financial
      information may not, however, necessarily reflect the results of operations,
      financial positions and cash flows that would have occurred if the Division
      had
      been a separate, stand-alone entity during the periods presented or our future
      results of operations, financial position and cash flows. For example, the
      historical financial statements of the Predecessor in this report include
      expenses for certain corporate services provided by International Paper and
      allocated based on various methods, including direct consumption, percent of
      capital employed, and number of employees. These historical charges and
      allocations may not be representative of expenses that Verso will incur in
      future reporting periods as Verso operates as a stand-alone entity.





**Comparison
      of Results for the Three-Month and Six-Month Periods Ending June 30 of 2007
      Successor Compared to 2006 Predecessor**




**Successor**
              
              
              **Predecessor**
              
              
              **Successor**
              
              
              **Predecessor****Consolidated**
              
              
              **Combined**
              
              
              **Consolidated**
              
              
              **Combined****Three
                  Months**
              
              
              **Six
                  Months****Ended**
              
              
              **Ended****June
                  30,**
              
              
              **June
                  30,**(In
                  thousands of U.S. dollars)
              
              **2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Net
                  sales
              
              $
              372,602
              
              
              $
              379,264
              
              
              $
              732,408
              
              
              $
              769,040Costs
                  and expensesCost of products sold -(exclusive of depreciation and amortization)
              
              
              332,843
              
              
              
              315,841
              
              
              
              649,194
              
              
              
              658,887Depreciation and amortization
              
              
              29,688
              
              
              
              31,450
              
              
              
              59,283
              
              
              
              62,958Selling, general and administrative expenses
              
              
              8,765
              
              
              
              15,254
              
              
              
              19,671
              
              
              
              30,937Restructuring and other charges
              
              
              6,970
              
              
              
              -
              
              
              
              12,243
              
              
              
              (322
              )Operating income (loss)
              
              
              (5,664
              )
              
              
              16,719
              
              
              
              (7,983
              )
              
              
              16,580Interest income
              
              
              (174
              )
              
              
              (13
              )
              
              
              (1,095
              )
              
              
              (19
              )Interest expense
              
              
              28,393
              
              
              
              3,633
              
              
              
              56,925
              
              
              
              7,159Income (loss) before income taxes
              
              
              (33,883
              )
              
              
              13,099
              
              
              
              (63,813
              )
              
              
              9,440Income tax expense
              
              
              -
              
              
              
              5,161
              
              
              
              -
              
              
              
              3,719Net income (loss)
              
              $
              (33,883
              )
              
              $
              7,938
              
              
              $
              (63,813
              )
              
              $
              5,721


**Results
      of operations – comparison of second quarter 2007 to second quarter
      2006**





*Net
      Sales*.  Net sales for the three months ended June 30, 2007, were
      $372.6 million compared to $379.2 million for the three months ended June 30,
      2006.  The decrease was the result of a 4.9% decrease in average sales
      price which was partially offset by a 3.3% increase in volume for the three
      months ended June 30, 2007, compared to the three months ended June 30,
      2006.





27




Net
      sales
      for our papers segment were $326.1 million for the three months ended June
      30,
      2007, compared to $331.2 million for the three months ended June 30,
      2006.  The decrease was due to lower paper sales prices, which
      decreased by 6.5% for the three months ended June 30, 2007, compared to paper
      prices for the three months ended June 30, 2006. This decrease was partially
      offset by a 5.3% increase in paper volumes over the comparable
      period.





Net
      sales
      for our market pulp segment were $36.7 million for the three months ended June
      30, 2007, compared to $38.1 million for the three months ended June 30,
      2006.  The decrease was due to a 6.2% decrease in volume, which was
      partially offset by a 2.5% increase in price.  The decrease in volume
      was mainly due to our increase in internal consumption.





Net
      sales
      for our other segment remained relatively flat at $9.8 million for the three
      months ended June 30, 2007, compared to $9.9 million for the three months ended
      June 30, 2006.





*Cost
      of sales*.  Cost of sales for the three months ended June 30,
      2007, was $362.6 million, compared to $347.3 million for the three months ended
      June 30, 2006, an increase of 4.4%, primarily driven by the increase in sales
      volume and unabsorbed overhead costs associated with market downtime. Our gross
      margin, excluding depreciation and amortization, was 10.7% for the three months
      ended June 30, 2007, compared to 16.7% for the same period in
      2006.  This decline reflects the decline in average sales prices for
      the three months ended June 30, 2007.  Depreciation and amortization
      expense for the three months ended June 30, 2007, was $29.7 million compared
      to
      $31.4 million for the three months ended June 30, 2006.





*Selling,
      general and administrative*.  Selling, general and administrative
      expenses were $8.8 million for the three months ended June 30, 2007, compared
      to
      $15.2 million for the same period in 2006, a decrease of 42.5%.  The
      decrease is primarily due to the elimination of an allocation from International
      Paper for corporate services during the three months ended June 30,
      2006.  For the period following the closing of the Acquisition,
      selling, general and administrative expenses reflect the expenses we incurred
      as
      a stand-alone business.





*Interest
      expense*.  Interest expense for the three months ended June 30,
      2007, was $28.4 million, compared to $3.7 million for the three months ended
      June 30, 2006.  The increase was due to the new debt issued as part of
      the Acquisition.





*Restructuring
      and other charges*.  Restructuring and other charges include
      one-time costs for us to operate as a stand-alone business.  The
      charges for the three months ended June 30, 2007, were $6.9
      million.  In conjunction with the Transaction, we entered into a
      Transition Service Agreement with International Paper whereby International
      Paper will continue to provide certain services specified in the agreement
      that
      are necessary for us to run as a stand-alone business.  Of the $6.9
      million included in restructuring and other charges, $1.6 million were related
      to charges we incurred under the Transition Services Agreement.




*Income
      tax expense*.  The Company is a limited liability corporation and
      is not subject to federal income taxes.  During the three-month period
      ended June 30, 2007, the company incurred no income taxes, compared to income
      tax expense of $5.1 million for our Predecessor for the three-month period
      ended
      June 30, 2006.






28




**Results
      of operations – comparison of first six months of 2007 to first six months of
      2006**





*Net
      Sales*.  Net sales for the six months ended June 30, 2007, were
      $732.4 million compared to $769.0 million for the six months ended June 30,
      2006.  The decrease was the result of a 3.8% decrease in average sales
      price and a 1.0% decrease in volume for the six months ended June 30, 2007,
      compared to the six months ended June 30, 2006.  This decrease in
      volume was primarily due to lower pulp sales.





Net
      sales
      for our papers segment were $640.9 million for the six months ended June 30,
      2007, compared to $673.0 million for the six months ended June 30,
      2006.  The decrease was due to lower paper sales prices, which
      decreased by 5.5% for the six months ended June 30, 2007, compared to paper
      prices for the six months ended June 30, 2006.  This was partially
      offset by a 0.8% increase in paper volumes over the comparable
      period.





Net
      sales
      for our market pulp segment were $72.7 million for the six months ended June
      30,
      2007, compared to $76.7 million for the six months ended June 30,
      2006.  The decrease was due to a 10.7% decrease in volume, which was
      partially offset by a 6.1% increase in price.  The decrease in volume
      was mainly due to our increase in internal consumption.





Net
      sales
      for our other segment were $18.8 million for the six months ended June 30,
      2007,
      compared to $19.3 million for the six months ended June 30,
      2006.   The decrease was due to a 3.9% decrease in sales price,
      which was partially offset by a 1.2% increase in volume.





*Cost
      of sales*.  Cost of sales for the six months ended June 30, 2007,
      was $708.5 million, compared to $721.8 million for the six months ended June
      30,
      2006, a decrease of 1.9%, primarily driven by lower sales volume.  Our
      gross margin, excluding depreciation and amortization, was 11.4% for the six
      months ended June 30, 2007, compared to 14.3% for the same period in
      2006.  This decline reflects the decline in average sales prices for
      the six months ended June 30, 2007.  Depreciation and amortization
      expense for the six months ended June 30, 2007, was $59.3 million compared
      to
      $62.9 million for the six months ended June 30, 2006.





*Selling,
      general and administrative*.  Selling, general and administrative
      expenses were $19.7 million for the six months ended June 30, 2007, compared
      to
      $30.9 million for the same period in 2006, a decrease of 36.4%.  The
      decrease is primarily due to the elimination of an allocation from International
      Paper for corporate services during the six months ended June 30,
      2006.  For the period following the closing of the Acquisition,
      selling, general and administrative expenses reflect the expenses we incurred
      as
      a stand-alone business.





*Interest
      expense*.  Interest expense for the six months ended June 30,
      2007, was $56.9 million, compared to $7.2 million for the six months ended
      June
      30, 2006.  The increase was due to the new debt issued as part of the
      Acquisition.





*Restructuring
      and other charges*.  Restructuring and other charges include
      one-time costs for us to operate as a stand-alone business.  The
      charges for the six months ended June 30, 2007, were $12.2
      million.  In conjunction with the Transaction, we entered into a
      Transition Service Agreement with International Paper whereby International
      Paper will continue to provide certain services specified in the agreement
      that
      are necessary for us to run as a stand-alone business.  Of the $12.2
      million amount included in restructuring and other charges, $3.5 million were
      related to charges we incurred under the Transition Services
      Agreement.






29




*Income
      tax expense*.  The Company is a limited liability corporation and
      is not subject to federal income taxes.  During the six-month period
      ended June 30, 2007, the company incurred no income taxes, compared to income
      tax expense of $3.7 million for our Predecessor for the six-month period ended
      June 30, 2006.





**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 second quarter 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 $160 million of availability under
      our revolving credit facility, which is currently undrawn, after deducting
      for
      $40 million of standby letters of credit that we have issued.





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,
      2007, operating activities used net cash of $31.1 million, compared to $9.5
      million of net cash provided during the comparable period in
      2006.  The reduction was primarily due to interest paid on the new
      debt issued as part of the Acquisition.





*Net
      cash flows from investing activities.*For the six months ended June 30,
      2007, we used $30.9 million of net cash in investing activities, compared to
      $21.0 million of net cash used during the comparable period in 2006 due to
      investments in capital expenditures.




*Net
      cash flows from financing activities.*For the six months ended June 30,
      2007, our financing activities used net cash of $8.7 million, which reflected
      principal payments on debt and a $7.3 million distribution paid to Holdings
      to
      service Holdings’ interest obligations. This compares to $11.4 million of net
      cash provided during the comparable period in 2006, which reflected $12.0
      million of equity contributions.





30




The
      Company entered into Senior Secured Credit Facilities on August 1, 2006, which
      consists 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,
                2007.





Our
      aggregate indebtedness at June 30, 2007, was $1,158 million. The Senior Secured
      Credit Facilities are secured by first priority pledges of all the equity
      interests owned by us in our subsidiaries. The 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.





In
      addition, on August 1, 2006, the Company completed an offering of $350 million
      9
      1/8% Second Priority Senior Secured Fixed Rate Notes due 2014, $250 million
      Second Priority Senior Secured Floating Rate Notes due 2014, and $300 million
      11
      3/8% Senior Subordinated Notes due 2016. 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.  The fixed rate portion of these
      notes pay interest semi-annually and the variable portion pays interest
      quarterly.  The Senior Subordinated Notes are unsecured senior
      subordinated obligations of the Company 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, restrict 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, to (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.





In
      January
      2007, Holdings entered into a $250 million senior unsecured floating rate term
      loan facility with a maturity of six years.  The Company has not
      guaranteed the loan nor have any of the Company’s assets been used for the
      collateral.  Holdings 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 a distribution of
      $7.3 million to Holdings in second quarter 2007.  The Company has no
      obligation to issue distributions to Holdings.  Holdings can, at its
      option, choose to forgo cash interest payments on the loan and choose to instead
      pay interest in kind.





**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.





31




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*, SFAS No. 106, *Employers’ Accounting for
      Postretirement Benefits Other Than Pensions*, as amended by SFAS
      No. 132 and 132(R), *Employers’ Disclosures About Pension and Other
      Postretirement Benefits*, 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.






32




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




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





The
      assessment of contingent liabilities, including legal contingencies, asset
      retirement obligations and environmental 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**





***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. The
      Company has not evaluated the provisions of SFAS No. 157 to determine the 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 is effective as of the beginning of an
      entity’s fiscal year beginning after November 15, 2007.  The Company
      has not evaluated the provisions of SFAS No. 159 to determine the impact on
      the
      Company’s consolidated results of operations or consolidated financial
      position.





33




**Covenant
      Compliance**





Certain
      covenants contained in the credit agreement governing our Senior Secured Credit
      Facilities and the indentures governing the Second-Priority Senior Secured
      Notes
      (i) require the maintenance of a senior secured debt to Adjusted EBITDA
      ratio 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, senior secured debt to Adjusted EBITDA
      and consolidated debt to Adjusted EBITDA ratios. The most restrictive of these
      covenants, the covenants to incur additional indebtedness and the ability to
      make future acquisitions, require an Adjusted EBITDA to Fixed Charges ratio
      (measured on a trailing four-quarter basis) of 2.0 : 1.0. Failure to comply
      with
      these covenants can result in limiting our long-term growth prospects by
      hindering our ability to incur future indebtedness or grow through
      acquisitions.





EBITDA
      consists of earnings before interest, taxes depreciation and amortization.
      EBITDA is a measure commonly used in our industry and we present EBITDA to
      enhance your understanding of our operating performance. We use EBITDA as one
      criterion for evaluating our performance relative to that of our peers. We
      believe that EBITDA is an operating performance measure, and not a liquidity
      measure, that provides investors and analysts with a measure of operating
      results unaffected by differences in capital structures, capital investment
      cycles and ages of related assets among otherwise comparable companies. Adjusted
      EBITDA is defined as EBITDA further adjusted to exclude unusual items and other
      pro forma adjustments permitted in calculating covenant compliance in the
      indentures governing the notes to test the permissibility of certain types
      of
      transactions. We have included Adjusted EBITDA because we consider it to be
      an
      important supplemental measure of our operating performance. We also believe
      that Adjusted EBITDA is a useful liquidity measurement tool for assessing our
      ability to meet our future debt service, capital expenditures and working
      capital requirements. However, EBITDA and Adjusted EBITDA are not measurements
      of financial performance under U.S. GAAP, and our EBITDA and Adjusted EBITDA
      may
      not be comparable to similarly titled measures of other companies. You should
      not consider our EBITDA or 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.





34




The
      following table reconciles net income to EBITDA and adjusted EBITDA for the
      periods presented:


**Successor**
              
              
              
              
              
              **Successor****Predecessor**
              
              
              **&
                  Predecessor**
              
              
              **Successor**
              
              
              **&
                  Predecessor****Six
                  Months**
              
              
              **Combined**
              
              
              **Six
                  Months**
              
              
              **Combined****Ended**
              
              
              **Year
                  Ended**
              
              
              **Ended**
              
              
              **Twelve
                  Months****June
                  30,**
              
              
              **December
                  31,**
              
              
              **June
                  30,**
              
              
              **Ended
                  June 30,**(In
                  millions of U.S. dollars)
              
              **2006**
              
              
              **2006**
              
              
              **2007**
              
              
              **2007**Net
                  Income (Loss)
              
              $
              5.7
              
              
              $
              8.9
              
              
              $
              (63.9
              )
              
              $
              (60.7
              )Interest
                  expense, net
              
              
              7.1
              
              
              
              55.3
              
              
              
              55.8
              
              
              
              104.0Income
                  taxes
              
              
              3.7
              
              
              
              7.0
              
              
              
              -
              
              
              
              3.3Depreciation
                  and amortization
              
              
              63.0
              
              
              
              121.0
              
              
              
              59.3
              
              
              
              117.3EBITDA
              
              $
              79.5
              
              
              $
              192.2
              
              
              $
              51.2
              
              
              $
              163.9Adjustments
                  to EBITDALease
                  not assumed (1)
              
              
              4.7
              
              
              
              5.8
              
              
              
              -
              
              
              
              1.1Change
                  in machine use, net (2)
              
              
              2.8
              
              
              
              2.8
              
              
              
              -
              
              
              
              -Restructuring,
                  severance and other (3)
              
              
              (0.4
              )
              
              
              9.8
              
              
              
              12.2
              
              
              
              22.4Non-cash
                  compensation/benefits (4)
              
              
              4.2
              
              
              
              5.4
              
              
              
              0.5
              
              
              
              1.7Inventory
                  fair value (5)
              
              
              -
              
              
              
              5.9
              
              
              
              -
              
              
              
              5.9Other
                  items, net (6)
              
              
              7.2
              
              
              
              (0.1
              )
              
              
              0.1
              
              
              
              (7.2
              )Adjusted
                  EBITDA
              
              $
              98.0
              
              
              $
              221.8
              
              
              $
              64.0
              
              
              $
              187.8Pro
                  forma cash interest expense, net (7)
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              106.8Adjusted
                  EBITDA to cash interest expense
              
              
              
              
              
              
              
              
              
              
              
              1.8




(1)
            Reflects
                the elimination of the historical rent expense incurred on the Sartell
                property lease that was not assumed by us.(2)
            Represents
                the elimination or addition of expected earnings as a result of changes
                in
                the use of two of our papermachines
                at the Androscoggin mill prior to the Transactions.(3)
            Includes
                restructuring and severance as per our financial
                statements.  Restructuring includes transition and
                othernon-recurring
                costs associated with acquisition and carve out.(4)
            Represents
                amortization of certain one-time benefit payments and non-cash benefit
                payments.  Also includes theelimination
                of historical non-cash stock compensation costs previously incurred
                by us
                under International Paper'scompensation
                plan.(5)
            Represents
                the fair value of inventory adjustment related to purchase
                accounting(6)
            Represents
                earnings adjustments for exceptional bad debt expenses, recoveries
                and
                other miscellaneous non-recurringitems,
                including adjustment for incremental estimated costs for activities
                previously part of the corporate allocationas
                well as other incremental costs we anticipate incurring on a stand-alone
                basis subsequent to the Transactions.(7)
            Presented
                pro forma for the Transactions.  Cash interest expense
                represents gross interest expense related to the debt,excluding
                amortization of debt issuance costs.NOTE:
            To
                construct twelve months ended June 30, 2007, financials, amounts
                have been
                calculated by subtracting the data forthe
                six months ended June 30, 2006, from the data for the year ended
                December
                31, 2006, and then adding the sixmonths
                ended June 30, 2007.





35





**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 which
      comprise approximately 550 end-user accounts. In 2007, 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, 2007,
      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.





***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 the prices of many of the commodities
      that we use 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.





36




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.





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, black liquor solids, 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. As prices fluctuate, we have some
      ability to switch between certain energy sources in order to minimize
      costs.  Additionally, the Company utilizes derivatives contracts as
      part of its risk management strategy to manage risks associated with market
      fluctuations in energy prices.








**ITEM
      4T.   CONTROLS AND
      PROCEDURES**





The
      Company maintains disclosure controls and procedures (as defined in the
      Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) that are designed
      to ensure that information that would be required to be disclosed in Exchange
      Act reports is recorded, processed, summarized and reported within the time
      periods specified in the SEC's rules and forms, and that such information is
      accumulated and communicated to our management, including their 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 the end of the period covered
      by
      this report. Based upon that evaluation, our Chief Executive Officer and Chief
      Financial Officer have concluded that, as of the end of the period covered
      by
      this report, 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 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.







37




There
      have
      been no changes in our internal control over financing reporting that occurred
      during the fiscal quarter ended June 30, 2007, that have materially affected,
      or
      are reasonably likely to materially affect, our internal control over financial
      reporting.











38






**PART
      II.  OTHER INFORMATION**





**ITEMS
      1, 2, 3, 4, and 5**





As
      of the
      end of the second quarter 2007, the answers to Items 1, 2, 3, 4, and 5 were
      either inapplicable or negative, and therefore, these items are
      omitted.








**ITEM 6.  
EXHIBITS**





Exhibit
                31.1
              Rule
                13a-14(a) Certifications of CEO (pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002)Exhibit
                31.2
              Rule
                13a-14(a) Certifications of CFO (pursuant to Section 302 of the
                Sarbanes-Oxley Act of 2002)Exhibit
                32.1
              18
                USC 1350 Certifications of CEO (pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002)Exhibit
                32.2
              18
                USC 1350 Certifications of CFO (pursuant to Section 906 of the
                Sarbanes-Oxley Act of 2002)


39








**SIGNATURES**





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







August
              14, 2007
            VERSO
              PAPER HOLDINGS LLC(Registrant)




By:
            /s/
                Michael A. Jackson**Michael
                A. Jackson****President
                and Chief Executive Officer****(Principal
                Executive Officer)**August
              14, 2007By:
            /s/
                Robert P. Mundy**Robert
                P. Mundy****Senior
                Vice President and Chief Financial Officer****(Principal
                Financial and Accounting Officer)**








40